The SFR Show

Not in a buy cycle?

In this episode, we talk about what investors can do in the meantime to prepare for when they are ready to invest.  

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this weekend wisdom, we got a fun topic, it's what you can do as remote real estate investor, if you're not ready to buy, or not in an acquisition cycle, or just getting ready, all the different activities you can do to build the muscles to execute well, when it's time to buy. Alright, let's do it.

All right, so this weekend wisdom is made for people who want to be remote real estate investor, or perhaps they are in remote real estate investor, and they are looking for things to do to help level up when they are just not ready to buy. Or perhaps they don't have the funds to buy something along those lines. So I've got a couple of ideas. But I think I'm going to make it more fun by just putting Emil on the spot. It looks like he's not necessarily listening.

Alright Emil, what are some things that people who want to invest but perhaps are not ready to grab funds or whatever reason? How can they build muscles to be a good remote real estate investor without actually buying a property?

Emil:

I would say so I'm kind of going through this myself on a little temporary pause. I am trying to just network with other people who invest where I invest, either through Facebook groups, BiggerPockets, forums, Roofstock Academy, wherever it is just meeting other people who invest where I invest early in my investing career, I had this very scarcity mindset about real estate investing, like why would anyone want to share information with other investors, like we're all competing against one another. But really, so many investors are so giving and willing to like, talk with other investors, because there's not many of us out there. So when you find another investor, especially if you're a remote investor, it's like, you know, that's your community, that's a tribe people love sharing information and just like talking to each other and getting best practices and stuff.

So like, for me, I've been trying to meet people who are local in St. Louis, talking to different property managers, different agents, just people who are local there who can help me, I don't know, get a better label and learn the market, find deals when I'm ready to find deals. So at this point, that's what I'm kind of focusing on.

Tom:

Love it. It's such a good one. And I think the logical fallacy that there's only you know, so many properties out there, and I need a box, everybody out is just such a logical fallacy. Like there's, there's literally millions of houses out there. And it's a great reason to connect and share. And I mean, I guess there could be situations, right, where you're making the property, you're making an offer on it, and somebody you know, is actively buying in that same area, like then it's reasonable to use a little bit of caution on very specific deals. But generally speaking, that's that's a fallacy. I think that I had as well getting into it thinking that, you know, it's a zero sum game.

Michael:

It could truly be a win win. I think, if you're thinking about that, and not willing to share information at a high level, like Tom you said, there are some things that of course, you want to keep your cards close to your vest, but at a high level, like if that's what you're thinking, then you're probably doing it wrong.

Tom:

All right, Michael, things you can do. As an investor, perhaps you're not ready to buy right now, or you're not in the buying cycle.

Michael:

Yeah, so similar to Emil. I'm kind of a great case study, because I'm not in a buy cycle. Right now. I am gearing up to be in a buy cycle. So right now, my wife and I sat down two weeks ago and are really honing in our finances and our spending and our savings rate, making sure that we are just storing up a bunch of dry powder. I'm also going through several refinances right now getting some equity out in the form of cash and just looking to hold on to that for a little bit. One so I can wrap up this project I've got working on and to just so I can have some more dry powder in the keg to deploy when I am ultimately ready to jump back into that buy cycle. So getting lean and mean and getting things in reserve.

Emil:

You hold dry powder in a keg? That's a dangerous man.

Michael:

That's not where you're supposed to hold right? Where do you hold your dry powder?

Emil:

On the floor? I don't know.

Michael:

But then there there's powder everywhere.

Emil:

In a savings account?

Tom:

On the shelf. Yes.

Michael:

I'm talking about dry powder in a pirate sense of the word. By the way, you know what the pirates favorite letter is?

Emil:

ARRR!

Michael:

No, that'd be the sea!

Tom:

Oh, Have you guys heard the Wellerman song remake? Ah, the Wellerman is just stuck in my head. It's like a pirate song and it was like a tick tock thing. Okay, here's your fun fact for the weekend wisdom. The wellerman is the person the ship that would deliver pirates their like goods. So like their tea and rum and stuff. And then the Tucker is the person from the whaling ship that had to clean the tongue anyways, sorry, that was it. So the Wellerman Search it up on YouTube while or when you guys will get it stuck in your head, catchy pirate song that was important.

Michael:

I added that I just love just continuing down this rabbit hole, how you're like, oh, delivering their goods like T and ROM as if that's the only thing that pirates consume. Like, no, they don't eat bread or cheese or meat just exclusively tea and rum,

Tom:

Listen to the Wellman song and you'll get it. Okay.

Michael:

Okay. I definitely will. So yeah, that has been my my wife's focus for the last several months here getting this probably over the finish line and getting lean and mean to be able to move forward easily. Some other things just that I think folks can do above and beyond, those two things are just starting to really learn their market and hone in what their buybox criteria look like. So if you are just starting to invest and not feeling like you're ready, yet, there's a number of things you can do. But first and foremost, go get educated, whatever that looks like. So whether that's joining the Roofstock Academy, or having someone hold your hand along the way, who has invested before getting very specific on your criteria, what you're expecting of your investments, and then learning about the different areas, different markets throughout the country, or the world, potentially, that will be able to give you those type of returns or meet those criteria, is what you should be spending the most of your time doing, because that's time very well spent.

Tom:

Awesome. I'll close this out here. So a couple of points that I was going to add on some of the existing stuff on learning the market super great. So pick a couple of markets that you think are you're interested in, I wouldn't have too many, just because what I'm gonna suggest you do is subscribe on there's a lot of online applications that you can get track, like sales as they're coming across like set boundaries in like similar to your buy box. So like set like the price range. And so you can just see every sold home and every new listing that comes up in that market. That's what we mean by knowing your market is like having a real pulse on what the transactions going on going in and going out are.

So a lot of places where you can track that Roofstock is one of them, where you can follow properties on the education stuff. Roofstock is a great spot. There's a lot of good online education Roofstock Academy is great, it's risk free, it's a paid program, but it's full money back if you're not happy or satisfied, whatever. So that'll be my one quick plug for Roofstock Academy, coaching and 50 hours of online yada yada all that good stuff on the education side is to get nerdy with a pro forma.

So someone that I was working with, with an academy, he took the initiative to basically just like you take apart a car is to took apart the pro forma for analyzing properties. So this is the calculator in Excel that you use to get IRR that you use to get cap rate. When he did it, he basically deconstructed it and then rebuilt it by himself. And I think that's such a good exercise ultimately knowing like, what are the levers on your return, I wouldn't say it's a hard requirement of being able to do that. But I think it's a good use of time, especially if you're not necessarily buying but you want to build those muscles up is to really know that particular model.

And the other one is to start talking to not just other investors in the market, but started talking to property managers, perhaps get their input on specific neighborhoods, I myself am a little bit of an introvert. So doing that, like takes a little bit of effort to do that. But every time I'm going to do it, it's like a muscle it's, you know, taking a lift of a bench press in the gym or something to build those muscles get a little uncomfortable, talk to property managers, something as simple as, Hey, my name is Tom, I'm an investor and I'm interested in this area. What are your thoughts on this address that I'm evaluating? And you can give my address or what do you think of this little neighborhood? Are there any neighborhoods that you think are particularly opportunistic or that are not opportunistic? So build those muscles, talk to those people talk to a lender, you don't have to do you know, find out who At what point are you going to have enough money to make an acquisition? If that's your holding point, right? Like how much of a downpayment Do you need, like getting all that information is going to make it a lot more clear. If you don't have a clear destination, it's hard to get there. Those are my brain word vomit of things that you can do that is going to put you in a good position when it's time to buy.

Awesome. Well thanks, everybody for listening and happy investing!

Emil:

Happy investing

Michael:

Happy investing.

In this episode Tom and Emil share their experience with the Refis an HELOCs they are currently processing. 

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Transcripts

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. My name is Michael Albaum and today I'm joined by my co hosts,

Tom:

Tom Schneider

Emil:

and Emil Shour.

Michael:

And today we're gonna be talking about loans, how to get them trials and tribulations upon getting them and things you can do to expedite the process along the way. So let's jump into it.

Alright guys, so Tom, I'm curious now for a quick update from you, how is your insurance restructuring coming along?

Tom:

So I had the call with Nick, who is a an academy member and also an insurance broker expert. And I am we had a great call, and I'm sending him my current policies right now. hopefully get that done today. And then he's going to come back with game planning some options. So it's making progress, albeit not at work speed, but I'm ahead of where I was when we recorded our last episode on my 2020 failings. So making progress.

Michael:

Okay, good to hear. I will follow up with you on the next episode and see where you're at next.

Tom:

Love this. Thanks. Thanks for being my accountability buddy, Michael,

Michael:

That's what I do. That's what I do. Is he looking at every single one of your policies, or just only a handful?

Tom:

He's looking at a handful of them. He's looking at like six of them. So well, I don't know. We'll take a look. I'll keep you updated.

Michael:

All right, guys, I know that we are all in the midst of some form of loan product. And so we're going to be talking about some of the different products that are out there some of different products that we've utilized in the past, but a meal, I want to start with you since I know that you're in the midst of a cash out refinance, which is something that a lot of investors utilize along the way. So can you walk us back to why you wanted to get this? What was the kind of point and then what the results have been thus far, and what kind of ping us some questions along the way?

Tom:

And you're a good person to go first, because you held us up and recording because you had some stuff to do while we were waiting on the line for you related to your refi.

Michael:

So we're gonna blast you at the hotseat.

Emil:

Yeah, that's right, this is very pertinent, because they basically just asked me for my firstborn child so we can get into it. Alright, so this is the second property ever bought property in Indianapolis, we bought it for 115,000, back in 2017. And right now, with interest rates being so low and inventory being so low and prices going up a bunch because people are owner occupants are driving prices up, because everyone wants to get in a home. Now, the value of this property grew, I thought to about 140,000, or 150,000. So my plan was I could probably cash out our original investment down payment, closing costs, all that stuff was around 25 K.

And I figured if values have risen to 140, 150K, I can probably pull out around 20,000 bucks, and it won't change my payment every month all that much. Because when I got the property, it was a 4.6% rate. And now at the refi, it's going to be a 3.1. So point and a half drop will offset a lot of what would be, you know, if I cashed out at the same rate, I'd be paying a lot more each month. But with that one and a half percent rate drop, my cash flow doesn't really change, my monthly payment goes up like 15 bucks or something 10, 15 bucks, and I get to pull this cash out.

So we got the appraisal back last week. And to our great surprise, usually the painful surprise, this was a good surprise, it appraised for 157,000. So we're actually gonna be able to pull out our entire original investment of 25,000 bucks. So we'll be in this property for $0. And our monthly payment i think is going to go up like 25, 30 bucks in total.

Tom:

You know what, I think that is Emil. I think that's cool. You wanna know why I think it's cool?

Emil:

Why?

Tom:

BRRRRRRR BRRRR

It's actually not like a traditional verb I cut he basically like effectively kind of did a burger, just being able to take all your cash out with the refinances. So it's not a full BRRRR. It's like a BRRR. Like you just Yeah, well, you probably didn't do a big renovation.

Emil:

I didn't know renovation, I was texting Michael, we were chatting on slack. And I coined a new phrase for this. It's called burger. And so what that stands for big GRP. So one is by the first key is get lucky and have the Fed drop rates. The second key is get more luck with low inventory and high demand. So prices go up. Yeah, the R is refi. And then the P is this probably won't repeat, we probably won't be able to do this lucky sequence of events because we just got lucky we didn't do anything we didn't we didn't force value and force appreciation we didn’t do anything special. It's just a nice sequence of events that sometimes when you're in the game, and the environment changes, you can take advantage of that. That's all happened here.

Tom:

BGRP. So that's sticky. I like that.

Emil:

Very, very sticky. It doesn't quite roll off the tongue.

Michael:

Rolls off the tongue so nicely. Fluid, you know, BGRP. So I have to ask though, I mean, I mean, it's we always joke on the show that you're a pessimistic person and I'm an optimist. Do you think that you made your own luck? Or do you really think this was just dumb luck? You threw darts at a board ended up in Indianapolis ended up with a, you know a great property? Or do you want to give yourself a little bit of credit and say, yeah, you know what I did some research, I did some legwork. This was a very calculated decision,

Emil:

I would say more luck than anything else, I'm not going to pretend like I saw this coming. And that's just me being really honest, I think you can often delude yourself into saying, Oh, I did all this research and blah, blah, blah. And sometimes, you know, maybe when Detroit or Cleveland in the past, you know, in 2008, when they had meteoric falls, I'm sure there were tons of people who were looking in those markets and saying, I bet Detroit or Cleveland could be on pace for great things, and then unpredictable things happen. I know, we all like to give ourselves a lot of credit and stuff. But I think a lot of stuff comes down to luck in my eyes.

Tom:

Yeah, I think that's true. But you also like need to be at the table to like to be lucky like that. Exactly. Like, if you're not if you're not gonna..

Emil:

You need to be in the game playing in the game.

Tom:

That's right. So circling back on the finance aspect of this, this is something that I think about when I refinance, especially when I refinance pretty quickly from the original origination of the loan. So your example, so you said you bought in 2019, or 2018?

Emil:

2017

Tom:

1. So you've made a bunch of loan payments, or a better way to put it as your renter has helped you make a bunch of loan payments. And with it being an amortized loan, the majority of those loan payments aren't cutting into the principal at all. It's just you're just basically, you know, paying that interest piece, I love to hear your guys's thoughts like in refinancing so quickly, it's like, you know, you don't bring the total loan basis down that much, just because those initial payments, so much of it is interest heavy, do you think that makes it like a better time to refinance versus just because you no longer into your mortgage, the more you're going to be able to cut into that hang down that principle total. And I'm just digging a little bit in the conversation and thinking about, I mean, I think we all like the concept of refinancing. But to play devil's advocate, so when you when you're refinancing, you're basically going back to square one, if you're doing another 30 year amortized loan, where you're only paying off interest for you know, are primarily interest for the first several years.

So I know that Michael probably has some a good rebuttal where he's gonna say, I disagree with you, Thomas, I'm happy to hear it. But just to be devil's advocate, you know, with these loans and the way that they're amortize those initial payments, you're just paying principal. And once you get over that extreme, you're just paying interest. And once you get over that, then you're actually cutting into the principal and by refinancing so quickly, you're never really cutting into the principal. So when you take out your mortgage for 30 year amortized, your first several years, so since 2017, your mortgage payments have primarily been going to just paying off interests. And over time of that 30 year loan, more of those payments are going to go towards the actual principles, but by refinancing so early on, you're never really cutting into the actual principal. And you know, to be honest, I refinanced stuff pretty quickly, either there's a pop in appreciation, or I was able to get it a little bit of a discount or whatnot. But my argument for this discussion is, are we throwing money just by only paying these loan interests before refinancing right away and not really cutting into the principal at all? Does that make sense?

Emil:

Yeah, no, I get your question to me, because my primary objective right now is to grow my portfolio. I'm not concerned with paying off anything I don't, I don't want to be free and clear on anything. For me right now to be able to pull out $25,000, right, only have my payment changed by 30 bucks a month and be able to go use that to buy something that I don't know, adds 100 $200 cash flow, whatever it is, it's a no brainer in terms of and then I get to have more properties in which I could potentially do what I'm doing right now with right like instead of one property that gets the appreciating you do a cash out refi. You take it and make it two properties, right, and you snowball a lot of that initial equity.

Tom:

Got it. So just a paraphrase. Even though the principal isn't getting cut down, because we've refinanced really early on in the mortgage. It's more valuable at this point of your life to just Hey, I want to scale this as quickly as possible, less concerned about getting as much of that loan paid down.

It's like his net worth or cashflow, more important I get is that kind of like?

Tom:

Sure, yeah. Yeah.

Emil:

For me, I'd rather take that equity and create more cash flow rather than pay down and have things free and clear, grow my net worth faster, things like that.

Tom:

I dig it.

Michael:

I tend to agree. I don't have a big looming rebuttal for you, Tom. It's not something that I look at super closely. And in fact, actually, I have several mortgages that are interest only because I'm doing some rehab stuff. And so that's like the epitome of what you're talking about is you're literally just paying for the right to have access to the money, you're not changing the principal balance whatsoever. And so doing a quick refinance, when you will see where you have potentially see a dramatic drop in the amount of interest that you pay, I think it'd be a really good thing to do.

And I know a lot of people that are in your like 20 or 25 or 30 year mortgage, and they're thinking about refinancing, and I think that the Question you're posing is much more applicable in that situation where they are so close to getting their home free and clear. Versus do they want to reset the clock, but take advantage of a better rate, there's a lot of things to consider there. And so at that point, you're just so aggressively beating down the principal versus someone in yours, you know, one through 5, 6, 7 even is it making a massive, massive dent on their principal, but something that I personally like to do, and I know, I've chatted with Emil about it in the past is on higher interest rate properties, or on primary residences, I'll actually make extra principal payments, either 50 bucks a month, or 100 bucks a month, something that I would, I'll never notice, thankfully, but that seems over time to make a pretty significant impact that over time, even in that short run, after one to three years of paying a loan down can have a pretty significant impact on the principal. And so make that refi even more exciting, so to speak.

Tom:

I like it good little little sidetrack of thinking about the amortization aspect of these interests and timing on a refinance. And it makes a ton where you're super late, you know, your year 20 into a 30 year when so much of your payments is going towards beating down the principal, anyways, just wanted to sidetrack us a little bit on that aspect, cuz it's something to think about, you know, on how much of your payment is going towards principal versus interest.

Michael:

Absolutely. And I think if anybody hasn't looked at an amortization table, or amortization schedule for their particular loans, they definitely should, because it's really eye opening, seeing how much is going to principal and how much is going towards interest. I think people are often really pissed when they like, if you add up the total amount of interest paid over the life of the loan, it ends up being like, I don't know, 170% of the original loan amount to begin with, and people stand, it's like, yeah, that's how loans work. So it's really important to really go into it eyes wide open, understand what you're paying, and for how long.

Tom:

Yeah, and just to kind of beat over the head of the topic of the amortization. Basically, when you have a 30 year loan, your payments in the beginning of that loan, it's broken up between that payment, some of it is going towards paying down the principal, and some of it is going down paying towards interest. And with amortized loan in the beginning, the early years of paying that loan, the majority of your payment is just going towards the interest and not the principal. So just a concept to understand.

Michael:

Okay, so I just pulled up an amortization table that I built for the Roofstock Academy, we have that as part of our academy playbook. And so for example, $192,000 mortgage at four and a quarter percent interest amortized over 30 years, the payment on that is $944.52. And so the payment is going to be consistent month over month for the entire life of the loan. But what changes Tom, like you're mentioning is the amount that goes to principal and the amount that goes towards interest. So in that first month, you make your payment, you have a principal payment amount of $264.52. And interest is $680, for an ending loan balance of 191,735 and 48 cents.

So we can see that the interest portion of the payment totally eclipses the principal payment. So year over a year, so in year one, we will have made a total payment of $11,334.30. And that stays consistent again, throughout the life of the loan, because your monthly payment never changes, the yearly principal that we've paid down on this particular mortgage is $3,236.86. And the amount of interest we've paid is $8,097.43. So again, a massive massive portion going to interest less so going to principal, versus as we get down into year five, again, we've still made a total payment of 11,334, because our monthly payment hasn't changed. But now we've paid 30 $835 in principle and only 7500 in interest. So as we slide down the time continuum, that scale shifts heavier weighted towards the principal side and lesser so on the interest side.

Tom:

So it's kind of mind boggling to learn, like the way that amortization work because I always thought like, okay, you make a payment of of your mortgage, and it's it's always split evenly between your principal and your interest. But nope. Yeah, it changes over time.

Michael:

Economics is crazy. It's definitely in favor of lenders, that's for sure.

Tom:

Yeah. Let's get back to Emil. Some of the friction that you have been dealing with in your refinancing, what are some some takeaways, some gentle frictions and thoughts on, managing anything you could done differently? Go ahead.

Emil:

Yeah. So I joked earlier that they're asking for our firstborn. And what I mean by that is they just asked for so many documents, right? And it's funny every time I refi or get a new loan, it seems like it's never standard. It's always something a little different. And if you're doing a cash out refi versus just buying the property that's a little different. The biggest tip I have I would say is like keep a folder with as many of these documents as you can write, like, all your prior tax returns, all of your leases, all of your evidence of insurance on the property, and then anything that comes up that a new lender needs throw that in the same folder.

So for example, they asked me for the certification of our trust, because we hold these properties in our trust, the lender is asking for like that first page, that certification of the trust is what it's called, it's I've never been asked that before. And so I had to go, like find that and scan it or whatever. But now I'm going to keep it in that folder for any time someone in the future asked about that. And I have like, one central place that I can keep these documents.

There's certain things like every lender is going to ask you for two months of statements for all of your checking and savings accounts, and your pay stubs. So those are things you're probably not going to regularly update every month. So those are probably something new you go get when you submit an application or whatever. But there's a lot of things that are standard that you can just keep in a folder, and it'll just make it so much easier to collect and wrangle all these files and documents you need to send the lender.

Michael:

What else? Do you have anything Top of Mind of other documents that people should expect to have on hand that you've been asked for? In this particular refi?

Tom:

Like, is that a question you're asking when you have an answer in the back of your head of some additional ones?

Michael:

No, no, no, I'm just curious.

Tom:

I just get I sometimes ask questions that I like have an answer for

Michael:

To set myself up to spike it?

Tom:

Yeah, just set up yourself.

Michael:

The Michael Jordan of podcasting questions,

Tom:

but Michael Albaum.

Emil:

This one was a little different in that this is the only property I have with an HOA. So that was a new one where I had to go back and dig up like proof of Hoa. There's also this funny side story of I hadn't paid my Hoa in a year and a half. If I had $1. For every time a bill got sent to the property I own and not not to me, man…

Michael:

You have $5

Emil:

I'd have $5. But I paid way more in fines. Let me tell you. So

Tom:

That's miserable.

Emil:

And there's nothing you can do. It's not like guys, you had the wrong, this is recorded. Why wasn't it changed? The buck stops with you. So you got to take care of these things you can't expect? I don't

Michael:

So are you saying that as a result of this? refi? You found out you hadn't paid your Hoa in a year and a half?

Emil:

Yes, sir.

Michael:

How was it being paid before you've owned this property for you know, almost four years.

Emil:

What happened was I've changed property managers in that time. And my last property manager was terrible. Sometimes you just forget that things need to be transferred or whatever. The thing is, is that there's so many bills you forget when one you're like, wait, have I paid my Hoa bill? You know, there's like Hoas…

Tom:

How did you manage? So did you end up just having the property manager reach out to the HOA? Are you doing that on your own? Or how did you know?

Emil:

I got a letter from an attorney saying there's a lien on my property until I pay my Hoa. So in the middle of a refi. No less. So that was fun.

Tom:

Oooogh

Michael:

It's so interesting how attorneys can find your proper mailing address immediately, but.

Emil:

Exactly. Yeah, it's hilarious. Yeah. I at least told them what happened. And then they removed like their attorneys fee, which was like 100 bucks, which was at least nice. But still, it's

Michael:

So you have a year and a half worth of HOA dues. Plus late fees, I'm sure.

Emil:

Yeah, exactly. More or less don’t buy properties with an Hoa is just a general.

Michael:

You know, Counter point. I don't think we can make that blanket statement.

Emil:

I know I just personally now dealing with an HOA if there's two properties you're looking at, and one doesn't have an HOA. The non Hoa is our choice.

Michael:

Yeah! HOAs 99% of the time a real pain in the butt to deal with.

Emil:

I know, look at this property is appreciated. It's got an HOA it's obviously been good. Like, that could be part of why it's appreciated in this area, right? Like the the community takes care of their properties and whatever. So

Michael:

Totally.

Tom:

Don't bite the hand that feeds you.

Emil:

Yeah, totally. I'm just bitter right now. I'm a little salty right now, because I got fine.

Tom:

Michael is asking what other documents are asking for. And I think that is emblematic of the document request process where instead of just asking for one time of the documents you need, it's like an ongoing run of like, every two or three days asking for a different document. It's like, Hey, you know, I'm excited to get you this information that you need that we both are excited about closing this loan, just send me an email, just just send me what you need. And I will respond back, I get it that sometimes, you know, something may come up where it will end up asking for another document.

But I feel like most the times, it's just a very slow trickle of like, okay, send me your, you know, IRA or 401k or bank account or checking, okay, now send me your insurance on these other properties. Okay, now, it's like, let's just do let's do one request. Let's do it one time, but I mean, whatever, not a big deal. The other kind of grinds my gears in this process, the website of the loan application. So a lot of these companies, they have one website for the loan application, and then one for actually managing the loan. So you set up this email account this for whatever, uploading documents or whatever, and then the loan closes, and you go back to that same website to do anything and it's like now That's just like a special purpose website for this company even though it's the same company as managing the loan they make you go to a different website let's let's get this all integrated Come on Come on everybody like we're originating loans and managing the loans let's do it in one spot.

So anyways that's the other grinds my gears you know, basically one storefront for originating so and I think most websites are like this you go to I'm not gonna say specific companies but even though it's the same company, originating it the other website for actually managing it, let's, let's get this all integrated.

Emil:

You know, the first point you mentioned Doc's, like, all throughout the process, it's like you get, they ask you for a ton in the beginning. And then it's like your closing week, and they ask you for a ton. It's like, Ah, there's never anything in the middle. It's always in the beginning. And always at the end. It's so funny. It's always the same. It always works like that

Tom:

In a marketing language. It's a drip campaign of asking.

Emil:

This is like, all up front, and then all on the back.

Michael:

Tidal wave.

Emil:

Yeah, exactly.

Michael:

I was gonna say real quick anecdote for kind of two stories relating to document request ridiculousness. So I bought my primary like two and a half years ago, and I got approved for the loan without going through the underwriting process and like, Oh, hey, we need this k one, which for anyone who doesn't know k one, it is basically a membership as part of an LLC form that you report on your tax return so the LLC performs a tax return and then gives all its members a K one so I bought some stock like $100 worth of stock in his company several years ago. And for whatever reason this company issues k one

Tom:

Bitcoin, it's doing pretty well now it's, uh, you know,

Michael:

I wish I wish, but so like, I don't know, on the K one, it shows like your membership ownership, percentage, and mine was like point 00000074 to have whatever like $100 for the stock. I got, like a $2 dividend. And like, Oh, we need this k one. Are you kidding me? Like I got a paper copy of it. And I sent it to my CPA years ago, because it was from two years ago, tax return. And now I don't like I don't have it, like, Oh, well, we need it's like, Are you kidding me? So my CPA, who's a partner at the firm is like, this is not materially important. This is like a $2 distribution. Like, I don't understand what the problem is. And they're like, Oh, yeah, okay. Okay. All right.

And then, literally, like you saying, a meal a week before we close they go, we need a letter from your employer saying that you can work remote. I was like, I'm literally on my way out the door to getting married in Costa Rica. You can go figure out how to get that because you're not going to get it in the next two days. When we settle too close, like, Oh, we need it. We need it. Like maybe I'll just come down to your office. I'm like, dude, I work for a multinational company, headquartered, like on the east coast. Like, that's just that's not happening. Sorry. So you should have asked for, like, months ago when you were doing this and like, okay, we'll get it figured out like, great. Do that. See ya.

It's like, unbelievable. So I think the lesson takeaway for me is like, push back, like they don't have the right to just delay and delay and delay like, we have some power as borrowers. And just yeah, I think just don't take flak from people be like, Hey, this is your fault. You need to go figure it out. Now. Don't make your lack of planning my problem.

Emil:

That's right. Yeah. Especially when they ask you for that downpayment. You just say, No, I'm good.

Michael:

I'll pass. I'm good.

Emil:

You guys got this?

Michael:

All right, Tom, I want to shift over and ask you a couple of questions. So I know that you're in the process of doing a HELOC. But you know, any final thoughts before I take you out of Limelight?

Emil:

No, no, I'm done. Take my mic away.

Michael:

Okay. So Tom, you're in the process of getting what's called a HELOC. And for anyone who's not familiar, maybe you could walk us through what that is and why you decided to utilize that as opposed to a Neil's cash out refinance.

Tom:

Yes. So HELOC is a home equity line of credit. And we've talked about on the show a little bit. And basically what it is, is it is a line of credit that you're getting. That is the difference between your loan amount and the up to a certain percentage of the value of the property. So for just a really simple example, let's say your house is worth $100,000 and you have a $50,000 loan, you can get a HELOC. Most of them go up to 80%. I've seen up to 90% that would be worth in this example of a $100,000 home with a $50,000 primary, this would be a $30,000 HELOC, so that's a rough the way the mathematics works. So I have this once this closes and I'm actually signing, I think tomorrow to close the HELOC then I will get basically it's almost looks like a checking account where this money is available for me to take out and spend on whatever the heck I want to there's no like rules on what I can or can't spend the HELOC money on and there is 10 years in which I can draw on this money or take it out. And then I believe it's another 20 years that I have to pay back on it. So that is the HELOC it is pretty much the same process as you would go through as a refinance where they'll do some sort of an appraisal on the property to determine what the value is so they determine how big of a keylock you can get you there is title involved. So this gets put into a second position behind like the primary mortgage there is you sign with a notary when you close to me All official.

Michael:

So the process sounds pretty similar to like a traditional cash out refinance or traditional refinance. So yeah. Why did you opt to go for the HELOC versus a cash out refi.

Tom:

I went for the HELOC? Well, this is on my primary. There's some benefits to it. One of it is you don't pay anything if you're not using, but you have that credit available. So I actually did all of this in 2020. I mean, just the fruits of having super low interest rates. So I did it initially did a refinance, I didn't take any cash out. So I kept a pretty healthy loan to value ratio, a lower loan to value ratio and instead of doing a cash out refinance for all of that equity that I had in the home, I am capturing that through the HELOC. And as I said before, the benefit of HELOC is I don't have to pay anything on the on it when I'm not using it. It's just there as like an available credit card at a super super low rate and the amount that you can take out. Depending on how much equity on your house can be super high. Like I know this one company, you can get a HELOC up to $200,000. And I can spend that on whatever I want. If I want to go buy some down payments, buy some property depending on how comfortable I am with debt and all that good stuff. Or if I want to do a personal remodel or stuff like that. It's whatever I however I want to spend that money I can.

Michael:

Right on. And so process wise one isn't really any easier than the other it sounds like it's similar. What I will say that with both he locks and cash out refinances.

Tom:

Oftentimes they won't even require a full appraisal. Like if you're buying a new property and buying it with a loan, they're going almost always going to require an appraiser to be on site and do that rigmarole but with key locks as well as refinances. Oftentimes, they're fine just doing a desktop appraisal. And what that is, is an appraiser just from their home looking at comps and not needing to go and do a full inspection. So it can be a little bit cheaper and faster on the on the appraisal side.

But it's the same process of like document requesting. And one of the issues that came up this time since you know we did this in pretty tight coordination where we refinanced our house then get the HELOC right after and when we refinance our house, the original lender didn't clear title completely. So there's some still some stuff that they're doing. So in the process of pulling this HELOC, they're like, hey, there's still a lien on your property. So it was probably a week and me going back and forth with the original lender and the company that's doing the HELOC and the title title company that's helping the HELOC where I'm like doing phone bridges between the new company like and what it needed to happen is they needed to notarize a document the original lender that had the original loan, you know, had to notarize a document saying we do not have this lien position anymore, blah, blah, blah. And and I probably started this process in November and it's getting close to finish and it's hard with a lot of investors are super type A and like move fast. And you know what, alright, what's next, what's next and just to be moving in this sort of slow motion it's like having a big chalkboard and some nails constantly dripping through but…

Michael:

Fast as molasses.

Tom:

As fast as molasses that's right.

Emil:

I’m smiling and shaking my head because I just got an email telling me the same thing on this cash out the last title company, whatever hadn't cleared it when we bought it in 2017 So…

Tom:

You know, though, I think the important thing to put in a context is this is kind of a moat, you know, this is a moat of the business that for a lot of people you know, it's not worth this kind of work and not that this is a lot of work it's just kind of the hands of a bunch of institutions. But I like to think of it as a moat like this type of investing strategy. There are a lot of benefits to it all the stuff we talked about with cash flow appreciation being able to you know, do things with debt and tax advantages and a reason why everyone and their mother doesn't do this is because there's this little bit of overhead that you have to deal with and a little bit of a know how and on what's available and getting through it. So something that keeps me whatever optimistic and like totally worth it is this is a little bit of a moat as in like not everybody wants to go through this process and I'm okay doing that to get the fruits of real estate investing that like that fruit taste.

Michael:

The fruit to the castle, the fruits of the castle.

Emil:

Yeah, you're right. It's a hassle and that's the silver lining is that probably scare some people away.

Michael:

Okay, guys got anything else tidbits, additional tips, tricks to make people's lives easier and grease the skids for getting their loans done.

Emil:

You had a good one that you posted on Twitter the other day about how you kind of organize files and folders. I think that'd probably be a good little message to end this episode on.

Michael:

Yeah, that's a super great point, Emil. So actually, for everybody listening check out last Saturday's weekend wisdom. We actually recorded an episode talking about specifically folder structures and how we structure them to be as most efficient as possible when doing refinances or purchasing or anything lending related, or even just end of your tax planning. Having all of those documents accessible at your fingertips makes your life much easier.

Thanks so much for listening, everybody that was our episode. If you liked it, feel free to leave us a rating or review wherever it is you listen to your podcasts, they are really, really helpful for us. So we'd love and appreciate the support and shout outs, always looking for more content. So if you have an idea for an episode that you'd like to hear, leave us a comment, and we'll talk to it. We'll see you on the next one. And happy investing.

Emil:

Happy investing.

Tom:

Happy investing.

In this short episode, Tom and Michael share their file organization strategies to ensure pain-free access to all the documents you might need as an investor. 

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. Join with me today is,

Michael:

Michael Albaum.

Tom:

On this episode, we're going to be talking about the folder structure we use to organize documents. So a very pragmatic and practical weekend wisdom. All right, let's do it.

As I mentioned, this is a more practical episode of weakened wisdom. And this content is brought to you by Roofstock Academy. This is directly out of some of the coaching session conversations that we have some of the templates that we have, we're organizing documents. So this is a great kind of sneak peek behind the veil of some of the content and type of coaching stuff that we do within Roofstock Academy.

Excellent. So whenever I buy a new property, this is the folder structure that I like to use within each property, a folder for tracking or having ready on hand the purchase and sale agreement, the tax bills that come in any marketing collateral, like photos that was perhaps collected during the inspection that I can have on hand to share with my local property manager from the transaction, a copy of the lease and historical leases, the closing statement, the insurance documents, as well as the loan documents and the property management agreement. So a bit of a mouthful. So Michael, any thoughts or other comments on here?

Michael:

Yeah, totally. So I think that's a really great way to organize things. So what I do, and I just pulled up my one of my folders, and I'll kind of give everybody listening, a walkthrough of what that looks like. So because I purchased mostly inside of LLCs. And I'll often form a new LLC for property purchases, I'll have all of the LLC documents. So first off, on my desktop, I have something called real estate. And then inside of real estate, I have all the LLC folders. And then within the LLC folder, I have the formation docs for that LLC. So the operating agreement, the articles of incorporation, Articles of Organization, all that all the formation documents, then I'll have property specific information that I can drill down to in property folders inside of the LLC folder.

And so like you, I have the closing statement, all of the marketing materials for that particular property, all the due diligence materials for that particular property, and I'll call that property docks. And then I break mine down into, I have additional folders where I'll have that year, and then insurance and that year and taxes. Because those things aren't static, they're not constantly evolving, but on an on between year to year there, they can be changing. And so I know that if I have to go pull my most recent property insurance Doc, I'll go to 2020 property insurance. And then I can also track it from 2020 2021 to 2022 and see what's been changing and can kind of compare and contrast those quotes. And then also have folders.

I have one right now that I'm working on a refinance. And so I have a refinance folder. So all of the things that I need to refinance that property are going into that folder. So bank statements, income statements, tax returns, all that kind of stuff goes there. And then if it doesn't work out with this particular lender, if I go to refinance with another one, I've got most of the stuff I need there, I'll just have to update bank statements and brokerage account statements, all that kind of stuff. So that's kind of how I have mine broken down. And then I'll put things in multiple places. I was just joking with my wife the other day, I'm a bit of a hoarder. I'll admit that

Tom:

Digital hoarder

Michael:

Physical and digital hoarder, yeah, by all means.

Tom:

So you need some Marie Kondo in your life, does it bring you joy?

Michael:

Well, we just spent like, all weekend, this past weekend, getting rid of stuff. And that was a pretty liberating feeling. So I've tried to do that digitally as well. But so I'll put things in multiple places. Because I know if I can't find it, I can just go to a couple different folders and find it. So like, I have another folder that I titled taxes. And again, I'll put the year so for my 2020 taxes, I had a folder where all of the things I knew were going to be part of my tax return or needed for my tax return, I'll put there like property tax statements like insurance documents that show how much premium was paid. And so all kind of double dip and put things in a number of different places for myself. But I think that was a really long and drawn out explanation.

Tom:

No it was great.

Michael:

I have those same documents on hand that you do the leases and the invoices for that property, essentially, any document associated with that property will be at least in that property folder, and it might be in a subfolder in and of its own.

Tom:

Yeah, you know, and if you don't want to get you have like a million different folders. Another way to organize this just to make sure that you have all the documents because sometimes it could be kind of silly having a folder with just one document in it is to have a spreadsheet and then a checklist verifying that those documents are in sort of the the single folder. So a couple of other documents that we left out that we could include is that you have a warranty a home warranty, you are going to want that easily accessible for, you know, hopefully you don't need it. But if you do need it, other ones is major work that was performed perhaps an invoice that's going to be helpful come tax time. And you know if perhaps something, let's say you have work done on a water heater, and then a month later, there's some issue with the water heater, right? So that that kind of gives you some ammunition of going back to the company that did the work saying like, Hey, I just paid for this. Why am I you know, why is it not working? So having that stuff it pays it pays to not be a digital hoarder, but be digitally organized. Being a digital hoarder just makes it take longer.

Michael:

Yes, it really does. It really does. And something that I've done I know I've talked about in other episodes is I've got a master Excel spreadsheet with every property that I own inside of every LLC. So I'll have the LLC name at the top, and then the properties in that LLC. And just all of the expenses that I pay personally, are logged in that sheet. And so I've got a record of them on the property Doc, if somebody needs to see that I've got a record for myself to know that I have to give this to my CPA at the end of the year. And then I also have a record showing kind of globally, what that picture looks like, how much did I if somebody said, Hey, Michael, how much you spend on insurance in 2020, I could spend about three minutes and tell you just totaling up from all the different LLCs how much I spent.

So that level of organization is helpful for me, I find that to be really useful. Not everybody will and everybody can, I would encourage everyone to develop their own system, because not everybody learns the same, not everybody works the same. So figure out what works for you. Maybe that's QuickBooks, maybe that's paper documents, you know, a filing system that works for you. So play around with some different stuff. But I would definitely say develop really good habits at the onset, when you've got one or two or three properties because those systems are going to be you're going to rely on them a lot more as soon as you start to scale. Because it does become a little bit more cumbersome if you haven't developed something from the onset.

Tom:

And a lot of these templates is a great benefit in Roofstock Academy, and that we have a lot of these kind of pre baked templates for, for this type of stuff, the spreadsheets and, and all of that great stuff. Go ahead Pierre, you were saying…

Pierre:

The photographer and the music producer in me just couldn't help but notice that you guys didn't talk about backing up your files.

Michael:

Oh, dude, that's so good. All right. So Pierre, you bring up a great point about backing up your files. So I used to work for a property insurance company and we had this like killer IT department and the IT guy was a good buddy of mine. And so all my stuff was always backed up on my work computer. And I didn't really worry about it too much my personal computer, well, I had him build me a personal computer and I was backing up all my stuff, I got my computer stolen like a year and a half ago, and come to find out that my stuff wasn't backed up as well or as robustly as I thought it was. So that was like, I don't know, eight or nine years worth of like stuff and files and organization that I had to redo the vast majority of some of it, I was able to recover but a lot of it wasn't and I like I was in tears for a while. And that was a really big bummer. I would say to put it lightly to the to the PG version. So backup your stuff, whether you use, you know, an external hard drive or something to the cloud, figure out something, but be really, really, really consistent and know how to find it and know that it's backing up and have it backup at some regular interval that's not a year. So whether that's daily or weekly, or hourly, or whatever works, but because having your stuff evaporate really sucks.

Pierre:

So the common practice in photography or other media work is that your files are backed up in two places. And your personal computer is not in place. That's liable to crash at any point and you can lose all of your stuff on there. Your files need to be in two separate places, maybe two separate physical locations or on the cloud and on a hard drive somewhere.

Michael:

That's so good. That's super good.

Tom:

Yeah, so many great relatively inexpensive cloud based storage stuff and external hard drive hard drives are cool but it's like another like thing you know?

Michael:

Yeah. And it's it's like another computer like if it drops or breaks or gets wet. Like get your up a paddle, up a paddle without a creek. creek without a paddle.

Tom:

Doesn't bring me joy. Well, the cloud brings me joy, but teach their own.

Michael:

Yeah. Great. Great point Pierre.

Tom:

Awesome, guys. Well, I hope you got some value out of today's weekend wisdom on talking about folder structure. Anyways, thanks for listening. If you enjoyed the episode, please rate us please check out rootstock Academy, all that good stuff. All right. Happy investing.

Michael:

Happy investing.

In this episode, we interview Roofstock's Director of Asset Management, Caroline Parker, about her diverse career path and the what she has learned about real estate along the way.

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Transcript 

Tom:

Greetings, and welcome to the remote real estate investor. I'm joined in this interview with,

Michael:

Michael Albaum.

Tom:

On this episode, we have Caroline Parker, who is the director of asset management Roofstock. And with Carolina, we're gonna be talking about asset management. What is it, we're also going to spend quite a bit of time going through Caroline's history and her all the different jobs that she's had super interesting working at student housing, working at big asset management companies working at John Burns. So let's get into it. Caroline Parker, welcome to the show. Thank you so much for joining us.

Caroline:

Nice to be here. Thanks for having me.

Tom:

So we before we get into the meat of discussion, let's go ahead and talk about your background. We've had john burns on the episode on the show before we've you know, touched on some other places in your history. So why don't you take us back from the beginning?

Caroline

Okay, great. Well, I have a bit of a unique background. I started in banking for four and a half years in Charlotte, North Carolina. I was an analyst in the investment banking division at Wachovia when it became insolvent. Then I worked through the merger with Wells Fargo, and eventually made my foray into real estate by joining Greystar Real Estate partners at their headquarters in Charleston, South Carolina, they're already became an asset manager and REO portfolio, and eventually moved into a unique role where I got to support the C suite, helping them with projects and being their ears and eyes of the organization and getting to participate in the things like investment committee and executive.

Tom:

So that was the heat of everything. Right, right in 2009, as a Wachovia got purchased, am I going back in time and thinking of that correctly?

Caroline:

Yeah. Yeah. The big downturn, so it was a crazy time to be in banking analyst, so I got to watch everything feel relatively less impacted in some of my work senior colleagues.

Tom:

Awesome. Cool. So you merge into this new position supporting the C suite?

Caroline:

Yeah. So that's where I really got to learn the housing industry. From a very high level strategic standpoint, I really understand, you know, the different facets of real estate or multifamily world from development and acquisitions to property manage. And so it was a really amazing experience. And I fell in love with, with rental and investment in the housing industry from that point on. So from there, I moved out to California for personal reasons. And I thought, well, how am I going to combine my experience from with greystar Real Estate partners and banking, I thought, Hey, I'll go into multifamily capital.

So from there, I was helping underwrite loans, multi, like from Fannie and Freddie to on balance sheet loans. And I really learned how to pick out outliers, how to ask critical questions about you know, asset performance, but what I really wanted to know and what's really driving those numbers, you know, how to, how do you really ask critical questions? And how do you really ascertain what is a good investment and what not. So from there, I knew that I needed to go back to the owner operator side.

So I decided to join the Irvine company and their apartments division, and I joined their new asset management team, they hired a whole new team of people to come in and really dive into their database and kind of change the way that division with making decisions truly using data collectively across all the cross functional silos and the division. So that was a really exciting experience where I really got my arms around operation, and how do those decisions each individual decision made on site? How does it really change the financial performance of the asset? So we started from the ground up and really analyzing data quality, putting in controls, and then from there creating new tools so that our counterparts can help make district strategic decision.

Michael:

That is so great.

Tom:

To paraphrase a little is you within that multifamily team, you basically were looking at all the data coming in from operations, analyzing that data and going back to them saying like, Hey, we're spending most of our money on XYZ, we should be doing this because it's is that it's sort of a rough synthesis of that role or filling in whatever gaps or whatever place I'm missing,

Caroline:

I would say it absolutely includes looking at where we're spending the money most frequently, but also a strategic decision that happened on site from pricing. You were helping create an in house proprietary pricing model akin to other multifamily operators are using but but based on the airline model, where you're constantly analyzing supply and demand. The unique aspect to the Irvine company is they have a highly concentrated high quality portfolio. So to use an out of the box solution would be cannibalistic. And you would incrementally like drive prices up or down depending upon you know what your competitors are in your market which are all your property.

So we were building one in house for example, or we were helping team make strategic decisions on allowing people to stay longer and their leave for asking them to move out early? Or maybe how can we make a turn more efficient so that we minimize the number of days that the property or the unit is vacant, things like that anything that can impact financial performance, which is everything we were getting under the hood on and having an opinion.

Michael:

Awesome. So as a multifamily guy myself, I'm curious to know, what were some of the biggest drivers of the financial performance that you were seeing?

Caroline:

I would say by and large, occupancy is the biggest driver of financial performance, you could raise your rent all day long. But if it takes you a home, but to to get a new tenant, then you essentially washed any returns that you would have gained from the incremental increase. So we were always scrutinizing How can we save a day here? How can we save a day there? Is it marketing a property before it's actually vacant and ready to be leased? Or is it using different channels? Is that targeting different people? You know, we're always just looking for ways to get that incremental dig occupancy, just one extra day of revenue.

Michael:

Yeah, makes total sense. As a total aside, the last company I worked for was a commercial property insurance we used to insure the Irvine company.

Caroline:

Oh, cool. And so I visited tons of their campuses up in the northern California area, and I was always blown away. It's like a resort. Like all their properties, like resort style living,

Caroline:

They are really beautiful. And Irvine company is very unique in the way that they care desperately about the aesthetic properties,

Tom:

Probably funny you in a position thinking of like, wow, how do we optimize the financials, when we're building a four seasons that you can just nod you don't have to? Okay, so you worked at the Irvine company, building those muscles and optimizing, you know, financial properties. What's next after the Irvine company?

Caroline:

Then after the Irvine company, I did join john Byrne's real estate consulting, I got to work very closely with john. And it was an amazing opportunity to get a macroeconomic perspective of the housing industry and all the different players and what keeps them up at night. So, you know, coming from being an asset manager, the Irvine company that's very in the weeds on day to day operations and execution, how that drives financial performance to going to like a very, very high level overview of, you know, demographic shifts and supply and demand. And, you know, where are people building? Where's their shortage? And how much can we get what technologies positioned to disrupt the industry. So it was fascinating. And frankly, that was where I got, you know, my first in depth look at single family rentals is a new asset class.

Tom:

So what a different experience from kind of being in the weeds to going way up top did your experience of being in the weeds, like help out from looking at this macro view? And I'd love to hear about it kind of changed your opinion on stuff? And if it did, and it just generally.

Caroline:

I absolutely think though, I think that, you know, real estate, in general, as an industry or a sector probably is one of the laggards of adopting technology. And that probably due to a lot of different reasons, but one of it being that, you know, there are a lot of individual investors, and anybody can do it. But one thing that I really took away that I didn't have a full appreciation for was housing, and so driven by demographics moreso, than the economic cycle. And I don't think people really talk about that enough. People are always going to need housing, and our population is consistently and constantly growing. The big things that are changing is, you know, what are the biggest cohorts within the population that are driving demand? And what do they want?

Michael:

Interesting.

Tom:

Can you give any, like specific examples, I'd love to kind of take that a level a layer in?

Caroline:

Well, for example, a lot of millennials, people like to talk about a millennial, you know, they're kind of turning old values upside down, maybe they decided that they don't want to earn home anymore, because they don't want the responsibility. Or maybe they just can't afford it. Because frankly, affordability has never been higher, more difficult. So now there's this whole new demographic that's out there, and they want our single family rental home. And you know, maybe they want space, maybe in their, you know, young professional years, they're choosing to live in an urban environment, and they're prioritizing lifestyle. But as they grow into different life stages, they're deciding that, you know, maybe I need more space, or maybe I'm ready to have a family.

Of course, there's the timing of those life choices can change. And a lot of times it's driven by, you know, financial factors and their ability to afford a family or pay off student loans. But all of these decisions are unique to people's age. But yeah, so all of these decisions that each cohort making, it's very much unique to their age group. So even thinking about generations in terms of millennials, which is often you know, 20, 30 years segments, it's more ideal to think about them, smaller cohorts, they all behave differently

Tom:

Within these different kind of roles that you've worked in. Are you following pretty closely on like, where younger demographics are moving? I'd love to just get, this kind of rubber hits the road with regards to kind of execution?

Caroline:

I don't know. Yeah, yeah. I don't think very broadly. But I would say in general, there is a trend to go to these more lifestyle oriented things. Cities, they're not necessarily the mega cities like New York or San Francisco, which people still go to because the professional opportunities are very superior. But a lot of people are seeking opportunities to live in mid sized cities that have more quality of life and maybe access to more activities. You know, we're outdoorsy type of places.

Michael:

Tom's trying to pump you for information, Carolina, figure out where you should invest next.

Tom:

Exactly. So working with John Burns, what's after that step in step in a career?

Caroline:

So I went back into the owner operator side of the world, which tends to be my passion. And I joined a student housing company called the Nelson partners. So there, I really got into a subset of rental housing specific to students. And so their primary strategy was buying properties that would house students all across the country. So they had properties that would have, you know, four or five apartments to you know, mega skyscrapers in the heart of, you know, Austin, Texas, on YouTube campus. So it was the common denominator really, when we want to lease to students, and the big sell there is that you can get a higher premium on your rental rates per unit, if you're leasing by the bed student. So that was really where they were targeted.

Michael:

Interesting.

Tom:

Got it. Wow, in so these were all just big, yeah, much larger properties only, like bigger cities, or like Austin or I don't know…

Caroline:

Every university or college is to, you know, like a micro market. So each college or university has their own supply, demand constraints, and also their own culture of, you know, what does students want, you know, what typically happens, they live on campus for two years, and they move off campus, I mean, every university is different. So we would really analyze each opportunity that came up very closely. And specifically to that to that University.

Tom:

Were you guys doing land development or acquiring existing buildings.

Caroline:

So often we be developing land or acquiring existing properties. And some of them are a trophy asset, meaning, you know, they were the beautiful skyscraper with an infinity pool on the roof, to, you know, something that was more modest, with a much smaller number of units.

Michael:

So without getting too deep into the weeds on the student housing side of things, I would be curious to know if someone was interested in getting involved with student housing as their investment thesis or strategy. What one or two pieces of advice would you give to them or things to look out for things to be aware of before jumping into that pool?

Caroline:

That's a great question. Student Housing can be very rewarding, and it is different than a regular apartment or rental house. So one thing that you just really need to understand is the local market, when do students typically secure their housing for the next year, how walkable is the university campus? What are the expectations there? And do they want to furnished you know, do they want to unfurnished but making sure that you are aligned with a timing of when students typically move in and move out and can work really, really well for because you can line up things very easily and have like a one hit every year and just know that everything's taken care of. But you can also get a premium for this effort. And if you leave by the bed, rather than like a traditional apartment, then you really got a lot of upside.

Michael:

Great to know,

Tom:

Within student housing is there much like engagement with the University at all with like marketing, I'd be curious to know that type of relationship,

Caroline:

There can be sometimes the universities will partner intentionally with third parties to provide student housing because they don't want to, but they know that there's a need. So there's that aspect. But also, you can often partner with the student affairs for the housing department on campus and give them your information. And a lot of times they'll help direct students to your property whenever there's a need or class. So that always happens. So yeah, there's a lot of opportunity to create synergies with universities, and usually they're very receptive.

Tom:

Interested in working with student housing versus not I would intuitively think that student housing has maybe a little bit of a higher R&M costs, I don't know just getting lived in a little bit harder than a regular house, I'd love your thoughts on that on a modeling out, looking at costs, and repairs, and maintenance and all that good stuff.

Caroline:

That's a good point definitely can be true, you typically wait for paint, and you just plan on painting every time there's a change. But one benefit is that if everybody's moving out at the same time, you can bring in some third party vendors and get everything taken care of at one time, you can get some economies of scale there. You can also charge back a lot. I think usually students know when they've trashed something that they're probably not getting their deposit back. So that helps a little.

Michael:

All I'm thinking about during this whole conversation is that movie Animal House. That's what I keep replaying over and over. And I remember Yeah, being a student having huge security deposits to put down for just this reason. That's really interesting.

Caroline:

Yeah, for marketing purposes, you can really easily get a student in by giving them a free pizza and getting them to sign a lease or in a traditional apartment. You could give them whole month free or something?

Michael:

Right, right, right. That's so good, tacos for everybody.

Caroline:

Bring a taco truck!

Tom:

Another question I have related to student housing that maybe a little bit like out there left field. So if a student is in the student housing is not being a good resident, would it be common practice or normal to like, reach out to I don't know, like parents or something, or

Michael:

Johnny is misbehaving.

Tom:

I had a similar experience where and I don't know, maybe it's like playing music too loud or something. And like these, like the apartment owners, like reached out to my parents, it was terrible. Jersey, am I getting picked on? Or is that like, more of a common practice?

Caroline:

That's a great question. I'm sure every manager handles that differently. But I imagine that you put fines on something and the parents inappropriately might get involved. If there are too many infractions.

Michael:

Get the parents involved.

Tom:

It's great if the parents can get the parents involved. Excellent, Caroline. So anything else on your experience, before we move on after working in student housing?

Caroline:

I would just say that, in general, there's always a talk about big data and how we think data. And I feel like the industry has really gotten to the point where we really weren't meaningfully using this robust information at our fingertips to drive financial performance. So I would say that would be a theme that has kind of developed over the course of my career.

Tom:

Yeah, you know, over the last 10 years or so a lot has been done with regards to technology to support this kind of information and decision making, has that like been meaningfully impactful? And how you've seen technology evolve and being able to utilize it in these different roles?

Caroline:

Absolutely. I do think that, but prior to the robust use of data to make decisions, you know, asset managers who are interested in the financial performance of the property would heavily rely on their property management counterparts and ask them questions about different things that may be happening on site. And a lot of times are reliant on the qualitative feedback that you get, or one time anecdotes to explain a, you know, a financial abnormality.

But now, I feel like with the access to the data, this has made the team more collaborative and stronger, because now we're able to create tools and provide more insight and together, use this information as if it was the playbook and come up with a strategy and really ask, you know, consultative questions of each other. What is happening here? And how can we change it? And what do we want to measure? And is that meaningful? And you can also use that to, you know, help coach and train your onsite team and drive incentive.

Tom:

That's awesome. Turning it from an art into a science getting data driven. Very cool.

Michael:

Caroline, you mentioned working with your property management counterpart. So I would love if you could give us a breakdown of the differences high level and then maybe nitty gritty to about what's a property manager versus an asset manager?

Caroline:

That's a great question. And a lot of times, the lines are blurred. So the way I think about it is property management is the team that's often on site, they're responsible for the day to day execution of managing a rental investment property. So they would do things like you know, be on top of property maintenance, collect rent, lease the house, and you know, interact with the residents on a day to day basis, whereas an asset manager is really focused on financial performance of this investment property. So they're really identifying ways to add value on a regular basis and could be, you know, driving rental rates, looking at opportunities, upgrade the unit for additional rent prop, timing, when to sell, or refinance. But really, they're just leveraging their insights and best practices, they have the ability to see a portfolio of assets and really pick out outliers and benchmark against each other and look for opportunities to improve the portfolio as a whole.

Michael:

Interesting. So in the single family space, kind of on the retail side, do you think that property managers were more of an asset management hat oftentimes?

Caroline:

I would say in the single family rental world, a lot of times, the mom and pop owner and the handful of properties and they're relying on a property manager, the property manager will often be a source for giving them guidance on how much they can charge for rent, you know, where to put their money when it comes to turning the unit? are they putting more money into the floors? Are they returning the houses? So I do you think that the property manager in that world would wear a hat, but I would also suggest that the owner do their own diligence and really ask them challenging questions and make sure that together, they're making the best decision.

Michael:

Awesome. And so if we dug deeper, a little bit on that, what questions would you say, are going to be pertinent for owners to ask if their property managers kind of in that department since they've got to be their own asset managers, quote, unquote?

Caroline:

Right. I wouldn't just be very active in asking about how they're marketing healthy. You can get a new resident and you know, do they have vendors lined up between residents so that the house is ready for somebody to move in as quickly as possible, just being on top of it. And knowing that you're thinking about these types of things, it's really important, especially to with vendors, if you're hiring a third party to come in and do repairs, or paint, you know, getting more than one bid. So those are probably the biggest ways that you can stay on top and making sure that you're just making the best decision and getting the most money out of your property.

Michael:

I love it.

Tom:

This ties right along with just how important the process of vetting your property manager is, you know, when you guys would open up new markets and any of these other companies, was there a process of that you guys did all in house property management? I'm curious, or did you think that existing property managers?

Caroline:

Well, over the place that I worked at either an in house property management team, but the role between the asset manager and the property manager, I really think it's intended to be a check and balance. So we always try to come at it from an angle where, you know, we were hiring our property management team. And granted, we were more collaborative, because we both worked for the same company. But we always tried to take that stance of you know, what if we were just hiring a third party manager, what would be effective? So we would very much hold him accountable to performing.

Michael:

So in thinking about a lot of folks that are using Roofstock, a lot of retail buyers, people that are scaling and building their portfolio, Is there like a good ballpark measure for when somebody could actually go hire an asset manager as opposed to being their own?

Caroline

That's a great question. I don't know.

Michael:

I'm just curious, because, you know, people are constantly looking at scaling. And we have this $100,000 passive playbook as part of the Academy. And I think it kind of catches people off guard when they realize I've got to own 51 single family homes at roughly $100,000 each, that cash flow 175 bucks a month to hit 100 grand a year in passive income. Yeah, I don't have time to manage 51 managers or keep tabs on that. So it just thinking about scaling, knowing that this asset manager is available. I wondering if there's a market for it on the for the kind of retail owner operator?

Caroline:

I mean, I think it's a great question. And certainly, if you own 51 properties, or whatever the magic number is, it would be very time consuming. So depending upon what you are doing the day to day basis. At some point you would want to hire somebody even if it was an institutional asset manager, but you would need somebody to help you oversee the performance of all of this investment.

Tom:

So a common question from a lot of investors is looking at duplexes versus single family. I think with your experience, you've probably had some some great insight on both the cost side as well as the revenue opportunity side on either opportunity. I'd love to hear you spiel on, you know, comparing those two different types of types of investments.

Caroline:

Great question. You strike my great question. I would say they are slightly different plays. I think duplexes immediately probably crash flow more easily because you've got more rental revenue with one purchase, while single family rentals probably have greater potential for appreciation than duplexes. So it's really about, you know, what is your immediate goal? Are you looking to cash flow very quickly, are you hearing the long term game and looking to really get the upside on the sell. And really, you can find properties that check both boxes. But I do think there are some synergies with having a duplex because they're often mirror images of themselves. And then when you have less risk of a tenant vacating you still have some passive income. So it really depends on the unique property and the market you're in. But I do think that there's could be some fundamental differences.

Tom:

Excellent. So continuing on the kind of path of career. So after student housing, welcome to Roofstock. Is that right?

Caroline:

Yeah, to be here, I love it.

Tom:

Tell me about what you know, focusing on and projects here at Roofstock.

Caroline:

Great. Well, I just joined the Roofstock asset management team. I'm a part of the Investment Services Division. So we are really focused on helping our institutional partners manage and place their capital into the single family rental market. So oftentimes, these institutional players are buying hundreds of homes at a time and we we are looking at them from a financial performance standpoint. So we're helping them make strategic decisions, determine, you know, renovation scope, and execute that and then also lease that and make sure that their assets are performing to their expectation. So I'm immediately helping with streamlining and automating some of our reporting. And so that'll be very dynamic and real time and allows our investors to be actionable and make strategic decisions in real time. That's the goal of our team. Really exciting place to be.

Michael:

That's so cool. I'm curious, Caroline. So these institutions that are buying hundreds of homes at a time? are they buying them from other institutions? Or are they buying them from 100 individual sellers?

Caroline:

Well, every institution strategy is different, and every market is different. So it really depends on what's available for purchase in that market. And Roofstock has several ways of sourcing investment properties. So sometimes that will be from other institutions that are selling a few homes at a time. And so that's a big win to get a few and get some economies of scale there. Otherwise, we could be looking at MLS data are also some of the homes that are listed in the Roofstock market place. And then finally, there are some single family home developers who are looking to sell a large number of homes at one time, that is a great opportunity for institutional investors.

Michael:

So you could have 100 transactions running simultaneously from 100. Different sellers.

Caroline:

Yeah, that's wild, it's crazy.

Tom:

On some of the new land development stuff is that like build to rent type communities?

Caroline:

These are built around communities, and they're very highly coveted by institutional investors.

Tom:

I would imagine, as an asset manager, like what a place to kind of put in whatever kind of knowledge we have of optimizing the portfolio. At the time, the very first nail is going in, I don't know where I'm going with that, it's just like, sounds like so opportunistic, you know, in thinking about how to optimize the portfolio. And that like at the at the very, very start of the build.

Caroline:

it is great, because a lot of times the single family home builders, if they're building the home for someone for an individual to purchase, they'll make that house a lot nicer. Or they'll put in really trendy finishes and things to really entice a premium from, you know, a normal person who's going out to buy their next house. Whereas if an investor comes in, and they pay me to take these 20 homes that are all contiguous, and because I know they're gonna be rental properties, you know, I might choose different flooring or different things that are, you know, more conducive for the wear and tear of a rental property, so that you can minimize your maintenance expense.

Tom:

Yeah, durability.

Michael:

For those that might not be familiar, what is a build to rent?

Caroline:

A build to rent is a home that is specifically built from the ground up and with the intention of being original property. So that's how I think of it. It's a very new construction. And a lot of times the advantages are the homes are very close together, which makes it easier to manage them. But also because they have similar for print, it also makes economies of scale in terms of, you know, making sure that you have all the supplies you need, and that you understand the nuances that the home and what to expect in terms of risk.

Michael:

And is this a new concept? Or is this kind of been around for a while?

Caroline:

It's relatively new, I would say also is the single family rental industry or the asset class, for

Michael:

Sure. And I just curious what your outlook is, if you know about the appreciation potential of those built to rent properties, kind of as an on an individual basis.

Caroline:

I'm very bullish on housing in general, I think from like the sheer macro economic drivers of supply and demand, our population is growing quickly. And particularly when you look at the life stages and cohorts of age, within the population, there's a significant amount of demand to have a home. So assuming that you know that you're choosing your market really well, I feel like it's a win. So I do think that a lot of times the build to rent communities are either part of a master planned community. So they're well positioned to be highly desirable, whether you want to keep them as rental properties or eventually sell them off. You know, I think there'll be high demand there, but also a lot of times they're infill. So a developer could come and find, you know, a smaller tract of land and put several homes on it. And then they're in amazing locations. So a lot of times the strategy around ultra rent can be slightly different. But more often than not, it's a great opportunity to invest and see a lot of appreciation.

Michael:

Interesting. Very cool.

Tom:

I guess one more question. on the technology side, I'm always kind of curious about like, kind of the evolution like I assume that, you know, it began in Excel and perhaps still, like a vast majority of is done in Excel, is there any plans within reflect to build any, like custom software to help, I don't know, make it more efficient, or I'd love to hear I don't know if there's any kind of cool tech stuff kind of on the pipeline related to this.

Caroline:

Roofstock really innovative and have the really, really highly talented team of engineers. So I do think that we are out there and trying different ideas. And the ones that stick, you know, I think, will ultimately help create a very robust API platform that'll be very proprietary. And the way that we assemble this information that we've we've gathered from different technologies, so be it from, you know, technology into physical home, and how thing is to streamline maintenance, or, you know, or the way that we're assembling different factors across different markets, you know, pricing and things like that. I do think that we are really well positioned to make that very robust and dynamic for our clients.

Tom:

You mentioned technology in the home, are you bullish on what said like IoT like Internet of Things of like within rental home, because I mean, there's some significant upfront costs in implementing something like that, you know, remote locking systems and water checks. And because that any analysis on that?

Caroline:

I will say that the single family rental industry has an advantage over traditional multifamily in a way that, you know, we're all learning the best way to manage a home of single family home, which is quite different than multifamily buildings. So I do think that the potential to experiment and adopt new technology is slightly easier because we are baked into a legacy way of doing things. And also because there's a need. So a lot of different operators, including ourselves are experimenting with a lot of technology that's coming on the market. And of course, there is an investment and buying the technology and then implementing it and then testing it out. And figuring out didn't actually create a fading. So not a lot of that is happening right now. And a lot of people are sharing their best practices and learning from each other. So I do think over time that the synergies and the value from using technology on the home will continue to be accretive.

Tom:

Yeah. And as we get more data on it, for sure, to make those decisions. Awesome. Carolyn, anything else before we finish up today?

Caroline:

No, I think that it's a wonderful place and super happy to be a part of this talented team. So anytime you guys have questions, feel free to reach out.

Michael:

Awesome.

Tom:

Awesome. Well, thank you so much for jumping on.

Michael:

Thank you so much.

Caroline:

Thank you.

Tom:

Thanks again to Caroline for joining us today. If you liked this episode, like the podcast, we always appreciate it if you like and subscribe, wherever you're listening to podcasts. And as always, happy investing.

Michael:

Happy investing.

Investing with family can be complicated.

In this episode, discuss things you should take into account when investing with family and some of the agreement structures that are common for this. 

--- 

Michael:

Hey everybody. Welcome to another episode of the remote real estate investor. My name is Michael Albaum and today I'm joined by,

Tom:

Tom Schneider

Emil:

and Emil Shour.

Michael:

And today we're going to be talking about partnering with family to do real estate deals, this can often be a hotly contested and debated topic. So I'm curious to get everybody's insights. Alright, let's get into it.

Alright guys, family, money, sex, drugs, rock and roll, all the cool things, all the fun things we want to talk about in the show. Have you ever done a deal with a family member? Tom?

Tom:

I have not I've approached family member but I think my family is generally a little bit risk averse and doing this kind of work. And that's okay. I you know, I've heard horror stories of friends doing stuff with family members were friends that it's gone south, but I personally have not done so. I'm going to be sniping in some some questions and maybe throwing some pessimism shade. But I've heard of people being successful. But anyways, long answer No. Short answer long. No.

Michael:

So when you say that your family is risk averse, does that imply that real estate investing is super risky?

Tom:

I think that it's fear of the unknown. Michael, if you're not familiar with it, it's can make you concerned that…

Emil:

It is a very common consensus.

Tom:

For sure. We'll have to kind of drill into some of that on another episode, but not risk averse. But just yeah, fear of the unknown. That's where I'd say my lot my family, I think a lot of people like a lot of them, like get it and want to do it. But man that going from zero to one is a pretty big move. That hasn't happened.

Emil:

Yeah, everyone has heard that horror story too, right? Like, oh, I had a friend who bought real estate and it became a crack house. And then it's like, okay, we're gonna pull the one. Everyone's heard that story. And so I think that's where the scariness of real estate is coming from, right?

Michael:

No one ever says like, Oh, yeah, I had a friend into real estate and worked out really well. So I want to do it now, too.

Tom:

Yeah, I mean, I think with a lot of people, it's fear of like, looking like a dummy, you know, and like throwing money away. And I think anytime you're quote, unquote, like making moves, like there's some risk for that. And a way to think a lot of people is just turn into a turtle and just do nothing.

Michael:

I like turtles,

Tom:

Nice throwback, cultural reference.

Michael:

It's interesting. Like, I would argue more people invest in the stock market, via retirement accounts, or via taxable accounts than invest in real estate. And so it's almost become normalized to say, like, oh, man, the stock market went down. So I lost a bunch of money today. And I was like, Oh, yeah, like that happens. That sucks. Versus in real estate, I think because there are less people doing it, it's probably talked about less. And so people are getting less exposure to it. And so they don't want to be that one person that looks bad, who went and lost money in real estate versus all their friends, family, whatever other acquaintances are losing money in the stock market, no one thinks twice about it because it's been normalized.

Tom:

Yeah. It's like what weighs heavier like the aversion for loss? Or the what's the opposite of aversion?

Michael:

Wanting? Desire?

Tom:

Desire, there we go, versus the seeking gain seeking. Yeah, aversion is a very strong force.

Michael:

I think loss aversion is stronger than gain. I think we did a book club at the Roofstock Academy, where we were talking about negotiation and that kind of thing. And people's loss aversion is a stronger driving factor in their decision making than ability to win and gain.

Tom:

I think it's not just loss aversion, but like aversion to looking like a dummy. You know, like, you don't want to be that person that the family talks about, like, oh, Tom, you know, he put all his chips on XYZ and lost it all.

Michael:

We told him it was silly.

Tom:

Yeah, it was silly. But anyways, no, so have not done deals with my family. I think I'm the only one in my family network that has drank the kool aid the sweet, sweet kool aid of real estate.

Michael:

Okay, Emil, what about yourself? Are your lips sticky with kool aid? Or have you gotten other people to, to enjoy with you?

Tom:

Do you share her kool aid?

Emil:

I don't. I don't like germs. I have spoken to family and I have family who is interested and ready, but I haven't found anything where it makes sense. And I haven't needed to include anyone yet. So I've had the conversation. Have some family members who are interested for when the right deal comes along where we need some extra capital they're interested in you know, I've set up some terms with them like we've gotten all the groundwork done like what they're interested in, how I think I would want to structure it. So had a lot of that conversation just haven't pulled the trigger because we haven't found any things investment sure

Tom:

Question for a meal or in moving forward with this. If you had to say the kind of the push the impetus is it more you looking for another capital partner or is it more Your family or friend wanting to participate in, in the kool aid of real estate investing,

Emil:

I think it's more so me requiring capital. And obviously, I'm going to offer them attractive terms better than some of the other invest… like, my family who I'm talking about here. They have other investments that they do on like the lending side. So they'll do, it's not like hard money lending, but it's this company that issues loans to people who have a harder time getting lending, so the interest rates higher. So they usually get like, I don't know, six 7% annual return.

So I'm thinking, you know, how can I offer a, an even more attractive return so that they'll want to invest with me if I need that money versus going and putting it with this other company? So they have some experience investing in real estate notes? Yeah, direct real estate, but with me, it would be like a note where I would pay them back, I don't know, maybe in 12 months, or whatever, depending on the type of project we take on.

Michael:

So that would be a debt structure as opposed to an equity structure,

Emil:

Correct? Yeah, right now, it's only been talks for a debt structure and not like a JV type partnership.

Michael:

Okay. And out of curiosity, why is that for you?

Emil:

Um, for me, it's probably just my control freak nature, I would rather just be the one in the driver's seat and not having to really answer to anybody and really make my own decisions, rather than, you know, you include people and they get a right to make those decisions, too. And that's not what I'm looking for with my real estate investing. So if it requires me to grow more slowly, because whatever, I'm the only person in the driver's seat, that's fine. But there's people who are interested in just the debt side of it and don't want to do any of like dealing with real estate or the operations or whatever.

Michael:

So is there a way to structure it where they have an equity position, but can still maintain that positivity?

Emil:

I'm sure there is. I approached it from a debt structure, they were cool with it. And that I think, works for both sides. So I didn't even you know, think about exploring kind of other avenues.

Michael:

Yeah, makes sense. And for people listening, that are sports fans, that might not know what the term JV means in real estate, what is JV?

Emil:

So that's a joint venture, that's where multiple people are pooling their money together multiple names on title multiple names on the LLC, or whatever it is holding this property. So they own the property as well, versus this would just be me owning it, I have like a note with them a debt obligation to them.

Tom:

And continuing to do the just the definition game before going back too far. Equity versus debt. So debt would be just someone who's just acting as a bank, they're not they're not on title, they're not you know, in a JV, it's just straight borrowing money from that person, where equity be equity is actually participating in the upside of the of the real estate. So debt would be like a confirmed amount on what you're paying back, you know, to that person, you're borrowing from where equity, it could be variable, there's risk, you know, perhaps the person who's loaning money loses money, if they're, you know, structured in an equity way, versus debt. It's just a flat percentage, or however that is structured. And there are pieces I should, we're missing in my explanation there, guys?

Michael:

No, I think that's great. But just to kind of bring it all home is If so, Tom, if we're in a debt structure, partnership, and I'm going and buying the deal, I might borrow $100,000 from you, and I'm going to pay you back X percent or X, you know, dollar amount monthly, based on your preferred return whatever you're trying to achieve as the bank. versus if I were to go into a LLC, I sell that property for 200. Grand, I just pay you back what's outstanding of that note of 100 grand versus if a meal and I were partners were Equity Partners. And I bought that same property for 100 grand and we were 50% partners, went up to 100 grand Emil would share in that profit as well versus you, Tom, as the as the debt partner would not.

Tom:

Why you gotta leave me out like that? All right Mike, your experience, partnerships, family friends, yeah,

Michael:

So I've done a bunch of stuff. My very first deal was a debt partnership with my family, they loaned me the money to purchase that first property. And that was worked out great at the time, interest rates were so low, I mean, interest rates are still so low, so they're able to get a better return than having their money sitting in the bank. It's a very safe investment with me, because they know where I live if I were to default, and it's secured by the property. So there's really very little risk involved for them. They didn't have to do the true traditional underwriting that a lender would traditionally do on somebody to determine, okay, is this person a reasonable borrower, because they knew me and stuff. So that was a really, really great win for both sides.

Tom:

How long? You don't mind what what were the what was the length of terms of the debt?

Michael:

Yeah, so the term was interest only for five years, because I borrowed more than 20% to help me get into the deal. Because I was just coming out of college, I didn't have a ton of cash. So the mortgage payment, the fully amortized mortgage payment would have made the property negative cash flow. So my dad helped me do is he's like, Okay, well, what if we just do interest only that significantly reduces your monthly payment amount, and then this property will cash flow. At the end of that five year period. Hopefully the rent will have increased So that way you, you'll be able to support a full mortgage payment.

So that's happened, I've opted to continue with the interest only route just because the cash flow is really killer and the appreciation is quite rapid. And so instead of paying it down, I have a better use for that cash flow elsewhere. At the end of the lifecycle of that property, whenever I ultimately sell it, or at the end of the next five year term, I'll either go to a fully amortized payment with principal and interest. Or if I sell the property, the loan balance has remained unchanged over time.

I mean, it's an expensive way to have access to capital. But it was the only way that made sense for me. And it was the only way I could get into the deal. So I said, Okay, it makes sense. Let's do it. And it worked out really, really well.

Tom:

Opportunistic.

Michael:

Yeah.

Emil:

When you structure this, do you put your family on title? Like, how do you kind of is it just like you have a contract? And it's just you making payments? Like, how do they get in on it so that they feel secure? And everything? I'm curious for my own?

Michael:

Yeah, so it can it can be one of two ways. So one way is just to have a promissory note that everybody signs and says, okay, yes, Michael Albaum is on the hook for this dollars. And it's, I mean, it's a contract. So if I don't make a payment, there's a late fee. And if I don't make the payment after the late fee, then they probably can get foreclosed on. And depending on how you want to structure it with your partner, or the family member or friend is they can actually have take a first deed of trust on the property and record that as them being the lien holder.

So if things go south with the relationship, and you just decide to not pay them, they actually have they can take title to the property quite easily. And so then you have to have them as a mortgagee on the insurance and on title and all that kind of good stuff.

It can go a number of two ways. The promissory note is definitely the more informal way to do it. While it's still formal, it just is less eyes on it, I guess you could say it makes it a little bit easier. versus doing the recording is is a little bit more hands on. That was one deal I did and then I partnered with my brothers, we bought four duplexes out in the Midwest. And so I bought two and they each bought one and we formed a multi member LLC. And so we kind of pooled our money together, we talked about a couple different ways to structure it. And the reason we did that is to get a killer deal on these four duplexes, because basically, we bought a mini portfolio, they were all bank owned foreclosures. And so we said, okay, we'll buy all four of these from you, bank, give us a killer deal. And they did. So in order to do that, we had to form this multi member, we didn't have this multi member LLC, boom, it was much easier to do, because now it was just a single transaction as opposed to, okay, my older brother buying his one, my younger brother buying his one and me buying my two. So that was a really great winner as well.

And now what we decided to do is share the expense load, because the properties had slightly different property tax rates, for whatever reason, even though the purchase price was all the same, we knew that they were going to have slightly different expenses from one month to the other. So what we did is we said, Hey, you know what, let's just pool the expenses across all of us. I'm a 50%. Owner, my two brothers are 25% owners. So it's almost like a co op in that regard. So if you know, my elder brother had a really bad month, this month, we all share in that loss versus if it's smooth sailing across the board for everybody. Everybody comes out ahead.

Tom:

I got a question for you, Michael, I love the way this is working out. We're just kind of go into these use case, because I wrote a bunch of questions ahead of time. So the amount of work that it takes to operate and do the acquisitions and all of that, how did you guys determine that upfront? And is the person who's doing more of the work getting compensated? How do you structure that?

Michael:

Great question. So typically, in that type of arrangement, if these weren't my brothers, I would have asked for, what's the word?

Emil:

Acquisition promote?

Michael:

Yeah, kind of like a promote, which is basically just the work involved for putting the deal together. And so it's family. So I was like, yo, whatever, you know, we don't need that, I'm happy to do it. And I was actually already in the area for other reasons, anyhow, like looking at another deal for my family. So it worked out quite well. But so for the management of the manager, because there's definitely a lot of ongoing work, paying the property taxes, paying the insurance dealing with the manager dealing with the home warranty, companies setting all that stuff up. So we decided to do a management fee that the LLC would pay the manager which I happen to be, but I had to participate in that payment as well. So I was paying 50% of my own management fee to manage the manager and kind of do all this stuff on a monthly basis. So he said that up until automatically every month from the rent, I got paid a management fee to deal with all that deal with the taxes, accounting taxes at the end of the year, all that kind of good stuff.

But so I think it's really important to outline all of that in whatever kind of partnership agreement someone's utilizing. We utilize a multi member LLC structure. So we just had an operating agreement, that outline Okay, who is responsible for what these were the duties, roles and responsibilities of each person? And it was very cut and dry. And it worked out really, really well.

Tom:

On the acquisition side was it I assume, since you liked the taste of that Kool Aid so much, who was driving the acquisition process?

Michael:

I was, so I was out there looking at another deal for our family and and happened to come across these other properties. And I said, Hey, well, you know, while now here, I may as well look at other stuff because my family always loved doing things for multiple reasons. So we were already invested. As a family out in this other property, and so I said, Oh, these are these look interesting. And I was making contacts with property managers and agents anyhow. So I came across these and say, yeah, this, this sounds awesome. So put it all together and brought it back to my brothers. And I said, Hey, you guys want you on in?

Tom:

That's awesome. And so you said your family was already doing stuff out there anyways, I mean, just kind of curious digging into the life of Michael, was this deal done, like before you were involved, or the other stuff that was going on out there?

Michael:

No. So it was simultaneously. So we were in the process of purchasing a commercial property out there in the Midwest. And so my dad sent me out because I was being physically constructed. And so my dad was like, hey, go check it out. Because that's what I used to do for a living is look at buildings and fire protection, and all that kind of stuff. So he was out there looking at the building and setting up our kind of footprint out there setting up the team meeting with property managers, meeting with agents, just kind of getting a lay of the land, so to speak.

And so got in touch with this other residential agent, and hit it off. And after interviewing, several decided this was the one to utilize. And she showed me some great properties. It was interesting, she actually double ended the deal. She had the listings from the bank, which again, they were bank owned foreclosures. So anytime this bank foreclosed on properties, they gave it to this agent. And so she said, Hey, I got these four properties. And it worked out really, really well. And then she stayed on as the manager as well. So I always talk about that in the academy, anytime you can utilize a agent who is also a manager, I think it's a big win, because they're very tied into the sales and acquisition side of the market, as well as the rental side. And an agent gets paid based on commission based on when they transact. And if they take off, you never see them again, you know, tough luck versus an agent, you're kind of hitching your wagon to their horse, so to speak. And so you know, you're in it together. So if they sell you a lemon, they've got a manager, lemon.

Tom:

Got it cool. Any other examples, or you want to walk through it?

Michael:

Yeah, so I've. So that was, let's say, we covered debt structure. So I did an equity partnership with a family member, they provided the capital, I provided the deal, and the management and the rehab and all that kind of good stuff. And so we're in the process of selling one of those properties right now. And they get to collect all of their money back plus, hopefully about a 50% return on their money for just providing the money to do the deal. So that's been well knock on wood will be once it finally sells a great win for everybody. And then another property that we bought together, they'll just get to collect cash flow, and literally have to do nothing for it and gets participate in the upside as well for when that property ultimately does appreciate. And we do sell it at some point down the road.

So I've done both debt structure and equity structure, they both have their place, they both can be great. On the debt side, it's great, because everybody's making money, the lender is making money day one. So if that's something that they need to do great if they have capital laying around, but they're not sure what to do with it, or how to invest it or maybe not interested in learning how to invest in real estate, but want to participate in the upside that real estate offers, the equity structure can be a really great way to go. And it's nice, because then you don't have that debt burden looming over your head as an owner operator. So especially for rehab stuff, which is a lot of what I'm doing right now, the equity structure makes way more sense, because the properties just aren't cash flowing, because they're being rehabbed. So to not have that looming, it's really nice.

Tom:

Michael, I'd love to hear what are some of the different terms or I guess, common terms that you've either seen or used, both on the debt side? And on the equity side? And specifically those terms? You know, how long are these typically structured for? And on the equity side? What How is that typically broken up? I’d love your…

Michael:

Yes, so I've been super fortunate in that I've got very caring, loving, flexible family. So anywhere from three to 6% on the debt side, in terms of interest rate, which is traditionally better than what you're going to get sometimes can be better than what you get at a bank, both in terms of being the borrower, and then also in terms of being like in terms of parking your money there. So for the person doing the lending, there's no way they're getting three to 6% by having their money in the bank. And as a borrower, there might not be any way I'm getting three to 6% depending on the asset and timing of the loan. So it can be a really great way to go again, kind of a win win.

And then on the debt side, I've just done 50/50 partnerships where people plug in, they pay for the acquisition, and most or all of the rehab, I take care of everything else. And then we just split everything down the middle 5050. And that's worked pretty well for me in the past. So it all kind of depends on each person's individual situation and what their individual goals are. If like Emil, you were mentioning, you're borrowing from family that's doing hard money lending, they have an opportunity to make, you know, 567 percent so you might have to offer more attractive terms versus the person that just has their money sitting in the bank because they're scared of the stock market and they don't know real estate, you know, they might be thrilled with a two and a half, three 4% returns, that's way more than make it in the bond market. And then as far as as structuring, they typically just do fixed 30 year financing and Basically locks in payments to that family member for a long time.

And of course, because we're family, we try to be flexible. And we all understand that there's money involved. And that can often complicate things, but we all talked about, look, if anybody feels like they're getting taken advantage of, or things aren't working out, let's talk about readjusting this. Because if interest rates go up to 15%, and somebody can get 15% by just parking their money in the bank, well, yeah, there's gonna need to be some conversations had to adjust that. So that's the nice thing about doing this with family is that you can be flexible, you're not beholden to the Fannie Freddie rules, you know, this is so much less regulation and eyes on it. It's just whatever is gonna work for everybody involved in the deal.

Tom:

Have you ever had a deal go sideways, or had some like major issues, I'd be curious to learn about experience in conflict management, but just like you're doing this partnership with somebody and things are going poorly, some one recommendations and to maybe some case studies or experience in managing when there's issues.

Michael:

Yeah, so might not be the best example. But this most recent deal that I worked on with a family member, where I was at 50%, equity partner, they put up the cash to do the deal. There was a contractor that we had involved to just was not working out well at all, he had all the right answers for all the questions, and then turned out to be a total slime bag. I mean, on the verge of criminal, so it did not go well, needless to say, but he was who we were planning on utilizing for a lot of the rehab on the building when we bought it. And so I was running point, giving updates to the family member that financed the deal. And I had to come and say, Hey, you know, this didn't work out. This isn't go as planned, we were supposed to have everything turned around in six months for X dollars. Well, that didn't happen.

So I basically fronted all of the additional costs to get it right. Because the way it worked out is that we just we didn't get the rehab done. And so things were slowing, and the building was eating money. And the rehab wasn't getting done until we weren't generating additional revenue. And then property tax payments, hit insurance payments hit so everything happened at the worst possible time. And so I, you know, I could have gone back and said, Hey, I need more money. But I made a commitment to my partner. And I basically said, Okay, I'm going to eat all this cost all the additional costs and fund the rest of the rehab that you thought you had funded already. So to make it right. And so that was a really big punch in the gut to just not have things go well, but being honest and transparent was by far the best way to go. And my partner was very flexible. They understood that, okay, this is real estate, they understand construction, things are always more expensive and take longer. But this was just one of those instances where things went really sideways, and you're playing with other people's money. So that to me has a much bigger weight on my shoulders than if it's my own money. So I said, Hey, I'm going to go make this right, I'm going to do right by this partner and suck it up and deal with it.

Tom:

I love it. I think it's kind of a general takeaway in these like communications is so important, open, honest, constructive, real time. And you might have mentioned this in a previous episode, but I love the Four Agreements by Don Miguel Ruiz, and it's the the four agreements are, be impeccable with your word. Don't take anything personally. Don't make assumptions and do your best I think, as a general credo for life, and then also partnership is a good way to go with. Go ahead, Emil, I see you jumping in.

Emil:

Yeah, one other takeaway I thought might lay your your thoughts here is like if you're doing this, either have some of your own money set aside, or raise a little bit more as a buffer in case things do go sideways, you don't have to go back and make I guess what's called like a capital call, right? Like projects going extra, you don't want to go back to your investor and say, Hey, we need more money makes you look bad, it makes it likely that you're not gonna less likely that you'll do a future business with this person again. So like just having some money set aside in case some things do go sideways, whether it's your own, whether it's the money you get from them, just having a little bit of buffer for things that do happen like this.

Michael:

There is such a difference for somebody, if I go to you and the owner and say, Hey, Emil, I need $30,000 to do this project. Really great, cool. 30 grand, here you go. And then I come back to you a few months later and go actually I'm able to project perform really well. Here's five grand back, you're like, Oh, awesome. Michael crushed it.

As opposed to Hey, Emil, any 15 grand to do this, oh, three months later, by the way, Hey, man, I need another 10 grand to get this done. And you're like, what? So at the end of the day, it's still 25 grand out of your pocket, but to under promise and over deliver as opposed to doing it the other way around? is I think so huge. So that's for sure been, like my biggest takeaway is things will go wrong. They will go sideways more than you think. And it'll be more expensive and take longer than you anticipate. So just be ready for that, especially with construction. It's just one of those things. So with partners, you want to be over deliver.

Tom:

One more question for me, and I'd love I know, Pierre is looking into doing some stuff with family members as well. I'd love to hear some, you know, give him a chance to have some self serving questions. But my last question is related to initial kind of prenup or contract that you have. What aspects Do you think it's really important to get into writing upon making either a debt structure or an equity You know, just to specify make it super clear upfront, I'd love to hear your input on that, in that that prenup, but you know, I'm saying…

Michael:

Yeah, yeah, just like, like an operating agreement, essentially, if it's a form LLC, or how you're going to operate things if it's not an LLC, so I think it's super important to just have everybody understand what the expectation is around their dollars, whether they're putting money in or they're expecting money out, how long is this money expected to be tied up? And how do you see decisions get made? Is it majority number of people who vote is it whoever put in the most money that gets to control the decision making is it whoever is the manager who may have put no money in so understanding the roles and responsibilities and duties of every person, I think is really important. And having an understanding of who's responsible for what and how power is distributed, so to speak, is really, really critical, because unmet expectation is really what leads to friction in relationships.

And so if you talk about all the expectations, again, for time and for money, and for roles and responsibilities, that tends to alleviate a lot of things down the road. Now, of course, you're not gonna be able to think of everything, you're not gonna be able to anticipate every situation. So planning for the worst, but hoping for the best with whatever you're aware of is great. And then talking to other people that have done partnerships, because that's a blind spot, like that was a huge blind spot for me was not anticipating the property taxes? And what if the contractor doesn't work out? And what if this goes longer than expected? So now that's less of a blind spot for me still working on it on a regular basis. But if I had talked to somebody that had done this exact thing a little bit more in detail, probably would have worked out better?

Tom:

Nice. Yeah. Pierre, do you have any self serving questions you want to ask?

Pierre:

We're just talking about this yesterday, trying to figure out a payment structure, what’s a fair payment structure that he could pay me for the time that I put into what we're doing, we still haven't come to a conclusion yet. But we want to make sure we have some sort of contract so that no one's feeling… I mean, my brother is very generous. So he doesn't want to feel like he's using me. But at the same time, I feel a little bad, because I don't think I'm bringing massive value, if you hired a asset manager, they'd be a lot better at doing what I'm doing. for him. I'm just like bumbling around trying to figure this stuff out with him. And so Asset Management do like one to 2% of monthly income. And so if there's only one property, and I'm only working on one property, that's pretty low for me doing but then at the same time, I'm not bringing that much value compared to what a real asset manager would be bringing in, like Tom says, short story long, I don't know what the heck we're doing.

Michael:

So you can do it a couple of different ways you can do an asset management fee. And you're right 1% of one property is not a big deal. But 1% of five properties is starts it gets pretty sizable. So you get to grow together as a team in that you get to build your reputation and experience level on that one property. And you're right, if you're not bringing much value, why should you be getting paid this, you know, a whole lot of money. And so you have to think of it too, from not necessarily his perspective, because he is your brother and his family he loves, you know, that kind of good stuff. But as an owner perspective, right?

Why would an owner be paying someone 567, whatever is a sizable amount of dollars, when there's not a whole lot of value being brought to them. So you can do an asset management fee. And then you can also do like sweat equity, because you're putting the deal together and doing all the legwork. So and participate in the upside. So maybe you know, 5, 10, 15%, whatever of the upside, when the property sells or gets refinanced above and beyond the profit you get taken advantage of. And so you're putting in all of this effort and value into the deal, not seeing a whole lot of return today. But when your brother sees a lot of return, that's when you that'll manifest itself.

And so I actually just remembered, this reminded me, that's what we did with that duplex deal I do with my brothers, I didn't charge them anything on the front end. But when they go and sell the property, I get X percent of the sale price as my feet for putting the deal together. So they're obviously winning, because they're now selling those properties. And so then I get to participate in that upside as well. But so it's kind of a win win. Again, it kind of hitches my cart to their horse, so to speak, and if they don't sell well, then Okay, then I don't get it anything.

But at some point down the road, I would anticipate them to sell these properties. And if not, that's okay, too. That's great. We all got a big win. So think about doing something like that as well and chat about it with your brother.

Tom:

Yeah, you know, it'd be an interesting way that I've seen here and it's kind of similar to Michael Zoomers model is if you're doing it when you sell like maybe your brother gets the first 10% of profit. And then you guys split after that. There's a lot of flexibility in the way that these can be structured. But I'd say on the acquisition side, like right now, it's so valuable the value that you're getting, getting and going through this exercise and kind of building that confidence that there's it's pretty awesome. It's important.

Pierre:

That's kind of how I feel about it is that I'm very thankful to be participating in this with him. It's I'm learning at time so that when it's my turn to do a deal, it's not going to be my first. So another thing we're talking about is just you scratch my back, I'll scratch yours when I go into a deal, he's going to help me the same, you know, we're just going to be working together when I do my next acquisition. So yeah, this is helpful. I'll hash this out with him.

Michael:

Yeah, yeah. And you can think about, you know, you can do a percentage, you know, 1%, or 2%, whatever asset management fee, or you could do a flat dollar amounts, the nice thing about the percentage that it grows over time as the rent grows, but if, again, if it's just one deal, you could just say, Okay, let's do whatever a flat fee, we're comfortable with this. Yeah, just another thing to think about, and take around.

Tom:

This is what I without giving recommendations, this is what I would recommend, I would recommend, like a very small percentage of the acquisition price as sort of like a finding fee and like doing that work, because that is like some pretty significant work, like maybe a half of 1%. So that would that if you're buying $100,000 house, that's 500 bucks, you know, not and then I think and then at the exit, I would book ended, I would do something on the front end, and then from something at the very end, and that way you're not…

Pierre:

and no fee monthly?

Tom:

No, no fees monthly, just so it's, you know, so keeping the operating costs low. And maybe, you know, if he's planning to hold it indefinitely, maybe some like option for you be able to pay him to get equity, if you want to in like five years, you know, at a predefined amount. I mean, what's so fun with these deals is it's very much a white canvas in the way that you structure them, my recommendation would be the book ends with an option to get some possible equity on the inside.

Pierre:

I think that makes a lot of sense. Because once you own the place, then there's going to be long periods of time where nothing is happening. And I'm not going to need to be doing a ton of work until we're going to be in the market to buy another place. Yeah, so it doesn't make sense for him to be paying me unless we're actively working.

Michael:

There will be active work going on, especially at the beginning with dealing with the property manager and getting the system set up and dealing with the accounting side of things. So there will definitely be stuff. But I think Tom said I think the vast majority is the legwork done on the front end getting to the acquisition point.

Pierre:

Yeah. The other thing is that we see this kind of as a partnership, and he's not making money right now. Why should I be making money right now when he's the one putting up the capital? I don't feel right taking money right now, because you're not making money right now. Let's get a deal and contract before we think about putting money but it'd be nice to know what the money is going to do when it's time for it.

Tom:

Yeah bookended and give yourself an option to get on the equity. I think for the work on the acquisition side, I think it's reasonable to take a you know, whatever a finder fee or whatever, when so when I was doing acquisitions for one of these rates, you know, that's our bonuses would be on, you know, acquisitions. And do you want to get really creative you could do some sort of bonus on how quote unquote good of a buyer it is, but I don't think you need to get that creative. It's like a family member. Just something simple and right, you know, simple and fair. So..

Pierre:

Sure. Thanks guys.

Tom:

Exciting stuff Pierre. Exciting stuff.

Michael:

Totally. Very exciting.

Alrighty, everybody, that was our episode for today. Thanks so much for listening hope that was valuable for people that are thinking about partnerships or that are in partnerships and how to structure maybe restructure them. If you liked the episode, feel free to give us a rating and review wherever it is you listen, your podcast has really helped us out quite a bit. We look forward to seeing the next one. Happy investing.

Emil:

Happy investing.