The Remote Investor

Michael and Pierre discuss various considerations for converting primary residences into rental properties, including tax advantages, challenges, and entity structure. They also explore insurance coverage, utility management, and financing options. Michael emphasizes the benefits of self-management and cash out refinancing and provides valuable insights into the decision-making process for managing rental properties.

Brought to you by https://www.myfiacademy.com/ 

In this episode, we host private equity fund manager, real estate investor, and podcast host Geoff Stuhr. We discuss his experiences and insights on real estate syndication, highlighting the lessons learned and challenges faced in this field. Geoff emphasizes the importance of transparency, mentorship, and team building to scale a successful business. He shares his challenges with private equity investing in industrial real estate, including managing assets, meeting pro forma expectations, and navigating market conditions. He shares his investment strategies, approaches to diversifying portfolios, and the importance of thorough due diligence and communication with experts.

See more of Geoff:

https://www.youtube.com/@WinningWealthPodcast

https://www.linkedin.com/in/geoffstuhr/

https://www.smartassetcapital.com/ 

In this episode, Tom and Michael discuss the pros and cons of investing in turnkey rental properties. They highlight the convenience of having a tenant already in place and the potential for a more “passive” income, but also acknowledge the lack of control over setting up the property, and the potential hidden fees. They also discuss red flags and risks associated with turnkey real estate investments, such as overlooked repair and maintenance costs, and the need for thorough due diligence on both the property and the turnkey provider. Michael, emphasizes the importance of grounding investment decisions in reality rather than relying solely on spreadsheets or projections.

Brought to you by myfiacademy.com 

Tom and Michael discuss using cash-out refinancing and HELOCs for investing in real estate. They explore the pros and cons of each option, considering loan-to-value ratios and timing for optimal financial outcomes. They also delve into the HELOC process, payments, and payment structure, highlighting the importance of understanding the mechanics of using a HELOC. Both Tom and Michael share their personal experiences and insights on refinancing and HELOC strategies, providing valuable information for real estate investors.

Brought to you by myfiacademy.com 

In this episode, we explore the tax benefits of primary residences versus investment properties. We highlight the mortgage interest deduction cap for primary residences and the lack of such a cap for investment properties. We also discuss house hacking, where individuals buy properties with extra units and rent them out to reduce living expenses.

Additionally, we cover strategies to maximize real estate investment benefits, such as buying down points to lower monthly payments, converting primary residences into investment properties, and alternative approaches blurring the line between rental and investment property.

Key points:

1. Consult a tax professional before making tax-related decisions.

In this episode, Tom and Michael hash it out over the topic: Should you buy a primary residence before purchasing an investment property, or should you invest in real estate first before settling into your own home? Through this debate we explore unique advantages and challenges of each approach, bringing in insights from our experiences as real estate investors.

A turn is the most active period for a real estate investor, apart from the acquisition itself. This is a critical time to rehab the property and make modifications that could increase the rent you can charge. But doing this on a property that is on the other side of the country adds a whole new layer complexity. Between the two, Tom and Michael have seen hundreds of turns and in this episode they discuss Tom's current turn down in Georgia. 

Brought to you by https://myfiacademy.com/ 

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Transcript

I think that makes a ton of sense, although slight counterpoint, I would say, is I think that the number that you've gotten reserves should be independent of your rent amount, because if someone owns a house, single family home that runs for 800 bucks a month, if I've got four months rent sitting in my bank account, that's $3,200 and I get hit with this turn because it's a similar sized property, I could be up a creek kind of a thing. What's going on? Everyone? Welcome to another episode of the remote investa. I'm Michael albaum, and joining me today is my co host, Tom Schneider, and today we're going to be talking to Tom about what it's like to do a turn, since you're in the middle of one, right? That's right. That is right. And for anybody who's new to real estate investing or who might not know what that is, can you just give us a quick rundown of, like, what is a turn and why? Like, why are we dedicating a whole show to this? Why is it important enough?

Yeah, so I'd say a turn is probably one of the most like, I guess, active or kind of busy decision making time after you've done the acquisition. So to kind of give specific kind of bookends of this, it's you have a resident who's lease sending and they've decided to give notice all the way to the point at which the home is occupied again. So lots of important kind of decisions to make with with me and my property manager, and excited to talk about it today.

Awesome, or or if you're like in Pierre's case, where your tenant doesn't give notice and just pieces out and you're left with an empty unit, you might have to do a turn then too. Yeah,

I guess not all turns are created equally. Evictions, there's Yeah, kind believed, yeah, yeah.

All right, cool. So let's, let's jump into this and dissect it a little bit. So first question, Tom, did you decide to do this turn, or did the tenant kind of make that decision, quote, unquote, for you, by leaving the unit in disrepair?

Yeah, I wouldn't say that they left the unit in disrepair. But so anyways, so I have a property management company that I use in Georgia. I'm over in California, and they're, they're on it like so their their process is, as we approach the end of a lease, they talk to I'm already getting away from the question you asked. I'm not exactly sure what it was.

I love your non answer.

I know what. So it was the resident decided to leave. So I got a little little winded there, but at high level, you know, we start the release process a couple months before the end, they decided now they wanted to move whatever. You know, we presented them an offer, and they decided to leave. So I think I got the got back on the rails of your actual question you were asking. You're

just doing a pitch for your property management partner for the episode.

I guess I am. I don't know. Yeah, yeah. All right. So

so your tenant left, yep, the property manager talked to them as the lease and approached its end, found out they were going to be leaving. And then, so then so then they gave you some heads up. Or, what did that look like? That? Hey, the tenant is leaving. We might have to do some work. Or how did you know that you were gonna have to do like, a quote, unquote turn, as opposed to just getting a new tenant in the door? Yeah, so

this is communication from my property manager and that, oh yeah, we've presented, you know, the updated rent they, you know, we're gonna leave nothing really to be done there. The first thing that they ask is like, oh, you know, do you want to lease it again, or do you want to, like, sell it? You know, they're probably excited about any and all situations, so long as they they keep, keep the business, perhaps make money. But yeah, I think I answered your question. All

right, yeah, no, I think that totally answers it. And so I'm curious, Tom like, with you and your property manager having this conversation, there's always the balancing act of occupancy and vacancy versus rent growth. And so did you try to get a rental increase for this at the end of this lease. And do you think that could, and if so, do you think that could have contributed to your tenant deciding

to leave? Excellent question. Michael, I, you know, I try to, usually, when my property manager comes to me at the end of lease, they'll say, Yeah, you know, the rents a little bit under they're a good resident. Oh, let's, you know, maybe increase it a little bit or not, and more often than not, my response is a, you know, what do you think is the right course of action, you know, and why? And, you know, good property management will kind of a thoughtful response to that. So I believe, for this particular case, that's happening right now, they did, they did. Thought it was, you know, a 25 or a $50 a month increase, you know, was, was the right, like, market length, but, you know, I would have been very willing, you know, let them know, like, hey, you know, if there's something we could do to save it, just because turns typically are just, you know, in vacancy and that kind of cost is just like, you know, a killer to the. Be underlined. So I believe the recommendation was going up a little higher, but like, leaving it open, if there was any kind of pushback around kind of keeping it, you know, keeping it the same. But I mean, as a really, like, really salient point, like, in going into a turn is like, hey, is there a way to avoid it? And you know, me as an investor, like, and especially having, like, a good tenant, like, great, you know, if they're good tenants, like, we don't necessarily need to change it. You know, while, like, some rent growth, growth is is always like, helpful to another line, you know, vacancy is like, much, much worse. So long winded story is, I think they were pushing for a little bit of rent growth, but even with the opportunity to keep it the same, they just they were moving anyways,

yeah, and that's exactly kind of what that tells me was, in the tenant's mind, like 25 bucks a month is whatever, $250 a year, if my math is right, in terms of additional rent that they're paying, like to go rent a U haul is like 200 bucks, let alone the hassle of moving. So I think you'd hit the nail on the head when you can keep things in place with a good tenant, it's a win win for everybody. And so even if you aren't getting that rent growth as the owner, you're not having to deal with vacancy, you're not having to deal with a release fee from your property manager, you're not having to deal with a turn cost. It can be a slam dunk even if you're not getting that rent growth. So I just encourage anybody who's who's kind of in a similar situation to run the numbers and not blindly run towards these rental increases, thinking that they're that they're doing so much better now, of course, now the obvious, the obvious downside to that is if you allow the tenant to stay at the same rent for multiple years at a time, and now there's a significant delta between market rent and your current rent that can get sticky at times, especially because our expenses do tend to increase on the property over time. All right, so shifting gears here. How did you figure out and what did that process look like in terms of what the scope of this turn was going to be? Did that come from you? Was that from your property manager? Was that from somebody else? Give us, give us some insights

there. Uh, this is from the property manager. And they, they manage a, you know, a little over a handful of properties for me. So, you know, a good

big hands. We talk in big hands, little hands,

medium sized hands. So perfect. Been through, been through like this process with them before. So the way that, you know, works with these guys is they will create a scope internally, and, you know, document it, have an inspection, and then they will go out and get multiple bids against that scope, okay? And that's so that's kind of with in house staff not doing it within in house. I think if the scope was really limited, like it was pretty much just, you know, mow and blow and whatever, you know, clean the carpets. But there's one, is a little bit more going on, you know, I think there's some some paint issues that you know gotta, gotta get into. So I think if the scope is very small, they'll like take it. But for this particular case, they they have some external folks jumping in, submitting bids. Okay,

all right. Man, I hope no one takes that rhyme out of context. They just sniff at the end of it, mow and blow and man, that is a funny rhyme. I never heard that one before. Oh,

that's a good one. Landscaping.

That's a real good one. Yeah. So, okay, so they, they develop this scope, they run it by you. They go get quotes for you, and then they just present them to you, and then you get to decide which what makes the most sense. Yep, I've got, actually have,

you know, very timely. I have that email in my inbox right now where they have presented the two bids against the scope. And, you know, something that, like never ceases to surprise me is, like, the differences in costs, like how kind of, like dramatic they could be, you know, between the two holders. And this isn't like an extreme case, but like a little bit, it kind of is a big, big swing.

Give us, give us the rundown of this, of the scope. And then I want to guess what the two the two bids are, okay, yeah, all

right, open it up right now. I just type the name of the property manager, and it has like the whole email, like history. It's like, you know, renewal suggestion, tenants notice to vacate. Utility connection. Okay? Turnkey estimates received all right. Drywall repair holes from nails and stuff like that. Paint they recommended, a full house, interior and exterior. There's drywall patches. Includes the walls trim and doors clean. They accept something called the rent ready package like door stoppers, light bulbs, smoke detector batteries, HVAC filters, landscaping, flooring. It says routine flooring clean. Why wouldn't that be just part of regular clean? Window blinds, lights are clean. It looks like. Not, and they're adding so this is net new window blinds, weather stripping, door power for the microwave is missing. I don't know what that means. What says the overhead microwave does not have power cord. Install a new card to replace the missing cord. There's, there's a few. This is like, I'm gonna, I'm gonna, I'm gonna speed this up a little bit. There is a little bit of water intrusion from the garage, from the back deck, so replace some water, refresh old water entry. Pressure washing. That's always fun videos. You guys watch pressure washing videos. So far, this is seeming pretty vanilla. I mean, except the full a full paint, full paint, see,

let's fire extend anything else major, or the rest of kind of miscellaneous outs and closet rack they like, list

the same thing twice. This is something that I'm gonna go back. I'm good. I usually don't go through this much of a but I might save myself 250 bucks by like, going in this a little bit deeper gutter cleaning.

Yeah, that's a mow and blow type of job, yeah, um. All right, so, so that's it, that's it. All right, I'm going 80, 8500

I'm feeling a little bit better. I could have imagined this being lower. So the bid that I'm looking at right now is 60, 885 okay, and this one, this particular bid, is the lower of the two that I received. And they're actually, like, kind of tight on each other. The other one was 7100 so here's the where I'm like, kind of like, I think I know what the right thing to do is. Well, just as a matter, matter of fun flow. So they manage a few properties, so they have, like, you know, they'll take run meant rent in and then, you know, pay, send it to me at the end of the month, and I kind of just tell them, like, Hey, don't send me money this month. Just like, use that towards this versus, like, sending, I mean, I guess it's like, indifferent, whatever. But oftentimes on these turns, you know, they'll request to, like, send money in, but just from like, a cash flow perspective, like, kind of what I'm just, yeah,

sending money out of your bank account feels worse than just not receiving it to begin with, totally All right. Well, that's that's helpful, and that's a good exercise, too, just for everybody listening, to get a kind of understanding of what could be involved in a turn like someone's moving out of the house, and you got to paint the whole house. That's a very different experience than someone moves out of the house, and now you've got to redo a bathroom, or put in new flooring, or simply just clean the unit and get somebody else in. So this is kind of middle of the road, one that's good to talk about. Yeah, so is there anything else above and beyond the scope that you're thinking about doing, like potential upgrades to either make the property more tenant proof, more resilient, or potential upgrades that would get higher rents,

you know, typically, like, typically not like, I would defer to the property manager, you know, I'm, I don't see this property very often, so it's, you know, fun looking at, like, the video of the inspection, just to kind of, you know, check in on everything that's there. And I see some potential spots to upgrade, you know, the granite counterplace, and, you know, whatever. But I think I don't want to add incur any more time on the rehab. And I just, you know, I want to get it like, occupied. I'm less less inclined, of, like, adding some additional scope, you know, to do that. And unless the property manager, like, explicitly mentioned something, you know, as such, and you know, perhaps it's something I can shoot to them to ask if they have any recommendations around that, but I might be like, pushing them to, like, say yes, if that's a way. I don't know, I feel like I wouldn't want them to try to think of something to do more, you know, when it's not necessary. But long winded, I'm not, yeah, I'm not, not planning

on it, yeah. Well, Tom, as you mentioning that just a couple things come to mind. One is the property manager might not be thinking about the increased revenue like you as an investor might be. So I, personally, I love just reaching out and asking, Hey, are there any upgrades that you'd recommend that you think would would command a higher rent? And just leave it kind of open ended and see what they say, because a lot of times it can be really little stuff. It's funny. It's like two sides to a coin, right? One is we as people, as individuals, have biases and have wants and needs and desires, and so we might think, Oh, I would never rent an apartment that didn't have x, or would never rent a house that didn't have x. So therefore I've got to go do exit on my rentals. And the reality is, real estate investing is so hyper market specific that might not do anything for that particular market. So like, if you're someone that loves marble countertops and you want to go put marble countertops in this particular property west of Atlanta, that might not be a big deal there. Like people might just not care. And now you now you've gotten spend this money for no reason. On the flip side of that, though there are so many things that are just a lot of property managers are very focused on getting the job done, and can be a little bit single track minded. And so if there's carpet down, they're just going to go figure out how to replace the carpet or clean the carpet if it needs attention, as opposed to thinking, Oh, hey, if you replace it with LVP. Be it might cost more upfront, but you're never gonna have to touch the stuff again. You're not gonna have to clean the LVP like you would a carpet. So there are things that that we want to just be mindful of as investors, some questions to be asking, thoughts, responses, feedback.

I like it. I'm processing all this bye, bye, and I actually have the email to respond to the the property manager, and I'm gonna put, put in a little, uh, little questions there about, you know, recommendations. I like it nice.

The other big one that I love, that I think is easy, is like carpet. Replacing carpet with LVP is a great one. My other favorite is replacing appliances with stainless steel. If the empty appliance has to be replaced, don't go swapping out a perfectly good appliance for a stainless steel one, but if you're doing it anyhow, you can start to slowly transition them to stainless steel. That can be a nice perk as well, and typically doesn't cost much more if you're buying a new appliance. Anyhow. So just something to think about that I enjoy doing. All right. Tom so you've got this big scope or medium sized scope, I'm curious, is the property manager charging you for this service to kind of manage this process, or are you managing the process? What does this look like? As a remote investor,

they're managing the like payment, and I think they have a little bit of an up charge on on this process. I've worked with one property manager that I don't work with anymore, who is, like, really, like, nickel and diming every activity and like, every day, like, it's just like perverse incentives. But for this particular property manager, they have, like, a little bit of an upcharge on the bills. They send me the invoices, like, direct from the vendors that they use. So, like, you know, a lot of transparency, and they'll even add, I recommend going with this one XYZ. We've used them before, so I built up enough trusts with this particular vendor that, you know, 99% of the time say, great. Let's go with what you recommend, you know, and then I'll add in a little bit of special questions that we went through on like other things within the market that could be help with occupancy and potentially rent. Okay, yeah,

that's great. One other thing I just thought of is, I know we were talking before about having your property manager pay those invoices from you the rent that they collected, as opposed to sending you the invoices. And if, if the vendor is able to collect payment via credit card, and there's no like, up charge on it, I've seen that before, that can be great, too. So that way you get credit card points or cash back, and, you know, maybe you get a 2% discount on the whole job, which for a $6,800 job or $7,000 job is not going to be life changing. But if you 5x that, you know, it's, yeah, and it's something like, it's free, it's free money at that point. So may as well try to take advantage of it again. If the if they can do that, I like it. My last question for you, Tom, is, how do you know whether to replace or repair something when it comes to a turn? Why don't you reach out to your to your property manager on some of this stuff, and go, Yeah, you know what? I don't think we need to paint the whole house. Maybe we can get by with painting these rooms. Yeah.

I mean, that's a very fair question. I mean, I'd say, like, on the spectrum, I'm probably less proactive in drilling into the specific, like line items, where they make those suggestions of repair and replace. So, you know, kind of where I am in my investing, I don't know how I would frame it. My investing, sort of like management style is, you know, I have enough, kind of, like, built up trust with this particular property manager. And when they provide a suggestion, they typically, you know, show their homework on, like, what they would recommend, you know, I would be fine, kind of drilling into them. But you know, for the most part, it's, it's a path of, although a path of least resistance, of like, Okay, let's move forward. Let's get you know, you know, I trust you as a local product manager, okay, repair. Okay, replace

that. And that makes total sense. And I function the exact same way. How long are you able to say, did it take you to get to get to this point. So if somebody's listening, has a new property manager, or is just getting started with their with their real estate investing. I mean, like you said, it takes time to develop that trust. How do How should they be thinking about that? Takes

time to develop that trust. I think a property manager that like, does their homework. You know, in that, if they have a recommendation, maybe I could, like, in first developing that relationship with them kind of noodle in a little bit deeper on stuff, versus being a little bit more passive. And I don't say like, you know, grill them on everything. But where are there are some like items where there could be, like, meaningful differences and costs or time, like, you know, ask them. Say, Hey, you know, I was curious, you know, you said, repair the paint or whatever. Like, replace the garage door opener or whatever. You know, what are our different options? Like, do you have similar situations with other customers? Like, how have you gone about it? What's the downside of doing this versus x? You know? Just just have, like, open a dialog.

I dig it. And I love that point you made about them doing their homework. If they come to you with with the solution, like the answer to the question, as well as all of the background and supporting evidence, you know, then, right? As opposed to saying, Okay, well, how did you come to this conclusion? Walk me through this a little bit more, and that's kind of what we always hearken back to, is communication when it comes to property managers is so crucial, yeah, so that's great. I think it makes a lot of

sense. And I think if you were like a, really the right word, as I know type A is the right type, but like, wanted to grind them on every single item, like, maybe, like, like real estate investing, like, could can be really stressful. So, yeah, you know, giving, like, the benefit out, like, I saw this, there's like, you know, there's a line for pressure washing in one place, and there's another and another spot. And it's like, why is there two lines for pressure washing? You know? Like, I think you can get really, like, sucked in and, like, frustrated on, like, what you're looking at, you know. But I think if you have, like, a good kind of guidelines on where those, like, turn costs, like, come in at and like, this is a good kind of middle of the road, you know, not, like a super duper cheap one, but it's not one where I'm gonna, like, throw like, a major stink, you know, on seeing, you know, some of this stuff. But

all right, Tom I gotta ask a question that I think might be burning in all of our listeners minds, what kind of rent are you getting on this house? Because you're paying you're going to pay about seven grand at the end of the day, more or less in a single turn. So what kind of rents you collecting on this property? Yes,

so market rent, their suggestion is 1550 so uh, 1550 is what they recommend for the monthly

All right, so that's $18,600 a year. Yep. And so we're, we're pushing seven out the door before we've collected any on that new market rent. So what is that 35% 40% is going out the door to this turn. And so people listening might be thinking, real estate investing sucks. Why would I ever, why would I ever purchase a property that I'm going to collect 18 grand on and have all my expenses and pay seven in a turn cost? So Tom, why? Why are you doing this?

Wait, wait a minute, maybe I shouldn't be investing. No, I mean, I think about it beyond the like, rent that it's collecting, it is appreciating a value. It has a loan on it that's getting paid off. So, you know that full value at the point in which I want to realize that home, you know, should I want to sell it? You know, thinking about the yield, which is like the rent relative to all of my expenses, is just one angle of the aspect of the kind of dual play of real estate investing. So, I mean, for me, like, I don't necessarily need the cash flow in my pocket right now. And if that was the case, I probably would consider, I don't know, moving my money somewhere else, possibly, but much more of a longer view investor, where, if you put together that cash flow yield, along with depreciation, along with the loan pay down, like, it's just a really exceptional like return and sort of like wealth building, especially with like, a couple of these properties humming, you know, along that it's the real kind of dual nature of the of the return. Yeah,

make a ton of sense. And also, to give like, some perspective, when was the last time you did a turn of this magnitude on this property? I

mean, two, three years, three years ago, four years ago. I'm not totally sure. I it's been, you know, yeah, big, good gaps. It's not every year, definitely not. No. I think that's the nature of the single family versus multifamily or, you know, apartments where you just, you get a little bit of higher turn with these single family homes, they the vacancy is a little bit further in between, probably more expensive turn costs, like, if this home is in a condo or an apartment, you know, maybe I'm paying half of that much, there's just Yeah, but there's less space, yeah, yeah,

1. I think that's great. I think that's great. And then my last question Tom, before we get out of here, in your pro forma, in your in your performance projections when you bought this property, did you have money set aside, in theory, and then also in practice, to tackle these types of turn costs. When they did a rise, did you earmark dollars? Or did you have everything going to one account? Walk us through what that was like,

yeah, so on, you know, setting up, I try to think about a couple of months rent. So cumulatively within the portfolio, you know, a few months rents for all of the properties, and they can act as like a backstop. So I set up a bank account, set up auto pay, both collecting from the property manager and going out to pay whatever mortgage. And as that money is flowing in, you know, typically, I'll just kind of keep it there and separate it from my personal bank account, but making. Sure that I have a good kind of balance there, maybe a few 1000 bucks, like anywhere, I don't know, five to 10,000 bucks just kind of sitting there for these type of turns. It's not common that turns happen on the same time on properties. But you know, if that was to happen, you know, pull some money in from other places. But it's, again, like, not super common, that that happens. But, you know, the worst thing that can happen in real estate is you, just as you run out, run out of money, and kind of get yourself in trouble that way. So being pretty conservative of having a few months rent, you know, on the back end for whatever size your portfolio is, I

think that makes a ton of sense. Although slight counterpoint, I would say, is I think that the number that you've gotten reserves should be independent of your rent amount. Because if someone owns a house, single family home that runs for 800 bucks a month, if I've got four months rent sitting in my bank account, that's $3,200 and I get hit with this turn because it's a similar sized property, I could be up a creek kind of a thing. And so I think that there is a mentally, we should be disconnecting the amount that we're having in reserve from the amount that we're collecting

in rent. Yeah, how would you think about the amount to have in reserve? For me, it's

just it's a flat number like five to 10 grand feels really great on a kind of per property basis. And that's kind of base level for your run of the mill property. If there are properties that have unique functions or features, like there's a property that has a hot tub that type of property, or that property specifically may require a larger turn expense, or there could be more things that go wrong with that property. And so I want to have additional dollars earmarked for that as opposed to one without. And so we just it's not a one size fits all approach. And so you want to be a little bit strategic around how you how you allocate funds in reserve based on on the property itself. Because I can't tell you how many times I see people talk about like, Oh, you just reserved 5% of the income for repair and maintenance, and you'll be good. And it's like, yeah, but to replace a water heater on a house that rents for $500 costs the same as it does for house that rents for two grand. But the person who reserving 5% on the $500 a month house is totally out of luck. So I think that there's a it's common practice in the industry to think about it that way, but personally, I like to be a little bit more conservative, unlike you, I prefer to think about it in a flat dollar amount term,

yeah, and, man, there's so many, like, high interest savings accounts out there right now that are doing like, 5% or something. So, you know, I manage all the, yeah, a bunch of checking accounts through Schwab, and they don't have as great so, like, maybe in my this particular, you know, real estate checking account, like, have, like, a thinner amount to make sure that I'm covering my, you know, mortgage payments, but the reserves for, you know, these properties, you know, make sense to have them in one of those higher interest savings account, but you still have the same liquidity that you could just slide it over into that account to wire over. So I think there's, you know, a thoughtful way to kind of get the best of all worlds where, you know, you have this automated machine pushing money in, pushing money out for kind of daily mortgage rent collection, and then you have the bigger reserve pool of reserves in a, you know, kind of strategic spot that's earning like 5% so it's not just sitting there doing totally nothing, but you still have that same

that's exactly what I do. Yeah, that's exactly what I do, yeah, yeah. Don't give away my secrets. Tom, give away my secrets. Awesome. Well, I think that just about wraps us up. Tom, any final thoughts to share with folks as you're in the midst of this turn? Yeah, you know, there's,

there's so many different components, and I think we can, honestly, like, have another section, you know, going into the marketing and and leasing of the property. You know, within a turn, it's, you know, it's one of the most active times, you know, as an investor, where you're actually kind of making some decisions. But the, I guess the kind of theme that I got, I kept speaking to is, you know, within your property manager, like, as you kind of develop that trust, trust, but verify. Also make them do their homework. Show them answer the why? Yeah,

try to verify that. That's great, man. Great advice. Well, thanks for opening up the vest a little bit on this. Really appreciate it and hope. Hope everyone enjoyed hearing about it. If you going through return, we would love to hear about it. Some of your struggles, some of your wins. Leave us a note in the comment section. We'd love to hear about it. If you got a question you're going through return or an upcoming term, we would also love to hear from you. We can try to answer those in our next episode. So thanks for hanging out with us. Everybody. Really appreciate it, and we will see you on the next one. Happy investing

Tom and Mike discuss the evolving short-term rental industry, including regulatory updates, tax implications, and property management strategies. They share their experiences and insights on adapting to these changes and maintaining a successful short-term rental business, with a focus on personalized property management and understanding the local market. Michael also highlights the importance of carefully considering the financial complexities of short-term rental investments, including overhead costs and potential revenues.

Brought to you by: https://www.myfiacademy.com/ 

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Transcript

And I just have not had great experiences or good luck with those bigger box brand names. I'm more of someone who really likes especially for the short term rental space, the very boutique, the very hands on. Welcome to another episode of the remote investor. I'm Michael albaum, and today I'm joined with my co host, Tom Schneider, and today, we are going to get into short term rentals. What you need to know? What questions should you ask and could they be a good fit for you? All right, guys, let's get into it. We've

talked about short term rentals, you know, kind of on and off for the past five, six years. I have always been hesitant to get into it. And I want to kind of noodle on you a little bit on some questions. Just

rigatoni spaghetti. What kind of noodle? Yeah,

yeah, something like that. Anyways, I want to noodle on it a little bit. I have yet to make the jump into it. I've always, kind of like, had concerns you are good, like, plus five years on it, what has changed from when you, you know, first were evaluating the opportunity, to now that you have a bunch of experience, what have been your, I guess, changes of assumptions or hypothesis having been in the space for a while? Yeah,

it's a really good question. And there's been a ton of changes, both in just the environment that we find ourselves in today, versus when I started investing in them, and then also just in my experience, what I've learned and kind of takeaways and key learnings, if you will. So first and foremost, I would say, is just the competition, like everybody and their brother and mother and uncle seemed to be in the short term rental space now, because it was so on fire for so long, especially during the pandemic, it was pretty easy money in a lot of instances, and so people would just jump in and have a fair degree of success. FROM ALL OF THE anecdotal stories that I've heard from, how many people are involved that was during kind of a worldwide pandemic, so a very unique set of circumstances. Now things have changed. People are maybe going back to work, maybe they're not traveling as much, not working from home as often, and so the short term rental space, just in the amount of heads and beds on an average night, has decreased dramatically. So that's that's kind of one and two things that have changed. The other thing is just regulations. Local regulations in a lot of the markets that were very short term rental friendly have soured on them quite a bit. And so where you may have been able to own and operate a short term rental or go buy a short term rental, there might be more restrictions around existing even if you're an existing owner operator, there might be restrictions on new short term rentals. And so that's changed the landscape in a pretty massive way for from is it greater?

Has it impacted your short term rentals a little a little

bit, a little bit? And so what I mean by that is there are now licensing requirements for all short term rental owners to obtain a license, which requires an inspection from the city and the fire department, whereas the couple years ago, that was not the case. It was kind of the Wild West. So I'm personally a fan of that requirement, because I think it's going to help as an as selfishly as as I'm saying this, it's going to help the the lesser than operators kind of wash out of the market. If you're not able to keep your property up to standard, and you're not going to play by the rules, then you're not going to be in the space anymore, which then leaves professional operators remaining. And so I think that as unfortunate as it is, the people that get washed out, it's going to leave the rest of us in a better position. And that's also what I'm seeing. I own, I own two short term rentals out in Lisbon, Portugal, seeing that happen on a pretty massive scale there as well. So they've changed the taxes that short term renter short term rental owners pay fairly significantly. And so they've changed a bunch of the rules and regulations and financial incentives and financial requirements for short term rental operators. And so there are people that got in at the wrong time that I think are going to get washed out by that. And those of us who are remaining are, I think going to going to come out the other side stronger.

Is similar type regulations in I think Smoky Mountains. Is that right?

That the still, yeah, that's, that's where the majority of them are. Yeah.

Do you find that a lot of the competition is using, like, third party, professional short term or is it a lot of, like, owner occupied like, oh, I'll just, you know, I own it. Oh, yeah, I can do the work. Like, I'll be the short term manager.

It's a mix of both that I found. So there are during the pandemic when when short term rental was just having a total day in the sun, and everybody was getting into it. I think there are a lot of management companies that got stood up realizing that there was a need and there was some money to be made. And there are some big, kind of big box brand names, I'll say, national managers, that have a fairly big footprint in the Smokies. I'll get their mailers all the time. I'm like, Hey, let us manage your rental and boost your revenue by 30% or whatever it is. And I just have not had great experiences or good luck with those bigger box brand names. I'm more of someone who really likes especially for the short term rental space, the very boutique, the very hands on, the very client focused property managers and so because I think I'm a believer in it's like, it's all about the guest experience, I'm also a big believer in the folks that are self managing, that are good at it, are killing it, like you can go see who has all five star reviews and 1000 of them, and you know, they are just knocking it out of the park, the again, the third party management, it could just be really tough, because you're a name and a number, if you're an owner with them, as opposed to somebody that's managing their own rental. I don't think you're ever going to compete in the same on the same playing field as someone who's self managing locally and really knows what they're doing.

Yeah, I feel like I've been burned in different areas of my life, like, you know, looking at the big box name versus, kind of actually getting to, like, know and understand, like the operation that's like a good general, like, life lesson on the home, like maintenance, like, some assumptions that I've always made that is that, like, short term rentals, you know, I feel like are more likely to get beat up just having, like, stayed in short term rentals. I mean, maybe it was like, more like bachelor party days, like, of them getting a little bit beat up. But how was your experience as it relates to maintenance and R and M and, you know, conditions of the home and those kind of costs, you know, in operating for four years as an owner?

It's a really, it's another really good question. So it's, it's a different animal in a couple senses of the word. And also, there's a deer outside my window. So I'm like, animal, different animal. So, yeah, yeah, different dough. So for one, there's the physical property itself, right? All of the things that are the same in a long term rental, and I have found that the condition of the property is actually better maintained in a short term rental than with a long term rental, because I've got folks going in there, a maintenance team and a cleaning team after every stay, and so every two days, every four days, every seven days, someone's physically getting into the property, being able to put eyes on and addressing the issues, versus with a long term tenant, long term rental, you might go a year or two years without being able to get into the property, and by that point people like, oh, the carpets trash, there's this leak that's been going on for the last six months. The walls trashed new paint throughout like So there, I think that there's the approach of, do you do touch up kind of minor repairs, which is what I would equate to the short term rental versus major surgery is what you're going to need with your long term rentals. So just from a beat up and use perspective, I think short term rental, I would argue, is almost better now, that being said, you do have the furnishings to maintain in a short term rental, which you probably aren't going to have in a long term rental. And so you need new bed sheets, you need new linens. You need new towels. You need new forks and knives and cups and dishware and all those sorts of things. Because those things break, there is insurance for that. Through Airbnb, they have, like host cover, I think is what it's called. So you can file claims and you can charge tenants or guests for for those sorts of things, but that can get a little bit sticky, especially if it comes time to getting a review from them. Like you're probably not getting a good review from someone. You charge 200 bucks to repair the couch that they ruined or what have you. So there are more dollars associated with maintaining a furnished property, and that, of course, does get beat up because of use as composed compared to a long term rental. So for sure, but grand scheme, property wise, I'm saying the property is going to be better maintained when it comes in a short term rental setup.

I like that. I heard a good analogy where it's like they're describing their short term rental as like a fire truck, and that it's getting used but it's going back to the house and getting washed up all the time. Super

good analogy.

So with so much hands on in that, you know, you're doing a cleaning after every stay, there's just like, a like, you know, everything you talked about, like, how would you compare the overhead of the fees versus longer term? And with that question, the actual, like, revenue side, you know, monthly versus, kind of the weekend, so you could kind of speak to the financials of being, you know, in a space, you know, seeing actual performance

totally. So it can run the spectrum. So I've had really great experiences with short term rentals being managed. And I've had great experience with short term rentals. Short term rentals, operating and managing them myself. So the fees, I'd say, your biggest fee is going to be a cleaning expense, just when we're looking at dollars in versus dollars out. And so some people will say, Oh, the cleaning expense is a pass through. If I pay my cleaning team 100 bucks per clean, I can charge again. Rest 100 bucks per stay, and then so it kind of washes out. So yes, you can do that, but what I found is that the cleaning fees you're able to charge are going to fall a little bit short in terms of what you're going to have to pay the cleaning staff in general. So in terms of dollars in versus dollars out, we're collecting a fee for the stay and then a fee for the cleaning and then we're paying out this fee, the fee to our to our cleaning staff, that tends to be bigger than the fee we're able to collect. So tends to be a net loss there, in general. Then when it comes to utilities, I think this is one that I massively underestimated

anyone being one a little like under the rug, but you don't necessarily think about Yeah, because you're like, Oh, I

live in like, yeah, we use water, like, or I'm used to living in a house, and, you know, my utility bill is 200 bucks a month, or 250 a month, whatever it is. And so I'm going to apply that same thinking to this, this investment property. If anyone's been to a short term rental stay where they're a guest, like, if it's hot out, they're cranking the AC down to 60 windows are open like or in the Conversely, in the winter time, if it's cold, heats up to 80, windows are open like, you're just not being effective, because you're not paying for it, so you don't care. And so if you're not paying for it, you don't care. You're not paying attention to it. You're gonna not you're gonna not be as concerned with it as a guest, right? And so we just have to be prepared for that as owners of these are the type of things guests are going to do. I wish it wasn't the case, but that's the reality. And so your utilities, my utilities, I vastly underestimated. So Gas and Electric were big ones. Water is also a big one. So if you've got a hot tub, I'm fairly certain that the local laws and regulations are going to require you to drain that hot tub and refill it after every guest stay so that it can be adequately cleaned. Hot tubs are several 100 gallons, if not multiple, 1000s of gallons per fill. So just be aware of that. Now it's I'm kind of a unique situation. The only property that I've got a hot tub in, I've got a well, so I only pay for electric in that instance. So I've got my own water supply, so it's not a big deal, but it can sneak up on you. The heating and HVAC can definitely sneak up on you. The other one that I think snuck up on me and caught me a little bit by surprise is insurance. And so anyone who knows me knows that I come from that world. I've got a lot of experience in the insurance space and world when it comes to owner occupants and investment property and investment property and commercial insurance, and short term rental insurance has just is expensive. When you compare it side by side against long term rental insurance, it can double and sometimes triple. And so we just want to be prepared for that. And everybody listening, I want to encourage you to be prepared for that if you're going to get into the space, because it is not the same. Now you asked about revenues. Revenue is also not the same. It is much more cyclical, and there's a lot more beta. You know, there's up and down, a big upside and big downside. We want to remember that we have very fixed payments when it comes to owning investment, real estate, pity is the best one, principal, interest, taxes, insurance are kind of the four components that if you have a mortgage on the property are going to be fixed universally of whether there's someone in the property or not. Now the variable expenses are going to be when it comes to management and the utilities, and then your your miscellaneous expenses. So bigger revenues on the upside, but you also have bigger expenses. So you just have to make sure everyone's got to run their numbers on a deal by deal basis of eight. By deal basis of if it makes sense or not. I came to the conclusion on a couple different properties that yes, this makes sense. On my house hack that I used to live in, I lived downstairs in a duplex. We operate a short term rental upstairs. The difference in revenue at the end of the day after we paid out all of the expenses for the cleaning and the consumables on that stuff. I think it was like 400 bucks a month, something like that, and we were managing it ourselves. We were we had a cleaning team that was doing all the turns, but we were managing the cleaning team. We were doing all the guest communication. And I was like, my wife was doing the vast majority of it. And we kind of looked at each other and we're like, what if, what if we just didn't, like, is $400 really worth all of the time, energy, effort, stress of doing this, versus just convert it to a long term furnished rental, we'll make 400 bucks a month less, but we don't have to deal with any of this stuff, and we get rid of all the volatility of what if we don't get a booking, or what if we're on a trip and we get a booking, because that happened to us too. We were in the middle of nowhere in our van and got a booking request. We're like, oh crap, our cleaning team isn't scheduled, so it just it can be a lot more headache than it's worth. And so just because it's a short term rental just doesn't necessarily mean it's going to make more money. So a lot of word vlogs, yeah,

no, I'm into it. I'm into it. We're running tight on time. My I guess final two questions, you know, where there is season volatility. Is there an opportunity to do, like, short term during the high seasons and then sort of like a midterm in the off season, so like, a six month lease? Have you, have you ever seen or done that type of maneuver?

Yeah, we did. Yeah. Yeah, we, we kind of did that with this house hack that we decided to convert to, to a long term furnish. We could very easily have gone midterm with that. And so I think it's a big, a big question of just what the demand side economics are. So if you're in a market that sees short term demand spike in certain times of the year, but you also have fairly sustained midterm demand, I think that's really where you You hit the nail on the head and can blow this thing up. We do that with our with our midterm rental down on the Central Coast, it's a condo. We can't short term rent it for less than 30 days. So we've done one month contracts, and we've also done a year contract. And so having that flexibility, assuming it's going to be furnished the whole time, I think is a great way to go. Now, you just want to be careful, because the management of that changes fairly significantly. And so if you've got a short term rental manager, they're probably not going to be equipped to handle midterm rentals and vice versa. So but if you're self managing, absolutely if I would encourage everybody who self manages a short term rental to explore midterm rentals in their down season, because it can be a great way to smooth things out and minimize your vacancy.

Last question from me, are you going to do more short term rentals? You know, based on your experience, do you plan on kind of adding to your portfolio? Yeah,

you know, I'm opportunistic about it. I'm open to it. I just know how much work is involved, even even as like the passive owner, there's just a lot more risk involved. So I like the short term rental. I think the the big side, the big upside, is huge when it's done right, but I know that it's challenging to do, right? So if I see a property that doesn't work as a long term rental, but could work as a short term rental, and upside is pretty huge. Yeah, I'm open to it. It's just not something I'm actively pursuing right now, but I'm, you know, I've always got one eye on on the market for sure. Awesome.

Michael, last 60 seconds. Any final, final thoughts on short term rental.

I think it's great. I think it's an awesome asset class. I think there's a lot of variability that's kind of unknown and doesn't get talked about. And so I would encourage anybody who's listening go do a deep dive. Go learn as much as you can about short term rentals in your particular market of interest, because we always say real estate is hyper local, short term rental is even hyper, hyper more local. And so you could have some counties or some cities within a state that have different rules governing short term rentals. So the last thing I want to see is somebody go invest in a short term rental thinking they're going to kill it and find out they can't even operate it as a short term rental. So go do your diligence. Go do your homework. Don't get caught off guard. Learn from our mistakes, and I'll see you on the on the short term rental trail.

Awesome. All right, everybody. Well, thank you for listening to this episode, and look forward to catching on the next one. Happy investing.

Happy investing. You.

Investing in real estate remotely can be intimidating, to say the least. From selecting which market to invest in, to building a team of reliable and communicative vendors, each step of the process is critical to building a healthy portfolio of homes. In this video, Michael gives you three tips that can help you get it right from the start!  

Brought to you by: https://www.myfiacademy.com/ 

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Transcript

What's going on. Everyone. Welcome to the remote investor. I'm Michael albaum, and I host the show with to my co hosts, Pierre Carrillo and Tom Schneider, and we talk about everything related to remote real estate investing. If you are new to remote real estate investing, you might be thinking to yourself, how in the world is that possible? I can't go see the property. I can't drive by the property to check up on things. So why would I possibly want to invest remotely? As a bay area resident and California native, I can tell you why, because investing where you live isn't always an option. So instead of throwing up your hands and saying, Well, I guess real estate investing isn't for me, come along with us, and we'll show you how it could absolutely be for you. So one of the biggest key takeaways I've learned over the years of investing remotely is how important and fundamental using a great property manager is. Now if you're someone that self manages, kudos to you. I have a lot of respect for the people that do that, but for the vast majority of us that are working still a nine to five job and don't have the luxury or ability to self manage, a property manager is going to be the linchpin and one of the most critical components you're going to have in your real estate investing arsenal. So number one, loop your property manager into the acquisition and buying process. Now this is something that a lot of people, when they hear property manager, probably aren't thinking acquisitions. When they hear property manager, they're probably thinking, hey, I already own the property now the property manager takes over and they're going to manage it for me. While that is true, something that I love to do and recommend to everybody I talk to about remote investing is leverage them in the buying process. I always say, date your agent and marry your property manager. So the property manager is somebody that you're going to have a long ongoing relationship with. A property manager is also somebody that lives, breathes and operates inside that market, day in and day out. It is their literal lifeblood to be an expert in that local market. Now, real estate agents can be local market experts as well, but they might not be as up to date on what market rent comps are or what market comparables are when it comes to rent. So if you involve your property manager in the process, they can give you a really good idea of what the property is going to rent for. They can also give you a really good idea of what it's like to own and operate rental real estate in that particular market, versus an agent. They're very familiar with what buying and selling real estate is in that local market. So having an agent is a great thing. Having a great property manager layered on top of that is even more important, in my opinion, additionally, getting your property manager to take a look at any inspection report you get is one of the most important pieces of the buying process. Again, in my humble opinion, property manager is going to give you great insights into what things need to be addressed now versus what can wait down the road, and can really give you a lot of ammunition when it comes to having the discussion and negotiation around the acquisition. So that's number one, involve the property manager in the acquisition or purchase process. Number two, interview multiple property managers well in advance of actually closing on a property in a particular market. Now I'll be honest with you, this wasn't something I was always good at practicing. I knew it in the back of my mind that it was something I was supposed to do, but when it came time to the acquisition, I got so excited and so short sighted that I said, I'll worry about the property manager after the fact, and boy, did I pay for it. I've chatted with some people in the past that have said, Michael, I interviewed one property manager and they were perfect. Why would I bother interviewing others? It just takes up more time and attention that I could be spending going to look for deals. Well, something that I always encourage people to do is when you interview multiple property managers, you're gonna get a really good feel for if the one you've selected is a great one, or maybe there are better choices out there. We just haven't come across them yet. So I find it a great use of time, energy and resources to go interview multiple property managers, because it's going to give you an idea of what the market has to offer. It might also tell you that it's not a market you're interested in investing in anymore because you can't find a good manager. Now, if somebody can't find a good manager, it might just be because they haven't looked in the right places, or haven't looked under every single stone, but if you truly have exhausted every management resource available to you in that market and can't find one that you're comfortable with, it might be worth reconsidering whether that market makes sense to invest in, because, again, as a remote real estate investor, the property manager is one of your biggest assets, but also your biggest potential fail points. And if we're not confident in our property management with our remote investment, again, it might be time to reconsider that market to invest in and last but certainly not least, take it from me as someone that has had to fire their share of property managers. Don't be afraid to fire quickly. Look, people are human. They may. Make mistakes. I make plenty of them, and I'll be the first to admit it when I do, or I like to think of myself in that light. Anyhow, property managers are no different. They make mistakes. There are issues that hopefully get overcome, and so that's not to say don't give anyone the benefit of the doubt, or don't allow anyone to be human, but all that being said, if a property manager is ineffective and you're not able to get out of them what you're needing. It might be time to change property managers. Now I'm someone that thought the pain of changing management companies was going to be worse than their transgressions, and turns out I was wrong. The short term pain is well worth the gain to bring in effective and new property managers. And one of the reasons I think this is so important is because the longer you stay with an ineffective property manager, the worse things tend to get, and the more embedded in your business they become. So cut your losses quickly and move to step two, which I mentioned previously, as you should have interviewed and screened multiple property managers. So hopefully one of those can be your backup, so you're not having to start from scratch. So this is all starting to come together with involving them in the acquisition process, interviewing multiple and not being afraid to pull the rip cord or rip the band aid off sooner rather than later. So hopefully this was helpful to everybody who's an active remote real estate investor or aspiring remote investor. I encourage everyone to come check out the show wherever you get your podcasts. We would love to hear topics and things you'd like to hear more about and learn about on the show, and we look forward to seeing you in the next one Happy investing. 

Hiring the best property manager for your out-of-state rental is critical to your bottom line, but how do you know which PM is best? In this episode, we go through, step-by-step, our process for vetting a selection of property managers in a remote market.

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Transcript

So they said, Hey, I need your fee to be at this percentage of the rent collected. And this is what I can afford to pay you in a leasing fee. And I said, Okay, we'll take that. So he was like, Hey, everyone, what's going on? Welcome to another episode of the remote investor. I'm Michael Albaum. And today I'm joined by my co host, Tom Schneider, Pierre Carrillo. And today, we're going to be walking you through exactly what the step by step guide should be to interviewing and screening property management partners. So let's get into it. Alright, guys, so let's just jump straight into it here. So anybody? Well, not anybody, but a lot of people who are investing remotely are leveraging property managers, and property managers, kind of like real estate agents are a dime a dozen in most markets. So I'm curious to get your thoughts and to have you share with everybody, what things are you looking for when you're screening and interviewing a property manager? Tom, you want to kick us off?

Yeah, I'll start us off. I mean, I'll start by saying, you know, selection is important. And what I mean by that is talking to multiple. So I think in starting the conversation, I like the idea of kind of maybe sourcing, like potential candidates, and then going through a standardized process of like reviewing them based on a bunch of criteria. So I'll go ahead and riff a little bit on this and thinking about it as like three steps, right? Sourcing, identifying different ones, and then interviewing and kind of like put running them all through a process of picking the best one and a gauntlet, that's right, onboarding. So I'm going to start with just the idea of like sourcing and where to find. So I think there's a couple of different flavors, there are larger brands out there that manage properties in multiple different markets. And, you know, we'll talk a little about the pros and cons of that. But just like searching and sourcing, so you can say, hey, real estate property manager XYZ on Google is a way for that to come up. And I think the idea is, is it should be if you're in a reasonably sized market, like you should be able to find find at least like 10 different potential property managers to select from, and to kind of go through this like rubric of evaluation. But you know, what I like to do all search through Google or perhaps even like, look on a site like Yelp. As you know, BiggerPockets is also has like, a lot of people trying to sell you something. So like, you know, their their resources are, are great, but you know, a good kind of starting place to build that list. So other than lead the conversation with that, like, first sourcing identifying a bunch of them to run through this process. Yeah. Michael Pierre, any other kind of like thoughts around identification?

I think that's a great place to start a fan. Something that I like doing is also like joining a local group, like a Facebook group of investors in that market, and then asking for references like asking, Hey, who, who's using property managers in this market? Who would you all recommend? And then combining those two lists from the my own research that I'm finding online? And then what people are, are saying locally in the market? Love references? Love here. What about you? What did you do when when you bought your property?

So made the mistake of just kind of going with the most convenient property manager when we first bought it, and they were awful. And it's

so easy, just have the path of least resistance of like, Oh, if they say they do what I need them to do great, I'm not going to spend extra time it's like, especially the PM, like that is just such a long tail relationship where you don't want to like cut corners. And

it can be super costly. I mean, it ended up being costly for us, because they didn't even let us know that the tenants were out. And then we had this extended vacancy, because we didn't even know our property was vacant. And so one of the one of the things was just like how quickly people respond is a good indicator. You

know, it's so funny. We there's probably a whole nother episode on horror stories with property managers, I had the same situation where a property manager just told me how they wanted to treat the vacancy, and I'm like, What are you talking about? Like, there's like, a lot of time on the lease, like, I go, ya know, they've moved out. And it's like, what, like, you know, I get away, I get it, stuff happens. And it's like out of your control. But anyways, I think this is like a future episode, like digging into those kind of horror stories. So thinking about different variables that I think about when okay, I've sourced a bunch of them from either my agent or maybe a lender or online reviews, forums, all that good stuff. A couple of like, really important questions that I that you need to know and have kind of like written down is, how many properties do they have under management? Right? Like, how big is their portfolio? Does their footprint match up to like, where I am investing? How are they getting paid? And that you know, that seems like a very basic question, but it actually varies quite a bit from property manager to property managers. Some take a percentage of rent some take a flat rate, some take a percentage of kappa acts, you know, or construction. So, you know, not even those

little differences can change the incentives relationship to So, yeah,

it's it totally. So I'm gonna leave a little bit of a like leg rib for a Michael here to kind of add on. But those are some, like initial sort of like numbers like within a spreadsheet. Each row is represented by a property manager that I'm evaluating columns being, you know, their pay structure, how many investment how much inventory they manage, if their investor in managing their own inventory as well. And then sort of like, you know, check the box on like, what zips as well as like property characteristics they manage, like, are they a Class A type or a Class B, what properties am I investing in? Does that match up? Or leave a big pregnant pause to

take all the Yeah, no, this is so great. Tom, you said something that you glossed over that I want to come back to. And it's when we were talking about references before about where to find some of these property managers, agents can be a great, great resource for that, too. So if there's somebody listening to this, that is actively buying in a market, and so is working with an agent or wants to find an agent, and then we'll also need a property manager, those two can often play off each other and will often have good working relationships. Sometimes an agent will have a property management business or vice versa. So definitely chat with your agent or property manager about looking for one or the other. And then something else you said, Tom, is that like, asking them how many units they have under management? I think is a great question. So one thing that I talk a lot about in my education content at my Fire Academy is not only like what the questions we should be asking are, but what then the answers were being told, tell us about that person or that company. And so I think I want to dive into this a little bit more, because I love the questions that you pose. But I want everyone to come away from this episode with Okay, well, I go ask the question, and now I get an answer. And now what do I do? Is that a good answer? A bad answer. So, so curious what you guys think like someone says to you, Hey, I've got 1000 units under management. What does that mean? What what how does that information help us make a decision?

I think it's all contextual, on like, where they're managing, like, I think 1000 is a decent is like, quite a bit like, especially in like, a smaller, like, perhaps like tertiary or even like a major market. Like I think that's like pretty significant scale. As a property manager. You know, with that I'm, you know, kind of curious, also how many, like property managers, you know, they have like, as like a ratio to managing. But, I mean, I think that's really specific. So like, you know, if I'm in like, managing in North Pole, Alaska, like, I wouldn't, that would be crazy to have somebody have like, 1000 properties that are management, or whatever. Yeah, you know, city in Alaska. Yeah. Yeah, come check out Yeah. So I think it's very Michael, it's very kind of dependent on where they're managing. But if they're managing in Atlanta, and they're only managing, like, 20, or like, 40 homes, like, that's a little bit of a red flag to me, being in like such a big market. So, you know, kind of rule of thumb. I don't know, like, I typically only invest in places that have like a million, you know, population and like the greater like, Metro. And if a property manager is managing, like, less than 100, or maybe even less than 200 homes, I'm like, that's, that's, that's like kind of lien like, I don't want them to learn the craft of property management on my like, dime. I think I think you're kind of kind of go into where you're alluding at is like, how long have they been in business?

Yeah. Yeah. I love it. I think you I think you nailed that. And I think that it's so important to understand that real estate investing is so hyperlocal. And so market specific. And so it's really tough to take an umbrella approach and apply it uniformly across the board. So I agree, totally like, I think it all depends on the market size, do you think that bigger is better? Or smaller is better? Or like, the age old question? Does size matter? How do you how do you feel about that when it comes to your property management partners?

Oh, that's a good question. I mean, I think there's too small. And I don't think there's too big, like, as long as like, the other sort of criteria is good. And that like, Oh, they're collections is pretty good. Oh, they're like average turn is like, like pretty reasonable. Oh, you know, the, the customer and residents seem pretty happy with the services that they you know, with a with a grain of salt, because that relationship is always can be a little bit tenuous at times, a land, you know, a rent manager and a resident. But I mean, there are like major red flags. I digress a little bit. So anyways, I'd say there is a floor Michael, but like, not really like a ceiling of like, if they manage townhomes. Great. I've got it like an efficient business. Like, you know, I, I want to be a part of that, you know,

totally. PR. I'm curious to get your thoughts because I know that the property manager that you ended up going with did have a really significant footprint. And it was really,

and yeah, so there were a huge tech enabled company, and that's kind of one of the red flags that I'd say it's like if they're a tech heavy Property management firms kind of like one of these property management light services that they're using technology to solve their problems. They use Bitcoin.

Like synergy I'm all

about all about like making your systems robust and tech heavy and using all the latest technology. But if you're replacing people with technology in property management, I'd say that's a real problem. Getting someone out like one of the big problems we had with that first company was getting someone to get out to the property. And it was just week after week, no one would give us any new photos. And that's how we ended up with an empty property and not even knowing about it. And the property manager that we ended up going with was much, much smaller. But they were out there right away, they sent us photos of our property that day, we got in contact with them. They weren't bragging about being the most sophisticated technology driven company, but they were people who did their job, right, and responded in a timely manner.

So yeah, it's interesting. So like, we obviously can't take one off experiences and apply them across the board. And to say that every large tech enabled property management company is going to is going to operate poor for you. Conversely, every small mom and pop operator might not be a great fit. So this is why I love this is why I love that we're having this conversation is just to give people some ammo and some takeaways to then go investigate for themselves. Yeah, there he is. It's funny, I go ahead, Tom.

I think there's like there's sometimes this like inverse relationship of efficiency, and resiliency, where if you know, the build something so efficient, like if things go off the rails a little bit like it can kind of hit a standstill, like, you know, pure, like, there's probably a non standard thing, I don't know, maybe non standard or whatever. But you can, you know, very easily throw the baby out with the bathwater of trying to look, we have one employee for every 10,000 homes. It's like, Oh, that's great. But you know, you're in a business that is as kind of dynamic and like kind of a moving target as like managing real estate, managing tangible property, like you need to have some resiliency and some, you know, not over efficiency it.

Yeah, and when I say red flag, I'm not saying stop sign, I'm saying just notice for inquiry here, make sure that they're not replacing the things that should be done by a human with some app or automated response.

That's great. That's great. Tom, you touched on this point a little bit ago, and we're talking about property managers per property, kind of on a ratio basis. And so if someone is new to the investment, real estate space, they might be a little bit confused by that, because I'm talking to the property manager, what do you mean, there's like a different one, so maybe you could go elaborate a little bit on on what that means and what that looks like, across the different companies.

I think it's, you know, so I, you know, work in, like, real estate and like, as like a team, that is like managing property, like, you want to have a fairly high ratio of like, employees to number of units that you manage, like, you know, one 200 Or one, two, whatever I you know, whatever that number be, I think probably as an outside investor, it's a little bit less important to, like, have that as a ratio. So like, as long as they're responsive, you know, able to take care of the home, able to provide a safe, habitable, all that good stuff, you know, with a resident and least a home with good people. I think that's probably like, less important, like, what that ratio is. Yeah, I think sometimes, like, you know, for better or worse, kind of, I like, apply a little bit of a lens of like, just institutional experience of like, oh, you know, if our systems and technology is running well, like, you know, we have a good ratio, obviously, not the awful ratio that results in like, no flexibility and not being able to handle like stuff outside the lines. But, you know, I think that's probably less important, but still, like an interesting data point, at least for me. You know, having totally,

totally, and I think it's something that because I know your background, because we have history, I know that you asked the question and had experience with the person that you were speaking to on the phone, as you were interviewing this property manager wasn't the same person that you were going to be dealing with on a day to day basis. So how do you screen for that type of thing? And is that important?

You know, you you gave a good example on how to do this, because so like, a lot of companies like they've got a salesperson, the sales man or woman that's, you know, sweet talk you. And I think,

oh, yeah, we've got that we can do that. No problem. Yeah.

I mean, it's something that I think I think you taught is around this sort of, like secret shopper, you know, like, find one of their listings, like kind of go through the process. And like, that's gonna give you a much better insight on the there as like an operation. Doing that, you know, not coming in as a potential customer, as you know, someone who's having to manage but as on the other sight as like a as a tenant?

Totally No, yeah, I love that. And what what Tom's referring to is, basically, if you're interviewing property manager, screening property managers, just go on their website, find one of their listings, and call the phone number as, as a prospective tenant, and see what that process is like, as a prospective tenant, if they are great to work with, if they take really good care of you, if they're responsive, that's a great sign, versus if they're giving you the dog and pony show as an owner. And they can do everything and they answer all the right questions, but you have no idea how they're treating your prospective clients who are your tenants, that could spell trouble down the road. So I always like to see how the tenant is treated. It's funny, I posted about this a while back on Twitter, and someone was like, you're starting the relationship off with with a lie under false pretenses. And I'm like, No, man, I'm trying to understand what the customer experience is like for the clients who they're serving. Yeah, and I'm like, Get out of here. I don't need that. I think there might have been a property manager too.

I think another way, I like to kind of get under the hood. And, again, this is would probably the like more extreme heavy, like, interviewing process of a property manager. And I think there's a spectrum of level of diligence. And I think it's a good exercise to do to apply more diligence into this process. But another question you can ask is a more kind of like, open ended question like, Hey, what's your process of managing a renewal or managing a turn, and a property manager who's like, on their game is going to be like, alright, well, first, we look up at local comps at what the rental amount is going to be, then we review with the owner what they want to do with the actual resident that's living there, then we approach the resident with XYZ and present this to them. And you know, it's not to say that every single property manager has the same process, but it's like, they can like succinctly like, tell you or share with you what their processes and like they have a plan, you know, and I think also like, in going through those questions, like you're just gonna get, like naturally more kind of educated, like, you don't have to know exactly what the right or wrong answer is. But it's almost like you, you out you, you throw a question out there like that, like, Hey, what's your renewal process? What's your turn process? And just like turn on your BS meter and turn on your like, learning, you know, ears and hear what two different companies say? Like, it's, I think there's very little to lose of coming in with a beginner's mindset, no matter where you are in your investor journey, and asking these these really important questions, like the process of a turn or an initial lease, or, you know, you know, how you deal with someone who's late a couple times, or whatever, you know? Yeah,

no, I think that's great. And I love the open ended style questions. Guys, I'm curious to get your thoughts and it's something I've heard through, through the folks that I've worked with in the past is, you know, I'm too new an investor, I'm nervous to call these property management companies that are gonna take me seriously, why would anybody talk to me? I'm not, you know, I'm not a client of theirs yet. What do you have to say to that?

Stop being a little bitch.

Yeah, like, yeah,

get your ego out of the way. Because you're, like, it's just such like, a no brainer of, like, it's okay to be a little bit vulnerable. And like, and, like, ultimately, like, every single cycle of going through, like asking these types of questions, like, you're gonna learn more, you're gonna get a little bit like less concerned about asking questions. And like, ultimately, like, who cares how much you know, looking like, not smart, like they're trying to sell to you like, they're trying to get you the business. And I think there's like, very list in very little risk and going about it in a very, you know,

you're gonna be paying them good money. You just, yeah, you just gotta get the information. However you can. And that's the best way.

Yeah. And I think to on top of that, if, if you call and if a property manager makes you feel silly for asking these seemingly, maybe trivial questions, then that's maybe it's not something you want to work with anyhow, like, someone, someone on the other end of the phone should be willing to help educate you and hold your hand and walk you through what the process is, like, if they truly understand the business, and if they want new business, if they're interested in growing, you know, you've heard of contractors throwing a few quotes, you know, it's ridiculous price for something. So like, they don't want the business anyhow. So we see that in the property management world, too. And that's, that should be assigned to you as what their relationship might look like going forward.

I'm gonna flip the question or not. So on that same topic real quick. More often than not these property managers. You can't get them to shut up about their business. And you call them and they're like, Oh, we do this. And we do that. And we're going to, like, just like, Dude, I had a 30 minute call with you. We're going 45 minutes like dude, and he's like, let me off. You're good. I

know. Like, it could be some regional cultural stuff, like a very long call. How y'all do for sure.

I've never I've all the property managers that we've called like, never are they like, you know, why are you calling me?

Tell me we won't take your money. Hey, Michael, I got a question for you, you've been throwing off these. I love to hear from yours yourself as well, Pierre, what are some red flags? So, you know, we go through a process, we identify a bunch of people, we're asking them, you know, discrete kind of quantitative questions, as well as some qualitative questions, getting some processes that they have, what are some red flags?

I think Pierre touched on it at the beginning here, and that's timeliness and responsiveness. So if I ask a question, and I don't hear back from them for a week, or two weeks, or or at all, major red flag, and Tom, you brought up the point to which I want to touch on the cultural differences in a lot of other parts of the country to like, we are a massive country with a diverse cultural background, and customs and norms. And so here in California, Silicon Valley, I mean, if someone doesn't get back to you, by the end of the day, to an email, you're kind of like what's going on? In a lot of other parts of the country, two days, three days, four days might be the cultural norm in terms of that's being really responsive. So I think it's important to set expectations to around just asking the question and having conversation of, hey, if I email you, how soon can I expect to hear back from you, is really important. But in for that initial call for that initial interaction, if I'm emailing you, especially if I'm a brand new lead for you, I expect to hear back. And if I don't, that's a major red flag. And it's funny, I interviewed a bunch of property managers, or tried to interview a bunch of different property managers and a couple of the markets they operate in. And the ones I work with today are the only ones that called me back. And I'm like, you know, we make the joke about contractors, if you pick up your phone, you'll get business like if you call people back, you'll get business. So I think communication is huge for me, in terms of red flags, but right up here,

that was the main main one for us is we couldn't get eyes on our property. And to have someone that was like one of the biggest selling points we interviewed, I think three or four when we were trying to fire the previous one. And the one we ended up going with was the person who was quick to respond quick to go to the property quick to send us photos give us like, they just provide an opener, like this person's on it. They know what they're doing. They're local, they definitely live there. We're going with them. And they were the same price as the the first awful company. Yeah,

I think another red flag. Okay.

And that reminds me of this did not happen to me. But I've heard Tom tell the story before and maybe I'll prompt it for you, Tom. But the hidden clause inside of the property management contract? Oh, yeah,

that's a good one. So on to stage three, sourcing, then looking at specific questions, and then having a request of things to review. And one of those being like their property management agreement. So I've had to fire Property Management before kind of similar things where it's like, I feel like they, the property was in a satellite region, which wasn't their main region. So they didn't have like a great team, they're managing anyways, when I fired them, they like, like, in the Property Management Agreement, which I did not read, which now I do, all the time. Whenever I add a new property manager is like, they were like, collecting a bunch of money on like, on in firing them, like within the pm agreement. I don't remember like the specific details about it. But you know, it was like taking an extra month rent that they just like took, there's a cancellation clause, cancellation clause after it there was within a certain number of years. And, you know, I think like on the onset, like if I had read the property management agreement before signing it and said, like, Hey, I'm not signing it, do you include that? Take it out, like, I probably would have saved myself 1000 bucks or 2000 bucks on some like, crazy, you know, cancellation clause. So you know, that other to that point, right? Red flag is, it might take a little bit of time, and just skimming and reading through that property management agreement. But that's a good use of time, like it would have saved me 1000 bucks, 2000 bucks and going through that.

And it would have taken you two hours, three hours to read it. So that's like some lawyer money right there. That's pretty good ROI. That's correct. Yeah. Yeah. I think I think also to like, in HR, I think it's so important to read, like, read the stuff that they send you. It's legal, it's binding, you need to be aware of what you're signing. The other thing that I always look out for, and it's it's kind of a personal preference and pet peeve of mine, but when I asked the property manager, how do they get paid? How do they make money, and they start listing off all these things, and well, we charge $50 for an inspection and this, this $20 to return email and $20 to answer the phone. And like, I hate getting nickeled and dimed for all these different line item charges. And I and I, you know, from a property managers perspective, I get it because it takes time to do these things and so they need to make money and they need to charge for their services and the time they spend doing things, but me personally, I like I want a flat fee, I want like a flat percentage of the rent that they collect is how much is how I pay them. And I think it's also important to set expectations out there for everybody who isn't maybe familiar with property management, property managers, and how they charge, there's a couple different models. One is Tom, like you mentioned, a flat fixed rate, they charge 50 bucks per door, whatever independent of the rent, some property managers will charge a percentage of the rent, and some will have it that includes everything. And then some might have this kind of ala carte menu style of services and costs. I'm a big fan of kind of that middle tier of the percentage of the rent. And however much you collect how much you're able to charge, that's how much you get paid on a percentage basis. Because I think that aligns incentives and real really well, in that if they're able to collect more rent, they win too, they get to share in the upside. So I just wanted to put that out there for everybody listening, that it's just a personal preference, you'll figure out what works well for you do what do you guys like? Which style works well in for you guys portfolio?

Percentage of the rent, I feel like makes the most makes the most sense. But it depends. Yeah, it depends on if you're going with one of the lighter services out there, there are, like some of these tech platforms that offer you per door, which can come out to a bit less,

yeah, I do the math, you know, and, you know, a lot of stuff we're saying, you know, market kind of specific. So, you know, I have a few units up in the north, east in Pennsylvania, and there's not as many property managers as there are another like big markets, and, you know, they have this like, tech fee, like $1 a month or something, and I cringe so much when I see it, but it's like, they're, they're good. They, you know, they have good relationships, they collect rent, they keep the house in good shape, they're like on responses and stuff. So I think on that, like, you know, format of getting paid. It's, you know, do do the math, like, if it's a per dollar per door, or percentage of friends, like along with your within when you're doing your underwriting and making assumptions about repairs and maintenance, like how much would that work out to be in property manager that they're charging an upcharge? Or a daily amount or whatever, you know, on? So I think it's, it's worth within your actual model itself, you know, applying the different property managers, things. However, they're they're collecting, collecting money.

Yeah. Have you seen property management fees go up over the last four years at all? Have you recognized any changes in your portfolio? Or is it safe? Pretty static?

Good question, Pierre.

You know, it's, it's a really good question. It stayed static. But so the percentage as a number has stayed static, but the rent has, of course, increased over the last four years. Now, what I have seen increase our labor material costs. So the the repair costs are more expensive, those projects are more expensive, but the property managers know, which is I think, kind of the beauty of real estate investing in general is that it's a great hedge against inflation, because as the rent goes, as your expenses go up with inflation, your your dollars are bringing in also go up over time. So and the property manager gets to participate in that upside,

final two little recommendations on property manager. So one of them is I'm sure I'll talk about this again, in a future episode, but like, bring them into your acquisition process. So like, kind of like bonus questions, which is honestly my favorite thing to do, like evaluating a property manager and say, Hey, I'm looking at buying 123 Main Street, like, what do you think, and like, you can almost leave it kind of open ended and see how detailed they come back, like, I've had a wonderful experience is actually it was that property manager that in Pittsburgh, they're like, oh, this great, this house is really great. There's a lot of three bedrooms, this one's a four bedrooms, we'd lease it right away, I think we'd get this kind of rent amount. And like, man, that's thoughtful, that's knowing the market. And there's like, such a double whammy when with that, and that you're kind of like, de masking that property manager about how well they know the market, and how it's conscientious, conscientious, the right word, or, you know, thoughtful they are in the way in thinking about real estate, but you're also adding them on your acquisition team. Like, that's fantastic, you know, you know, and there's been other folks that says, like, ah, you know, we don't really manage a lot of properties in that area, you know, XYZ, so that's one pro tip, the other one and the other one is get a reference, like, that's like an awkward call or communication but like, such a high ROI, so say, Hey, do you have any like customers, you use that like I can talk to? And like actually just like emailing people and say, Hey, I'm thinking about using ABC property manager, and they said, you know, to get your feedback, like, what do you think about them? What I do well, what could they improve upon blah, blah, and it really good use of time? You know, that's sort of like a little bit of an introvert. It's a kid That's a

much more robust data point than their online rating. Because on property managers get rated by people who have to deal with them on a day to day basis, the tenants and tenants hate property managers. Totally.

Yep. I think that's a great point. My last pro tip that I'll leave everybody with is, everything is negotiable. So I've heard from students I've coached with in the past that they're like, oh, you know, I found this great property manager, but I ran their fees through my model, and it's like, it doesn't work. And I'm not hitting my cash flow targets. And I said, Okay, ask them to lower their fee. See what they say, like, you can do that. I'm like, Yeah, everything's negotiable. So it's like, okay, so they said, Hey, I need your fee to be at this percentage of the rent collected, and this is what I can afford to pay you in a leasing fee. And I said, Okay, we'll take that. So he was like, I got to have my cake and eat it too. So I would encourage everyone not to be shy about asking for the things that work for you. By that same token, you can't get mad at somebody for saying no. So their fees are their fees, and everybody's got to make money. But I would encourage everyone to ask the question, because all too often people say up, the numbers don't work for me. I gotta move on, when in reality, there are things that we have within our control or question that we can ask to help make the situation better. Sweet. Well, thanks so much for hanging out with us, everybody. Really appreciate it. We look forward to seeing you on the next one. Happy investing