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Should You Put Your Properties Into an LLC? We Asked a Real Estate Lawyer… Aug 06, 2020

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In this episode, Michael and Emil speak with real estate lawyer Kellie Chrisman about the pros and cons of LLCs and Legal entities in regards to protecting your investments. --- Transcript Michael: Hey, everybody. Welcome to another episode of remote real estate investor. I'm Mike Albaum and as always, I'm joined by.. Emil: The good ol’ Emil Shour Michael: And today we've got a very special guest in Kellie Chrisman, who is actually a real estate attorney. So today we're going to dive deep into all things LLC and trust related. And Kelly is going to answer a ton of our questions. And for those of you who can't make it through the episode, cause it does get a little bit long, make sure to listen to the end of the episode where she gives her contact information in case you have any real estate specific questions for Kellie. So let's go ahead and jump right in to it. Michael: Kellie. Thank you so much for taking the time for joining us today. We really appreciate it. Kellie: Yeah, no problem. Thanks for having me guys. Michael: Absolutely. So I was hoping you could give our listeners a little bit of background on you, you know, where do you come from? What kind of law do you practice and we'll start with there. Kellie: All right. Sounds good. So I'm originally from Northern California, Chico and I have been practicing in California for seven years college at UCLA and couldn't leave LA and we stayed down there with Loyola Law school lived in Santa Monica, practice down there, my first, probably four or five years, and then moved back to Sacramento to be closer to family and go all over California and practice all sorts of exciting law that no one usually likes to talk about unless I get real estate people, or unfortunately somebody's going through a hard situation. So I do trust the States business planning and then estate planning as well. And they all kind of intermingle and go together. And it's interesting. Michael: It's very interesting. And in full disclosure, Kellie and I have done quite a bit of work together in the real estate arena and the trust arena. And now I think Emil has now as well, right? Emil: Yes. From your referral. So thank you. Michael: Another convert to team Kellie. Kellie: That's right. But I can’t confirm unless you guys can confirm. Attorney client privileges. Michael: Awesome. Well, Kellie, I was hoping we could jump into kind of the meat and potatoes of what we want to talk about today and start with some definitions to give folks, because I think so often in the real estate realm/arena, people throw around terms without really defining what they are. So for those of our listeners that have no idea, I would love to just run through some definitions of maybe sole proprietorship, LLCs, S Corps, C Corp and trusts. Can you break down for everybody? What those are? Kellie: For me, I am a visual learner, which doesn't work necessarily here, but I can at least try and break it down. And I always have to give the disclaimer, I'm not getting legal advice, getting general recommendation based on things that I know. And we can always talk more detailed than I can get legal advice. I see those as two different things. So a trust is, is in its own category from the sole proprietorship partnership, LLCs, Corporations S Corp C Corp, cause they're really accomplishing two different things. So on the most basic level, the trust is something that's going to plan for worst case scenario. So something bad happens, who's in charge where everything is going and what you want that. Then we get onto the other side, the entity side, every other kind of thing we've mentioned. And that's the type of business or entity protection liability protection. So sole proprietorship is if you are going to own a rental property and you don't do anything, you are automatically. So if there's nothing you want to do, you can of course draft stuff and make it more. But on its most basic level can do nothing. That's what, no, if you do nothing with someone else, then you are a partnership. You can automatically be a partnership. If you do nothing, or you can spend a lot of money to draft beautiful documents and be a general partnership. They're taxed at the individual level, LLC is a limited liability company. And a corporation is both of those. Together are something you file with a secretary of state, whatever state you live in and they give you liability protection so they can have one member. It can be just you, it can be you and a sibling or you want a friend or it can be in corporations and Apple has countless shareholders. So it can go from there, LLCs, the incorporations provide that protection. And then within a corporation you can be two different texts, escort, which is a closely held corporation or a C Corp, which is what we're most commonly used to. So like an Apple or a year, it can be somebody small. Michael: So if I'm hearing you right, if I just bought the property and do nothing, I take title in my personal name. I'm a sole proprietor. Yep. Okay, cool. Kellie: And if you do nothing with a friend, then you're a partnership. Michael: Got it. Okay. Emil: Yeah. I was going to ask. Okay. So I think for people listening, what are you potentially opening yourself up to? If you're a sole proprietorship owning real estate, what are the risks? Kellie: Okay. Michael: How deep do we want to go down that dark dark? Kellie: Don't ask the lawyer that question. So I don't like to scare people, but I always like to be realistic and everybody has their own comfort level. If you are a sole proprietorship, you are leaving everything on the line. So to put it in real estate terms, you, if it's a commercial property, somebody walks into your tenants property and they slip and fall on the curb. You are technically responsible in certain situations, most situations for keeping that curve maintained and safe. So if you get sued, everything you own is on the line, your home, all your other property, your retirement, your income, and it can follow you. So you can get a judgment that you might not have a lot now, but in a little while. Well, so the risk, if you have nothing, that's huge is everything. However, how common that? It’s not so, but not so uncommon. I mean, it can be something as simple. If you have a rental property, I had clients that their tenant had a party to make people on the balcony and somebody moved on the ledge. And once we went over and got hurt, whether they're reliable or not, they're included in the lawsuit. So there can be a lot of expense just to prove you’re not liable. Michael: Versus going the LLC or corporation routes. Now that's a very different scenario that we're looking at. Kellie: Yeah. So then we're looking at the only thing on the line is what's owned in that corporation or LLC. So you cap your liability and we'll talk, I'm sure a little bit about how that happened and how to maintain that. But if I don't have something in place, everything you own is on the line. If you do have a corporation or an LLC, then just whatever is held in that corporation of the LLC. And so a lot of times you'll see corporations or LLC get sued and then they go bankrupt because they're not going to put more assets into that and they'll have to be other risks. If you just have to go back to the most question, if you just have a sole proprietorship or partnership, you know, if you don't get along with with your partner, if you die, what happens to it? If something tax wise, there's a lot of stuff you can do within this corporation, that instruction. So it gets very strategic and fun if I can say that. Michael: Yeah. So it just sounds like you have, from a very high level inside an entity structure, as opposed to a sole proprietorship, more options and more liability protection than if you're just a sole proprietorship, is that accurate or fair to say? Kellie: Yeah, I think that's fair to say. There's a lot more that you can do and there's a level of comfort that comes with it. Michael: Sure. Okay. And so I get the question all the time of Michael, do I need an LLC to invest in real estate? And I think in the real estate community, there's this very hotly debated topic of pro LLC. No, LLC. So it sounds like we touched on, you know, what the pros are of having an LLC. Are there any pros to just being a sole proprietorship that you really lose out on if you have an LLC? Kellie: Yeah. So, and it's funny cause I I'm preaching all of this and, and I just went through it as an attorney. You know, whether I want to become an LLC, a limited liability corporation or whether I want to stay the sole proprietor. And when I talk with my accountant, who is usually my they're usually the person that I work with clients tax wise, there can be consequences. So if you do create an LLC, obviously the first thing is that there's a cost associated with it, just filing it with the state. The state has asked me, um, to create it. Usually you're, you're going to need to either pay somebody to do it, or you're going to buy a package online to do it. And there's some things that come within each state that you have to do. So in California, for example, you have to then start paying payroll taxes. So rather than in a sole proprietorship where I just pull my stake and then I get taxed at my own level, I now have a couple of additional tax requirements, but at a point it becomes worth. So that's where I always recommend working with a CPA or a tax professional. Michael: Okay, great. Emil Like let's say I buy a property in Florida. I decided to put an LLC, you can set up the LLC in Florida, but California will still require you pay like the franchise tax fee. Like you're an LLC, here right? Kellie: The problem is, the government writes the law, um, and they always find a way to get their fingers on a little bit of something. So if you have a corporation or an entity in another state and you live in California and you're essentially running it out of California, which is, I own a rental property that I rent, but I received my rent and my California bank account, you have to register as a foreign entity and you pay a small fee to do that. But that's one of the costs of doing the upside of that liability protection. Emil: Totally Michael: Wait. So did I, maybe I misunderstood that. So if I own property in Ohio, but I live in California and I registered my, I created my LLC in Ohio and registered it as a foreign entity in California. Should I be paying the $800 annual California franchise tax fee? Kellie: You do what it is for a foreign corporation, whatever they require for that. Michael: I got, I got to take a closer look at that. Cause if I've been overpaying, I got to talk to somebody that's ridiculous. Kellie: That's why I say, talk to your tax professional. Michael: Right, right. Right. All right. Cool. Well, I will definitely have to look into that then, but so for, in California, I mean, there's really no way to get around telling California that we have even a foreign entity in California if we're living here, right? Kellie: Yeah. They're going to figure it out because the second you file your income taxes, you're going to have that income from the corporation. And they're going to say, Hey, right. So it's a small price. You take my lawyer hat off. And $800 is not a small price for me, but I put my lawyer hat back on and I say, this is $800 is a small price to pay. But when you're looking at the amount of money that you're investing in, what you're building and hoping to gain from creating an entity in front of investing in multiple properties, it's really a drop, hopefully, in the bucket in the grand scheme of things. Michael: Sure. And kind of getting back to that original two camps, right? The pro LLC, the new LLC. I think the biggest argument that the no LLC camp makes is that, Hey, I can get the same type of asset protection of liability protection with high liability insurance limits and then get an umbrella on top of that. What are your thoughts around that? Kellie: Yes, super common. It just… This is such a lawyer answer. It just depends. So I worked with a medium sized firm here in Sacramento and that's what the partner is. He would tell clients, you know, why spend $800 a year when I can buy you a hell of an umbrella policy? And I agree with that in some situations, and I don't agree with it and others. So there's no the person that, you know, maybe they bought their first house and they're going to keep it and buy their next house. Never going to be a longterm investor. That makes sense. You know, if it's a single family home that you're renting, that's a good amount of insurance. But if somebody slips and falls in that house, I mean, slip and falls was one of many things that can happen. It's just common place. Example. You're hoping, and you're, you're gambling that you bought enough insurance to cover that lawsuit and your lawyer fees. Because if you didn't, then now everything was on the line. Now that dream home you bought is on the line for this rental home that you have. A lot of times it works in, comes down to, and I'll probably touch on this throughout. It's how risk averse, how well you're going to sleep at night. Wonder, I always use the example of my husband. And so I I'm a little bit of a gambler. We had one property. I don't know if I put it in an LLC. I probably would seeing, having seen other things that I had done and worked on my husband is extremely risky because he's an engineering he would, before we bought the property, he would have an LLC set up. He would make sure everything was like perfect and Excel and everything. And it would be, everything would be in separate LLC, which I'm sure we'll talk about too. So it depends. Michael: Yeah. I love that answer. Cause I think so many people approach it with a one size fits all, but it sounds like you can't look at it through that lens. Kellie: No. And every situation is different. Every set of facts, if it's commercial property and they're going to be multiple people on this property every day, if there's going to be any kind of manufacturing, any kind of longterm structure to me, that's a no brainer. I would advise my clients to immediately do it and have an entity in place. But it just depends if there's an accident. Emil: Yeah. So one of the questions we wanted to ask you is how do you handle insurance if you're using an LLC, does it differ if you're a sole proprietor versus LLC, do insurance companies look at those differently? Kellie: So you talked to your insurance agent and each insurance company is going to handle them differently. A lot of times you will insure the LLC itself or the entity LLC, or corporation, and then insure yourself separately. So you can, I mean, if you're extremely risk averse and we send it, my husband would probably have insurance on the LLC and then we'd have an umbrella personally, over ourselves as owners of the LLC as well. So you're, you're double protected, but each insurance company saying that a little differently. Emil: So you don't insure the property, you insure the LLC. So if I acquire more.. Kellie: So you would insure the property, but the property is going to be owned by the LLC itself. So if you're insuring you can insure business and then you can insure the property, but you're likely going to do both. And if you have a mortgage on the property, the…

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The Showdown of The Century (Round 3): Remote vs. Local Investing Aug 03, 2020

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In this episode Tom and Emil go head to head to debate which investing strategy is superior, local or remote investing. --- Transcript Michael: Hey, everybody. Welcome to another episode of their moat real estate investor. I'm Michael album. And today I'm joined by my usual hosts, Tom: Tom Schneider Emil: And Emil, The Real Deal, Shour. Michael: Ooh, I love that self-proclaimed nickname. Love it. And today we're going to be doing another show down. We've got a lot of feedback from our listeners that showed on episodes were well received. So today we are going to be debating the pros and cons of remote investing versus local investing dunked on done. Well, guys, let's jump into it. Emil: That was actually a nickname that someone I went to college with gave me. Michael: Okay. So it wasn't self-proclaimed. Tom: Emil, The Real Deal. Emil: We were in the same frat and we had like boxing night and… Michael: that's so good. Emil: He introduced me as Emil, The Real Deal! Michael: I would never go on a boxing match with anybody that had that intense of a nickname. Emil: Those people went down. Went down hard. Michael: Okay. So for any of our new listeners out there, my name is Michael Albaum and I'm the head coach with the Roofstock Academy, Roofstock’s education arm, and Emil, do you want to tell us a little bit about yourself and who you are? Emil: Yes. My name is Emil Shour. I work on the marketing team here at Roofstock, which if anyone's not familiar, it's a marketplace where investors come to buy and sell single family rental homes. And so I work on the marketing team. I actually invested through Roofstock’s marketplace before I was employed here. And now I have the joy of getting to spread the word. Michael: So you're drinking the Koolaid. Emil: That's right. Tom: An evangelist! Michael: That’s right. And Tom, who are you my friend? Tom: That is a deep question. Michael: Start at birth! Tom: Start at birth. So I am an investor. I'm a California broker. I work here at Roofstock on the investor education team. I initially worked at one of the very first publicly traded REITs, doing single family rental, kind of in the wild West of 2009. And then our CEO went and was a co founder and starting Roofstock. So I jumped over and joined him at Roofstock on the product side and the operations. And now, as I mentioned on the investor education side. Michael: Awesome. Love it. Tom: Before we get into the meat of the episode, a quick announcement as usual, this episode was brought to you by Roofstock Academy. Roofstock Academy is Roofstock’s education program to get you to the next level. We include over $2,500 worth of marketplace credits on demand lectures, one-on-one coaching group coaching, all kinds of benefits. And we have this new benefit that we put together that Michael is leading it's our book club. Michael: Within the Roofstock Academy, we actually do a monthly book club. We get together and read the same book over the course of the month that has some takeaway, some motif, some applicable things to real estate investing. And we get together at the end of the month and we have a chat about it. And cause now it's COVID, we're doing that all virtually, but hope to be able to do that in person at some point down the road. And this upcoming months book club book is Michael Uber's, one rental at a time. And as an added bonus for this month book club, we're actually going to have Michael Zuber on that call with us as kind of a fireside chat. And as we're going to be discussing his books, we get to hear it from the source himself about some of the reasons he wrote the book and some of the takeaways from the book as well. So now is the opportune time to join the Roofstock Academy roofstockacademy.com. So you can join us for that monthly book club and take advantage of all of the other advantages the Roofstock Academy has to offer as well. Emil: For people who aren't familiar with Michael Zuber, he's been on the podcast twice. Good friend of the podcast episode 11 was the first one we had with him, the power of four rental properties and how it can change your life. And most recently, I think we, we dropped an episode with him this past week called how Michael Zuber Quit His Job On a Whim After Achieving Financial Independence. So if you're not familiar with who he is, go back and listen to those episodes. He's a super, super smart guy he's been investing for. I think 20 plus years. Now he knows a lot and has a really, really awesome message for other investors. Michael: So today for our shutter and episode, we're going to be taking two sides of this argument and splitting it up a meal. Why don't we give you remote? We'll give you a remote and Tom, you're going to have to defend local investing. Tom: Yeah. A classic episode, a classic discussion for the remote real estate. We're going to, you know, try not to be too biased… Michael: But it is called The Remote Real Estate Investor, Tom: But it'll be fun. It'll be fun. I don't know. Yeah. It's fun going to the other side of the table. So.. Michael: I think it's important to address and acknowledge both sides of any topic of any discussion because it's two sides to every coin and there is no one size fits all approach, even though remote real estate investing is far superior, but we're going to get to that in the episode. So a meal, would you like to go first or second Emil: I'm game for either Michael? Michael: Okay. Emil: You're the moderator. Tom: Go first Emil. That way I'm giving you a heads up. I'm handicapping you alright, Michael: Emil, the floor is yours. Emil: All right. So I have three points I want to hit here. That Tom is going to have a very hard time rebutting. So the first one is that with remote investing, you buy where it makes sense. So if you're a local investor, you're looking around at your local market, you're geographically constrained to just the deals around you. So if you live in Los Angeles or the Bay area, like we do, prices have gone out of control. Prices have gone up a lot and rent has not been able to keep up with that. So in certain markets, it's very hard to find cash flowing properties, unless you have a lot of money, put a lot of money down. It's very, very hard to make those work. There's still good markets. It's just harder to make the cash flow work. So when you're a remote investor, you buy where it makes sense. You look at different markets, you look at where deals are, where the fundamentals are good and you invest there. You're not geographically constrained to only where you live. You go to where the deal is. Makes sense. The second point I want to touch on is you get to build a team instead of doing everything yourself. I know personally, if I was investing locally, I would want to do a lot of things myself, instead of relying on other people, finding the right team. And I think that's an advantage in building a team because these people are professionals. I'm not, I'm not a professional property manager or inspector any of these things, but being the person I am and liking control, I feel like I would try to get my hand into too many of those things. Whereas when you're remote again, you have to rely on the fuel. You have to build a team. And so I think that's one of the advantages of going remote is you're required to build that team of professionals. The last one I want to touch on before I get on the floor is I think with remote investing, it's a lot less emotional and more about the numbers. I think when you go and view properties all the time in person, it's hard to ignore some of the blemishes that you bring to the property, right? You have some bias. You're like, Oh, would I live here? And with rental properties, especially for cashflow, that's not what matters. It's do the numbers make sense in a market that I like. And is this an area that I'm comfortable with? The risk it's not about is this somewhere I could see myself living. And I think if you're doing the local investing, you bring a lot of that emotion in looking at a lot of the properties you look at. Michael: Wow. Tom, come back from those man. Tom: I like it. I'm so confident. I'm going to slow roll a little bit. I'm actually just going to compliment a couple of your points before I stepped back and do the fade away three while kicking my leg out for you to run into it for me to get an extra free throw. So yeah. Emil: Okay. James harden. Tom: Okay. So to honor my comment there, I love the point about how it allows you to not kind of get in your own head and just be super data-driven about it, but okay. Onto the good stuff, I'm a good stuff. So investing local is definitely the way that you want to do it. So I think the first point that I'm going to make, which could be the most relevant is you're never going to know a market better than your own market. And me personally, I've been studying the market since I was about eight years old. I'd go to Safeway, I'd get the homes and land magazine. And I would just study comps. And I had this long trend of analysis. I know the different markets, different property types, how they're trending. Heck I even know the agents, right? The Kerses family out here, great agents. So you're going to know a market a lot better just from, you know, kind of hounding your local Zillow or Redfin or whatever. Basically the adult version of the homes and land magazine from the Safeway. All right. The next point is, man, what value is it to be able to touch and feel the house, you know, to go up to the house and touch the walls and kind of like smell it. You can't do that remotely. And one of the reasons people like investing in real estate is because it's a tangible asset. It's, it's something, you know, you're not buying some future of gasoline because the price of crude is low. You know, it's an actual asset that some people actually use using by doing it remotely. You're kind of getting away from that. You're getting away from that touchy, feely wonderfulness of buying a house that you can actually see and walk into. And you know, you get out of the ethereal, if I steal a word from Michael here, it's a nice to the realleal, so, you know, you're being there. So that's number two is the tangibility of it, of actually being there, getting to go see it. It's pretty awesome. And lastly is you're not going to get taken advantage of, you know, doing things over the phone. You're going to have these quick talking sharks, selling you snake oil and all kinds of trouble. So I like to shake somebody's hand or I guess nowadays is you do an elbow bump of, you know, getting, if I'm going to do business with somebody, I'm going to want to get to know them. I'm going to want to look them in the eye and touch elbows or whatever we do now with COVID and you can't do that in zoom. It's just super awkward. So there you go. That's why you want to invest locally. Michael: So, Tom, what would you have to say to some of the meals points that he brought up? Tom: All right. Let's do it so well, I, I quite agree with a lot of appeals points. I totally agree. I mean, I don't want to waste my, you know, momentum for when we switched sides of the argument, but there is a lot of limitations on only looking into your own area, but you know, just when we say local, that doesn't mean you have to do everything, you know, within five miles of your house, roll it out a little bit further, you know, go 30 miles go a couple hours. So we were talking before the episode where we were talking about our experience with local investing and I have done some stuff working for fun, not with my own money, doing local investing, but Michael has invested locally. I would consider, you know, within that three hour range that kind of counts as local. So to address that point about, you know, not being specific things in your area, you know, rollout the distance, the radius, spread it out a little bit further. You can still do things locally. You know, if you're uncomfortable going 2000 miles away go 200 miles away like within striking distance. So that would be my point number one. The point number two, about being comfortable about using other folks is, you know, it's a muscle and if you're uncomfortable, you know, going a hundred percent building a team, that's okay. Just kind of pick points and spots and build that muscle of getting trust in getting good at letting go of things. And honestly, that's a big problem. I know for a lot of people, especially investors who are pretty generally pretty type a kind of go getters is to consciously make an effort of letting go of certain aspects of the business. So you can focus on where you have higher ROI. Michael: I've got a question for you, both that you both kind of touched on Amelia, you mentioned that if you're going to invest remotely, that you can't go see the property and that that's difficult to do. And Tom, you mentioned, you know, being local, you're able to go touch and feel and see the property, but couldn't someone who's investing remotely still go touch and feel, see, and smell and taste. I think you included in there, the property, Tom: If you're good, you will. Emil: That's right. Always want to lick the walls before you sign those docs. Michael: Check the lead based paint disclosure before licking the walls. Emil: Correct. Actually, I think the right thing to do is to lick it, to make sure that there isn’t lead. Michael: That’s right. Tom: It's your tongue turns blue then… Emil: Trust the verify. Tom: No, you're totally right, Michael. I mean I've for some of the house that I've bought, I've seen them, but for most of them might have nod and what the ticket is, is having an inspector because honestly, if I go to the house and my ability to assess, you know, issues is not going to be better than an inspector who like does this professionally. So, you know, having the idea that, Oh, me going out there, I'm going to be able to do a better job than some inspector is a little bit of a stretch. So, you know, having confidence in the credentials and you know, where these inspectors are coming from, and then also looking at their homework. So like when an inspector goes and does an inspection on a house, they're filling out a super thorough report on what was identified. And that is including pictures and descriptions and as well as adding any followup items that are on there. So I'm not really sure where I'm arguing on this. I got, I got going, but you know, to the point, like I think it's, yo u know, going to see the property before buying it, you could totally do that. Even if it is remote, you know, there's no reason why you couldn't do it. And it makes you get comfortable to be able to get in the game. You know, that's an expense that you can use as a writeup. I'm not a tax professional, but for that in there, Emil: Thank you, Tom, for further arguing my remote point but no, I think you're right. I think you can, like, let's say you put an offer on a property you're in escrow. You can go visit that property, put some eyes on it, make sure everything looks good. Yes. You know, I rely on pictures and video and things like that to like before the offer process. But I actually want to make that part of how I operate going forward. Obviously with COVID, it makes it a lot tougher, b…

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7 Insider Tips to Get The Most Out of Your Property Manager Jul 30, 2020

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In this episode, Tom and Michael chat with Matthew Whitaker from GK Houses about what it takes to have effective property management and how investors can set themselves up for successful relationships with their PMs. --- Transcript Michael: Hey, everyone. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum. And today I'm joined by Tom Schneider and Matthew Whitaker with GK Houses, Matt and GK Houses is one of our preferred property management partners at Roofstock. And so we're going to be talking to Matt today about what it's like to be a property manager. What are some things that we as investors can do to make their lives easier? And give us a little bit of insight into what a day in the life of a PM looks like. So let's get into it. Theme Song Michael: Matt Whitaker. Thank you so much for joining us today. Really, really appreciate you taking the time to be with us. How are you doing? Matthew: Yeah, I'm doing great. I'm excited to be here and excited to do this with you. Michael: Awesome. And you're down in the Southeast, right? Matthew: I am. Yeah. I'm in Birmingham, Alabama. That's where our corporate office is and we're in eight different markets. So we're in three markets in Colorado and then we are also in Birmingham, Nashville, Atlanta, Chattanooga, and Little Rock. Michael: Awesome. Awesome. And for those of our guests who might not know you, can you give us a little bit of background about yourself on GK houses, help everyone get to know you a bit? Matthew: Yeah. I'd love to some, the CEO of GK houses. I started it about 13 years ago during the last recession. And during that kind of, 07, 08, 09 time when the market crashed, I owned about 30 rental houses at the time and had a hard time selling those once the market crashed. Most of those were in the low to moderate income world and the ability to sell that went away. And I started a property management company, converted all those 30 over into rentals and was able to get some of my investor buddies to also let me manage them. So I got up to about 70 houses pretty quickly, and that was kind of how I lasted through that recession through 08, 09, 2010 was by managing homes in about, we also were selling homes. So we were doing some turnkey stuff at the time, kind of original before it was very popular. And, but in 2013 we really started off focusing on the management business. And we decided at that point we managed about 250 homes right here in Birmingham. And at that point we decided that we wanted to get to 25,000 houses under management. And so we've been growing that ever since 2013. And today we manage somewhere around 26, 2,700 homes in those eight markets that I talked about earlier. Michael: Great. And did you have any personal management experience in the real estate arena or did you go straight from owner to manager? Matthew: I always swore I would never be a property manager or a real estate agent… Michael: You’re in good company. Matthew: And a lot of companies did that same thing. Yeah. And so never, never say that to yourself, but now I'm a real estate agent and a property manager. And so I managed my own homes. So I had been doing it ever since I first got started, even my first house I ever bought, I still own, and I have rented it ever since. And that was a disaster story. So it's amazing that I'm in the property management business. So yes, I did have a little bit of management experience. I had been in the buying and selling business for about seven or eight years. So I was very familiar with what a manager did. I had some other third party managers that manage some homes for me for some time and found all the things that I didn't like about a property manager. And so I decided to just do it ourselves, with GK Houses. Michael: That's great. I love that. You've got that personal experience that you did it for yourself and then went into business, helping other people do it because it just shows that you understand the business kind of from the ground up, which I think is so huge. And you're able to treat the rentals as if they were your own. Matthew: Yeah. There's nothing that replaces knowing what it's like to have a $500 bill come through, or a $2,000 air conditioning, a replacement come through where you're expecting that cashflow to pay the mortgage. And now all of a sudden you've got to figure out some other way to pay that mortgage. So it definitely gives us empathy for our owners. And that's something that we've tried to communicate and teach to the team members that work for us is, you know, and I'll often say to them, what if on Friday you found out that I was going to pay you $500 less with your paycheck. And they, you know, that would be disappointing to them if it was a surprise. And that is the same surprise that we were calling up from time to time. And unfortunately having to deliver bad news to owners because inevitably things are going to break when an owner buys a rental house they're in business and you're going to have expenses for that business. And so we've learned a lot over the years about having reserves and making sure that you can afford to pay for the lumpy expenses that are in this business, but it still requires a bunch of empathy from our team members when they're communicating with owners and having deliver, you know, have tough conversations. Michael: That's great. Tom: You touched on reserves. I'd love your thoughts, Matt, on, you know, what do you think an appropriate like reserve level is? Matthew: Yeah. If I was in new person getting into the business and I bought a foot, let's call it a fully renovated home. I would probably stay about. And obviously depending on the age or the vintage of the house, I would stay about $3,000 out. So I would keep at least $3,000 available at all times. And then as I got to a bigger portfolio, obviously the per house number would come down because you could dilute that across the portfolio. But getting started, I would say somewhere around two to $3,000, just available to make sure that it doesn't affect your lifestyle. And if you do have one of those expenses that comes through Michael: And in that same vein, most lenders are going to require a cash reserve amount for PITI. Would you consider that a couple thousand dollars to be that same pool of the reserve bucket? Are you saying above and beyond this? The reserve? Matthew: Yeah. I'm just talking about expenses and then capitalizable type items. I mean, I may even start as you started to build a portfolio and this is one of the reasons I always tell people don't buy one rental house. I mean, certainly try it on dip your toe in the water, but it's way easier to own 10 rental homes than it is to own one because you all these expenses start to get diluted amongst your cashflow of your portfolio. And then it doesn't become as big of a deal when you have a $500 bill come through. If you have a rental house, a $500 bill comes through, you're literally writing a check out of your back pocket. Sometimes if you have 10 rental houses and a $500 bill comes through, it's just another number on your statement. And you're just calculating your return based on that. So I think of that in excess of that, I'm just thinking of, in terms of repairs and maintenance, Michael: Tom like you always say peanut butter spreading that across. Tom: Peanut butter spread the risk. I love that quote yeah, 10 properties, a lot easier than one property. Matthew: It is, and absolutely if you're not having to manage all of them, any, even if you are, obviously you're spreading that risk across multiple residents with different jobs and different industries. And if somebody invests through you, they can even do it across different markets. So 10 seems to be the magic number in my opinion. Michael: Great Tom: perfect segue talking about, you know, as long as you're not managing it, and let's talk in a little bit about the roles and responsibility of a third party property manager that you would hire, what are the different things that services that they would provide in the process? Matthew: I really think the services of a property manager fall into two buckets. There is the accounting bucket and the communication bucket. And obviously under that communication comes execution, but let's talk about accounting first. Part of our operations is accounting for our homeowners. We want to make sure that the money comes in on time, that the resident's abiding by what the lease term says in terms of money paid. And so we're going to kind of hold the resident to making sure financially that house is getting taken care of. And then we're going to account for all the dollars that come in and of course paying any expenses that we need to pay out of that money that comes in. And then the other side is just operations and communication around those operations. We're obviously going to make sure that the house is taken care of. One of the interesting things, especially around small multifamily and single family. There's a lot of logistics involved in that. I always say it's a communication challenge and a logistics problem. So it's about, you know, having a one house, one owner or one vendor, you're always communicating with somebody. So you need to be really good at communicating. And our property managers become more like air traffic controllers. They're making sure the vendor knows where to go. What time to be there has the resident's information. The resident knows that the vendor's coming. The owner knows that there's a problem at the house if it exceeds a certain amount of money. And so you're having to keep all of these people in the loop and make sure that the planes aren't running into each other while you're that. And so, again, it just boils really down to accounting and making sure that I's are dotted and T's are crossed and then operations and communications. Michael: Matt, you said something that I want to circle back to that the owner knows if there's a problem, if it's above a certain dollar amount. So from folks who have never purchased a property, what do you mean by that? And why is that important to highlight? Matthew: Yes. So you hire a private manager to basically take care of the problems and you don't want to know that something small has happened at your house. That's not really going to affect your lifestyle. It's just kind of brain damage for somebody to call you over a hundred dollar issue. So we have, what's called a $500 kind of threshold. And if one of our maintenance guys goes out there and he sees that this thing's going to exceed over $500, we're going to contact the owner before we do anything and provide them an estimate. But if it's below that $500, we're generally just going to take care of that issue. And then the owner's going to see that happen. You know, see that payment on their statement. You hire a property manager and you will be circled in on all the big issues, but we want to handle all the small issues. That's why we feel like you hire us is for a turnkey solution, not to have to sweat the small stuff. Michael: Awesome. Thanks for clarifying and Matt, in your opinion, you know what separates the good from the great property managers? Matthew: Yeah. We go back to accounting and communication again, getting the numbers right. Is so incredibly important and you'd be surprised at how many property managers get that wrong. The other, again, communicating, it's so hard in our business to communicate and trying to make sure as an owner. And of course I was in this position. So I know exactly how they feel. If you don't know what's going on, it's not like you expect the best is happening. And so you want to make sure that you're clearly in the loop and you have the confidence and the trust of your property manager, that if something bad is happening, that you're going to be well aware of it. And also communicated with what we call uncomfortable transparency, which means I'm not going to withhold information from you to make it easier to tell you or more palatable or, you know, easier on me really, because I don't want you to get mad at me. So we want to make sure that we're giving our owners the truth. And we call that also entering into the danger and telling them, being willing to tell them exactly what's going on with their house so that they, if it is a big issue, they can make the best decision for themselves. And also try to remain as objective as possible when we're communicating, because money can be very emotional for people. And if we can kind of steer them towards the best solution, then we want to make sure that we're doing that based on our experience as a property manager, you know, we do have the benefit of, and especially in the South right now, it's getting really hot and air conditioners are breaking well. We have the benefit of knowing that air conditioners break and things we've done in the past and mistakes that we've made in the past. So, you know, when it becomes a, should I spend 600 or $700 to fix this air conditioner and it may last another couple of years or a $2,000 replacement or a $2,500 replacement. Well, we can give them kind of some objective advice based on what we've seen in the past. And then the owner can make their own decision based on that information. Tom: That's a great example of being proactive in informing the most decision and using some of the information that you guys have as an investor. We want to get the top dollar. We want to manage the least amount of vacancy as possible. What were some things that you would advise that the owner, the investor can help achieve those? Matthew: Yeah, the biggest expense and investor's going to have is turnover. You know, you can have a picky tenant that calls in a lot of maintenance work orders, or it feels like they're calling in a lot of maintenance work orders, but truly turnover in my opinion is the biggest expense you have. I think of it and you played football, Tom. It is like going in to score a touchdown. And instead of you throw an interception on as you're about to score, and then they run it back for a touchdown, it's like a 14 point swing that somebody moves out because, and the reason I say that is not only do you have loss of rent, so you're not having money come in, but you're also having to pay money out on deferred expenses when that happens. And so it's very important that you keep residents in homes and the way you do that is you do it through good communication with the residents. You do that through handling maintenance work orders. One of the things we found was our residents started staying longer when we internalize maintenance because our maintenance team is not out there just fixing a problem. Our maintenance team is tasked with making the resident happy because they're a GK team member. And so if you think about kind of the change in that, if a maintenance team member thinks his job is to just fix something, well, that's a problem if ultimately in the owner's best interest is that resident staying alone time. But if the maintenance team member is out there with the idea, I want to make this resonant as happy as possible, then it makes the resident happy. It's in the owner's best interest because the resident stays a whole lot longer. Michael: That's great. Tom: Oftentimes decisions, especially those big decisions that you'll…

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Market Deep Dive: Birmingham Alabama with Matthew Whitaker Jul 20, 2020

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In this episode we do a deep dive with Matthew Whitaker from GK Houses on what makes Birmingham Alabama a unique investment market. --- Transcript Tom: Greetings and welcome to the remote real estate investor. And today we have a special episode where we'll be doing a market spotlight today. We're going to be focusing on Birmingham and we have a special guest today and Matthew Whitaker, and I'll be joined with my cohost Michael album. All right, let's do it. Tom: Matthew, thank you for joining us today. Matthew: Well, thanks for having me. I'm super excited about being on this new spotlight and excited about being able to present Birmingham to you. Tom: So Matt, why don't you tell us a little bit about your, your background and GK housing as well? Matthew: Yes. So I got into investing when I was 23 years old and bought my first house using a home equity line of credit off of a little house that my wife and I, or a girlfriend, fiancé at the time owned and started buying and selling houses and got really excited about it and quit my job, day job. I was doing it on nights and weekends and started flipping houses for a living thought. I was a big shot real estate investor at 23 and did that for about four or five years and pretty successfully we flipped about a hundred houses. I had some partners, I always joke that they had a lot of money and no time. And I had a lot of time and no money and we got married. So we formed a partnership. I was the operating partner that was out there buying and selling homes. We did about a hundred deals in four years. So for a 25 year old kid, that's out there wheeling and dealing. It was the good old days. And I thought I had the tiger by the tail. And then as y'all know how the story ends in 2008, 2009 becomes the real estate market crash. And as Warren buffet says, when the tide goes out, you realize who was swimming, found any shorts on? And I looked down and I was one of the ones that didn't have any shorts on. So had I owned about 30 rental houses at the time or 30 homes that we were 15 of, which we were trying to flip 15 of, which were already rentals and we just moved everything into a rental portfolio. And so we started managing, we started out managing as a way to sell more homes though. We were kind of on the front end of turnkey world. And it was very new. The idea of selling homes or packages of homes to investors was very new at the time. And so we did that for three or four years and helped put together a big fund of local investors that bought up a bunch of Birmingham houses. But back in, let's see, 2013, we decided that we enjoyed managing more than the kind of deal of buying and selling. We were more of a, we call ourselves grinders the more of the plotters. And so we enjoyed management. So we, I still invest on the side about, about 30 or 40 houses a year, still personally, with a partner. And, but my, my day job is I'm the CEO of a company called GK houses. And we started here in Birmingham and started, I always tell the story started with those 15 or 30 houses, depending on how you looked at it. And then started just growing that business. In 2013, we managed about 250 homes. And today we've moved out of Birmingham into eight different markets and manage about 26, 2,700 homes. But Birmingham is still my home. It's where our corporate offices it's where all of our back office accounting and all of our corporate team is. And so, um, Birmingham is the market. I know really well and, and still spend a lot of my time investing in Tom: Yeah, Matthew and GK houses are great friends of rootstocks and a great partner that we love to advocate for. And we actually are double dipping our podcast. We are having a podcast dedicated specifically to property management that is going to be coming out very soon with Matthew as well. But today, where is the market focus? So great partner. Matthew: I love anytime I get to get on and sing Birmingham's praises, it has come from having a bad reputation for some certain things that happened in the past, but I'll tell you where Birmingham is a great place. And one of the things that people consistently say when they come here is number one, how green it is. So when you watch a movie about the state of Alabama, it's all red clay. And there are areas of Alabama that are certainly like that. But where I live is very green and very hilly. And they're amazed at how progressive, not just politically I'm, I don't want to get into that, but in terms of how it's moving forward. And we're really known for our food scene, our arts and culture scene. So very excited to get on and get to talk about the city that I live and have no desire to move. I get to travel a lot, obviously with my role as the CEO here at the company, but I have no desire to move because Birmingham is such a great place to live. Tom: Excellent. So the way that this episode is going to flow is we're going to start with some high level quantitative overview of the market. And then we're going to needle into math to talk about some of the specific qualitative of employer's points of interest and, and all that good stuff. So why don't we go ahead and start in our quantitative breakdown, and we're going to make this consistent for all the markets that we talk about first, the MSA. So the greater area of Birmingham, it has a population of 1.313 million, and this was based off of the last census data and map. What are the major cities that consists of the greater Birmingham area? Matthew: Great question. So Birmingham proper the city Birmingham is about 350,000 people, I think. And then it is made up of a group of municipalities. So one of the things that an investor would need to understand about Birmingham is it's not a County based government, but it's a very city-based government. So it's very fractured in terms of each little, like I live in Homewood, which is just South of Birmingham. And we have our own city government that manages our own school system, manages our own trash. Whereas somebody like a Nashville or a Kansas city would have a County based government. So that 350,000 people is Metro Birmingham. And then we have a bunch of municipalities in the kind of suburbs, so to speak what we call South of town and over the mountain area, which is all South of town. And then that also includes the Tuscaloosa area, which is where the university of Alabama is, which is about 45 minutes from Birmingham Southwest. And obviously that area has grown a lot with, uh, with the university of Alabama, as most university towns are starting to grow. So that's where they make up that 1.3 million. There's probably 1.1 ish, a one to 1.1 in what I would consider really proper Birmingham. We don't manage specifically down in Tuscaloosa than Bessemer, which is about halfway between Birmingham and Tuscaloosa is the, is one of the other big towns or cities. And then Hoover, which is due South of Birmingham is another. So generally when you talk about the MSA, you talk about the Hoover Birmingham Metro area. And so Hoover and Birmingham are really the two largest communities in that MSA. Tom: Got it. I'm looking forward to needle again, a little bit on those specific, uh, as it relates to thinking about those areas as investors. So that area has seen pretty significant population growth. According to the information we have with census plus 2.8% over the last couple of years, it has a median household income of $57,500 as a medium household income. This is coming from the John Burns data, and there's a pretty significant amount of units. So when I say units, single family homes, there is 520,000 homes in this MSA where 26% of them are renters. And this is again, John Burns along with some census data. So continuing looking at some of these metrics that we have on Birmingham. So a major uptick in new permits to build single family residence. The last value in 2019 is 3,280, and that is up 17.2% year over year. A couple of other metrics to throw around the entry home value within Birmingham is about $134,800. And this is coming from core logic. And the median rent, this is 1030 $2. Again, this is core logic where this is coming with a really steady rent growth. We'll actually have all the metrics, all the markets that I've seen as one of the highest that 6.5% increase in rent. The last couple of metrics I'll hit on before we get in to the quality of stuff that we'll talk with Matthew about is the rent tiers. So we see a rent tier, and this is again at John Burns metrics on the lower end of an $827, the mid $1032. That's that same median level and at the high tier $1,408. So those are the bands at which are identified in the Birmingham market. All right. So let's get back in talking about those specific main cities and other cities within the Birmingham market. So are the majority of the rental market, is it just an at Birmingham proper, or tell us a little bit about that. The distribution of rentals. Matthew: Let’s talk about Birmingham, because I think I need to kind of set the scene. So if you're listening at home and you wanted to bring up a map of Birmingham, what you will see is that Birmingham appears to flow from the North Eastern side of town down through the Southwestern side of town. And so one of the reasons for that is there is the start of the Appalachian mountains, just South of town and runs from the Southeast to the North are excuse me, from the Southwest to the Northeast, and then runs all the way up through South Carolina and in North Carolina. And, and so it starts here. And, and so if you think about when Birmingham was built, it was built in the early 19 hundreds, 1920s, and it was built because this was kind of the Pittsburgh of the South. It was a steel based industry. So you had a lot of wealth here, and then you had a lot of workers to support that steel industry. There's a lot of mining happen up underneath the mountain. And so when you think about the housing stock, the housing stock started kind of from the Northeast and flows down through the Southwest. And that is the older housing stock that was built on flat land. So if you look at the map and you look at places like Bessemer, which I talked about going up, I 20 through midfield and Fairfield, and then the Western side of town is called West End. And then you get to the Eastern side of town, which is, and starting to head North towards the airport, Woodlawn, Terrant Roebuck. You're talking about, East Lake, you're talking about areas that were built a lot of times in the, uh, some of those areas started in the twenties and then were built through about the forties or fifties. So when you think about investing in Birmingham, you need to kinda know what the age of the home is. And that's kind of the first thing I think is important is when houses are built and 19 hundreds, they were built with the idea, there was no air conditioning. And if you've never been to the South in the summer, it is really hot here. And we're, we're recording this during the summer. So I'm coming right out of the heat and it's a hundred and something degrees, heat index with almost a hundred percent humidity. And, and so that is really hot. So you can imagine the ceiling, sometimes in those homes were 12 feet tall so that the heat would rise. And so when you're investing, you want to make sure that either those ceilings have been lowered, because now you're going to be required to have air conditioning in them. And if you buy this older housing stock, you just need to know that it's older housing stock. So your repairs and maintenance are going to be a little bit higher. And what you'll probably want to dig into some of those, but let me, I'll give kind of the 20,000 foot view. And then we can dig into some areas. As move Northeast. And as you move North, and as you move further West, you get into more homes that were built in the fifties and sixties. So there was another kind of housing boom, around that time, those are more of your brick ranchers, more of your wood, three bedroom, one and a half, one to one and a half, two bathroom homes. And these, I call these your tanks. I mean, they're built for modern amenities because we started to use an air conditioning back then, but they're very efficient. They have closets, but they're not huge closets. They're just a very efficiently built house. So you might find a 1200 to 1400, 1500 square foot home in these areas. And they are great rental houses because again, their tanks, they just hold up really well. They're again, they're very modern people enjoy them. The one bedrooms obviously rent a little bit less than the two bedrooms. Anytime you get multiple, excuse me, not the one bathrooms, uh, rent less than the two bathrooms. Anytime you get multiple bathrooms. Very important. Now, one of the interesting things too, is what I would consider the more A-class housing stock is South of town. So imagine in the sixties and seventies. Tom: Is that Hoover? Matthew: Yes, you're talking about Hoover. You're talking about Vestavia, Homewood, mountain Brook, and these areas, these homes are hard to buy and make the rental numbers work, but these are all built up on the mountain. So when we say over the mountain, you had more, as technology came in along and building, you are building these homes on the side of mountains. And so the housing stock is much younger as you get more vertical in Birmingham. And now if you're listening to this in Denver, you might fly into here and wonder where the mountains are. There's all rolling Hills, but we call them mountains. And then as you get further North, just like any city, it grew out, right? You're going to get into areas like Fultondale and Gardendale North. You're going to get into areas like Trussville to the East. You're going to get into areas like Hoover and kind of the Indian Oak mountain Indian Springs area, where my wife grew up, where Oak mountain state park is. And then as you go West, you're going to get into Hueytown and pleasant Grove. Now these are your B plus neighborhoods that are kind of out a little bit further great areas to buy for high appreciation, but there's suburbs there. People are going to be driving into the city to work. And so, you know, just like any town, you can pretty much dictate what the pricing is of the house based on when it was built and what the housing stock was built for. Tom: I think one of my favorite adjectives for a rental property is a tank property. That just goes on. You didn't mention what cities you said it was in the West or the Southwest. Is that like pleasant Grove and Fairfield or… Matthew: Yeah, Hueytown pleasant Grove. Our Fairfield's more of that first area that I was talking about that was built more of a C class neighborhood. But when you get into Hueytown and pleasant Grove, you're talking about B plus B plus properties with high possibility for appreciation, a lot of home ownership in those areas. So really if you talk to some of the local investors, those are some of the areas that they like to hit the hardest. Michael: Got it. Matthew, I've got a question for you. What I want to know is why are people living in Birmingham and are moving there? You know, there's gotta be job, pull job growth. Can you talk to us a little bit about who some of the major employers are and why folks are headed that way? Matthew: The biggest employer in Birmingham is university of Alabama at Birmingham, the hospital and the university. So when you combine that it is a teaching hospital, it's one of the, in the Southeast, it…

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A Deep Dive With a CPA to Uncover All The Tax Benefits of Rental Properties Jul 16, 2020

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In this episode, we have Joel Jensen from Tax Sentry explain exactly why real estate is so powerful when it comes to tax benefits. --- Transcript: Michael: Hey everyone. Welcome to another episode, The Remote Real Estate Investor, I'm Michael Albaum. And today I'm joined by Emil Shour. And today as our guest, we have Joel Jensen from Tax Sentry, and Joel is a tax expert and guru, and is going to be talking to us today about what we as investors need to know about income taxes and how to strategize and plan for our taxes so that we can come out ahead. So let's get into it. Theme Song Michael: Joel, thank you so much for being here. Really appreciate you taking the time. Joel: Sure. I love to be here. Michael: Awesome. So can you give all of our listeners a little bit of background about yourself and how long you've been working in the tax space and kind of what you've been doing? Joel: You bet. So I graduated with my master's degree from Brigham Young University in the early nineties. So it feels like a long time ago, but from there I went to work for Ernst and Young, which is one of the, we'll call them the last four large service firms out there. When I was there, they were the big six. Now I kind of call them the final four, but I was with Ernst and Young for about 10 years working on large audits, large compliance, scc transactions, that type of thing. And after doing it for 10 years, the part of the job I really, really liked was working with people, you know, the interactions I had with people, the part I didn't like was feeling like that was just servicing kind of these large companies. So what I decided to do was leave Ernst and Young kind of start my own firm. So I could actually have a significant impact on an individual's tax and financial circumstances where I felt it was much more gratifying for myself personally. And I've been doing that for almost 20 years now, became a real estate investor myself, probably back in 2005. So I've been doing that as well on the side, which I really enjoy some houses, own some rental properties. So since then, I guess I'm in the real estate game, but my full time job is CPA. Great. Michael: You know, it's so counterintuitive that you mentioned that the favorite part of your job working at one of the big six of the big four was interacting with people. Cause all the accountants I know the worst part of their day is when they have to interact with people. Joel: I know there's probably only lasted 10 years, right? I'm like, ah, this isn't for me. I gotta go, gotta get out. I gotta get out now while I can. Michael: Awesome. Awesome. So, and I love too that you're an investor because you drinking the Koolaid too. And so really talking and preaching and consulting on the things that you're also doing. Joel: Correct. Yeah. So I think it helps, you know, if you're dealing with a CPA, for example, that at least they have a working knowledge of what it is that you do. And since I am in the real estate game, obviously I have lots of real estate clients, even contractor clients, anyone, even within the field of real estate, whether they own it or provide services to people who own real estate, that kind of outlines a significant of my clients. Michael: Great, great. So I wanted to jump into the meat and potatoes of this tax discussion right away. And I'm gonna let Emil kick it off in talking about deductions and kind of what those are, what those look like, what people should be aware of. Emil: So the various types of deductions that real estate investors should have on their radar are property taxes, property insurance, mortgage, interest, property management, fees, property repairs, and maintenance, capital improvements, and ongoing maintenance and advertising expenses. So things like the cost to list a rental, to find a new tenant marketing your property for sale. Those things are also deductions as well. Joel: Let me go through maybe the aspect of what it is like to actually own a property. So I go out and I buy a rental property. I'm going to bring that in. I'm going to put a renter in there and I'm going to earn rental income, right? So that's kind of the basic premise of when I own a rental property. Now what's offsetting part of that revenue are some of the standard deductions, like you mentioned. So oftentimes when we buy rental real estate property, we're financing it. So we have mortgage interest, right? We're deducting against that revenue. We have insurance that we have to pay to insure the property that we're also going to deduct against that revenue. Oftentimes it's maybe it's our self, right? Maybe we're managing a property and we don't have a management company that's doing it. Or let's say the property is, I don't know, a hundred miles away from me. So I have to get a property management company involved. So I got to pay them in order to do it. So I may have some of those types of fees, maybe some HOA fees for owning the property that are due, especially in kind of a condominium space, right? Condos or maybe apartments or multi-doors, rental properties, that sort of thing. I may have some of those fees as well. You know, advertising, whether I'm advertising something for a person to rent or whether I'm advertising for maybe a home to sell all those costs, kind of go in to offset my particular rental income that I'm earning. So if you can think of kind of, if I take, you know, lots of people have experienced with their personal homes, right? And they say, look at all these outgoing bills, you know, utilities, interest in my property, taxes, all those things, think of it in those terms, all those same expenses that you have for your personal home, you're still going to have for your rental property. Cause it is still house, right? In most cases, right? So you're going to have those expenses. Now, all of those things that you're paying out for that property become deductions against your revenue. So I would just look at it as kind of all the expenses that are associated with the property. I get to deduct to get any rental income that a renter is paying me. Michael: And that's so different than like you mentioned on our primary residence. If someone has a primary and they have a property tax bill, they don't get to deduct that against any income because there isn't an income, but they don't get to deduct that against them. So it sounds like pretty much everything on a rental property, if it's an expense as a deduction. Joel: Yeah possibly can be, yeah. So let's make it easy. So I got to go change a light bulb for someone because they don't have a ladder. So I go to Depot, I buy a light, I go over to my rental property. I put that light bulb in, I get the cost of that light bulb and I get a mileage deduction for driving down home Depot and for driving over to my rental property and then for driving back to my house. So that encapsulates two actual deductions that I may have going for me to offset some of that income. So I always tell people, look at what it took for you to make a dollar. Let's do it at the bare bones minimum. What did it take for you to make a dollar in conjunction with that rental property? How did you spend your time? How many miles did you drive? What were you buying on behalf of that rental property? What were you buying in order to maintain that property or service that property? For example, you know, renters in there, I managing it myself, got to have a cell phone right now that's cell form becomes a deduction against the rental income. Probably got to have internet if I'm going to list something. Well, now I get to write off my internet as part of the operations of that rental property. So I always say really take a hard look. What did it take for you to make a dollar? Okay, what did it take for you make a dollar and that's probably what you're going to be able to deduct on your tax return as part of that real estate operation. Michael: That's great. Emil: So all those things we just mentioned are those fully deductible or is it only 50% or some partial amount? Joel: Ah, good question. Because of the new tax code limits as personally from our property tax perspective, right? So we can only deduct up to $10,000 worth of state or property tax on our personal tax return. But when it comes to my rental activity, I don't have those same kinds of limitations or I'm deducting property tax in full I'm, deducting my mortgage interest. I'm deducting, you know, the cost of the light bulb in full. Most of those aren't limited or don't have limitations as far as my deductability against the rental property. Michael: So then Joel, is it accurate to say, let's say I made $10,000 in rental income in the year and I spent $6,000 in these various expenses that we just mentioned, the delta, there is four, 4,000. So that I ended up with $4,000. But is that what's taxed? Joel: That is what's taxed. Yeah. It's your bottom line. Sometimes people get revenue. I an accountant right. So I kind of speak in the account language. So sometimes people think revenue, Oh, I'm texting revenue. This renter just paid me $24,000. Now I got to include $24,000 in my income tax return. And that's what I'm taxed on. But in actuality, what happens is you're taxed on the net. Okay. So I take maybe that $24,000 or in your case, the $10,000 I deduct the $6,000. I'm only taxed on the four grand, not on that top line number. Michael: Great, great, super, super powerful. And so that kind of leads in actually to the next point that I want to talk about, which is this thing called depreciation, which I think most investors have heard about maybe not sure how to use or what it actually means. So can you give everyone an idea and a breakdown of what depreciation is and how we can use it to our advantage? Joel: Sure. Now I will say If I own a rental, you must take depreciation expense. It's not something that you can leave off. I've seen tax returns that were given to me after the fact of rental operations for people that wanted me to review it. And then I look at depreciation and there's no depreciation. So know that you have to depreciate a rental property. And what that means is the IRS is giving us basically a useful life. If you will. They're saying that I go buy a rental property. It's useful. Life is 27 and a half years. So I'm going to define the cost of that property over that 27 and a half years. And I get a yearly expense of whatever that number ends up being that yearly expense is awesome because I'm able to deduct that. Let's take back your scenario of 16,000 worth of expenses, like with 4,000, right? But those six thousands were hard, cash, outflow numbers or dollars. I still get to deduct my depreciation that gets that four grand. And now maybe I'm only taxed on $2,000. Right? So depreciation is a wonderful thing because it's also kind of a non-cash item. Okay. I bought the property, it has a loan on it, or maybe it doesn't. Maybe I was able to take the property down in full when I initially purchased it. But I still, even under that scenario, get to depreciate the property. So I'm not paying for the depreciation. It just happens automatically once I purchase it. Michael: And so you mentioned that it's based on the purchase price. Is that right? Joel: Based on the purchase price. That's correct. Yep. Michael: So, In our $10,000 rental example, if we bought the property for a hundred thousand dollars, I did the math really quick, here, Joel: Thank you. Michael: I wasn’t going to put you on the spot. And we say that residential property is 27 and a half years. Right? Commercial property is 39 years. Joel: Correct. Michael: And so if it's residential property, we divide the purchase price by 27 and a half. If it's commercial property, we divide the purchase price by 39 years. So let's take our a property. We bought for a hundred thousand dollars divided by 27 and a half years, we get $3,636 of depreciation every year, Joel: Every year until that 27 and a half years has passed. Michael: Got it. So going back to our $10,000 in revenue example, we had $10,000 in rental income, $6,000 in expenses. So it leaves us with $4,000 net gain. But now you're saying we get to deduct an additional 36 36 and meaning our taxable income is going to be like 40 bucks for the year? Joel: Correct? Yep. Holy smokes. Yeah. So that's the power of appreciation. That's why it's so great. So when I buy a rental property, a great position to be in because of depreciation is to be what I call cash positive. Meaning that the revenue that I'm earning is greater than the cash outflow for any expenses that I have. But because I have this depreciation figure, right, I can actually have a loss on my tax return yet still be cash positive in the real world. I mean, that's the power of real estate. So when people say, Hey, I want to go into real estate. There are tons of tax benefits. Oftentimes that's what they're referring to. That I can create loss on my tax return and offset. Maybe my wages, my w two wages from my employer, even though I'm cash positive when it comes to the actual activity of the property. Michael: So what another way of saying that be at the end of the year, I can end up with a thousand dollars in my pocket, but actually offset the income that I've earned from my W2 and get taxed at a lesser Joel: That's correct. Yup. Yup. I see it all the time. Emil: I love that you guys brought this up because this is why people tout the benefits of real estate, right? It's like everyone knows there's huge tax benefits and this is the biggest one where you can actually be making money all year cashflow positive, but because of depreciation, you're showing either no gain or a loss potentially offsetting your personal income, so. Joel: That's correct. Yep. Maybe you have that scenario, loss, cash positive. The other thing that happens with real estate is our gains, right? So our appreciation just to the value of the property over years tends to go up. So when I sell it, I'm going to sell it at a higher dollar than when I purchased it for, and the entire time I'm owning it, I'm showing all these losses, but I'm still reaping these cash, positive cash, positive cash flow numbers that are coming through. Yeah. It's a real powerful game when it comes to real estate. That's why I'm in it, right? Michael: That's right. That's right. Joel: Yup. Emil: Probably a little bit more tactical or advanced, but okay. Let's say I've owned the property for 27 and a half years. Right? I've taken full depreciation now I want to sell it. Right. One strategy we've talked about on prior episodes is using a 1031. So let's say 1031. So I have no capital gains on the sale. When I 1031 will my new property, will I be able to depreciate that one over 27 and a half years or what happens to this amount? I've depreciated all that time. Joel: So it depends on basis, right? And typically what happens in 1031 exchanges, if you held it for that long and then 10 31 to a new property. I mean, that would be a pretty phenomenal thing, but, but what we do is oftentimes people are selling something to get into something that's larger or bigger or creates more revenue. Right? So it depends on my basis. So if I had something that was worth 300,000 and appreciated at all 27 and a half years, I 1031 exchange that and do something that's 500,000, I've alread…

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The Pros & Cons of Investing in Rental Properties with an HOA Jul 09, 2020

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In this episode, we have Katrina Phillips from Investor HOA Services on to explain everything investors should know about investing in properties that are a part of HOAs. --- Transcript Tom: Greetings and welcome to The Remote Real Estate Investor. On today's episode, we have one of the most knowledgeable persons I know on HOA. We have Katrina Phillips, who's the founder and CEO of investor HOA services. So are you, you are interested in investing in a property that is in an HOA. This is a great episode to listen to. All right, let's do it. Theme Song Tom: Hey, Katrina. Thank you so much for jumping on with us. Katrina: Thank you. Thank you so much for having me today. It's my favorite topic to discuss. Tom: Perfect. Well, why don't we go ahead and start, give us a little bit of a background about yourself. Katrina: So I started in the single family industry back in 2012. Prior to that, I was actually a contractor and had several properties that we bought refurbished and sold. And so I spent about 20 years in construction learning it from every aspect so that I can learn it from. And then I started working with American residential property and really develop their operating platform or was their first hire on their operations team. And people really hadn't done this in the past. The first multifamily, we were able to pull things from, but really we were writing the policies and procedures, the books and utilities and HOA were two things that people hadn't really thought about. It wasn't even a line item on people's profit and loss that they were considering in their, you know, when evaluating investments. And so we really began to build that piece of the process. How does that work? How does, you know, the fact that we own 70% of our properties are in an HOA? How do we interact with them and how does that work? So that's how I kind of got into this side of the business. Tom: Awesome. It's funny to think about 2012 and I was there too. It was the wild West where, you know, a lot of these companies such as yours and the ones that I was working at was raising a ton of money, buying these houses. And it's just kind of learning as we go and, you know, HOA and utilities, you know, came to be pretty important, parts of the details in doing this at scale. Katrina: It did. And it was so much fun. I thoroughly enjoyed every minute of it. And, uh, you know, we learned a lot and grew it, and here we are today. Tom: That's awesome. And you have since gone on to start a new company, right? Why don't you tell us a little bit about your company that you are running right now? Katrina: So I was actually sitting in a meeting and, um, we were working with a utility provider that function very similarly to what we have structured as well. We actually asked them the question of if they'd like to take on HOA as, you know, as part of their process and has it was becoming a really growing concern and issue and having some pretty significant impact on the bottom line for companies. So they said, absolutely not that they wanted to stick with what they specialize in and that really planted that seed for me. And so that's where investor HOA services came into play, where, you know, we took a singular focus to build an operations platform around that that also integrates pretty seamlessly with other companies, systems and process. I knew I couldn't go in and say, throw away what you're working on right now and use what I'm saying to use. I also knew that we had to get it so that people could kind of go to one place to access information and things that they needed to manage the property. And so that's what we began developing back in 2017 is really an operations platform that can be used in several other areas. We just chose to focus on HOA because we could see it with a growing concern, making bigger and bigger impacts to the bottom line of companies. So we focused in there first, so that is investor HOA services. Tom: That's awesome. So to sort of paraphrase investor HOA services is a provider for investors to manage basically all things related to the hos for the properties that are located at those hos. Is that right? Is that a good summary? Katrina: That's correct. So everything related in the full life cycle of compliance, which could be a city code, HOA, rental, registration, municipal permitting, and all of those kinds of things on the compliance side of property management. Tom: Very cool. Very cool. Awesome. Well, let's go ahead and dig into some of the meat of this learning a little bit more about H ways and how they relate to investors who are evaluating. So why don't we take a step back and why don't you define what is an HOA and, you know, high level, what are they Katrina: So HOAs can be actually kind of several different things. And of course there's no consistency across the country of what an HOA physically is, but in general, in HOA is a nonprofit company that manages common areas, common elements within the community amenities. And there's also of course, condo owner associations, there's civic associations that are often voluntary membership, and we're starting to see more and more different types of HOAs, such as a borough and a neighborhood developments. Of course, in Florida, you actually see a lot of community development districts. There's some really fun, fancy development districts in Florida that have waterslides and water parks and all kinds of fun things in those. And so to be a member or participate and utilize those amenities items, then you pay your assessments fee on an, you know, either quarterly or annual or semiannual basis. And the HOA then kind of takes care of all those common area elements. Tom: Got it. And that's interesting about some of the, those new amenities that are poking up around water slides. I mean, he made it sound it optional at all to join the HOA, or is it like, you know, since your property's located there, or is it kind of built into the deed that you have to join the HOA? I'm curious about that. Katrina: Yeah. Civic associations are voluntary. Often they'll have a community pool or something that is shared amenity there or a park or something along those lines. We'll see a lot of lakes and that kind of thing within a civic. So that's voluntary. You also have something called a club membership, which will be, you can pay for different levels of membership within that. So for example, most often they include a golf course. You know, they might include a workout facility that's extra above and beyond what a standard membership would be. And so those are voluntary in regards to what the levels are that you can buy into. But in general, yes, if you're in an HOA, just kind of a standard HOA, then you are required to participate in their program. Michael: And it sounds like there's kind of numerous different styles of HOA. I know for me, when I hear HOA, I just automatically think of condo association, but what you're telling us is that they could apply to single family homes, town homes, you know, planned communities. Is that fair to say, Katrina: Yes, they can be commercials, commercial spaces. There's just all kinds of different options out there. Michael: Interesting. Got it. Katrina: There's probably about 10 that are standard that we see standard across the board. And then in different parts of the country, you see kind of different nuances within that. Like I said, you'll see boroughs, of course, in New York and New Jersey, that's a little, you know, structured similarly to a civic or community development, but they all have a little bit of different nuances to them. Michael: Okay. Interesting. And you touched on amenities a little bit, and I was curious if there is such a thing as kind of a common or a standard set of amenities that you get as being part of an HOA, or do they vary as drastic as the style of HOA that there could even be out there? Katrina: They vary very drastically. So we have especially see this a lot in Georgia where maybe it was built in the eighties, especially, well, pretty much any community built within the 1970s and eighties when HOAs first kind of started coming on the scene, they are just more of a planned community. So you'll see the coldest actual see similarities in regards to finishes on the exterior and, you know, mailbox requirements and that kind of thing. And then it's kind of more where it evolves as time went on. And that's where you kind of see some standardization on what I guess they were into in that moment. So then you hit into the two thousands and, and then now into the late two or 2020 range, and you're seeing these, you know, fun things like that are going on in Florida. So really it varies pretty tremendously. And that's a big part of what we do is we look at okay, what amenities are available, where that assessment money going to, and what's the benefit you're receiving from that. Tom: That's interesting. I never thought about it that way about, you know, the vintage of the property. Like what was the fad for developments in the way that they structure these communities? So depending on what year you bought it, it is kind of a different flavor of the way that they were structuring. Super interesting. So I got a question. So if you put your investor goggles on and just think this is very high level about evaluating a property with an HOA, what would you say generally speaking, like what are the good things about buying a rental property that's in an HOA and what would be some of the detractors of buying a property in investment property? That's at an HOA. So we'll start with the positive. Katrina: Yeah, let's start with the positive. So one of the things we learned and identified very early on is here, we are an investment firm and we're based out of Scottsdale Arizona. And our house is in Georgia and the HOA begins to function as kind of your eyes and ears and helping you monitor and keep an eye on that property. So I think as an investor, that's a huge value to you. You don't have to actually have people on the ground, you know, checking that property, the HOA is doing that for you. So I think that's probably the biggest positive as well as from a leasing perspective, of course, you know, you're leasing a property that has most likely some upgraded amenities and features that are desirable to people leasing. So, you know, it assist with that, it making it a home to that person occupying that property, not just a rental, they feel like they're part of a community and part of a home on the flip side of that, that can actually, that community sense is something that the HOA have expressed that they're concerned about when institutional investors come into their community, will there be that loss of sense of community because it's a renter there and they're not going to actually participate in the HOA itself. So that can be a con I think one of the other issues that has occurred over the last several years and kind of my number one thing that I focus on is rebuilding communication bridges, because what happened was when institutional investors came into communities, the HOA did it kind of feared that and was a little concerned that the property values would degrade and there would be issues. So one of the things that has been, I guess, a missed out by the industry is that they didn't work to keep those communications open with the HOA and the HOA began to grow very frustrated. So what they've done out of their frustration is began to really Institute some rental restrictions to either prohibit institutional investment in that community, or really eliminate it and control it. So that's been kind of the, the other side of it that's evolved since 2012, when we first got into the industry, they were happy and they were excited about us coming into the communities. We were remodeling the property and making things better. And then that slowly started to shift in 2013 and 14, where they began to grow skeptical. So there's been a lot of work to alleviate that situation, but there's still some work to do there. So that's kind of the flip side of it, where the HOA is, are frustrated and they're kind of lashing out in these different ways to really essentially get some people's attention and get things cured. And together, Michael: You touched on it a little bit ago, Katrina, but I wanted to circle back to it for my own edification. We said that HOA is our nonprofit businesses, who is the HOA when we talk about HOAs. Katrina: So the HOA for the most part is a voluntary board of directors of owners within that community. So I we're seeing fewer and fewer of those, maybe it's because most HOA has gone out and decided to have a management company come in, such as associate or for service residential and come in and manage that. So the HOA is just meant to collect dues, cover the expenses of maintaining those common elements. And then that's pretty much it, that's all their job that's there. And then of course, to ensure that people adhere to the CC&Rs for that community and, you know, don't let their grass get to leave their garbage cans out, all that fun stuff. Michael : Okay. And so when you talk about the HOA members or board being frustrated with institutional investors coming in and looking to crack down on that a little bit, that's just a group of owners in that specific community that are feeling that way and expressing those frustrations? Katrina: Correct. Michael: Got it. Tom: Gosh, I love your point about, on the good side of thinking of as another eyes and ears. I think a lot of times, you know, we ask these questions, I kind of have an idea of which direction, you know, we're going to get a response, but I never thought about that way of thinking of the HOA as, as kind of part of your team love that. So you touched into a great transition point CC&Rs and, you know, making owners out here, what are some of the recourse that the HOA companies have and with owners that are not adhering, and I'd love for you to get into that and CC&Rs and rules around that. Michael: And Katrina for those of our listeners that might not be aware, familiar, what does CC&R stand for? Katrina: Covenants codes and restrictions? So it of course varies by state. Each state has some extra nuances. You know, Florida has some really interesting ones, New York, New Jersey as well. So the CCNR are put into place and in those CC and RS, it's really spelled out what the recourse is. We have some, we've had some interesting updates over the last several years in regards to what the HOA can charge you because previous to this, and it kind of started in an Arizona, which is where most HOA has, you know, kind of evolved from. But the previous to this legislation that came through the HOA, kind of do whatever they wanted in regards to getting your attention and having you pay fee. So we're seeing over the last five years or so where they're really standardizing that across the country, which is wonderful. We like standardization. And so they're making it so that they have to go through a very specific process to notify you of that violation, give you a period of time to cure. If you don't cure, then it goes to the next step. And so usually it's a courtesy warning, one, two, and three, then by warning three are incurring a fine, and those generally start at $25. But in a lot of States, we also have, what's called a stair set process, which is another thing that investors, there's a way to…

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A Special Announcement... Jul 01, 2020

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Emil:

Hey Michael

Michael:

Hey Emil whats going on?

Emil:

So right now we are doing something a little different than we normally do. Usually we have a full length episode, but what we wanted to do was do an AMA, an Ask Me Anything, where we want to take questions from you guys, our listeners, and answer them on an episode. So if you guys want to record your question, email it over to us, we will feature you on the episode and answer those questions live. So email those over to eshour@roofstock.com and also send over to Michael who’s at malbaum@roofstock.com. Just grab your phone, open up the voice memo app and record your question and share it with us and we will feature you on the episode. Or, if that is too complicated, just send us your question in an email and we will answer those as well.

Michael:

Or if that seems like too much trouble and you’re not really tech savvy such as myself you can go ahead and call us and leave a voicemail with your question as well. So the number is 415 343 5866. And just leave us a voicemail with whatever your question is and we will answer it on the episode.

Emil:

And make sure you get us those questions by Wednesday July 8th, because we are probably going to record this on Thursday July 9th and release the episode on Tuesday July 14. So make sure to get us those questions by Wednesday July 8th.

Michael:

Hey Emil I got a question, what’s your shoe size?

Emil:

You’ll have to send me an email and I will answer it on the episode.

Michael:

Awesome, so anything you want to know real estate related, send us a question and we will answer it on the episode. Looking very forward to it.

3 Simple Systems Every Investor Should Use to Efficiently Scale Their Portfolio Jun 29, 2020

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In this Episode Tom, Michael and Emil share their systems that take the headache out of acquisitions and ownership to effectively scale up. --- Transcript: Tom: Greetings and welcome to the remote real estate investor. My name is Tom Schneider, and I'm here with Emil Shour and Michael Albaum. And today we're going to be talking about something that is near and dear to my heart. We're talking about building systems. We're talking about automation. We're talking about scaling. We're going to touch on these topics and a couple of specific strategies as it relates to acquisitions and ownership. All right, let's do it. Tom: All right. Welcome back to The Remote Real Estate Investor. Before we get going today, we're going to do a quick introduction from the host a little bit about ourselves and our experience and background and all that good stuff. So, Michael, why don't you go ahead and lead us off? Michael: Sure. So I'm Michael Albaum. I used to work in my past life as a professional fire protection engineer in the commercial property insurance industry. So everyone has to bear with me if I speak in math terms, cause I'm a reformed engineer. I've been an investor for the better part of a decade and started very traditionally with single families. And now I've found a, found my stride and niche with multifamily value, add projects out in the Midwest. And I'm also the head coach of the Roofstock Academy program and meal. Can you introduce us to yourself and your mustache? Emil: Hey everybody. My name is Emil Shour. I work on the marketing team here at Roofstock. My fun fact is I actually bought a couple properties through Roofstock before I was ever working here. It was a big fan of what the company was doing and now lucky enough to get to help spread the word. And I own a couple single family rentals across the Southeast and Midwest. Tom: And my name is Tom Schneider. I am the director of investor education here at Roofstock. My career has been focusing on putting technology process to scale and build systems. So this episode is particularly exciting for me is how I do this personally, with my investing. I've been in real estate investing for over the past 10 years, and I'm also a California broker. Michael: Nice. Emil: The only one of us who's licensed. Where do you have your license hung somewhere as a broker? Tom: You can just hang it right around here. Michael: Yeah. Hang it on yourself. Tom: Hang it on myself. Michael: The broker test. Isn't so much more work than just the agent test, right? Tom: It is. They've made it harder when I got my broker's license, it wasn't quite as difficult, but they made the experience requirements a lot more difficult. It was kind of funny. I initially worked in acquisitions for one of the publicly traded rates and literally the day that I passed the broker test, the person who was leading our technology says, Hey Tom, we need a can-do guy to help build out a bunch of systems. And I was like, okay, cool. Let's do it. So I got my broker's license and then proceeded to never use it until I did use it when I bought my own house. So I guess it paid for itself there. Emil: What is the difference between an agent and a broker? Tom: I'll tell you, I should kind of have an idea on this. So an agent needs their license to be hung underneath the broker. The idea is a broker understands the business a little more and folks who are agents can eventually become a broker. If they wish to, they basically can operate on their own. So within California, you can apply for an agent or a broker. And the broker aspect of the test is a little bit harder and the requirements to get it is a little bit more difficult. Emil: Got it. So a broker can do everything an agent can do, but an agent can't do everything a broker can do. Tom: Yes. Yes, that's correct. That's a good way to put it. Michael: Getting ready for my broker tests. Emil: Awesome. I've already learned something on this episode! Tom: Early and often, baby early and often. All right. We'll jump into some system stuff. So we have a variety of different things and we're going to have a different one of the hosts take the lead in talking about. So we're going to start with acquisitions. And Emil, why don't you lead us off on some systems, some practical systems that folks can do on their own. Emil: It might be a little obvious, but I still think it's worth stating. Set up automated filters and alerts on the places you look for properties. If you're on Roofstock. If you guys are familiar with stock is our marketplace where people can buy and sell single family rental properties. You can go and filter by whatever meets your criteria and save that filter. So you get notifications when new properties hit the site that meet that filter requirement, same thing on other sites like Zillow or Redfin or realtor.com, wherever you're, once you've figured out your buy box. And I'll talk about that in a second. Defining it, plugging it in as a filter so you get automatic notifications cause you want to be on top of those listings, right? When they hit the site, right? It's a lot more effective than just constantly going on them and checking your listings. Even though I do that all the time anyways, Michael: I don't know about you guys, but I constantly get notifications from Zillow and Redfin about new properties that have hit the market, but I didn't save a filter even, you know, I searched there twice or three times and now I was like, Oh great. You're super hungry for properties in that market. So I'm just getting blasted by these emails. Yeah. Emil: Every time I look@realtor.com, like I was curious the other day about like, what do multifamily in Bakersfield sell for? And now I've just, I've been getting Bakersfield filter notifications from realtor.com. It's like, man, Tom: What's cool about these websites and the filters, a little pro tip is you can get really granular with your filters and set up multiple filters. So what I'll do is on my inbox that I have all set up multiple inboxes and I'll set up a filter within my I'm gonna, we're gonna do filters on filters. This is a very layered, Michael: Filter-ception Tom: Yeah. Very meta. So within my inbox, shout out Gmail, just kidding Emil: @Gmail, let us know if you want to sponsor us. Michael: Yeah. I've never heard of this Gmail, but this Tom Schneider guy talked about it. Tom: Anywho, I set up like a master folder for like incoming property leads. Right. Then within that I'll set up additional folders for each different type of either region or property type. So as new listings that meet my criteria are hitting. I have them in a nice clean folder, so, Oh, great. A new Florida property. That's a duplex in this area and I have a special folder for that. What I'll also do is oftentimes timing can be pretty important and moving quickly, instead of setting up a filter that comes just once a week or once a month, since I have this infrastructure within my Google Gmail, shout out again, I'll have it actually doing real time. So I'm not getting pinged in my main inbox if I'm working on some other stuff, but I have a way to see immediately based on whatever that criteria it's hitting that inbox. So again, the super simple paraphrase, but this isn't that complicated. I have a bunch of different inboxes within my Gmail. And then within the, my buying platforms, I'll set up many filters and many alerts and many immediate alerts. So it'll hit right into my Gmail and I'll know at that time, all right, this one looks pretty good and I can move pretty quickly. And I don't have that issue of, Oh, Property. It's already pending. Like I'm not passively looking for it. It's proactively hitting me as soon as it hits the market and I can act and jumped on it. So that was my extra tidbit on that piece of mill, Michael: That description Tom was amazing. It gave me such a visual of kind of how you operate. And it made me reflect about how I operate. And you, I'm picturing this nice, neat cubby with nice section organizers. And mind's like just a fricking melted pizza, but it's just crap everywhere. It's, I'm so jealous. I want to be like you and I grow up and have these systems, but in place, I love that. Tom: That's why we make a great team, Michael. That's why we make great team Michael: Coffee-man, and melted pizza. Emil: Oh yeah. I'm not surprised Tom is like the most organized out of all of us internally. And I'm not surprised when it comes to acquisitions. You're equally as organized with the pick and choose you pick and choose. There's definitely lots of messages. So one thing, if you're going to one of the sites we mentioned, and you're not sure how you should set your criteria, just know that it's okay to start a little wider. And then as you've looked at more and more listings, I think you'll get better at defining your buy box. I know we talk about it a lot and we say, okay, build your buy box. And sometimes it's hard to just like, know what to choose. Right. I kind of started larger. For example, I chose a couple of different markets, couple of different properties, size, like a bigger property size. Tom: I like it. You feel that you need to shoot with a sniper. I keep using these weapon analogies, but it's okay if you're not sure to start with like a broader spray and then work your way down as you refine what you're looking for. But I'd say it's better to keep it an open, an open range, and then, then shrink that down. Michael: Nick it down. Emil: Yup, exactly. And also because sometimes whoever uploaded the listing, sometimes they don't include that information. Right? So if you have like really, really specific defined criteria, you may miss something where whoever listed at the seller or the agent or whatever, just didn't submit that information. It doesn't hit the filter. I've noticed that on a couple of things. Michael: And just a pro tip for everybody listening to, if your budget is a hundred grand on the high end, set your filter up to one 20 to include properties that are listed above that because you might offer a 100K and get it. Versus if you set your filter criteria right at your end budget, you might never have seen those properties. Emil: Yeah great tip, go like 10, 20% above what you are actually planning on spending. Michael: It also gives you an idea of what the next tier of property looks like. So if you did want to ultimately spend more, no. What would that buy you? Tom: One last piece of advice on building a bike box is to think about how many properties do you practically want to evaluate at a given time? And yeah, you can control this with your buybacks by how targeted it is. So if I have a lot of time and I want to look at a lot of product properties, I'm going to have a really wide buy box. If I don't have a lot of time right now to evaluate properties, I'm going to tighten my buybacks down a little bit. So one way to think about it is to work backwards about what your kind of capacity is for evaluating effectively. Emil: It's also, I think when you're first starting out, I think it's okay to, again, to nail this point of going a little broader, I think with time and experience and having different property types, you'll start to get an idea of like, this is the exact property I want in this exact area. Tom: Awesome. Michael, do you wanna jump on your next acquisition system? Michael: Yeah, absolutely. So, so much of this, in addition to searching, can be done socially kind of quote unquote. And so just talking to everybody who's willing to listen and maybe even some of those who aren't, about what it is that you're looking for. So just in everyday conversations, talk to friends, family members, people in your network about what it is you're doing and what it is you're looking to do because so many eyes are going to be better than, than just one set. So if someone then comes across a property just in their everyday life and thinks, Oh, well, I remember Tom mentioning that he was kind of looking for something like this. That can be a great deal funnel for you as well. Property managers can also be a fantastic, fantastic source of deals for you, which is pretty automatic. You just tell them, Hey, this is what I'm looking for. You, you set your filter, so to speak with them and any property that comes across their radar. Oh, Hey. Yeah. I remember, you know, Emil, I kind of managed this property for him. And he's looking for something like this. It becomes so easy. And so automatic that it's one of those things you can just kind of say it and continue saying it and then forget it. There's not a whole lot of nurturing that has to be done with those types of things, other than some, you know, reminders. And don't be the person that, Hey, have you found any properties yet? Have you found any properties? Just put it out into the universe and just kind of let it, let it bake for a bit and see. Tom: It’s like The Secret. You guys remember that book? Pierre: I'm still waiting for that check in the mail. Tom: It’s coming! Wasn't it The Secret and then The Answer as a followup or something. Emil: Yeah. Tom: Incredible. Incredible marketing. Michael: I didn't read that one. What's The Secret about? Pierre: It's the laws attraction. Michael: Uh, okay. Okay. Pierre: It's when you focus on something for long enough and eventually it comes to you, essentially. Emil: That's right. You don't have to actually do anything. Just think about it every day. Hope for it every morning, but no action required. Just think about it. Michael: Million dollars, Million dollars! So it's interesting. So for the Academy book club, we just did Think and Grow Rich. And I thought that, you know, that was such a great title by Napoleon Hill and we read it and I thought it was really awesome and talked about a lot of kind of high level things, mindset type stuff. And it was talked about very similar type stuff. And it was, it was interesting. They're all talking about, you know, if we stand around here and talk about blue cars, we'll probably go out and see a bunch more blue cars. And it's not so much that there are more blue cars on the road. It's just that now we're cognizant of that thing. It's kind of front of mind. So it appears more often for us. Tom: Yeah. I love that example, Michael, cause not all systems are digital or not all systems are technology, but it's, it's leveraging the people side of your network of funneling in deals through that. So at the end of the day, like a lot of real estate is a people business and nurturing that and building a system that you want and funneling them in deals is excellent. Michael: All the real estate meetups that I went to, um, pre COVID, they all talk about they'll usually start or end with the needs and wants section. So people talk about, okay, this is what I need or is it “have and wants” Tom: Maybe it’s a “give and a take”, I think I know what you are talking about. Michael: Yeah. You announced to the group, what it is that you have to offer to the group and then what it is that you're looking for from the group or from in general, until people say I have money and I'm looking for a deal or whatever. And so it's that those are great opportunities as well. And so again, just kind of reiterating, put it out to the world, don…

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How Private Money Lenders Can Help You Close More Deals in Less Time Jun 25, 2020

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In this episode we have David Young from RCN Capital tell us all about the world of private lending: what it is, how it works, who might want to use it, where the money comes from and how it differs from traditional lending. --- Transcript: Tom: Greetings and welcome to the remote real estate investor. In this episode, we're going to be talking about what investors should and need to know about private capital. We're connecting today with David Young of RCN capital to answer all of our questions. Alright, let's do it. -Theme song- Tom: Awesome David. Well, first off, thank you so much for joining us. And, why don't we start by telling us a little bit about yourself. David: Thanks to Tom and Michael for having me, really appreciate the opportunity. Yeah. My name is David Young. I'm the director of business development with RCN capital. We are a direct private lender headquartered in South Windsor, Connecticut, just outside of Hartford. And we do lend nationwide. I'm actually located personally in Boston, remote to the office as are some of our employees. And my background is pretty diverse, prior to arriving at RCN where I got to RCN in 2014, the company started in 2010 in response to the previous financial crisis. If you will, now, we're certainly going through another challenging period, but if you go back to the 2007/2008/2009 nine meltdown RCN was started in response to that, and I'll get to that a little bit more. So my background is spreads across a variety of things. I graduated from the United States military Academy. At West point, I was in the army active for about seven and a half years upon leaving the service. I took on a variety of roles, many of which were oriented around sales business development. I had executive level positions as a division vice president as well. I also ran a small business in central Massachusetts as a VP running a outbound and inbound call center and a variety of other roles spread across a lot of different types of skills and levels of experience that cover a lot of different ranges of medical, home improvement financing, and several others as well. Tom: All right, that's great David, let's jump right into the meat of questions around private lending. So a lot of remote investors, they like to invest with debt, lot of great benefits to investing with debt. And there's this decision right of private capital versus more traditional loans that you would get in your personal home mortgage. Why don't you break down some of the differences between private capital and a more traditional mortgage? David: Sure. So, you know, the more traditional route of a mortgage say going to a bank of America or Wells Fargo and applying for your typical 30 year mortgage is certainly an option and might be the best option for somebody depending on their particular situation. In fact, private lending essentially exists and evolves in response to those that can't be served by the traditional sector. So it's filling a gap that isn't being met in the traditional sense. So, you know, a traditional mortgage may be suitable if there are no issues to consider in terms of, you know, damaged credit, if there's not an extreme or even a high sense of urgency in terms of time and being able to complete a transaction in a very rapid amount of time, perhaps if there is no issues with, you know, citizenship, you know, private lending, a lot of the firms such as ours will work with foreign nationals, you know, with traditional mortgages or other, you know, hoops, if you will, that you have to jump through. There's a lot more that goes into the underwriting with a traditional mortgage in terms of looking at income verification, tax returns and so forth. So, but again, it may be the right route. Generally, the rates are going to be lower and a traditional mortgage, as you see right now, 30 year mortgages are somewhere in the low to mid threes and on private lending, you're not going to be able to get that low, but that's because you're being represented in a different asset class and there's different variables that come into play. So why would somebody pursue a private loan in terms of making a real estate transaction? That could be a variety of reasons. Let's just look at a typical fix and flip, if you will. Timing might be very critical. Somebody might be analyzing an asset that they want to move on and they need to line up financing on that. There may be competition for that particular asset, perhaps there is perhaps there isn't, but either way investors tend to feel a sense of urgency when they identify something that they want to acquire and then renovate and eventually flip. So private lending, generally speaking is going to give you a much faster response time. In other words, you can link up private lenders, such as RCN capital and fairly quickly get through the process and get approved and actually get funded on that loan. Why? Well, there's generally a lot less that goes into the underwriting and there's general early, a lot less in terms of a regulatory issues and traditional banks, you know, going back to the bank of America in order to administer and process your typical mortgage, there's a lot of regulation involved. There's a lot of issues that they have to consider. They're not necessarily the ones that are thrusting that upon you. Those are things that they must comply with, private lending, not as much, for example, we're not at least in RCN and many others as well. There's no check on tax returns. There's no check on income verification in terms of you don't necessarily have to have a W2 type wage job in order to be approved. And it certainly wouldn't hurt, but you don't necessarily have to have that private lending, particularly if we look at hard money fix and flip, you know, residential real estate where RCN focuses on non owner occupied residential it's asset based. So the focus is on the asset itself. And then other key factors tend to be the experience of the borrower. So how many transactions have the borrower has the borrower completed? We tend to look at the last, most recent 36 months by verifying if their name is on entity that completed a transaction. And then there's going to be a look at other things like credit score. But for example, in private lending, there are requirements or expectations on a credit score typically lower. In fact, maybe even much lower than in traditional mortgages case in point right now, just in response to the COVID crisis. In some tightening of lending standards across the board, both traditional and private lending, a lot of your traditional banks have really ratcheted up their standards and expectations. Credit score minimums have gone way up liquidity requirements, et cetera, that in and of itself is going to bump a lot of people over to the private lending space and private lending. Currently at RCN Capital, the minimum FICO is 650. If you look across all of our product categories, you're not going to find that at a Wells Fargo. So speed, credit requirements, the ability to be perhaps a little bit more creative with an approach and how to go about getting something done and being rewarded much, much more so for the asset itself. So is this a good deal that you're going for? You know, that's going to be a very high concern to a private lender. Yeah, nd the experience that you bring to the table. So do you know what you're doing? Do you have the experience, do you have the liquidity to accomplish it? That is what really matters as opposed to what, you know, a Wells Fargo or bank of America is forced to look at. Michael: That's a really great point. Yeah, I was just going to ask you, you mentioned it in passing hard money is private capital and hard money. Are those two synonymous or do they really differ? David: Yeah, that's a great question. Now again, I've been with RCN since 2014. Initially I wasn't directly on the real estate side, but a lot has changed as RCN originated in 2010. What private money consisted of in hard money was what a lot of people I hear now refer to as you know, kind of the old school where, you know, you know, a guy who might know a guy who could get you alone. And then when we say asset based, I mean, it's, there may, there may not even have been, and this still exists today, by the way, we compete with this and RCN where leverage, LTVs loan to values. If you will, to keep it simple, tend to be lower and you're more old school had money, maybe even no doc may not have require barely any documentation. And certainly not necessarily an appraisal or even running a credit score and for the purposes of just adding it to a file. So now when you kind of, it's almost, you know, a point of contention or even something that people joke with each other about in the industry where, you know, hard money has really evolved into a much bigger and more sophisticated ecosystem where more money comes in, where there's more requirements like just looking at the FICO, FICO requirements, FICO minimums. A lot of that is tied to where the capital is originating from to fund these loans. So there's institutional capital that helps. And not in all cases, there are funds. Well, there are private investors that buy loans directly, but institutional capital tends to come with certain expectations. The FICO is one of those where you have to check the box. If you will, the old school, if you will hide money, probably shrug their shoulders at that. Um, they're not concerned with that. They're not necessarily concerned with an appraisal. They want to see the asset and they're going to protect themselves by, in all likelihood having a lower level of leverage, lower LTV we had prior to COVID essentially the whole private lending, hard money space fix and flip space was getting, you know, leverages, you know, up to 90% or even higher with some particular vendors out there where you were getting 90% of LTV, plus a hundred percent of the rehab funding to close a loan on a flip, as an example, someone doing your so-called old school, hard money. I mean, I haven't heard of anybody doing that high of leverage in that space, but it's still out there. There's those people that, whether it's a lot of times it's speed, somebody will close alone very, very quickly with minimal underwriting work done aside from looking at the asset itself. So there's still a market for that, but there's a lot to your question, a lot of crossover or kind of a lot of blending they're one and the same in some ways. And then they separate from each other as well in different segments of the marketplace, depending on who you ask, different people have different interpretations as well. Tom: One piece you touched on is room for, I don’t know is creativity is the right word, but there's a little bit more variability in the different products in that it's just, there's way less regulation I'd say on it. Would you mind touching on that on some of the different products that, and maybe one of the more popular products specifically as a remote investor that you guys originate? David: Yeah. One of the ones that really took off, uh, heading into COVID and we've now just activated it again is our 30 year long term rental. Okay. So this is a 30 year fixed, fully amortized loan, much like what many people are familiar with with your traditional 30 year mortgage that we talked about a couple of minutes ago. So 30 year fixed non owner occupied residential. We have that available on one to four units. This really came into play. It. This really took off like a rocket, uh, in March of roughly in the spring of 2019. I don't remember the exact date when we launched it, to be honest with you up to COVID. This thing was already approaching 40% of our originations at that point. And it gives people a lot of flexibility. We could look at portfolios of assets, so you'd have investors out there with say they had 10 single family residences and they had 10 different financing situations on each one. Maybe two of them were with a particular guy. I know a guy who knows a guy who gave them a bridge loan a couple of years ago. Maybe one of them was with someone else. And there was just all spread out everywhere. The 30 year longterm rental, you could take a whole portfolio and roll it into one transaction and get that entire portfolio into a 30 year fixed fully amortized mortgage. At that time, back in February, you know, rates were getting as low as four 449 on that, which is very low for non owner occupied resi. So you had that, you had the ability to look at those assets. So you may have one particular, if we stick with that example, one house perhaps was not cash flowing as strongly as the others. You weren't necessarily penalized for that. You weren't necessarily told that that one couldn't join the party, so to speak. That one was weighed against the portfolio as a whole. So we could look at the whole portfolio, also look at the investors level of experience, their level of liquidity and take all of that into account to make a decision. We have an executive committee at RCN Capital that looks in each and every transaction and they can exhibit, you know, a certain amount of creativity, if you will, at any point in time to see if the transaction truly makes sense, as opposed to trying to run that through a large bank, traditional bank could potentially be an entirely different experience. Michael: That's so cool. David, it's something I talk a lot about with students in the Academy about portfolio loans. It's something that I've used on the commercial side of things, and I think it's the best thing since sliced bread. So I've always thought that they existed for single families, but that's great to hear that they do indeed. So anybody listening that have spoken to me within the Academy about getting, go for portfolio loan, go call David Young at RCN Capital. Tom: in coming up with what the rates are. Is there a little bit of a discount for larger pools, larger portfolios, or how does that typically work? David: Yeah, that's a great question. So we have generally, you'll see, uh, and right now, as listeners are hearing this, uh, allow me to emphasize if I can, that things are changing very quickly. So in terms of pricing as a whole rates points and whatnot, we saw a very high level of liquidity is kind of sloshing around the system, heading into a COVID and then things really tightening up seizing up even, and then starting to now loosen up. We've seen changes on almost a daily basis over the last couple of weeks here at RCN capital. So the way those rates are determined, you know, in terms of the price at anything is which is, you know, in large part driven by supply and demand as things seized up and there was less or no liquidity for this paper and the secondary market, it became very difficult to price it, you know, because we didn't know what it was trading at when there was a lot more trading volume and activity on this paper and the secondary. Then you could determine pricing a lot more clearly. Furthermore, you had a lot more of the competitors actually active and lending in the last couple of months, people have pulled back. So we don't necessarily know what this company over here is doing because they've completely ceased lending at this current time. So a lot of that is supply and demand driven, how much volume and activity is there for this paper behind the scenes. And then that results in, you know, subsequent pricing that the retail sees factors that we look at from an underwrit…

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