The SFR Show

In this episode Emil, Tom and Michael discuss the most important factors to consider when looking for insurance.

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Emil: 

Hey everyone, welcome back for another episode of your favorite show The Remote Real Estate Investor. My name is Emil Shour. And today I'm joined by my co host,

Tom:

Tom Schneider

Michael:

Michael Albaum.

Emil:

So in today's episode, we're going to be talking about how to find and vet an insurance provider. So let's hop into this one.

Emil:

Alright guys, before we hop in, let's talk updates, what's going on your real estate investing lives?

Michael:

So I had that six unit under contract I was talking about last time that fell out buyer couldn't perform, I was pretty frustrated with the whole contract of itself. I did a poor job reviewing it, but my agent didn't point out a couple pretty big ticket items that were included in that contract. And so I fired him this morning, and I'm gonna be placing that listing with somebody else. It was an uncomfortable conversation, but I think one that had to be had. And, you know, he asked me point blank, he says, What are you unhappy with the service? And I tell him, yeah, these are my issues that I'm having with it alone as independent issues, not a big deal, but kind of cumulatively, they cause me a lot of heartache. And the other thing I didn't realize is that I had signed a year long agreement with this listing agent, which goes against every fiber of my being. But again, it was something that I rushed and didn't do a good job looking at. So anytime you're signing a listing agreement with an agent, be very particular about the length of time in which that contract is enforced for.

Tom:

I love these episodes, and kind of respect Atomy stuff, putting a lot of these learnings forward to limit people in the future for making them. So looking back retrospect when you initially vetted this agent, and we'll do another episode, you know, more specific on the agent side, but what would you have done differently? I mean, one, you mentioned the one year listing agreement, what else anything else you would have done to suss out this subpar?

Michael:

Yeah, he was a recommendation from my property manager who I like quite a bit, and I was kind of looking to get it done pretty quick. So I said, Okay, sure. Yeah, we'll go with your guy. That sounds great. They've already got a pre existing relationship. I didn't think about this other group that I already had done a bunch of deals with, because my agent friend had ended up he had left that group. And so I said, Oh, well just use him for everything. And then he left the picture. So I didn't really have a good person to reach out to so this is a personal reference. Cool, just go that route. But absolutely, I should have interviewed some other folks. But I was looking to get it done too quickly. So didn't listen to my own advice. And yet again, it's come to bite me in the rear. So I don't know why I think that'll stop happening one day, it just clearly is it won't

Tom:

Good. Take away. Good take away.

Michael:

Yeah. What about you, Tom? What you got going on?

Tom:

Oh, not a lot still waiting on this refi close at the Wheelock wine wine wine complaint complaints, snail mail, blah, blah, blah. I just listened to our last week's episode, kind of related kind of unrelated, we're going into another week of bad air and in California, these fires and my wife are playing around the idea of Oh, you know, what if we you know, live or move around a little bit and one idea remote real estate invested kind of relating is like what if we like bought a house in an area that we are bullish on investing, you know, bought one probably more of appreciation play in like a Raleigh or like a Columbia, South Carolina or, and we go and live in it for like six months or a year, rent our house here in California, and then come back to California. And we also have, you know, turn that other one into a rental. So playing around with some kind of like exotic owner occupied slash turned into a rental slash bounce around, we have a son right now and be fun to get a place that has a big yard to let him run around at least for a year in his life. And who knows, maybe just fall in love in Raleigh, it's probably unlikely, but it's not out of the realm of possibility of doing some exercise like that. So

Michael:

Do it.

Emil:

Tom, we had someone on the podcast who basically did this like not in as short of a timeframe, but moved from city to city picked up a rental house hack did live there, and then change it to a rental when he left that city. So not a bad strategy.

Michael:

He just left this slug trail of rentals in his wake.

Tom:

I love that idea. And it's like your cities are fun. Yeah, go from each one to one.

Michael:

And not only that, but new cities are fun. And depending on the purchase price, too. It might never make sense as an investment property when purchased as an investment property. But if your interest rate is such that your your financing is such that it's so much cheaper, you may have just created the potential for a rental where there previously wasn't one.

Tom:

Yeah, exactly. And I think that really drills The advantage of this kind of strategy is you're like you're going sub 3% on these like awesome fixed 30 year products and buying it as an owner occupied because that's what you're initially going to do. And then your slug trail just moves away. And then you still have the remnants of this really historically awesome financing. And a house that normally where you wouldn't be able get the cash flow since you're having such incredible rates. So I don't know. We'll see. We'll see. It's a pontificating.

Michael:

Nice

Tom:

thinking about it. Yeah. Anyway, that's my update.

Michael:

And Emil?

Emil:

An update for me. We put an offer on a four unit property yesterday in St. Louis, where I'm looking right now and it was priced really well it's priced under 100 K, which is really rare to see the neighborhood's okay. Probably like a two star neighborhood rating if we were to equate it on, like Roofstock scale. But 700 k newer mechanicals, right like new new h fac new water heater, new boilers. But the insides of these apartments are a little dilapidated. But that seemed like an easier first project and kind of like full gut rehab and like new mechanicals and everything, so it kind of seemed like it was it was gonna be the right property. We put an offer in yesterday. But the seller I got noticed today that seller went with a different offer. So onto the next one.

Michael:

Are you going to put in a standing backup?

Emil:

I don't even know what that is. So no.

Michael:

You should put a standing backup offer is basically saying, hey, if that buyer can't perform, I'm willing to still buy it at your offer original offer, or some other offer. And so the seller knows that, hey, okay. I don't have to go call these for other people that also submit offers, I can go to Emil, because I know what his offer is. And it's still good on it.

Emil:

Yeah, I should just talk about that. We just left it as let's keep our eye on this. And if it falls through, we'll go back. Yeah.

Michael:

But the standing offer is nice, because it kind of separates you from any of the other people that are also doing that. And you're saying, Yes, I can perform. Yes, I will perform, should it become available.

Tom:

Love that idea?

Emil:

Is there any let's see, I find something else. And I get into offer on something like it's not like binding?

Michael:

No, not by any means. Not by any means.

Emil:

Well, then I have a nice action item after this episode. Thanks, Michael.

Michael:

You’re welcome man. And so kind of to Tom's question. What would you have done differently? Or if anything on that knowing what you know, now?

Emil:

Nothing I think…

Michael:

Perfect.

Emil:

I made an offer where I was comfortable. I made an offer where I was comfortable and let the chips land where they, lie where they land? It takes 2 to tango? I don't know.

Michael:

There is no crying in baseball.

Emil:

So yeah, no, I felt good about it. It was a I hadn't made an offer in a while. So it's good to just at least start making some activity and start pushing through again. So

Tom:

That's a funny little dopamine. I'm probably like six or eight months since I've made an offer. It's like, oh, man, we would feel pretty good right now submitting an offer.

Emil:

It's also nerve wracking. And even though you've done it a bunch, right, when it's been a while and you're back at it, like you look at your spreadsheet numbers look good. Still. There's something about like, going and actually making an offer. That's a little nerve racking. I don't know,

Michael:

I remember the first offer I made. I was like, I hope they wait so backwards. Yeah,

Tom:

I know. Yeah. It's like, Oh, I'm a sucker if they you know, accept it right away. And I know, right? Did your work? You're okay. Right. What a funny psychology.

Emil:

Yeah, of it all hundred percent.

Michael:

Emil, I love that you wouldn't change anything. Because I think we talked about on previous episodes, we should be really looking to evaluate the decision making process, not the outcome. And so it clearly you did your homework, you felt good about it. And the fact that you wouldn't do anything differently means that I think you executed really well. And now it's out of your hands.

Emil:

Thanks, man. Yeah, it wasn't like emotional at all, like, here's what I can do, here's what would be a good deal for me, and you lose enough offers. And it's just, it's on to the next. Right, so it's all part of it. So let's move on to the topic for this episode, which is how do you find and vet an insurance provider? And we're gonna start with when in the process? Do you go out and find insurance? Is it before you make offers is it during escrow, I can actually leave this one off, I don't have a ton to add to this episode, not my area of specialty, but I can add to this one. So for me in the past, I have typically looked for insurance once I have a property under escrow, that's when I'm going out and looking for insurance. I don't really do any upfront before I go and buy any properties. What are you guys?

Tom:

Yeah, so the first thing I'll do is get kind of guidelines on estimating how much insurance is going to be. And I would just put into two camps like a property is either in a zone where I'm going to have to pay extra because maybe it's a hurricane or tornado or or it's not, it's an it's an area that's relatively low. So just for like proforma purposes, have a rough idea of where I'm going to be paying for insurance. And this can be talking to other investors, forums, whatnot, and actually selecting an insurance provider. Oftentimes, I'd say your first deal is like, when you add extra properties, a lot of times you're using a similar and maybe there might be some cases where you're not, but I agree with Emil, and that it's something that I won't spend a lot of Midnight Oil, there probably is some improvements you can get on pricing and going through a lot of different ones, but it's kind of similar pricing, there's not going to be just these wild swings, unless in some areas where there is like hurricane stuff, but generally speaking, it's a pretty commodity. So it's it's similar answer to him, you know, we're all get something in escrow. And specifically, I already have insurance providers that I like, just layer right on top, Michael?

Michael:

Yeah, perfect. I'm pretty similar. I'm also waiting, I think partially because it's such an like, I'm not gonna say easy task, but it's a fairly quick task to have done. This isn't a very long process. So I can be on the phone with an insurance rep in the morning and have a quote by the afternoon and so it's not something that takes a long time that they need a lot of documentation for and you also need to have some specific property information, some property specific information, to answer some of the questions to get an accurate quote, like, what is the year of the roof? What is the year of some of the mechanicals? When was the property last rehab. So if you don't know any of those things about a property, it's tough to get an accurate quote for. But Tom, I'm actually going to disagree with you on the commoditization of insurance. I think that there are some vastly different rates out there from different carriers. And so I think it's really important to kind of compare and contrast them, I was chatting with my commercial insurance broker.

And he was telling me that if we had to go place my current portfolio with a different carrier, it would probably be about a $15,000, delta in coverage. And for like, less coverage, for less good, I guess that's a, that's a phrase coverage. So I think that there is a significant difference between carriers. And of course, there's a large portfolio. So those numbers are magnified. But even on single family homes on single units, or duplexes, there are carriers that do this stuff really well, and that are hungry for growth. And so they're going to be priced really competitively. There are other companies that are not looking to grow are not interested in that risk, like a property or a certain style of insurance is called a risk. They're not interested in that. And so they're going to price it because they don't want it but they're happy to take your money if you're willing to give it to them. So kind of like general contractors, if they're really busy, they're gonna throw out a ridiculous high bid, because they don't want the work. But they're happy to do it for that price. Same thing with insurance carriers. So I would definitely look to interview several different and get several different quotes. And we're going to talk here on this episode about how to do that effectively here in just a little bit. I

Tom:

I have no come back. I think you're right. I mean that in the sense that like once you have a carrier that you like, it's pretty plug and play. But some of the other like big moving variables is like deductible amounts, which we'll talk about a little bit more is there can be some weirdness in the way that they're applied. For example, if the premises occupied versus vacant, we were actually talking about before the episode that I probably need to change my insurance on just looking to improve it and that I haven't changed in a while or shopped around and probably some shekels to save and some liability to limit But anyways, Michael, good challenge, and you win. All right.

Michael:

I've won the day.

Tom:

It was a test and you pass.

Emil:

Tom, you bring up something good that I forgot to mention is like getting an estimate first, obviously, like in order to make an offer, you should not like have a an assumption for what his insurance is going to be ballpark estimate. So that is definitely a good point in like putting a ballpark. And I think you mentioned a couple ways to find that. So good point.

Michael:

Yeah, just to piggyback on that to Emil, Tom, you bring up an amazing point that there are these outside coverages that are not part of a standard insurance policy. And for everybody listening, those are typically going to be flood, and earthquake are going to be two separate policies that are not going to be covered on your standard policy. So if you are purchasing a property in a flood zone, or in an earthquake zone, be aware of that. And that can be found out by simple search, you know, flood zones in this area, or earthquake zones in this area. And if you plan on purchasing those insurances, there's additional costs there. And most lenders are going to require that you're going to carry flood insurance, they are not going to require you to carry earthquake insurance for the most part. And so talk with your lender about what it is that they're looking for. And in coverage. So hurricanes kind of tricky, because the way that the insurance works is typically based on the initiating events. And so if there's a flood, if the property receives water damage, as a result of the waters coming from the ground, they might not cover that could be called considered a flood. But if you left the window open, and then the rain got in, I don't know, I think it's important to make that as is their separate hurricane insurance?

Tom:

I believe there is and I think it's also extremely expensive. I remember a couple of years ago, Roofstock He was like a different investor that I knew there was flooding, and they didn't have flood insurance. And the house happened to get hit by a tree. That was I don't know if it was moved by the flood or whatnot. But they were able to argue that it's the tree that hit it. Like it wasn't the flood, it wasn't the flood, they're able to collect on their policy. And I mean, the water I think was going to cause you know, massive trouble for the house. But since the house got hit by a tree, they are able to be okay and collecting insurance to fix the property. But if it had not, it's like a funny thing. If there's like disasters, you're just like rooting for certain things to happen. You know, to be able for your insurance policy.

Michael:

We always used to joke, you know, in the business with a lot of clients and they're like, man, I don't want to put sprinklers in my building because I want the thing to burn down because it's like guys, like don't tell me this. I'm the wrong person to be having this conversation with but it's pretty funny. I get what you're saying.

Tom:

And also just you know, we're not taking lightly like the really tragic stuff with this happens with some people with these workings but it's just crazy with insurance. How one little way of your house getting damaged versus another if the waters is running into it. Oh no, they're not going to cover that. Oh, with a tree, wacks it. Oh, there you go. Now you get full coverage. The other than Sandy is the right word, but just kind of weirdness of it all.

Michael:

Yeah. So I think this begs the issue of go talk to your insurance rep, whoever that might be, and look to get a very clear understanding of what is covered, and what is not, especially based on the zone that you're in. And so be armed with that information, Hurricane zone, flood zone, earthquake zone, as you are going to look to get quotes,

Tom:

I think, well, this is an episode like just on floods and hurricanes will bring someone in FEMA or something. So anyways, future episode, let's we'll continue on.

Emil:

Alright, so let's segue into how do we actually go out and source different insurance providers wants to take first crack at that?

Michael:

The interwebs. I like online reviews and searches of different carriers and providers. And a distinction I think that we should make here is the difference between an insurance carrier or an insurance agent, or an insurance representative or an insurance broker. So a broker is kind of like a mortgage broker, and that they might not work for a specific company, they'll go out and shop the market and find a good product for you. Again, just like a mortgage broker would, and insurance agents often will work for an insurance broker. And so they're just kind of like a real estate agent. And so those can just typically be employees of the brokerage. And so but you can also have direct agents that work for a carrier themselves, like if you call up State Farm, you're going to talk to an insurance agent, but they're only going to be able to sell you State Farm Insurance. Now, they might be able to sell you something else if you don't fit into their program. But traditionally, they are going to try to place you into the State Farm program.

So you can have agents that are independent, you can have agents that are work for specific companies, and go back all of our listeners to go back and listen to the insurance episode we had Nick Aube on. He's an insurance broker, I think is what the term he coined himself. And that is Episode 26, where we talk about insurance and insurance needs of investors with Nick Aube. So he talks about the differences in insurances and some terminology there. But so it's I think it's hard to make that distinction. And understand when you're calling someone, what type of insurance they are going to be looking to sell to you, whether it's direct from that company, or it's they're going to go out and shop the market on your behalf.

So all that being said, if you already own a property, if you own your primary, you can just start with the insurer of your primary, if you're satisfied with that insurance, just like for lenders, if you already have a preexisting relationship, wherever you do your banking, you can work reach out to those lenders to start, then online reviews are really good for folks both of brokerages, as well as companies specifically, but also take that with a grain of salt, because typically the people that are leaving reviews are the unsatisfied ones, the ones that are really pissed off. So again, take it with a grain of salt, but asking for referrals and references from online forums from you know, Bigger Pockets. Or if you're in the Roofstock Academy, we've got a whole list of vendors that we're putting together for everyone to utilize. So ask people that you know that have done what you're looking to do who they've used. Wow, rant over. Sorry, guys.

Tom:

I'm going to synthesize the rant a little bit of the way that I think about it, I would think about this for any type of vendor that I'm adding at the top of the hierarchy would be personal references, you know, not the end all be all, but definitely my favorite way of referencing any type of vendor insurance. The second layer down would be professional references. So if I'm working with a lender that I like, you know, hey, do you guys have any authors and you know, whatever, an agent or a property manager, that would be kind of a tier two way of sourcing a level three would be forum so our friends at bigger pockets have awesome discussion board. Roofstock Academy has a private Slack channel, the people are popping in recommendations and experiences all the time. And then lastly, at the bottom would just be the the old Google search. So to paraphrase personal references, professional references, online forums, and then general research.

Emil:

Awesome. We've mentioned it I think on the last episode, asked the other people on your team for references for other people on your team. So ask your property manager for an agent or insurance or lenders so you can you can always ask the members of your team if they have any references, if you don't know any other investors in that area.

Tom:

Yeah. And on that team, like specifically, your lenders often working fairly close within their network. They have insurance anyways. Sorry, go ahead.

Michael:

I just want to take a moment to address everyone talks about the team so often, like us included, and I think I just want to put it out there for everybody listening in case they don't know. This is like a very informal thing. It's like my team has jerseys with the team name on it.

Emil:

You don't? My team, we all have the same jerseys. Yeah, we have our nicknames on them!

Michael:

Oh dude, I am severely lacking. I just think it's so funny because we always hear about the team. And when I first started investing, I was like God, like, I don't have money to pay my team players. I don't understand, but it's just a very informal relationship. I use the same lender as my I can there on the team, I use an agent, I can pick up the phone, and they'll answer Oh, hey, Michael, how's it going? If that's the relationship you have, that's probably someone that's on your quote unquote, team. And so I just don't want people getting bogged down with, oh, I have this formal relationship. And I interviewed this person. And I asked them formally, would you like to be on my team? It's, it's not like that. So for anybody listening that thought that we can just clear that up and hopefully ease a little bit of heartache.

Emil:

It's a good point.

Michael:

Thank you.

Emil:

All right, let's keep it moving. So the next part that we want to dissect is, what are the questions you should ask, as you're vetting these different insurance providers to make sure you're getting good insurance? And that you're covered as much as you need? Do you guys have any tips here? For our listeners?

Tom:

Sure. Sure. Sure. So in the same way that I would categorize different lead sources, I'll categorize the high level types of questions that will ask the lender, I'll ask questions about the business, you know, how long they've been? Do they have a lot of different branches? Like at what areas? Do they do insurance in? Not every insurance company will do insurance everywhere. Do they work with a lot of investors? And then maybe go into some of the specific product details? What type of properties do they provide insurance on? Like, is it do they do like multifamily, small apartments? SFR? Maybe like a makeup of their typical type of customer? Like, are they doing a lot of work with investors, I would also ask questions around communication. So you know, who's the main point of contact? What's the best way to get a hold of them? And then get into the money related question, I'm stealing all the content from Michael. So I'm sure.

Just also Michael's way more knowledgeable on this stuff. So he's going to have an easier time coming in and layering in extra good nuggets. So my other category would be around rates, and criteria and performance. So do they have various rates as it relates to deductibles? And do how do they value the house? Is it replacement value as an actual cash value? Do they have any discounts as it relates to doing in bulk, or, you know, adding on other products, and then the process of how claims are handled? So Michael, I'm gonna let you keep running with it before I pick all the good stuff. But even though you are gonna have good stuff, no matter what.

Michael:

I think, a super good outline an overview. So I think it's also important to understand again, who you're speaking to, and are they a direct writer? I mean, are you talking to like a State Farm type of agent? Are you talking to a broker who can shop the market, they're likely not going to be able to answer these questions. If if they're kind of a broker, you're gonna have to wait until they get a quote, for a specific carrier to start talking about some of these companies specific questions, but they could tell you absolutely, who they work with a lot. And something that I've realized after dealing with a couple outrageous claims is, it's really important to ask them if they're a broker, and they give you a quote for a specific insurance company, how much of their business as a brokerage comes from that one insurance company, because what I found is that there are agents that will favor insurance companies, because they're kind of in cahoots, so to speak. And so they'll want to write a lot of business with this carrier, because the carrier will give them good commissions.

And so it might not necessarily be the best product for you, it might be the best product that they have available through that brokerage, but it might not be a good fit. And so you want to talk to that's why again, can't over stress this enough, you want to talk to multiple agents, multiple brokerages and see what insurance companies different brokerages have available to them, because some brokers don't even have certain carriers that they can't write with. And so getting an idea of who they even are eligible to place you with is going to be very helpful, in addition to understanding who the best carriers are for investors in the area for your specific kind of risk. So if you have a single family home, go look to understand that market who's writing the best single family home policies out there, and then go look to find a broker that can write with them, or see if they'll write direct and you can call the company directly.

Ask them about what their insurance rating is, you know, once we get to the company level, ask there's a rating system out there best and then a&m, I think it's Standard and Poor's, I think are all rating agencies. And so they're going to have a letter grade associated with them as a carrier. And so we're gonna want to understand just what that rating is. And then of course, asking, like Tom mentioned about discounts a big one and a common one is a multi policy discount. So if you have multiple policies, whether that be your auto your home, multiple investment properties with them, that can be great to ask about and then asking about a discount for years in which you are claim free can also be a nice one like All State, I think is someone that does that for auto insurance. Don't quote me on that, but I think I've seen their advertising on that. So asking about what discounts you're eligible for what discounts exist, and then asking about if they're, if you're able to grow with them with that same insurance company, I think are always to position yourself to win.

Tom:

Hey, Michael, for those rates do want to do a quick run through of like key decisions just talking very quickly about deductibles and replacement value. And, and I'm just looking at a spreadsheet of different rates, like what are those mean?

Michael:

Yeah, absolutely, it's a really good question. So the deductible is the amount of money that you have to pay as an owner out of pocket before the insurance will come into effect. So let's say I have a 20 $500 deductible and a tree falls on my house and causes $5,000 in damage. Well, if that's a covered loss, I can submit a claim to the insurance company and they'll come out. And they'll say, Okay, yeah, it's $5,000 claim, I get the bid to have the work done to repair the damage. If it's $5,000, I'm on the hook for the first 2500. So the insurance company is going to cut me a check for the second 2500. So changing the deductible changes the amount of we call it in house risk that someone is taking on themselves. So if I lowered that deductible to $1,000, I would pay the first thousand and the insurance company would pay the next four, again, in that $5,000 damage example.

And so for that lower deductible, I'm probably going to be paying a higher premium. And a premium is just the annual cost of the insurance that I pay to the insurance company or carrier. So lower deductible, higher premiums, higher deductible, lower premiums, but I would say look very closely at the difference in premium for a significant change in deductible. So I found, for example, that, you know, changing my deductible from 1000 to 2500, only saved me like 60 bucks on my annual premium in one example. And so it wasn't worth it for me to take on the extra 2500 in in house risk for 60 dollar savings a year. If we do the payback time on that, let's just see run at 1500 divided by 60 bucks, that's 25 years to get that premium savings back to offset the extra risk that I'd be taking in house. And that's a personal decision that every investor is going to look to make about Okay, how much risk Am I willing to take on personally and what deductible makes sense for me.

Then the replacement value versus actual cash value? These are two different types of policies. And so you want to look to understand, like you mentioned, Tom, what type of policy Am I being quoted is the replacement value and actual cash value. These are often seen as acronyms on the policy as RC for replacement cost, or ACV, which is actual cash value. And so most insurance companies, for the vast majority of single family homes out there, you're going to see a replacement cost or replacement value policy. But in a lot of commercial buildings or bigger buildings or older properties, they're only willing to write an actual cash value policy or an ACV policy, because it's just so expensive to insure the building to replace it like for like, because it's older construction typically is going to be beefier and more components. So it's just more expensive to insure. So they'll insure for an actual cash value, which is basically accounting for depreciation of the structure itself. And so the dollar amount of an ACV policy versus an RC policies typically going to be less. And so talk to your insurance agent or provider about what the difference is in those policies mean for you as an owner when it comes time to file a claim or for dealing with the claim, because they are vastly, vastly different.

Emil:

Dang!

Tom:

Great, great overview I dig it, I was looking through on some of my policies that I have that I may be changing out in the not too not too distant future is my deductible moves depending if the property is occupied or vacant. And Michael is doing give me a little bit of coaching is asking me, Hey, is that does that start right away? Or is there a grace period from the time that a vacates and it's, you know, my answer was? No, it starts right away. And it's the trigger to go back and get some updates. You know, a cool thing about insurance policy is I think we might have talked about it, maybe last episode is that it's pretty easy to change out in that unlike other types of these relationships, like a lender, you can basically sign an insurance policy and at any point in time change that and Michael, please correct me if I'm butchering that explanation, and word it better go.

Tom:

No you're spot on. It's just a it's a very fluid policy and agreement in that if you are unhappy or you want to change your policy mid year, they'll refund you the prorated amount. But depending on how you pay if you pay in full, you pay the full premium at day one, you decide that you want to change carriers six months down the road, you'll get refunded that six month premium payment, and then you can go place new insurance. Now you want to be very careful on the timing of this such that you don't have any insurance lapse because Heaven forbid you're canceling your insurance on a Monday, and then you place new insurance on a Wednesday. Murphy's law says that something's going to happen on that Tuesday, right there's gonna be a fire tree or something. So make sure that you don't have any lapse in coverage. And so be very communicative with the old carrier and the new carrier about when you want to bind that policy and having them seamlessly transition is really important. Same thing for your lender, your lender is going to require notification that you're changing, the insurance companies will take care of that notification. But you really, really, really, really, really want to make sure that you're having lapses in coverage. And so be overly communicative with all the parties involved, about the dates and timing of when that change is going to happen.

Tom:

And that feature of being able to change it out, it puts less pressure on me to find the perfect policy up front, like, oh, plug something in that is good, like not letting great get in the way, if I find a house that I want to buy, great, awesome, move forward. And I know that I want to tease out, you know, getting that best rate and best coverage, that's something I can do later, I don't have to stress myself out and making sure, but great be the enemy of good on that initial coverage.

Michael:

Yeah, it's a super good point, I just changed up my insurance program for all my California properties. midterm, I said I was getting quotes for renewal. And that's something you'll get every year, the insurance company will send you out a renewal package, which basically has Okay, this is what your new rates and new coverages look like. And those will tend to go up over time, just because of inflation, cost of materials goes up. And so you'll get the needed coverage will also go up. And then of course, the premium that you're paying will also increase. And so I was just really dissatisfied with the agency that I was working with who had the policies in place, as well as the coverages from the carrier's themselves. So I called up a good buddy of mine who's an agent, and I said, Hey, quote this for me, and he got me some really competitive quotes. And so I moved everything over to him. And now I'm getting refunds from those carriers because I cancelled mid mid term.

So don't be afraid to quote unquote, fire your agent or fire that insurance company if you're not getting the service or the coverage that you feel you need are entitled to. And again, remember these folks work for you. And they are in business to pay claims. That's an insurance company's one job. And if they are unable to do that, well, well, then why would you be working with them?

Emil:

And so on that note, what are some red flags people should be on the lookout for, as they're vetting different insurance providers? And you guys might have already mentioned them, but maybe just summarizing them here.

Michael:

Yep, poor claims handling record, I think for me is is a big one, if you have to fight tooth and nail with your insurance company to get paid out on a claim, it's not worth the extra savings that you might see on your premium.

Emil:

How do you find that out before it's too late, though, online reviews, and again, kind of taking those with a grain of salt. But when they're talking about claims, specifically, I think that's one that we can look at. And also talk to the agent or carrier about what their claims handling process looks like. And what their what their rating is what their insurance rating is, with, with some of the rating companies out there. They should be touting their claims handling record, if they're a great carrier. And I'm personally having been through some awful claims and happy and willing to pay more for that coverage. Because I know it's going to get handled, not if but when I have a claim.

Tom:

It's great point I like that. I would ask about the renewal process. And I went through renewal a little bit ago just kind of accepting what they what they're sending back, which his answer is I'm gonna go be a little more proactive on this, you know, went through the process, there was like three different websites like one for paying one for site, it was super kluge. I went through this process, I paid them for all different properties that I have. And then I start getting notifications from my lender that my insurance expired and that they have paid for lender provided insurance because insurance companies will do that. But the problem when insurance companies do that is they're they're basically going to be like not a good shopper at all, and just give you very expensive insurance.

Michael:

So wait, Tom, do you mean that the lender will do that the lender will go out and buy insurance because…

Tom:

The lender buys insurance.

Michael:

Because you said insurance companies will do that.

Tom:

Sorry, lender. Thank you, thank you for correcting me. So the lender, they'll do lender will purchase insurance on your behalf and just hold the payments in escrow. So I, this happened to me just within the last few weeks where I you know renewed my insurance policy, which is an okay policy, and then I get notification from my lender that they're going to shop for insurance like there were some dropping the ball and communication. And at that same time my insurance provider mailed me back a check for the amount that I had paid to renew my insurance, and it's just a quagmire, just a little bit of a mess right now, which is that is on my list of things to do is clean up that mess. So that the renewal process just making sure like I'll probably put in like a negative review, just in this has been just such a clunky process. So asking him about the process of renewal and looking at the new rates and making sure that is a smooth process. So that would be mine. And then also I mentioned before looking at moving deductible rates like I don't like that is something I didn't look into when initially selecting the provider. So you know, having someone you can kind of who is knowledgeable in this space like Michael is a great example to kind of bounce these ideas off of is a helpful resource to have.

Michael:

And something else I would look for too is is the person you're speaking with, either at the company direct the carrier directly or broker willing to educate you and kind of hold your hand through the process if you're not super familiar with insurance, because I think it's not something that's taught in school, you don't learn about it. We covered you know quite a bit in the academy about some things to look out for. It's some questions to ask to arm you to go have those intelligent conversations. But I would argue that an agent's job is split half between education and half insurance placement. And if they're not willing to take the time and walk you through and talk to you about some of the coverages that you're looking that you should be considering or looking for. That's kind of a red flag for me. And I've had conversations with agents. And this isn't me tooting my own horn, but I've structured some of the policies in certain ways.

And they're like, Oh, well, it's a really good idea. And I'm like, you should be telling me what the good ideas are. Why am I coming to you with that, like you do this for a living? So I would say, you know, look to find someone who's knowledgeable and who's willing to walk you through this process.

Tom:

When you get a quote, Michael, you asked them for like three different versions, like on like, okay, a 2000, and 1500 and a 5000? Is that like, pretty standard practice?

Michael:

Yeah, exactly. And so I'll build out a skeleton quote of what I want as kind of a minimum, I'll send it to them. So it's not a back and forth quoting thing, we'll look to get a kind of massage to where I want it to be. And then yeah, I'll do exactly that. I'll have the lowest deductible, your next highest and the next highest, just to see what the difference in premium is. And then of course, we can look to massage, different line item coverages at different values, if they are movable, to see how the premium gets affected, because you want to look to see what levers are going to have the biggest impact. And I think so often, unfortunately, deductible isn't one of them. It's typically the underlying coverages themselves that are going to have some of the biggest impact.

Tom:

Love it.

Emil:

Great advice. All right, guys. Lots of good information here. I think it's a good spot for us to wrap this episode up. What do you guys think?

Michael:

Totally. I think if anything, you know, wasn't making sense. Please go back, give it a read. Listen, there's a lot of stuff in there. And so you know, take notes, listen to it again. And don't hesitate with any questions for your agent for your carrier. Again, they should be playing an educator role.

Emil:

Not to make this sound too much of an ad but as always, there's only so much we can cover in a 45 minute or one hour episode. And Roofstock Academy which is our coaching and training program for investors can get a lot of your personal questions answered. Talk to Tom, Michael, myself, other investors on like really specific situations. So feel like you need more help, or just want to, you know, improve your real estate investing, go check out RoofstockAcademy.com. And, as always, make sure you guys subscribe, leave us a review. Let us know what you think of these episodes and we'll catch you on the next one. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

In this episode Emil, Tom and Michael discuss the most important factors to consider when looking for insurance.

---

Emil: 

Hey everyone, welcome back for another episode of your favorite show The Remote Real Estate Investor. My name is Emil Shour. And today I'm joined by my co host,

Tom:

Tom Schneider

Michael:

Michael Albaum.

Emil:

So in today's episode, we're going to be talking about how to find and vet an insurance provider. So let's hop into this one.

Emil:

Alright guys, before we hop in, let's talk updates, what's going on your real estate investing lives?

Michael:

So I had that six unit under contract I was talking about last time that fell out buyer couldn't perform, I was pretty frustrated with the whole contract of itself. I did a poor job reviewing it, but my agent didn't point out a couple pretty big ticket items that were included in that contract. And so I fired him this morning, and I'm gonna be placing that listing with somebody else. It was an uncomfortable conversation, but I think one that had to be had. And, you know, he asked me point blank, he says, What are you unhappy with the service? And I tell him, yeah, these are my issues that I'm having with it alone as independent issues, not a big deal, but kind of cumulatively, they cause me a lot of heartache. And the other thing I didn't realize is that I had signed a year long agreement with this listing agent, which goes against every fiber of my being. But again, it was something that I rushed and didn't do a good job looking at. So anytime you're signing a listing agreement with an agent, be very particular about the length of time in which that contract is enforced for.

Tom:

I love these episodes, and kind of respect Atomy stuff, putting a lot of these learnings forward to limit people in the future for making them. So looking back retrospect when you initially vetted this agent, and we'll do another episode, you know, more specific on the agent side, but what would you have done differently? I mean, one, you mentioned the one year listing agreement, what else anything else you would have done to suss out this subpar?

Michael:

Yeah, he was a recommendation from my property manager who I like quite a bit, and I was kind of looking to get it done pretty quick. So I said, Okay, sure. Yeah, we'll go with your guy. That sounds great. They've already got a pre existing relationship. I didn't think about this other group that I already had done a bunch of deals with, because my agent friend had ended up he had left that group. And so I said, Oh, well just use him for everything. And then he left the picture. So I didn't really have a good person to reach out to so this is a personal reference. Cool, just go that route. But absolutely, I should have interviewed some other folks. But I was looking to get it done too quickly. So didn't listen to my own advice. And yet again, it's come to bite me in the rear. So I don't know why I think that'll stop happening one day, it just clearly is it won't

Tom:

Good. Take away. Good take away.

Michael:

Yeah. What about you, Tom? What you got going on?

Tom:

Oh, not a lot still waiting on this refi close at the Wheelock wine wine wine complaint complaints, snail mail, blah, blah, blah. I just listened to our last week's episode, kind of related kind of unrelated, we're going into another week of bad air and in California, these fires and my wife are playing around the idea of Oh, you know, what if we you know, live or move around a little bit and one idea remote real estate invested kind of relating is like what if we like bought a house in an area that we are bullish on investing, you know, bought one probably more of appreciation play in like a Raleigh or like a Columbia, South Carolina or, and we go and live in it for like six months or a year, rent our house here in California, and then come back to California. And we also have, you know, turn that other one into a rental. So playing around with some kind of like exotic owner occupied slash turned into a rental slash bounce around, we have a son right now and be fun to get a place that has a big yard to let him run around at least for a year in his life. And who knows, maybe just fall in love in Raleigh, it's probably unlikely, but it's not out of the realm of possibility of doing some exercise like that. So

Michael:

Do it.

Emil:

Tom, we had someone on the podcast who basically did this like not in as short of a timeframe, but moved from city to city picked up a rental house hack did live there, and then change it to a rental when he left that city. So not a bad strategy.

Michael:

He just left this slug trail of rentals in his wake.

Tom:

I love that idea. And it's like your cities are fun. Yeah, go from each one to one.

Michael:

And not only that, but new cities are fun. And depending on the purchase price, too. It might never make sense as an investment property when purchased as an investment property. But if your interest rate is such that your your financing is such that it's so much cheaper, you may have just created the potential for a rental where there previously wasn't one.

Tom:

Yeah, exactly. And I think that really drills The advantage of this kind of strategy is you're like you're going sub 3% on these like awesome fixed 30 year products and buying it as an owner occupied because that's what you're initially going to do. And then your slug trail just moves away. And then you still have the remnants of this really historically awesome financing. And a house that normally where you wouldn't be able get the cash flow since you're having such incredible rates. So I don't know. We'll see. We'll see. It's a pontificating.

Michael:

Nice

Tom:

thinking about it. Yeah. Anyway, that's my update.

Michael:

And Emil?

Emil:

An update for me. We put an offer on a four unit property yesterday in St. Louis, where I'm looking right now and it was priced really well it's priced under 100 K, which is really rare to see the neighborhood's okay. Probably like a two star neighborhood rating if we were to equate it on, like Roofstock scale. But 700 k newer mechanicals, right like new new h fac new water heater, new boilers. But the insides of these apartments are a little dilapidated. But that seemed like an easier first project and kind of like full gut rehab and like new mechanicals and everything, so it kind of seemed like it was it was gonna be the right property. We put an offer in yesterday. But the seller I got noticed today that seller went with a different offer. So onto the next one.

Michael:

Are you going to put in a standing backup?

Emil:

I don't even know what that is. So no.

Michael:

You should put a standing backup offer is basically saying, hey, if that buyer can't perform, I'm willing to still buy it at your offer original offer, or some other offer. And so the seller knows that, hey, okay. I don't have to go call these for other people that also submit offers, I can go to Emil, because I know what his offer is. And it's still good on it.

Emil:

Yeah, I should just talk about that. We just left it as let's keep our eye on this. And if it falls through, we'll go back. Yeah.

Michael:

But the standing offer is nice, because it kind of separates you from any of the other people that are also doing that. And you're saying, Yes, I can perform. Yes, I will perform, should it become available.

Tom:

Love that idea?

Emil:

Is there any let's see, I find something else. And I get into offer on something like it's not like binding?

Michael:

No, not by any means. Not by any means.

Emil:

Well, then I have a nice action item after this episode. Thanks, Michael.

Michael:

You’re welcome man. And so kind of to Tom's question. What would you have done differently? Or if anything on that knowing what you know, now?

Emil:

Nothing I think…

Michael:

Perfect.

Emil:

I made an offer where I was comfortable. I made an offer where I was comfortable and let the chips land where they, lie where they land? It takes 2 to tango? I don't know.

Michael:

There is no crying in baseball.

Emil:

So yeah, no, I felt good about it. It was a I hadn't made an offer in a while. So it's good to just at least start making some activity and start pushing through again. So

Tom:

That's a funny little dopamine. I'm probably like six or eight months since I've made an offer. It's like, oh, man, we would feel pretty good right now submitting an offer.

Emil:

It's also nerve wracking. And even though you've done it a bunch, right, when it's been a while and you're back at it, like you look at your spreadsheet numbers look good. Still. There's something about like, going and actually making an offer. That's a little nerve racking. I don't know,

Michael:

I remember the first offer I made. I was like, I hope they wait so backwards. Yeah,

Tom:

I know. Yeah. It's like, Oh, I'm a sucker if they you know, accept it right away. And I know, right? Did your work? You're okay. Right. What a funny psychology.

Emil:

Yeah, of it all hundred percent.

Michael:

Emil, I love that you wouldn't change anything. Because I think we talked about on previous episodes, we should be really looking to evaluate the decision making process, not the outcome. And so it clearly you did your homework, you felt good about it. And the fact that you wouldn't do anything differently means that I think you executed really well. And now it's out of your hands.

Emil:

Thanks, man. Yeah, it wasn't like emotional at all, like, here's what I can do, here's what would be a good deal for me, and you lose enough offers. And it's just, it's on to the next. Right, so it's all part of it. So let's move on to the topic for this episode, which is how do you find and vet an insurance provider? And we're gonna start with when in the process? Do you go out and find insurance? Is it before you make offers is it during escrow, I can actually leave this one off, I don't have a ton to add to this episode, not my area of specialty, but I can add to this one. So for me in the past, I have typically looked for insurance once I have a property under escrow, that's when I'm going out and looking for insurance. I don't really do any upfront before I go and buy any properties. What are you guys?

Tom:

Yeah, so the first thing I'll do is get kind of guidelines on estimating how much insurance is going to be. And I would just put into two camps like a property is either in a zone where I'm going to have to pay extra because maybe it's a hurricane or tornado or or it's not, it's an it's an area that's relatively low. So just for like proforma purposes, have a rough idea of where I'm going to be paying for insurance. And this can be talking to other investors, forums, whatnot, and actually selecting an insurance provider. Oftentimes, I'd say your first deal is like, when you add extra properties, a lot of times you're using a similar and maybe there might be some cases where you're not, but I agree with Emil, and that it's something that I won't spend a lot of Midnight Oil, there probably is some improvements you can get on pricing and going through a lot of different ones, but it's kind of similar pricing, there's not going to be just these wild swings, unless in some areas where there is like hurricane stuff, but generally speaking, it's a pretty commodity. So it's it's similar answer to him, you know, we're all get something in escrow. And specifically, I already have insurance providers that I like, just layer right on top, Michael?

Michael:

Yeah, perfect. I'm pretty similar. I'm also waiting, I think partially because it's such an like, I'm not gonna say easy task, but it's a fairly quick task to have done. This isn't a very long process. So I can be on the phone with an insurance rep in the morning and have a quote by the afternoon and so it's not something that takes a long time that they need a lot of documentation for and you also need to have some specific property information, some property specific information, to answer some of the questions to get an accurate quote, like, what is the year of the roof? What is the year of some of the mechanicals? When was the property last rehab. So if you don't know any of those things about a property, it's tough to get an accurate quote for. But Tom, I'm actually going to disagree with you on the commoditization of insurance. I think that there are some vastly different rates out there from different carriers. And so I think it's really important to kind of compare and contrast them, I was chatting with my commercial insurance broker.

And he was telling me that if we had to go place my current portfolio with a different carrier, it would probably be about a $15,000, delta in coverage. And for like, less coverage, for less good, I guess that's a, that's a phrase coverage. So I think that there is a significant difference between carriers. And of course, there's a large portfolio. So those numbers are magnified. But even on single family homes on single units, or duplexes, there are carriers that do this stuff really well, and that are hungry for growth. And so they're going to be priced really competitively. There are other companies that are not looking to grow are not interested in that risk, like a property or a certain style of insurance is called a risk. They're not interested in that. And so they're going to price it because they don't want it but they're happy to take your money if you're willing to give it to them. So kind of like general contractors, if they're really busy, they're gonna throw out a ridiculous high bid, because they don't want the work. But they're happy to do it for that price. Same thing with insurance carriers. So I would definitely look to interview several different and get several different quotes. And we're going to talk here on this episode about how to do that effectively here in just a little bit. I

Tom:

I have no come back. I think you're right. I mean that in the sense that like once you have a carrier that you like, it's pretty plug and play. But some of the other like big moving variables is like deductible amounts, which we'll talk about a little bit more is there can be some weirdness in the way that they're applied. For example, if the premises occupied versus vacant, we were actually talking about before the episode that I probably need to change my insurance on just looking to improve it and that I haven't changed in a while or shopped around and probably some shekels to save and some liability to limit But anyways, Michael, good challenge, and you win. All right.

Michael:

I've won the day.

Tom:

It was a test and you pass.

Emil:

Tom, you bring up something good that I forgot to mention is like getting an estimate first, obviously, like in order to make an offer, you should not like have a an assumption for what his insurance is going to be ballpark estimate. So that is definitely a good point in like putting a ballpark. And I think you mentioned a couple ways to find that. So good point.

Michael:

Yeah, just to piggyback on that to Emil, Tom, you bring up an amazing point that there are these outside coverages that are not part of a standard insurance policy. And for everybody listening, those are typically going to be flood, and earthquake are going to be two separate policies that are not going to be covered on your standard policy. So if you are purchasing a property in a flood zone, or in an earthquake zone, be aware of that. And that can be found out by simple search, you know, flood zones in this area, or earthquake zones in this area. And if you plan on purchasing those insurances, there's additional costs there. And most lenders are going to require that you're going to carry flood insurance, they are not going to require you to carry earthquake insurance for the most part. And so talk with your lender about what it is that they're looking for. And in coverage. So hurricanes kind of tricky, because the way that the insurance works is typically based on the initiating events. And so if there's a flood, if the property receives water damage, as a result of the waters coming from the ground, they might not cover that could be called considered a flood. But if you left the window open, and then the rain got in, I don't know, I think it's important to make that as is their separate hurricane insurance?

Tom:

I believe there is and I think it's also extremely expensive. I remember a couple of years ago, Roofstock He was like a different investor that I knew there was flooding, and they didn't have flood insurance. And the house happened to get hit by a tree. That was I don't know if it was moved by the flood or whatnot. But they were able to argue that it's the tree that hit it. Like it wasn't the flood, it wasn't the flood, they're able to collect on their policy. And I mean, the water I think was going to cause you know, massive trouble for the house. But since the house got hit by a tree, they are able to be okay and collecting insurance to fix the property. But if it had not, it's like a funny thing. If there's like disasters, you're just like rooting for certain things to happen. You know, to be able for your insurance policy.

Michael:

We always used to joke, you know, in the business with a lot of clients and they're like, man, I don't want to put sprinklers in my building because I want the thing to burn down because it's like guys, like don't tell me this. I'm the wrong person to be having this conversation with but it's pretty funny. I get what you're saying.

Tom:

And also just you know, we're not taking lightly like the really tragic stuff with this happens with some people with these workings but it's just crazy with insurance. How one little way of your house getting damaged versus another if the waters is running into it. Oh no, they're not going to cover that. Oh, with a tree, wacks it. Oh, there you go. Now you get full coverage. The other than Sandy is the right word, but just kind of weirdness of it all.

Michael:

Yeah. So I think this begs the issue of go talk to your insurance rep, whoever that might be, and look to get a very clear understanding of what is covered, and what is not, especially based on the zone that you're in. And so be armed with that information, Hurricane zone, flood zone, earthquake zone, as you are going to look to get quotes,

Tom:

I think, well, this is an episode like just on floods and hurricanes will bring someone in FEMA or something. So anyways, future episode, let's we'll continue on.

Emil:

Alright, so let's segue into how do we actually go out and source different insurance providers wants to take first crack at that?

Michael:

The interwebs. I like online reviews and searches of different carriers and providers. And a distinction I think that we should make here is the difference between an insurance carrier or an insurance agent, or an insurance representative or an insurance broker. So a broker is kind of like a mortgage broker, and that they might not work for a specific company, they'll go out and shop the market and find a good product for you. Again, just like a mortgage broker would, and insurance agents often will work for an insurance broker. And so they're just kind of like a real estate agent. And so those can just typically be employees of the brokerage. And so but you can also have direct agents that work for a carrier themselves, like if you call up State Farm, you're going to talk to an insurance agent, but they're only going to be able to sell you State Farm Insurance. Now, they might be able to sell you something else if you don't fit into their program. But traditionally, they are going to try to place you into the State Farm program.

So you can have agents that are independent, you can have agents that are work for specific companies, and go back all of our listeners to go back and listen to the insurance episode we had Nick Aube on. He's an insurance broker, I think is what the term he coined himself. And that is Episode 26, where we talk about insurance and insurance needs of investors with Nick Aube. So he talks about the differences in insurances and some terminology there. But so it's I think it's hard to make that distinction. And understand when you're calling someone, what type of insurance they are going to be looking to sell to you, whether it's direct from that company, or it's they're going to go out and shop the market on your behalf.

So all that being said, if you already own a property, if you own your primary, you can just start with the insurer of your primary, if you're satisfied with that insurance, just like for lenders, if you already have a preexisting relationship, wherever you do your banking, you can work reach out to those lenders to start, then online reviews are really good for folks both of brokerages, as well as companies specifically, but also take that with a grain of salt, because typically the people that are leaving reviews are the unsatisfied ones, the ones that are really pissed off. So again, take it with a grain of salt, but asking for referrals and references from online forums from you know, Bigger Pockets. Or if you're in the Roofstock Academy, we've got a whole list of vendors that we're putting together for everyone to utilize. So ask people that you know that have done what you're looking to do who they've used. Wow, rant over. Sorry, guys.

Tom:

I'm going to synthesize the rant a little bit of the way that I think about it, I would think about this for any type of vendor that I'm adding at the top of the hierarchy would be personal references, you know, not the end all be all, but definitely my favorite way of referencing any type of vendor insurance. The second layer down would be professional references. So if I'm working with a lender that I like, you know, hey, do you guys have any authors and you know, whatever, an agent or a property manager, that would be kind of a tier two way of sourcing a level three would be forum so our friends at bigger pockets have awesome discussion board. Roofstock Academy has a private Slack channel, the people are popping in recommendations and experiences all the time. And then lastly, at the bottom would just be the the old Google search. So to paraphrase personal references, professional references, online forums, and then general research.

Emil:

Awesome. We've mentioned it I think on the last episode, asked the other people on your team for references for other people on your team. So ask your property manager for an agent or insurance or lenders so you can you can always ask the members of your team if they have any references, if you don't know any other investors in that area.

Tom:

Yeah. And on that team, like specifically, your lenders often working fairly close within their network. They have insurance anyways. Sorry, go ahead.

Michael:

I just want to take a moment to address everyone talks about the team so often, like us included, and I think I just want to put it out there for everybody listening in case they don't know. This is like a very informal thing. It's like my team has jerseys with the team name on it.

Emil:

You don't? My team, we all have the same jerseys. Yeah, we have our nicknames on them!

Michael:

Oh dude, I am severely lacking. I just think it's so funny because we always hear about the team. And when I first started investing, I was like God, like, I don't have money to pay my team players. I don't understand, but it's just a very informal relationship. I use the same lender as my I can there on the team, I use an agent, I can pick up the phone, and they'll answer Oh, hey, Michael, how's it going? If that's the relationship you have, that's probably someone that's on your quote unquote, team. And so I just don't want people getting bogged down with, oh, I have this formal relationship. And I interviewed this person. And I asked them formally, would you like to be on my team? It's, it's not like that. So for anybody listening that thought that we can just clear that up and hopefully ease a little bit of heartache.

Emil:

It's a good point.

Michael:

Thank you.

Emil:

All right, let's keep it moving. So the next part that we want to dissect is, what are the questions you should ask, as you're vetting these different insurance providers to make sure you're getting good insurance? And that you're covered as much as you need? Do you guys have any tips here? For our listeners?

Tom:

Sure. Sure. Sure. So in the same way that I would categorize different lead sources, I'll categorize the high level types of questions that will ask the lender, I'll ask questions about the business, you know, how long they've been? Do they have a lot of different branches? Like at what areas? Do they do insurance in? Not every insurance company will do insurance everywhere. Do they work with a lot of investors? And then maybe go into some of the specific product details? What type of properties do they provide insurance on? Like, is it do they do like multifamily, small apartments? SFR? Maybe like a makeup of their typical type of customer? Like, are they doing a lot of work with investors, I would also ask questions around communication. So you know, who's the main point of contact? What's the best way to get a hold of them? And then get into the money related question, I'm stealing all the content from Michael. So I'm sure.

Just also Michael's way more knowledgeable on this stuff. So he's going to have an easier time coming in and layering in extra good nuggets. So my other category would be around rates, and criteria and performance. So do they have various rates as it relates to deductibles? And do how do they value the house? Is it replacement value as an actual cash value? Do they have any discounts as it relates to doing in bulk, or, you know, adding on other products, and then the process of how claims are handled? So Michael, I'm gonna let you keep running with it before I pick all the good stuff. But even though you are gonna have good stuff, no matter what.

Michael:

I think, a super good outline an overview. So I think it's also important to understand again, who you're speaking to, and are they a direct writer? I mean, are you talking to like a State Farm type of agent? Are you talking to a broker who can shop the market, they're likely not going to be able to answer these questions. If if they're kind of a broker, you're gonna have to wait until they get a quote, for a specific carrier to start talking about some of these companies specific questions, but they could tell you absolutely, who they work with a lot. And something that I've realized after dealing with a couple outrageous claims is, it's really important to ask them if they're a broker, and they give you a quote for a specific insurance company, how much of their business as a brokerage comes from that one insurance company, because what I found is that there are agents that will favor insurance companies, because they're kind of in cahoots, so to speak. And so they'll want to write a lot of business with this carrier, because the carrier will give them good commissions.

And so it might not necessarily be the best product for you, it might be the best product that they have available through that brokerage, but it might not be a good fit. And so you want to talk to that's why again, can't over stress this enough, you want to talk to multiple agents, multiple brokerages and see what insurance companies different brokerages have available to them, because some brokers don't even have certain carriers that they can't write with. And so getting an idea of who they even are eligible to place you with is going to be very helpful, in addition to understanding who the best carriers are for investors in the area for your specific kind of risk. So if you have a single family home, go look to understand that market who's writing the best single family home policies out there, and then go look to find a broker that can write with them, or see if they'll write direct and you can call the company directly.

Ask them about what their insurance rating is, you know, once we get to the company level, ask there's a rating system out there best and then a&m, I think it's Standard and Poor's, I think are all rating agencies. And so they're going to have a letter grade associated with them as a carrier. And so we're gonna want to understand just what that rating is. And then of course, asking, like Tom mentioned about discounts a big one and a common one is a multi policy discount. So if you have multiple policies, whether that be your auto your home, multiple investment properties with them, that can be great to ask about and then asking about a discount for years in which you are claim free can also be a nice one like All State, I think is someone that does that for auto insurance. Don't quote me on that, but I think I've seen their advertising on that. So asking about what discounts you're eligible for what discounts exist, and then asking about if they're, if you're able to grow with them with that same insurance company, I think are always to position yourself to win.

Tom:

Hey, Michael, for those rates do want to do a quick run through of like key decisions just talking very quickly about deductibles and replacement value. And, and I'm just looking at a spreadsheet of different rates, like what are those mean?

Michael:

Yeah, absolutely, it's a really good question. So the deductible is the amount of money that you have to pay as an owner out of pocket before the insurance will come into effect. So let's say I have a 20 $500 deductible and a tree falls on my house and causes $5,000 in damage. Well, if that's a covered loss, I can submit a claim to the insurance company and they'll come out. And they'll say, Okay, yeah, it's $5,000 claim, I get the bid to have the work done to repair the damage. If it's $5,000, I'm on the hook for the first 2500. So the insurance company is going to cut me a check for the second 2500. So changing the deductible changes the amount of we call it in house risk that someone is taking on themselves. So if I lowered that deductible to $1,000, I would pay the first thousand and the insurance company would pay the next four, again, in that $5,000 damage example.

And so for that lower deductible, I'm probably going to be paying a higher premium. And a premium is just the annual cost of the insurance that I pay to the insurance company or carrier. So lower deductible, higher premiums, higher deductible, lower premiums, but I would say look very closely at the difference in premium for a significant change in deductible. So I found, for example, that, you know, changing my deductible from 1000 to 2500, only saved me like 60 bucks on my annual premium in one example. And so it wasn't worth it for me to take on the extra 2500 in in house risk for 60 dollar savings a year. If we do the payback time on that, let's just see run at 1500 divided by 60 bucks, that's 25 years to get that premium savings back to offset the extra risk that I'd be taking in house. And that's a personal decision that every investor is going to look to make about Okay, how much risk Am I willing to take on personally and what deductible makes sense for me.

Then the replacement value versus actual cash value? These are two different types of policies. And so you want to look to understand, like you mentioned, Tom, what type of policy Am I being quoted is the replacement value and actual cash value. These are often seen as acronyms on the policy as RC for replacement cost, or ACV, which is actual cash value. And so most insurance companies, for the vast majority of single family homes out there, you're going to see a replacement cost or replacement value policy. But in a lot of commercial buildings or bigger buildings or older properties, they're only willing to write an actual cash value policy or an ACV policy, because it's just so expensive to insure the building to replace it like for like, because it's older construction typically is going to be beefier and more components. So it's just more expensive to insure. So they'll insure for an actual cash value, which is basically accounting for depreciation of the structure itself. And so the dollar amount of an ACV policy versus an RC policies typically going to be less. And so talk to your insurance agent or provider about what the difference is in those policies mean for you as an owner when it comes time to file a claim or for dealing with the claim, because they are vastly, vastly different.

Emil:

Dang!

Tom:

Great, great overview I dig it, I was looking through on some of my policies that I have that I may be changing out in the not too not too distant future is my deductible moves depending if the property is occupied or vacant. And Michael is doing give me a little bit of coaching is asking me, Hey, is that does that start right away? Or is there a grace period from the time that a vacates and it's, you know, my answer was? No, it starts right away. And it's the trigger to go back and get some updates. You know, a cool thing about insurance policy is I think we might have talked about it, maybe last episode is that it's pretty easy to change out in that unlike other types of these relationships, like a lender, you can basically sign an insurance policy and at any point in time change that and Michael, please correct me if I'm butchering that explanation, and word it better go.

Tom:

No you're spot on. It's just a it's a very fluid policy and agreement in that if you are unhappy or you want to change your policy mid year, they'll refund you the prorated amount. But depending on how you pay if you pay in full, you pay the full premium at day one, you decide that you want to change carriers six months down the road, you'll get refunded that six month premium payment, and then you can go place new insurance. Now you want to be very careful on the timing of this such that you don't have any insurance lapse because Heaven forbid you're canceling your insurance on a Monday, and then you place new insurance on a Wednesday. Murphy's law says that something's going to happen on that Tuesday, right there's gonna be a fire tree or something. So make sure that you don't have any lapse in coverage. And so be very communicative with the old carrier and the new carrier about when you want to bind that policy and having them seamlessly transition is really important. Same thing for your lender, your lender is going to require notification that you're changing, the insurance companies will take care of that notification. But you really, really, really, really, really want to make sure that you're having lapses in coverage. And so be overly communicative with all the parties involved, about the dates and timing of when that change is going to happen.

Tom:

And that feature of being able to change it out, it puts less pressure on me to find the perfect policy up front, like, oh, plug something in that is good, like not letting great get in the way, if I find a house that I want to buy, great, awesome, move forward. And I know that I want to tease out, you know, getting that best rate and best coverage, that's something I can do later, I don't have to stress myself out and making sure, but great be the enemy of good on that initial coverage.

Michael:

Yeah, it's a super good point, I just changed up my insurance program for all my California properties. midterm, I said I was getting quotes for renewal. And that's something you'll get every year, the insurance company will send you out a renewal package, which basically has Okay, this is what your new rates and new coverages look like. And those will tend to go up over time, just because of inflation, cost of materials goes up. And so you'll get the needed coverage will also go up. And then of course, the premium that you're paying will also increase. And so I was just really dissatisfied with the agency that I was working with who had the policies in place, as well as the coverages from the carrier's themselves. So I called up a good buddy of mine who's an agent, and I said, Hey, quote this for me, and he got me some really competitive quotes. And so I moved everything over to him. And now I'm getting refunds from those carriers because I cancelled mid mid term.

So don't be afraid to quote unquote, fire your agent or fire that insurance company if you're not getting the service or the coverage that you feel you need are entitled to. And again, remember these folks work for you. And they are in business to pay claims. That's an insurance company's one job. And if they are unable to do that, well, well, then why would you be working with them?

Emil:

And so on that note, what are some red flags people should be on the lookout for, as they're vetting different insurance providers? And you guys might have already mentioned them, but maybe just summarizing them here.

Michael:

Yep, poor claims handling record, I think for me is is a big one, if you have to fight tooth and nail with your insurance company to get paid out on a claim, it's not worth the extra savings that you might see on your premium.

Emil:

How do you find that out before it's too late, though, online reviews, and again, kind of taking those with a grain of salt. But when they're talking about claims, specifically, I think that's one that we can look at. And also talk to the agent or carrier about what their claims handling process looks like. And what their what their rating is what their insurance rating is, with, with some of the rating companies out there. They should be touting their claims handling record, if they're a great carrier. And I'm personally having been through some awful claims and happy and willing to pay more for that coverage. Because I know it's going to get handled, not if but when I have a claim.

Tom:

It's great point I like that. I would ask about the renewal process. And I went through renewal a little bit ago just kind of accepting what they what they're sending back, which his answer is I'm gonna go be a little more proactive on this, you know, went through the process, there was like three different websites like one for paying one for site, it was super kluge. I went through this process, I paid them for all different properties that I have. And then I start getting notifications from my lender that my insurance expired and that they have paid for lender provided insurance because insurance companies will do that. But the problem when insurance companies do that is they're they're basically going to be like not a good shopper at all, and just give you very expensive insurance.

Michael:

So wait, Tom, do you mean that the lender will do that the lender will go out and buy insurance because…

Tom:

The lender buys insurance.

Michael:

Because you said insurance companies will do that.

Tom:

Sorry, lender. Thank you, thank you for correcting me. So the lender, they'll do lender will purchase insurance on your behalf and just hold the payments in escrow. So I, this happened to me just within the last few weeks where I you know renewed my insurance policy, which is an okay policy, and then I get notification from my lender that they're going to shop for insurance like there were some dropping the ball and communication. And at that same time my insurance provider mailed me back a check for the amount that I had paid to renew my insurance, and it's just a quagmire, just a little bit of a mess right now, which is that is on my list of things to do is clean up that mess. So that the renewal process just making sure like I'll probably put in like a negative review, just in this has been just such a clunky process. So asking him about the process of renewal and looking at the new rates and making sure that is a smooth process. So that would be mine. And then also I mentioned before looking at moving deductible rates like I don't like that is something I didn't look into when initially selecting the provider. So you know, having someone you can kind of who is knowledgeable in this space like Michael is a great example to kind of bounce these ideas off of is a helpful resource to have.

Michael:

And something else I would look for too is is the person you're speaking with, either at the company direct the carrier directly or broker willing to educate you and kind of hold your hand through the process if you're not super familiar with insurance, because I think it's not something that's taught in school, you don't learn about it. We covered you know quite a bit in the academy about some things to look out for. It's some questions to ask to arm you to go have those intelligent conversations. But I would argue that an agent's job is split half between education and half insurance placement. And if they're not willing to take the time and walk you through and talk to you about some of the coverages that you're looking that you should be considering or looking for. That's kind of a red flag for me. And I've had conversations with agents. And this isn't me tooting my own horn, but I've structured some of the policies in certain ways.

And they're like, Oh, well, it's a really good idea. And I'm like, you should be telling me what the good ideas are. Why am I coming to you with that, like you do this for a living? So I would say, you know, look to find someone who's knowledgeable and who's willing to walk you through this process.

Tom:

When you get a quote, Michael, you asked them for like three different versions, like on like, okay, a 2000, and 1500 and a 5000? Is that like, pretty standard practice?

Michael:

Yeah, exactly. And so I'll build out a skeleton quote of what I want as kind of a minimum, I'll send it to them. So it's not a back and forth quoting thing, we'll look to get a kind of massage to where I want it to be. And then yeah, I'll do exactly that. I'll have the lowest deductible, your next highest and the next highest, just to see what the difference in premium is. And then of course, we can look to massage, different line item coverages at different values, if they are movable, to see how the premium gets affected, because you want to look to see what levers are going to have the biggest impact. And I think so often, unfortunately, deductible isn't one of them. It's typically the underlying coverages themselves that are going to have some of the biggest impact.

Tom:

Love it.

Emil:

Great advice. All right, guys. Lots of good information here. I think it's a good spot for us to wrap this episode up. What do you guys think?

Michael:

Totally. I think if anything, you know, wasn't making sense. Please go back, give it a read. Listen, there's a lot of stuff in there. And so you know, take notes, listen to it again. And don't hesitate with any questions for your agent for your carrier. Again, they should be playing an educator role.

Emil:

Not to make this sound too much of an ad but as always, there's only so much we can cover in a 45 minute or one hour episode. And Roofstock Academy which is our coaching and training program for investors can get a lot of your personal questions answered. Talk to Tom, Michael, myself, other investors on like really specific situations. So feel like you need more help, or just want to, you know, improve your real estate investing, go check out RoofstockAcademy.com. And, as always, make sure you guys subscribe, leave us a review. Let us know what you think of these episodes and we'll catch you on the next one. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

Emil:

Hey everyone. Welcome back for another episode of The Remote Real Estate Investor on today's episode, Michael and I are talking to Jonathan Barr, who is a friend of ours is also a local resident of Los Angeles like me. And in today's episode, he shares his journey as originally starting out as an investor in the Los Angeles area. And then over time realizing that he could get better returns in out of state markets. And we just talked to him about his journey, how he did it, and he shares a lot of the details so let's get into this episode.

Emil:

Jonathan, welcome to the show, man. We're excited to have you.

Jonathan:

Thanks guys. Happy to be here.

Emil:

You are. You are another person that Michael and I have met on Twitter. You and I have had a couple calls and some stoked to have you on the podcast, man, to talk about.

Jonathan:

Both LA Guys so.

Emil:

That's right. That's right. LA shout out another LA guy investing out of state.

Michael:

The tres LA Amigos on this one.

Emil:

Yeah. Cool, man. Um, so before we get into what I really want to talk to you about, which is your out of state investing, just give our listeners a little background on you, where you're from, what you do and we'll take it from there.

Jonathan:

Cool. I'm Jonathan bar, my company's JB2 investments born and raised in LA. Hablo espanol. So come from like immigrant parent background. I love LA for all the diversity and the different kinds of neighborhoods and the endless things to do here, even though we can't really enjoy it right now, obviously, and LA is so damn expensive, so it's hard to invest here as well. Right? I grew up in a real estate family and my parents been doing flips and involve in real estate. And my mom was a real estate agent showing houses with her being my daycare was basically her office.

So I've basically been around it all my life, but I started mainly my journey in high school. I got my real estate license when I turned 18. Didn't really use it at the time, but I'd go to like my parents' office after school every day and kind of learn a few things here. And there went to college, graduated 2008 after the great recession, not the best time to get a job. And so I couldn't find a job. My mom's like, come work for us. I was pretty reluctant to go because I wanted to do my own thing. Be independent, all that kind of stuff, but they also got hit pretty hard through the relapse recession.

So I kind of felt like a duty to my family to come help out, come rebuild. Folk came back, became an agent for a little bit, was working with buyers. I'm pretty terrible at it. Just wasn't confident, didn't know a lot. And I just didn't really like it, right? It's not really that fun. That part of the business is not fun. At least not for me. Right. And people just have crazy expectations. And so then we started getting into the trustee sales of foreclosure auction. So luckily my parents, you know, have some education there and they luckily had some connections to investors have capital. So we were able to raise some capital and go to the auctions.

And so at the beginning I was involved in everything. Like I was looking at the properties running title, I'm going to courthouse steps. And we were also a lot of times it was like breaking into vacant houses to try to get a look at the inside just because it made a huge difference. I mean, if you can get in doors and see like, Oh actually the kitchen is pretty nice. Oh, the bathroom's pretty nice. Oh, I can actually see that the electrical is done or like looking at old permits. And a lot of the times, like one of those properties were going to sale. They were bought in like, ‘04/05 So it was old, like MLS listings. I could kind of like, look at descriptions and look at old pictures and that kind of thing.

Emil:

I was going to ask you to share one of your, when you're a crazy auction stories, hoping you would, uh, mentioned that. And that that's definitely a crazy auction story. I mean, yeah. It gives you a leg up because a lot of times you're going in blind and you don't even know what you're bidding on. Right?

Jonathan:

Yeah. And, I remember the first house I bid on. I actually bid myself up cause I was so nervous, you know? Cause like, you know, you have, cause you have like the actual money orders, like in a envelope ready to pay for these properties. And I was like 24 at the time, my first time ever doing this and I was like, Whoa, this is insane. You know? Cause how they do it, they like, they're like, okay Jonathan, your bid. But when they say Jonathan, your bid, that means you're the highest bidder by thought he said, Jonathan, you bid. I was like, Oh yeah, I'll bid.

Michael:

It's your turn to bid.

Emil:

Oh man. I can't imagine how like adrenaline inducing an auction must be, especially the first time, like you said.

Jonathan:

Yeah. We were bidding on like 10 different houses. On one point it was definitely like a rush like every morning was like a big rush analyzing all these deals. And you know, we were at a point where buying three, four homes a week at one point it was insane. One year we did 82 homes. Pretty crazy.

Michael:

So Jonathan paint this picture for me, you know, listeners, right? I'm picturing a guy on a podium talking about, you know, property one, two, three, $5, $5. I hit $5. Right. And everybody's out there in the crowd, you know, bidding. Is that actually what it's like?

Jonathan:

Yeah. But it's basically in front of the courthouse steps, super casual. And at that time there was only like 20 people going to the auction. So it wasn't a lot of people. And like we were so super focused in a certain neighborhood. So like we were the only ones that bought and these couple neighborhoods. And when you bid on those properties, people kind of knew to kind of back off. Cause we going to be the most competitive investors. And we were also doing like higher end kind of like trendy designs that a lot of people at that time weren't quite doing yet. So we were able to push the values on the properties that we're buying by, you know, 10, 15%. So we're able to kind of bid 10, 15% more than anyone else. So that's what allowed us to kind of buy these properties over other people. Knowing our pockets and knowing all that.

Michael:

Knowing your market. Yeah.

Jonathan:

Yeah. It makes a big difference.

Emil:

These auction were around LA, right?

Jonathan:

Yeah. They were mainly in Northeast LA. So if you're familiar with LA, Silverlake, echo park, Highland park, kind of like the hipster havens up that way, I guess you could call it, you know.

Michael:

Now some of the most trendy neighborhoods in LA.

Jonathan:

Yeah. Yeah, definitely. And you can't find too much under a million dollars in those neighborhoods now. When we're buying properties at like 250, 300, 350,000, it was like crazy. Like these are like Midwest prices, you know?

Michael:

Wow.

Emil:

And now the hottest part of LA. So that's a good segue into like your, your beginnings and how you picked up your first couple of investment properties that we were talking about.

Jonathan:

Yeah. So I luckily during like the 2010, 2012 period was able to pick up a few duplexes in that area. And one of which I lived in and basically how SAC, cause I rented a room to a friend and, and rented the back house and I was kinda like, Holy crap, these people that I'm renting this house to in the back or paying my mortgage, this is insane. I need to continue to do more of this. And like, all I gotta do is like, they call me every few months to get fixed some minor thing. And I just got to pay a few bills and put it on auto pay and we're good. Right. So that was kind of my aha moment. We also like around that time started getting into some development. So we're doing like small outs, subdivision developments, entitlements, and doing like townhouse style construction because the REO is, and all that stuff was kind of drying up. So that was, don't really want to do that anymore. It was a learning experience. We have a lot of NIMBYs in LA and for your listeners that don't know what an NIMBY is, not in my backyard. So that's a big problem we have here. And that's part of the reason of getting out of California was just all the rules, regulations and problematic things like that. Right.

Michael:

Makes sense. Yeah.

Emil:

How did you find that that first duplex is that auction?

Jonathan

Yeah. That's an interesting story actually. So my mom's first broker she ever had in LA when she was, I don't know, 22, 23, like barely speaking English at the time was this like older, like lady that had been doing real estate, like maybe 10, 15 years before she even started working for, and she was still doing real estate at the time. And she had this listing that she wasn't able to sell. And we looked at it as actually buying it as a flip, but it didn't quite make sense, but I was looking at it and I was like, you know what? I would live here. And then I saw at the time silver Lake was still kinda like getting better. So it wasn't quite there yet. So, and then I saw some girl walking with her dog. I was like, well, this lady is walking with her dog here. It must be all right.

You know, but the thing is, the back house was like on its side. So I had to build a whole new foundation, the front, like it was a total fixer and, and luckily the foundation guy was this Jewish guy and I have a Jewish background. My dad's from Israel. So we had like some connection way and he had a lot of funds as well. So he's like, how are you funding this? I was like, well, I'm going to try to do like a 203K loan with which, for your listeners is basically like a FHA loan where they give you money for construction as well. He's like, well, I'll lend you that money at that same rate. And I was like, what? Like amortized and everything. I went to my mom and I was like this like good.

Like, like, should I do this? And she's like, yes, that's amazing. Like do that. Cause I thought it was like, I was like, there's gotta be something shady about this. Why is this guy trying to throw money at you? Right. So I went through with it and I fix up the property. He gave me the money for the construction. I paid him and then I refinanced it a couple of years later. So it was like blessing.

Michael:

That's awesome. Did the foundation issue, I mean, clearly it didn't scare you away, but what were you thinking going into it? I mean, that sounds like a pretty big lift.

Jonathan:

I mean, I think with the connections that I had, it wasn't a scary for me. I think for someone that's just starting, like, you probably don't want to get into something like that. Cause it was definitely more expensive, definitely more problems. And it was a headache, but that's like my focus, right. I know for your guys' listeners, they're buying, you know, like turnkey houses out of state and that's a good way to go and something that's already done that you just kind of plug and play and just make sure you manage the manager. Well, right.

Michael:

Yeah. Yeah.

Emil:

You had a background in real estate. So you'd been doing this for a while before. You're like, all right, I'm going to take something on like that, that is going to need a lot of work. It wasn't like the first, your first run with real estate. And you're like, I'm just going to take this massive project on.

Jonathan:

Yeah. Usually the more work you need to do, the better deal you're going to get. But the more headaches you have to deal with.

Emil:

Yeah, absolutely.

Jonathan:

Yeah. If you have the time and expertise to do it, it works. But if you don't, then it could be a headache that ruins the deal.

Michael:

Brain damage.

Jonathan:

Or you just don't know what to do. And it ends up being a terrible deal. Right. Because you can get in the best deal in the world, but then if you're over construction by 200,000 and it takes you a year longer than you thought it could turn into a pretty bad situation, right?

Michael:

Yes it can. So speaking from experience something, right. I talk a lot about the podcasts this vast development project. I'm working on it. It's like so over budget. And so over timeline, part of the issue is I had two fires in the building during construction, which halted everything.

Jonathan:

What?

Michael:

Yeah. And the ironic part is I used to work as a professional fire protection engineer. So the fact that I had to in a building that I owed is like, not only statistically impossible, but like the most embarrassing thing ever. So just dealing with the insurance headache is, has just been total joint..

Jonathan:

Did you have tenants or was it just like a random combustion?

Michael:

I have four tenants. And so one was started in a tenant space. We, the fire department wasn't able to put their finger on like, Hey you did it because they're pretty like blahzay about it. Oh the fire started. We're not willing to say who did it. And then the second was I was having a new roof put on and the fire started on the roof and I'm like, yeah, the roofer started the fire. But the, they weren't able to say conclusively, it was this, that or the other thing.

So which would have been so much easier for me. Cause then my insurance company could go subrogate. And if we're going to keep this in, but subrogation is basically someone's my insurance company going after a different person's insurance company to then recover their losses.

Jonathan:

And they, they didn't want to accept that it was their fault?

Michael:

Yeah, exactly. Of course. They're not going to be like, cause no, you can't prove it. It's, it wasn't our fault. This is our protocol and procedure for cigarette handling and butt butts and this and that. So they weren't able to, to pin it on anybody. So I had to deal with it.

Jonathan:

Yeah. And that's why we have insurance, but that's why we have insurance.

Michael:

Exactly. It could have been so much worse. Um, so I have to keep everyone posted on how the public adjustment process goes. Yeah. It's been over a year since the fires, but in any case. Yeah. So don't get into a project that's too, over your head. It can be a real, real pain in the butt.

Jonathan:

Especially if you're out of state.

Michael:

Especially if you'reout of state, it just makes it, it adds a layer of complication.

Jonathan:

Yeah. Cause if you can't be there to be there, like at least once a week on a big project like that, it makes it difficult for sure.

Michael:

It makes it tough for sure. Okay. So talk to us a little bit about what made you want to leave LA, what pushed you out of LA and where did you go from there?

Jonathan:

Yeah. So like I said, I bought these few duplexes and like after the last recession and like 2018, 2019, I am, while the equity on these properties has grown like huge, like crazy. Right. And I started like, my cash on cash was good based on what I had actually invested in cash in these properties. I think a lot of people make that mistake. Sometimes they don't look at the full equity that's in their property. And so I started looking at what my return on the actual equity I have in those buildings. And it was like three or 4%. And I was like, I know I have to do better than this. Right. And so I started looking at LA because I know LA and I know all the vendors and you know, I feel comfortable there. I know it well. And the only thing I saw to do was buy a building that had tenants in it that I have to deal with rent control, relocations, all that stuff. And I've dealt with all of that stuff before, but it is a big headache.

You have to try to negotiate for them to move out and pay for them to move out. And it's like, I have a heart too, and it's hard for me to push people like that out. And I know they're going to leave and have to pay like $2,500 now and that's going to have a huge impact on their family. Right. And so I'd have to do that. And then also probably do a whole gut job just to get maybe like six or 7% return after that much brain damage, it's just not worth it. And so I think it was like Christmas 2017. I was in Kansas city with my wife and because she has family there and I was like bored one day. And I started looking at real estate in the area. Yeah. Real estate guy.

Michael:

It's what we all do. It's like, well, what's your favorite pastime golfing now looking at deals, man.

Jonathan:

And I just started like doing some math and I'm like, could be something here, you know? And, and then I just started reaching out to brokers and making some connections and doing some touring. And you know, there was kind of like these trendy areas, just like silver Lake echo park and all that.

Emil:

Nice. All right. So you're looking around Kansas city. You said your wife's family's from there. So what made you finally pull the trigger?

Jonathan:

Last summer? I finally decided to sell one of those duplexes and January of 2019, I'd been in Kansas city and I had toured a couple of properties. And so I called some of the brokers I had met with and toured properties with earlier that year. And one of the properties that I toured was like halfway done. And by the time I put my place on the market, they had finished that project and leased it up and they sent me the numbers. I did my numbers, I was already familiar with the building. So I was able to secure that off market. So put my duplex in escrow. And then probably two, three weeks later, I put that property in escrow before I even closed the other one because I was doing the 1031 exchange. So for me, it was kind of important to secure something because of time constraints and for your listeners to a 1031 allows you to, you know, move the gains from one property to another property without paying taxes.

But there's a 45 day window to select the property in 180 day deadline to close on that property. So a lot of people aren't successful because of those time constraints. But because I did a lot of work on the front end, I was able to secure something and kinda getting into it that way. And because I was in a 1031, they're motivated to work with me and not really push it to other people and kind of make it happen. And so far that property is doing about 10 to 15% better. And it kind of was just like that proof of concept for me that I could actually go out of state and do this successfully.

Micheal:

I got to ask a quick question before the Lamarck is back on, why did you opt to do a 10 31 as opposed to a cash out refi and tap into that equity?

Jonathan:

Because a cash out refi would limit the amount of cash that you can get. And I think I would have been more powerful that way and that I just kind of wanted it not be in that investment anymore. It was a small duplex and just made sense to kind of move into something bigger. Yeah.

Michael:

Right on

Emil:

With the cash out would have potentially made that duplex, like cashflow negative.

Jonathan:

I think so that too. Yeah. Cause I was like making me be like 12, 1300 bucks a month before, and then I, I basically more than tripled that going into the new property.

Emil:

Wow.

Michael:

Awesome.

Emil:

There you go. Proof of concept. How many units did you buy into by the way? So you sold the duplex?

Jonathan:

14.

Emil:

Okay.

Michael:

Holy crap. So a duplex in LA gets you a 14 unit anywhere else. Oh, that's fantastic.

Jonathan:

I mean, I had a lot of cash to move over and that was part of it, but still yeah, for that. And I sold that duplex for around a million and bought the 14 unit for 1.6. I think. But I'd bought it for like 400. I think I bought it for that.

Michael:

Good for you, man. That's awesome.

Emil:

That is so awesome. Serious appreciation.

Jonathan:

So like I'm not against investing in LA, but right now it's not the time. If you buy something right now, if anything, you might get the appreciation. Cause I think LA might take a hit with everything going on down the line.

Michael:

Yeah. Jonathan circling back to a metric that you mentioned previously. It's not one that I think is talked about super regularly. So can you share with everybody what a return on equity is a measurement of?

Jonathan:

Yeah, so like I bought this property for 400 and I probably put like a hundred K into it. So my cash was actually a hundred, but then the equity in it was the gain. So like it was worth a million dollars. Now, now I have in it, like let's say after closing costs and commissions and everything, my equity is like five, five 50. So it's the cashflow on the property divided by that equity gives you the percent return on that equity.

Michael:

It's basically a measure of how hard your dollars the equity is working for you in that property. You could almost look at it.

Jonathan:

Yeah. This is my actual cash in the property. And what's my return on that actual cash, even though it's not actual cash, but you could turn it into cash, which I did and moved it over.

Michael:

It's lazy cash. Right? The equity is often lazy cash and it's not doing anything for you.

Jonathan:

Yeah. And that's a thing like some people say I want to hold my property forever and I think that's good depending on the property, but a small duplex like that. Once you get to a certain point where you build up enough equity, it makes sense to kind of move it along at that point or do like a cash out refi, but sometimes depends on the bank and where things are at it'll depend how much, like maybe I only got 500 out, but if I did a cash out refi, maybe I would have when he got $300 and then I would have had to buy a different property.

Michael:

Sure, sure. And when you sold your property, where you, your own agent,

Jonathan:

I was so that

Michael:

Perfect!

Jonathan:

Now the 3% that saved me, like 30 grand.

Michael:

Yeah. Yeah. That's fantastic. Okay. So the 14 unit was your first deal in KC, right. And where are you now? What's your next deal? What do you have your sights on for going forward?

Jonathan:

So I could kind of explain like what we're doing now and where I'm at. So I bought that November, 2019 in January. I left the family business to just kind of that proof of concept just gave me the confidence that I could do stuff on my own. I also, with that cash flow on, I had another property. I was gaining cashflow from it. My wife has a full time job and we have benefits through that. So I was able to kind of leave that business and not get the salary I was getting there and surviving and all that. And so my brother and I both left at the same time to start our own business. And so I sold another duplex that I had that I lived in. So, and then my brother sold, just sold his duplex. And so we're looking for a larger deal, like 50 plus units either in KC or we open it up a few hundred miles from KC. So it was like Omaha st. Louis, Tulsa, Oklahoma city, Wichita, some of those kind of Midwest cities. And my brother connected with a property manager in Oklahoma city had a deal on. And then he connected separately with a broker that had that deal. And so that property manager kind of gave us credibility and kind of vouched for us, even though he didn't even know us, but he's still vouched for us.

He's like our age. And like, we kinda like sold them our story. And like, we were like, we want to keep on doing this. So he felt good with us. I guess you could say. So we put 72 unit deal under contract and we just closed two weeks ago.

Michael:

Oh mazel tov

Jonathan:

Yeah. Thank you.

Michael:

That's awesome.

Jonathan:

Thank you. Yeah. And it's not a traditional value add where we're doing a lot of work cause it's in pretty good shape. We're just kind of giving it our touch and doing some rebranding and we are changing management and reducing expenses by 25%. So that's our big value add right there. And it's actually, I think for COVID right now, it's the ideal value add where you're not like disturbing the tenants much. You're not pushing rents much. You're just like getting the operations to work better and be more efficient and less costly. Right.

Michael:

So cool. A couple of questions. Did you and your brother do 10 30 ones for, for the duplexes that you sold best go around?

Jonathan:

So the duplex that I sold since I lived there, half of it, I was able to keep tax-free and the other half I turned 10 31 and until the deal, then my brother, cause he lived in the other property, he was actually just able to move his tax free money over into the deal. And then we raised money from one other investor to raise the rest of the funds. And that's another thing we're working on is raising capital and talking to investors. And that's been tough because of COVID and also because it was our first larger multifamily deal. So everyone was kinda like, well invest in that. We want to see how you do on this one. I know that's the next one.

Michael:

Nobody wants to be the pioneer.

Jonathan:

We were able to kind of put it together, you know? Got it. And so that's what we're doing now. We're focusing on larger value, add 50 plus units in Oklahoma city or Kansas city. And we're looking to do three or four deals a year and we don't really have like a unit target. We have more like a cashflow target, but it'll end up being probably over a thousand units that we want to get to initially and then kind of see where it goes from there.

Michael:

Right on. And so with the raising, the rest of the funds from the investor was a finance deal or it was all cash?

Jontahan:

Financed. So we got a bank loan two and a half percent interest rate, which is insane. No reserves.

Michael:

Who is this bank?

Jonathan:

Bank of the West. Yeah. California bank.

Michael:

That's fantastic.

Jonathan:

But they're all they're nationwide. Like my banker was actually in Kansas city and that's how I got introduced to him through a broker that I know in Kansas city.

Emil:

Okay. We always talk about that too like use the people, you know, to ask if they know other people in that area. Super good point.

Jonathan:

Yeah. Yeah. That's a thing. And you start getting active in certain areas and with certain people and you're doing business with them, they'll refer you to people and it's just, everyone's like, it's kind of a small world and everyone's of interconnected. Right.

Michael:

So you mentioned reducing the expenses on that building by 25%. And it's a question that I get all the time and I'm a multifamily guy too. So I talk about all the different levers you can pull, which is one of the reasons I love multifamily so much. So talk to us a little bit about what you're doing to reduce the expenses by 25% because that's huge.

Jonathan:

Yeah. It's a hundred over a hundred thousand a year. So, um, 50,000 of it is, is marketing expense. They were like spending money in all these like different like marketing, like systems and websites that was like completely unnecessary. So we're basically, you're reducing that 50, 60,000 they're spending a year to like $3,600 a year for apartments.com and that's about it. So that's the main one. And then insurance costs where you to kind of tighten that up a little bit because our property manager owns and manages a couple of complexes nearby. We don't have to pay for it, leasing agent. They just have people kind of bouncing around. So we're kind of able to share resources a little bit as well. And they had a lot of turns that they did in the last T 12 basically. Um, and so we won't have as many turns we're going to have, we have a maintenance guy that's there full time to kind of reduce maintenance costs as well. So all that stuff combined is I think it ends up being like a $112,000 in savings in the first year alone.

Michael:

So for those of our listeners that don’t know what a T12 is shed a little light on that for us.

Jonathan:

A T12 is basically just all the income and expenses for 12 months of the year. And it just details like if the rent income, if there's like a utility bill back income and like breaks down like insurance, property taxes, all the maintenance, everything all in one big spreadsheet. So you can kind of see get an, I get the whole story, you know? And like a lot of times with these bigger, um, apartments, you could get T12 like a few years back. So you can kind of see the progression of the whole story, the novel.

Michael:

Right, right, right, right. Yeah. So the proforma is looking forward. This is how we projected the property to perform. And I think the T comes from trailing and it's the trailing 12 months looking backward. And how did it perform? So it can be really helpful. I love that. It's, it's a novel, it's the story of how the property.

Jonathan:

Yeah. Well, I mean, I guess they couldn't make up those numbers, but they technically are not supposed to.

Michael:

It's bad form.

Jonathan:

Yeah. But that's why you back it up, you looked at like bank accounts, utility statements, rent, rolls, everything leases. And you kinda like look at everything. Like the due diligence process is huge and lengthy and if you're doing it right, you know,

Michael:

If someone says it's easy, they're not doing it right.

Jonathan:

Exactly.

Michael:

Awesome. So what, having done it now, are a couple of different times, Jonathan, what would you say are some of your top tips for those who are just getting started investing out of state?

Jonathan:

You mean like what to do when vetting vendors and that of thing, or just to do it in general?

Michael:

Or it could be, it could be high level of like, Hey, you know what? I've invested, you know, I bought a house ‘cause I think a lot of investors on the marketplace own their own home. And so I understand what that process looks like, but I cannot imagine what it would be like to go buy a property out of state. I have no idea, conceptually, physically, emotionally, how that would work. How would it make me feel? What would you recommend it to those folks?

Jonathan:

First? From my end, like it took me like two, three years to actually take the jump and go out of state and actually feel comfortable with that because I, you know, I'd done hundreds of deals in LA and I was like, I can't leave LA, this is crazy. Like, why would I ever do this? This is like the sure thing. Right? Yeah. You know, but like real estate, there's some inherent risks and you got to take the plunge sometimes. Right.

Emil:

I'm always curious to know, like it's really hard to mentally get over that feeling of, okay, I'm going somewhere where I can't just drive to the property. And like you mentioned, you were already doing stuff locally. So I feel like that's a double mental barrier. I'm curious if there's like, what kind of just got you over the hump? Was it the, the potential reward and it was, you know, early enough in your career?

Jonathan:

Yeah. I mean, another thing too is like in LA we have rent control and the cities, we don't have rent control. So you can, you could give someone a notice to move out in LA you can't just give someone a notice to move out. You kind of have to either pay for them to leave or you're stuck with them. So like for example, like I've just had a lot of like, like scariest situations with tenants, like psychopath tenants that call me for every smudge on the wall and I've come to my office and cuss me out because they're basically a psychopath. And I can't just tell this person to leave in 60 days. I literally I'm stuck with them and I'm like, I should have the freedom and the right to tell someone to leave if they're a pain in the ass. Right. So that was a big one. Um, so not having to deal with that, like in Oklahoma, the property manager basically said I can evict someone in 21 days. I mean, I'm not advocating for just throwing people out, but I'm just saying, if you have a problem person, you can get them out quickly.

And that, to me, that was important. I think the most important thing is just picking the right team, right. Picking the right property manager, picking the right contractor, the right broker is all that like vetting them, getting referrals, you know, like one thing I heard someone that they do is they pick like a lot of times that the property managers will have the buildings that they manage on the website. And you'll be like, I want to talk to the owner of that, building, that, building that building. And I want to talk to them to see how their experience has been. Right. So you get like a random, they can't just give you their best referrals that are going to talk the best about them. Right. And then also like shopping their existing listings. So like having like maybe like a burner email where you email a couple of their listings and see how quickly they respond.

Cause that's important. Like, I, she just did that with my property manager in Kansas city because they were having some trouble leasing, one of the units and I sent an email to the advertisement and they actually responded in an hour. I was like, wow. Okay. That's, that's, that's really good. You know, as long as they respond within 24 hours, I think that's really important because if you don't then you lose that person. Right. And then I think the other really important thing, like before I would buy anything, I mean maybe if you're buying like a single family home, it's not as big of a deal, but if you're doing like a larger investment, I would just go there, meet these people in person and actually get a feel for the area. Because like any big city, different pockets could be different from each other. So like, if you go North or West from a certain street or freeway, it could be completely different.

And then over time, you'll kind of figure out the different areas that are the best and that will work. And that's why it's important to kind of focus on like one or two cities and not being like 10 different cities, I would say.

Michael:

Yep. I love it.

Emil:

These a solid, solid tips. I also, uh, I wrote this down. It's kind of a takeaway. I love that. You know, for you, you started small granted it's in Los Angeles, so it's a more expensive market, but you started small. You started with duplexes at the time.

Jonathan:

At the It was an expensive market.

Emil:

Yes, exactly.

Jonathan:

When I first started, it was actually somewhat reasonable.

Emil:

Yeah. Yeah. But you started small, you were in a good market, you know, you waited this, wasn't like a year down the road that you were able to leverage it. And some of these things…

Jonathan:

We're talking like a decade here, you know, like I think that's also a big misconception people have. They want it like right now, they want to like have a, you know, and it just takes time. Like real estate takes time. You need to buy it, hold it for awhile. And then that's when the magic happens. Right. It doesn't happen overnight.

Michael;

Wait, I'm forget this whole real estate thing. I'm out.

Emil:

If you follow people on YouTube, certain gurus. Yeah. They'll tell you, you can be a millionaire in like six months, but don't listen to them.

Jonathan:

Don't listen to them for sure. And that's another thing too. It's like a lot of people, another big misconception is you don't need money to do this. I mean, you could raise it from other people, but if you don't have experience or money, you kind of need one or the other, you know, like, it's good to work in a W2 for 10 years and really save up some capital and then get into it, you know? And you learn a lot in those businesses and companies and how the world works and whatever. Right.

Emil:

A hundred percent couldn't agree more.

Michael:

Yeah. Yeah. I'm right there with you.

Emil:

All right. Michael, anything else you want to ask before we do the wrap up?

Michael:

No, this has been killer. This has been killer.

Emil:

Cool. So Jonathan, we'd like to kind of ask a random question on every episode, but before we get insurance, what is the best way that people can get in touch with you if they want to get in touch, chat with you?

Jonathan:

Yeah, just go to my website. JB2investments.com or email [email protected].

Michael:

And Twitter right?

Jonathan:

And Twitter. Yeah. You look at me up on Twitter. That works too. It's just my name and then there's some numbers. I think if you go to my website, if you email me, that's, that's probably the best way.

Emil:

Awesome. Yeah. Cool. Alright. So random question for you. What is something new that you've picked up during, since lockdown started since COVID hit something new real estate wise or, or any, it could be like, no, just in general, general habit. Yeah. Like, I don't know. One of our other coaches started slacklining at home. That was kind of his new thing during COVID.

Jonathan:

What’s slacklining?

Emil:

Oh dude. It's, it's the best. It's a, where you tie a Slack line between two posts and then, you know, your people like walk across them and do like the balancing thing. You see parks and stuff.

Jonathan:

Yeah. I've seen, I know we were talking about, I guess a lot of people have time on their hands. This person must not have kids or maybe they do.

Emil:

He just had a kid. It was, it was when the baby was like brand new though.

Michael:

So, you know, like before his baby could walk and crawl, you could just set it down and identify where it was going to be when he got off slackline.

Jonathan:

Um, I think, I think what this time is, I guess taught me or, or maybe not something necessarily new, but just like patience, you know, because like, you know, we left the business in January and then basically started our business and then COVID hit and then we're like, Oh. You know, it basically put like everything on hold for like almost six months, you know? So like filling that time and being patient and keeping at it and knowing eventually it would happen and like taking incremental steps every day. I think that's a big part of being a real estate investor is like the psychological side of it because there's a lot of ups and downs and how to deal with that.

And like all the different things that you need to deal with and things that come up and you gotta be mentally strong to be able to handle those things. And so building that, this was a good time to really build that. I guess you could say.

Emil:

Yeah. That is a very important skill that nobody talks about real estate investing is just having like mental fortitude because you're eating crap all along the way. Like there's just constant things and pain.

Jonathan:

Yeah. The wins are like only every once in a while. Right. But when the wins happen, they're sweet and it makes it worth keeping going. Right.

Michael:

Sometimes it's a fire hose of crap. Other times it's just a trickle from a garden hose. There's always something to deal with.

Jonathan:

And you literally got a fire hose. Right.

Michael:

That's so true. It's so true. I think a fire easier to clean up than all the water damage from the. It's crazy.

Emil:

Jonathan. Thanks so much for coming on the show, man.

Jonathan:

Thanks guys.

Michael:

Thanks so much, Jonathan.

Jonathan:

Thank you guys. It was fun.

Emil:

Alright big. Thanks to Jonathan again for hopping on this episode with us. If you guys haven't already, I'm sure you're tired of hearing it from me, but please go subscribe to the podcast. Leave us a review. We always like to hear what you guys are thinking. Good, bad, ugly. Hopefully not too ugly, but all the good stuff. And we'll catch you on next week's episode. Happy investing.

Emil:

Hey everyone. Welcome back for another episode of The Remote Real Estate Investor on today's episode, Michael and I are talking to Jonathan Barr, who is a friend of ours is also a local resident of Los Angeles like me. And in today's episode, he shares his journey as originally starting out as an investor in the Los Angeles area. And then over time realizing that he could get better returns in out of state markets. And we just talked to him about his journey, how he did it, and he shares a lot of the details so let's get into this episode.

Emil:

Jonathan, welcome to the show, man. We're excited to have you.

Jonathan:

Thanks guys. Happy to be here.

Emil:

You are. You are another person that Michael and I have met on Twitter. You and I have had a couple calls and some stoked to have you on the podcast, man, to talk about.

Jonathan:

Both LA Guys so.

Emil:

That's right. That's right. LA shout out another LA guy investing out of state.

Michael:

The tres LA Amigos on this one.

Emil:

Yeah. Cool, man. Um, so before we get into what I really want to talk to you about, which is your out of state investing, just give our listeners a little background on you, where you're from, what you do and we'll take it from there.

Jonathan:

Cool. I'm Jonathan bar, my company's JB2 investments born and raised in LA. Hablo espanol. So come from like immigrant parent background. I love LA for all the diversity and the different kinds of neighborhoods and the endless things to do here, even though we can't really enjoy it right now, obviously, and LA is so damn expensive, so it's hard to invest here as well. Right? I grew up in a real estate family and my parents been doing flips and involve in real estate. And my mom was a real estate agent showing houses with her being my daycare was basically her office.

So I've basically been around it all my life, but I started mainly my journey in high school. I got my real estate license when I turned 18. Didn't really use it at the time, but I'd go to like my parents' office after school every day and kind of learn a few things here. And there went to college, graduated 2008 after the great recession, not the best time to get a job. And so I couldn't find a job. My mom's like, come work for us. I was pretty reluctant to go because I wanted to do my own thing. Be independent, all that kind of stuff, but they also got hit pretty hard through the relapse recession.

So I kind of felt like a duty to my family to come help out, come rebuild. Folk came back, became an agent for a little bit, was working with buyers. I'm pretty terrible at it. Just wasn't confident, didn't know a lot. And I just didn't really like it, right? It's not really that fun. That part of the business is not fun. At least not for me. Right. And people just have crazy expectations. And so then we started getting into the trustee sales of foreclosure auction. So luckily my parents, you know, have some education there and they luckily had some connections to investors have capital. So we were able to raise some capital and go to the auctions.

And so at the beginning I was involved in everything. Like I was looking at the properties running title, I'm going to courthouse steps. And we were also a lot of times it was like breaking into vacant houses to try to get a look at the inside just because it made a huge difference. I mean, if you can get in doors and see like, Oh actually the kitchen is pretty nice. Oh, the bathroom's pretty nice. Oh, I can actually see that the electrical is done or like looking at old permits. And a lot of the times, like one of those properties were going to sale. They were bought in like, ‘04/05 So it was old, like MLS listings. I could kind of like, look at descriptions and look at old pictures and that kind of thing.

Emil:

I was going to ask you to share one of your, when you're a crazy auction stories, hoping you would, uh, mentioned that. And that that's definitely a crazy auction story. I mean, yeah. It gives you a leg up because a lot of times you're going in blind and you don't even know what you're bidding on. Right?

Jonathan:

Yeah. And, I remember the first house I bid on. I actually bid myself up cause I was so nervous, you know? Cause like, you know, you have, cause you have like the actual money orders, like in a envelope ready to pay for these properties. And I was like 24 at the time, my first time ever doing this and I was like, Whoa, this is insane. You know? Cause how they do it, they like, they're like, okay Jonathan, your bid. But when they say Jonathan, your bid, that means you're the highest bidder by thought he said, Jonathan, you bid. I was like, Oh yeah, I'll bid.

Michael:

It's your turn to bid.

Emil:

Oh man. I can't imagine how like adrenaline inducing an auction must be, especially the first time, like you said.

Jonathan:

Yeah. We were bidding on like 10 different houses. On one point it was definitely like a rush like every morning was like a big rush analyzing all these deals. And you know, we were at a point where buying three, four homes a week at one point it was insane. One year we did 82 homes. Pretty crazy.

Michael:

So Jonathan paint this picture for me, you know, listeners, right? I'm picturing a guy on a podium talking about, you know, property one, two, three, $5, $5. I hit $5. Right. And everybody's out there in the crowd, you know, bidding. Is that actually what it's like?

Jonathan:

Yeah. But it's basically in front of the courthouse steps, super casual. And at that time there was only like 20 people going to the auction. So it wasn't a lot of people. And like we were so super focused in a certain neighborhood. So like we were the only ones that bought and these couple neighborhoods. And when you bid on those properties, people kind of knew to kind of back off. Cause we going to be the most competitive investors. And we were also doing like higher end kind of like trendy designs that a lot of people at that time weren't quite doing yet. So we were able to push the values on the properties that we're buying by, you know, 10, 15%. So we're able to kind of bid 10, 15% more than anyone else. So that's what allowed us to kind of buy these properties over other people. Knowing our pockets and knowing all that.

Michael:

Knowing your market. Yeah.

Jonathan:

Yeah. It makes a big difference.

Emil:

These auction were around LA, right?

Jonathan:

Yeah. They were mainly in Northeast LA. So if you're familiar with LA, Silverlake, echo park, Highland park, kind of like the hipster havens up that way, I guess you could call it, you know.

Michael:

Now some of the most trendy neighborhoods in LA.

Jonathan:

Yeah. Yeah, definitely. And you can't find too much under a million dollars in those neighborhoods now. When we're buying properties at like 250, 300, 350,000, it was like crazy. Like these are like Midwest prices, you know?

Michael:

Wow.

Emil:

And now the hottest part of LA. So that's a good segue into like your, your beginnings and how you picked up your first couple of investment properties that we were talking about.

Jonathan:

Yeah. So I luckily during like the 2010, 2012 period was able to pick up a few duplexes in that area. And one of which I lived in and basically how SAC, cause I rented a room to a friend and, and rented the back house and I was kinda like, Holy crap, these people that I'm renting this house to in the back or paying my mortgage, this is insane. I need to continue to do more of this. And like, all I gotta do is like, they call me every few months to get fixed some minor thing. And I just got to pay a few bills and put it on auto pay and we're good. Right. So that was kind of my aha moment. We also like around that time started getting into some development. So we're doing like small outs, subdivision developments, entitlements, and doing like townhouse style construction because the REO is, and all that stuff was kind of drying up. So that was, don't really want to do that anymore. It was a learning experience. We have a lot of NIMBYs in LA and for your listeners that don't know what an NIMBY is, not in my backyard. So that's a big problem we have here. And that's part of the reason of getting out of California was just all the rules, regulations and problematic things like that. Right.

Michael:

Makes sense. Yeah.

Emil:

How did you find that that first duplex is that auction?

Jonathan

Yeah. That's an interesting story actually. So my mom's first broker she ever had in LA when she was, I don't know, 22, 23, like barely speaking English at the time was this like older, like lady that had been doing real estate, like maybe 10, 15 years before she even started working for, and she was still doing real estate at the time. And she had this listing that she wasn't able to sell. And we looked at it as actually buying it as a flip, but it didn't quite make sense, but I was looking at it and I was like, you know what? I would live here. And then I saw at the time silver Lake was still kinda like getting better. So it wasn't quite there yet. So, and then I saw some girl walking with her dog. I was like, well, this lady is walking with her dog here. It must be all right.

You know, but the thing is, the back house was like on its side. So I had to build a whole new foundation, the front, like it was a total fixer and, and luckily the foundation guy was this Jewish guy and I have a Jewish background. My dad's from Israel. So we had like some connection way and he had a lot of funds as well. So he's like, how are you funding this? I was like, well, I'm going to try to do like a 203K loan with which, for your listeners is basically like a FHA loan where they give you money for construction as well. He's like, well, I'll lend you that money at that same rate. And I was like, what? Like amortized and everything. I went to my mom and I was like this like good.

Like, like, should I do this? And she's like, yes, that's amazing. Like do that. Cause I thought it was like, I was like, there's gotta be something shady about this. Why is this guy trying to throw money at you? Right. So I went through with it and I fix up the property. He gave me the money for the construction. I paid him and then I refinanced it a couple of years later. So it was like blessing.

Michael:

That's awesome. Did the foundation issue, I mean, clearly it didn't scare you away, but what were you thinking going into it? I mean, that sounds like a pretty big lift.

Jonathan:

I mean, I think with the connections that I had, it wasn't a scary for me. I think for someone that's just starting, like, you probably don't want to get into something like that. Cause it was definitely more expensive, definitely more problems. And it was a headache, but that's like my focus, right. I know for your guys' listeners, they're buying, you know, like turnkey houses out of state and that's a good way to go and something that's already done that you just kind of plug and play and just make sure you manage the manager. Well, right.

Michael:

Yeah. Yeah.

Emil:

You had a background in real estate. So you'd been doing this for a while before. You're like, all right, I'm going to take something on like that, that is going to need a lot of work. It wasn't like the first, your first run with real estate. And you're like, I'm just going to take this massive project on.

Jonathan:

Yeah. Usually the more work you need to do, the better deal you're going to get. But the more headaches you have to deal with.

Emil:

Yeah, absolutely.

Jonathan:

Yeah. If you have the time and expertise to do it, it works. But if you don't, then it could be a headache that ruins the deal.

Michael:

Brain damage.

Jonathan:

Or you just don't know what to do. And it ends up being a terrible deal. Right. Because you can get in the best deal in the world, but then if you're over construction by 200,000 and it takes you a year longer than you thought it could turn into a pretty bad situation, right?

Michael:

Yes it can. So speaking from experience something, right. I talk a lot about the podcasts this vast development project. I'm working on it. It's like so over budget. And so over timeline, part of the issue is I had two fires in the building during construction, which halted everything.

Jonathan:

What?

Michael:

Yeah. And the ironic part is I used to work as a professional fire protection engineer. So the fact that I had to in a building that I owed is like, not only statistically impossible, but like the most embarrassing thing ever. So just dealing with the insurance headache is, has just been total joint..

Jonathan:

Did you have tenants or was it just like a random combustion?

Michael:

I have four tenants. And so one was started in a tenant space. We, the fire department wasn't able to put their finger on like, Hey you did it because they're pretty like blahzay about it. Oh the fire started. We're not willing to say who did it. And then the second was I was having a new roof put on and the fire started on the roof and I'm like, yeah, the roofer started the fire. But the, they weren't able to say conclusively, it was this, that or the other thing.

So which would have been so much easier for me. Cause then my insurance company could go subrogate. And if we're going to keep this in, but subrogation is basically someone's my insurance company going after a different person's insurance company to then recover their losses.

Jonathan:

And they, they didn't want to accept that it was their fault?

Michael:

Yeah, exactly. Of course. They're not going to be like, cause no, you can't prove it. It's, it wasn't our fault. This is our protocol and procedure for cigarette handling and butt butts and this and that. So they weren't able to, to pin it on anybody. So I had to deal with it.

Jonathan:

Yeah. And that's why we have insurance, but that's why we have insurance.

Michael:

Exactly. It could have been so much worse. Um, so I have to keep everyone posted on how the public adjustment process goes. Yeah. It's been over a year since the fires, but in any case. Yeah. So don't get into a project that's too, over your head. It can be a real, real pain in the butt.

Jonathan:

Especially if you're out of state.

Michael:

Especially if you'reout of state, it just makes it, it adds a layer of complication.

Jonathan:

Yeah. Cause if you can't be there to be there, like at least once a week on a big project like that, it makes it difficult for sure.

Michael:

It makes it tough for sure. Okay. So talk to us a little bit about what made you want to leave LA, what pushed you out of LA and where did you go from there?

Jonathan:

Yeah. So like I said, I bought these few duplexes and like after the last recession and like 2018, 2019, I am, while the equity on these properties has grown like huge, like crazy. Right. And I started like, my cash on cash was good based on what I had actually invested in cash in these properties. I think a lot of people make that mistake. Sometimes they don't look at the full equity that's in their property. And so I started looking at what my return on the actual equity I have in those buildings. And it was like three or 4%. And I was like, I know I have to do better than this. Right. And so I started looking at LA because I know LA and I know all the vendors and you know, I feel comfortable there. I know it well. And the only thing I saw to do was buy a building that had tenants in it that I have to deal with rent control, relocations, all that stuff. And I've dealt with all of that stuff before, but it is a big headache.

You have to try to negotiate for them to move out and pay for them to move out. And it's like, I have a heart too, and it's hard for me to push people like that out. And I know they're going to leave and have to pay like $2,500 now and that's going to have a huge impact on their family. Right. And so I'd have to do that. And then also probably do a whole gut job just to get maybe like six or 7% return after that much brain damage, it's just not worth it. And so I think it was like Christmas 2017. I was in Kansas city with my wife and because she has family there and I was like bored one day. And I started looking at real estate in the area. Yeah. Real estate guy.

Michael:

It's what we all do. It's like, well, what's your favorite pastime golfing now looking at deals, man.

Jonathan:

And I just started like doing some math and I'm like, could be something here, you know? And, and then I just started reaching out to brokers and making some connections and doing some touring. And you know, there was kind of like these trendy areas, just like silver Lake echo park and all that.

Emil:

Nice. All right. So you're looking around Kansas city. You said your wife's family's from there. So what made you finally pull the trigger?

Jonathan:

Last summer? I finally decided to sell one of those duplexes and January of 2019, I'd been in Kansas city and I had toured a couple of properties. And so I called some of the brokers I had met with and toured properties with earlier that year. And one of the properties that I toured was like halfway done. And by the time I put my place on the market, they had finished that project and leased it up and they sent me the numbers. I did my numbers, I was already familiar with the building. So I was able to secure that off market. So put my duplex in escrow. And then probably two, three weeks later, I put that property in escrow before I even closed the other one because I was doing the 1031 exchange. So for me, it was kind of important to secure something because of time constraints and for your listeners to a 1031 allows you to, you know, move the gains from one property to another property without paying taxes.

But there's a 45 day window to select the property in 180 day deadline to close on that property. So a lot of people aren't successful because of those time constraints. But because I did a lot of work on the front end, I was able to secure something and kinda getting into it that way. And because I was in a 1031, they're motivated to work with me and not really push it to other people and kind of make it happen. And so far that property is doing about 10 to 15% better. And it kind of was just like that proof of concept for me that I could actually go out of state and do this successfully.

Micheal:

I got to ask a quick question before the Lamarck is back on, why did you opt to do a 10 31 as opposed to a cash out refi and tap into that equity?

Jonathan:

Because a cash out refi would limit the amount of cash that you can get. And I think I would have been more powerful that way and that I just kind of wanted it not be in that investment anymore. It was a small duplex and just made sense to kind of move into something bigger. Yeah.

Michael:

Right on

Emil:

With the cash out would have potentially made that duplex, like cashflow negative.

Jonathan:

I think so that too. Yeah. Cause I was like making me be like 12, 1300 bucks a month before, and then I, I basically more than tripled that going into the new property.

Emil:

Wow.

Michael:

Awesome.

Emil:

There you go. Proof of concept. How many units did you buy into by the way? So you sold the duplex?

Jonathan:

14.

Emil:

Okay.

Michael:

Holy crap. So a duplex in LA gets you a 14 unit anywhere else. Oh, that's fantastic.

Jonathan:

I mean, I had a lot of cash to move over and that was part of it, but still yeah, for that. And I sold that duplex for around a million and bought the 14 unit for 1.6. I think. But I'd bought it for like 400. I think I bought it for that.

Michael:

Good for you, man. That's awesome.

Emil:

That is so awesome. Serious appreciation.

Jonathan:

So like I'm not against investing in LA, but right now it's not the time. If you buy something right now, if anything, you might get the appreciation. Cause I think LA might take a hit with everything going on down the line.

Michael:

Yeah. Jonathan circling back to a metric that you mentioned previously. It's not one that I think is talked about super regularly. So can you share with everybody what a return on equity is a measurement of?

Jonathan:

Yeah, so like I bought this property for 400 and I probably put like a hundred K into it. So my cash was actually a hundred, but then the equity in it was the gain. So like it was worth a million dollars. Now, now I have in it, like let's say after closing costs and commissions and everything, my equity is like five, five 50. So it's the cashflow on the property divided by that equity gives you the percent return on that equity.

Michael:

It's basically a measure of how hard your dollars the equity is working for you in that property. You could almost look at it.

Jonathan:

Yeah. This is my actual cash in the property. And what's my return on that actual cash, even though it's not actual cash, but you could turn it into cash, which I did and moved it over.

Michael:

It's lazy cash. Right? The equity is often lazy cash and it's not doing anything for you.

Jonathan:

Yeah. And that's a thing like some people say I want to hold my property forever and I think that's good depending on the property, but a small duplex like that. Once you get to a certain point where you build up enough equity, it makes sense to kind of move it along at that point or do like a cash out refi, but sometimes depends on the bank and where things are at it'll depend how much, like maybe I only got 500 out, but if I did a cash out refi, maybe I would have when he got $300 and then I would have had to buy a different property.

Michael:

Sure, sure. And when you sold your property, where you, your own agent,

Jonathan:

I was so that

Michael:

Perfect!

Jonathan:

Now the 3% that saved me, like 30 grand.

Michael:

Yeah. Yeah. That's fantastic. Okay. So the 14 unit was your first deal in KC, right. And where are you now? What's your next deal? What do you have your sights on for going forward?

Jonathan:

So I could kind of explain like what we're doing now and where I'm at. So I bought that November, 2019 in January. I left the family business to just kind of that proof of concept just gave me the confidence that I could do stuff on my own. I also, with that cash flow on, I had another property. I was gaining cashflow from it. My wife has a full time job and we have benefits through that. So I was able to kind of leave that business and not get the salary I was getting there and surviving and all that. And so my brother and I both left at the same time to start our own business. And so I sold another duplex that I had that I lived in. So, and then my brother sold, just sold his duplex. And so we're looking for a larger deal, like 50 plus units either in KC or we open it up a few hundred miles from KC. So it was like Omaha st. Louis, Tulsa, Oklahoma city, Wichita, some of those kind of Midwest cities. And my brother connected with a property manager in Oklahoma city had a deal on. And then he connected separately with a broker that had that deal. And so that property manager kind of gave us credibility and kind of vouched for us, even though he didn't even know us, but he's still vouched for us.

He's like our age. And like, we kinda like sold them our story. And like, we were like, we want to keep on doing this. So he felt good with us. I guess you could say. So we put 72 unit deal under contract and we just closed two weeks ago.

Michael:

Oh mazel tov

Jonathan:

Yeah. Thank you.

Michael:

That's awesome.

Jonathan:

Thank you. Yeah. And it's not a traditional value add where we're doing a lot of work cause it's in pretty good shape. We're just kind of giving it our touch and doing some rebranding and we are changing management and reducing expenses by 25%. So that's our big value add right there. And it's actually, I think for COVID right now, it's the ideal value add where you're not like disturbing the tenants much. You're not pushing rents much. You're just like getting the operations to work better and be more efficient and less costly. Right.

Michael:

So cool. A couple of questions. Did you and your brother do 10 30 ones for, for the duplexes that you sold best go around?

Jonathan:

So the duplex that I sold since I lived there, half of it, I was able to keep tax-free and the other half I turned 10 31 and until the deal, then my brother, cause he lived in the other property, he was actually just able to move his tax free money over into the deal. And then we raised money from one other investor to raise the rest of the funds. And that's another thing we're working on is raising capital and talking to investors. And that's been tough because of COVID and also because it was our first larger multifamily deal. So everyone was kinda like, well invest in that. We want to see how you do on this one. I know that's the next one.

Michael:

Nobody wants to be the pioneer.

Jonathan:

We were able to kind of put it together, you know? Got it. And so that's what we're doing now. We're focusing on larger value, add 50 plus units in Oklahoma city or Kansas city. And we're looking to do three or four deals a year and we don't really have like a unit target. We have more like a cashflow target, but it'll end up being probably over a thousand units that we want to get to initially and then kind of see where it goes from there.

Michael:

Right on. And so with the raising, the rest of the funds from the investor was a finance deal or it was all cash?

Jontahan:

Financed. So we got a bank loan two and a half percent interest rate, which is insane. No reserves.

Michael:

Who is this bank?

Jonathan:

Bank of the West. Yeah. California bank.

Michael:

That's fantastic.

Jonathan:

But they're all they're nationwide. Like my banker was actually in Kansas city and that's how I got introduced to him through a broker that I know in Kansas city.

Emil:

Okay. We always talk about that too like use the people, you know, to ask if they know other people in that area. Super good point.

Jonathan:

Yeah. Yeah. That's a thing. And you start getting active in certain areas and with certain people and you're doing business with them, they'll refer you to people and it's just, everyone's like, it's kind of a small world and everyone's of interconnected. Right.

Michael:

So you mentioned reducing the expenses on that building by 25%. And it's a question that I get all the time and I'm a multifamily guy too. So I talk about all the different levers you can pull, which is one of the reasons I love multifamily so much. So talk to us a little bit about what you're doing to reduce the expenses by 25% because that's huge.

Jonathan:

Yeah. It's a hundred over a hundred thousand a year. So, um, 50,000 of it is, is marketing expense. They were like spending money in all these like different like marketing, like systems and websites that was like completely unnecessary. So we're basically, you're reducing that 50, 60,000 they're spending a year to like $3,600 a year for apartments.com and that's about it. So that's the main one. And then insurance costs where you to kind of tighten that up a little bit because our property manager owns and manages a couple of complexes nearby. We don't have to pay for it, leasing agent. They just have people kind of bouncing around. So we're kind of able to share resources a little bit as well. And they had a lot of turns that they did in the last T 12 basically. Um, and so we won't have as many turns we're going to have, we have a maintenance guy that's there full time to kind of reduce maintenance costs as well. So all that stuff combined is I think it ends up being like a $112,000 in savings in the first year alone.

Michael:

So for those of our listeners that don’t know what a T12 is shed a little light on that for us.

Jonathan:

A T12 is basically just all the income and expenses for 12 months of the year. And it just details like if the rent income, if there's like a utility bill back income and like breaks down like insurance, property taxes, all the maintenance, everything all in one big spreadsheet. So you can kind of see get an, I get the whole story, you know? And like a lot of times with these bigger, um, apartments, you could get T12 like a few years back. So you can kind of see the progression of the whole story, the novel.

Michael:

Right, right, right, right. Yeah. So the proforma is looking forward. This is how we projected the property to perform. And I think the T comes from trailing and it's the trailing 12 months looking backward. And how did it perform? So it can be really helpful. I love that. It's, it's a novel, it's the story of how the property.

Jonathan:

Yeah. Well, I mean, I guess they couldn't make up those numbers, but they technically are not supposed to.

Michael:

It's bad form.

Jonathan:

Yeah. But that's why you back it up, you looked at like bank accounts, utility statements, rent, rolls, everything leases. And you kinda like look at everything. Like the due diligence process is huge and lengthy and if you're doing it right, you know,

Michael:

If someone says it's easy, they're not doing it right.

Jonathan:

Exactly.

Michael:

Awesome. So what, having done it now, are a couple of different times, Jonathan, what would you say are some of your top tips for those who are just getting started investing out of state?

Jonathan:

You mean like what to do when vetting vendors and that of thing, or just to do it in general?

Michael:

Or it could be, it could be high level of like, Hey, you know what? I've invested, you know, I bought a house ‘cause I think a lot of investors on the marketplace own their own home. And so I understand what that process looks like, but I cannot imagine what it would be like to go buy a property out of state. I have no idea, conceptually, physically, emotionally, how that would work. How would it make me feel? What would you recommend it to those folks?

Jonathan:

First? From my end, like it took me like two, three years to actually take the jump and go out of state and actually feel comfortable with that because I, you know, I'd done hundreds of deals in LA and I was like, I can't leave LA, this is crazy. Like, why would I ever do this? This is like the sure thing. Right? Yeah. You know, but like real estate, there's some inherent risks and you got to take the plunge sometimes. Right.

Emil:

I'm always curious to know, like it's really hard to mentally get over that feeling of, okay, I'm going somewhere where I can't just drive to the property. And like you mentioned, you were already doing stuff locally. So I feel like that's a double mental barrier. I'm curious if there's like, what kind of just got you over the hump? Was it the, the potential reward and it was, you know, early enough in your career?

Jonathan:

Yeah. I mean, another thing too is like in LA we have rent control and the cities, we don't have rent control. So you can, you could give someone a notice to move out in LA you can't just give someone a notice to move out. You kind of have to either pay for them to leave or you're stuck with them. So like for example, like I've just had a lot of like, like scariest situations with tenants, like psychopath tenants that call me for every smudge on the wall and I've come to my office and cuss me out because they're basically a psychopath. And I can't just tell this person to leave in 60 days. I literally I'm stuck with them and I'm like, I should have the freedom and the right to tell someone to leave if they're a pain in the ass. Right. So that was a big one. Um, so not having to deal with that, like in Oklahoma, the property manager basically said I can evict someone in 21 days. I mean, I'm not advocating for just throwing people out, but I'm just saying, if you have a problem person, you can get them out quickly.

And that, to me, that was important. I think the most important thing is just picking the right team, right. Picking the right property manager, picking the right contractor, the right broker is all that like vetting them, getting referrals, you know, like one thing I heard someone that they do is they pick like a lot of times that the property managers will have the buildings that they manage on the website. And you'll be like, I want to talk to the owner of that, building, that, building that building. And I want to talk to them to see how their experience has been. Right. So you get like a random, they can't just give you their best referrals that are going to talk the best about them. Right. And then also like shopping their existing listings. So like having like maybe like a burner email where you email a couple of their listings and see how quickly they respond.

Cause that's important. Like, I, she just did that with my property manager in Kansas city because they were having some trouble leasing, one of the units and I sent an email to the advertisement and they actually responded in an hour. I was like, wow. Okay. That's, that's, that's really good. You know, as long as they respond within 24 hours, I think that's really important because if you don't then you lose that person. Right. And then I think the other really important thing, like before I would buy anything, I mean maybe if you're buying like a single family home, it's not as big of a deal, but if you're doing like a larger investment, I would just go there, meet these people in person and actually get a feel for the area. Because like any big city, different pockets could be different from each other. So like, if you go North or West from a certain street or freeway, it could be completely different.

And then over time, you'll kind of figure out the different areas that are the best and that will work. And that's why it's important to kind of focus on like one or two cities and not being like 10 different cities, I would say.

Michael:

Yep. I love it.

Emil:

These a solid, solid tips. I also, uh, I wrote this down. It's kind of a takeaway. I love that. You know, for you, you started small granted it's in Los Angeles, so it's a more expensive market, but you started small. You started with duplexes at the time.

Jonathan:

At the It was an expensive market.

Emil:

Yes, exactly.

Jonathan:

When I first started, it was actually somewhat reasonable.

Emil:

Yeah. Yeah. But you started small, you were in a good market, you know, you waited this, wasn't like a year down the road that you were able to leverage it. And some of these things…

Jonathan:

We're talking like a decade here, you know, like I think that's also a big misconception people have. They want it like right now, they want to like have a, you know, and it just takes time. Like real estate takes time. You need to buy it, hold it for awhile. And then that's when the magic happens. Right. It doesn't happen overnight.

Michael;

Wait, I'm forget this whole real estate thing. I'm out.

Emil:

If you follow people on YouTube, certain gurus. Yeah. They'll tell you, you can be a millionaire in like six months, but don't listen to them.

Jonathan:

Don't listen to them for sure. And that's another thing too. It's like a lot of people, another big misconception is you don't need money to do this. I mean, you could raise it from other people, but if you don't have experience or money, you kind of need one or the other, you know, like, it's good to work in a W2 for 10 years and really save up some capital and then get into it, you know? And you learn a lot in those businesses and companies and how the world works and whatever. Right.

Emil:

A hundred percent couldn't agree more.

Michael:

Yeah. Yeah. I'm right there with you.

Emil:

All right. Michael, anything else you want to ask before we do the wrap up?

Michael:

No, this has been killer. This has been killer.

Emil:

Cool. So Jonathan, we'd like to kind of ask a random question on every episode, but before we get insurance, what is the best way that people can get in touch with you if they want to get in touch, chat with you?

Jonathan:

Yeah, just go to my website. JB2investments.com or email [email protected].

Michael:

And Twitter right?

Jonathan:

And Twitter. Yeah. You look at me up on Twitter. That works too. It's just my name and then there's some numbers. I think if you go to my website, if you email me, that's, that's probably the best way.

Emil:

Awesome. Yeah. Cool. Alright. So random question for you. What is something new that you've picked up during, since lockdown started since COVID hit something new real estate wise or, or any, it could be like, no, just in general, general habit. Yeah. Like, I don't know. One of our other coaches started slacklining at home. That was kind of his new thing during COVID.

Jonathan:

What’s slacklining?

Emil:

Oh dude. It's, it's the best. It's a, where you tie a Slack line between two posts and then, you know, your people like walk across them and do like the balancing thing. You see parks and stuff.

Jonathan:

Yeah. I've seen, I know we were talking about, I guess a lot of people have time on their hands. This person must not have kids or maybe they do.

Emil:

He just had a kid. It was, it was when the baby was like brand new though.

Michael:

So, you know, like before his baby could walk and crawl, you could just set it down and identify where it was going to be when he got off slackline.

Jonathan:

Um, I think, I think what this time is, I guess taught me or, or maybe not something necessarily new, but just like patience, you know, because like, you know, we left the business in January and then basically started our business and then COVID hit and then we're like, Oh. You know, it basically put like everything on hold for like almost six months, you know? So like filling that time and being patient and keeping at it and knowing eventually it would happen and like taking incremental steps every day. I think that's a big part of being a real estate investor is like the psychological side of it because there's a lot of ups and downs and how to deal with that.

And like all the different things that you need to deal with and things that come up and you gotta be mentally strong to be able to handle those things. And so building that, this was a good time to really build that. I guess you could say.

Emil:

Yeah. That is a very important skill that nobody talks about real estate investing is just having like mental fortitude because you're eating crap all along the way. Like there's just constant things and pain.

Jonathan:

Yeah. The wins are like only every once in a while. Right. But when the wins happen, they're sweet and it makes it worth keeping going. Right.

Michael:

Sometimes it's a fire hose of crap. Other times it's just a trickle from a garden hose. There's always something to deal with.

Jonathan:

And you literally got a fire hose. Right.

Michael:

That's so true. It's so true. I think a fire easier to clean up than all the water damage from the. It's crazy.

Emil:

Jonathan. Thanks so much for coming on the show, man.

Jonathan:

Thanks guys.

Michael:

Thanks so much, Jonathan.

Jonathan:

Thank you guys. It was fun.

Emil:

Alright big. Thanks to Jonathan again for hopping on this episode with us. If you guys haven't already, I'm sure you're tired of hearing it from me, but please go subscribe to the podcast. Leave us a review. We always like to hear what you guys are thinking. Good, bad, ugly. Hopefully not too ugly, but all the good stuff. And we'll catch you on next week's episode. Happy investing.

In this episode Emil, Tom and Michael discuss the most important factors to consider when looking for financing.

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Emil:

Hey, everyone. Welcome back for another episode of The Remote Real Estate Investor. My name is Emil shour, and today I'm joined by my cohost,

Michael:

Michael Albaum,

Tom:

Tom Schneider.

Emil:

And we're going to be talking about how to find and vet lenders, a big part of your real estate investment team. We're going to be tackling each one of the key players in its own unique episode. And in this episode, we're going to be tackling the lender. So let's hop in.

Tom:

Hey just want to let everybody know we're running a special deal with Roofstock Academy. If you want to talk to Michael and myself or any of the Roofstock Academy coaches, we are running this program right now where it's $101 off with the coupon code SEPTEMBER. This is Roofstock Academy. It is risk-free, includes coaching, over 50 hours of lectures, the Roofstock playbook. So we have our templates for interviewing vendors, all kinds of information, plus a lifetime satisfaction, full refund guarantee. And on top of that, Roofstock will pay you to invest If you invest on the Roofstock marketplace for every transaction on Roofstock, Roofstock Academy, we'll pay you $500 for the next five transactions, individual properties. So that's $2,500 worth of cash back. The coupon code that we're running is September. The coupon code is September, and that's going to be $101 off your purchase of Roofstock Academy to make the purchase go to Roofstock academy.com.

Emil:

All right guys, before we get into the topic, some we always love to do what's going on in your world as it relates to real estate investing or not just what's going on, Tom, kick us off.

Tom:

Oh boy. Having some issues with mail stuff. So I'm refinancing my primary and I took the advice of opening a HELOC then. Awesome, awesome. To have that line of credit, but I closed it out just because my lender wanted to close out the HELOC, uh, to do the refinance. And I'm waiting on the mail for the letter saying that the HELOC has been closed out and I'm like kinda concerned. It's been like two weeks. And I said, they sent the letter. So that has really put me on hold. Cause I plan to use that HELOC to go, uh, do some more rental property fishing. Cause I have to close the HELOC, open the new refinance and open the HELOC again. So just going through that rigmarole. So right now it's waiting on the snail mail.

Michael:

They can't email you or fax you that letter.

Tom:

I'm going to try it. You know, and another thing lenders will sometimes do is they have these third party, intermediary calls, I guess, is related to real estate investing. Also primary owning is they will have a third party company they'll call you. And then they'll loop in like a conference, call your bank and then they'll say, Hey, please confirm whatever your social, whatnot to confirm your you. And then they can get whatever answers they're looking for just over the phone. Cause they have you kind of authenticating for that third party confirm. So I'm trying to have them do that. And I'm trying to explain them that, Hey, can we do this? And might've kind of butchered my requests for them to do it. Hopefully can, but we'll see. I mean, that's a good question, Michael. I'm gonna knock down some doors trying to make it happen.

Michael:

Yeah. When they ask you to confirm your social, how do you answer?

Tom:

I, Oh boy. Get, get outta here, get outta here. I'm not getting my social.

Emil:

Almost got him.

Michael:

So close. So close. I could see you thinking about it? Like yeah, my social is.

Tom:

Yeah.

Emil:

That's never fun. All the like back and forth and forms and like

Michael:

Just jumping through hoops, it seems like it's not a streamlined process.

Emil:

Yeah. It never is. That's part of it. It's part of the game. So what about you Michael?

Michael:

Yep. So do to close on that six unit I'm selling in Cincinnati on October 7th. So hopefully that'll go smooth, knock on wood and then I'm actually listing a property for sale on Roofstock in Southern California. It's a rental condo that I own. There's some been appreciation down there in that market. And so I think I can redeploy that capital and go somewhere else. So I'm going through the certification process as we speak and also in the process of refinancing my primary as well. So I am not looking forward to that rigmarole as Tom mentioned, hopefully it's a bit of a smoother process

Emil:

I just refinanced like a month ago. And I'm in that process where the bank is having, it's like transferring the servicing of the loan to somebody else and nobody can give me a straight answer about how I do I just set up auto pay. Cause I don't want to send checks in the mail and stuff. And it's just Ugh. The joys of new lending.

Michael:

The fumbled handoff always.

Emil:

It's never smooth. It's never smooth. Yeah. But anyway, all part of it, all part of it.

Tom:

Anything else going on Emil?

Emil:

Yeah, I got two calls yesterday from some mailers I've been sending out the last couple of weeks, both people who reached back out to me, they didn't want to sell the property that I was mailing them about. One guy actually had a property that's on market and he's just like, Hey, I have this property. It's on market. If you're interested, I'm good. It's a little bit too big for me. And your price is a little high. And then the other woman, same thing. She, I was contacting her about a four unit, but she's like, I have this 18 unit and I want 1.2 million. I was like, that is way out of my range. And she wasn't top dollar, like I'm fishing for deals. That is a little bit out of what I'm looking for, but I was at least happy to have some people contact me back. And hopefully I think they both mentioned they'd be looking to sell those properties within a year or two, just not right now. So hopefully when the time comes they have my information, you know, we had a good call and try to be friendly and hopefully they call me in a year or two, but it was cool to at least start getting some response from those mailers. So happy about that.

Tom:

Seeds planted.

Emil:

Yeah.

Michael:

Did you feel like you were going to the car dealership, like a Toyota dealership, like getting, going to get a Corolla and they were like, yeah, we don't have this car, any Carola's for sale, but we have this pretty cool Ferrari. If you'd be interested, it's like, that's not what that's not at all. But I was asking about or interested in

Emil:

I kind of had the expectation that it wouldn't be like people just calling me like, yes, here's my property. And it'd be like just this perfect thing. Right. I knew it would be like people calling and, you know, want to talk and like kind of spinning the wheels. But I guess my expectation was kind of, yeah, just sell me the property I was calling about. But anyway, at least just planting some seeds.

Tom:

On that shooting, the breeze is it's pretty funny, culturally like different areas, like depending on who you're on the phone with, you know, like talking to some people from probably like California, New York, pretty choppy, like average call duration for this type of work. Oh, I don't know, like five minutes or something, then start moving down into the Southeast, like expanding it out. I like the changing gears of both types of conversations.

Emil:

Totally. Yeah. Someone from California called me. It'd be a real fast conversation, but uh, this is in the Midwest where people are super nice and like, it was nice. It was cool to just talk to investors who are local and I don't know, just get on their radar and chat with them a little bit. So it's cool. At least getting some response.

Michael:

When I was first buying properties out in the Midwest, I went and met with a property manager and I wanted to start asking her about questions and stuff about business related. And she's like, well, Michael, we haven't hardly had a chance to visit yet. And I was like, visit,

Tom:

You got to break bread, Michael.

Michael:

Yes, that's right. That's right. And I was like, this is cool. It's a little bit different. So it's funny when I talk to people, investors who get frustrated with like timeliness of working with other professionals and there are parts of the country, I'm like some folks just operate at different speeds. And so I think it's important to ask the question of like, Hey, if I email you, how long should I wait until I hear back? Because it standard might be three, four days, right? Where I think we're on the West coast and East coast, I think are used to a much timelier response time. And it's not someone being rude. Isn't not someone forgetting about you. It's just that they operate maybe at a different speed and there's nothing wrong with that. We just have to understand what it is, right?

Emil:

Yeah. Total different pace of life. For sure. It was nice. Like you always say people from the Midwest are super nice. It is very true. They're super nice. It's very true. All right. Let's get into our episode. So the three things I have outlined here for us to talk about in terms of funding and bedding lenders is the first thing we're gonna be talking about is timing. So when in the sequence of your investment, should you go out and start looking for lending? How do you source lenders? How do you find them? And then last part of this episode is going to be vetting and certain questions you can ask to find the right lending partner. So start with that first one timing. When in the sequence, should you even start looking for a lender? Is it before you even start looking for properties? And once you have a property under contract, so who wants to take first stab at time?

Michael:

Go ahead, Tom.

Tom:

I could take an early, early stab at this. So what's cool about a lender is you can plug them in either. If you're buying all cash, you can do this after the fact and it doesn't need to be done. But if you are going to be purchasing with financing, this is something that you want to do super early for a couple of reasons. So one of them would be, I would do this before you even start evaluating properties. Just kind of work in parallel on these two tracks. The reason that you want to do this, it's a couple. You're going to one, know what your purchasing power is. So this is going to inform sort of your buy box on how expensive a property you can afford, or you can buy multiple properties. I'm going through that exercise of getting preapproved and all that is going to inform you on that information.

The other one reason is it's going to make the transaction and everything much smoother. We've talked about before. One of the beauties of coming in with all cash is it can often lead to a much smoother transaction. If you are financing, you can make that transaction experience for everybody. A lot easier. If you have your ducks in a row, your lender identified, pre-qualified all, you know, you have all that in a row. So if you are buying with lending, doing that way up front, you know, way before you've submitted your offer already having that preapproval letter. But if you're planning to buy all cash, there's no reason why you can't go through the acquisition by it without cash, and then go through that lending exercise. So I'll, I'll uh, put, uh, in, in my response there, Michael,

Michael:

No, man, peanut gallery is on strike. You ain't get nothing out of us. I agree with everything you said. I think that's the ideal scenario, right? Where you can set things up to be executed on a very calculated and set timeline. I know personally I've done deals and have not got the lender set up in advance. I'll just start looking at deals and learning the market. And you know, I'll be two, three months out before purchasing wham get hit with a really great deal. And I was like, Oh, I got to jump on it. And so having done both the lender prep ahead of time and also lender prep kind of after the fact, it's, it's so much easier doing it ahead of time. And I don't think it's ever too early to start just having those very cursory conversations, high level conversations. I'm an investor I live in this state. This is where I'm interested in investing. And depending on who the lender is like geographically, where they are, that'll shift the conversation a little bit as well.

So if you're chatting with a national lender, it's going to be probably a different conversation then with a local lender of, Hey, I'm committed to growing in XYZ market. And this is, I know where you live. It's the local vendor versus, Hey, I'm looking at purchasing. And one of these five States, can you help me without, throughout that entire process or through any of those States? So just understanding the limitations and capabilities of the lenders is really great as well. And what kind of get in that later in the episode, when we talked about some of the questions you want to be asking, but I would say the more specific you are on your market, the more committed you are to a specific market, the more specific, and the earlier you can start having those conversations with local lenders versus you can go more high level with the, uh, with the more national folks.

Emil:

Do you guys go get preapproved each time? Like I think you guys mentioned this really smart to go get preapproved, to get everything lined up. I'd say before property one, subsequent properties, I haven't gone through the preapproval process. Again. I don't know if this is the right way of doing it, but I just knew that I got lending from that lender. Everything was smooth. All good. So I didn't do it ahead of time on subsequent properties, just the first property. Do you guys do it for each property? Curious before each property.

Tom:

If you're working, like what happens if you buy one rental property, you start adding, you start establishing a relationship with that mortgage broker and it could be not a, a full, you know, it could be just reaching out to them cause you've done several deals with them and you like them. They have a great operations team. They have great rates. You could just ask them the email, like, Hey, I'm looking at buying this and they already have, you're assuming your information hasn't changed too much. You can get just an initial check on your, your buying power. So maybe not the full thing, but as you start doing it again and again, and again, I'd say less intensive, especially if you have a relationship with a mortgage broker who knows what you're up to and you're background.

Michael:

Yep. I would totally agree. And just so everybody knows who, who, maybe isn't familiar with a mortgage broker, but a mortgage broker is just someone who goes and shops around at different lenders to find you the best product. Kind of like an insurance broker is going to go shop the insurance market and come back and present you with a few different products versus going to a specific lender, like a bank of America. If you're going to go to bank America, you're going to talk, you're going to get bank of America products. If you go to a mortgage broker, they might have, you know, seven or 10, whatever different products available to you. So just wanted to shed some light on that. And I totally agree, Tom, I think with the more repetitive you are with the same lenders, the easier it becomes. And so I'm with you and you'll, I only did it a handful of times to go get prequalified or preapproved. So I think it's also important to ask the question of your lender of like, Hey, you know, you understand my profile now going forward, what does this look like?

What do I need to be cognizant of? Because I think it can get pretty basic. It can get pretty easy to understand of what you will and won't qualify for depending on what your debt to income looks like. And depending on what the bone of value that you're trying to utilize on a purchase looks like. And so it always surprised me when people would like make offers on properties and they couldn't go get financing. It's like, wait, how did you not know that you're not going to qualify? Like you have a credit score of 400, like no, duh. So just be aware of what the lender is looking for. And then it makes it so much easier. It's you're not going to be surprised.

Emil:

And then you know your buying power, right?

Michael:

Yeah. You know, you're buying for that. Shouldn't be a surprise to you either. Like when you get that preapproval letter, I don't know. You should never be like, Holy crap. Like I either qualify for a lot or a little, like you should know.

Tom:

I've got a good point too, to make the difference between a prequalification and a preapproval. So I think this is there's some ambiguity in these two. So just as a quick disclaimer, between the two. So a prequalification is based on what you have submitted to the lender. It's a, a letter, to be honest, it doesn't really mean anything just because it's what you're telling the lender. A preapproval is a more involved process where the lender is running credit and getting verification. So those are the two different ones. I'm okay. Doing a prequalification where I'm spending information. Cause I'm going to be honest and straightforward. I mean, that's not something that you want to fluff around with because if you do embellish things at the point at which you actually needed the loan, the lender is going to find out the truth like doing there.

So it's, you're really just wasting everybody's time. So I'll do get a prequalification. I could do a preapproval, but I'm okay. So that's just a quick kind of disclaimer on the difference between a preapproval and a prequal. So pre-qualify, doesn't really mean a whole lot. It's what you tell the lender. And as long as you're being honest, that's great. It'll be the mustard, it'll work, pass mustard!

Michael:

Pass muster.

Tom:

It'll pass mustard.

Micheal:

But I think it's, I think it's, I don't think, are you putting a D on the end of that word? It's muster, not mustard, like the condiment mustard.

Tom:

I like, you know, effort, you know, cause you want to have a lot of effort, mustard. Okay.

Michael:

Uh huh.

Tom:

You can cut the mustard. It's really easy. It's a vinegar based condiment.

Michael:

I thought you would be peanut butter spreading that mustard. If I was a betting man.

Tom:

You can. It depends.

Emil:

And this episode has completely gone off the rails.

Tom:

The other reasons too early get your qualification or approval is you can get different rates. So you can go through this vetting process that we're going to talk about to make sure that you're getting the different rates. And it can be really easy to do this process once with one lender and say, Oh, I liked them and I'm not going to do it again. But honestly you can like save money by doing this upfront and doing it multiple times with multiple lenders. You wouldn't want to go through a pre approval multiple times, cause that is multiple credit checks. You know, that more kind of intensive process and doing multiple of them could be detrimental to your credit score. And that's something I would ask the lender like, Hey, is this going to touch my credit score in the process? So that was my one other point I wanted to roll back and doing it early is you can get rates from multiple lenders who are making the best decision.

Michael:

Just to piggyback on that.Tom, the way that I describe it to folks is a prequel is an interest in a lender to lend to you. A preapproval is their commitment to lend. And so I've also heard…

Michael:

Dating and engagement.

Michael:

That's right. That's right. So I've also heard that some lenders are actually do require a credit pull to get your pre-qual letter, which is the less intense. So I always say, thanks. No thanks. I won't go through that credit pool until I'm ready to actually pull a trigger on a mortgage because a lot of these prequel letters are only good for 90 days. And so if you go through that process, prequel or preapproval and they pull your credit and you do nothing for 90 days where they're going to have to do that again, to reestablish that qualification or that approval. So that's why I always say, find a lender that doesn't require a credit pull to get a prequal letter. That way you have the letter that says, Hey, I could get lending from someone once needed and then go get the approval from whoever you're going to do the mortgage with.

Emil:

Solid. Alright, let's move on to our next topic here. So it's how to source. And I'm curious if you guys go local versus national, do you have a preference and just in general, how do you guys source? Like where do you even start looking for a lender? That's a good place and resource for people.

Michael:

It varies. So a lot of times I'll ask my agent who I'm working with. If they have a good lender recommendation, and usually they will. And so I've worked with national folks on numerous deals out in the Midwest. They've also used a lot of local folks also out in the Midwest. So I like entertaining both. When I talked to a lot of students in the Academy, I talked to them about take three and just, it's super easy to start pick one that you already have an existing relationship with because you could have a checking account or savings account somewhere. Start there, see if they'll lend where you're interested, find a, a big national lender, see if they’ll lend to you and then find a local lender to wherever the property is. Start there and then dig deeper on finding more of the same.

If those one of those three doesn't work out. And there are really great resources to find fun. I mean, bigger pockets has a super thorough forum with all kinds of contributors and active members about lending and where to go and who to use. Google is just great. Getting reviews of investor friendly lenders in X market, or, you know, based on where you are, where the property is. And often I just cold call people, Hey, this is what I'm looking for. Is this something that you offer and just starting having a conversation with them? A lot of folks are really just starting from scratch, especially if you don't have, if your local bank, you know, your bank of America that you have your savings account with doesn't lend in Tennessee.

Tom:

Yeah. Under network is a great spot to start. I'll do a shout out to Roofstock Academy. That's our internal program that we have here at Roofstock that people can join if they want. One of the perks of your sec Academy is inside of this Slack channel, which is this forum amongst members and coaches. And I actually am doing my refinance off of a recommendation from one of the members in the Slack channel with Roofstock Academy. So worth checking out Roofstock Academy.

Emil:

I did the same thing. Yeah. Network is just huge. And you'd take everybody with what they say with trust, but verify. So you get that lead and then you go to your homework.

Emil:

Totally.

Michael:

Where do you look Emil?

Emil:

In the past, I have, since I've primarily bought my properties from Roofstock, I have looked through Roofstock’s networks, so Roofstock will recommend a couple of lenders and it's a good place to at least get started. Anytime you talk to one of our Roofstock experts, they can give you the contact information for a couple of different lenders who they know will lend out of state. So that's always a good place to start. I've found that there's a couple of these lenders who primarily work online, right? They're just like, they're like internet lenders and their rates seem to be better than national chains, like a US bank or Chase or whoever. So like, you guys mentioned, you find someone who's good. I've used them for a couple of loans now and that's been nice. The nice thing. Also, once you've done the homework and you've found a lender, you like is Tom, you mentioned it.

They have all your information. You don't need to do the two years of previous tax returns and for pay stubs and all this and that. They have all your information and it's a really smooth, easy process. So it's nice to do the homework upfront and then just piggyback that relationship for each subsequent deal. And that's been for residential now for, since I'm potentially looking at properties that require a commercial loan, which has five plus unit buildings. I'm talking to people who invest in those markets. Right. So just talking to other investors, Hey, who, what lender use investor-friendly agents. They have tons of lenders that they work with. So get their lists and start contacting each one. Yeah. Between those two, those have been the most helpful for me.

Michael:

Right on.

Emil:

Yeah. Anything else on sourcing guys? We can add here?

Michael:

I would just say, kind of above and beyond what we already mentioned. Networking. Just talk to as many people as you can and let them know what it is that you're doing, because I think it's pretty shocking how many people know other people that can be helpful to what it is you're looking to accomplish. So whenever I'm looking for financing, I'll talk to everybody that I have a conversation with that we're talking about real estate, Hey, you know, I'm looking for finding lending in this area for this type of building. If you haven't known anybody, let me know. And that's just not casual dinner conversation, right? Like, Hey, the chicken's really good. Oh yeah. By the way, I'm like, don't be that guy at that get together or a zoom call. Cause it was doing social distance still. But I just say, talk to everybody. You can and let them know what it is you're looking to accomplish what it is you're looking for.

Tom:

When you're talking to alumni on the phone, they're gonna try to close you and like lock it up and have you choose them and who knows, maybe they might get the best, but I would make sure that you speak to at least two or three lenders, like at a minimum. So, and you can be upfront with that in that initial conversation with them like, Hey, I'm evaluating you and a couple of other folks. So I'm not going to make a decision today. This is for, I'm just collecting some information to make the best decision. And I would let them know that because these guys are a lot of them are sales folks, right? They're trying to get you to originate your loan with them. So have that in your head upfront and you can be totally transparent and saying, Hey, this is a discovery call and not making any decisions today.

Michael:

Be strong. Don't give in. Some of them are really good.  

Tom:

Yeah, they are.

Emil:

Yeah. Yeah. They'll tell you, you know, we have the best rates and we charge the lowest points and least fees and all that

Michael:

You lock in your rate today. It could go up tomorrow. So lock it in today.

Tom:

Yeah. Fear man. Fear sells. Yep.

Emil:

Yep. All those things. Alright. So our last thing we want to hit on on this episode is the meat. Vetting questions. What should you be asking lenders to find the best one? So…

Michael:

Who does number two work for?

Emil:

These episodes are becoming like South Park and funny movies. Dammit Michael.

Michael:

Sorry.

Emil:

It's good. It's good. We got to keep these fun. Alright.

Michael:

A little Austin Powers in the morning.

Emil:

So yeah. What are, what are some tried and true questions you guys go to when you're evaluating a new lender?

Tom:

I’ll lead the way on this one, do a little Michael sandwich. Well, I'll leave that first one and leave this one. So I would think about it in high level categories and have questions for each of these high level categories. We're actually, by the time this is released, we will have just put out a webinar with Roofstock on, on this talking about property managers, lenders, all kinds of good stuff. We'll probably be on YouTube, go check it out. It's by Roofstock Academy. So anyways, high level question. So the first one level of questions, and I'll let Michael get into the specific questions. I'll just put the high level ones together. So is learning about the company. I think there can be a little bit of a sniff test and looking about how big are they are, how much business they do, how many employees they have, what kind of customer experience.

So like about the businesses is a good one. The other important category of questions is how do they make money? The other ones is standard operating procedures and lastly cannot be overlooked his references. So can I talk to someone who isn't your grandmother about your business? Who's done work with you. So all I'll lead with that high level overview. Michael, if you want to just in some specific questions or however you want to take the second part of this.

Michael:

Yeah I am going to do a sprinkling. You made a really good point. And actually I just had kind of this epiphany this morning and just now, because I was having a call with the lender earlier this morning. And so about the size of the operation, this is a smaller local bank out in the Midwest. And I was having, this is now I think my second or third call with the president of the bank. And so I think it's interesting to look and see who it is that you're speaking to or who it is that you can get ahold of because a lot of these banks are structured differently and so they have the front end salespeople and then it kind of funnels through to the ultimate decision makers.

And so if you're able to speak directly to a VP or a president or somebody who is a key decision maker at that bank, you can often get things done a lot sooner, a lot more effectively as well. So I'm now starting to put a little bit more weight on that when I don't think I was previously,

Emil:

Would you say that's more important for a commercial loan versus a residential?

Michael:

Yeah. These are all commercial loan products and some portfolio type stuff. So I think that does make for him a similar transaction process for the commercial type of stuff, because that's where things tend to be a bit more flexible or a little bit more custom. The residential space is pretty cut and dry. It either is, or it isn't since the vast majority of those are getting bought up on the secondary market by Fannie and Freddie.

Emil:

Right. Yep. Good distinction.

Michael:

So, okay. So some specific questions that I like asking lenders is who do you work with? Who are most of your clients? Are you work with investors? Do you work with owner occupants? Where are they in relation to their properties? Are you work with out of state investors? I like asking you about interest rates. That's always a big one because that's a big driver of who I'm going to ultimately decide to borrow from. And of course, with the understanding that interest rates change every day, but with commercial lenders, again, they're going to have more custom products. They're going to have often a wider range of products to choose from and with varying interest rates.

So again, for residential asked that question as well, but with the understanding that they're going to change, also, you can ask them about what their fees look like and what their credits look like. See if they can give you a, just a general breakdown of, Hey, to originate this loan, what's it going to cost me? What are all the different fees I'm going to be paying? Who are those going to and what are they for? Because you just want to get an understanding of, Hey, okay. If, if lender A has offered me a, an interest rate of four and a half then or B is also offered me four and a half, uh, there's really no difference. Well, there could be a vast difference in the fees that you're paying on the front end just to originate that loan. And so that can be sometimes to the tune of several thousand dollars difference.

So we want to make sure that we're actually choosing the best lender to work with also really important to ask about prepayment penalties. These are like really important. And basically what our prepayment penalty is, is if you pay back the loan early, either in the form of a sale or just a cash injection that you're paying back the entirety of the loan early, you can get penalized. That's more common for commercial loans. I don't know if I've ever seen one in residential. Tom, have either of you guys, have you seen pre-payment penalty on a residential loan, not something that I've ever seen, but ask the question of the lender. Also asking about their specific underwriting criteria. Kind of like we were chatting about earlier in the episode is if I'm a borrower, I should know what the lender is looking for.

As far as what my debt to income should look like as a strong borrower, what my loan to value should look like as a strong borrower. And so asking these questions on the front end is going to help build out this framework for you to decide, okay, well, lender A will give you no only cares. If my loan of value is maxed out at 35%, this other lender wants it lower at 25%. So maybe I'm a better candidate over here asking these questions is I think that'd be really helpful. Ask them how they treat rental income is a really big one. Some lenders will treat it as part of your, uh, income on the debt to income ratio, others won't. So if someone is not going to treat the income that you're planning on generating or that the property is currently generating as usable income, that might be a reason enough to walk away. I don't know. It's going to depend how…

Tom:

Stop taking my points, Michael. I was going to, stop take it by points. I was like, it's crazy how the, the range that lenders have on making decisions on applicants, you think it'd be like a little bit more standardized, but anyways, excellent point, Michael, on confirming that rental income is yeah. If they treat it as income. Yeah.

Michael:

I was chatting with my buddy in the Bay area and he was looking at house hacking. And so he found this duplex, it was really interested in, and he went and chatted with this lender and the lender said, Oh yeah, you know, this is, this is the max loan amount you're eligible for. And I said, ask him if they'll consider the rental income from the second half of the duplex, as, as income, as usable income. He's like, okay. So he did that. And he's like, Holy crap. He qualified for like an additional 120 K in loan amounts.

So sometimes don't take the face value as the answer for most of these questions. If it's not an answer that you like, I'll ask the question why, you know, always follow up and either you're going to get somewhere or you won't, but at least then you'll know hopefully why that is the way that it is. And if it's flexible at all, some more questions to ask our typical club time, because you don't want to get stuck with a lender that has a really long close time, but your escrow timeline is much shorter than that. And so then you could be at risk of losing the deal because you can't perform or assume your lender can't perform in the time stipulated by the purchase and sale agreement. Another great question to ask is what's going to happen to my mortgage after it's originated.

And Tom, you had a really good rant on this, on a previous episode about what happens to mortgages after you've originated them. And so often they get bought up by other companies and then you have to change where your loan payments go and then you have to change your password, but they only accept Firefox as the internet server. And so just getting an understanding of what's going to happen to it. Who's to keep that, are you going to stilll, are you going to continue dealing with the same lender time and time again for the same loan or are you going to have to, you know, move around? So asking about what happens to it is a really great question asking them if they'll match rates, I think is great. So a lot of lenders are really wanting to compete for business. And so if you say, Hey, you know, you're offering me a four and a half and able to get 4% over here and better closing costs, will you match it most often they'll say yes.

But only if you ask the question, so which only goes to further your point, Tom, if you only talk to one lender, you only know what their interest rates and their closing costs look like versus you go talk to two, three, four, five, you have a plethora of closing costs, spreads rates spread. You can take the best one and go to your favorite lender because it was good relationship or you like working with them or what have you and just say, Hey, this is, this is a quote I got from a different lender. Can you beat it and see what they say? Most often they've got a lot of flexibility on moving stuff around. So that was my rant on the questions to ask. And of course there's more, but those at a high level are some pretty pertinent ones, at least at a minimum that I would, I like to start with whenever chatting with the new lender.

Emil:

I wrote down a couple that I just wanted to highlight on. I think you mentioned it, Michael, but just making sure that when you talk to a lender, if they're national, make sure that they lend in the state, you're going to go buy a property. The other thing sometimes you'll talk to different lenders, ask them what their interest rates are and what you need to make sure you do is ask them how many points are associated with those interest rates. So one may tell you, Oh, we're doing, we'll do a 3%. Yeah. The one could say 2.75. And what they're not telling you upfront is that you also have to pay one point. And what a point means is let's say you get a loan for a hundred thousand dollars. One point is 1% of that loan added on as a closing cost fee. So in this case, it'd be a thousand dollar fee. You pay as part of your closing costs. So make sure you ask what points are associated with those interest rates that they're quoting you. I would also ask if they lend to an LLC. So if you're planning on setting everything up into an LLC and you want the loan taken out in LLC, you have to make sure you ask if the bank will lend to an LLC.

Michael:

What do you do if they say no,

Emil:

That's a good question. I don't have anything in an LLC right now. So I don't know the answer to you.

Michael

Something you can do is ask if once the loans originated, if you can transfer the loan to an LLC and a lot of lenders won't care because they've got you on the hook for the loan. So, but some may say no. And so there's this thing called a due on sale clause, which basically says, if you sell or transfer the property, that mortgage can be called due in full. And so you just want to avoid that in its entirety. And so adding that conversation on the front end, I think is huge of, Hey, once I purchased this thing, I'm planning on purchasing, transferring it to an LLC. Are you cool with that? And if they say, yes, get it in writing. And if they say no, that might influence your decision on who you ultimately use for, for a lender.

Emil:

Solid, good points, other things to ask, let's say, you're buying a property that you want to fix up and potentially refi later doing something like the BRRRR method you want to ask about seasoning period, which is how long the bank will require you to own the property before they'll do a reassessment of the value to do that refi. So another good thing to ask, and I think that was it. Those are the only other things I wanted to add.

Michael:

I just want to pepper in one more thing. And it's kind of a, like a gut feel type of thing. Make sure you like your lender. Like I'm dealing with this lender right now that is such a pain in the butt to work with. And every time I see an email or phone call from him, I'm just like, Oh God, like I don't want to answer. And it's like pulling teeth every time I interact with them. And it sucks because they have a fat prepayment penalty on my mortgage and it's a big mortgage, so I can't even go refinance out anywhere else. And now I'm just kicking myself that it was the dumbest thing ever. But at the time he was so easy to work with and he was able to get the deal done. So I just, time is of the essence, but now I'm just like, God, like this is so awful. So just, if you can like, just like try to like who you're working with, make sure that they're easy to work with that, you know, you're not dreading their phone calls and emails.

Emil:

That sounds like a tough situation in that they seemed good on the front end. Like you couldn't have vetted it out in the front. Cause it sounded like they were easy to work with. It just happened once you started really working with them once the loan was final.

Michael:

Yeah. Yeah. It was a little, yeah. Once the, once the loan was finalized, the gloves came off, man. And it was like, let's go.

Tom:

Oh you're, you're locked in. You're locked in. This is the real me.

Michael:

And yeah, the whole prepayment penalty thing is really a pain in the butt too. So, um, it was at a time when I wasn't really even thinking about that kind of stuff, but now it's come full circle and I've realized how captive it makes you. So if you can find a lender that does not offer those, it doesn't require those. I think that's worth a lot.

Tom:

My last thing I'll add on this general episode is sometimes you might be concerned and calling up a lender to talk to them. You might be concerned about like sounding dumb or like not knowing you're doing, don't worry about it. This is talking to lenders or talking to people in real estate in general is like a muscle. Every time you do it, it's going to be a little bit easier. Uh, something we talk a lot about with Academy members, it's getting your bats in another thing is generally speaking. These people are trying to sell you.

So they're like, they're nice. I wouldn't be concerned about, you know, they're, they're not gonna be like, Oh Tom, you dumb. I can't believe you asked this question. Like, like, no, they're going to be totally reasonable. So put those fear and ego aside and start on the fence. Just jump in man. Talking to lenders, identifying them, especially if you're planning to buy with financing, that's an important thing to do upfront.

Michael:

And I think just to that, for that point, take it as an opportunity to learn to, I mean, ask the dumb questions. It looks silly because you're interviewing and speaking to a bunch of people, but you're only going to work with one of them. So ask the dumb questions and learn from it because you're probably not going to ever see those people again. Yeah. Just real quick guys. Pancakes or waffles.

Tom:

How about this savory pancake?

You thought it was going to have something after saying that like, well, I don't.

Michael:

There's no option C it's a simple a B. All right. Tom pancakes. Emil, pancakes?

Emil:

I’m taking pancakes. We've been making a lot of pancakes at home lately. Waffles is just such a production with like a waffle maker. So pancakes, baby.

Michael:

Pierre? And do not say I don't eat pancakes or waffles. I don't want to hear it.

Pierre:

You can peanut butter spread onto both of those I’ll take either one.

Emil:

Ooh, well done.

Michael:

You make a pancake sandwich with two waffles on top and bottom,

Pierre:

But I'll take a German pancake any day.

Tom:

What about a giant fluffy Japanese pancake. Oh, sorry. Go ahead.

Michael:

Ooh. And so what's different about a German pancake.

Pierre:

Oh, it's the Dutch baby. It's like a, I'll give you the recipe right here. Three eggs, a third of a cup of cream, a third of a cup of milk, a quarter of a cup of butter and half a cup of flour and preheat your oven to 400 degrees, put a cast iron pan inside the oven, preheat it, melt some butter on it. Throw it in there for 15 minutes. And it's like a big old souffle.

Emil:

Wow. Sounds incredible. Alright. I know what I'm doing this weekend.

Michael:

That sounds amazing. I'm a, I'm a pancake guy too. If anyone's ever eaten at iHop, I'm a big fan of the, I think it's like a junior happy face, like a chocolate pancake with chocolate chips and whipped cream on it. Such a kid at heart.

Emil:

So are you like 13 years old?

Michael:

I'm like 9, I'm this many years old.

Emil:

Thank you guys again for joining us on this episode as always, please leave us a review. Guys do we like reviews?

Michael:

Big fans of reviews.

Tom:

Love them, love them.

Emil:

We need to, we need to bring back giving people shout outs when they leave us a review. So leave us a review and we'll give you a shout out on a future episode and we'll catch you on the next one. Happy investing.

Michael:

Happy investing.

In this episode Emil, Tom and Michael discuss the most important factors to consider when looking for financing.

---

Emil:

Hey, everyone. Welcome back for another episode of The Remote Real Estate Investor. My name is Emil shour, and today I'm joined by my cohost,

Michael:

Michael Albaum,

Tom:

Tom Schneider.

Emil:

And we're going to be talking about how to find and vet lenders, a big part of your real estate investment team. We're going to be tackling each one of the key players in its own unique episode. And in this episode, we're going to be tackling the lender. So let's hop in.

Tom:

Hey just want to let everybody know we're running a special deal with Roofstock Academy. If you want to talk to Michael and myself or any of the Roofstock Academy coaches, we are running this program right now where it's $101 off with the coupon code SEPTEMBER. This is Roofstock Academy. It is risk-free, includes coaching, over 50 hours of lectures, the Roofstock playbook. So we have our templates for interviewing vendors, all kinds of information, plus a lifetime satisfaction, full refund guarantee. And on top of that, Roofstock will pay you to invest If you invest on the Roofstock marketplace for every transaction on Roofstock, Roofstock Academy, we'll pay you $500 for the next five transactions, individual properties. So that's $2,500 worth of cash back. The coupon code that we're running is September. The coupon code is September, and that's going to be $101 off your purchase of Roofstock Academy to make the purchase go to Roofstock academy.com.

Emil:

All right guys, before we get into the topic, some we always love to do what's going on in your world as it relates to real estate investing or not just what's going on, Tom, kick us off.

Tom:

Oh boy. Having some issues with mail stuff. So I'm refinancing my primary and I took the advice of opening a HELOC then. Awesome, awesome. To have that line of credit, but I closed it out just because my lender wanted to close out the HELOC, uh, to do the refinance. And I'm waiting on the mail for the letter saying that the HELOC has been closed out and I'm like kinda concerned. It's been like two weeks. And I said, they sent the letter. So that has really put me on hold. Cause I plan to use that HELOC to go, uh, do some more rental property fishing. Cause I have to close the HELOC, open the new refinance and open the HELOC again. So just going through that rigmarole. So right now it's waiting on the snail mail.

Michael:

They can't email you or fax you that letter.

Tom:

I'm going to try it. You know, and another thing lenders will sometimes do is they have these third party, intermediary calls, I guess, is related to real estate investing. Also primary owning is they will have a third party company they'll call you. And then they'll loop in like a conference, call your bank and then they'll say, Hey, please confirm whatever your social, whatnot to confirm your you. And then they can get whatever answers they're looking for just over the phone. Cause they have you kind of authenticating for that third party confirm. So I'm trying to have them do that. And I'm trying to explain them that, Hey, can we do this? And might've kind of butchered my requests for them to do it. Hopefully can, but we'll see. I mean, that's a good question, Michael. I'm gonna knock down some doors trying to make it happen.

Michael:

Yeah. When they ask you to confirm your social, how do you answer?

Tom:

I, Oh boy. Get, get outta here, get outta here. I'm not getting my social.

Emil:

Almost got him.

Michael:

So close. So close. I could see you thinking about it? Like yeah, my social is.

Tom:

Yeah.

Emil:

That's never fun. All the like back and forth and forms and like

Michael:

Just jumping through hoops, it seems like it's not a streamlined process.

Emil:

Yeah. It never is. That's part of it. It's part of the game. So what about you Michael?

Michael:

Yep. So do to close on that six unit I'm selling in Cincinnati on October 7th. So hopefully that'll go smooth, knock on wood and then I'm actually listing a property for sale on Roofstock in Southern California. It's a rental condo that I own. There's some been appreciation down there in that market. And so I think I can redeploy that capital and go somewhere else. So I'm going through the certification process as we speak and also in the process of refinancing my primary as well. So I am not looking forward to that rigmarole as Tom mentioned, hopefully it's a bit of a smoother process

Emil:

I just refinanced like a month ago. And I'm in that process where the bank is having, it's like transferring the servicing of the loan to somebody else and nobody can give me a straight answer about how I do I just set up auto pay. Cause I don't want to send checks in the mail and stuff. And it's just Ugh. The joys of new lending.

Michael:

The fumbled handoff always.

Emil:

It's never smooth. It's never smooth. Yeah. But anyway, all part of it, all part of it.

Tom:

Anything else going on Emil?

Emil:

Yeah, I got two calls yesterday from some mailers I've been sending out the last couple of weeks, both people who reached back out to me, they didn't want to sell the property that I was mailing them about. One guy actually had a property that's on market and he's just like, Hey, I have this property. It's on market. If you're interested, I'm good. It's a little bit too big for me. And your price is a little high. And then the other woman, same thing. She, I was contacting her about a four unit, but she's like, I have this 18 unit and I want 1.2 million. I was like, that is way out of my range. And she wasn't top dollar, like I'm fishing for deals. That is a little bit out of what I'm looking for, but I was at least happy to have some people contact me back. And hopefully I think they both mentioned they'd be looking to sell those properties within a year or two, just not right now. So hopefully when the time comes they have my information, you know, we had a good call and try to be friendly and hopefully they call me in a year or two, but it was cool to at least start getting some response from those mailers. So happy about that.

Tom:

Seeds planted.

Emil:

Yeah.

Michael:

Did you feel like you were going to the car dealership, like a Toyota dealership, like getting, going to get a Corolla and they were like, yeah, we don't have this car, any Carola's for sale, but we have this pretty cool Ferrari. If you'd be interested, it's like, that's not what that's not at all. But I was asking about or interested in

Emil:

I kind of had the expectation that it wouldn't be like people just calling me like, yes, here's my property. And it'd be like just this perfect thing. Right. I knew it would be like people calling and, you know, want to talk and like kind of spinning the wheels. But I guess my expectation was kind of, yeah, just sell me the property I was calling about. But anyway, at least just planting some seeds.

Tom:

On that shooting, the breeze is it's pretty funny, culturally like different areas, like depending on who you're on the phone with, you know, like talking to some people from probably like California, New York, pretty choppy, like average call duration for this type of work. Oh, I don't know, like five minutes or something, then start moving down into the Southeast, like expanding it out. I like the changing gears of both types of conversations.

Emil:

Totally. Yeah. Someone from California called me. It'd be a real fast conversation, but uh, this is in the Midwest where people are super nice and like, it was nice. It was cool to just talk to investors who are local and I don't know, just get on their radar and chat with them a little bit. So it's cool. At least getting some response.

Michael:

When I was first buying properties out in the Midwest, I went and met with a property manager and I wanted to start asking her about questions and stuff about business related. And she's like, well, Michael, we haven't hardly had a chance to visit yet. And I was like, visit,

Tom:

You got to break bread, Michael.

Michael:

Yes, that's right. That's right. And I was like, this is cool. It's a little bit different. So it's funny when I talk to people, investors who get frustrated with like timeliness of working with other professionals and there are parts of the country, I'm like some folks just operate at different speeds. And so I think it's important to ask the question of like, Hey, if I email you, how long should I wait until I hear back? Because it standard might be three, four days, right? Where I think we're on the West coast and East coast, I think are used to a much timelier response time. And it's not someone being rude. Isn't not someone forgetting about you. It's just that they operate maybe at a different speed and there's nothing wrong with that. We just have to understand what it is, right?

Emil:

Yeah. Total different pace of life. For sure. It was nice. Like you always say people from the Midwest are super nice. It is very true. They're super nice. It's very true. All right. Let's get into our episode. So the three things I have outlined here for us to talk about in terms of funding and bedding lenders is the first thing we're gonna be talking about is timing. So when in the sequence of your investment, should you go out and start looking for lending? How do you source lenders? How do you find them? And then last part of this episode is going to be vetting and certain questions you can ask to find the right lending partner. So start with that first one timing. When in the sequence, should you even start looking for a lender? Is it before you even start looking for properties? And once you have a property under contract, so who wants to take first stab at time?

Michael:

Go ahead, Tom.

Tom:

I could take an early, early stab at this. So what's cool about a lender is you can plug them in either. If you're buying all cash, you can do this after the fact and it doesn't need to be done. But if you are going to be purchasing with financing, this is something that you want to do super early for a couple of reasons. So one of them would be, I would do this before you even start evaluating properties. Just kind of work in parallel on these two tracks. The reason that you want to do this, it's a couple. You're going to one, know what your purchasing power is. So this is going to inform sort of your buy box on how expensive a property you can afford, or you can buy multiple properties. I'm going through that exercise of getting preapproved and all that is going to inform you on that information.

The other one reason is it's going to make the transaction and everything much smoother. We've talked about before. One of the beauties of coming in with all cash is it can often lead to a much smoother transaction. If you are financing, you can make that transaction experience for everybody. A lot easier. If you have your ducks in a row, your lender identified, pre-qualified all, you know, you have all that in a row. So if you are buying with lending, doing that way up front, you know, way before you've submitted your offer already having that preapproval letter. But if you're planning to buy all cash, there's no reason why you can't go through the acquisition by it without cash, and then go through that lending exercise. So I'll, I'll uh, put, uh, in, in my response there, Michael,

Michael:

No, man, peanut gallery is on strike. You ain't get nothing out of us. I agree with everything you said. I think that's the ideal scenario, right? Where you can set things up to be executed on a very calculated and set timeline. I know personally I've done deals and have not got the lender set up in advance. I'll just start looking at deals and learning the market. And you know, I'll be two, three months out before purchasing wham get hit with a really great deal. And I was like, Oh, I got to jump on it. And so having done both the lender prep ahead of time and also lender prep kind of after the fact, it's, it's so much easier doing it ahead of time. And I don't think it's ever too early to start just having those very cursory conversations, high level conversations. I'm an investor I live in this state. This is where I'm interested in investing. And depending on who the lender is like geographically, where they are, that'll shift the conversation a little bit as well.

So if you're chatting with a national lender, it's going to be probably a different conversation then with a local lender of, Hey, I'm committed to growing in XYZ market. And this is, I know where you live. It's the local vendor versus, Hey, I'm looking at purchasing. And one of these five States, can you help me without, throughout that entire process or through any of those States? So just understanding the limitations and capabilities of the lenders is really great as well. And what kind of get in that later in the episode, when we talked about some of the questions you want to be asking, but I would say the more specific you are on your market, the more committed you are to a specific market, the more specific, and the earlier you can start having those conversations with local lenders versus you can go more high level with the, uh, with the more national folks.

Emil:

Do you guys go get preapproved each time? Like I think you guys mentioned this really smart to go get preapproved, to get everything lined up. I'd say before property one, subsequent properties, I haven't gone through the preapproval process. Again. I don't know if this is the right way of doing it, but I just knew that I got lending from that lender. Everything was smooth. All good. So I didn't do it ahead of time on subsequent properties, just the first property. Do you guys do it for each property? Curious before each property.

Tom:

If you're working, like what happens if you buy one rental property, you start adding, you start establishing a relationship with that mortgage broker and it could be not a, a full, you know, it could be just reaching out to them cause you've done several deals with them and you like them. They have a great operations team. They have great rates. You could just ask them the email, like, Hey, I'm looking at buying this and they already have, you're assuming your information hasn't changed too much. You can get just an initial check on your, your buying power. So maybe not the full thing, but as you start doing it again and again, and again, I'd say less intensive, especially if you have a relationship with a mortgage broker who knows what you're up to and you're background.

Michael:

Yep. I would totally agree. And just so everybody knows who, who, maybe isn't familiar with a mortgage broker, but a mortgage broker is just someone who goes and shops around at different lenders to find you the best product. Kind of like an insurance broker is going to go shop the insurance market and come back and present you with a few different products versus going to a specific lender, like a bank of America. If you're going to go to bank America, you're going to talk, you're going to get bank of America products. If you go to a mortgage broker, they might have, you know, seven or 10, whatever different products available to you. So just wanted to shed some light on that. And I totally agree, Tom, I think with the more repetitive you are with the same lenders, the easier it becomes. And so I'm with you and you'll, I only did it a handful of times to go get prequalified or preapproved. So I think it's also important to ask the question of your lender of like, Hey, you know, you understand my profile now going forward, what does this look like?

What do I need to be cognizant of? Because I think it can get pretty basic. It can get pretty easy to understand of what you will and won't qualify for depending on what your debt to income looks like. And depending on what the bone of value that you're trying to utilize on a purchase looks like. And so it always surprised me when people would like make offers on properties and they couldn't go get financing. It's like, wait, how did you not know that you're not going to qualify? Like you have a credit score of 400, like no, duh. So just be aware of what the lender is looking for. And then it makes it so much easier. It's you're not going to be surprised.

Emil:

And then you know your buying power, right?

Michael:

Yeah. You know, you're buying for that. Shouldn't be a surprise to you either. Like when you get that preapproval letter, I don't know. You should never be like, Holy crap. Like I either qualify for a lot or a little, like you should know.

Tom:

I've got a good point too, to make the difference between a prequalification and a preapproval. So I think this is there's some ambiguity in these two. So just as a quick disclaimer, between the two. So a prequalification is based on what you have submitted to the lender. It's a, a letter, to be honest, it doesn't really mean anything just because it's what you're telling the lender. A preapproval is a more involved process where the lender is running credit and getting verification. So those are the two different ones. I'm okay. Doing a prequalification where I'm spending information. Cause I'm going to be honest and straightforward. I mean, that's not something that you want to fluff around with because if you do embellish things at the point at which you actually needed the loan, the lender is going to find out the truth like doing there.

So it's, you're really just wasting everybody's time. So I'll do get a prequalification. I could do a preapproval, but I'm okay. So that's just a quick kind of disclaimer on the difference between a preapproval and a prequal. So pre-qualify, doesn't really mean a whole lot. It's what you tell the lender. And as long as you're being honest, that's great. It'll be the mustard, it'll work, pass mustard!

Michael:

Pass muster.

Tom:

It'll pass mustard.

Micheal:

But I think it's, I think it's, I don't think, are you putting a D on the end of that word? It's muster, not mustard, like the condiment mustard.

Tom:

I like, you know, effort, you know, cause you want to have a lot of effort, mustard. Okay.

Michael:

Uh huh.

Tom:

You can cut the mustard. It's really easy. It's a vinegar based condiment.

Michael:

I thought you would be peanut butter spreading that mustard. If I was a betting man.

Tom:

You can. It depends.

Emil:

And this episode has completely gone off the rails.

Tom:

The other reasons too early get your qualification or approval is you can get different rates. So you can go through this vetting process that we're going to talk about to make sure that you're getting the different rates. And it can be really easy to do this process once with one lender and say, Oh, I liked them and I'm not going to do it again. But honestly you can like save money by doing this upfront and doing it multiple times with multiple lenders. You wouldn't want to go through a pre approval multiple times, cause that is multiple credit checks. You know, that more kind of intensive process and doing multiple of them could be detrimental to your credit score. And that's something I would ask the lender like, Hey, is this going to touch my credit score in the process? So that was my one other point I wanted to roll back and doing it early is you can get rates from multiple lenders who are making the best decision.

Michael:

Just to piggyback on that.Tom, the way that I describe it to folks is a prequel is an interest in a lender to lend to you. A preapproval is their commitment to lend. And so I've also heard…

Michael:

Dating and engagement.

Michael:

That's right. That's right. So I've also heard that some lenders are actually do require a credit pull to get your pre-qual letter, which is the less intense. So I always say, thanks. No thanks. I won't go through that credit pool until I'm ready to actually pull a trigger on a mortgage because a lot of these prequel letters are only good for 90 days. And so if you go through that process, prequel or preapproval and they pull your credit and you do nothing for 90 days where they're going to have to do that again, to reestablish that qualification or that approval. So that's why I always say, find a lender that doesn't require a credit pull to get a prequal letter. That way you have the letter that says, Hey, I could get lending from someone once needed and then go get the approval from whoever you're going to do the mortgage with.

Emil:

Solid. Alright, let's move on to our next topic here. So it's how to source. And I'm curious if you guys go local versus national, do you have a preference and just in general, how do you guys source? Like where do you even start looking for a lender? That's a good place and resource for people.

Michael:

It varies. So a lot of times I'll ask my agent who I'm working with. If they have a good lender recommendation, and usually they will. And so I've worked with national folks on numerous deals out in the Midwest. They've also used a lot of local folks also out in the Midwest. So I like entertaining both. When I talked to a lot of students in the Academy, I talked to them about take three and just, it's super easy to start pick one that you already have an existing relationship with because you could have a checking account or savings account somewhere. Start there, see if they'll lend where you're interested, find a, a big national lender, see if they’ll lend to you and then find a local lender to wherever the property is. Start there and then dig deeper on finding more of the same.

If those one of those three doesn't work out. And there are really great resources to find fun. I mean, bigger pockets has a super thorough forum with all kinds of contributors and active members about lending and where to go and who to use. Google is just great. Getting reviews of investor friendly lenders in X market, or, you know, based on where you are, where the property is. And often I just cold call people, Hey, this is what I'm looking for. Is this something that you offer and just starting having a conversation with them? A lot of folks are really just starting from scratch, especially if you don't have, if your local bank, you know, your bank of America that you have your savings account with doesn't lend in Tennessee.

Tom:

Yeah. Under network is a great spot to start. I'll do a shout out to Roofstock Academy. That's our internal program that we have here at Roofstock that people can join if they want. One of the perks of your sec Academy is inside of this Slack channel, which is this forum amongst members and coaches. And I actually am doing my refinance off of a recommendation from one of the members in the Slack channel with Roofstock Academy. So worth checking out Roofstock Academy.

Emil:

I did the same thing. Yeah. Network is just huge. And you'd take everybody with what they say with trust, but verify. So you get that lead and then you go to your homework.

Emil:

Totally.

Michael:

Where do you look Emil?

Emil:

In the past, I have, since I've primarily bought my properties from Roofstock, I have looked through Roofstock’s networks, so Roofstock will recommend a couple of lenders and it's a good place to at least get started. Anytime you talk to one of our Roofstock experts, they can give you the contact information for a couple of different lenders who they know will lend out of state. So that's always a good place to start. I've found that there's a couple of these lenders who primarily work online, right? They're just like, they're like internet lenders and their rates seem to be better than national chains, like a US bank or Chase or whoever. So like, you guys mentioned, you find someone who's good. I've used them for a couple of loans now and that's been nice. The nice thing. Also, once you've done the homework and you've found a lender, you like is Tom, you mentioned it.

They have all your information. You don't need to do the two years of previous tax returns and for pay stubs and all this and that. They have all your information and it's a really smooth, easy process. So it's nice to do the homework upfront and then just piggyback that relationship for each subsequent deal. And that's been for residential now for, since I'm potentially looking at properties that require a commercial loan, which has five plus unit buildings. I'm talking to people who invest in those markets. Right. So just talking to other investors, Hey, who, what lender use investor-friendly agents. They have tons of lenders that they work with. So get their lists and start contacting each one. Yeah. Between those two, those have been the most helpful for me.

Michael:

Right on.

Emil:

Yeah. Anything else on sourcing guys? We can add here?

Michael:

I would just say, kind of above and beyond what we already mentioned. Networking. Just talk to as many people as you can and let them know what it is that you're doing, because I think it's pretty shocking how many people know other people that can be helpful to what it is you're looking to accomplish. So whenever I'm looking for financing, I'll talk to everybody that I have a conversation with that we're talking about real estate, Hey, you know, I'm looking for finding lending in this area for this type of building. If you haven't known anybody, let me know. And that's just not casual dinner conversation, right? Like, Hey, the chicken's really good. Oh yeah. By the way, I'm like, don't be that guy at that get together or a zoom call. Cause it was doing social distance still. But I just say, talk to everybody. You can and let them know what it is you're looking to accomplish what it is you're looking for.

Tom:

When you're talking to alumni on the phone, they're gonna try to close you and like lock it up and have you choose them and who knows, maybe they might get the best, but I would make sure that you speak to at least two or three lenders, like at a minimum. So, and you can be upfront with that in that initial conversation with them like, Hey, I'm evaluating you and a couple of other folks. So I'm not going to make a decision today. This is for, I'm just collecting some information to make the best decision. And I would let them know that because these guys are a lot of them are sales folks, right? They're trying to get you to originate your loan with them. So have that in your head upfront and you can be totally transparent and saying, Hey, this is a discovery call and not making any decisions today.

Michael:

Be strong. Don't give in. Some of them are really good.  

Tom:

Yeah, they are.

Emil:

Yeah. Yeah. They'll tell you, you know, we have the best rates and we charge the lowest points and least fees and all that

Michael:

You lock in your rate today. It could go up tomorrow. So lock it in today.

Tom:

Yeah. Fear man. Fear sells. Yep.

Emil:

Yep. All those things. Alright. So our last thing we want to hit on on this episode is the meat. Vetting questions. What should you be asking lenders to find the best one? So…

Michael:

Who does number two work for?

Emil:

These episodes are becoming like South Park and funny movies. Dammit Michael.

Michael:

Sorry.

Emil:

It's good. It's good. We got to keep these fun. Alright.

Michael:

A little Austin Powers in the morning.

Emil:

So yeah. What are, what are some tried and true questions you guys go to when you're evaluating a new lender?

Tom:

I’ll lead the way on this one, do a little Michael sandwich. Well, I'll leave that first one and leave this one. So I would think about it in high level categories and have questions for each of these high level categories. We're actually, by the time this is released, we will have just put out a webinar with Roofstock on, on this talking about property managers, lenders, all kinds of good stuff. We'll probably be on YouTube, go check it out. It's by Roofstock Academy. So anyways, high level question. So the first one level of questions, and I'll let Michael get into the specific questions. I'll just put the high level ones together. So is learning about the company. I think there can be a little bit of a sniff test and looking about how big are they are, how much business they do, how many employees they have, what kind of customer experience.

So like about the businesses is a good one. The other important category of questions is how do they make money? The other ones is standard operating procedures and lastly cannot be overlooked his references. So can I talk to someone who isn't your grandmother about your business? Who's done work with you. So all I'll lead with that high level overview. Michael, if you want to just in some specific questions or however you want to take the second part of this.

Michael:

Yeah I am going to do a sprinkling. You made a really good point. And actually I just had kind of this epiphany this morning and just now, because I was having a call with the lender earlier this morning. And so about the size of the operation, this is a smaller local bank out in the Midwest. And I was having, this is now I think my second or third call with the president of the bank. And so I think it's interesting to look and see who it is that you're speaking to or who it is that you can get ahold of because a lot of these banks are structured differently and so they have the front end salespeople and then it kind of funnels through to the ultimate decision makers.

And so if you're able to speak directly to a VP or a president or somebody who is a key decision maker at that bank, you can often get things done a lot sooner, a lot more effectively as well. So I'm now starting to put a little bit more weight on that when I don't think I was previously,

Emil:

Would you say that's more important for a commercial loan versus a residential?

Michael:

Yeah. These are all commercial loan products and some portfolio type stuff. So I think that does make for him a similar transaction process for the commercial type of stuff, because that's where things tend to be a bit more flexible or a little bit more custom. The residential space is pretty cut and dry. It either is, or it isn't since the vast majority of those are getting bought up on the secondary market by Fannie and Freddie.

Emil:

Right. Yep. Good distinction.

Michael:

So, okay. So some specific questions that I like asking lenders is who do you work with? Who are most of your clients? Are you work with investors? Do you work with owner occupants? Where are they in relation to their properties? Are you work with out of state investors? I like asking you about interest rates. That's always a big one because that's a big driver of who I'm going to ultimately decide to borrow from. And of course, with the understanding that interest rates change every day, but with commercial lenders, again, they're going to have more custom products. They're going to have often a wider range of products to choose from and with varying interest rates.

So again, for residential asked that question as well, but with the understanding that they're going to change, also, you can ask them about what their fees look like and what their credits look like. See if they can give you a, just a general breakdown of, Hey, to originate this loan, what's it going to cost me? What are all the different fees I'm going to be paying? Who are those going to and what are they for? Because you just want to get an understanding of, Hey, okay. If, if lender A has offered me a, an interest rate of four and a half then or B is also offered me four and a half, uh, there's really no difference. Well, there could be a vast difference in the fees that you're paying on the front end just to originate that loan. And so that can be sometimes to the tune of several thousand dollars difference.

So we want to make sure that we're actually choosing the best lender to work with also really important to ask about prepayment penalties. These are like really important. And basically what our prepayment penalty is, is if you pay back the loan early, either in the form of a sale or just a cash injection that you're paying back the entirety of the loan early, you can get penalized. That's more common for commercial loans. I don't know if I've ever seen one in residential. Tom, have either of you guys, have you seen pre-payment penalty on a residential loan, not something that I've ever seen, but ask the question of the lender. Also asking about their specific underwriting criteria. Kind of like we were chatting about earlier in the episode is if I'm a borrower, I should know what the lender is looking for.

As far as what my debt to income should look like as a strong borrower, what my loan to value should look like as a strong borrower. And so asking these questions on the front end is going to help build out this framework for you to decide, okay, well, lender A will give you no only cares. If my loan of value is maxed out at 35%, this other lender wants it lower at 25%. So maybe I'm a better candidate over here asking these questions is I think that'd be really helpful. Ask them how they treat rental income is a really big one. Some lenders will treat it as part of your, uh, income on the debt to income ratio, others won't. So if someone is not going to treat the income that you're planning on generating or that the property is currently generating as usable income, that might be a reason enough to walk away. I don't know. It's going to depend how…

Tom:

Stop taking my points, Michael. I was going to, stop take it by points. I was like, it's crazy how the, the range that lenders have on making decisions on applicants, you think it'd be like a little bit more standardized, but anyways, excellent point, Michael, on confirming that rental income is yeah. If they treat it as income. Yeah.

Michael:

I was chatting with my buddy in the Bay area and he was looking at house hacking. And so he found this duplex, it was really interested in, and he went and chatted with this lender and the lender said, Oh yeah, you know, this is, this is the max loan amount you're eligible for. And I said, ask him if they'll consider the rental income from the second half of the duplex, as, as income, as usable income. He's like, okay. So he did that. And he's like, Holy crap. He qualified for like an additional 120 K in loan amounts.

So sometimes don't take the face value as the answer for most of these questions. If it's not an answer that you like, I'll ask the question why, you know, always follow up and either you're going to get somewhere or you won't, but at least then you'll know hopefully why that is the way that it is. And if it's flexible at all, some more questions to ask our typical club time, because you don't want to get stuck with a lender that has a really long close time, but your escrow timeline is much shorter than that. And so then you could be at risk of losing the deal because you can't perform or assume your lender can't perform in the time stipulated by the purchase and sale agreement. Another great question to ask is what's going to happen to my mortgage after it's originated.

And Tom, you had a really good rant on this, on a previous episode about what happens to mortgages after you've originated them. And so often they get bought up by other companies and then you have to change where your loan payments go and then you have to change your password, but they only accept Firefox as the internet server. And so just getting an understanding of what's going to happen to it. Who's to keep that, are you going to stilll, are you going to continue dealing with the same lender time and time again for the same loan or are you going to have to, you know, move around? So asking about what happens to it is a really great question asking them if they'll match rates, I think is great. So a lot of lenders are really wanting to compete for business. And so if you say, Hey, you know, you're offering me a four and a half and able to get 4% over here and better closing costs, will you match it most often they'll say yes.

But only if you ask the question, so which only goes to further your point, Tom, if you only talk to one lender, you only know what their interest rates and their closing costs look like versus you go talk to two, three, four, five, you have a plethora of closing costs, spreads rates spread. You can take the best one and go to your favorite lender because it was good relationship or you like working with them or what have you and just say, Hey, this is, this is a quote I got from a different lender. Can you beat it and see what they say? Most often they've got a lot of flexibility on moving stuff around. So that was my rant on the questions to ask. And of course there's more, but those at a high level are some pretty pertinent ones, at least at a minimum that I would, I like to start with whenever chatting with the new lender.

Emil:

I wrote down a couple that I just wanted to highlight on. I think you mentioned it, Michael, but just making sure that when you talk to a lender, if they're national, make sure that they lend in the state, you're going to go buy a property. The other thing sometimes you'll talk to different lenders, ask them what their interest rates are and what you need to make sure you do is ask them how many points are associated with those interest rates. So one may tell you, Oh, we're doing, we'll do a 3%. Yeah. The one could say 2.75. And what they're not telling you upfront is that you also have to pay one point. And what a point means is let's say you get a loan for a hundred thousand dollars. One point is 1% of that loan added on as a closing cost fee. So in this case, it'd be a thousand dollar fee. You pay as part of your closing costs. So make sure you ask what points are associated with those interest rates that they're quoting you. I would also ask if they lend to an LLC. So if you're planning on setting everything up into an LLC and you want the loan taken out in LLC, you have to make sure you ask if the bank will lend to an LLC.

Michael:

What do you do if they say no,

Emil:

That's a good question. I don't have anything in an LLC right now. So I don't know the answer to you.

Michael

Something you can do is ask if once the loans originated, if you can transfer the loan to an LLC and a lot of lenders won't care because they've got you on the hook for the loan. So, but some may say no. And so there's this thing called a due on sale clause, which basically says, if you sell or transfer the property, that mortgage can be called due in full. And so you just want to avoid that in its entirety. And so adding that conversation on the front end, I think is huge of, Hey, once I purchased this thing, I'm planning on purchasing, transferring it to an LLC. Are you cool with that? And if they say, yes, get it in writing. And if they say no, that might influence your decision on who you ultimately use for, for a lender.

Emil:

Solid, good points, other things to ask, let's say, you're buying a property that you want to fix up and potentially refi later doing something like the BRRRR method you want to ask about seasoning period, which is how long the bank will require you to own the property before they'll do a reassessment of the value to do that refi. So another good thing to ask, and I think that was it. Those are the only other things I wanted to add.

Michael:

I just want to pepper in one more thing. And it's kind of a, like a gut feel type of thing. Make sure you like your lender. Like I'm dealing with this lender right now that is such a pain in the butt to work with. And every time I see an email or phone call from him, I'm just like, Oh God, like I don't want to answer. And it's like pulling teeth every time I interact with them. And it sucks because they have a fat prepayment penalty on my mortgage and it's a big mortgage, so I can't even go refinance out anywhere else. And now I'm just kicking myself that it was the dumbest thing ever. But at the time he was so easy to work with and he was able to get the deal done. So I just, time is of the essence, but now I'm just like, God, like this is so awful. So just, if you can like, just like try to like who you're working with, make sure that they're easy to work with that, you know, you're not dreading their phone calls and emails.

Emil:

That sounds like a tough situation in that they seemed good on the front end. Like you couldn't have vetted it out in the front. Cause it sounded like they were easy to work with. It just happened once you started really working with them once the loan was final.

Michael:

Yeah. Yeah. It was a little, yeah. Once the, once the loan was finalized, the gloves came off, man. And it was like, let's go.

Tom:

Oh you're, you're locked in. You're locked in. This is the real me.

Michael:

And yeah, the whole prepayment penalty thing is really a pain in the butt too. So, um, it was at a time when I wasn't really even thinking about that kind of stuff, but now it's come full circle and I've realized how captive it makes you. So if you can find a lender that does not offer those, it doesn't require those. I think that's worth a lot.

Tom:

My last thing I'll add on this general episode is sometimes you might be concerned and calling up a lender to talk to them. You might be concerned about like sounding dumb or like not knowing you're doing, don't worry about it. This is talking to lenders or talking to people in real estate in general is like a muscle. Every time you do it, it's going to be a little bit easier. Uh, something we talk a lot about with Academy members, it's getting your bats in another thing is generally speaking. These people are trying to sell you.

So they're like, they're nice. I wouldn't be concerned about, you know, they're, they're not gonna be like, Oh Tom, you dumb. I can't believe you asked this question. Like, like, no, they're going to be totally reasonable. So put those fear and ego aside and start on the fence. Just jump in man. Talking to lenders, identifying them, especially if you're planning to buy with financing, that's an important thing to do upfront.

Michael:

And I think just to that, for that point, take it as an opportunity to learn to, I mean, ask the dumb questions. It looks silly because you're interviewing and speaking to a bunch of people, but you're only going to work with one of them. So ask the dumb questions and learn from it because you're probably not going to ever see those people again. Yeah. Just real quick guys. Pancakes or waffles.

Tom:

How about this savory pancake?

You thought it was going to have something after saying that like, well, I don't.

Michael:

There's no option C it's a simple a B. All right. Tom pancakes. Emil, pancakes?

Emil:

I’m taking pancakes. We've been making a lot of pancakes at home lately. Waffles is just such a production with like a waffle maker. So pancakes, baby.

Michael:

Pierre? And do not say I don't eat pancakes or waffles. I don't want to hear it.

Pierre:

You can peanut butter spread onto both of those I’ll take either one.

Emil:

Ooh, well done.

Michael:

You make a pancake sandwich with two waffles on top and bottom,

Pierre:

But I'll take a German pancake any day.

Tom:

What about a giant fluffy Japanese pancake. Oh, sorry. Go ahead.

Michael:

Ooh. And so what's different about a German pancake.

Pierre:

Oh, it's the Dutch baby. It's like a, I'll give you the recipe right here. Three eggs, a third of a cup of cream, a third of a cup of milk, a quarter of a cup of butter and half a cup of flour and preheat your oven to 400 degrees, put a cast iron pan inside the oven, preheat it, melt some butter on it. Throw it in there for 15 minutes. And it's like a big old souffle.

Emil:

Wow. Sounds incredible. Alright. I know what I'm doing this weekend.

Michael:

That sounds amazing. I'm a, I'm a pancake guy too. If anyone's ever eaten at iHop, I'm a big fan of the, I think it's like a junior happy face, like a chocolate pancake with chocolate chips and whipped cream on it. Such a kid at heart.

Emil:

So are you like 13 years old?

Michael:

I'm like 9, I'm this many years old.

Emil:

Thank you guys again for joining us on this episode as always, please leave us a review. Guys do we like reviews?

Michael:

Big fans of reviews.

Tom:

Love them, love them.

Emil:

We need to, we need to bring back giving people shout outs when they leave us a review. So leave us a review and we'll give you a shout out on a future episode and we'll catch you on the next one. Happy investing.

Michael:

Happy investing.

Michael and Emil speak with Chad Wales about how he built his investment portfolio by performing multiple house hacks across the country. 

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Transcript

Emil:

Hey, everyone. Welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour, and today I'm joined by

Michael:

Michael Albaum.

Emil:

And in today's episode, we are joined by Chad Wales. And Chad is an investor who has moved around the country and has picked up rental properties along the way. He has a little bit of a unique story. And so we thought it'd be great to share it. So let's hop into his episode. Chad, welcome to the podcast, man. We're super excited to have you on.

Chad:

Thank you so much for having me. I'm really excited. Yeah.

Emil:

You are another friend of ours from the Twitter verse that has made his way onto the show. It seems, it seems like this is becoming a trend meeting people on Twitter, talking real estate, bring them on the podcast.

Chad:

Yeah. I've met a lot of people, um, in the real estate world. I also trade some options. So options trading and then just general like personal finance as well. And Tesla, I love Tesla. So there's a large Tesla community out there.

Michael:

You know, if our moms knew what we were doing, talking to all these strangers, they would have a field day with us.

Chad:

Yeah, they would.

Speaker 1:

Yes. Sometimes my wife is like, you just talked to people on the internet. I'm like, yeah, I know. It sounds weird when I say it aloud, but…

Chad:

I've actually had like phone calls with people.

Emil:

Yeah, like.

Michael:

I have too.

Emil:

It's a, it's a great way to network, meet people.

Chad:

And my wife always says, are you talking with your Twitter boyfriend again? And I'm like, yep.

Emil:

My wife says the same thing.

Michael:

That's great.

Emil:

All right. Cool man. So before we dive into your real estate investing story, give our listeners just a quick background, some info about you, where you live, what you do for a living. All that good stuff.

Chad:

Yeah. So I'm 32 years old. I have two kids. I have a two year old, a five month old. Um, I work as a product manager for a software company in Anne Arbor. Um, I have seen to be four rental properties with seven doors total, so.

Michael:

Right on.

Emil:

That's awesome. And so how did you take us, take us back. How did you get into real estate investing?

Chad:

I was telling you guys before that I lived in San Francisco for a couple of years and it kind of conditioned my wife and I too high rent prices. Right. So we were paying like 20, a hundred dollars a month. And that was like the cheapest that we could find right. For a one bedroom apartment in San Francisco, Nashville. So we left San Francisco to be closer to some family in Chicago and we wanted to buy a house and we bought a place that was like, our mortgage would be $2,800 a month. Right. Like we were conditioned to that, but we were living paycheck to paycheck, but it was kind of tight. Right. So I read rich dad, poor dad. Um, I think I actually had a hard time reading it. I do audio books and audio books have changed my life because I never read much until I started audio books. I, I think that's a debate for later on if it's really reading or not…

Emil:

That is a great debate.

Chad:

So I started telling a guy from work that I worked with in Chicago. I was like, yeah, I read this book, rich dad, poor dad. He's like, Oh yeah, I read that too. And then I started buying rental properties and I'm like, I'm here. I don't properties. Do you have, he's like, I have three, three unit buildings. And it just like blew my mind. Right? Like it's like a complete different dimension that I wasn't aware of that you didn't own rental property. Right.

Michael:

It's Plugged from the matrix.

Emil:

And you kind of think like it's always just reserved for this special group of really rich people. And then you meet your first like, you know, quote unquote average, Joe, who's investing in. It's like, I can do this.

Chad:

Yeah. He worked with me and he's probably made similar money than I did. Like how in the world did he do this? Right? So he, uh, he asked me if I wanted to go to a real estate investor, meet up. And Brie Schmidt is in Chicago. She's really well known in the multifamily community. Um, she runs a real estate investor meet up group and she's a realtor as well. She lives in praise multifamily in the North of Chicago. She actually does the South side as well. We looked kind of all over Chicago and had a great conversation with her. She was actually featured twice on the Bigger Pockets podcast. And she talked to us a little bit more. She's like, if you really want to get involved in this, like you're going to have to make some sacrifices. Right? You're not going to be able to have a walk in closet.

You're going to be further outside of the city. So my wife and I, we had a nice place, but had a walk in closet, like a huge master bathroom. And I'm like, we were living pretty comfortably in Lincoln park. Right. It's 15 minutes outside of Chicago to get to work. So six months later I had listened to like 250 Bigger Pockets podcasts. I read like three books. I started analyzing deals in, I got my wife onboard. So I got my wife to read rich dad, poor dad. I also got her to listen to a couple of Bigger Pockets podcast by Bree, who was our realtor. And my wife was like, okay, like I get it. This will be kind of fun. So we bought a place in Alberta park, which is, uh, the end of the Brown line. The L it was about an hour to get to work for me.

But it was a building that had been on the market for about six months. It seemed like the owners kind of did a flip and they did like 90% and then just left it. Right. They didn't add a garage. There's a few other things that just weren't completed. And we just kind kept making offers. Low at first, every week, we'd go up a little bit. Finally they accepted our offer and the numbers on paper didn't really work all the time that we would go see places. So my wife and I, we would go into them and we'd ask, how can we make this work? Right. It might not cash flow very well, but like how can we make it cashflow? So we added the garage, we get like 50 bucks a month for each space. Um, we added a couple rooms in the basement, a unit, the ground unit,

Michael:

Chad, what kind of building is this?

Chad:

It's a three-unit building. So we purchased it for 495,000. We put 5% down. I think our interest rate that we got was like 2.87%.

Emil:

How did you, how did you end up only having to put 5% down? I think most people are used to, if I want to go buy a rental property, I got to put 20% down minimum. How did you get away with 5%?

Chad:

Because we lived in, we got a lower interest rate. We only had to put 5% down and the way we were able to come up with that money, as we sold our condo in Chicago, um, we made like 40, 50 K off the sale of that. After living there for two years, actually an interesting point that I wanted to mention something that happened. So when we were selling your condo in Chicago, we had three offers and one of the authors had an escalation clause, like up to $25,000 over we'll pay three grand. Right? So we'll beat the highest and best offer and is based on the other offers, we would have only really made like maybe 10, 15 grand off of our place. We went back, we told all the offers highest and best. We weren't accepting escalation clauses. So they came back and made an offer 25 K over what their base offer was, which I thought was pretty cool.

Emil:

Wow.

Chad:

Does that make sense to you guys?

Michael:

Fantastic

Emil:

Just by doing a final and best everyone who had an offer in?

Chad:

Yeah. So one author had an escalation clause, right.

Michael:

But you tell them, we don't want that. We want your highest and best.

Chad:

Yeah. W we don't want this. Like, I feel like escalation clause is like, you know, the cheapskate route. We just want you to put your best offer forward. Right. We got three offers, like give us your highest and best. So that was a way that we made a lot more money off of the sale of our condo. And we use that money for a three unit that we purchased that we made some improvements to.

Emil:

Awesome.

Michael:

You mentioned that you lived there for two years. Why is that important?

Chad

Yep. Don't have to pay taxes when you sell.

Michael:

So for a married couple it's, I think 500,000. If you're single, it's 250 K if you've lived in the property, two out of the last five years, check with your accountant, tax professional on that to validate that. But that's what the rule says in my understanding,

Emil:

Meaning up to 500 K won't be taxed. Like if you sell for up to 500 or up to 500 K profit?

Michael:

Profit. Oh, nice. Your capital gains of 250 K is a single or 500 K as a married couple goes tax-free if you've lived there too at the last five years.

Emil:

That's awesome. Is that only on your first property that you lived in or?

Chad:

It's if you live in it for two years.

Emil:

All right.

Michael:

Any property that you've lived in for two years.

Emil:

Nice.

Michael:

And if you've lived in for less than two years, it's prorated.

Michael:

Oh, really? I didn't know that. Yeah. That's really good to know.

Chad:

Let's talk with your tax professional.

Emil:

Always our disclaimer every time we talk about tax stuff. We think, but you should check with your tax professional.

Chad:

This first rental that we bought. So it was a three bedroom, one bath upstairs, two bedroom, one bath on the main floor. And then it was one bedroom, one bath downstairs. Right. And we knew that we could get 1600 a month for a three bedroom, one bath, and the downstairs, we could get like 1100, right.

Michael:

For the one bed, one bath.

Chad:

Yeah. We could put in two more bedrooms and we could get like $500 more a month, right.

Emil:

Total or each?

Chad:

Total, so for the one bedroom, one bath, we put in two bedrooms and that increased the cash flow $400 a month.

Emil:

Got it.

Chad:

So we went into it and we were like, how can we make this work? Right. Because we were getting outbid by all these other places that are cash investor. So this one place we kept coming back to and we also were like, okay, let's put in garage and we can make a hundred bucks a month. Can we charge pet fees? We can get $50 a month per pet. So when we ran the numbers, initially we were going to name, you know, two, $300 a month cashflow. But once we made some investments, you know, added some rooms, started charging, pet fees, um, garage fees, you know, now we're making eight, $900 cash flow a month. You know, it looks a little bit more lucrative. Right. And because we lived in, it was a house hack. We were making money while we were living there. Right. So we went from paying a mortgage every month and being like, you know, stress financially to actually getting paid to live somewhere, which is pretty sweet. Right.

Michael:

That's the dream.

Emil:

I was, as you were talking, all that, I was, uh, I was writing down the numbers. So it started out with 16, a hundred for the three bed, 1100 for the one bed, one bath. So $2,700. When you looked at the deal on paper, in terms of rent?

Chad:

So Rents all in, before we made the additions?

Emil:

Correct?

Chad:

Yeah.

Emil:

Okay. So $495,000 purchase price. So most people would see this and be like, Oh, it's only like the rent is only half the purchase price and maybe a lot of investors skip it, but you saw, okay. We can make some additions. You brought that you added a couple bedrooms brought that second. Basically. You made it another three bed bath, right? Yep. So brought that to 1500. So now you're at 3,100, stay with me, everybody. And then you add a garage pet fee. So what did that bring monthly rent to

Chad

Our monthly rents are now 48, 50 a month for that building.

Emil:

Wow. Okay.

Michael:

Holy smokes.

Emil:

So you, you brought it from a half a percent property to basically a 1% property because you saw the potential there while being able to live in it.

Chad:

Correct.

Emil:

That's awesome. That's, that's where a lot of people probably just skip over and not seeing the potential. And this is where I think, you know, people find good deals is in what they can create. Not in just how the property stands.

Chad:

Yeah. You gotta be creative. Right. I mean, if we found a 1% deal, it was gone. So when was paying cash for it, right. We couldn't compete.

Emil:

Right. And for anyone who, uh, is curious what the 1% rule it's a, uh, real estate investing rule or benchmark that says if my monthly rent is at least 1% of the purchase price. So in this case, it was, you wanted your rent to be 400, 4,950 per month because the purchase price was 495,000. That it'll cashflow. That's what the 1% rule says. And if anyone who is curious about learning more about these benchmarks and a couple of other ones, check out episode 25 of our podcast for more detail on that, but sorry, go ahead, Chad.

Chad:

So something also to think about is if you live in your interest rate is much lower, right? She, your monthly mortgage, principal and interest are lower as well. So you don't even really have to hit the 1% because your monthly payment is so much slower. So I think that if we would have bought this place as an investment, we would have had to put 25% down because of some multifamily and our interest rate would probably be like 5%. Right. But we got 2.875. So yeah, we're able to hit the 1% rule with that low of the interest rate. A lot more cash is going into our pocket at the end of every month. Right.

Michael:

So you rents after the addition was 3,100, and then you talked about pet fees and garages. So there's an additional like $1,700 a month in rent that you make. And they're like 20 cats running around this place?

Chad:

Well, that's after we moved out. Right. Because our unit that we lived in were

Michael:

okay, that's the piece that was missing. I was like, Holy smokes. It was 3,100. And then they're living in a unit making 48 50. That's insane.

Chad

Yeah. Hopefully that wasn't confusing for everybody.

Michael:

Got it. So you moved out of that middle unit now you're renting it out. Now the building total is 48 50.

Chad:

Correct.

Michael:

Got it.

Chad:

That would have been real nice making 4850 cashflow living there. I think I mentioned earlier that it was like 300 a month living there.

Michael:

No, I missed that part. I'm sorry. So when you were living there in the middle unit, you were paying $300 a month?

Chad:

When you were getting paid $300.

Michael:

You were making $300 a month from living there. Got it. Got it. Got it. Okay. Thanks for clarifying. Cause my head just like couldn't wrap around what was going on.

Emil:

I just jumped forward. I was like, wow. 48.

Michael:

Okay, cool. So even at the 3,100, plus the pet fees and the garage fees and all the other value add type stuff, you were still making, you're still cashflow positive whilst living there.

Chad:

Correct.

Michael:

Perfect. Love it.

Chad:

Yeah. Which is a good place to be in. And that kind of helped us. We got the bug after that. Right. I think living there, it, first of all, helped build relationships with our tenants. Right. So, I mean, we have some great tenants. They've been there since we bought the place. If something goes wrong, they call me. Right. I know you guys talked a lot about having property managers, but we manage our properties all by ourselves. Right. And I don't live in Chicago anymore. So how am I managing a building in Chicago? I listened to bigger pockets. And someone on there said all a property manager does is answer the phone in the middle of the night.

And you're going to pay them eight to 10% for that. Right. So I actually had a test a couple of months back, if I can get through this, I do not need a property manager. So I tendency in the ground unit, they said about two weeks ago, there are some black stuff that started growing on the walls. I'm like, Oh my gosh, like the worst thing that could happen being out of state, you know, I don't know where it's coming from. I don't know why, but I have a contractor that I use. Right. So I told my contractor, Hey, I got some mold growing. Can you go kind of find the source? Like I'll pay you your hourly rate. Like whatever it is, we found three sources of water. We had there's water coming from a drain pipe. There's condensation from waterline in the ceiling.

And then there's a foundation crack, all of a sudden done 15 K I didn't have to go out there. Insurance covered some of it because we had a water backup coverage, but I called service master. They went out, they kind of took all mold out. I got my contractor to go in and put new drywall and insulation. And so I had about 10 K out of pocket costs, which sounds crazy. But I'm glad that it's over and my tenants are safe and they're living in a good place. Right. So it probably blew up my cashflow for a year.

Emil:

We'd like to talk about it on this show, it's not always Rose colored glasses. When it comes to real estate investing, it's not perpetual cashflow. Like things go wrong. These are buildings. They have issues just like anyone has in the apartment. Dave lived in or the house they live in. These things need repairs and maintenance. So these things happen. It's all part of it. And uh, I'm glad you highlighted that cause it's good for people to know, like these things happen. It's not like totally uncommon. So how did you, you were not living in Chicago when all that stuff happened?

Chad:

No, this was a couple of months ago.

Emil:

Wow. And I just was able to do it all. I had a plumber I worked with in the past. They called him, um, I had a great contractor that went out there and took care of it. I have a close relationship with my tenants too. So, uh, I was able to work through it with them as well.

Emil:

Yeah, I think that helps that you, you live there, you like, you probably vetted a lot of your tenants, met them and have a relationship with them to kind of be able to manage from distance. That helps a lot.

Chad:

Yeah. So that cashflow that we were making kind of helped us buy a next place. So by that point, my wife was pregnant. We were in Chicago, but we wanted to be closer to family. You know, we didn't really have a mortgage. So we were able to save up a lot of money. We purchased a home in Ann Arbor for 240,000. It needed a little bit of work, but in our average real estate market was very, very hot at the time. The place that we made an offer on had, I think it was like 13 different offers at the same time. I mean insane. Right? So some lessons that I learned from Bigger Pockets podcasts, we put together like a really nice cover letter that talked about my wife and I, our dog, how we could see ourselves living there, a dog running in the backyard daughter, she's going to grow up there and we put in a strong offer. Right. But we built a relationship with the seller. Like, you know, she probably didn't have that connection with anyone else. Right. It was all just numbers. So we had the right number and we had that connection. So we were able to win that deal.

Emil:

Was this a single family, by the way?

Chad:

This is a single family. Yeah. So we moved to Ann Arbor, Michigan single family, this place, we, we put about 20 cane into it, new hardwood floors. We had the cabinets painted new countertops. Uh, one of the rooms had like this burgundy carpet. We ripped that out, put hardwood floors in there. And then I did a little bit of work as well. I changed out some doors and stuff and we lived there for six months. Actually. It was about a year. Um, and we were pregnant again or wanted to get pregnant and it was a little bit tight. So we're like, okay, we should rent this place out. And again, we had a great interest rate because we lived in it. This one we had, we put 10% down because we bought it as a second home or a vacation home. Cause we didn't move in right away. Cause we were doing renovations from Chicago. We kind of lined up some contractors and stuff and were able to rent that for 2,400 a month with a $50 pet fee.

Emil:

So again, just about hitting the 1% rule you did put, you know, the 20 K in to make repairs, but yep. Just about hitting the 1% rule. I might've missed it. But did you walk in, did you guys buy this property thinking it'd be for you guys to live in and then you convert it into rental? Or did you have in mind, we're going to buy this and turn it into a rental later

Chad:

We saw it as a way to get to Ann Arbor. We were looking at like higher priced homes, but since we weren't moving into it right away, we knew we had to buy it as a second home and put 10% down and we didn't want to burn up all of our cash. So we thought it would be a way to us get to Anne Arbor.

Michael:

Did it need so much work that the bank wouldn't finance it as is as your primary?

Chad:

The issue was that you have to move in and like six months, I don't know why we put 10% down. I forget, but we didn't have any financing issues. We have very good relationship with our broker.

Michael:

Great. So we've worked through quite a bit of issues with him in East grade. I mean, we talked to him every couple of months just to kind of stay connected and make sure that whatever we're trying to work on next we can get funding for.

Emil:

Okay. So you guys move out of this one, run it for 2,400 and then, then where'd you guys go what'd you do?

Chad:

We moved up. So about a year later, we moved to another home in Ann Arbor. It's paid 454 again for this one. Our mortgage is right around 3000 in Ann Arbor is a college town, right? There's hospitals here. There's a university. There's a lot of football games. Football is huge here. So we bought a new place and we're like, we can Airbnb this. So we started Airbnb in our house, like 500, 2000 bucks a night at the place we're currently in.

Emil:

500 to a thousand a night.

Chad:

Yup.

Emil:

Dang!

Chad:

For graduation, you can get like a thousand and night football games. You get close to 800, 909. It's all like beds and heads. Right? So we have a four bedroom house for couples and kids to stay here and you know, 800, 2000 bucks really isn't that bad per person. Right?

Emil:

How did you decided to make this one, a short term rental versus saying, you know what let's, let's just do what we've been doing long term rentals.

Chad:

We heard of our neighbors doing short term rentals and generally, how can we make this work? Right. So a lot of people are like, I don't want people sleeping in my bed and stuff like, that's weird. I'm like, Hey, anyone can tweet my bed that they want to as long as they pay me a thousand bucks a night,

Emil:

It is weird. The first time you Airbnb your place and someone you think about someone's sitting on your couch, sleeping in your bed, like using your bathroom. It's it's a weird, thought the first time you Airbnb, if no one.

Chad:

Yeah.

Emil:

If you're listening to this and you've never done it, it's a interesting mind shift.

Michael:

Have you done it Emil?

Emil:

I have, yeah in a couple apartments. Not our house that we own, but apartments we've lived in. Have you?

Michael:

I haven't. But I'm actually just about to do a home exchange for the first time, which basically you go to someone else's home, they come to yours. So at least if I find out they're doing things that I don't like in my home, I can do it in their home too. Alright. Sorry, Chad. So you were saying, so your neighbors had done it and…

Chad:

Yeah. We wanted to see how he could do it as well. Right? Emily, you were talking about this. You're like, you know, it's weird having people asleep in your bed and all that stuff. And it's like a mind shift change, right? Yep. I've had a lot of my friends ask me, how can I get in real estate? Or how can I make money? And I'm like, well, you have a car, right? Like rent your car out on Turo. Come on, man. I don't want someone driving my car. I'm like, well, you kind of get over this. Like you got to have this mindset change. Like if you want to make money and be like free and financially free and like be able to do the things that you want to do travel, like compares this one, sleeps in your bed. Who cares if someone drives your car? Right? Like, so last year my wife and I went to Europe for two weeks with our daughter and we had two different Airbnb guests stay in our place. We covered our flights or hotels or food, everything like, why not? Right.

Emil:

It's amazing.

Chad:

Like it just like opens up the whole world to you.

Emil:

Travel for free.

Chad:

Yeah. I hate paying for hotels and I'm paying for mortgage as well. And like, I feel like when I used to go on vacation, I was like very cheap. Like I'd hate to go spend a lot of money for dinner or something because you know, we're paying for a hotel, but now it's like, yeah, I want to go to a nice dinner every night, a month vacation. I don't want to get a nicer bottle of wine. And it kind of makes those things not feel as bad. Right.

Michael:

It's funny. You talk about your friend's head. I also have a friend similar and I've made some very similar suggestions, go get a side hustle or go do something. And he's like, no one really wants you. I'm like, okay, so you want something for nothing. Like there's no such thing as a free lunch. You've got to, like your agent was saying, Kristen, right. You've got to make some kind of sacrifice. You've got to do something extra. You've got to want it. And I think a lot of people want the result without wanting to put in the work.

Chad:

Yeah. I think that's the one thing I can like can pay to like new investors is like, there's gotta be a little bit of a sacrifice for that first one. And once you learn to sacrifice for the first one, then you can sacrifice for the second one, the third one, right? Like it makes it a whole lot easier because you have that mindset change.

Michael:

I would almost make the counterpoint in that it's a mindset shift away from, it's a sacrifice to, it's a mindset shift to it's an investment I'm making. Right. So living in a smaller place is an investment I'm making. And when you turn you gamify or make it fun. Yeah. It's a, it's a much easier sell to yourself or to your spouse or whomever you're living with. Yeah. So if you can have that kind of, um, not scarcity mindset, that's the opposite abundance mindset right. About it. Well, it's a smaller place, but look at all the things I could still do or look at what I'm able to do now. Yeah. I think that really helps frame perspective for folks.

Emil:

Or, you know, you live in a smaller place. It's easier to clean. It's less maintenance. Like there's all these ways you can say, Oh, this place just isn't big enough for us into like, well now we have less things we need to put in space to take up walls, whatever it is, you know what I mean? There's just two ways of looking at everything.

Michael:

Hide and go seek is easier. It's not as challenging.

Chad:

Yeah, definitely. So, you know, Rich Dad, poor dad talks about your house is not an asset. Well like how can we change our house into an asset? How can we make money off of it? So that's kind of always how we're kind of looking at things now.

Michael:

Have you seen people just as a real quick side note, talk about that on Twitter and this everybody gets lit up. No, it is an asset. No, it's not an asset. It's like, all right guys, like what are we doing here?

Chad:

So we, uh, recently we wanted to travel it's COVID now, right? We got some small kids. We're not going to go flying. We're like so where's somewhere in the United States. So we want to go to for an extended period of time. So we went down to Charleston, we took a road trip. We stopped in Asheville, North Carolina. We were there for a week. We, uh, stayed in Charleston for a month. And this entire time we Airbnbed our house. We actually had quite a few people ping us on Airbnb wanting like month-long stays three month long stays because they're in New York and they wanted to get out in a big city. Right. So we had a ton of demand to rent our place out. And we're like, let's take advantage of this. We're working remotely. Like, let's go travel with our kids. So we were in Charleston and I was like, man, if people can work remotely, this is a really, really desirable market.

Like Charleston has great food. It's by the ocean taxes are not as bad as like New York or California. And it's like, it's very desirable. It's not too hot. It's not like Florida where it's like a hundred degrees every day. Right. So we're like, there's, there's a lot of opportunity here. I actually made some money trading options, uh, early in the year. And I wanted to buy an investment because I wanted to kind of save that money. I made some money and then I lost portion of that. It's very hard to consistently trade options. So I wanted to put in real estate to kind of protect it. Right. So we were looking at places to buy in Ann Arbor. But with university here, no football coming back, the market is a little bit unknown. Right? So we feel like there's a little bit of risk in buying another place near Anne Arbor. We're going to buy somewhere else, like Charleston. Like we can go there for a year. It's going to be warm. We're not going to have the winter and be stuck in doors. Right. So we started looking at places. We found a realtor all while we're on vacation. Right. And we're like, let's see if we can rent our house out for a year back in Ann Arbor. So we posted on Zillow for four grand a month.

Emil:

This is while you're on vacation. Yeah. Ambitious. I like it. Okay. Keep going.

Chad:

And we had air B and D photos, right? So we're like, let's just take these Airbnb photos. We'll throw them on Zillow. Let's throw a crazy number out like four grand a month and see what happens. So we had someone tell us, this is perfect. They want a furnished home. So we're leaving like majority of our furniture in here. And we rented it out. We actually agreed upon 3,800. And then we threw in a $50 pet fee. Uh, so 3850 a month. And that covers our mortgage and then some quite a bit. Right. Cause we got a low interest rate because we lived in it. So now we're going to Charleston. Uh, we're buying a duplex uh, that we found off market while we were down there. Can we just got locked in it? 2.9% interest rate and the place we're buying is 700 kid. And the plan is we'll live in the top unit and will Airbnb the bottom unit.

Michael:

What do you expect to be able to make per night on the bottom Unit?

Chad:

We think we could do like 230 to 300 a night. So it's downtown Charleston. It's about a seven minute walk to King street and 10 minute drive to the beach. So it's pretty great location. Awesome. So this is essentially my wife is she cut her hours back at work. We aren't sending our kids daycare. There's some savings there, but our big house is covered through rent. Plus we're making some cashflow on it and we're going to be down there and living pretty much free because our Airbnb will cover our expenses. So we don't really have any other debts. So it's kind of like, we hit financial freedom by doing this for the year, at least.

Right. So we kind of put ourselves in a position where we're financially free, but I'm still able to work remotely. And my wife is still working a few hours. So we just kind of saw this as like a fun opportunity. Get our kids involved. We got some young kids and you gonna learn much cause they're too young, but they'll see us like working smart, not hard. I always say like work smart, not hard. Right. And I feel like if you're working really hard, there's a difference between working smart and hard. If you're working on the right things for me, that's real estate. I feel like you're able to get a lot more traction. I feel like before real estate I would work so hard, but I felt in my wheels were always spinning. Right. So I want to teach my kids work smart and they're going to be a part of this. Right. They're going to kind of grow up, being involved in a rental property that we're going to do some improvements to an Airbnb out.

Michael:

That’s so rad. I think so many people would have, or who might be eligible for having a similar type story to you say, Oh, but I have kids. I can't do it. Yeah. What's what's that been like adding the kids to the equation?

Chad:

Oh my gosh. It's been the whole COVID with kids and working and trying to move. And like, I mean, it's been awesome because like my wife and I, we talked about this, we feel like we didn't really know our kids or our daughter or my son was born, uh, April fool's day, this year. So in the heart of COVID, right? Like in like,

Michael:

Wow.

Chad:

The most intense COVID period. But like, we need to spend all day every day with our kids now. Right. Working remotely from home. So it's great because we can spend so much time with them. But also like I were talking about this before, like working remotely, it's not a lot of the whole, like, you know, talking at the water cooler, it's you focus on your work and you get it done. And then you have some free times. So when we have free time, we're able to like, hang out with our kids. We're able to pack real to like get our place ready. So we kind of just see it as like a fun adventure. We're going to go on for a year. And then we either continue to Airbnb it out or we just rent it out and we'll help place the tenants. So know we'll feel good about it. And we won't have title property manager.

Michael:

Right on. So you really see it as an additive more is much more so than a attractor or hurdle to overcome.

Chad:

Yeah.

Michael:

Awesome. Love that.

Emil:

So your strategy has been the living right by a place live in it and then potentially turn it into short term long term. And you're kind of collecting places as you go. I'm curious. Why has that been your strategy versus buying a property just to purely be a rental?

Chad:

Yeah. We didn't really have the cash to buy something as a pure investment. Right. Because as a single family, you have to put 20% down as a multifamily, have to put 25% down and plus there's like two basis point increase your interest rate if you're buying it as investment property versus a primary residence. Right. So your monthly payment is sniff currently lower. So we'll keep doing this until we can't or we're sick of moving. I'm in the thick of it. I mean, we just sent a pod down to Charleston this morning, so we've been cleaning and packing and it's a lot with two kids and jobs and stuff. We say that we're not going to do it again, but I know in a year we're going to want another one and we're going to want another adventure.

Emil:

Well, as long as you guys are flexible and cool moving around, you know, like it works for you.

Chad:

Yeah. Yeah. And you know, when we move a lot, it gets easier each time. Cause we get rid of a lot of the junk that we don't need.

Emil:

It's like you're forced spring cleaning, basically

Michael:

Pulling a Marie Kondo.

Chad:

Um, you know, it's a lot, but for us, like now we got the cash flow. We'll have cash flow from four places. Um, our like our mortgages are being paid down every month. Something we should talk about is PMI, right? So if you don't put down 20% for a single family or multifamily, I believe you have to pay PMI. And we've been able to, because of the improvements we've made and stuff, we've been able to get written, call the bank up and we say, Hey, we want our property praise. Cause we want to remove the PMI. So they dropped the PMI from property, right? So we've been able to remove a PMI. So we have equity in our places. Now by the time our kids go to college, if they want to go to college, like we'll do a cash out, refinance, we'll take money out.

We won't have any taxes on that because that's tax free and they can go to school where they want. Right. Like we don't have to set up like the college fund for them. But I think right now the best opportunity to invest in real estate is a hedge against inflation. Right? So with COVID the fed is pumping trillions of dollars into the economy. Right. And when you do that, you devalue the dollar and a great hedge against inflation is debt. Right? A lot of people don't understand that or they use the wrong kind of debt. So credit card that is the wrong time. But if you have that backed by an asset that is paying cash flow and we see inflation, I mean, this is like having gold, right. Because dollar goes down, but your debt stays the same.

Emil:

And then your equity goes up because yeah. Everything costs more.

Chad:

Yep. Yeah. So it's like 30 years ago you could buy a pack of bubble gum for 5 cents and now it's two bucks, right? That's inflation. So I'm buying properties like when the bubble gum is 5 cents. I hope in 30 years, they're two bucks. Right?

Michael:

That's such a good analogy.

Emil:

I think this is a, a good spot for us to end this one. Chad, thank you so much for coming on and talking about your story. I know a lot of people are going to take away some good information. This is actually the first time we've had someone on, who's talked about like consecutive house hacking. So this was a really unique story. Thanks again, man, really enjoyed it.

Michael:

Chad, if people want to find out more about you reach out about questions, about your story. Is there a good way for folks to get in contact with you?

Chad:

Yeah. I'm on Twitter. @_Chad_the_dad, uh, can also email me. Uh, [email protected]. I'd love to talk and you know, happy to analyze deals or if there any opportunities, uh, feel free to send them my way.

Michael:

Awesome. Thanks so much. I really appreciate you coming on and taking the time.

Chad:

Thank you.

Emil:

All right. Thanks again, everyone for joining us for this episode you haven't already, I know you're probably tired of hearing me say it, but make sure you go and subscribe. So you get an update whenever release new episodes and let us know what you think of the show. Leave us a review. We love them. We will beg for them. Just kidding. We don't want to beg for them, but please leave us a review. We like them. We like hearing from you guys and we'll catch you on the next episode. Happy investing.

Michael:

Happy investing.

Michael and Emil speak with Chad Wales about how he built his investment portfolio by performing multiple house hacks across the country. 

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Transcript

Emil:

Hey, everyone. Welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour, and today I'm joined by

Michael:

Michael Albaum.

Emil:

And in today's episode, we are joined by Chad Wales. And Chad is an investor who has moved around the country and has picked up rental properties along the way. He has a little bit of a unique story. And so we thought it'd be great to share it. So let's hop into his episode. Chad, welcome to the podcast, man. We're super excited to have you on.

Chad:

Thank you so much for having me. I'm really excited. Yeah.

Emil:

You are another friend of ours from the Twitter verse that has made his way onto the show. It seems, it seems like this is becoming a trend meeting people on Twitter, talking real estate, bring them on the podcast.

Chad:

Yeah. I've met a lot of people, um, in the real estate world. I also trade some options. So options trading and then just general like personal finance as well. And Tesla, I love Tesla. So there's a large Tesla community out there.

Michael:

You know, if our moms knew what we were doing, talking to all these strangers, they would have a field day with us.

Chad:

Yeah, they would.

Speaker 1:

Yes. Sometimes my wife is like, you just talked to people on the internet. I'm like, yeah, I know. It sounds weird when I say it aloud, but…

Chad:

I've actually had like phone calls with people.

Emil:

Yeah, like.

Michael:

I have too.

Emil:

It's a, it's a great way to network, meet people.

Chad:

And my wife always says, are you talking with your Twitter boyfriend again? And I'm like, yep.

Emil:

My wife says the same thing.

Michael:

That's great.

Emil:

All right. Cool man. So before we dive into your real estate investing story, give our listeners just a quick background, some info about you, where you live, what you do for a living. All that good stuff.

Chad:

Yeah. So I'm 32 years old. I have two kids. I have a two year old, a five month old. Um, I work as a product manager for a software company in Anne Arbor. Um, I have seen to be four rental properties with seven doors total, so.

Michael:

Right on.

Emil:

That's awesome. And so how did you take us, take us back. How did you get into real estate investing?

Chad:

I was telling you guys before that I lived in San Francisco for a couple of years and it kind of conditioned my wife and I too high rent prices. Right. So we were paying like 20, a hundred dollars a month. And that was like the cheapest that we could find right. For a one bedroom apartment in San Francisco, Nashville. So we left San Francisco to be closer to some family in Chicago and we wanted to buy a house and we bought a place that was like, our mortgage would be $2,800 a month. Right. Like we were conditioned to that, but we were living paycheck to paycheck, but it was kind of tight. Right. So I read rich dad, poor dad. Um, I think I actually had a hard time reading it. I do audio books and audio books have changed my life because I never read much until I started audio books. I, I think that's a debate for later on if it's really reading or not…

Emil:

That is a great debate.

Chad:

So I started telling a guy from work that I worked with in Chicago. I was like, yeah, I read this book, rich dad, poor dad. He's like, Oh yeah, I read that too. And then I started buying rental properties and I'm like, I'm here. I don't properties. Do you have, he's like, I have three, three unit buildings. And it just like blew my mind. Right? Like it's like a complete different dimension that I wasn't aware of that you didn't own rental property. Right.

Michael:

It's Plugged from the matrix.

Emil:

And you kind of think like it's always just reserved for this special group of really rich people. And then you meet your first like, you know, quote unquote average, Joe, who's investing in. It's like, I can do this.

Chad:

Yeah. He worked with me and he's probably made similar money than I did. Like how in the world did he do this? Right? So he, uh, he asked me if I wanted to go to a real estate investor, meet up. And Brie Schmidt is in Chicago. She's really well known in the multifamily community. Um, she runs a real estate investor meet up group and she's a realtor as well. She lives in praise multifamily in the North of Chicago. She actually does the South side as well. We looked kind of all over Chicago and had a great conversation with her. She was actually featured twice on the Bigger Pockets podcast. And she talked to us a little bit more. She's like, if you really want to get involved in this, like you're going to have to make some sacrifices. Right? You're not going to be able to have a walk in closet.

You're going to be further outside of the city. So my wife and I, we had a nice place, but had a walk in closet, like a huge master bathroom. And I'm like, we were living pretty comfortably in Lincoln park. Right. It's 15 minutes outside of Chicago to get to work. So six months later I had listened to like 250 Bigger Pockets podcasts. I read like three books. I started analyzing deals in, I got my wife onboard. So I got my wife to read rich dad, poor dad. I also got her to listen to a couple of Bigger Pockets podcast by Bree, who was our realtor. And my wife was like, okay, like I get it. This will be kind of fun. So we bought a place in Alberta park, which is, uh, the end of the Brown line. The L it was about an hour to get to work for me.

But it was a building that had been on the market for about six months. It seemed like the owners kind of did a flip and they did like 90% and then just left it. Right. They didn't add a garage. There's a few other things that just weren't completed. And we just kind kept making offers. Low at first, every week, we'd go up a little bit. Finally they accepted our offer and the numbers on paper didn't really work all the time that we would go see places. So my wife and I, we would go into them and we'd ask, how can we make this work? Right. It might not cash flow very well, but like how can we make it cashflow? So we added the garage, we get like 50 bucks a month for each space. Um, we added a couple rooms in the basement, a unit, the ground unit,

Michael:

Chad, what kind of building is this?

Chad:

It's a three-unit building. So we purchased it for 495,000. We put 5% down. I think our interest rate that we got was like 2.87%.

Emil:

How did you, how did you end up only having to put 5% down? I think most people are used to, if I want to go buy a rental property, I got to put 20% down minimum. How did you get away with 5%?

Chad:

Because we lived in, we got a lower interest rate. We only had to put 5% down and the way we were able to come up with that money, as we sold our condo in Chicago, um, we made like 40, 50 K off the sale of that. After living there for two years, actually an interesting point that I wanted to mention something that happened. So when we were selling your condo in Chicago, we had three offers and one of the authors had an escalation clause, like up to $25,000 over we'll pay three grand. Right? So we'll beat the highest and best offer and is based on the other offers, we would have only really made like maybe 10, 15 grand off of our place. We went back, we told all the offers highest and best. We weren't accepting escalation clauses. So they came back and made an offer 25 K over what their base offer was, which I thought was pretty cool.

Emil:

Wow.

Chad:

Does that make sense to you guys?

Michael:

Fantastic

Emil:

Just by doing a final and best everyone who had an offer in?

Chad:

Yeah. So one author had an escalation clause, right.

Michael:

But you tell them, we don't want that. We want your highest and best.

Chad:

Yeah. W we don't want this. Like, I feel like escalation clause is like, you know, the cheapskate route. We just want you to put your best offer forward. Right. We got three offers, like give us your highest and best. So that was a way that we made a lot more money off of the sale of our condo. And we use that money for a three unit that we purchased that we made some improvements to.

Emil:

Awesome.

Michael:

You mentioned that you lived there for two years. Why is that important?

Chad

Yep. Don't have to pay taxes when you sell.

Michael:

So for a married couple it's, I think 500,000. If you're single, it's 250 K if you've lived in the property, two out of the last five years, check with your accountant, tax professional on that to validate that. But that's what the rule says in my understanding,

Emil:

Meaning up to 500 K won't be taxed. Like if you sell for up to 500 or up to 500 K profit?

Michael:

Profit. Oh, nice. Your capital gains of 250 K is a single or 500 K as a married couple goes tax-free if you've lived there too at the last five years.

Emil:

That's awesome. Is that only on your first property that you lived in or?

Chad:

It's if you live in it for two years.

Emil:

All right.

Michael:

Any property that you've lived in for two years.

Emil:

Nice.

Michael:

And if you've lived in for less than two years, it's prorated.

Michael:

Oh, really? I didn't know that. Yeah. That's really good to know.

Chad:

Let's talk with your tax professional.

Emil:

Always our disclaimer every time we talk about tax stuff. We think, but you should check with your tax professional.

Chad:

This first rental that we bought. So it was a three bedroom, one bath upstairs, two bedroom, one bath on the main floor. And then it was one bedroom, one bath downstairs. Right. And we knew that we could get 1600 a month for a three bedroom, one bath, and the downstairs, we could get like 1100, right.

Michael:

For the one bed, one bath.

Chad:

Yeah. We could put in two more bedrooms and we could get like $500 more a month, right.

Emil:

Total or each?

Chad:

Total, so for the one bedroom, one bath, we put in two bedrooms and that increased the cash flow $400 a month.

Emil:

Got it.

Chad:

So we went into it and we were like, how can we make this work? Right. Because we were getting outbid by all these other places that are cash investor. So this one place we kept coming back to and we also were like, okay, let's put in garage and we can make a hundred bucks a month. Can we charge pet fees? We can get $50 a month per pet. So when we ran the numbers, initially we were going to name, you know, two, $300 a month cashflow. But once we made some investments, you know, added some rooms, started charging, pet fees, um, garage fees, you know, now we're making eight, $900 cash flow a month. You know, it looks a little bit more lucrative. Right. And because we lived in, it was a house hack. We were making money while we were living there. Right. So we went from paying a mortgage every month and being like, you know, stress financially to actually getting paid to live somewhere, which is pretty sweet. Right.

Michael:

That's the dream.

Emil:

I was, as you were talking, all that, I was, uh, I was writing down the numbers. So it started out with 16, a hundred for the three bed, 1100 for the one bed, one bath. So $2,700. When you looked at the deal on paper, in terms of rent?

Chad:

So Rents all in, before we made the additions?

Emil:

Correct?

Chad:

Yeah.

Emil:

Okay. So $495,000 purchase price. So most people would see this and be like, Oh, it's only like the rent is only half the purchase price and maybe a lot of investors skip it, but you saw, okay. We can make some additions. You brought that you added a couple bedrooms brought that second. Basically. You made it another three bed bath, right? Yep. So brought that to 1500. So now you're at 3,100, stay with me, everybody. And then you add a garage pet fee. So what did that bring monthly rent to

Chad

Our monthly rents are now 48, 50 a month for that building.

Emil:

Wow. Okay.

Michael:

Holy smokes.

Emil:

So you, you brought it from a half a percent property to basically a 1% property because you saw the potential there while being able to live in it.

Chad:

Correct.

Emil:

That's awesome. That's, that's where a lot of people probably just skip over and not seeing the potential. And this is where I think, you know, people find good deals is in what they can create. Not in just how the property stands.

Chad:

Yeah. You gotta be creative. Right. I mean, if we found a 1% deal, it was gone. So when was paying cash for it, right. We couldn't compete.

Emil:

Right. And for anyone who, uh, is curious what the 1% rule it's a, uh, real estate investing rule or benchmark that says if my monthly rent is at least 1% of the purchase price. So in this case, it was, you wanted your rent to be 400, 4,950 per month because the purchase price was 495,000. That it'll cashflow. That's what the 1% rule says. And if anyone who is curious about learning more about these benchmarks and a couple of other ones, check out episode 25 of our podcast for more detail on that, but sorry, go ahead, Chad.

Chad:

So something also to think about is if you live in your interest rate is much lower, right? She, your monthly mortgage, principal and interest are lower as well. So you don't even really have to hit the 1% because your monthly payment is so much slower. So I think that if we would have bought this place as an investment, we would have had to put 25% down because of some multifamily and our interest rate would probably be like 5%. Right. But we got 2.875. So yeah, we're able to hit the 1% rule with that low of the interest rate. A lot more cash is going into our pocket at the end of every month. Right.

Michael:

So you rents after the addition was 3,100, and then you talked about pet fees and garages. So there's an additional like $1,700 a month in rent that you make. And they're like 20 cats running around this place?

Chad:

Well, that's after we moved out. Right. Because our unit that we lived in were

Michael:

okay, that's the piece that was missing. I was like, Holy smokes. It was 3,100. And then they're living in a unit making 48 50. That's insane.

Chad

Yeah. Hopefully that wasn't confusing for everybody.

Michael:

Got it. So you moved out of that middle unit now you're renting it out. Now the building total is 48 50.

Chad:

Correct.

Michael:

Got it.

Chad:

That would have been real nice making 4850 cashflow living there. I think I mentioned earlier that it was like 300 a month living there.

Michael:

No, I missed that part. I'm sorry. So when you were living there in the middle unit, you were paying $300 a month?

Chad:

When you were getting paid $300.

Michael:

You were making $300 a month from living there. Got it. Got it. Got it. Okay. Thanks for clarifying. Cause my head just like couldn't wrap around what was going on.

Emil:

I just jumped forward. I was like, wow. 48.

Michael:

Okay, cool. So even at the 3,100, plus the pet fees and the garage fees and all the other value add type stuff, you were still making, you're still cashflow positive whilst living there.

Chad:

Correct.

Michael:

Perfect. Love it.

Chad:

Yeah. Which is a good place to be in. And that kind of helped us. We got the bug after that. Right. I think living there, it, first of all, helped build relationships with our tenants. Right. So, I mean, we have some great tenants. They've been there since we bought the place. If something goes wrong, they call me. Right. I know you guys talked a lot about having property managers, but we manage our properties all by ourselves. Right. And I don't live in Chicago anymore. So how am I managing a building in Chicago? I listened to bigger pockets. And someone on there said all a property manager does is answer the phone in the middle of the night.

And you're going to pay them eight to 10% for that. Right. So I actually had a test a couple of months back, if I can get through this, I do not need a property manager. So I tendency in the ground unit, they said about two weeks ago, there are some black stuff that started growing on the walls. I'm like, Oh my gosh, like the worst thing that could happen being out of state, you know, I don't know where it's coming from. I don't know why, but I have a contractor that I use. Right. So I told my contractor, Hey, I got some mold growing. Can you go kind of find the source? Like I'll pay you your hourly rate. Like whatever it is, we found three sources of water. We had there's water coming from a drain pipe. There's condensation from waterline in the ceiling.

And then there's a foundation crack, all of a sudden done 15 K I didn't have to go out there. Insurance covered some of it because we had a water backup coverage, but I called service master. They went out, they kind of took all mold out. I got my contractor to go in and put new drywall and insulation. And so I had about 10 K out of pocket costs, which sounds crazy. But I'm glad that it's over and my tenants are safe and they're living in a good place. Right. So it probably blew up my cashflow for a year.

Emil:

We'd like to talk about it on this show, it's not always Rose colored glasses. When it comes to real estate investing, it's not perpetual cashflow. Like things go wrong. These are buildings. They have issues just like anyone has in the apartment. Dave lived in or the house they live in. These things need repairs and maintenance. So these things happen. It's all part of it. And uh, I'm glad you highlighted that cause it's good for people to know, like these things happen. It's not like totally uncommon. So how did you, you were not living in Chicago when all that stuff happened?

Chad:

No, this was a couple of months ago.

Emil:

Wow. And I just was able to do it all. I had a plumber I worked with in the past. They called him, um, I had a great contractor that went out there and took care of it. I have a close relationship with my tenants too. So, uh, I was able to work through it with them as well.

Emil:

Yeah, I think that helps that you, you live there, you like, you probably vetted a lot of your tenants, met them and have a relationship with them to kind of be able to manage from distance. That helps a lot.

Chad:

Yeah. So that cashflow that we were making kind of helped us buy a next place. So by that point, my wife was pregnant. We were in Chicago, but we wanted to be closer to family. You know, we didn't really have a mortgage. So we were able to save up a lot of money. We purchased a home in Ann Arbor for 240,000. It needed a little bit of work, but in our average real estate market was very, very hot at the time. The place that we made an offer on had, I think it was like 13 different offers at the same time. I mean insane. Right? So some lessons that I learned from Bigger Pockets podcasts, we put together like a really nice cover letter that talked about my wife and I, our dog, how we could see ourselves living there, a dog running in the backyard daughter, she's going to grow up there and we put in a strong offer. Right. But we built a relationship with the seller. Like, you know, she probably didn't have that connection with anyone else. Right. It was all just numbers. So we had the right number and we had that connection. So we were able to win that deal.

Emil:

Was this a single family, by the way?

Chad:

This is a single family. Yeah. So we moved to Ann Arbor, Michigan single family, this place, we, we put about 20 cane into it, new hardwood floors. We had the cabinets painted new countertops. Uh, one of the rooms had like this burgundy carpet. We ripped that out, put hardwood floors in there. And then I did a little bit of work as well. I changed out some doors and stuff and we lived there for six months. Actually. It was about a year. Um, and we were pregnant again or wanted to get pregnant and it was a little bit tight. So we're like, okay, we should rent this place out. And again, we had a great interest rate because we lived in it. This one we had, we put 10% down because we bought it as a second home or a vacation home. Cause we didn't move in right away. Cause we were doing renovations from Chicago. We kind of lined up some contractors and stuff and were able to rent that for 2,400 a month with a $50 pet fee.

Emil:

So again, just about hitting the 1% rule you did put, you know, the 20 K in to make repairs, but yep. Just about hitting the 1% rule. I might've missed it. But did you walk in, did you guys buy this property thinking it'd be for you guys to live in and then you convert it into rental? Or did you have in mind, we're going to buy this and turn it into a rental later

Chad:

We saw it as a way to get to Ann Arbor. We were looking at like higher priced homes, but since we weren't moving into it right away, we knew we had to buy it as a second home and put 10% down and we didn't want to burn up all of our cash. So we thought it would be a way to us get to Anne Arbor.

Michael:

Did it need so much work that the bank wouldn't finance it as is as your primary?

Chad:

The issue was that you have to move in and like six months, I don't know why we put 10% down. I forget, but we didn't have any financing issues. We have very good relationship with our broker.

Michael:

Great. So we've worked through quite a bit of issues with him in East grade. I mean, we talked to him every couple of months just to kind of stay connected and make sure that whatever we're trying to work on next we can get funding for.

Emil:

Okay. So you guys move out of this one, run it for 2,400 and then, then where'd you guys go what'd you do?

Chad:

We moved up. So about a year later, we moved to another home in Ann Arbor. It's paid 454 again for this one. Our mortgage is right around 3000 in Ann Arbor is a college town, right? There's hospitals here. There's a university. There's a lot of football games. Football is huge here. So we bought a new place and we're like, we can Airbnb this. So we started Airbnb in our house, like 500, 2000 bucks a night at the place we're currently in.

Emil:

500 to a thousand a night.

Chad:

Yup.

Emil:

Dang!

Chad:

For graduation, you can get like a thousand and night football games. You get close to 800, 909. It's all like beds and heads. Right? So we have a four bedroom house for couples and kids to stay here and you know, 800, 2000 bucks really isn't that bad per person. Right?

Emil:

How did you decided to make this one, a short term rental versus saying, you know what let's, let's just do what we've been doing long term rentals.

Chad:

We heard of our neighbors doing short term rentals and generally, how can we make this work? Right. So a lot of people are like, I don't want people sleeping in my bed and stuff like, that's weird. I'm like, Hey, anyone can tweet my bed that they want to as long as they pay me a thousand bucks a night,

Emil:

It is weird. The first time you Airbnb your place and someone you think about someone's sitting on your couch, sleeping in your bed, like using your bathroom. It's it's a weird, thought the first time you Airbnb, if no one.

Chad:

Yeah.

Emil:

If you're listening to this and you've never done it, it's a interesting mind shift.

Michael:

Have you done it Emil?

Emil:

I have, yeah in a couple apartments. Not our house that we own, but apartments we've lived in. Have you?

Michael:

I haven't. But I'm actually just about to do a home exchange for the first time, which basically you go to someone else's home, they come to yours. So at least if I find out they're doing things that I don't like in my home, I can do it in their home too. Alright. Sorry, Chad. So you were saying, so your neighbors had done it and…

Chad:

Yeah. We wanted to see how he could do it as well. Right? Emily, you were talking about this. You're like, you know, it's weird having people asleep in your bed and all that stuff. And it's like a mind shift change, right? Yep. I've had a lot of my friends ask me, how can I get in real estate? Or how can I make money? And I'm like, well, you have a car, right? Like rent your car out on Turo. Come on, man. I don't want someone driving my car. I'm like, well, you kind of get over this. Like you got to have this mindset change. Like if you want to make money and be like free and financially free and like be able to do the things that you want to do travel, like compares this one, sleeps in your bed. Who cares if someone drives your car? Right? Like, so last year my wife and I went to Europe for two weeks with our daughter and we had two different Airbnb guests stay in our place. We covered our flights or hotels or food, everything like, why not? Right.

Emil:

It's amazing.

Chad:

Like it just like opens up the whole world to you.

Emil:

Travel for free.

Chad:

Yeah. I hate paying for hotels and I'm paying for mortgage as well. And like, I feel like when I used to go on vacation, I was like very cheap. Like I'd hate to go spend a lot of money for dinner or something because you know, we're paying for a hotel, but now it's like, yeah, I want to go to a nice dinner every night, a month vacation. I don't want to get a nicer bottle of wine. And it kind of makes those things not feel as bad. Right.

Michael:

It's funny. You talk about your friend's head. I also have a friend similar and I've made some very similar suggestions, go get a side hustle or go do something. And he's like, no one really wants you. I'm like, okay, so you want something for nothing. Like there's no such thing as a free lunch. You've got to, like your agent was saying, Kristen, right. You've got to make some kind of sacrifice. You've got to do something extra. You've got to want it. And I think a lot of people want the result without wanting to put in the work.

Chad:

Yeah. I think that's the one thing I can like can pay to like new investors is like, there's gotta be a little bit of a sacrifice for that first one. And once you learn to sacrifice for the first one, then you can sacrifice for the second one, the third one, right? Like it makes it a whole lot easier because you have that mindset change.

Michael:

I would almost make the counterpoint in that it's a mindset shift away from, it's a sacrifice to, it's a mindset shift to it's an investment I'm making. Right. So living in a smaller place is an investment I'm making. And when you turn you gamify or make it fun. Yeah. It's a, it's a much easier sell to yourself or to your spouse or whomever you're living with. Yeah. So if you can have that kind of, um, not scarcity mindset, that's the opposite abundance mindset right. About it. Well, it's a smaller place, but look at all the things I could still do or look at what I'm able to do now. Yeah. I think that really helps frame perspective for folks.

Emil:

Or, you know, you live in a smaller place. It's easier to clean. It's less maintenance. Like there's all these ways you can say, Oh, this place just isn't big enough for us into like, well now we have less things we need to put in space to take up walls, whatever it is, you know what I mean? There's just two ways of looking at everything.

Michael:

Hide and go seek is easier. It's not as challenging.

Chad:

Yeah, definitely. So, you know, Rich Dad, poor dad talks about your house is not an asset. Well like how can we change our house into an asset? How can we make money off of it? So that's kind of always how we're kind of looking at things now.

Michael:

Have you seen people just as a real quick side note, talk about that on Twitter and this everybody gets lit up. No, it is an asset. No, it's not an asset. It's like, all right guys, like what are we doing here?

Chad:

So we, uh, recently we wanted to travel it's COVID now, right? We got some small kids. We're not going to go flying. We're like so where's somewhere in the United States. So we want to go to for an extended period of time. So we went down to Charleston, we took a road trip. We stopped in Asheville, North Carolina. We were there for a week. We, uh, stayed in Charleston for a month. And this entire time we Airbnbed our house. We actually had quite a few people ping us on Airbnb wanting like month-long stays three month long stays because they're in New York and they wanted to get out in a big city. Right. So we had a ton of demand to rent our place out. And we're like, let's take advantage of this. We're working remotely. Like, let's go travel with our kids. So we were in Charleston and I was like, man, if people can work remotely, this is a really, really desirable market.

Like Charleston has great food. It's by the ocean taxes are not as bad as like New York or California. And it's like, it's very desirable. It's not too hot. It's not like Florida where it's like a hundred degrees every day. Right. So we're like, there's, there's a lot of opportunity here. I actually made some money trading options, uh, early in the year. And I wanted to buy an investment because I wanted to kind of save that money. I made some money and then I lost portion of that. It's very hard to consistently trade options. So I wanted to put in real estate to kind of protect it. Right. So we were looking at places to buy in Ann Arbor. But with university here, no football coming back, the market is a little bit unknown. Right? So we feel like there's a little bit of risk in buying another place near Anne Arbor. We're going to buy somewhere else, like Charleston. Like we can go there for a year. It's going to be warm. We're not going to have the winter and be stuck in doors. Right. So we started looking at places. We found a realtor all while we're on vacation. Right. And we're like, let's see if we can rent our house out for a year back in Ann Arbor. So we posted on Zillow for four grand a month.

Emil:

This is while you're on vacation. Yeah. Ambitious. I like it. Okay. Keep going.

Chad:

And we had air B and D photos, right? So we're like, let's just take these Airbnb photos. We'll throw them on Zillow. Let's throw a crazy number out like four grand a month and see what happens. So we had someone tell us, this is perfect. They want a furnished home. So we're leaving like majority of our furniture in here. And we rented it out. We actually agreed upon 3,800. And then we threw in a $50 pet fee. Uh, so 3850 a month. And that covers our mortgage and then some quite a bit. Right. Cause we got a low interest rate because we lived in it. So now we're going to Charleston. Uh, we're buying a duplex uh, that we found off market while we were down there. Can we just got locked in it? 2.9% interest rate and the place we're buying is 700 kid. And the plan is we'll live in the top unit and will Airbnb the bottom unit.

Michael:

What do you expect to be able to make per night on the bottom Unit?

Chad:

We think we could do like 230 to 300 a night. So it's downtown Charleston. It's about a seven minute walk to King street and 10 minute drive to the beach. So it's pretty great location. Awesome. So this is essentially my wife is she cut her hours back at work. We aren't sending our kids daycare. There's some savings there, but our big house is covered through rent. Plus we're making some cashflow on it and we're going to be down there and living pretty much free because our Airbnb will cover our expenses. So we don't really have any other debts. So it's kind of like, we hit financial freedom by doing this for the year, at least.

Right. So we kind of put ourselves in a position where we're financially free, but I'm still able to work remotely. And my wife is still working a few hours. So we just kind of saw this as like a fun opportunity. Get our kids involved. We got some young kids and you gonna learn much cause they're too young, but they'll see us like working smart, not hard. I always say like work smart, not hard. Right. And I feel like if you're working really hard, there's a difference between working smart and hard. If you're working on the right things for me, that's real estate. I feel like you're able to get a lot more traction. I feel like before real estate I would work so hard, but I felt in my wheels were always spinning. Right. So I want to teach my kids work smart and they're going to be a part of this. Right. They're going to kind of grow up, being involved in a rental property that we're going to do some improvements to an Airbnb out.

Michael:

That’s so rad. I think so many people would have, or who might be eligible for having a similar type story to you say, Oh, but I have kids. I can't do it. Yeah. What's what's that been like adding the kids to the equation?

Chad:

Oh my gosh. It's been the whole COVID with kids and working and trying to move. And like, I mean, it's been awesome because like my wife and I, we talked about this, we feel like we didn't really know our kids or our daughter or my son was born, uh, April fool's day, this year. So in the heart of COVID, right? Like in like,

Michael:

Wow.

Chad:

The most intense COVID period. But like, we need to spend all day every day with our kids now. Right. Working remotely from home. So it's great because we can spend so much time with them. But also like I were talking about this before, like working remotely, it's not a lot of the whole, like, you know, talking at the water cooler, it's you focus on your work and you get it done. And then you have some free times. So when we have free time, we're able to like, hang out with our kids. We're able to pack real to like get our place ready. So we kind of just see it as like a fun adventure. We're going to go on for a year. And then we either continue to Airbnb it out or we just rent it out and we'll help place the tenants. So know we'll feel good about it. And we won't have title property manager.

Michael:

Right on. So you really see it as an additive more is much more so than a attractor or hurdle to overcome.

Chad:

Yeah.

Michael:

Awesome. Love that.

Emil:

So your strategy has been the living right by a place live in it and then potentially turn it into short term long term. And you're kind of collecting places as you go. I'm curious. Why has that been your strategy versus buying a property just to purely be a rental?

Chad:

Yeah. We didn't really have the cash to buy something as a pure investment. Right. Because as a single family, you have to put 20% down as a multifamily, have to put 25% down and plus there's like two basis point increase your interest rate if you're buying it as investment property versus a primary residence. Right. So your monthly payment is sniff currently lower. So we'll keep doing this until we can't or we're sick of moving. I'm in the thick of it. I mean, we just sent a pod down to Charleston this morning, so we've been cleaning and packing and it's a lot with two kids and jobs and stuff. We say that we're not going to do it again, but I know in a year we're going to want another one and we're going to want another adventure.

Emil:

Well, as long as you guys are flexible and cool moving around, you know, like it works for you.

Chad:

Yeah. Yeah. And you know, when we move a lot, it gets easier each time. Cause we get rid of a lot of the junk that we don't need.

Emil:

It's like you're forced spring cleaning, basically

Michael:

Pulling a Marie Kondo.

Chad:

Um, you know, it's a lot, but for us, like now we got the cash flow. We'll have cash flow from four places. Um, our like our mortgages are being paid down every month. Something we should talk about is PMI, right? So if you don't put down 20% for a single family or multifamily, I believe you have to pay PMI. And we've been able to, because of the improvements we've made and stuff, we've been able to get written, call the bank up and we say, Hey, we want our property praise. Cause we want to remove the PMI. So they dropped the PMI from property, right? So we've been able to remove a PMI. So we have equity in our places. Now by the time our kids go to college, if they want to go to college, like we'll do a cash out, refinance, we'll take money out.

We won't have any taxes on that because that's tax free and they can go to school where they want. Right. Like we don't have to set up like the college fund for them. But I think right now the best opportunity to invest in real estate is a hedge against inflation. Right? So with COVID the fed is pumping trillions of dollars into the economy. Right. And when you do that, you devalue the dollar and a great hedge against inflation is debt. Right? A lot of people don't understand that or they use the wrong kind of debt. So credit card that is the wrong time. But if you have that backed by an asset that is paying cash flow and we see inflation, I mean, this is like having gold, right. Because dollar goes down, but your debt stays the same.

Emil:

And then your equity goes up because yeah. Everything costs more.

Chad:

Yep. Yeah. So it's like 30 years ago you could buy a pack of bubble gum for 5 cents and now it's two bucks, right? That's inflation. So I'm buying properties like when the bubble gum is 5 cents. I hope in 30 years, they're two bucks. Right?

Michael:

That's such a good analogy.

Emil:

I think this is a, a good spot for us to end this one. Chad, thank you so much for coming on and talking about your story. I know a lot of people are going to take away some good information. This is actually the first time we've had someone on, who's talked about like consecutive house hacking. So this was a really unique story. Thanks again, man, really enjoyed it.

Michael:

Chad, if people want to find out more about you reach out about questions, about your story. Is there a good way for folks to get in contact with you?

Chad:

Yeah. I'm on Twitter. @_Chad_the_dad, uh, can also email me. Uh, [email protected]. I'd love to talk and you know, happy to analyze deals or if there any opportunities, uh, feel free to send them my way.

Michael:

Awesome. Thanks so much. I really appreciate you coming on and taking the time.

Chad:

Thank you.

Emil:

All right. Thanks again, everyone for joining us for this episode you haven't already, I know you're probably tired of hearing me say it, but make sure you go and subscribe. So you get an update whenever release new episodes and let us know what you think of the show. Leave us a review. We love them. We will beg for them. Just kidding. We don't want to beg for them, but please leave us a review. We like them. We like hearing from you guys and we'll catch you on the next episode. Happy investing.

Michael:

Happy investing.