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In this episode, our guest Chris Willard tells us about his total returns strategy and how he uses it to fuel the rapid growth stage of his investment career. --- Transcript Michael: Hey, everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum, and I am joined today by my co host, Tom Schneider. And we have a very special guest with us, Chris Willard. And he's going to be talking to us today about total returns and using that to scale his portfolio. So I won't take up any more time. Let's jump into it. Before we get into it, we want to talk really briefly about a special offer that we have going on for the Roofstock Academy. And for those of you who might not be familiar, Roofstock Academy is your one stop shop education arm of Rootstock. It's comprised of one on one coaching, over 50 hours of on demand lectures, cashback incentives for closing on properties through Roofstock $2500 cash back to be specific, as well as private access into our online forums. So as you go to roofstockacademy.com into the checkout section, use coupon code SANTA2020 for $151 off a registration. Again, that's roofstockacademy.com. And coupon code is SANTA2020. Tom: And to make this even more of a no brainer, it is a lifetime satisfaction guarantee. Take the coaching, watch the lectures, if you're not happy, get a full refund. No expiration, you're not gonna find that anywhere else. And on the cashback aspect, if you do the math, right, the discount, taking a 151 off, that's gonna make it $1,098. And you're going to be getting $2500 in return. So you're actually making money with the program. So join risk free today. SANTA2020 Michael: Awesome. Well, Chris, welcome to the show, man. super happy to have you here. Thanks for taking the time. Chris: Thanks, guys. Always fun talking to you both right on. Michael: So maybe you could give our listeners for those who are not familiar with your background, your story, a little bit of background on yourself. And then we'll jump into this thing about total return. Chris: Yeah, so I've been in real estate for going on about 10 or 12 years, several different capacities, but more recently on the single family rental side of it with Roofstock. I currently, you know, work as the head of sourcing, oversee a lot of our larger portfolio transactions through our platform, but through my life here at Roofstock. And prior at Waypoint with Tom been able to do a lot of investing on my own, which is pretty exciting. Michael: Awesome. Awesome. And I know that you kind of invest all over the country, is that right? Chris: Yeah, I don't have any specific markets that are interesting to me, deals are interesting to me. So I'm always pretty opportunistic, and happy to go into new markets when I find the right deal. Michael: Awesome. Tom: Chris, I'm gonna interrupt a little bit. So Chris and I are in a special Roofstock Club. So our CEO at Roofstock. Gary has been on the episode a couple of times, he was formerly the CEO of one of the very first publicly traded single family routes. And both Chris and myself used to work with Gary at this company. And when Gary and Gregor and those guys came up with the idea of Roofstock as a company, we shortly thereafter joined Gary on this adventure. So Chris, why don't you just talk real quickly about all the different stuff you did at that single family read as well. I think it'll give good context experience. Chris: Yeah, so at way point, and even prior to waypoint I was underwriting hundreds of homes a day, we were buying off the courthouse steps back in, oh, nine 2010, you know, when right at the downturn of the market, when everything was when the world was falling off, I had the opportunity to join the waypoint team. And as 2011 or so down in Southern California, we started growing the region, buying hundreds of homes quickly grew that over a couple years to several 1000 homes and really manage kind of all facets of acquisitions, they're all the way through from acquisitions to lease up, we obviously manage the properties there. And then kind of towards the tail end of my tenure there really oversaw a lot of the disposition efforts, so got involved with selling homes. And you know, Tom, to kind of your point, it's really funny, because, you know, when we started selling homes at waypoint, we did it like everyone else, you know, we vacated you know, move the tenant out, put the home on the MLS, we incurred all the fix up costs, the vacancy, the leakage, you know, and then we realized that about 30% of the time, or more than that investors were buying the homes and putting tenants back into them. And so, you know, then we had the bright idea, well, why don't we just list the home with a tenant in place on the MLS? And, you know, there's just a lot of challenges that agents have to deal with in terms of, you know, not being able to show the homes, you know, the condition of the homes and obviously, there was no platform like Roofstock at that time, you know, I think is when you know, Gary Gregor and, and the others got the light bulb, and obviously, overnight, you know, rootstock was formed. So, you know, pretty exciting, you know, to come up through the industry like that and see all the different facets to where we are today. I think we were bootstrapping things pretty frequently back then. Now we leverage a lot of technology to scale up and grow our business, Tom: Both sides of the business I love that how just you know in running that route and trying to sell this realizing the inefficiencies of selling occupied. Alright, I digress. I'll let Michael go ahead and bring us back in. Michael: No, it's I mean, it's super interesting background. It's it's super cool to see and hear about it is kind of like this seemingly obvious only in hindsight of like, Well, yeah, duh, it's investments, we're buying it anyhow, why are we taking on all this extra expense and headache to move these people out to have different people just move back in. So… Tom: Totally! Leakage. That's a word we use. Michael: Got it. Tom: Preventing leakage. Michael: That's a great word. Tom: It's a great word. It’s alright. It's an okay word. Michael: Getting back on the rails here. So, Chris, I really want to chat and focus today about total return. And I think this is kind of this word, this concept that might be thrown around a lot that some people might not have a good grasp of, or a hard time defining and pinning down. So can you give us what your definition of a total return actually means? Chris: Yeah, I mean, the way I look at it, which might be a little bit different, but you know, it takes that idea of, you've got your cashflow investments, and you've got your appreciation investments, and it's a blend of both Now, now, total return doesn't necessarily mean that you're not going to have steady cash flow. And it doesn't mean that you not might not be able to catch, you know, market and an upswing and take on some appreciation. But you know, you get a little bit of both worlds there. When I try to target you know, investments, when I'm kind of putting my acquisition hat on and looking at acquiring homes, I always look at homes that have maybe have some upside on the rental side of things, maybe also have some upside in the market value of the home. So that's how I kind of look at it and categorize total return is takes a little bit from both the cash flow model as well as the appreciation model. Michael: Awesome. And do you factor when looking at acquisitions? Do you factor in like the tax benefits are the loan paid down into like, calculating a total return? Chris: My model? I don't necessarily look at the tax advantages of that too much. You know, for me, I'm really focused on what is my cash on cash return, that's where I focus a lot of my energy, I do have a great CPA, and he tells me and kind of writes the ship when, you know, may go down the wrong road from from a tax perspective. But for me, it's really looking at what is my cash flow, because that's going to be kind of my day to day, right? You know, my cash in and my cash out is going to get me from point A to point B, but then where I can capitalize on some of that upside, you know, that's really kind of the unknown, that's where the risk comes in. But that's also where the reward, you know, can be found. Michael: Absolutely. And so for those of our listeners who might not be familiar with some of the metrics we're tossing around here, can you define for people? What is cash on cash return? And what is cash flow? Chris: Yeah, so cash on cash return is really just comparing or analyzing the cash you put into the investment, whether it's, you know, your down payment, any capital expenditures, repairs, and maintenance, all cash going into the investment verse, you know, the cash that's coming out, really your profit at the end of the day from that investment, oftentimes, that does come from your monthly cash flows, the distributions you get from your your property manager, but also could be, you know, realized, as, you know, potential profit from an upswing in a market and, you know, equity and appreciation. Michael: Awesome. Yeah, I always like to make the analogy that your cash on cash return is just a measure of how hard your dollars are working for you. Chris: I like that. There you go. Michael: Dollars out over dollars in. Tom: So thinking about total return, Chris, I'd love having been in the space for you know, both professionally and personally, as your philosophy around what type of returns you're looking for changed much over time from x from beginning of time till now, and I'd love to hear about that evolution of your philosophy on that. Chris: Yeah, the short answer is yes. You know, I think when I first started getting into you know, investing, I was fairly focused on what that cap rate what that cash flow look like, made sure I had, you know, high cash flow properties. And what I realized, you know, the, the, the time that we had at Waypoint was very helpful, being able to spend private equity capital rather than my own to, to learn a lot of this and make some mistakes there. But, you know, really, what I learned is that sometimes there's some negative factors with those higher cash flow properties, they're typically going to be older investments, they typically will need you know, more work just given the age, sometimes they can be associated with a lower rent price point in a certain market, which could increase your turnover. Therefore increasing your vacancy costs, increasing your turn times and thus decreasing your cash flow. So I would say that I probably started on the side of the fence when I started personally investing as a I'm going to be a little bit more cashflow driven to now really, I take a balanced approach. And I think as you probably build your own portfolio, you start to take more of a balanced approach naturally, I do like to invest in heavy cash flow properties, but I make sure that when I do so I'm looking at the major components of that home, what is the age of the roof, the age HVAC, the the water heater, electrical, plumbing systems, those are going to be my big ticket items outside of anything cosmetic, and if I can make sure that from that perspective, the home is bulletproof than I think I've pretty safe from you know, looking and taking the risk on some of those high cash flow properties. But where I'm starting to and I look over the last, you know, five or six years in my investment strategy I start to see that, okay, the vintages of homes I'm buying today versus I was buying, you know, five, six years ago, are starting to become newer home values are also becoming more expensive. They're safer investments and, and while maybe on the surface, the cash flows or the returns are not as great as those high cash flow properties, high return properties over the long term, if you look at over the span of multiple years, and you consider all those external factors of reducing your vacancy, reducing your turn cost, as we talked about cash in cash out, you know, the more money I can keep to myself, rather than, you know, giving out then honestly, the newer, more expensive homes, the way my investment philosophy is transitioning is panning out to even higher returns. Tom: You can say something in a minute, Michael, I was just having a coaching session with a member of our sec Academy. And they were talking about having a hard time finding newer homes that cash flow well, right. Because if you're buying a house for $200,000, it's got to have a pretty reasonably high rent, if you're using debt on the property, and you're servicing that debt to still get a healthy cash flow. Two questions in this I mean, for what you're targeting right now in your portfolio? Like what, what is the relationship between the price and the rent, that you're able to find these newer homes? And if you could talk a little about markets that you're looking at? I think that would be interesting to hear. Chris: Yeah, I mean, you obviously hear the 1% rule, you know, quite a bit. And I think it's something in the back of my head I certainly look at but you know, as I've seen the transition across my philosophy of my own personal portfolio, you know, I'm starting to dip well below that, that 1%. You know, I even just recently purchased a home, you know, in South Carolina, where the cash flows weren't great. But I was stepping into quite a bit of equity upside, which was was the play, but the way I was able to mitigate and improve some of that lower cash flow or negative cash flow was I made the conscious decision of, you know, I'm going to manage this myself. So now I'm going to save 10% a month, and that's going to inject cash back into the rental. You know, I think there's other things that you can do by running maybe a competitive process around insurance rates, making sure that you are getting the most competitive rate out there. I often talk with a handful of insurance providers on every home, I purchase and make sure and this is not something I do just on the front end. But this is something I do consistently every every year, every couple years, I'll start looking at different insurance providers and see who has the best straight out there. Michael: You said something, Chris, that I just want to circle back and touch on is with the high cash flow properties. If you are in a lower rental tier, you might see the higher turnover cost, which means you have a higher vacancy, and then you might have higher repair and maintenance. So it can often be this kind of Domino ladder effect where one expense has a significant impact on all the others. And I think it's so important to highlight that for folks. I can't tell you how many turnkey provider proformas I've seen. They're like, Oh, we just rehab the property, zero maintenance and zero capex needed. And it's like, yeah, maybe for the first year. But if you're going to own this thing for 2,3,4,5,10 years, like we have to be factoring this stuff in so coming to the table with your eyes wide open, when you're buying some of those properties, I think is hyper hyper important. Chris: To that point like really is you're stepping into an investment, you need to understand how long am I expecting to hold this am I is this kind of a buy kind of set it and forget it type mentality where I'm going to have it for 15, 20 years, and it's just going to work itself out or what I've been able to do over the las…
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