The SFR Show

In this episode Tom and Michael go head to head yet again with a hot debate on what is best; buying your primary or an investment property first. 

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Transcript

Emil:

Hey everybody welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co hosts,

Tom:

Tom Schneider.

Michael:

and Michael Albaum.

Emil:

And on today's episode, we're gonn a be doing another showdown of the century talking about buying your first rental property before you have your primary residence or buying your primary residence before you buy a rental property. So Tom and Michael are going to be going head to head and I'm going to be officiating this one. So let's take out the gloves and start the show down.

Michael:

Tom, did you drink your um cheat juice this morning? aka coffee?

Tom:

I did I did. We were talking about this yesterday. The espresso nap.

Michael:

Oh boy. So did you espresso nap before we record this?

Tom:

I did an espresso sleep. I what I did is like, I put the espresso in time release capsules. So I could you know start my sleep early. And then it dissolved at around you know four o'clock I got a solid 45 minutes asleep. I just watched elf pretty recently so I got a solid 45 minutes of sleep eating the the four main food groups. There's sugar bear,

Michael:

candy corn, candy canes,

Emil:

Maple syrup. Is it the last one? Yeah, we've all watched elf way too many times. Clearly.

Tom:

There's like, within movies, there's like funny quotes that just like stick with you that are like not like super obvious. Yeah, my favorite elf quote is when elf is offering the spaghetti to like, what's his face? The dad and the dad's like, he's like, Oh, yeah, of course. Of course. We don't want that. Yes. My wife has an inside joke. Like when someone says like, No, I don't want that to go. Oh, yeah, of course. Of course.

Michael:

That's really good. That's really good. All right, enough of the friendly gestures, the friendly pleasantries. Let's get down to it. Tom.

Emil:

Why don’t you guys get your corners here.

Michael:

Weighing in at 150 pounds!

Emil:

All right. So, Tom, Which side are you taking? To start this round off,

Tom

I'm gonna start with the buying the house that you live in for

Michael:

Easy one, 1st round knockout.

Emil:

Alright, so Tom, you'll start this round, Michael gets the rebuttal and you get the final word. All right, I want you guys to meet in the middle touch gloves and fight.

Tom:

Okay, so within this battle, the reason that you should buy your house first, before you buy a rental property is a simple question of math, that's going to be my number one argument. And it's a simple number of math because you need to think about your investing in your life holistically. So there's money in money out when you are buying a house that you are going to be living in not only are you getting on the old appreciation train of buying a house that you're living in, but you are drastically decreasing your costs. So when you buy a house that you are going to be living in good news, you're not paying rent anymore, you're paying a mortgage. So those that fun that you're using to pay that mortgage, you would still need to be paying rent if you were to buy an investment property elsewhere.

So, huge difference that is a Crossing the Chasm if you will of no longer paying rent number two which is I think more straightforward is you are learning the ropes if you want to get into specifically remote investing, what better way to learn the mechanics of a transaction and lending and all that stuff by boots on the floor doing the transaction where you are going to be living? Right makes sense. So learning the that transaction process the financing process and lastly, is we do this investing as a way to you know, get to a point to financial freedom, we do it for ourselves and what better way to do it for yourself then to get into a place that you can call home especially in these times of being you know, in a pandemic you might want to do a house project can you do that if you're renting Nope, can't do that. You could do that but it's not ultimately now yours so pay yourself first you know that's how you buy buying a house that you're going to live in you are paying yourself first smoking mirrors, smoking mirrors, okay. Okay done.

Michael:

Well Tom, those are all really great points. I'm so glad that you brought up so many of them. And I just took kind of your first point I love the fact that you brought up paying a mortgage now instead of paying rent because there is no faster way to be unsure about how much your housing expense is going to be then with paying a mortgage and the utilities and the extra expenses you have with owning a home so if I'm renting a home for 1000 bucks I know month in and month out I'm paying 100 bucks a month the end Bodie Bodie.

Tom:

What!? That is not Bodie. Did you just through my dog under the bus?

Michael:

I through my dog under the bus>

Tom:

You’re dog is named Bodie too?!

Michael:

Yeah.

Tom:

Shut up.

Michael:

I’ve told you so many times?

Emil:

Way to pay attention Tom.

Michael:

but he's squeaking his toy right in the middle of my home run here,

Tom:

Smoking and Mirrors,

Michael:

Smoke and mirrors. That's right. So there is no better way to be uncertain about your monthly housing expense than by owning your own home. So up, we have a leak in the roof, that's $2,000 got to fix that up the stove broke, got to go get a new one that's in there. $600. So when you're renting, you know, month in and month out exactly how much your housing expense is going to run you. And I would argue that as you're saving up to start investing, that's one of the most important things is knowing what your savings rate is. Number two, we also talked so often about how and the investment property world you want your tenants to pay your mortgage? Well, that's true for the investment property that you buy, and then rent out, why can't that also not be true for your primary residence. So go buy an investment property first, and then let your tenants pay your mortgage on your primary. Thirdly, depending on where you live, this might be out of the question for you.

So Bay Area, California, Seattle, New York, the cost of housing is so expensive. And so if you take that down payment for what you would pay in downpayment and go elsewhere, you can potentially buy properties all cash, you could get into numerous investment properties. But I also think that in order to save up for your down payment for your primary, it's going to take a while. And so if you can go invest and build up cash flow, this cash flow train this cash flow snowball, by buying investment properties, first, your tenants will pay your mortgage and your tenants might even pay your down payment on your primary versus going the other way, it's going to take you a long time to save up for your next down payment if you go buy a primary until you can start investing in rental properties. So I love that you brought up appreciation, Tom, because you're absolutely right, go buy investment properties and have those puppies start appreciating all the while you're waiting to go buy your primary residence.

Tom:

Alright, so

we're going to come to an agreement on a point you made is I think house hacking is kind of the splitting the difference of this argument. And what house hacking is, if those are not familiar, that's buying a duplex living in one unit, renting out the other unit good point there,

Michael:

It doesn't even have to be a duplex. It's just something bigger than you need for yourself. So if you're one person, you could go buy a three bed house and rent out the other two bedrooms. You could buy a duplex triplex or quad or rent out the other unit. So it can be a really diverse approach doesn't need to be just a duplex. So just to clarify that.

Tom:

Yep. Like that. So okay, so that to your argument, you're making at me here. So one of them was related to unknown costs. So you're saying, you know, if there's a leak in the roof, great, you're spending money and there's unknown costs on buying your own house? Well, Michael, there's unknown costs are just as likely to occur on your rental property than they as they are on your property. But in fact, I would say you have more control of those unknown costs at your own personal house. So for example, if something say I don't know, some simple plumbing issue or something happens at your personal house, and then also happens at your rental house, you are guaranteed to have to pay pretty much top dollar at that rental property to get that fixed, where at your own house, you know, you kind of make an adventure of it, you know, oh, just cold water? No, it's good for your lymph nodes to get into cold water shower.

But on the rental property, you can't control that you're going to you're going to be paying to fix that. So I'd say those costs measures are you have a little more control of your own house, also on the cost factor. So I rented for a couple years and oh my goodness, did I get jammed on rent every year, I think it went up like 25% year over year, where if you're buying your own house, you're getting fixed costs. Sure, there are some issues that can happen with the plumbing, but then you get a really good health treatment where you get a cold water shower for a little bit as long as you don't want a cold water shower. But those costs are fixed versus if you're renting. And if that landlord wants to jam ya for 25% increase, you're just subject to that you just have to take it so I would say that you know your argument that around costs is you definitely have to pay whether things happening to your rental property and for your own personal house. You can make some cheap decisions around health and financial well being of accepting culture. Yeah, I think that's a I'm going to end on the cold shower.

Micheal:

Emil weigh in man, please.

Emil:

All right, there's a little bit of thunder left you know a little bit of juice to squeeze out of these two topics. I don't want to steal your guys's thunder and call everything you know what I mean. Yeah, just wait till the end.

Michael:

All right. Yes. All right.

Emil:

All right, guys. That was a very fierce round, a little bit less fierce than I've seen you guys in the past like sometimes I see you guys just just going straight for the jugular this time, you know, a little more civil.

Michael:

It’s the holidays, you know, you got to be

Tom:

I started the day with a cold shower. My endocrine system is doing awesome. You guys.

Emil:

Alright, well now that we're switching So Tom, you are taking buying your rental before you buy your primary but we'll let Michael go first. With buying a primary I want you guys to bring a little bit more fight. All right, like throw the haymakers Let's go guys give the people what they want. I'm raising my standard. Yeah, there you go, Tom stand up. It's game over. Let's go. All right. All right, Michael, when you're ready?

Michael:

Yeah. So it's kind of a no brainer you got to take care of number one first and that's you as an individual get your housing squared away first and foremost before even thinking about going in investing. I mean if you're gonna have your rent payment jacked up like Tom mentioned previously, how could you possibly be forecasting for the future with saving for future investment. So take care number one, get it locked up, get it squared away, first and foremost. Secondly, there is no better financing than owner occupant financing. So go buy a primary residence, let the appreciation train work its magic. And in a couple of years, you can either move out of that primary residence and convert it into a rental thereby creating a rental with owner occupant financing, or do a cash out refi or get a HELOC on that property. Again, with owner occupant financing and use that money to go start investing down the road, it becomes so much easier and so much cheaper when you have owner occupant cash to compete against peer investors for bidding on properties. So it's a no brainer. In my opinion, go buy your primary First, get it locked, ready in an appreciating market. And watch what happens. It'll blow your mind.

Tom:

Mike, you ready to take it?

Michael:

Let's just do it. I would love to see what you're going to try to drum up here.

Tom:

All right, Michael, it's time to September some real talk. Michael, I think you need to be long term greedy. You know, I think the short term greedy thing for you to do is Oh, I'd like a house the women that I own right now and to go buy a house, you know, and that might be great for current Michael. But future Michael is going to be so much better off for so many reasons of deploying the capital in building his real estate Empire, you have plenty of time to buy a house. In fact, you're going to be able to buy a better house in the future by making these smart, prudent, long term greedy decisions now of buying, you know, buying rental properties right now. And one of the reasons why it makes a lot of sense is your money can go so much further if you were to buy rental property, especially remotely. So where you're living at now, Michael, you weren't what you would be paying to buy a house, you could buy like three houses three rental properties, think of all that cash flow you can have your money just goes so much further versus in the market that you're living right now versus if you were to go and invest in one of these remote markets. So be long term greedy.

The other really value of this is being a person Michael, who likes to travel and stuff. You don't have to weigh yourself down with some house, you can deploy this capital, get it working for you, if you have it just sitting at your own house. It's not working. It's being slothful, you want to get this working for you invested, get it running. So you can go do some fun things. Oh, you want to go ride a motorcycle up and down Chile? Great. You can go do that. If you want to go to Spain, great. You could do that. It's out working so you can go be playing, right? So get your money working. Be young, be awesome. Go do fun stuff. And do that.

So my next little bit, I'm going to just put on my economist cap. I'm going to mess the countries up. But this is that I'm specifically talking about but I'm it's going to be directionally right. So within Europe, there's this inverse relationship between unemployment and homeownership. It's true. So countries like, again, I might nest the specific countries, but countries like the pigs countries like the Spain, Portugal, they have very high ownership, but also very high unemployment, versus certain Scandinavian countries like the Norway and Sweden, they have relatively low homeownership, but very high employment. And the reason for this insert inverse relationship is by not owning your home that you're living in, it gives you a lot more flexibility to move around to wherever the jobs are at.

So when you're done riding your motorcycle in Chile, you can go to wherever the jobs have, it gives you flexibility, but you know that key investment in housing, you're able to still participate and all that upside by deploying that capital in a good market that you can be remote investing. So in closing, you want to be long term greedy Michael, don't be shorted short term greedy, buy your house now and get your money working for you. Number two, take your money further, you're able to do a lot more by deploying it in investment properties. And number three, look at the European model be a Scandinavian country not a one of the pigs country that Portugal, Spain, I forgot the other ones, but be one of those ones where it's a high employment, you know, riding a motorcycle in Chile. Go ahead.

Michael:

Tom, I really love and appreciate those points you brought up first and foremost being long term greedy, I couldn't be more excited that the fact that you brought that up because what could be more long term greedy than living in a property for two out of five years and getting a capital gains exemption when you sell the property of 250,000 as an individual or 500,000, as a married couple. It totally personifies long term greedy. So thank you so much for bringing that up. And then secondly, get your money working for you. I also love the fact that you Mention this point, I'm getting an owner occupied key lock on my owner occupied property that I live in at two and a quarter percent. What better way to get your money working for you then appreciating in a California market and being able to take advantage of that owner occupant financing for the purchase and then owner occupied HELOCs. Amazing, amazing money again, really great point. Thank you for bringing that up for in support of owner occupant property first before investment property.

And then you mentioned taking your money further. What better way to utilize your money than using an FHA owner occupied financing loan where you only have to put down a much smaller percentage and 20% 20%. And on it so happier to 25% get out of town. If I can put down between two and a half to 5% on a primary residence, get into something get rid of paying rent, start building appreciation, building equity, getting HELOCs, getting owner occupant financing. It's just an all day when win win win you look at the math, so I would say you know thank you so much for proving my point, that owner occupant is the way to go.

Tom:

Yeah, yeah, yeah. All right Emil, come in here.

Emil:

Ding ding ding Guys, get back to your corners. That's what I'm talking about. That's how we throw some haymakers bring some emotion, leave it all in the ring, guys. Well done. My comments here you guys on the second round, basically got through some of the stuff I had written down, FHA loan was being the big one on the primary just to be able to get in with 5%. Down, I think the to step back from our debate here and talk about our own personal situations, all three of us, I think, bought a rental property before we bought a primary. I think just depending on where you live, it just makes more sense to do one or the other us being in expensive cities, looking elsewhere, buying a rental property, I think made sense. But I don't think there's anything wrong with buying a primary if you can afford it just like the Hilo cash out that you mentioned, Michael, especially if you're an appreciating market, and you use like an FHA loan to get in for 5%. And then your home appreciates a bunch. Like that is an awesome way, if you don't have a ton of cash up front to get into something stop paying, you know, quote, unquote wasting rent, you know, build some equity, and then in a couple years, if the market is good, you can actually pull some cash out and then go buy rental properties with it. But you know, I think there's something to be said about us all buying rental properties before we bought a primary. And the big one that stood out to me was you're using you know, if you think about it, the cash flow from your rental properties can go towards paying your own mortgage on your primary, right, you can use it to pay your mortgage, you can use it to just grow your portfolio, whatever it is. Yeah, I think solid points on on both sides.

Tom:

Yeah, I mean, I bought a rental before my primary. And I would do it again. And again, there's a great article on the New York times.com slash interactive slash 2014 slash up slots hash by slash rent slash calculator. If you just type buy or rent calculator, New York Times, it's a really cool calculator that they have that evaluates like, oh, should you buy or rent, basically, and it's very situational from person to person on where they live, it got to the point where me where I was just getting jammed at this apartment in the East Bay, just outside of San Francisco, where my rent was very close to what my mortgage would be. And you know, there was an initial kind of nut to pay with the downpayment. But after that, it was actually cheaper on a monthly basis to pay my mortgage versus my what the rent had gotten to and it wasn't like that when I first went in there was just as crazy increases in rent year after year.

So it just at that point is like, okay, you know, bite the bullet, I suppose that that was like super hardcore and discipline, I would just continue to rent and just continue to use that down payment and using my house on other rental properties. But there is something to be said, of, you know, having a place to live that your own that you can do fun projects on is is fun, it may not be the most long term greedy thing to do if you're really bullish on on building your investment. And this is a decision that you know, I have now like pretty regularly like, Oh, do I want to do some remodeling on the kitchen? Or do I want to add a couple of roofs or do something like that it's it's honestly kind of hard and making that decision. I mean, it's a very blessed to be able to have like decisions like that to be made, but it's kind of a constant pull and tug, tug and pull, push and pull, you know, how much am I spending on building this these rental folio, which I love and is really fun and has major long term benefits versus these current times doing projects on the house or whatnot. So it's a kind of a push and pull for me kind of related to this conversation of ongoing stuff, you know, that you want to do on your own house. So for my 10 cents it's different for everybody's situation,

Emil:

You guys view the primary as a hotly debated is your primary and investment?

Tom:

No.

Michael:

I would say pretty confidently for me that it's not I kind of I use Kiyosaki Rich Dad Poor Dad definition of asset versus liability, who puts money in your pocket, it's an asset. If it takes money out of your pocket. It's a liability. No point in getting any more complicated than that. Every month I pay money to live in this home. It's a liability. Every month I get money in my pocket from my cash flowing investment. It's an asset so you could expand that absolutely and say well Yeah, if I sold it down the road and I made money on the sale, well, maybe it would be an asset, but on a kind of snapshot month by month basis, it cost me money. So it's a liability.

Tom:

I like that. I mean, I would take Yeah, whatever the kind of harshest stances, you know, it's, yeah.

Emil:

I wanted to rent for a long time until my wife was pregnant. And we were both just like, to me buying a home is a emotional decision. And you do it because you want to not because you think it's gonna be this amazing investment. Hopefully, it turns out that way, but I try not to treat it as such. So yeah, for us, it was just like, the timing was right, we were in the place in our lives where we wanted to do it and and did it for nothing, besides wanting it not looking at it as an investment.

Tom:

Yes, pretty funny. the buying process of like owner occupied versus buying a rental where I feel like a rental, like I'm extremely disciplined, like, I have my performance, my max bid and all this stuff. And like now I'm out, get out of here, versus like when you get it home, and it's like,

Emil:

It's so emotional

Tom:

Wife and baby look at it like, oh, that's the one that's the right one.

Michael:

I took a semi different approach when we bought our primary. And so we were looking down in the Central Coast and everything became way more expensive than we anticipate. And I had a really tight budget just because I knew how much I wanted to pay on a monthly basis based on how much the rentals are bringing in. And so I thought, Okay, this is what we can afford. So we actually ended up buying a condo down here. And we analyze it as an investment because we knew if we were to move out, or when we were to move out. And when we started having kids that we were gonna turn it into an investment. So it totally makes sense as an investment property and cash flows as an investment property, which is super exciting.

But something else to be thinking about as you're looking at buying primary residences is the maintenance and exteriors additional stuff that just comes with owning a property when you're living in it versus being a rental and Tom, we were kind of talking about that in the showdown is Yeah, you're gonna have expenses that pop up that you're able to control a little bit less on your rentals and your primary. But if it's your primary, you're probably going to take a higher degree of like, you just want things looking a lot better, I would say in your primary because you're living there versus a rental. So there's a lot more pride of ownership, as they say. And so I find that people often dump a lot more money into their primary than they would into a rental of similar caliber.

And so with a condo is just kind of nice, I don't worry about exterior maintenance, roof, paint, any of that stuff, all I have to take care of is the inside of my place. And and it's good. So from a maintenance standpoint and a cost standpoint, aside from the HOA, I mean, the condo can be a decent way to go. So I would employ everybody to kind of think about that. And then also evaluate it as a rental for if you ever plan on converting it into one or at least that at that point, you have the option two if you'd like as opposed to being saddled with this huge mortgage payment that would never make sense as a rental. Now you're stuck.

Emil:

You don't pay to fix your roof on a condo?

Michael:

Every Hoa is a little bit different. But the condo pays in my particular case, they pay my water sewer trash, they pay all the exterior maintenance, which includes paint, landscaping, and roof and then just maintenance in the association itself. The Hoa the fee is way too high for what we're getting, because we don't have any real amenities. But my homeowners insurance is a little bit less. I don't have to worry about any of that stuff. So we just had our roof redone, like last week. And we didn't come out of pocket for that. Yep, it's nuts. It's nuts. But something to think about and consider as an option, because I didn't for a long time, but it's just especially in older homes. First time homebuyers are looking to get into you know, if there's a lot there, I think there's just a lot more than meets the eye. So make sure you go into it kind of eyes wide open.

Tom:

So Michael, are you aware of your condo if they have Hoa rules about renters if you were to move out and to rent that place out?

Michael:

Oh, yeah, we checked the CC&RS way before we purchased this thing, and they don't, which is the important thing. So they don't have any rental restrictions.

Tom:

Good, good, good.

Michael:

Well, okay, I think that like they have rental restrictions for short term rentals. So there has to be 30 days or longer. So when we Airbnb at our place, we had to have a 30 day minimum stay, which because we're doing this during COVID times that worked out just fine.

Emil:

Cool, nice job guys any other parting wisdom before we clock out of this episode.

Michael:

I would just say to everybody who's kind of on the fence considering between the two, just look at the numbers, like Tom was saying at the beginning of the episode and see what makes the most sense. But also understand that there's an opportunity cost it to whatever decision you make. So if you buy an investment property before you buy your primary, just look and understand how long it's going to take you to save up your down payment before your next either investment property or to your next primary. And conversely if you're going to go buy your primary before your investment property, go look and understand how long it's going to take you to save up for your down payment for that next investment property or for the first investment property for buying your primary first and understand that there's a cost and benefit to doing one versus the other. And I don't think there's one right or wrong universal for us. It seemed to be investment properties first owner occupant you know, primary residence after the fact but everybody's coming at it from a different place. So talk with whoever's in your life

Tom:

Love it just to reword it, you know, have a plan that everyone's situation is unique. But just kind of map out short term, long term, midterm middle term, middle term. Yeah.

Emil:

Did you guys actually plan that far ahead? Like for me, I kind of just like, let me get some rental properties. And then we'll kind of figure it out as you go along. Like, do you guys find that like, mid to long term planning is a helpful? And B, do you even stick to it? Like, do things just change so much in the journey that it's like, it's almost not even worth it,

Tom:

I enjoy the exercise of putting it down to paper, and then modifying it everybody's functions differently. But I think doing it at some sort of a high level, there's value to that, in that there's more of a Northstar. And like we talked before, with like Academy, you know, write it in pencil, have an idea doesn't need to be in pen or in stone. But in sort of providing yourself sort of a Northstar. There's a lot of value to that. And in the way that you're kind of managing the day to day to have that.

Michael:

I totally agree. I mean, for me, when I first started investing, I was just flailing around. And not having a plan makes it so easy to flail, but I was also single, I wasn't married. And so none of that was even part of the picture. I was just go go, go, go go. And then after the fact is like, Oh, I guess I should consider buying a primary, I guess that makes sense to do now, now that I'm getting married. So I think, again, if you have the resources, like the educational resource that goes into this podcast, you can just evaluate where you currently are, and then also talk to other people who have done it before you I didn't have that luxury. When I first started investing, I was kind of figuring it out. My dad now we're kind of figuring it out for ourselves. So didn't have many other people to lean on to talk to you about what that planning might look like or even how to strategize.

Emil:

Thank you everybody for tuning in to another episode of the real estate investor. I hope you guys enjoyed this one. If you do, we always like to ask that you leave us review. Let us know your thinking of the show. And if you do sometimes we'd like to just pick people at random and send them some cool stuff, like we've done on previous episodes. So wherever you listen your podcasts, leave us a rating and review we'd love that and we might pick you to get some cool swag. Alright guys, check out the next one. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

In this episode Tom and Michael go head to head yet again with a hot debate on what is best; buying your primary or an investment property first. 

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Transcript

Emil:

Hey everybody welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co hosts,

Tom:

Tom Schneider.

Michael:

and Michael Albaum.

Emil:

And on today's episode, we're gonn a be doing another showdown of the century talking about buying your first rental property before you have your primary residence or buying your primary residence before you buy a rental property. So Tom and Michael are going to be going head to head and I'm going to be officiating this one. So let's take out the gloves and start the show down.

Michael:

Tom, did you drink your um cheat juice this morning? aka coffee?

Tom:

I did I did. We were talking about this yesterday. The espresso nap.

Michael:

Oh boy. So did you espresso nap before we record this?

Tom:

I did an espresso sleep. I what I did is like, I put the espresso in time release capsules. So I could you know start my sleep early. And then it dissolved at around you know four o'clock I got a solid 45 minutes asleep. I just watched elf pretty recently so I got a solid 45 minutes of sleep eating the the four main food groups. There's sugar bear,

Michael:

candy corn, candy canes,

Emil:

Maple syrup. Is it the last one? Yeah, we've all watched elf way too many times. Clearly.

Tom:

There's like, within movies, there's like funny quotes that just like stick with you that are like not like super obvious. Yeah, my favorite elf quote is when elf is offering the spaghetti to like, what's his face? The dad and the dad's like, he's like, Oh, yeah, of course. Of course. We don't want that. Yes. My wife has an inside joke. Like when someone says like, No, I don't want that to go. Oh, yeah, of course. Of course.

Michael:

That's really good. That's really good. All right, enough of the friendly gestures, the friendly pleasantries. Let's get down to it. Tom.

Emil:

Why don’t you guys get your corners here.

Michael:

Weighing in at 150 pounds!

Emil:

All right. So, Tom, Which side are you taking? To start this round off,

Tom

I'm gonna start with the buying the house that you live in for

Michael:

Easy one, 1st round knockout.

Emil:

Alright, so Tom, you'll start this round, Michael gets the rebuttal and you get the final word. All right, I want you guys to meet in the middle touch gloves and fight.

Tom:

Okay, so within this battle, the reason that you should buy your house first, before you buy a rental property is a simple question of math, that's going to be my number one argument. And it's a simple number of math because you need to think about your investing in your life holistically. So there's money in money out when you are buying a house that you are going to be living in not only are you getting on the old appreciation train of buying a house that you're living in, but you are drastically decreasing your costs. So when you buy a house that you are going to be living in good news, you're not paying rent anymore, you're paying a mortgage. So those that fun that you're using to pay that mortgage, you would still need to be paying rent if you were to buy an investment property elsewhere.

So, huge difference that is a Crossing the Chasm if you will of no longer paying rent number two which is I think more straightforward is you are learning the ropes if you want to get into specifically remote investing, what better way to learn the mechanics of a transaction and lending and all that stuff by boots on the floor doing the transaction where you are going to be living? Right makes sense. So learning the that transaction process the financing process and lastly, is we do this investing as a way to you know, get to a point to financial freedom, we do it for ourselves and what better way to do it for yourself then to get into a place that you can call home especially in these times of being you know, in a pandemic you might want to do a house project can you do that if you're renting Nope, can't do that. You could do that but it's not ultimately now yours so pay yourself first you know that's how you buy buying a house that you're going to live in you are paying yourself first smoking mirrors, smoking mirrors, okay. Okay done.

Michael:

Well Tom, those are all really great points. I'm so glad that you brought up so many of them. And I just took kind of your first point I love the fact that you brought up paying a mortgage now instead of paying rent because there is no faster way to be unsure about how much your housing expense is going to be then with paying a mortgage and the utilities and the extra expenses you have with owning a home so if I'm renting a home for 1000 bucks I know month in and month out I'm paying 100 bucks a month the end Bodie Bodie.

Tom:

What!? That is not Bodie. Did you just through my dog under the bus?

Michael:

I through my dog under the bus>

Tom:

You’re dog is named Bodie too?!

Michael:

Yeah.

Tom:

Shut up.

Michael:

I’ve told you so many times?

Emil:

Way to pay attention Tom.

Michael:

but he's squeaking his toy right in the middle of my home run here,

Tom:

Smoking and Mirrors,

Michael:

Smoke and mirrors. That's right. So there is no better way to be uncertain about your monthly housing expense than by owning your own home. So up, we have a leak in the roof, that's $2,000 got to fix that up the stove broke, got to go get a new one that's in there. $600. So when you're renting, you know, month in and month out exactly how much your housing expense is going to run you. And I would argue that as you're saving up to start investing, that's one of the most important things is knowing what your savings rate is. Number two, we also talked so often about how and the investment property world you want your tenants to pay your mortgage? Well, that's true for the investment property that you buy, and then rent out, why can't that also not be true for your primary residence. So go buy an investment property first, and then let your tenants pay your mortgage on your primary. Thirdly, depending on where you live, this might be out of the question for you.

So Bay Area, California, Seattle, New York, the cost of housing is so expensive. And so if you take that down payment for what you would pay in downpayment and go elsewhere, you can potentially buy properties all cash, you could get into numerous investment properties. But I also think that in order to save up for your down payment for your primary, it's going to take a while. And so if you can go invest and build up cash flow, this cash flow train this cash flow snowball, by buying investment properties, first, your tenants will pay your mortgage and your tenants might even pay your down payment on your primary versus going the other way, it's going to take you a long time to save up for your next down payment if you go buy a primary until you can start investing in rental properties. So I love that you brought up appreciation, Tom, because you're absolutely right, go buy investment properties and have those puppies start appreciating all the while you're waiting to go buy your primary residence.

Tom:

Alright, so

we're going to come to an agreement on a point you made is I think house hacking is kind of the splitting the difference of this argument. And what house hacking is, if those are not familiar, that's buying a duplex living in one unit, renting out the other unit good point there,

Michael:

It doesn't even have to be a duplex. It's just something bigger than you need for yourself. So if you're one person, you could go buy a three bed house and rent out the other two bedrooms. You could buy a duplex triplex or quad or rent out the other unit. So it can be a really diverse approach doesn't need to be just a duplex. So just to clarify that.

Tom:

Yep. Like that. So okay, so that to your argument, you're making at me here. So one of them was related to unknown costs. So you're saying, you know, if there's a leak in the roof, great, you're spending money and there's unknown costs on buying your own house? Well, Michael, there's unknown costs are just as likely to occur on your rental property than they as they are on your property. But in fact, I would say you have more control of those unknown costs at your own personal house. So for example, if something say I don't know, some simple plumbing issue or something happens at your personal house, and then also happens at your rental house, you are guaranteed to have to pay pretty much top dollar at that rental property to get that fixed, where at your own house, you know, you kind of make an adventure of it, you know, oh, just cold water? No, it's good for your lymph nodes to get into cold water shower.

But on the rental property, you can't control that you're going to you're going to be paying to fix that. So I'd say those costs measures are you have a little more control of your own house, also on the cost factor. So I rented for a couple years and oh my goodness, did I get jammed on rent every year, I think it went up like 25% year over year, where if you're buying your own house, you're getting fixed costs. Sure, there are some issues that can happen with the plumbing, but then you get a really good health treatment where you get a cold water shower for a little bit as long as you don't want a cold water shower. But those costs are fixed versus if you're renting. And if that landlord wants to jam ya for 25% increase, you're just subject to that you just have to take it so I would say that you know your argument that around costs is you definitely have to pay whether things happening to your rental property and for your own personal house. You can make some cheap decisions around health and financial well being of accepting culture. Yeah, I think that's a I'm going to end on the cold shower.

Micheal:

Emil weigh in man, please.

Emil:

All right, there's a little bit of thunder left you know a little bit of juice to squeeze out of these two topics. I don't want to steal your guys's thunder and call everything you know what I mean. Yeah, just wait till the end.

Michael:

All right. Yes. All right.

Emil:

All right, guys. That was a very fierce round, a little bit less fierce than I've seen you guys in the past like sometimes I see you guys just just going straight for the jugular this time, you know, a little more civil.

Michael:

It’s the holidays, you know, you got to be

Tom:

I started the day with a cold shower. My endocrine system is doing awesome. You guys.

Emil:

Alright, well now that we're switching So Tom, you are taking buying your rental before you buy your primary but we'll let Michael go first. With buying a primary I want you guys to bring a little bit more fight. All right, like throw the haymakers Let's go guys give the people what they want. I'm raising my standard. Yeah, there you go, Tom stand up. It's game over. Let's go. All right. All right, Michael, when you're ready?

Michael:

Yeah. So it's kind of a no brainer you got to take care of number one first and that's you as an individual get your housing squared away first and foremost before even thinking about going in investing. I mean if you're gonna have your rent payment jacked up like Tom mentioned previously, how could you possibly be forecasting for the future with saving for future investment. So take care number one, get it locked up, get it squared away, first and foremost. Secondly, there is no better financing than owner occupant financing. So go buy a primary residence, let the appreciation train work its magic. And in a couple of years, you can either move out of that primary residence and convert it into a rental thereby creating a rental with owner occupant financing, or do a cash out refi or get a HELOC on that property. Again, with owner occupant financing and use that money to go start investing down the road, it becomes so much easier and so much cheaper when you have owner occupant cash to compete against peer investors for bidding on properties. So it's a no brainer. In my opinion, go buy your primary First, get it locked, ready in an appreciating market. And watch what happens. It'll blow your mind.

Tom:

Mike, you ready to take it?

Michael:

Let's just do it. I would love to see what you're going to try to drum up here.

Tom:

All right, Michael, it's time to September some real talk. Michael, I think you need to be long term greedy. You know, I think the short term greedy thing for you to do is Oh, I'd like a house the women that I own right now and to go buy a house, you know, and that might be great for current Michael. But future Michael is going to be so much better off for so many reasons of deploying the capital in building his real estate Empire, you have plenty of time to buy a house. In fact, you're going to be able to buy a better house in the future by making these smart, prudent, long term greedy decisions now of buying, you know, buying rental properties right now. And one of the reasons why it makes a lot of sense is your money can go so much further if you were to buy rental property, especially remotely. So where you're living at now, Michael, you weren't what you would be paying to buy a house, you could buy like three houses three rental properties, think of all that cash flow you can have your money just goes so much further versus in the market that you're living right now versus if you were to go and invest in one of these remote markets. So be long term greedy.

The other really value of this is being a person Michael, who likes to travel and stuff. You don't have to weigh yourself down with some house, you can deploy this capital, get it working for you, if you have it just sitting at your own house. It's not working. It's being slothful, you want to get this working for you invested, get it running. So you can go do some fun things. Oh, you want to go ride a motorcycle up and down Chile? Great. You can go do that. If you want to go to Spain, great. You could do that. It's out working so you can go be playing, right? So get your money working. Be young, be awesome. Go do fun stuff. And do that.

So my next little bit, I'm going to just put on my economist cap. I'm going to mess the countries up. But this is that I'm specifically talking about but I'm it's going to be directionally right. So within Europe, there's this inverse relationship between unemployment and homeownership. It's true. So countries like, again, I might nest the specific countries, but countries like the pigs countries like the Spain, Portugal, they have very high ownership, but also very high unemployment, versus certain Scandinavian countries like the Norway and Sweden, they have relatively low homeownership, but very high employment. And the reason for this insert inverse relationship is by not owning your home that you're living in, it gives you a lot more flexibility to move around to wherever the jobs are at.

So when you're done riding your motorcycle in Chile, you can go to wherever the jobs have, it gives you flexibility, but you know that key investment in housing, you're able to still participate and all that upside by deploying that capital in a good market that you can be remote investing. So in closing, you want to be long term greedy Michael, don't be shorted short term greedy, buy your house now and get your money working for you. Number two, take your money further, you're able to do a lot more by deploying it in investment properties. And number three, look at the European model be a Scandinavian country not a one of the pigs country that Portugal, Spain, I forgot the other ones, but be one of those ones where it's a high employment, you know, riding a motorcycle in Chile. Go ahead.

Michael:

Tom, I really love and appreciate those points you brought up first and foremost being long term greedy, I couldn't be more excited that the fact that you brought that up because what could be more long term greedy than living in a property for two out of five years and getting a capital gains exemption when you sell the property of 250,000 as an individual or 500,000, as a married couple. It totally personifies long term greedy. So thank you so much for bringing that up. And then secondly, get your money working for you. I also love the fact that you Mention this point, I'm getting an owner occupied key lock on my owner occupied property that I live in at two and a quarter percent. What better way to get your money working for you then appreciating in a California market and being able to take advantage of that owner occupant financing for the purchase and then owner occupied HELOCs. Amazing, amazing money again, really great point. Thank you for bringing that up for in support of owner occupant property first before investment property.

And then you mentioned taking your money further. What better way to utilize your money than using an FHA owner occupied financing loan where you only have to put down a much smaller percentage and 20% 20%. And on it so happier to 25% get out of town. If I can put down between two and a half to 5% on a primary residence, get into something get rid of paying rent, start building appreciation, building equity, getting HELOCs, getting owner occupant financing. It's just an all day when win win win you look at the math, so I would say you know thank you so much for proving my point, that owner occupant is the way to go.

Tom:

Yeah, yeah, yeah. All right Emil, come in here.

Emil:

Ding ding ding Guys, get back to your corners. That's what I'm talking about. That's how we throw some haymakers bring some emotion, leave it all in the ring, guys. Well done. My comments here you guys on the second round, basically got through some of the stuff I had written down, FHA loan was being the big one on the primary just to be able to get in with 5%. Down, I think the to step back from our debate here and talk about our own personal situations, all three of us, I think, bought a rental property before we bought a primary. I think just depending on where you live, it just makes more sense to do one or the other us being in expensive cities, looking elsewhere, buying a rental property, I think made sense. But I don't think there's anything wrong with buying a primary if you can afford it just like the Hilo cash out that you mentioned, Michael, especially if you're an appreciating market, and you use like an FHA loan to get in for 5%. And then your home appreciates a bunch. Like that is an awesome way, if you don't have a ton of cash up front to get into something stop paying, you know, quote, unquote wasting rent, you know, build some equity, and then in a couple years, if the market is good, you can actually pull some cash out and then go buy rental properties with it. But you know, I think there's something to be said about us all buying rental properties before we bought a primary. And the big one that stood out to me was you're using you know, if you think about it, the cash flow from your rental properties can go towards paying your own mortgage on your primary, right, you can use it to pay your mortgage, you can use it to just grow your portfolio, whatever it is. Yeah, I think solid points on on both sides.

Tom:

Yeah, I mean, I bought a rental before my primary. And I would do it again. And again, there's a great article on the New York times.com slash interactive slash 2014 slash up slots hash by slash rent slash calculator. If you just type buy or rent calculator, New York Times, it's a really cool calculator that they have that evaluates like, oh, should you buy or rent, basically, and it's very situational from person to person on where they live, it got to the point where me where I was just getting jammed at this apartment in the East Bay, just outside of San Francisco, where my rent was very close to what my mortgage would be. And you know, there was an initial kind of nut to pay with the downpayment. But after that, it was actually cheaper on a monthly basis to pay my mortgage versus my what the rent had gotten to and it wasn't like that when I first went in there was just as crazy increases in rent year after year.

So it just at that point is like, okay, you know, bite the bullet, I suppose that that was like super hardcore and discipline, I would just continue to rent and just continue to use that down payment and using my house on other rental properties. But there is something to be said, of, you know, having a place to live that your own that you can do fun projects on is is fun, it may not be the most long term greedy thing to do if you're really bullish on on building your investment. And this is a decision that you know, I have now like pretty regularly like, Oh, do I want to do some remodeling on the kitchen? Or do I want to add a couple of roofs or do something like that it's it's honestly kind of hard and making that decision. I mean, it's a very blessed to be able to have like decisions like that to be made, but it's kind of a constant pull and tug, tug and pull, push and pull, you know, how much am I spending on building this these rental folio, which I love and is really fun and has major long term benefits versus these current times doing projects on the house or whatnot. So it's a kind of a push and pull for me kind of related to this conversation of ongoing stuff, you know, that you want to do on your own house. So for my 10 cents it's different for everybody's situation,

Emil:

You guys view the primary as a hotly debated is your primary and investment?

Tom:

No.

Michael:

I would say pretty confidently for me that it's not I kind of I use Kiyosaki Rich Dad Poor Dad definition of asset versus liability, who puts money in your pocket, it's an asset. If it takes money out of your pocket. It's a liability. No point in getting any more complicated than that. Every month I pay money to live in this home. It's a liability. Every month I get money in my pocket from my cash flowing investment. It's an asset so you could expand that absolutely and say well Yeah, if I sold it down the road and I made money on the sale, well, maybe it would be an asset, but on a kind of snapshot month by month basis, it cost me money. So it's a liability.

Tom:

I like that. I mean, I would take Yeah, whatever the kind of harshest stances, you know, it's, yeah.

Emil:

I wanted to rent for a long time until my wife was pregnant. And we were both just like, to me buying a home is a emotional decision. And you do it because you want to not because you think it's gonna be this amazing investment. Hopefully, it turns out that way, but I try not to treat it as such. So yeah, for us, it was just like, the timing was right, we were in the place in our lives where we wanted to do it and and did it for nothing, besides wanting it not looking at it as an investment.

Tom:

Yes, pretty funny. the buying process of like owner occupied versus buying a rental where I feel like a rental, like I'm extremely disciplined, like, I have my performance, my max bid and all this stuff. And like now I'm out, get out of here, versus like when you get it home, and it's like,

Emil:

It's so emotional

Tom:

Wife and baby look at it like, oh, that's the one that's the right one.

Michael:

I took a semi different approach when we bought our primary. And so we were looking down in the Central Coast and everything became way more expensive than we anticipate. And I had a really tight budget just because I knew how much I wanted to pay on a monthly basis based on how much the rentals are bringing in. And so I thought, Okay, this is what we can afford. So we actually ended up buying a condo down here. And we analyze it as an investment because we knew if we were to move out, or when we were to move out. And when we started having kids that we were gonna turn it into an investment. So it totally makes sense as an investment property and cash flows as an investment property, which is super exciting.

But something else to be thinking about as you're looking at buying primary residences is the maintenance and exteriors additional stuff that just comes with owning a property when you're living in it versus being a rental and Tom, we were kind of talking about that in the showdown is Yeah, you're gonna have expenses that pop up that you're able to control a little bit less on your rentals and your primary. But if it's your primary, you're probably going to take a higher degree of like, you just want things looking a lot better, I would say in your primary because you're living there versus a rental. So there's a lot more pride of ownership, as they say. And so I find that people often dump a lot more money into their primary than they would into a rental of similar caliber.

And so with a condo is just kind of nice, I don't worry about exterior maintenance, roof, paint, any of that stuff, all I have to take care of is the inside of my place. And and it's good. So from a maintenance standpoint and a cost standpoint, aside from the HOA, I mean, the condo can be a decent way to go. So I would employ everybody to kind of think about that. And then also evaluate it as a rental for if you ever plan on converting it into one or at least that at that point, you have the option two if you'd like as opposed to being saddled with this huge mortgage payment that would never make sense as a rental. Now you're stuck.

Emil:

You don't pay to fix your roof on a condo?

Michael:

Every Hoa is a little bit different. But the condo pays in my particular case, they pay my water sewer trash, they pay all the exterior maintenance, which includes paint, landscaping, and roof and then just maintenance in the association itself. The Hoa the fee is way too high for what we're getting, because we don't have any real amenities. But my homeowners insurance is a little bit less. I don't have to worry about any of that stuff. So we just had our roof redone, like last week. And we didn't come out of pocket for that. Yep, it's nuts. It's nuts. But something to think about and consider as an option, because I didn't for a long time, but it's just especially in older homes. First time homebuyers are looking to get into you know, if there's a lot there, I think there's just a lot more than meets the eye. So make sure you go into it kind of eyes wide open.

Tom:

So Michael, are you aware of your condo if they have Hoa rules about renters if you were to move out and to rent that place out?

Michael:

Oh, yeah, we checked the CC&RS way before we purchased this thing, and they don't, which is the important thing. So they don't have any rental restrictions.

Tom:

Good, good, good.

Michael:

Well, okay, I think that like they have rental restrictions for short term rentals. So there has to be 30 days or longer. So when we Airbnb at our place, we had to have a 30 day minimum stay, which because we're doing this during COVID times that worked out just fine.

Emil:

Cool, nice job guys any other parting wisdom before we clock out of this episode.

Michael:

I would just say to everybody who's kind of on the fence considering between the two, just look at the numbers, like Tom was saying at the beginning of the episode and see what makes the most sense. But also understand that there's an opportunity cost it to whatever decision you make. So if you buy an investment property before you buy your primary, just look and understand how long it's going to take you to save up your down payment before your next either investment property or to your next primary. And conversely if you're going to go buy your primary before your investment property, go look and understand how long it's going to take you to save up for your down payment for that next investment property or for the first investment property for buying your primary first and understand that there's a cost and benefit to doing one versus the other. And I don't think there's one right or wrong universal for us. It seemed to be investment properties first owner occupant you know, primary residence after the fact but everybody's coming at it from a different place. So talk with whoever's in your life

Tom:

Love it just to reword it, you know, have a plan that everyone's situation is unique. But just kind of map out short term, long term, midterm middle term, middle term. Yeah.

Emil:

Did you guys actually plan that far ahead? Like for me, I kind of just like, let me get some rental properties. And then we'll kind of figure it out as you go along. Like, do you guys find that like, mid to long term planning is a helpful? And B, do you even stick to it? Like, do things just change so much in the journey that it's like, it's almost not even worth it,

Tom:

I enjoy the exercise of putting it down to paper, and then modifying it everybody's functions differently. But I think doing it at some sort of a high level, there's value to that, in that there's more of a Northstar. And like we talked before, with like Academy, you know, write it in pencil, have an idea doesn't need to be in pen or in stone. But in sort of providing yourself sort of a Northstar. There's a lot of value to that. And in the way that you're kind of managing the day to day to have that.

Michael:

I totally agree. I mean, for me, when I first started investing, I was just flailing around. And not having a plan makes it so easy to flail, but I was also single, I wasn't married. And so none of that was even part of the picture. I was just go go, go, go go. And then after the fact is like, Oh, I guess I should consider buying a primary, I guess that makes sense to do now, now that I'm getting married. So I think, again, if you have the resources, like the educational resource that goes into this podcast, you can just evaluate where you currently are, and then also talk to other people who have done it before you I didn't have that luxury. When I first started investing, I was kind of figuring it out. My dad now we're kind of figuring it out for ourselves. So didn't have many other people to lean on to talk to you about what that planning might look like or even how to strategize.

Emil:

Thank you everybody for tuning in to another episode of the real estate investor. I hope you guys enjoyed this one. If you do, we always like to ask that you leave us review. Let us know your thinking of the show. And if you do sometimes we'd like to just pick people at random and send them some cool stuff, like we've done on previous episodes. So wherever you listen your podcasts, leave us a rating and review we'd love that and we might pick you to get some cool swag. Alright guys, check out the next one. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

In this short episode Tom and Michael cover an important issue you need to consider if you recently transferred funds into your account for a down payment. 

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Transcript

Tom:

Greetings, and welcome to the remote real estate investor. Today we're going to talk about financing, specifically eligibility of funds to be used for your down payment and be held in reserve.

Alright, let's do it. Michael, why don't you lead us on this little riff of today's weekend wisdom?

Michael:

Yeah. So it's, I think, a really important topic to touch on, because I think it catches a lot of people by surprise. And really what it is, is is called seasoning the funds. And that's not like seasoning your cast iron skillet or seasoning your food. It's, it's having the funds available in the account for long enough to satisfy the lender, such so that they understand that those are your funds. So I'll give you an example of this. I had a lender Tell me, Michael, your down payment needs to be in your account three months in advance of the loan funding. So there was a small inheritance that I received when a family member passed. And so that came in, and that's kind of what made me decide to buy this property that I was going to and the lender was like, Whoa, what's this big check deposit here, you can't use that as part of your down payment. And so I had to write a letter of explanation and explain what's going on and show them a death certificate and all this kind of poop law stuff. But so just be aware of that.

For a lot of lenders, I don't know if three months is like the Fannie Freddie conventional loan minimum requirement or the standard that set but that's what it was, for me with this particular lender was I had to have the funds for the entire down payment in the account sitting there three months prior to funding. And so if you're going to be using a keylock or some other form of funds that aren't in your account, right now, just you want to talk to a lender about how long you need to have the funds sitting there. And I don't know how it would work with like, a sale of stock portfolio or that kind of stuff, I think, because they look at all that when they underwrite. So my guess is that they would be okay. And I think what they told me in the past was, we need to see the amount going from your stock portfolio to your bank account. And you need to show us like the bill of sale, essentially, from the stock portfolio. And that number needs to match up exactly, so that I can prove that the money came from my own stocks and went to my own bank account.

Tom:

Yeah, that's a great rule of thumb, I think 90 days, and you'd be surprised how unique each bank and each lender is on these types of requirements, taken out many different loans, it seems like each one had their own kind of unique flavor on that amount of time. But I'd use that as a good baseline as if you know, you have funds that are you going to be used to be buying with debt is to get them in place, you know, a few months in advance of when you do the purchase just so when it comes with financing, it's no questions and smooth process.

Michael:

Yeah. And I think to just I would also ask the question in advance of like what you need to do, because, for me, in my instance, I was selling stock in order to buy a property. And if the property purchased didn't end up happening, or I was still kind of on the fence about it, I would have been pretty bummed that I had sold those stocks. So you want to make sure if you're going to be moving funds from one form of investment vehicle to another that causes a transaction or a taxable event or what have you. You just want to be very well aware and pretty committed to that because you have a taxable event and you sell stock and you're like crap, I'm not gonna buy the house anyhow, that's that can often be a bummer.

Tom:

Yeah, for sure. I know some banks will count stocks at some discount if they're still like being held as an equity and usually that would be not for the down payment, but for later reserves. So something to consider for your reserves, raising retirement accounts.

Michael:

Totally.

Tom:

Yeah, so this is a short episode, but our rule of thumb and advice for funds in your bank for lending is 90 days, but at the end of the day, it's really up to your lender. So I would recommend talking to your lender talking to multiple lenders doing that interview process early and asking them specifically that questions of seasoning funds in the bank so you make sure that you're right for them. All right, Michael any final touches

Michael:

Nah, I think we pretty well covered it. Season hard and season fast.

Tom:

Season season. Happy investing.

Michael:

Happy investing.

In this short episode Tom and Michael cover an important issue you need to consider if you recently transferred funds into your account for a down payment. 

----

Transcript

Tom:

Greetings, and welcome to the remote real estate investor. Today we're going to talk about financing, specifically eligibility of funds to be used for your down payment and be held in reserve.

Alright, let's do it. Michael, why don't you lead us on this little riff of today's weekend wisdom?

Michael:

Yeah. So it's, I think, a really important topic to touch on, because I think it catches a lot of people by surprise. And really what it is, is is called seasoning the funds. And that's not like seasoning your cast iron skillet or seasoning your food. It's, it's having the funds available in the account for long enough to satisfy the lender, such so that they understand that those are your funds. So I'll give you an example of this. I had a lender Tell me, Michael, your down payment needs to be in your account three months in advance of the loan funding. So there was a small inheritance that I received when a family member passed. And so that came in, and that's kind of what made me decide to buy this property that I was going to and the lender was like, Whoa, what's this big check deposit here, you can't use that as part of your down payment. And so I had to write a letter of explanation and explain what's going on and show them a death certificate and all this kind of poop law stuff. But so just be aware of that.

For a lot of lenders, I don't know if three months is like the Fannie Freddie conventional loan minimum requirement or the standard that set but that's what it was, for me with this particular lender was I had to have the funds for the entire down payment in the account sitting there three months prior to funding. And so if you're going to be using a keylock or some other form of funds that aren't in your account, right now, just you want to talk to a lender about how long you need to have the funds sitting there. And I don't know how it would work with like, a sale of stock portfolio or that kind of stuff, I think, because they look at all that when they underwrite. So my guess is that they would be okay. And I think what they told me in the past was, we need to see the amount going from your stock portfolio to your bank account. And you need to show us like the bill of sale, essentially, from the stock portfolio. And that number needs to match up exactly, so that I can prove that the money came from my own stocks and went to my own bank account.

Tom:

Yeah, that's a great rule of thumb, I think 90 days, and you'd be surprised how unique each bank and each lender is on these types of requirements, taken out many different loans, it seems like each one had their own kind of unique flavor on that amount of time. But I'd use that as a good baseline as if you know, you have funds that are you going to be used to be buying with debt is to get them in place, you know, a few months in advance of when you do the purchase just so when it comes with financing, it's no questions and smooth process.

Michael:

Yeah. And I think to just I would also ask the question in advance of like what you need to do, because, for me, in my instance, I was selling stock in order to buy a property. And if the property purchased didn't end up happening, or I was still kind of on the fence about it, I would have been pretty bummed that I had sold those stocks. So you want to make sure if you're going to be moving funds from one form of investment vehicle to another that causes a transaction or a taxable event or what have you. You just want to be very well aware and pretty committed to that because you have a taxable event and you sell stock and you're like crap, I'm not gonna buy the house anyhow, that's that can often be a bummer.

Tom:

Yeah, for sure. I know some banks will count stocks at some discount if they're still like being held as an equity and usually that would be not for the down payment, but for later reserves. So something to consider for your reserves, raising retirement accounts.

Michael:

Totally.

Tom:

Yeah, so this is a short episode, but our rule of thumb and advice for funds in your bank for lending is 90 days, but at the end of the day, it's really up to your lender. So I would recommend talking to your lender talking to multiple lenders doing that interview process early and asking them specifically that questions of seasoning funds in the bank so you make sure that you're right for them. All right, Michael any final touches

Michael:

Nah, I think we pretty well covered it. Season hard and season fast.

Tom:

Season season. Happy investing.

Michael:

Happy investing.

In this episode, our guest Chris Willard tells us about his total returns strategy and how he uses it to fuel the rapid growth stage of his investment career. 

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Transcript

Michael:

Hey, everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum, and I am joined today by my co host, Tom Schneider. And we have a very special guest with us, Chris Willard. And he's going to be talking to us today about total returns and using that to scale his portfolio. So I won't take up any more time. Let's jump into it.

Before we get into it, we want to talk really briefly about a special offer that we have going on for the Roofstock Academy. And for those of you who might not be familiar, Roofstock Academy is your one stop shop education arm of Rootstock. It's comprised of one on one coaching, over 50 hours of on demand lectures, cashback incentives for closing on properties through Roofstock $2500 cash back to be specific, as well as private access into our online forums. So as you go to roofstockacademy.com into the checkout section, use coupon code SANTA2020 for $151 off a registration. Again, that's roofstockacademy.com. And coupon code is SANTA2020.

Tom:

And to make this even more of a no brainer, it is a lifetime satisfaction guarantee. Take the coaching, watch the lectures, if you're not happy, get a full refund. No expiration, you're not gonna find that anywhere else. And on the cashback aspect, if you do the math, right, the discount, taking a 151 off, that's gonna make it $1,098. And you're going to be getting $2500 in return. So you're actually making money with the program. So join risk free today. SANTA2020

Michael:

Awesome. Well, Chris, welcome to the show, man. super happy to have you here. Thanks for taking the time.

Chris:

Thanks, guys. Always fun talking to you both right on.

Michael:

So maybe you could give our listeners for those who are not familiar with your background, your story, a little bit of background on yourself. And then we'll jump into this thing about total return.

Chris:

Yeah, so I've been in real estate for going on about 10 or 12 years, several different capacities, but more recently on the single family rental side of it with Roofstock. I currently, you know, work as the head of sourcing, oversee a lot of our larger portfolio transactions through our platform, but through my life here at Roofstock. And prior at Waypoint with Tom been able to do a lot of investing on my own, which is pretty exciting.

Michael:

Awesome. Awesome. And I know that you kind of invest all over the country, is that right?

Chris:

Yeah, I don't have any specific markets that are interesting to me, deals are interesting to me. So I'm always pretty opportunistic, and happy to go into new markets when I find the right deal.

Michael:

Awesome.

Tom:

Chris, I'm gonna interrupt a little bit. So Chris and I are in a special Roofstock Club. So our CEO at Roofstock. Gary has been on the episode a couple of times, he was formerly the CEO of one of the very first publicly traded single family routes. And both Chris and myself used to work with Gary at this company. And when Gary and Gregor and those guys came up with the idea of Roofstock as a company, we shortly thereafter joined Gary on this adventure. So Chris, why don't you just talk real quickly about all the different stuff you did at that single family read as well. I think it'll give good context experience.

Chris:

Yeah, so at way point, and even prior to waypoint I was underwriting hundreds of homes a day, we were buying off the courthouse steps back in, oh, nine 2010, you know, when right at the downturn of the market, when everything was when the world was falling off, I had the opportunity to join the waypoint team. And as 2011 or so down in Southern California, we started growing the region, buying hundreds of homes quickly grew that over a couple years to several 1000 homes and really manage kind of all facets of acquisitions, they're all the way through from acquisitions to lease up, we obviously manage the properties there. And then kind of towards the tail end of my tenure there really oversaw a lot of the disposition efforts, so got involved with selling homes. And you know, Tom, to kind of your point, it's really funny, because, you know, when we started selling homes at waypoint, we did it like everyone else, you know, we vacated you know, move the tenant out, put the home on the MLS, we incurred all the fix up costs, the vacancy, the leakage, you know, and then we realized that about 30% of the time, or more than that investors were buying the homes and putting tenants back into them.

And so, you know, then we had the bright idea, well, why don't we just list the home with a tenant in place on the MLS? And, you know, there's just a lot of challenges that agents have to deal with in terms of, you know, not being able to show the homes, you know, the condition of the homes and obviously, there was no platform like Roofstock at that time, you know, I think is when you know, Gary Gregor and, and the others got the light bulb, and obviously, overnight, you know, rootstock was formed. So, you know, pretty exciting, you know, to come up through the industry like that and see all the different facets to where we are today. I think we were bootstrapping things pretty frequently back then. Now we leverage a lot of technology to scale up and grow our business,

Tom:

Both sides of the business I love that how just you know in running that route and trying to sell this realizing the inefficiencies of selling occupied. Alright, I digress. I'll let Michael go ahead and bring us back in.

Michael:

No, it's I mean, it's super interesting background. It's it's super cool to see and hear about it is kind of like this seemingly obvious only in hindsight of like, Well, yeah, duh, it's investments, we're buying it anyhow, why are we taking on all this extra expense and headache to move these people out to have different people just move back in. So…

Tom:

Totally! Leakage. That's a word we use.

Michael:

Got it.

Tom:

Preventing leakage.

Michael:

That's a great word.

Tom:

It's a great word. It’s alright. It's an okay word.

Michael:

Getting back on the rails here. So, Chris, I really want to chat and focus today about total return. And I think this is kind of this word, this concept that might be thrown around a lot that some people might not have a good grasp of, or a hard time defining and pinning down. So can you give us what your definition of a total return actually means?

Chris:

Yeah, I mean, the way I look at it, which might be a little bit different, but you know, it takes that idea of, you've got your cashflow investments, and you've got your appreciation investments, and it's a blend of both Now, now, total return doesn't necessarily mean that you're not going to have steady cash flow. And it doesn't mean that you not might not be able to catch, you know, market and an upswing and take on some appreciation. But you know, you get a little bit of both worlds there. When I try to target you know, investments, when I'm kind of putting my acquisition hat on and looking at acquiring homes, I always look at homes that have maybe have some upside on the rental side of things, maybe also have some upside in the market value of the home. So that's how I kind of look at it and categorize total return is takes a little bit from both the cash flow model as well as the appreciation model.

Michael:

Awesome. And do you factor when looking at acquisitions? Do you factor in like the tax benefits are the loan paid down into like, calculating a total return?

Chris:

My model? I don't necessarily look at the tax advantages of that too much. You know, for me, I'm really focused on what is my cash on cash return, that's where I focus a lot of my energy, I do have a great CPA, and he tells me and kind of writes the ship when, you know, may go down the wrong road from from a tax perspective. But for me, it's really looking at what is my cash flow, because that's going to be kind of my day to day, right? You know, my cash in and my cash out is going to get me from point A to point B, but then where I can capitalize on some of that upside, you know, that's really kind of the unknown, that's where the risk comes in. But that's also where the reward, you know, can be found.

Michael:

Absolutely. And so for those of our listeners who might not be familiar with some of the metrics we're tossing around here, can you define for people? What is cash on cash return? And what is cash flow?

Chris:

Yeah, so cash on cash return is really just comparing or analyzing the cash you put into the investment, whether it's, you know, your down payment, any capital expenditures, repairs, and maintenance, all cash going into the investment verse, you know, the cash that's coming out, really your profit at the end of the day from that investment, oftentimes, that does come from your monthly cash flows, the distributions you get from your your property manager, but also could be, you know, realized, as, you know, potential profit from an upswing in a market and, you know, equity and appreciation.

Michael:

Awesome. Yeah, I always like to make the analogy that your cash on cash return is just a measure of how hard your dollars are working for you.

Chris:

I like that. There you go.

Michael:

Dollars out over dollars in.

Tom:

So thinking about total return, Chris, I'd love having been in the space for you know, both professionally and personally, as your philosophy around what type of returns you're looking for changed much over time from x from beginning of time till now, and I'd love to hear about that evolution of your philosophy on that.

Chris:

Yeah, the short answer is yes. You know, I think when I first started getting into you know, investing, I was fairly focused on what that cap rate what that cash flow look like, made sure I had, you know, high cash flow properties. And what I realized, you know, the, the, the time that we had at Waypoint was very helpful, being able to spend private equity capital rather than my own to, to learn a lot of this and make some mistakes there. But, you know, really, what I learned is that sometimes there's some negative factors with those higher cash flow properties, they're typically going to be older investments, they typically will need you know, more work just given the age, sometimes they can be associated with a lower rent price point in a certain market, which could increase your turnover. Therefore increasing your vacancy costs, increasing your turn times and thus decreasing your cash flow.

So I would say that I probably started on the side of the fence when I started personally investing as a I'm going to be a little bit more cashflow driven to now really, I take a balanced approach. And I think as you probably build your own portfolio, you start to take more of a balanced approach naturally, I do like to invest in heavy cash flow properties, but I make sure that when I do so I'm looking at the major components of that home, what is the age of the roof, the age HVAC, the the water heater, electrical, plumbing systems, those are going to be my big ticket items outside of anything cosmetic, and if I can make sure that from that perspective, the home is bulletproof than I think I've pretty safe from you know, looking and taking the risk on some of those high cash flow properties.

But where I'm starting to and I look over the last, you know, five or six years in my investment strategy I start to see that, okay, the vintages of homes I'm buying today versus I was buying, you know, five, six years ago, are starting to become newer home values are also becoming more expensive. They're safer investments and, and while maybe on the surface, the cash flows or the returns are not as great as those high cash flow properties, high return properties over the long term, if you look at over the span of multiple years, and you consider all those external factors of reducing your vacancy, reducing your turn cost, as we talked about cash in cash out, you know, the more money I can keep to myself, rather than, you know, giving out then honestly, the newer, more expensive homes, the way my investment philosophy is transitioning is panning out to even higher returns.

Tom:

You can say something in a minute, Michael, I was just having a coaching session with a member of our sec Academy. And they were talking about having a hard time finding newer homes that cash flow well, right. Because if you're buying a house for $200,000, it's got to have a pretty reasonably high rent, if you're using debt on the property, and you're servicing that debt to still get a healthy cash flow. Two questions in this I mean, for what you're targeting right now in your portfolio? Like what, what is the relationship between the price and the rent, that you're able to find these newer homes? And if you could talk a little about markets that you're looking at? I think that would be interesting to hear.

Chris:

Yeah, I mean, you obviously hear the 1% rule, you know, quite a bit. And I think it's something in the back of my head I certainly look at but you know, as I've seen the transition across my philosophy of my own personal portfolio, you know, I'm starting to dip well below that, that 1%. You know, I even just recently purchased a home, you know, in South Carolina, where the cash flows weren't great. But I was stepping into quite a bit of equity upside, which was was the play, but the way I was able to mitigate and improve some of that lower cash flow or negative cash flow was I made the conscious decision of, you know, I'm going to manage this myself. So now I'm going to save 10% a month, and that's going to inject cash back into the rental. You know, I think there's other things that you can do by running maybe a competitive process around insurance rates, making sure that you are getting the most competitive rate out there. I often talk with a handful of insurance providers on every home, I purchase and make sure and this is not something I do just on the front end. But this is something I do consistently every every year, every couple years, I'll start looking at different insurance providers and see who has the best straight out there.

Michael:

You said something, Chris, that I just want to circle back and touch on is with the high cash flow properties. If you are in a lower rental tier, you might see the higher turnover cost, which means you have a higher vacancy, and then you might have higher repair and maintenance. So it can often be this kind of Domino ladder effect where one expense has a significant impact on all the others. And I think it's so important to highlight that for folks. I can't tell you how many turnkey provider proformas I've seen. They're like, Oh, we just rehab the property, zero maintenance and zero capex needed. And it's like, yeah, maybe for the first year. But if you're going to own this thing for 2,3,4,5,10 years, like we have to be factoring this stuff in so coming to the table with your eyes wide open, when you're buying some of those properties, I think is hyper hyper important.

Chris:

To that point like really is you're stepping into an investment, you need to understand how long am I expecting to hold this am I is this kind of a buy kind of set it and forget it type mentality where I'm going to have it for 15, 20 years, and it's just going to work itself out or what I've been able to do over the last couple years is I have a mentality of I'm always buying a home that I'm typically going to sell in the next one to two years. And I'm going to buy it in a market that is seeing higher appreciations. And they they have historically, that tells me that there might be a little bit of an upswing, and that way, I've been able to grow my portfolio and roll it I sell one I buy three. So one, I buy four. So one, I buy two, and then before you know it, it's a little bit of a domino effect. But kind of going back to Tom's point, you know, markets. Tom, I think you've centralized around a few markets, right. And I think you've got a few properties in Florida and a few properties in Atlanta, if I'm not mistaken.

Whereas I I've got two properties in Atlanta, I've got to spread out in Florida, but I've got a property in Kansas, you know, I just sold a property in Texas. Now I've got a property in South Carolina, I've owned in California, I've owned in Arizona, I own a couple in Detroit, I'm really all over and it kind of just for me. It's you know, where's the opportunity, you know, I'm less focused on building scale within a certain market. I do like Atlanta. I do like Florida. And when I see deals, I'm always happy to jump on them. But I think there's certain opportunities in other markets as well, that for me, at least my investment philosophy is, you know, I want to be less restricted around markets. I'm happy to work with third party property managers, if and where it makes sense. And most of my properties are, are being managed by a third party property manager, but it really just comes down to the opportunity and your investment style.

Tom:

I'm interested in how is the self management process going are you pretty far into that?

Chris:

So truth be told, see, it was about four years ago when I owned my first home. I was self managing it. And you know, for the first six months or so, or maybe as a couple years, it was fine, you know, the tenant was clean, rarely got a phone call from them. Then I joined Roofstock. And six months later, I bought my second property. And similar philosophy, I bought it as a new home, I think it was only two or three years old. And it had a tenant that was two months into a 36 month lease. And I said, Great, well, I'm pretty bulletproof on having to release this home, and there's not going to be a whole lot of repairs and maintenance are going to be needed. The home was just built. And I remember being at work. And I received two phone calls within 30 minutes of each other couldn't answer both because I was working and the HVAC went out on one home and the water heater went out on the was leaking on the other. And I made the decision right then and there that I am no longer self managing multiple properties. And, you know, now fast forward five years, I'm breaking that rule.

But again, like I'm breaking the rule, because, you know, with this property, the tenant has been in the home since 2015. It's 2020, they've got a strong track record, they always pay their rent on time, the home was built in 2007. So as I speak to those major components of the of the property, everything is still relatively new. And you know, the age of its useful life, there's still a lot of a lot of runway left. And so so far, I mean, it's been a month into a month and a half into it, it's going well, the tenant was very flexible.

Michael:

That's awesome. What are you doing all the leasing? I guess you didn't tend to do the lease up on that property.

Chris:

Yeah, what I liked about this lease is that it just automatically rolls to month a month. And so you know, my strategy with this home, which is why I was okay with it is she has a lease through February of 2022. And this was one of those homes that I was planning on selling at the end of that lease and holding for less than 24 months, Columbia, South Carolina has seen I think about five or 6% appreciation compared to the 2% historical average, you know, over the last 20 years. And so there's a bit of an upswing in the market, there's a lot of institutional demand for that area. Right now, I did speak with other realtors and property managers going, you know, when I was doing my own diligence, and they're seeing a lot of my folks moving into the market from out of state. So there's a lot of positive drivers in the market right now that are pointing to that appreciation. So but when you think about you know, releasing the home, that's not something that I plan on doing.

Now, I plan on selling it. I also didn't plan on releasing the home in Jacksonville, I bought four years ago, with a tenant that had a 36 month lease in it, the tenant ended up moving out my goal there was to try and sell it to the tenant, they had just got, you know, engaged or married. And I figured, well, you know, who not better to be a buyer than your tenant, but they ended up moving out. And that's when I did engage with the local property manager to do the turn and, and the releasing efforts. Unfortunately, I don't have time, you know, for that or want to do that from you know, 3000 miles away.

Michael:

Right. Right. Chris, I'm curious to get your thoughts on home warranties.

Chris:

Yes. So I actually had a conversation with an investor, you know, last year around this, who does home warranties on every single one of their investment properties that they own. Up until recently, it was not a strategy that I utilized, you know, but, you know, obviously, when I bought my primary residence in the bay, I did get a home warranty. And within the first, you know, six months, I did have, you know, some work that needed to be done on a couple of the major appliances. And that was a very, extremely easy process. And so, with these last two homes, you know, I did ask for home warranties, and it's something that I'm going to, you know, incorporate into my offers going forward. You know, the way I look at it is if an owner is selling to another owner occupant, it's pretty standard to have a home warranty into that contract. So we're it's not like we're asking for something that is out of the ordinary or is not standard in these agreements. So again, it doesn't hurt to ask and it that extra layer of protection with it can also keep down you know, as we talked about cash in and cash out, and also keep cash in your pocket.

Michael:

Totally my very first property that I ever purchased. I did the exact same thing as for a home warranty provided by the seller, they agreed to it. So the year comes up on my home warranty and my manager called me she says hey, do you want to renew it? I said How much is it? She's like 500 bucks. I'm like, ah, we've never used it. I don't know Like, I don't know, and she goes, it's up to you. And I said, You know what, screw it. Let's just do it. Let's spend the 500 to bite the bullet. The next day, the AC went out and I got a brand new AC and I was like, oh, such a good call. You know!

Chris:

I the exact same thing happened with my primary, which I forgot about until now that I it wasn't even the home warranty. I had a mailer come through the mail from the water company, saying Do you want extra insurance on your external water pipe? You know, the pipe going from the the main line from the house to the sewer? I was like, Okay, well, you know, this is what 100 bucks for the year, I own a 70 year old house, I don't think it's ever been replaced. You know, why not? Let's do it. And six months, you know, a year ago by I think it was about eight months, nine months go by and I completely forgot, I didn't even realize I did it. And then all of a sudden, our pipes start backing up, and we have a company come out and end up you know, having to spend $12,000 to replace that pipe. Well, three months later, and I got the renewal for this insurance that I paid for. And lo and behold, they accepted my reimbursement. So I got all of that covered through paying this, you know, extra $100 a month for $100 a year for insurance, something that you expect never to use, but if you have it…

Michael:

Use it!

Chris:

Exactly.

Michael:

I've never heard of that sewer lateral insurance.

Tom:

Yeah, that's incredible. I mean, one thing that concerns me and hopefully other investors with these warranties, and you know, more obscure insurances that when it comes time to collect, you know, okay, it's a battle like the the mattresses of being able to collect on that and, and hearing these winning, you know, stories from both you guys. I've never been a big Home Warranty guy, but I guess they're inspiring me.

Michael:

The devils in the details, man, like big company has to be reputable, because I've had horrible experiences with other home warranty companies where it's fight tooth and nail to get everything covered, when it's clear as day that it is covered. So do your research on the issuer in the company. But it's funny to talk because you know a little bit about my due fires. It's not it doesn't even have to be obscure, obscure, and obscure insurance have to fight tooth and nail to get it handled.

Tom:

So Chris, yeah, I love talking about your strategy is kind of a short term rental planning to hold it for the one to two year really kind of maximizing the return you can get on that immediate appreciation as well as the cash flow. I mean, did you always land on this kind of shorter term? And as you're doing this diaspora of converting one house into three, those three into another three? Are you concerned about the amount of overhead that it's going to take? And do you have like, Okay, this is what done looks like and getting to a certain number, just because I would imagine a point he gets untenable as you're multiplying this, this portfolio?

Chris:

Yeah, no, it's something we have been thinking about. And, you know, I've been leveraging the the 1031 exchange, you know, pretty well, you know, really, in the last four years, since joining Roofstock, I've gone from one home now to 10 homes, all through, you know, three different 1031 exchanges. Now, the challenges with that, you know, I've been able to really exhaust the conventional, you know, financing, you know, through an individual have 10 loans in my name, what I do need to do pretty quickly here is start having my wife make her first investment, and then doing the same thing, but to your question. And to the point is, the strategy for me was to grow my portfolio, while leveraging the least amount of capital from the onset. I made the investment into my very first home, and then I took that home sold, took the proceeds from that sale, bought four, and then one of those homes that I bought from that for I sold 18 months later. And so whenever I'm doing this 1031 exchange, I'm always looking, okay, where's the next sale, and then which is the next property, I can just put into the portfolio and kind of forget about it.

Now, those other properties that stay in your portfolio that you're not selling every couple years and maximizing the return there, you know, those are also good candidates, depending on where you are in a market cycle to potentially pull out some of that equity, do a refinance, and then use that capital to reinvest in and purchase other homes. So I think that the next strategy here is probably for one of two things to happen. And, you know, I've got some homes that have quite a bit of equity in them and could certainly look at refinancing those interest rates are extremely low right now. Pull out that capital, put it off to the side for a period of three to six months, and then allow my wife to start investing using that capital, and then she can start doing the same strategy, you know, where we start, you continue to roll these homes, where I'd like to get, you know, is that each of us have, you know, 10 in in our names 20 amongst the two of us to really maximize that that conventional loan, you know, 10 or 20 to a husband and wife requirement, but, you know, yeah, I mean, we've got a long term goal.

You know, ultimately we want to be able to retire and have a nest egg that we can pass on, you know, to our children and you know, College is a lot more expensive today then it was when we all went through it, and but we've got a goal of, you know, 50, 60, 70, 100 homes that we want to get to. And, you know, this is, you know, at least in the short term, this was a way that I identified that I could kickstart that and do it pretty rapidly without investing a ton of outside personal capital. You know, today, I've really only invested about $100,000 in been able to grow the portfolio from strictly cash flow, and proceeds from sales. So being able to take a small pool of capital like that, and just continue to let it roll. For me, that's been pretty neat to do.

Michael:

Good for you man, that's awesome for your properties that have a lot of equity. And, Chris, that you're talking about taking some cash out. Are you okay, if a property goes negative cash flow?

Chris:

Rnder the right circumstance? Yes. For instance, this one in South Carolina, I think right now it's modeled and if it performs perfectly, it's modeled out to have, you know, maybe a $200 return on the entire year. So it's very likely that that will be a negative cash flow property, because it's real estate and nothing goes away it's planned to.

Michael:

You mean the models aren't perfect?

Chris:

They call them proforma for a reason, right?

Michael:

Yeah.

Chris:

So yeah, I mean, under the right circumstance, yes. I'm okay with taking a negative cash flow on a property if I know that there's other drivers such as I'm stepping into $40,000 in equity day one. Yeah, sure. I'll take a slight loss on the first year in those situations, I'm fine with it.

Michael:

Sure. And then what about tapping into equity that's in a property, cashflow, positive, saddling that property with debt so that you're by design, making it cash flow negative to that and go do something with that cash? Is that something you'd be open to? Or a strategy believe in?

Michael:

Yeah, and that's where I think you've got to be able to forecast or have insights into what is the future look like with that? You know, with that market? What is the future look like with that property? Is that a property that I'm expecting to hold for 20, 30, 40, 50 years, then? Yeah, I mean, negative cash flow really doesn't mean a whole lot to me then right? You know, because that's a long term investment, not a short term play. So each investment is its own use case. But again, I'm opportunistic. So if I can pull equity out and use that to invest in other properties, and, you know, while this property may be negative cash flow, in aggregate with the property that I'm going to acquire, now, I'm in a positive situation. And now I've got two properties that are now growing equally on the equity side as well.

Tom:

Portfolio total return!

Chris:

Yeah.

Tom:

So I know, we love debt, debt is great. But I think it's kind of like the ocean and that you need to respect it. And at there is some point, you know, some kind of downturn, making sure you're not over your tips. Do you think about what the loan to value is of your portfolio? And just to redefine that real quick? That's the amount of total debt you have, of all your mortgages divided by the total value of all the homes together? Do you think about your portfolio LTV or loan to value? And is there any rules you have in keeping above a certain level?

Chris:

The way I think about it, Tom, it's Yes, I mean, in the back of my mind, I'm always thinking about my LTV. I'm always calculating, you know, what is my loan balance? What is today's BPO? And how much equity Do I have there? But the way that I look at and right, wrong or indifferent, you know, hedging against, you know, a potential, you know, recession is really understanding, okay, where is my rent today? First, where is my mortgage payment? You know, for me, if you look at the history of, you know, the single family rental, you know, industry, and if you look at rents, even going back through the last couple recessions, rents have never really dipped terribly low, rents have stayed pretty flat and consistent. And then as we come out of the recession, they continue to rise. So what I really plan for is that if I'm in a situation where I can drop my rent 20% and still be in a breakeven situation, to me, that's a very positive investment, you know, thinking about the worst case possible scenario from cash flows, and I just don't see a scenario looking at the historical data where, you know, we'll likely have to drop 20%.

You get through the holidays, and sure, you might have to cut rents five or 10%, just because it's a slow time of the season, but you come out of that strong and rents are continuing to grow. Some markets right now are seeing 15% rent growth, whereas other markets are continuing to see kind of single digit, you know, rent growth, what I've been able to do on my homes on renewals is what I look at is what is the market rent today for that home? What is the alternative for that tenant to move out of that home? What are their other options, and then let's factor in moving costs. And so maybe if the market rent on another home is going to be $1400, it's not advantageous for me to mark my home all the way up to $1400. Maybe I give the 10 a little bit of a discount, but I price it in an aggressive way that I factor in, what are their moving expenses, and then factor in what are their moving expenses plus their security deposit plus first month's rent and that's the amount of money that they're going to have to come out of pocket. So I take a very calculated approach there. But with that approach, I've been able to achieve six to 7% across the portfolio pretty consistently, while keeping tenants in place for three, four, or five plus years.

Michael:

That's awesome. That's so good to think about to like, and make it so blatantly obvious for the tenant. Because I think when tenants get that renewal of like, oh, the rents increased, their first thought is like, Oh, well screw the landlord, like I'm moving. And then they go look around, it's like, I can't really go anywhere, for anything better. So why bother? It makes a lot of sense.

Chris:

And if you think about it. And unless you have a huge family, or some great friends, they'll help you move, every time you do, you're likely spending upwards of $1,000. If you don't have a vehicle, and you're trying to do it yourself, you got to go rent the vehicle. If you're trying to hire a moving company, it even gets more expensive. So oftentimes, you know, investors may not be as clear to an investor that those are considerations and factors that should go into the equation. And that's just how I look at it.

Michael:

Yeah, makes sense. So Chris, it's funny, I had a pretty similar approach being opportunistic as far as markets are concerned, in my past life, I was working all over the country as a fire protection engineer was constantly looking at the different markets wherever I found myself for work. And it just got to a point for me where it's too overwhelming mentally and physically trying to keep track of this property manager managing this project. And this business filing due in this state, I utilize LLCs, for a lot of stuff, do you envision getting to a point at which the market just you're too spread too thin? And you're gonna look to consolidate or focus on a couple different markets? Or do you see this growth country wide? Kind of continuing for yourself?

Chris:

Yeah, it's a great question. I don't think I have a definitive answer yet. Yes, I think…

Michael:

You'll know, you'll get there.

Chris:

Exactly. It'll get to a point, you know, someday in the future, that, you know, I'll probably start to consolidate and it'll make more sense. My wife, and I always talk about, you know, her, you know, eventually managing all the properties when we're done having kids and she's done working. And, you know, that's what she does to kind of help support the family. But that's also when we have you know, 50 6070, potentially 100 properties. And you know, if even for her to do something like that, obviously becomes very taxing to have them all over the US, right. And so there will be a consolidation at one point in the future. But you know, where I am in my investment cycle, now, I'm in a growth mode, and I'm in a rapid growth mode and software, I can take advantage of growing my portfolio, increasing my equity that's ultimately going to get me closer to my long term goal.

Michael:

That's why I love real estate. I mean, you, myself and Tom all have vastly different strategies. And it's all right for all of us. Right? There's no right or wrong. There's no right or wrong for the individual. So this is killer man to wrap things up, gents.

Tom:

Yeah. This is great, Chris. Yeah, thank you so much for coming on. I think the first is gonna be a regular segment checking on especially because you, you always have so many irons in the fire. It's awesome to hear it, man.

Chris:

I told myself last year that I wasn't gonna make any moves this year. And then I did. Part of that was due to COVID. Now, I've told myself already, I'm not going to make any moves next year, but we'll see what 2021 has in store.

Tom:

Financing rates are just too great. You gotta you got to take advantage of it.

Chris:

I was just told the other day from a neighbor that he reified. He's got some investment properties here in the Bay Area, but he refinanced all of his investments up here at less than 2% on on a 30 year fix. So now it now it's now it's got me thinking,

Michael:

Who's his lender?

Chris:

It's actually a group that you showed sent to me a while back, I think Loan Depot.

Tom:

Yeah.

Chris:

Is who he's been working through. But yeah, he was quoted, or he's got these locked in at 1.99. Now, I don't know how many points he's paying. I'm sure he's paying a few points there. But he's thinking of it long term. So if I got to pay a couple $1,000 in points now, to lock these in for the next 30 years, then you know that that's something that works for him.

Tom:

The Loan Depot came up in we talked about Roofstock Academy a couple of times proud sponsor of the podcast. within it, we have a Slack channel, which is like a forum and there's this one called vendors or I think it might be lending. And somebody talked about, Hey, have you guys ever looked at loan depot? And I think like five members of all like refinance, but loan depot loans

Michael:

Yeah. Them and Network Capital, A bunch of them utilized them to.

Tom:

Amazing

Chris:

Yeah, we got to get him on here to be a sponsor.

Tom:

Michael:

That's a great idea, we send them so much business. We should be getting commissions or something.

Tom:

Yeah, wet the beak a little.

Michael:

Awesome. Well, Chris, thank you so much for hanging out with us. Really appreciate it, man. And we will definitely have to do this again soon.

Chris:

Thanks, guys. We'll catch you next time.

Tom:

Thanks, Chris.

Michael:

Alrighty, everybody, that was our episode a big big, big thank you to Chris. Thanks again for coming on the show, man. A lot. A lot of fun. We'll definitely have to have you back on again soon. If you liked this episode, feel free to leave us a rating or review wherever you listen, your podcast that was really helped us out. And as always, if there's anything in particular that you want to hear an episode about, leave us a note in the comment section. Thanks so much for listening. We look forward to see you on the next one. And happy investing.

Tom:

Happy investing.

In this episode, our guest Chris Willard tells us about his total returns strategy and how he uses it to fuel the rapid growth stage of his investment career. 

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Transcript

Michael:

Hey, everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum, and I am joined today by my co host, Tom Schneider. And we have a very special guest with us, Chris Willard. And he's going to be talking to us today about total returns and using that to scale his portfolio. So I won't take up any more time. Let's jump into it.

Before we get into it, we want to talk really briefly about a special offer that we have going on for the Roofstock Academy. And for those of you who might not be familiar, Roofstock Academy is your one stop shop education arm of Rootstock. It's comprised of one on one coaching, over 50 hours of on demand lectures, cashback incentives for closing on properties through Roofstock $2500 cash back to be specific, as well as private access into our online forums. So as you go to roofstockacademy.com into the checkout section, use coupon code SANTA2020 for $151 off a registration. Again, that's roofstockacademy.com. And coupon code is SANTA2020.

Tom:

And to make this even more of a no brainer, it is a lifetime satisfaction guarantee. Take the coaching, watch the lectures, if you're not happy, get a full refund. No expiration, you're not gonna find that anywhere else. And on the cashback aspect, if you do the math, right, the discount, taking a 151 off, that's gonna make it $1,098. And you're going to be getting $2500 in return. So you're actually making money with the program. So join risk free today. SANTA2020

Michael:

Awesome. Well, Chris, welcome to the show, man. super happy to have you here. Thanks for taking the time.

Chris:

Thanks, guys. Always fun talking to you both right on.

Michael:

So maybe you could give our listeners for those who are not familiar with your background, your story, a little bit of background on yourself. And then we'll jump into this thing about total return.

Chris:

Yeah, so I've been in real estate for going on about 10 or 12 years, several different capacities, but more recently on the single family rental side of it with Roofstock. I currently, you know, work as the head of sourcing, oversee a lot of our larger portfolio transactions through our platform, but through my life here at Roofstock. And prior at Waypoint with Tom been able to do a lot of investing on my own, which is pretty exciting.

Michael:

Awesome. Awesome. And I know that you kind of invest all over the country, is that right?

Chris:

Yeah, I don't have any specific markets that are interesting to me, deals are interesting to me. So I'm always pretty opportunistic, and happy to go into new markets when I find the right deal.

Michael:

Awesome.

Tom:

Chris, I'm gonna interrupt a little bit. So Chris and I are in a special Roofstock Club. So our CEO at Roofstock. Gary has been on the episode a couple of times, he was formerly the CEO of one of the very first publicly traded single family routes. And both Chris and myself used to work with Gary at this company. And when Gary and Gregor and those guys came up with the idea of Roofstock as a company, we shortly thereafter joined Gary on this adventure. So Chris, why don't you just talk real quickly about all the different stuff you did at that single family read as well. I think it'll give good context experience.

Chris:

Yeah, so at way point, and even prior to waypoint I was underwriting hundreds of homes a day, we were buying off the courthouse steps back in, oh, nine 2010, you know, when right at the downturn of the market, when everything was when the world was falling off, I had the opportunity to join the waypoint team. And as 2011 or so down in Southern California, we started growing the region, buying hundreds of homes quickly grew that over a couple years to several 1000 homes and really manage kind of all facets of acquisitions, they're all the way through from acquisitions to lease up, we obviously manage the properties there. And then kind of towards the tail end of my tenure there really oversaw a lot of the disposition efforts, so got involved with selling homes. And you know, Tom, to kind of your point, it's really funny, because, you know, when we started selling homes at waypoint, we did it like everyone else, you know, we vacated you know, move the tenant out, put the home on the MLS, we incurred all the fix up costs, the vacancy, the leakage, you know, and then we realized that about 30% of the time, or more than that investors were buying the homes and putting tenants back into them.

And so, you know, then we had the bright idea, well, why don't we just list the home with a tenant in place on the MLS? And, you know, there's just a lot of challenges that agents have to deal with in terms of, you know, not being able to show the homes, you know, the condition of the homes and obviously, there was no platform like Roofstock at that time, you know, I think is when you know, Gary Gregor and, and the others got the light bulb, and obviously, overnight, you know, rootstock was formed. So, you know, pretty exciting, you know, to come up through the industry like that and see all the different facets to where we are today. I think we were bootstrapping things pretty frequently back then. Now we leverage a lot of technology to scale up and grow our business,

Tom:

Both sides of the business I love that how just you know in running that route and trying to sell this realizing the inefficiencies of selling occupied. Alright, I digress. I'll let Michael go ahead and bring us back in.

Michael:

No, it's I mean, it's super interesting background. It's it's super cool to see and hear about it is kind of like this seemingly obvious only in hindsight of like, Well, yeah, duh, it's investments, we're buying it anyhow, why are we taking on all this extra expense and headache to move these people out to have different people just move back in. So…

Tom:

Totally! Leakage. That's a word we use.

Michael:

Got it.

Tom:

Preventing leakage.

Michael:

That's a great word.

Tom:

It's a great word. It’s alright. It's an okay word.

Michael:

Getting back on the rails here. So, Chris, I really want to chat and focus today about total return. And I think this is kind of this word, this concept that might be thrown around a lot that some people might not have a good grasp of, or a hard time defining and pinning down. So can you give us what your definition of a total return actually means?

Chris:

Yeah, I mean, the way I look at it, which might be a little bit different, but you know, it takes that idea of, you've got your cashflow investments, and you've got your appreciation investments, and it's a blend of both Now, now, total return doesn't necessarily mean that you're not going to have steady cash flow. And it doesn't mean that you not might not be able to catch, you know, market and an upswing and take on some appreciation. But you know, you get a little bit of both worlds there. When I try to target you know, investments, when I'm kind of putting my acquisition hat on and looking at acquiring homes, I always look at homes that have maybe have some upside on the rental side of things, maybe also have some upside in the market value of the home. So that's how I kind of look at it and categorize total return is takes a little bit from both the cash flow model as well as the appreciation model.

Michael:

Awesome. And do you factor when looking at acquisitions? Do you factor in like the tax benefits are the loan paid down into like, calculating a total return?

Chris:

My model? I don't necessarily look at the tax advantages of that too much. You know, for me, I'm really focused on what is my cash on cash return, that's where I focus a lot of my energy, I do have a great CPA, and he tells me and kind of writes the ship when, you know, may go down the wrong road from from a tax perspective. But for me, it's really looking at what is my cash flow, because that's going to be kind of my day to day, right? You know, my cash in and my cash out is going to get me from point A to point B, but then where I can capitalize on some of that upside, you know, that's really kind of the unknown, that's where the risk comes in. But that's also where the reward, you know, can be found.

Michael:

Absolutely. And so for those of our listeners who might not be familiar with some of the metrics we're tossing around here, can you define for people? What is cash on cash return? And what is cash flow?

Chris:

Yeah, so cash on cash return is really just comparing or analyzing the cash you put into the investment, whether it's, you know, your down payment, any capital expenditures, repairs, and maintenance, all cash going into the investment verse, you know, the cash that's coming out, really your profit at the end of the day from that investment, oftentimes, that does come from your monthly cash flows, the distributions you get from your your property manager, but also could be, you know, realized, as, you know, potential profit from an upswing in a market and, you know, equity and appreciation.

Michael:

Awesome. Yeah, I always like to make the analogy that your cash on cash return is just a measure of how hard your dollars are working for you.

Chris:

I like that. There you go.

Michael:

Dollars out over dollars in.

Tom:

So thinking about total return, Chris, I'd love having been in the space for you know, both professionally and personally, as your philosophy around what type of returns you're looking for changed much over time from x from beginning of time till now, and I'd love to hear about that evolution of your philosophy on that.

Chris:

Yeah, the short answer is yes. You know, I think when I first started getting into you know, investing, I was fairly focused on what that cap rate what that cash flow look like, made sure I had, you know, high cash flow properties. And what I realized, you know, the, the, the time that we had at Waypoint was very helpful, being able to spend private equity capital rather than my own to, to learn a lot of this and make some mistakes there. But, you know, really, what I learned is that sometimes there's some negative factors with those higher cash flow properties, they're typically going to be older investments, they typically will need you know, more work just given the age, sometimes they can be associated with a lower rent price point in a certain market, which could increase your turnover. Therefore increasing your vacancy costs, increasing your turn times and thus decreasing your cash flow.

So I would say that I probably started on the side of the fence when I started personally investing as a I'm going to be a little bit more cashflow driven to now really, I take a balanced approach. And I think as you probably build your own portfolio, you start to take more of a balanced approach naturally, I do like to invest in heavy cash flow properties, but I make sure that when I do so I'm looking at the major components of that home, what is the age of the roof, the age HVAC, the the water heater, electrical, plumbing systems, those are going to be my big ticket items outside of anything cosmetic, and if I can make sure that from that perspective, the home is bulletproof than I think I've pretty safe from you know, looking and taking the risk on some of those high cash flow properties.

But where I'm starting to and I look over the last, you know, five or six years in my investment strategy I start to see that, okay, the vintages of homes I'm buying today versus I was buying, you know, five, six years ago, are starting to become newer home values are also becoming more expensive. They're safer investments and, and while maybe on the surface, the cash flows or the returns are not as great as those high cash flow properties, high return properties over the long term, if you look at over the span of multiple years, and you consider all those external factors of reducing your vacancy, reducing your turn cost, as we talked about cash in cash out, you know, the more money I can keep to myself, rather than, you know, giving out then honestly, the newer, more expensive homes, the way my investment philosophy is transitioning is panning out to even higher returns.

Tom:

You can say something in a minute, Michael, I was just having a coaching session with a member of our sec Academy. And they were talking about having a hard time finding newer homes that cash flow well, right. Because if you're buying a house for $200,000, it's got to have a pretty reasonably high rent, if you're using debt on the property, and you're servicing that debt to still get a healthy cash flow. Two questions in this I mean, for what you're targeting right now in your portfolio? Like what, what is the relationship between the price and the rent, that you're able to find these newer homes? And if you could talk a little about markets that you're looking at? I think that would be interesting to hear.

Chris:

Yeah, I mean, you obviously hear the 1% rule, you know, quite a bit. And I think it's something in the back of my head I certainly look at but you know, as I've seen the transition across my philosophy of my own personal portfolio, you know, I'm starting to dip well below that, that 1%. You know, I even just recently purchased a home, you know, in South Carolina, where the cash flows weren't great. But I was stepping into quite a bit of equity upside, which was was the play, but the way I was able to mitigate and improve some of that lower cash flow or negative cash flow was I made the conscious decision of, you know, I'm going to manage this myself. So now I'm going to save 10% a month, and that's going to inject cash back into the rental. You know, I think there's other things that you can do by running maybe a competitive process around insurance rates, making sure that you are getting the most competitive rate out there. I often talk with a handful of insurance providers on every home, I purchase and make sure and this is not something I do just on the front end. But this is something I do consistently every every year, every couple years, I'll start looking at different insurance providers and see who has the best straight out there.

Michael:

You said something, Chris, that I just want to circle back and touch on is with the high cash flow properties. If you are in a lower rental tier, you might see the higher turnover cost, which means you have a higher vacancy, and then you might have higher repair and maintenance. So it can often be this kind of Domino ladder effect where one expense has a significant impact on all the others. And I think it's so important to highlight that for folks. I can't tell you how many turnkey provider proformas I've seen. They're like, Oh, we just rehab the property, zero maintenance and zero capex needed. And it's like, yeah, maybe for the first year. But if you're going to own this thing for 2,3,4,5,10 years, like we have to be factoring this stuff in so coming to the table with your eyes wide open, when you're buying some of those properties, I think is hyper hyper important.

Chris:

To that point like really is you're stepping into an investment, you need to understand how long am I expecting to hold this am I is this kind of a buy kind of set it and forget it type mentality where I'm going to have it for 15, 20 years, and it's just going to work itself out or what I've been able to do over the last couple years is I have a mentality of I'm always buying a home that I'm typically going to sell in the next one to two years. And I'm going to buy it in a market that is seeing higher appreciations. And they they have historically, that tells me that there might be a little bit of an upswing, and that way, I've been able to grow my portfolio and roll it I sell one I buy three. So one, I buy four. So one, I buy two, and then before you know it, it's a little bit of a domino effect. But kind of going back to Tom's point, you know, markets. Tom, I think you've centralized around a few markets, right. And I think you've got a few properties in Florida and a few properties in Atlanta, if I'm not mistaken.

Whereas I I've got two properties in Atlanta, I've got to spread out in Florida, but I've got a property in Kansas, you know, I just sold a property in Texas. Now I've got a property in South Carolina, I've owned in California, I've owned in Arizona, I own a couple in Detroit, I'm really all over and it kind of just for me. It's you know, where's the opportunity, you know, I'm less focused on building scale within a certain market. I do like Atlanta. I do like Florida. And when I see deals, I'm always happy to jump on them. But I think there's certain opportunities in other markets as well, that for me, at least my investment philosophy is, you know, I want to be less restricted around markets. I'm happy to work with third party property managers, if and where it makes sense. And most of my properties are, are being managed by a third party property manager, but it really just comes down to the opportunity and your investment style.

Tom:

I'm interested in how is the self management process going are you pretty far into that?

Chris:

So truth be told, see, it was about four years ago when I owned my first home. I was self managing it. And you know, for the first six months or so, or maybe as a couple years, it was fine, you know, the tenant was clean, rarely got a phone call from them. Then I joined Roofstock. And six months later, I bought my second property. And similar philosophy, I bought it as a new home, I think it was only two or three years old. And it had a tenant that was two months into a 36 month lease. And I said, Great, well, I'm pretty bulletproof on having to release this home, and there's not going to be a whole lot of repairs and maintenance are going to be needed. The home was just built. And I remember being at work. And I received two phone calls within 30 minutes of each other couldn't answer both because I was working and the HVAC went out on one home and the water heater went out on the was leaking on the other. And I made the decision right then and there that I am no longer self managing multiple properties. And, you know, now fast forward five years, I'm breaking that rule.

But again, like I'm breaking the rule, because, you know, with this property, the tenant has been in the home since 2015. It's 2020, they've got a strong track record, they always pay their rent on time, the home was built in 2007. So as I speak to those major components of the of the property, everything is still relatively new. And you know, the age of its useful life, there's still a lot of a lot of runway left. And so so far, I mean, it's been a month into a month and a half into it, it's going well, the tenant was very flexible.

Michael:

That's awesome. What are you doing all the leasing? I guess you didn't tend to do the lease up on that property.

Chris:

Yeah, what I liked about this lease is that it just automatically rolls to month a month. And so you know, my strategy with this home, which is why I was okay with it is she has a lease through February of 2022. And this was one of those homes that I was planning on selling at the end of that lease and holding for less than 24 months, Columbia, South Carolina has seen I think about five or 6% appreciation compared to the 2% historical average, you know, over the last 20 years. And so there's a bit of an upswing in the market, there's a lot of institutional demand for that area. Right now, I did speak with other realtors and property managers going, you know, when I was doing my own diligence, and they're seeing a lot of my folks moving into the market from out of state. So there's a lot of positive drivers in the market right now that are pointing to that appreciation. So but when you think about you know, releasing the home, that's not something that I plan on doing.

Now, I plan on selling it. I also didn't plan on releasing the home in Jacksonville, I bought four years ago, with a tenant that had a 36 month lease in it, the tenant ended up moving out my goal there was to try and sell it to the tenant, they had just got, you know, engaged or married. And I figured, well, you know, who not better to be a buyer than your tenant, but they ended up moving out. And that's when I did engage with the local property manager to do the turn and, and the releasing efforts. Unfortunately, I don't have time, you know, for that or want to do that from you know, 3000 miles away.

Michael:

Right. Right. Chris, I'm curious to get your thoughts on home warranties.

Chris:

Yes. So I actually had a conversation with an investor, you know, last year around this, who does home warranties on every single one of their investment properties that they own. Up until recently, it was not a strategy that I utilized, you know, but, you know, obviously, when I bought my primary residence in the bay, I did get a home warranty. And within the first, you know, six months, I did have, you know, some work that needed to be done on a couple of the major appliances. And that was a very, extremely easy process. And so, with these last two homes, you know, I did ask for home warranties, and it's something that I'm going to, you know, incorporate into my offers going forward. You know, the way I look at it is if an owner is selling to another owner occupant, it's pretty standard to have a home warranty into that contract. So we're it's not like we're asking for something that is out of the ordinary or is not standard in these agreements. So again, it doesn't hurt to ask and it that extra layer of protection with it can also keep down you know, as we talked about cash in and cash out, and also keep cash in your pocket.

Michael:

Totally my very first property that I ever purchased. I did the exact same thing as for a home warranty provided by the seller, they agreed to it. So the year comes up on my home warranty and my manager called me she says hey, do you want to renew it? I said How much is it? She's like 500 bucks. I'm like, ah, we've never used it. I don't know Like, I don't know, and she goes, it's up to you. And I said, You know what, screw it. Let's just do it. Let's spend the 500 to bite the bullet. The next day, the AC went out and I got a brand new AC and I was like, oh, such a good call. You know!

Chris:

I the exact same thing happened with my primary, which I forgot about until now that I it wasn't even the home warranty. I had a mailer come through the mail from the water company, saying Do you want extra insurance on your external water pipe? You know, the pipe going from the the main line from the house to the sewer? I was like, Okay, well, you know, this is what 100 bucks for the year, I own a 70 year old house, I don't think it's ever been replaced. You know, why not? Let's do it. And six months, you know, a year ago by I think it was about eight months, nine months go by and I completely forgot, I didn't even realize I did it. And then all of a sudden, our pipes start backing up, and we have a company come out and end up you know, having to spend $12,000 to replace that pipe. Well, three months later, and I got the renewal for this insurance that I paid for. And lo and behold, they accepted my reimbursement. So I got all of that covered through paying this, you know, extra $100 a month for $100 a year for insurance, something that you expect never to use, but if you have it…

Michael:

Use it!

Chris:

Exactly.

Michael:

I've never heard of that sewer lateral insurance.

Tom:

Yeah, that's incredible. I mean, one thing that concerns me and hopefully other investors with these warranties, and you know, more obscure insurances that when it comes time to collect, you know, okay, it's a battle like the the mattresses of being able to collect on that and, and hearing these winning, you know, stories from both you guys. I've never been a big Home Warranty guy, but I guess they're inspiring me.

Michael:

The devils in the details, man, like big company has to be reputable, because I've had horrible experiences with other home warranty companies where it's fight tooth and nail to get everything covered, when it's clear as day that it is covered. So do your research on the issuer in the company. But it's funny to talk because you know a little bit about my due fires. It's not it doesn't even have to be obscure, obscure, and obscure insurance have to fight tooth and nail to get it handled.

Tom:

So Chris, yeah, I love talking about your strategy is kind of a short term rental planning to hold it for the one to two year really kind of maximizing the return you can get on that immediate appreciation as well as the cash flow. I mean, did you always land on this kind of shorter term? And as you're doing this diaspora of converting one house into three, those three into another three? Are you concerned about the amount of overhead that it's going to take? And do you have like, Okay, this is what done looks like and getting to a certain number, just because I would imagine a point he gets untenable as you're multiplying this, this portfolio?

Chris:

Yeah, no, it's something we have been thinking about. And, you know, I've been leveraging the the 1031 exchange, you know, pretty well, you know, really, in the last four years, since joining Roofstock, I've gone from one home now to 10 homes, all through, you know, three different 1031 exchanges. Now, the challenges with that, you know, I've been able to really exhaust the conventional, you know, financing, you know, through an individual have 10 loans in my name, what I do need to do pretty quickly here is start having my wife make her first investment, and then doing the same thing, but to your question. And to the point is, the strategy for me was to grow my portfolio, while leveraging the least amount of capital from the onset. I made the investment into my very first home, and then I took that home sold, took the proceeds from that sale, bought four, and then one of those homes that I bought from that for I sold 18 months later. And so whenever I'm doing this 1031 exchange, I'm always looking, okay, where's the next sale, and then which is the next property, I can just put into the portfolio and kind of forget about it.

Now, those other properties that stay in your portfolio that you're not selling every couple years and maximizing the return there, you know, those are also good candidates, depending on where you are in a market cycle to potentially pull out some of that equity, do a refinance, and then use that capital to reinvest in and purchase other homes. So I think that the next strategy here is probably for one of two things to happen. And, you know, I've got some homes that have quite a bit of equity in them and could certainly look at refinancing those interest rates are extremely low right now. Pull out that capital, put it off to the side for a period of three to six months, and then allow my wife to start investing using that capital, and then she can start doing the same strategy, you know, where we start, you continue to roll these homes, where I'd like to get, you know, is that each of us have, you know, 10 in in our names 20 amongst the two of us to really maximize that that conventional loan, you know, 10 or 20 to a husband and wife requirement, but, you know, yeah, I mean, we've got a long term goal.

You know, ultimately we want to be able to retire and have a nest egg that we can pass on, you know, to our children and you know, College is a lot more expensive today then it was when we all went through it, and but we've got a goal of, you know, 50, 60, 70, 100 homes that we want to get to. And, you know, this is, you know, at least in the short term, this was a way that I identified that I could kickstart that and do it pretty rapidly without investing a ton of outside personal capital. You know, today, I've really only invested about $100,000 in been able to grow the portfolio from strictly cash flow, and proceeds from sales. So being able to take a small pool of capital like that, and just continue to let it roll. For me, that's been pretty neat to do.

Michael:

Good for you man, that's awesome for your properties that have a lot of equity. And, Chris, that you're talking about taking some cash out. Are you okay, if a property goes negative cash flow?

Chris:

Rnder the right circumstance? Yes. For instance, this one in South Carolina, I think right now it's modeled and if it performs perfectly, it's modeled out to have, you know, maybe a $200 return on the entire year. So it's very likely that that will be a negative cash flow property, because it's real estate and nothing goes away it's planned to.

Michael:

You mean the models aren't perfect?

Chris:

They call them proforma for a reason, right?

Michael:

Yeah.

Chris:

So yeah, I mean, under the right circumstance, yes. I'm okay with taking a negative cash flow on a property if I know that there's other drivers such as I'm stepping into $40,000 in equity day one. Yeah, sure. I'll take a slight loss on the first year in those situations, I'm fine with it.

Michael:

Sure. And then what about tapping into equity that's in a property, cashflow, positive, saddling that property with debt so that you're by design, making it cash flow negative to that and go do something with that cash? Is that something you'd be open to? Or a strategy believe in?

Michael:

Yeah, and that's where I think you've got to be able to forecast or have insights into what is the future look like with that? You know, with that market? What is the future look like with that property? Is that a property that I'm expecting to hold for 20, 30, 40, 50 years, then? Yeah, I mean, negative cash flow really doesn't mean a whole lot to me then right? You know, because that's a long term investment, not a short term play. So each investment is its own use case. But again, I'm opportunistic. So if I can pull equity out and use that to invest in other properties, and, you know, while this property may be negative cash flow, in aggregate with the property that I'm going to acquire, now, I'm in a positive situation. And now I've got two properties that are now growing equally on the equity side as well.

Tom:

Portfolio total return!

Chris:

Yeah.

Tom:

So I know, we love debt, debt is great. But I think it's kind of like the ocean and that you need to respect it. And at there is some point, you know, some kind of downturn, making sure you're not over your tips. Do you think about what the loan to value is of your portfolio? And just to redefine that real quick? That's the amount of total debt you have, of all your mortgages divided by the total value of all the homes together? Do you think about your portfolio LTV or loan to value? And is there any rules you have in keeping above a certain level?

Chris:

The way I think about it, Tom, it's Yes, I mean, in the back of my mind, I'm always thinking about my LTV. I'm always calculating, you know, what is my loan balance? What is today's BPO? And how much equity Do I have there? But the way that I look at and right, wrong or indifferent, you know, hedging against, you know, a potential, you know, recession is really understanding, okay, where is my rent today? First, where is my mortgage payment? You know, for me, if you look at the history of, you know, the single family rental, you know, industry, and if you look at rents, even going back through the last couple recessions, rents have never really dipped terribly low, rents have stayed pretty flat and consistent. And then as we come out of the recession, they continue to rise. So what I really plan for is that if I'm in a situation where I can drop my rent 20% and still be in a breakeven situation, to me, that's a very positive investment, you know, thinking about the worst case possible scenario from cash flows, and I just don't see a scenario looking at the historical data where, you know, we'll likely have to drop 20%.

You get through the holidays, and sure, you might have to cut rents five or 10%, just because it's a slow time of the season, but you come out of that strong and rents are continuing to grow. Some markets right now are seeing 15% rent growth, whereas other markets are continuing to see kind of single digit, you know, rent growth, what I've been able to do on my homes on renewals is what I look at is what is the market rent today for that home? What is the alternative for that tenant to move out of that home? What are their other options, and then let's factor in moving costs. And so maybe if the market rent on another home is going to be $1400, it's not advantageous for me to mark my home all the way up to $1400. Maybe I give the 10 a little bit of a discount, but I price it in an aggressive way that I factor in, what are their moving expenses, and then factor in what are their moving expenses plus their security deposit plus first month's rent and that's the amount of money that they're going to have to come out of pocket. So I take a very calculated approach there. But with that approach, I've been able to achieve six to 7% across the portfolio pretty consistently, while keeping tenants in place for three, four, or five plus years.

Michael:

That's awesome. That's so good to think about to like, and make it so blatantly obvious for the tenant. Because I think when tenants get that renewal of like, oh, the rents increased, their first thought is like, Oh, well screw the landlord, like I'm moving. And then they go look around, it's like, I can't really go anywhere, for anything better. So why bother? It makes a lot of sense.

Chris:

And if you think about it. And unless you have a huge family, or some great friends, they'll help you move, every time you do, you're likely spending upwards of $1,000. If you don't have a vehicle, and you're trying to do it yourself, you got to go rent the vehicle. If you're trying to hire a moving company, it even gets more expensive. So oftentimes, you know, investors may not be as clear to an investor that those are considerations and factors that should go into the equation. And that's just how I look at it.

Michael:

Yeah, makes sense. So Chris, it's funny, I had a pretty similar approach being opportunistic as far as markets are concerned, in my past life, I was working all over the country as a fire protection engineer was constantly looking at the different markets wherever I found myself for work. And it just got to a point for me where it's too overwhelming mentally and physically trying to keep track of this property manager managing this project. And this business filing due in this state, I utilize LLCs, for a lot of stuff, do you envision getting to a point at which the market just you're too spread too thin? And you're gonna look to consolidate or focus on a couple different markets? Or do you see this growth country wide? Kind of continuing for yourself?

Chris:

Yeah, it's a great question. I don't think I have a definitive answer yet. Yes, I think…

Michael:

You'll know, you'll get there.

Chris:

Exactly. It'll get to a point, you know, someday in the future, that, you know, I'll probably start to consolidate and it'll make more sense. My wife, and I always talk about, you know, her, you know, eventually managing all the properties when we're done having kids and she's done working. And, you know, that's what she does to kind of help support the family. But that's also when we have you know, 50 6070, potentially 100 properties. And you know, if even for her to do something like that, obviously becomes very taxing to have them all over the US, right. And so there will be a consolidation at one point in the future. But you know, where I am in my investment cycle, now, I'm in a growth mode, and I'm in a rapid growth mode and software, I can take advantage of growing my portfolio, increasing my equity that's ultimately going to get me closer to my long term goal.

Michael:

That's why I love real estate. I mean, you, myself and Tom all have vastly different strategies. And it's all right for all of us. Right? There's no right or wrong. There's no right or wrong for the individual. So this is killer man to wrap things up, gents.

Tom:

Yeah. This is great, Chris. Yeah, thank you so much for coming on. I think the first is gonna be a regular segment checking on especially because you, you always have so many irons in the fire. It's awesome to hear it, man.

Chris:

I told myself last year that I wasn't gonna make any moves this year. And then I did. Part of that was due to COVID. Now, I've told myself already, I'm not going to make any moves next year, but we'll see what 2021 has in store.

Tom:

Financing rates are just too great. You gotta you got to take advantage of it.

Chris:

I was just told the other day from a neighbor that he reified. He's got some investment properties here in the Bay Area, but he refinanced all of his investments up here at less than 2% on on a 30 year fix. So now it now it's now it's got me thinking,

Michael:

Who's his lender?

Chris:

It's actually a group that you showed sent to me a while back, I think Loan Depot.

Tom:

Yeah.

Chris:

Is who he's been working through. But yeah, he was quoted, or he's got these locked in at 1.99. Now, I don't know how many points he's paying. I'm sure he's paying a few points there. But he's thinking of it long term. So if I got to pay a couple $1,000 in points now, to lock these in for the next 30 years, then you know that that's something that works for him.

Tom:

The Loan Depot came up in we talked about Roofstock Academy a couple of times proud sponsor of the podcast. within it, we have a Slack channel, which is like a forum and there's this one called vendors or I think it might be lending. And somebody talked about, Hey, have you guys ever looked at loan depot? And I think like five members of all like refinance, but loan depot loans

Michael:

Yeah. Them and Network Capital, A bunch of them utilized them to.

Tom:

Amazing

Chris:

Yeah, we got to get him on here to be a sponsor.

Tom:

Michael:

That's a great idea, we send them so much business. We should be getting commissions or something.

Tom:

Yeah, wet the beak a little.

Michael:

Awesome. Well, Chris, thank you so much for hanging out with us. Really appreciate it, man. And we will definitely have to do this again soon.

Chris:

Thanks, guys. We'll catch you next time.

Tom:

Thanks, Chris.

Michael:

Alrighty, everybody, that was our episode a big big, big thank you to Chris. Thanks again for coming on the show, man. A lot. A lot of fun. We'll definitely have to have you back on again soon. If you liked this episode, feel free to leave us a rating or review wherever you listen, your podcast that was really helped us out. And as always, if there's anything in particular that you want to hear an episode about, leave us a note in the comment section. Thanks so much for listening. We look forward to see you on the next one. And happy investing.

Tom:

Happy investing.

This episode is the first of a new series in which hosts, Tom, Michael and Emil help the producer of the show, Pierre with his first remote real estate acquisition. In this episode, we help Pierre get out of analysis paralysis and determine the next steps towards his acquisition. 

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Transcript

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by,

Tom:

Tom Schneider.

Emil:

Emil Shour.

Pierre:

Pierre Carrillo.

Michael:

And we've got kind of a special miniseries coming up for everybody. Pierre is our producer here, awesome dude at Roofstock. And he's actually going through the process of buying his first investment property as we speak. And so we thought it would be super fun to help him out, answer all of his questions that he has, as well as give everybody an insider's look and kind of behind the curtain at what Pierre is going through on a day to day basis. So in today's episode, we are going to tackle Pierre’s, questions, comments, concerns, we'll be recording episodes like these throughout the hero's journey. So everybody listening at home can join him along for his ride and his experience. Let's get into it.

Michael:

All right Pierre, bring everybody up to speed on where you've been thus far, where you're at now, and where you're trying to go? The past the present the future.

Pierre:

Yeah. So full disclosure, this is not my property. I am teaming up with my brother. I'm trying to save up for my property. But in the meantime, my brother has some capital to deploy. He's been listening to us. He's been in the academy for a while now. So he's getting stoked on the idea of real estate. So he's employed me to help him acquire a property.

Michael:

Awesome.

Emil:

So you're his acquisitions manager?

Pierre:

There it is. Yeah, exactly.

Michael:

And so Pierre, you've been using some of the tips and tricks that Zach Breverman talks about in episode 73 because he's a CFP, we had him on talking about how to save up your reserve to get started investing for yourself, right?

Pierre:

I have, you know, I could be a little bit better. I always struggle. You know, I'm at the beginning of my career right now. And expenses always seem to… I have an automated system to set aside money into my savings. But somehow I always find myself dipping into it for some sort of expense, or life emergency or something always seems to hit me.

Michael:

Right. Right. And I get that goes.

Pierre:

Just getting the snowball started is tough right now. That's why I'm stoked to be working with my brother because I am stoked to invest in real estate, and I'm not ready for it. And having my brother's capital to work with is giving me a practice run so that when I buy my first house, it's not going to be my first transaction.

Michael:

Right.

Tom:

Awesome, great way to do it.

Michael:

All right. So talk to us a little bit about what kind of property you and your brother are targeting. And where you both are looking without giving away too much of the secret sauce.

Pierre:

Sure, we are looking for a single family rental property that has a rent of over 1000 per month, or 1000 and above, that's just something that we thought would be safe, a better tenant pool in a better quality neighborhood with good school ratings. And, and we have been looking at Georgia, we like Georgia. Awesome. So some of the ways that we've been zeroing in on different markets is I built a Google map. So you can make your own custom Google Maps and then import data sets. So I've downloaded these spreadsheets about property taxes, and then overlaid that on my Google Maps. And you can add layers onto the maps. And so I color code each layer. So I found all these different industries imported those in I had to do those manually, because I didn't just have like a spreadsheet of all the different big companies, but I researched all the big companies drop them in on a green layer for industry. I did the top 25 school districts put those in on a blue layer. I did property taxes, put those in on a red layer, because to heck with property tax, to heck with taxes.

Michael:

Yeah.

Pierre:

And then I did the history of natural disasters like flooding, and tornadoes and just all these different data points that I found interesting. And then I put like a little radius around them, and then where I'm seeing all these different overlapping of my Venn diagrams, then we start zeroing in on those markets.

Michael:

Awesome.

Pierre:

So we are on the outskirts of Atlanta right now. That's what we’ve zoomed in on. Shouldn't have told everyone that because everyone's gonna…

Michael:

Thanks for the hard work.

Emil:

Biggest kept secret Atlanta.

Tom:

Little market nobody's ever heard of.

Michael:

So, tell us your what you and your brothers kind of investment thesis is are you targeting cash flow? are you targeting appreciation?

Pierre:

Yes. So following the Roofstock archetypes of investor profiles, we find ourselves in the balance buff category, which is seeking cash flow, but with the balance of appreciation, but with you know, heavy on the cash flow.

Michael:

Awesome. And so I'm gonna stop blabbering here for a minute. And I'm going to turn the mic over to you here and give you an opportunity to ask some questions to Tom Emil and I, in the section that we like to call coaches coaching coaches.

Pierre:

Cool. Yeah. So I mean, we're at this place where we've done a lot of analysis I think we're at the analysis paralysis stage, where we've done a lot of the research we we built our buy box in our financial so in the roofstock Academy we have this seven step investment plan know your financials great SMART goals, choose a strategy build your buy box

Pick a target market, identify your team. So we've gotten most of those things done. But now it's like it's a big purchase, it's a lot of money to drop down. Do we know enough? Is our research sufficient? Should we act? Or are we, you know, fooling ourselves and thinking that we know enough, and we're gonna just make a stupid decision with all this cash like, and for me, it's, I'm a bit nervous, too, because it's my brother's capital. And so I would feel terrible to advise my brother to do something that would not be the best investment with his cash. So that's where we're at right now we've done the research we found where we like really built a map and studied the market. And now we're like, Is this good? Are we in a good place to make a decision now?

Tom:

Something that I think could be a way to kind of break through that paralysis by analysis is, start leveraging that team, I do not think you can bring them in too early. So as a way to get myself comfortable in a specific sub market that I may not have a lot of experience in, is in going to the process of analyzing this properties. Bringing in specifically, I know Roofstock, has a buyer broker in the market, there is also a local property manager, what I wouldn't wait on and I think as a way to kind of keep momentum going is start bringing in a sanity check with some of these partners, that you're working with them and really leverage them as you're in your acquisition process. I think some specific questions I would ask, I would come to them with specific properties, and ask them what they think about the rent, what they think about the neighborhood, more times than not you're going to get a good is a informative answer. You know, one way or the other.

I've gotten responses back that you know, this property, this area doesn't appreciate a lot or, you know, maybe there's a little more tenant turnover, or Oh, great, this is a four bedroom, you're showing me and there's not a lot of those, it's going to run really quickly. So I find a way to personally get over that hold up, is to bring in some other eyeballs into the process. So that would be my first tip right now and getting over that initial kind of hump. Because I mean, man, from what you're the way that you're talking about it. And the way that you're evaluating this market, I'd say you're, you're pretty far ahead of advanced in the way that a lot of people think about it. And Atlanta is an awesome market. I love Atlanta, it's like a big part of my portfolio, especially kind of on those some of those suburb edges. So, I mean, it sounds like the next good step to kind of keep the pistons going is not just identifying those partners, but start engaging with them on a specific deal basis.

Michael:

I'm going to piggyback off Tom's answer and tweak the approach just a little bit. And so I think absolutely engaging with those local folks on the ground is going to be huge, but I wouldn't necessarily ask them their opinion outright, I would actually tell them your opinion and your conclusions of a property and see if they're going to validate them. Because what you're also going to determine is if your evaluation process is accurate. And so if you tell them, Hey, I found this property in this neighborhood, this is what I'm thinking to rent for this is what I'm thinking it'll, it'll sell for, and they can tell you yea or nay or anything in between. and they can actually help tweak your evaluation process and start educating you as opposed to a Yeah, I like it or no, I don't type of answer from them. And so that's something I always tell folks in the academy is, hey, if you ask me a question about a property, I want to know your conclusion. And then I want you to ask me a question. So that way, I can help you evaluate how you're thinking about properties and how you're actually evaluating properties, rather than just yes, no, I like it, or I don't.

Pierre:

That's great.

Emil:

I'm gonna go in a little bit of a different direction. I want to ask you, are you guys looking for something turnkey? Or are you looking to take on a project to start? Are you in different?

Pierre:

That was another question that I had, I mean, my brother is a contractor. So he is very well versed in the domain of building and rehab. But this is remote, he lives outside of the country, and a timezone far, far away. So we would have to have someone in the location that we trust, if we were going to do any rehab, but we're open to rehab, just to say tendon that's a little bit related is that we had enough cash to maybe buy to, to finance two properties. He met with Michael and we've kind of established a new strategy was to buy an all cash and then because to prioritize cash flow, we're going to buy an all cash property and then refinance it down the road. So we are open to doing a rehab. But, you know, what? Is that wise? I hear a lot of people saying your first property should be turnkey.

Emil:

I don't think there is a right or wrong. I think it's your level of comfort, just speaking from personal I went turnkey. For that reason. I was like, I don't know anything about real estate. I'm investing a couple 1000 miles away. Like I got to build trust with this property manager in this area, like feel confident enough before I go and take that on. So that is an approach a lot of people take. There's tons of stories of people who do the same thing and they take on a project and they do fine or they take on a project and they get in over their head but then they have a lot of learning that they can take the second one so I don't know. I think it's it's kind of just like what do you feel comfortable. That'll allow you to just take step one, right, like we talked about all the time, I think the most important thing to remember is this is not going to be your home run deal. This is like your learning property, you're going to do a lot more, and each one should get better. So like when you have that in mind that it doesn't need to be the perfect or the homerun deal. I think it just helps you like realize this is part of learning part of just the process.

Alright, so if you're open to both, I would say like, the biggest thing that can build confidence is like you're thinking, I don't know if this is a good deal. Is it a good deal compared to other deals? Right? Like, do I feel like I'm getting the right deal in this market? Now that you've chosen your market? Right? So I think the best thing you can do is just look at a lot of properties, underwrite them, analyze them, and just look at the returns. And then you can start to figure out this is what Michaels Zuber talks about, you know, we've had on the podcast about learning a market is like in the areas you're interested in, what are the returns in those areas, right. And then once you've looked at a lot of properties, you'll know what is a good deal versus a bad deal versus an average deal or whatever. So I think that helps build a lot of confidence, I think is when you've looked at enough deals in that market you're set on, then you're like, Okay, I've analyzed a bunch of properties, I think this one's going to be a good deal compared to the others I've seen.

Pierre:

So just more specifically, around underwriting. I know you guys have spoken a lot about the assumptions that you bake into underwriting, what are some considerations that I should be taking in mind when calculating the returns of a particular property?

Michael:

You should go listen to Episode 67, or whatever it is. Just kidding.

Piere:

Yeah. That's how I was thinking I was looking for one episode that we had just to revise, because I mean, I hear you guys talk about it all the time. But I, I don't have the hands on repeated experience of it. So I can hear you guys talk about it. But I always forget, like, oh, when I'm calculate 2% for insurance or whatever, or calculate this much for… what are the top five things I should be looking for when making an assumptions for a property?

Michael:

I would say first and foremost is your property taxes, you've got to get that right. And very similar to like what a meal was mentioning, talking about what Michael Zuber talks about is go there in the market. And so if you're pretty committed to Atlanta, or you're very interested in Atlanta, I would go find out what counties are in Atlanta, and then call the county assessor and ask them, How do you calculate your after sale property taxes and investor? Because then you'll know that it'll give you some kind of formula, some kind of millage rate times value, whether that's the purchase price or some assessed value. Now, you know, for every property you evaluate in that county, how do you calculate your property taxes, so it becomes much less of an assumption, and much more a calculated value.

Pierre:

So you would say, and that's interesting, because I haven't been doing that with my property taxes, I've actually gone through and just downloaded a spreadsheet of every County's median property taxes. And so I have like, by the median property tax, I haven't done a calculation, I just have a straight hard number that is the median property taxes for that particular region.

Michael:

So the problem with that I had a problem with that…

Tom:

I think I'm gonna say the exact same thing you're gonna say.

Michael:

Yeah, go for it. Tom.

Tom:

There's a lot of owner occupied taxes where they have homestead exemptions. I'm glad I stole this from Michael, just to get the average number.

Pierre:

You're so good, Tom.

Michael:

You're like a hyena.

Tom:

Man, I feel like I just stole some candy. Homeowners, they typically get a pretty big discount on their property taxes. So doing that kind of flatline, is going to be that that I would be a little little weary of.

Pierre:

Good to know.

Michael:

Same thing goes for insurance. And it when you look at the average insurance rates, it's typically going to be quoted for homeowners, which is a different rate than for investors and landlords. So that's why I just like calling the county assessor and just getting it directly from the source, they'll give you some kind of millage rate, and they'll just likely tell you how to calculate it. And I wouldn't let that person off the phone until you have a pretty clear understanding of how you come up with that number.

Emil:

You can also ask your property manager, I've called county assessors, and sometimes they're very unhelpful. And they have these really complicated formulas where I'm like, there's no chance in hell that I'm going to be able to figure out what you're talking about. So like, I think your property manager, if they own investment properties, like a lot of property managers, the founder owns a couple investment properties. Sometimes they can be a good resource as well, or just people who invest there, I can just tell you, like their rate that they see on investment properties can be helpful as well.

Pierre:

Cool.

Emil:

But the county assessor is a good place to start, because it's Yeah, it just sometimes aren't helpful.

Michael:

What other expenses should Pierre be thinking about? When he's making his assumptions?

Pierre:

We're looking at cap x, we're looking at closing costs, a maintenance reserve, property taxes.

Emil:

So Episode 72, which I think the one we were talking about, ignore the noise. Here's how to actually calculate projected cash flow that walks through a lot of the assumptions A lot of us take, I think, for single family. The big ones we were talking about is like a percentage can be misleading percentage of rent. So just having a fixed number there. I think I do like $150 total ish for cap x and R&M per month thing, Michael, you said you do a little bit more.

Michael:

That's kind of right in there I like 75 $200 a month for R&M. And then cap x is driven by the property, vintage and the age  of the systems in the home. So the mechanicals, water heater roof, that kind of stuff that can go up or down depending on the condition and vintage.

Pierre:

So the way you presented it Emil right now was you had capex and R&M. That's one category. And, Michael, you have capex and R&M separate? What's the relationship between those two? And why do you separate them?

Emil:

They're gonna be different repair and maintenance is ongoing little stuff, capex is the big stuff having to replace an H vac, when you do turns, let's say you place floors or kitchen stuff, or whatever it is, those will be capex, but I just lump them together. Because, to me, it's like one thing, it's paying for stuff that is broken or needs to be fixed. So if that stuff, you know what I mean. So I just kind of lump it together under one line item.

Tom:

And I would say, for some of these values, I can just guarantee you that your assumptions are going to be wrong, you know, like capex and repairs. So what I mean by that is like, don't boil the ocean and trying to come up with these perfect assumption, I think get something that is directionally correct. And hopefully, it averaged out and the stuff comes to a wash. So use these your these best practices as it relates to coming up with these assumptions and then move on and then like plug through, plug them into your, into your process just because I think if you get too overburdened with these, like small, you know, we're talking about smallish, like tweaks to the system, I think you can kind of get lost in that and build onto that paralysis by analysis, my, my 10 cents, and also, you know, within Roofstock within their individual property listings, if you're looking at a listing on Roofstock, or you bring one to the cloud house analysis tool, it's going to list all these assumptions and and break them out using some best practices, either as a percentage as the purchase price, or what you'll see some some values for those. But again, my advice would be is, a lot of these numbers are not going to be correct, that you're coming up with a friend, obviously, you should try to get the ones that you can be correct. But to not kind of lose sight of making progress by just getting buried and tweaking little marginal marginal stuff.

Michael:

And like Emil said, at the end of the day, you know, I separate them out. But at the end of the day, it's paying for stuff. Like it doesn't really matter what stuff that's for, whether it's monthly or annual, whatever. But for me, because I'm a very process driven person, and I'm a very numbers driven person, it makes more sense for me just mentally, in my mind to break things out on kind of a line item. So I can attribute different expenses. But not everybody operates that way. So there's no right or wrong way. It's just whatever makes sense to you and how you think about it and how you better think about it. Is it one big bucket that takes care of everything cool. For me, I want to break it out, turn reserve R&M capex, it's just easier for me to visualize.

Pierre:

All right. So looking at insurance assumptions, I think I remember you saying something, Mike, about 1.8 to 2%, or something.

Michael:

Yeah, sort of. So for properties under 150,000 purchase price, I'll just throw point oh, eight of the purchase price to 1.2% of the purchase price. So if you that straight up the middle on $100,000 purchase price, I would call it about 1000 bucks in insurance. And like Tom said, you know, it's going to be probably around there. And could you get insurance for less? Yeah, absolutely. But that's the number that I use personally, just from my personal experience based on the types of coverages I want to get. And then that may also include an umbrella as well for some additional liability. So I'm saying my own insurance cost is going to be about 1%, roughly, of the of the home cost.

Pierre:

Okay, so for making assumptions, your tax assumption should come from the county assessor, your cap x and R&M should be $1 amount, and your insurance is going to be a percentage?

Michael:

I break everything down, basically into dollars and percentages. And I totally flip flop back and forth between the percentage value I attribute to the income or to the property purchase price. So I will think about it as a percentage, right as 1% of the purchase price, but I'll then mentally shift to $1 and think okay, great for $100,000 purchase at 1%. That's 1000 bucks and insurance costs, and my property taxes is going to be 2400 bucks. And then my repair maintenance is 75 bucks a month, which is 100 bucks a year. That's why writing all this stuff down and having a calculator built out is super helpful to look at everything. Once I have everything built in terms of either annual dollars or monthly dollars or percentage of the income. I then kind of sum everything I sum the monthly dollars, I sum the annual dollars and I sum the expense ratio totals. And so for every line item, there's a monthly amount, an annual amount and a percentage of rent them out. I looked to see where my big expense items in terms of percentage of the rent, how much of my rent is getting eaten up on a percentage basis by this line item expense and then looking at the total that total summation because we have the 50% rule, which says take 50% of the income and throw it out to expenses. I want to see how close did I get to that?

Emil:

This is probably another one where it's probably good to not guess and maybe call a couple insurance providers. Because the one place where this could just go completely out the window with these kind of rates that Michael mentioned, which are I think, are a good rule of thumb is like when you invest in a place like Florida, because there's hurricanes and all these potential natural disasters, my insurance is way more over there than it is in somewhere like St. Louis. So that's where the rain could potentially go out the window.

Michael:

Yeah, super good point, insurance is hyper local. So this is a very broad stroke that I've used, and I don't invest in places like Florida, which is the only reason that put bracket probably has held true for me for as long as it has. And that also goes out the window in places like California if you're getting earthquake insurance. And that's something you opt to purchase. That's expensive coverage like flood. So just be mindful of that this is just for your primary dwelling fire policy, in a non crazy has hazard zone.

Pierre:

So to get a clear picture of that, I just call an insurance agent down in the area and present them with a mock property and say, how much would this cost? Is that a reasonable thing to do? like telling the County, Tax assessor?

Emil:

I think so? I think they should be able to?

Michael:

Yeah, I think so. I think so they're probably going to ask you some questions about and just give them your best answer, like when How old is the roof? Is there a basement? That kind of stuff they'll want to know about? And just guess, and then you'll get a kind of ballpark idea of costs? But again, just keep in mind that as soon as you change, like zip codes, that insurance costs can can vary drastically.

Pierre:

All right. I think that's that section. I know a lot of people talk about you guys. Tom, you love single family rentals. Michael, you love multifamily? What should I know? Like we still haven't set our sights on a particular property yet we've looked at we've analyzed quite a few. But we're not set on whether we want to do a duplex or single family, what are some considerations that I should be taking to zero in on exactly what we're going to buy?

Tom:

I would say it kind of depends on your availability to analyze properties. So if you're looking at an area that has a ton of single family rentals, as well as duplexes available, if it makes sense to maybe make that decision earlier, if you have the time to look at both multifamily as well as single family, like why not run through that exercise. So I mean, I would say you don't necessarily have to make your decision. But it could be helpful in making that decision in the limit the number of properties that you're going to be evaluating. Typically there, there isn't a ton of multifamily. So there's no reason to take a look at those like as they're popping up in the areas that you're interested in buying. I would also mentioned this before is talk to the local property manager and get their input on if there's, you know, a good pop on single family rentals on that rent amount. And then look at your spreadsheet, you know, have them both kind of run in where you do cumulative income and costs and comparing them but I would say you don't necessarily have to make that decision right now, especially if there's not a lot of properties that you're evaluating.

Emil:

And you can also refer back to Episode 19 where we did our those are first or second showdown of the century series where we talked about single family versus multi family overriding their pros and cons to each speaking about my own investment journey. I'm happy I started with single family. I have both single family and small multifamily. I'm happy as a single family again, remote investor easier to get started with you have one tenant one unit, your tenant usually stays longer than a multifamily. So just like less things to deal with less headache. And then from there, you know, you sort of look at other stuff and say it is small multifamily, or medium sized multifamily make more sense. And I think take it from there. But I think I think single film is a great way to get started personally.

Michael:

Echoing the guys I started with single family too. And I'm so glad that I did. I would also say talk to your brother and determine what you want your ownership experience to look like and talk to property local property managers about what the difference in housing stock looks like in terms of different tenant pools. Oftentimes with multifamily, you have a very different tenant class tenant pool than you do with single family. And so if you have a much higher retention rate in a single family that is compared to multifamily, definitely think about that that'll affect your vacancy rate that will affect your property management fees that you're paying. So there's a lot more I think, than meets the eye when it comes to taking single family versus multi family. But think about how much you know, again, what do you want your ownership experience to look like?

Pierre:

Cool. So on the topic of property availability, like what's available in the market. Currently, we like the idea of buying on Roofstock buying on Roofstock provides some pretty cool securities and guarantees but right now I'm not seeing a ton of properties in the areas that we have selected as our high priority areas. So can you talk to me, Tom or Emil about BYOP Do we need our own agent and BYOP does Roofstock sock act as our agent there, do the Roofstock guarantees apply in Bring your own property is the acronym there.

Emil:

BYOP or bring your own property is a program that we we launched I think over a year and a half ago. And it allows people, when they find a listing on the MLS realtor.com, wherever just something not listed on roofstock, you can submit it for evaluation. And if it's approved, you get all of the guarantees and the safety net of roof stock without actually being listed on the site. And so what happens is you submit a property it has to be in one of the cities that we serve. So I think right now, it's about a dozen cities, I think Atlanta is one of those areas that bring you on property is available. So you would submit a property, goes to our underwriting team, they look at it, they analyze whether they believe it would qualify for the roof stock guarantee, if it's approved, we basically put you in touch with our local buyer broker agent in Atlanta. And they're the ones who actually submit your offer to the seller's agent. And so you'll work with that local buyer agent. And they'll help throughout the process, you still get again all the all the guarantees of Roofstock So the 30 day money back, you get the lease up guarantee if the property is vacant, if you go into contract on the property, Roofstock covers the inspection, think we're gonna be growing that program to more and more cities. But right now I think it's about a dozen cities, I believe you go to the homepage and you go to the menu, there's like a, either in the top menu or the bottom, there's…

Tom:

Like a learn it's the Learn drop down menu.

Emil:

Yeah. So if you click the Learn drop down, you'll see the bring your own property link, you click on that, it'll take you to the landing page, the landing page will tell you the different markets were available in for that program.

Pierre:

Cool. Do you know anything about like, if the fees are? Do you pay what you would pay an agent if you just found an agent on the MLS, or you're paying the fees that you would pay Roofstock?

Emil:

Yeah, so with Roofstock as a buyer, the only fees you pay are the marketplace fee. So it's either half a percent of the purchase price, or $500, minimum, whichever is greater. So if you think about it, it's kind of like a way of covering the inspection cost. It's kind of how I like to look at it. But you as the buyer, in a typical transaction, like let's say we're going off Roofstock, you don't pay anything. Usually during a transaction, the only thing you're paying for is you're paying for your own inspection report, you're paying for all those the fees and normal things, but it's the seller who's paying a lot of those fees.

Tom:

I think that BYOB program is a good opportunity. I mean, one of the to be you know, totally candid, one of the things I'd love to see with your stock is to get more listings. So with what this program with b y o p, it basically opens up the full MLS on the markets that we're in to be able to take advantage of the guarantees, take advantage of the transaction coordination services, as well as the post transaction support that we provide. And also, you know, we talked before about Roofstock Academy, as you get 20 $500 in credits to buy properties, you get to use those too. So in the last thing, just kind of like what you're paying agents, the seller is paying those Commission's so you as the buyer are just paying that one $500 or a half of 1% on that amount. So yeah, I would say BYOB is a good strategy. If there isn't something specific on the research platform that you're interested in B y o p is a great way to take advantage of some of those warranties, guarantees and all that good stuff.

Pierre:

Cool. I mean, I have a ton of other questions. But I guess we can revisit this, I don't want to dive into a whole new topic with just a couple minutes left here. So just wrapping up here. Do you guys have any final takeaways that I should consider?

Tom:

I think the most important thing you can do right now here is open a dialogue with some of those local partners. A very quick way to get trapped in paralysis by analysis is getting into a dark room and not talking to anybody. So like ultimately, real estate is a little bit of a it's a people business like a lot of businesses. So I think by setting kind of internal deadlines on yourself like okay, I got to talk to one property manager or a lender or whatever are turns broker do that and put self imposed deadlines, so you get it done. Otherwise, I think that is a risk of getting into paralysis by analysis by being in a dark room by yourself.

Emil:

And my biggest takeaway for you going back to just like, how do you get that feeling of confidence and know that you're making the right move? Wherever you decide to go analyze a bunch of deals until you have a good feeling, you know, analyze 50 plus deals and you feel like Alright, now I know, what kind of seems to be like an average deal, what's a bad deal? And what's a good deal so that you can invest with confidence?

Michael:

Yeah, I'm gonna kind of borrow a little bit from Tom and Emil and say, don't be in an echo chamber with just you and your brother, because every decision you've made is has gotten you to this point. So it's helpful to get input from from outside folks. And then like Emil was saying, analyze as many deals as you can and really learn about what you don't want. Because that will then bring to the surface, oh, this is what I do want. And so if you're having a hard time putting your finger on that, again, look for the stuff that you don't want, shed that and then move on.

Pierre:

Cool, that's really helpful, because I guess one of the main things that I was looking for from this first session here was that my brother and I, we meet every Monday evening, and we were at a loss of how do we use our time wisely? What's our checklist? What's a formula for our agenda that we meet every week, like what should we be doing? So I guess this is really helpful because I think now we can say Oh, analyze five properties and add them to our spreadsheet and let's go through and really see what this market is looking like return wise.

Michael:

Yeah. And what you can also do is I think I found it to be very helpful exercise. You both analyze the same property independently, and then meet up and talk about it. Cool. You get to see how he thinks you get to see how he thinks.

Pierre:

Nice.

Tom:

That was a freebie a final freebie.

Pierre:

Thanks, guys.

Tom:

Go get em Pierre.

Emil:

Yeah, let's check in with here in like a month. Yeah,

Michael:

Yeah, we'll definitely circle back and record another one of these. I think this is a really great insight into the journey of Pierre.

Emil:

I was gonna say it will be cool, also super fun to do an episode with you like while you're in escrow? And then after you close, like…

Michael:

Emil:

Yeah, exactly. I think that'll be really fun to document so we should definitely do that.

Michael:

Yeah.

Pierre:

Awesome, guys. Thank you so much.

Michael:

Totally. Alright, everybody. That was our episode with Pierre. A lot, a lot of fun, super great insight into his journey, what he's going through with his brother right now. We will definitely keep you all posted going forward. If you'd like this episode, feel free to give us a rating and review wherever it is your podcast that's super helpful for us. And we look forward to seeing you on the next one. Happy investing.

Emil:

Happy investing.

Tom:

Happy investing.

This episode is the first of a new series in which hosts, Tom, Michael and Emil help the producer of the show, Pierre with his first remote real estate acquisition. In this episode, we help Pierre get out of analysis paralysis and determine the next steps towards his acquisition. 

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Transcript

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by,

Tom:

Tom Schneider.

Emil:

Emil Shour.

Pierre:

Pierre Carrillo.

Michael:

And we've got kind of a special miniseries coming up for everybody. Pierre is our producer here, awesome dude at Roofstock. And he's actually going through the process of buying his first investment property as we speak. And so we thought it would be super fun to help him out, answer all of his questions that he has, as well as give everybody an insider's look and kind of behind the curtain at what Pierre is going through on a day to day basis. So in today's episode, we are going to tackle Pierre’s, questions, comments, concerns, we'll be recording episodes like these throughout the hero's journey. So everybody listening at home can join him along for his ride and his experience. Let's get into it.

Michael:

All right Pierre, bring everybody up to speed on where you've been thus far, where you're at now, and where you're trying to go? The past the present the future.

Pierre:

Yeah. So full disclosure, this is not my property. I am teaming up with my brother. I'm trying to save up for my property. But in the meantime, my brother has some capital to deploy. He's been listening to us. He's been in the academy for a while now. So he's getting stoked on the idea of real estate. So he's employed me to help him acquire a property.

Michael:

Awesome.

Emil:

So you're his acquisitions manager?

Pierre:

There it is. Yeah, exactly.

Michael:

And so Pierre, you've been using some of the tips and tricks that Zach Breverman talks about in episode 73 because he's a CFP, we had him on talking about how to save up your reserve to get started investing for yourself, right?

Pierre:

I have, you know, I could be a little bit better. I always struggle. You know, I'm at the beginning of my career right now. And expenses always seem to… I have an automated system to set aside money into my savings. But somehow I always find myself dipping into it for some sort of expense, or life emergency or something always seems to hit me.

Michael:

Right. Right. And I get that goes.

Pierre:

Just getting the snowball started is tough right now. That's why I'm stoked to be working with my brother because I am stoked to invest in real estate, and I'm not ready for it. And having my brother's capital to work with is giving me a practice run so that when I buy my first house, it's not going to be my first transaction.

Michael:

Right.

Tom:

Awesome, great way to do it.

Michael:

All right. So talk to us a little bit about what kind of property you and your brother are targeting. And where you both are looking without giving away too much of the secret sauce.

Pierre:

Sure, we are looking for a single family rental property that has a rent of over 1000 per month, or 1000 and above, that's just something that we thought would be safe, a better tenant pool in a better quality neighborhood with good school ratings. And, and we have been looking at Georgia, we like Georgia. Awesome. So some of the ways that we've been zeroing in on different markets is I built a Google map. So you can make your own custom Google Maps and then import data sets. So I've downloaded these spreadsheets about property taxes, and then overlaid that on my Google Maps. And you can add layers onto the maps. And so I color code each layer. So I found all these different industries imported those in I had to do those manually, because I didn't just have like a spreadsheet of all the different big companies, but I researched all the big companies drop them in on a green layer for industry. I did the top 25 school districts put those in on a blue layer. I did property taxes, put those in on a red layer, because to heck with property tax, to heck with taxes.

Michael:

Yeah.

Pierre:

And then I did the history of natural disasters like flooding, and tornadoes and just all these different data points that I found interesting. And then I put like a little radius around them, and then where I'm seeing all these different overlapping of my Venn diagrams, then we start zeroing in on those markets.

Michael:

Awesome.

Pierre:

So we are on the outskirts of Atlanta right now. That's what we’ve zoomed in on. Shouldn't have told everyone that because everyone's gonna…

Michael:

Thanks for the hard work.

Emil:

Biggest kept secret Atlanta.

Tom:

Little market nobody's ever heard of.

Michael:

So, tell us your what you and your brothers kind of investment thesis is are you targeting cash flow? are you targeting appreciation?

Pierre:

Yes. So following the Roofstock archetypes of investor profiles, we find ourselves in the balance buff category, which is seeking cash flow, but with the balance of appreciation, but with you know, heavy on the cash flow.

Michael:

Awesome. And so I'm gonna stop blabbering here for a minute. And I'm going to turn the mic over to you here and give you an opportunity to ask some questions to Tom Emil and I, in the section that we like to call coaches coaching coaches.

Pierre:

Cool. Yeah. So I mean, we're at this place where we've done a lot of analysis I think we're at the analysis paralysis stage, where we've done a lot of the research we we built our buy box in our financial so in the roofstock Academy we have this seven step investment plan know your financials great SMART goals, choose a strategy build your buy box

Pick a target market, identify your team. So we've gotten most of those things done. But now it's like it's a big purchase, it's a lot of money to drop down. Do we know enough? Is our research sufficient? Should we act? Or are we, you know, fooling ourselves and thinking that we know enough, and we're gonna just make a stupid decision with all this cash like, and for me, it's, I'm a bit nervous, too, because it's my brother's capital. And so I would feel terrible to advise my brother to do something that would not be the best investment with his cash. So that's where we're at right now we've done the research we found where we like really built a map and studied the market. And now we're like, Is this good? Are we in a good place to make a decision now?

Tom:

Something that I think could be a way to kind of break through that paralysis by analysis is, start leveraging that team, I do not think you can bring them in too early. So as a way to get myself comfortable in a specific sub market that I may not have a lot of experience in, is in going to the process of analyzing this properties. Bringing in specifically, I know Roofstock, has a buyer broker in the market, there is also a local property manager, what I wouldn't wait on and I think as a way to kind of keep momentum going is start bringing in a sanity check with some of these partners, that you're working with them and really leverage them as you're in your acquisition process. I think some specific questions I would ask, I would come to them with specific properties, and ask them what they think about the rent, what they think about the neighborhood, more times than not you're going to get a good is a informative answer. You know, one way or the other.

I've gotten responses back that you know, this property, this area doesn't appreciate a lot or, you know, maybe there's a little more tenant turnover, or Oh, great, this is a four bedroom, you're showing me and there's not a lot of those, it's going to run really quickly. So I find a way to personally get over that hold up, is to bring in some other eyeballs into the process. So that would be my first tip right now and getting over that initial kind of hump. Because I mean, man, from what you're the way that you're talking about it. And the way that you're evaluating this market, I'd say you're, you're pretty far ahead of advanced in the way that a lot of people think about it. And Atlanta is an awesome market. I love Atlanta, it's like a big part of my portfolio, especially kind of on those some of those suburb edges. So, I mean, it sounds like the next good step to kind of keep the pistons going is not just identifying those partners, but start engaging with them on a specific deal basis.

Michael:

I'm going to piggyback off Tom's answer and tweak the approach just a little bit. And so I think absolutely engaging with those local folks on the ground is going to be huge, but I wouldn't necessarily ask them their opinion outright, I would actually tell them your opinion and your conclusions of a property and see if they're going to validate them. Because what you're also going to determine is if your evaluation process is accurate. And so if you tell them, Hey, I found this property in this neighborhood, this is what I'm thinking to rent for this is what I'm thinking it'll, it'll sell for, and they can tell you yea or nay or anything in between. and they can actually help tweak your evaluation process and start educating you as opposed to a Yeah, I like it or no, I don't type of answer from them. And so that's something I always tell folks in the academy is, hey, if you ask me a question about a property, I want to know your conclusion. And then I want you to ask me a question. So that way, I can help you evaluate how you're thinking about properties and how you're actually evaluating properties, rather than just yes, no, I like it, or I don't.

Pierre:

That's great.

Emil:

I'm gonna go in a little bit of a different direction. I want to ask you, are you guys looking for something turnkey? Or are you looking to take on a project to start? Are you in different?

Pierre:

That was another question that I had, I mean, my brother is a contractor. So he is very well versed in the domain of building and rehab. But this is remote, he lives outside of the country, and a timezone far, far away. So we would have to have someone in the location that we trust, if we were going to do any rehab, but we're open to rehab, just to say tendon that's a little bit related is that we had enough cash to maybe buy to, to finance two properties. He met with Michael and we've kind of established a new strategy was to buy an all cash and then because to prioritize cash flow, we're going to buy an all cash property and then refinance it down the road. So we are open to doing a rehab. But, you know, what? Is that wise? I hear a lot of people saying your first property should be turnkey.

Emil:

I don't think there is a right or wrong. I think it's your level of comfort, just speaking from personal I went turnkey. For that reason. I was like, I don't know anything about real estate. I'm investing a couple 1000 miles away. Like I got to build trust with this property manager in this area, like feel confident enough before I go and take that on. So that is an approach a lot of people take. There's tons of stories of people who do the same thing and they take on a project and they do fine or they take on a project and they get in over their head but then they have a lot of learning that they can take the second one so I don't know. I think it's it's kind of just like what do you feel comfortable. That'll allow you to just take step one, right, like we talked about all the time, I think the most important thing to remember is this is not going to be your home run deal. This is like your learning property, you're going to do a lot more, and each one should get better. So like when you have that in mind that it doesn't need to be the perfect or the homerun deal. I think it just helps you like realize this is part of learning part of just the process.

Alright, so if you're open to both, I would say like, the biggest thing that can build confidence is like you're thinking, I don't know if this is a good deal. Is it a good deal compared to other deals? Right? Like, do I feel like I'm getting the right deal in this market? Now that you've chosen your market? Right? So I think the best thing you can do is just look at a lot of properties, underwrite them, analyze them, and just look at the returns. And then you can start to figure out this is what Michaels Zuber talks about, you know, we've had on the podcast about learning a market is like in the areas you're interested in, what are the returns in those areas, right. And then once you've looked at a lot of properties, you'll know what is a good deal versus a bad deal versus an average deal or whatever. So I think that helps build a lot of confidence, I think is when you've looked at enough deals in that market you're set on, then you're like, Okay, I've analyzed a bunch of properties, I think this one's going to be a good deal compared to the others I've seen.

Pierre:

So just more specifically, around underwriting. I know you guys have spoken a lot about the assumptions that you bake into underwriting, what are some considerations that I should be taking in mind when calculating the returns of a particular property?

Michael:

You should go listen to Episode 67, or whatever it is. Just kidding.

Piere:

Yeah. That's how I was thinking I was looking for one episode that we had just to revise, because I mean, I hear you guys talk about it all the time. But I, I don't have the hands on repeated experience of it. So I can hear you guys talk about it. But I always forget, like, oh, when I'm calculate 2% for insurance or whatever, or calculate this much for… what are the top five things I should be looking for when making an assumptions for a property?

Michael:

I would say first and foremost is your property taxes, you've got to get that right. And very similar to like what a meal was mentioning, talking about what Michael Zuber talks about is go there in the market. And so if you're pretty committed to Atlanta, or you're very interested in Atlanta, I would go find out what counties are in Atlanta, and then call the county assessor and ask them, How do you calculate your after sale property taxes and investor? Because then you'll know that it'll give you some kind of formula, some kind of millage rate times value, whether that's the purchase price or some assessed value. Now, you know, for every property you evaluate in that county, how do you calculate your property taxes, so it becomes much less of an assumption, and much more a calculated value.

Pierre:

So you would say, and that's interesting, because I haven't been doing that with my property taxes, I've actually gone through and just downloaded a spreadsheet of every County's median property taxes. And so I have like, by the median property tax, I haven't done a calculation, I just have a straight hard number that is the median property taxes for that particular region.

Michael:

So the problem with that I had a problem with that…

Tom:

I think I'm gonna say the exact same thing you're gonna say.

Michael:

Yeah, go for it. Tom.

Tom:

There's a lot of owner occupied taxes where they have homestead exemptions. I'm glad I stole this from Michael, just to get the average number.

Pierre:

You're so good, Tom.

Michael:

You're like a hyena.

Tom:

Man, I feel like I just stole some candy. Homeowners, they typically get a pretty big discount on their property taxes. So doing that kind of flatline, is going to be that that I would be a little little weary of.

Pierre:

Good to know.

Michael:

Same thing goes for insurance. And it when you look at the average insurance rates, it's typically going to be quoted for homeowners, which is a different rate than for investors and landlords. So that's why I just like calling the county assessor and just getting it directly from the source, they'll give you some kind of millage rate, and they'll just likely tell you how to calculate it. And I wouldn't let that person off the phone until you have a pretty clear understanding of how you come up with that number.

Emil:

You can also ask your property manager, I've called county assessors, and sometimes they're very unhelpful. And they have these really complicated formulas where I'm like, there's no chance in hell that I'm going to be able to figure out what you're talking about. So like, I think your property manager, if they own investment properties, like a lot of property managers, the founder owns a couple investment properties. Sometimes they can be a good resource as well, or just people who invest there, I can just tell you, like their rate that they see on investment properties can be helpful as well.

Pierre:

Cool.

Emil:

But the county assessor is a good place to start, because it's Yeah, it just sometimes aren't helpful.

Michael:

What other expenses should Pierre be thinking about? When he's making his assumptions?

Pierre:

We're looking at cap x, we're looking at closing costs, a maintenance reserve, property taxes.

Emil:

So Episode 72, which I think the one we were talking about, ignore the noise. Here's how to actually calculate projected cash flow that walks through a lot of the assumptions A lot of us take, I think, for single family. The big ones we were talking about is like a percentage can be misleading percentage of rent. So just having a fixed number there. I think I do like $150 total ish for cap x and R&M per month thing, Michael, you said you do a little bit more.

Michael:

That's kind of right in there I like 75 $200 a month for R&M. And then cap x is driven by the property, vintage and the age  of the systems in the home. So the mechanicals, water heater roof, that kind of stuff that can go up or down depending on the condition and vintage.

Pierre:

So the way you presented it Emil right now was you had capex and R&M. That's one category. And, Michael, you have capex and R&M separate? What's the relationship between those two? And why do you separate them?

Emil:

They're gonna be different repair and maintenance is ongoing little stuff, capex is the big stuff having to replace an H vac, when you do turns, let's say you place floors or kitchen stuff, or whatever it is, those will be capex, but I just lump them together. Because, to me, it's like one thing, it's paying for stuff that is broken or needs to be fixed. So if that stuff, you know what I mean. So I just kind of lump it together under one line item.

Tom:

And I would say, for some of these values, I can just guarantee you that your assumptions are going to be wrong, you know, like capex and repairs. So what I mean by that is like, don't boil the ocean and trying to come up with these perfect assumption, I think get something that is directionally correct. And hopefully, it averaged out and the stuff comes to a wash. So use these your these best practices as it relates to coming up with these assumptions and then move on and then like plug through, plug them into your, into your process just because I think if you get too overburdened with these, like small, you know, we're talking about smallish, like tweaks to the system, I think you can kind of get lost in that and build onto that paralysis by analysis, my, my 10 cents, and also, you know, within Roofstock within their individual property listings, if you're looking at a listing on Roofstock, or you bring one to the cloud house analysis tool, it's going to list all these assumptions and and break them out using some best practices, either as a percentage as the purchase price, or what you'll see some some values for those. But again, my advice would be is, a lot of these numbers are not going to be correct, that you're coming up with a friend, obviously, you should try to get the ones that you can be correct. But to not kind of lose sight of making progress by just getting buried and tweaking little marginal marginal stuff.

Michael:

And like Emil said, at the end of the day, you know, I separate them out. But at the end of the day, it's paying for stuff. Like it doesn't really matter what stuff that's for, whether it's monthly or annual, whatever. But for me, because I'm a very process driven person, and I'm a very numbers driven person, it makes more sense for me just mentally, in my mind to break things out on kind of a line item. So I can attribute different expenses. But not everybody operates that way. So there's no right or wrong way. It's just whatever makes sense to you and how you think about it and how you better think about it. Is it one big bucket that takes care of everything cool. For me, I want to break it out, turn reserve R&M capex, it's just easier for me to visualize.

Pierre:

All right. So looking at insurance assumptions, I think I remember you saying something, Mike, about 1.8 to 2%, or something.

Michael:

Yeah, sort of. So for properties under 150,000 purchase price, I'll just throw point oh, eight of the purchase price to 1.2% of the purchase price. So if you that straight up the middle on $100,000 purchase price, I would call it about 1000 bucks in insurance. And like Tom said, you know, it's going to be probably around there. And could you get insurance for less? Yeah, absolutely. But that's the number that I use personally, just from my personal experience based on the types of coverages I want to get. And then that may also include an umbrella as well for some additional liability. So I'm saying my own insurance cost is going to be about 1%, roughly, of the of the home cost.

Pierre:

Okay, so for making assumptions, your tax assumption should come from the county assessor, your cap x and R&M should be $1 amount, and your insurance is going to be a percentage?

Michael:

I break everything down, basically into dollars and percentages. And I totally flip flop back and forth between the percentage value I attribute to the income or to the property purchase price. So I will think about it as a percentage, right as 1% of the purchase price, but I'll then mentally shift to $1 and think okay, great for $100,000 purchase at 1%. That's 1000 bucks and insurance costs, and my property taxes is going to be 2400 bucks. And then my repair maintenance is 75 bucks a month, which is 100 bucks a year. That's why writing all this stuff down and having a calculator built out is super helpful to look at everything. Once I have everything built in terms of either annual dollars or monthly dollars or percentage of the income. I then kind of sum everything I sum the monthly dollars, I sum the annual dollars and I sum the expense ratio totals. And so for every line item, there's a monthly amount, an annual amount and a percentage of rent them out. I looked to see where my big expense items in terms of percentage of the rent, how much of my rent is getting eaten up on a percentage basis by this line item expense and then looking at the total that total summation because we have the 50% rule, which says take 50% of the income and throw it out to expenses. I want to see how close did I get to that?

Emil:

This is probably another one where it's probably good to not guess and maybe call a couple insurance providers. Because the one place where this could just go completely out the window with these kind of rates that Michael mentioned, which are I think, are a good rule of thumb is like when you invest in a place like Florida, because there's hurricanes and all these potential natural disasters, my insurance is way more over there than it is in somewhere like St. Louis. So that's where the rain could potentially go out the window.

Michael:

Yeah, super good point, insurance is hyper local. So this is a very broad stroke that I've used, and I don't invest in places like Florida, which is the only reason that put bracket probably has held true for me for as long as it has. And that also goes out the window in places like California if you're getting earthquake insurance. And that's something you opt to purchase. That's expensive coverage like flood. So just be mindful of that this is just for your primary dwelling fire policy, in a non crazy has hazard zone.

Pierre:

So to get a clear picture of that, I just call an insurance agent down in the area and present them with a mock property and say, how much would this cost? Is that a reasonable thing to do? like telling the County, Tax assessor?

Emil:

I think so? I think they should be able to?

Michael:

Yeah, I think so. I think so they're probably going to ask you some questions about and just give them your best answer, like when How old is the roof? Is there a basement? That kind of stuff they'll want to know about? And just guess, and then you'll get a kind of ballpark idea of costs? But again, just keep in mind that as soon as you change, like zip codes, that insurance costs can can vary drastically.

Pierre:

All right. I think that's that section. I know a lot of people talk about you guys. Tom, you love single family rentals. Michael, you love multifamily? What should I know? Like we still haven't set our sights on a particular property yet we've looked at we've analyzed quite a few. But we're not set on whether we want to do a duplex or single family, what are some considerations that I should be taking to zero in on exactly what we're going to buy?

Tom:

I would say it kind of depends on your availability to analyze properties. So if you're looking at an area that has a ton of single family rentals, as well as duplexes available, if it makes sense to maybe make that decision earlier, if you have the time to look at both multifamily as well as single family, like why not run through that exercise. So I mean, I would say you don't necessarily have to make your decision. But it could be helpful in making that decision in the limit the number of properties that you're going to be evaluating. Typically there, there isn't a ton of multifamily. So there's no reason to take a look at those like as they're popping up in the areas that you're interested in buying. I would also mentioned this before is talk to the local property manager and get their input on if there's, you know, a good pop on single family rentals on that rent amount. And then look at your spreadsheet, you know, have them both kind of run in where you do cumulative income and costs and comparing them but I would say you don't necessarily have to make that decision right now, especially if there's not a lot of properties that you're evaluating.

Emil:

And you can also refer back to Episode 19 where we did our those are first or second showdown of the century series where we talked about single family versus multi family overriding their pros and cons to each speaking about my own investment journey. I'm happy I started with single family. I have both single family and small multifamily. I'm happy as a single family again, remote investor easier to get started with you have one tenant one unit, your tenant usually stays longer than a multifamily. So just like less things to deal with less headache. And then from there, you know, you sort of look at other stuff and say it is small multifamily, or medium sized multifamily make more sense. And I think take it from there. But I think I think single film is a great way to get started personally.

Michael:

Echoing the guys I started with single family too. And I'm so glad that I did. I would also say talk to your brother and determine what you want your ownership experience to look like and talk to property local property managers about what the difference in housing stock looks like in terms of different tenant pools. Oftentimes with multifamily, you have a very different tenant class tenant pool than you do with single family. And so if you have a much higher retention rate in a single family that is compared to multifamily, definitely think about that that'll affect your vacancy rate that will affect your property management fees that you're paying. So there's a lot more I think, than meets the eye when it comes to taking single family versus multi family. But think about how much you know, again, what do you want your ownership experience to look like?

Pierre:

Cool. So on the topic of property availability, like what's available in the market. Currently, we like the idea of buying on Roofstock buying on Roofstock provides some pretty cool securities and guarantees but right now I'm not seeing a ton of properties in the areas that we have selected as our high priority areas. So can you talk to me, Tom or Emil about BYOP Do we need our own agent and BYOP does Roofstock sock act as our agent there, do the Roofstock guarantees apply in Bring your own property is the acronym there.

Emil:

BYOP or bring your own property is a program that we we launched I think over a year and a half ago. And it allows people, when they find a listing on the MLS realtor.com, wherever just something not listed on roofstock, you can submit it for evaluation. And if it's approved, you get all of the guarantees and the safety net of roof stock without actually being listed on the site. And so what happens is you submit a property it has to be in one of the cities that we serve. So I think right now, it's about a dozen cities, I think Atlanta is one of those areas that bring you on property is available. So you would submit a property, goes to our underwriting team, they look at it, they analyze whether they believe it would qualify for the roof stock guarantee, if it's approved, we basically put you in touch with our local buyer broker agent in Atlanta. And they're the ones who actually submit your offer to the seller's agent. And so you'll work with that local buyer agent. And they'll help throughout the process, you still get again all the all the guarantees of Roofstock So the 30 day money back, you get the lease up guarantee if the property is vacant, if you go into contract on the property, Roofstock covers the inspection, think we're gonna be growing that program to more and more cities. But right now I think it's about a dozen cities, I believe you go to the homepage and you go to the menu, there's like a, either in the top menu or the bottom, there's…

Tom:

Like a learn it's the Learn drop down menu.

Emil:

Yeah. So if you click the Learn drop down, you'll see the bring your own property link, you click on that, it'll take you to the landing page, the landing page will tell you the different markets were available in for that program.

Pierre:

Cool. Do you know anything about like, if the fees are? Do you pay what you would pay an agent if you just found an agent on the MLS, or you're paying the fees that you would pay Roofstock?

Emil:

Yeah, so with Roofstock as a buyer, the only fees you pay are the marketplace fee. So it's either half a percent of the purchase price, or $500, minimum, whichever is greater. So if you think about it, it's kind of like a way of covering the inspection cost. It's kind of how I like to look at it. But you as the buyer, in a typical transaction, like let's say we're going off Roofstock, you don't pay anything. Usually during a transaction, the only thing you're paying for is you're paying for your own inspection report, you're paying for all those the fees and normal things, but it's the seller who's paying a lot of those fees.

Tom:

I think that BYOB program is a good opportunity. I mean, one of the to be you know, totally candid, one of the things I'd love to see with your stock is to get more listings. So with what this program with b y o p, it basically opens up the full MLS on the markets that we're in to be able to take advantage of the guarantees, take advantage of the transaction coordination services, as well as the post transaction support that we provide. And also, you know, we talked before about Roofstock Academy, as you get 20 $500 in credits to buy properties, you get to use those too. So in the last thing, just kind of like what you're paying agents, the seller is paying those Commission's so you as the buyer are just paying that one $500 or a half of 1% on that amount. So yeah, I would say BYOB is a good strategy. If there isn't something specific on the research platform that you're interested in B y o p is a great way to take advantage of some of those warranties, guarantees and all that good stuff.

Pierre:

Cool. I mean, I have a ton of other questions. But I guess we can revisit this, I don't want to dive into a whole new topic with just a couple minutes left here. So just wrapping up here. Do you guys have any final takeaways that I should consider?

Tom:

I think the most important thing you can do right now here is open a dialogue with some of those local partners. A very quick way to get trapped in paralysis by analysis is getting into a dark room and not talking to anybody. So like ultimately, real estate is a little bit of a it's a people business like a lot of businesses. So I think by setting kind of internal deadlines on yourself like okay, I got to talk to one property manager or a lender or whatever are turns broker do that and put self imposed deadlines, so you get it done. Otherwise, I think that is a risk of getting into paralysis by analysis by being in a dark room by yourself.

Emil:

And my biggest takeaway for you going back to just like, how do you get that feeling of confidence and know that you're making the right move? Wherever you decide to go analyze a bunch of deals until you have a good feeling, you know, analyze 50 plus deals and you feel like Alright, now I know, what kind of seems to be like an average deal, what's a bad deal? And what's a good deal so that you can invest with confidence?

Michael:

Yeah, I'm gonna kind of borrow a little bit from Tom and Emil and say, don't be in an echo chamber with just you and your brother, because every decision you've made is has gotten you to this point. So it's helpful to get input from from outside folks. And then like Emil was saying, analyze as many deals as you can and really learn about what you don't want. Because that will then bring to the surface, oh, this is what I do want. And so if you're having a hard time putting your finger on that, again, look for the stuff that you don't want, shed that and then move on.

Pierre:

Cool, that's really helpful, because I guess one of the main things that I was looking for from this first session here was that my brother and I, we meet every Monday evening, and we were at a loss of how do we use our time wisely? What's our checklist? What's a formula for our agenda that we meet every week, like what should we be doing? So I guess this is really helpful because I think now we can say Oh, analyze five properties and add them to our spreadsheet and let's go through and really see what this market is looking like return wise.

Michael:

Yeah. And what you can also do is I think I found it to be very helpful exercise. You both analyze the same property independently, and then meet up and talk about it. Cool. You get to see how he thinks you get to see how he thinks.

Pierre:

Nice.

Tom:

That was a freebie a final freebie.

Pierre:

Thanks, guys.

Tom:

Go get em Pierre.

Emil:

Yeah, let's check in with here in like a month. Yeah,

Michael:

Yeah, we'll definitely circle back and record another one of these. I think this is a really great insight into the journey of Pierre.

Emil:

I was gonna say it will be cool, also super fun to do an episode with you like while you're in escrow? And then after you close, like…

Michael:

Emil:

Yeah, exactly. I think that'll be really fun to document so we should definitely do that.

Michael:

Yeah.

Pierre:

Awesome, guys. Thank you so much.

Michael:

Totally. Alright, everybody. That was our episode with Pierre. A lot, a lot of fun, super great insight into his journey, what he's going through with his brother right now. We will definitely keep you all posted going forward. If you'd like this episode, feel free to give us a rating and review wherever it is your podcast that's super helpful for us. And we look forward to seeing you on the next one. Happy investing.

Emil:

Happy investing.

Tom:

Happy investing.