The SFR Show

In this episode, Michael and Emil speak with real estate lawyer Kellie Chrisman about the pros and cons of LLCs and Legal entities in regards to protecting your investments. 

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Transcript

Michael:

Hey, everybody. Welcome to another episode of remote real estate investor. I'm Mike Albaum and as always, I'm joined by..

Emil:

The good ol’ Emil Shour

Michael:

And today we've got a very special guest in Kellie Chrisman, who is actually a real estate attorney. So today we're going to dive deep into all things LLC and trust related. And Kelly is going to answer a ton of our questions. And for those of you who can't make it through the episode, cause it does get a little bit long, make sure to listen to the end of the episode where she gives her contact information in case you have any real estate specific questions for Kellie. So let's go ahead and jump right in to it.

Michael:

Kellie. Thank you so much for taking the time for joining us today. We really appreciate it.

Kellie:

Yeah, no problem. Thanks for having me guys.

Michael:

Absolutely. So I was hoping you could give our listeners a little bit of background on you, you know, where do you come from? What kind of law do you practice and we'll start with there.

Kellie:

All right. Sounds good. So I'm originally from Northern California, Chico and I have been practicing in California for seven years college at UCLA and couldn't leave LA and we stayed down there with Loyola Law school lived in Santa Monica, practice down there, my first, probably four or five years, and then moved back to Sacramento to be closer to family and go all over California and practice all sorts of exciting law that no one usually likes to talk about unless I get real estate people, or unfortunately somebody's going through a hard situation. So I do trust the States business planning and then estate planning as well. And they all kind of intermingle and go together. And it's interesting.

Michael:

It's very interesting. And in full disclosure, Kellie and I have done quite a bit of work together in the real estate arena and the trust arena. And now I think Emil has now as well, right?

Emil:

Yes. From your referral. So thank you.

Michael:

Another convert to team Kellie.

Kellie:

That's right. But I can’t confirm unless you guys can confirm. Attorney client privileges.

Michael:

Awesome. Well, Kellie, I was hoping we could jump into kind of the meat and potatoes of what we want to talk about today and start with some definitions to give folks, because I think so often in the real estate realm/arena, people throw around terms without really defining what they are. So for those of our listeners that have no idea, I would love to just run through some definitions of maybe sole proprietorship, LLCs, S Corps, C Corp and trusts. Can you break down for everybody? What those are?

Kellie:

For me, I am a visual learner, which doesn't work necessarily here, but I can at least try and break it down. And I always have to give the disclaimer, I'm not getting legal advice, getting general recommendation based on things that I know. And we can always talk more detailed than I can get legal advice. I see those as two different things. So a trust is, is in its own category from the sole proprietorship partnership, LLCs, Corporations S Corp C Corp, cause they're really accomplishing two different things. So on the most basic level, the trust is something that's going to plan for worst case scenario. So something bad happens, who's in charge where everything is going and what you want that. Then we get onto the other side, the entity side, every other kind of thing we've mentioned. And that's the type of business or entity protection liability protection. So sole proprietorship is if you are going to own a rental property and you don't do anything, you are automatically. So if there's nothing you want to do, you can of course draft stuff and make it more.

But on its most basic level can do nothing. That's what, no, if you do nothing with someone else, then you are a partnership. You can automatically be a partnership. If you do nothing, or you can spend a lot of money to draft beautiful documents and be a general partnership. They're taxed at the individual level, LLC is a limited liability company. And a corporation is both of those. Together are something you file with a secretary of state, whatever state you live in and they give you liability protection so they can have one member. It can be just you, it can be you and a sibling or you want a friend or it can be in corporations and Apple has countless shareholders. So it can go from there, LLCs, the incorporations provide that protection. And then within a corporation you can be two different texts, escort, which is a closely held corporation or a C Corp, which is what we're most commonly used to. So like an Apple or a year, it can be somebody small.

Michael:

So if I'm hearing you right, if I just bought the property and do nothing, I take title in my personal name. I'm a sole proprietor. Yep. Okay, cool.

Kellie:

And if you do nothing with a friend, then you're a partnership.

Michael:

Got it. Okay.

Emil:

Yeah. I was going to ask. Okay. So I think for people listening, what are you potentially opening yourself up to? If you're a sole proprietorship owning real estate, what are the risks?

Kellie:

Okay.

Michael:

How deep do we want to go down that dark dark?

Kellie:

Don't ask the lawyer that question. So I don't like to scare people, but I always like to be realistic and everybody has their own comfort level. If you are a sole proprietorship, you are leaving everything on the line. So to put it in real estate terms, you, if it's a commercial property, somebody walks into your tenants property and they slip and fall on the curb. You are technically responsible in certain situations, most situations for keeping that curve maintained and safe. So if you get sued, everything you own is on the line, your home, all your other property, your retirement, your income, and it can follow you. So you can get a judgment that you might not have a lot now, but in a little while. Well, so the risk, if you have nothing, that's huge is everything. However, how common that? It’s not so, but not so uncommon. I mean, it can be something as simple. If you have a rental property, I had clients that their tenant had a party to make people on the balcony and somebody moved on the ledge. And once we went over and got hurt, whether they're reliable or not, they're included in the lawsuit. So there can be a lot of expense just to prove you’re not liable.

Michael:

Versus going the LLC or corporation routes. Now that's a very different scenario that we're looking at.

Kellie:

Yeah. So then we're looking at the only thing on the line is what's owned in that corporation or LLC. So you cap your liability and we'll talk, I'm sure a little bit about how that happened and how to maintain that. But if I don't have something in place, everything you own is on the line. If you do have a corporation or an LLC, then just whatever is held in that corporation of the LLC. And so a lot of times you'll see corporations or LLC get sued and then they go bankrupt because they're not going to put more assets into that and they'll have to be other risks. If you just have to go back to the most question, if you just have a sole proprietorship or partnership, you know, if you don't get along with with your partner, if you die, what happens to it? If something tax wise, there's a lot of stuff you can do within this corporation, that instruction. So it gets very strategic and fun if I can say that.

Michael:

Yeah. So it just sounds like you have, from a very high level inside an entity structure, as opposed to a sole proprietorship, more options and more liability protection than if you're just a sole proprietorship, is that accurate or fair to say?

Kellie:

Yeah, I think that's fair to say. There's a lot more that you can do and there's a level of comfort that comes with it.

Michael:

Sure. Okay. And so I get the question all the time of Michael, do I need an LLC to invest in real estate? And I think in the real estate community, there's this very hotly debated topic of pro LLC. No, LLC. So it sounds like we touched on, you know, what the pros are of having an LLC. Are there any pros to just being a sole proprietorship that you really lose out on if you have an LLC?

Kellie:

Yeah. So, and it's funny cause I I'm preaching all of this and, and I just went through it as an attorney. You know, whether I want to become an LLC, a limited liability corporation or whether I want to stay the sole proprietor. And when I talk with my accountant, who is usually my they're usually the person that I work with clients tax wise, there can be consequences. So if you do create an LLC, obviously the first thing is that there's a cost associated with it, just filing it with the state. The state has asked me, um, to create it. Usually you're, you're going to need to either pay somebody to do it, or you're going to buy a package online to do it. And there's some things that come within each state that you have to do. So in California, for example, you have to then start paying payroll taxes. So rather than in a sole proprietorship where I just pull my stake and then I get taxed at my own level, I now have a couple of additional tax requirements, but at a point it becomes worth. So that's where I always recommend working with a CPA or a tax professional.

Michael:

Okay, great.

Emil

Like let's say I buy a property in Florida. I decided to put an LLC, you can set up the LLC in Florida, but California will still require you pay like the franchise tax fee. Like you're an LLC, here right?

Kellie:

The problem is, the government writes the law, um, and they always find a way to get their fingers on a little bit of something. So if you have a corporation or an entity in another state and you live in California and you're essentially running it out of California, which is, I own a rental property that I rent, but I received my rent and my California bank account, you have to register as a foreign entity and you pay a small fee to do that. But that's one of the costs of doing the upside of that liability protection.

Emil:

Totally

Michael:

Wait. So did I, maybe I misunderstood that. So if I own property in Ohio, but I live in California and I registered my, I created my LLC in Ohio and registered it as a foreign entity in California. Should I be paying the $800 annual California franchise tax fee?

Kellie:

You do what it is for a foreign corporation, whatever they require for that.

Michael:

I got, I got to take a closer look at that. Cause if I've been overpaying, I got to talk to somebody that's ridiculous.

Kellie:

That's why I say, talk to your tax professional.

Michael:

Right, right. Right. All right. Cool. Well, I will definitely have to look into that then, but so for, in California, I mean, there's really no way to get around telling California that we have even a foreign entity in California if we're living here, right?

Kellie:

Yeah. They're going to figure it out because the second you file your income taxes, you're going to have that income from the corporation. And they're going to say, Hey, right. So it's a small price. You take my lawyer hat off. And $800 is not a small price for me, but I put my lawyer hat back on and I say, this is $800 is a small price to pay. But when you're looking at the amount of money that you're investing in, what you're building and hoping to gain from creating an entity in front of investing in multiple properties, it's really a drop, hopefully, in the bucket in the grand scheme of things.

Michael:

Sure. And kind of getting back to that original two camps, right? The pro LLC, the new LLC. I think the biggest argument that the no LLC camp makes is that, Hey, I can get the same type of asset protection of liability protection with high liability insurance limits and then get an umbrella on top of that. What are your thoughts around that?

Kellie:

Yes, super common. It just… This is such a lawyer answer. It just depends. So I worked with a medium sized firm here in Sacramento and that's what the partner is. He would tell clients, you know, why spend $800 a year when I can buy you a hell of an umbrella policy? And I agree with that in some situations, and I don't agree with it and others. So there's no the person that, you know, maybe they bought their first house and they're going to keep it and buy their next house. Never going to be a longterm investor. That makes sense. You know, if it's a single family home that you're renting, that's a good amount of insurance. But if somebody slips and falls in that house, I mean, slip and falls was one of many things that can happen. It's just common place. Example. You're hoping, and you're, you're gambling that you bought enough insurance to cover that lawsuit and your lawyer fees.

Because if you didn't, then now everything was on the line. Now that dream home you bought is on the line for this rental home that you have. A lot of times it works in, comes down to, and I'll probably touch on this throughout. It's how risk averse, how well you're going to sleep at night. Wonder, I always use the example of my husband. And so I I'm a little bit of a gambler. We had one property. I don't know if I put it in an LLC. I probably would seeing, having seen other things that I had done and worked on my husband is extremely risky because he's an engineering he would, before we bought the property, he would have an LLC set up. He would make sure everything was like perfect and Excel and everything. And it would be, everything would be in separate LLC, which I'm sure we'll talk about too. So it depends.

Michael:

Yeah. I love that answer. Cause I think so many people approach it with a one size fits all, but it sounds like you can't look at it through that lens.

Kellie:

No. And every situation is different. Every set of facts, if it's commercial property and they're going to be multiple people on this property every day, if there's going to be any kind of manufacturing, any kind of longterm structure to me, that's a no brainer. I would advise my clients to immediately do it and have an entity in place. But it just depends if there's an accident.

Emil:

Yeah. So one of the questions we wanted to ask you is how do you handle insurance if you're using an LLC, does it differ if you're a sole proprietor versus LLC, do insurance companies look at those differently?

Kellie:

So you talked to your insurance agent and each insurance company is going to handle them differently. A lot of times you will insure the LLC itself or the entity LLC, or corporation, and then insure yourself separately. So you can, I mean, if you're extremely risk averse and we send it, my husband would probably have insurance on the LLC and then we'd have an umbrella personally, over ourselves as owners of the LLC as well. So you're, you're double protected, but each insurance company saying that a little differently.

Emil:

So you don't insure the property, you insure the LLC. So if I acquire more..

Kellie:

So you would insure the property, but the property is going to be owned by the LLC itself. So if you're insuring you can insure business and then you can insure the property, but you're likely going to do both. And if you have a mortgage on the property, they're likely going to require that you meet the minimum requirements, ensuring that properties.

Emil:

Right. Got it.

Michael:

So let's just take an example. I've got two properties, both in the same city, both currently insured with the same insurance carrier and I move one of those properties into an LLC. Can I use that same policy, so to speak, that'll cover both properties or do I need now a separate insurance policy for the LLC property and then a separate insurance policy for my, the one I own my personal name.

Kellie:

Yeah. So I'm going to punt to your insurance agent, i’ts going to depend on what they want to do. So, and it's interesting because this area of law is something that's rapidly developing and becoming more common. I think that a lot of smaller investors are becoming more sophisticated. And so now they're looking into these LLC avenues and now lenders and insurance agents are catching up. So I've had clients who, that's not a problem. They're able to do that and just list the entity as a second finer or additional party. And then some insurance companies will say no way, you're not touching separate policies now. So it's just gonna depend on your insurance agent.

Micheal:

Okay. Something that I know we've talked about in the past, Kelly is commingling funds and we'll kind of get there in a minute, but I want to talk about maybe commingling insurance. So if the insurance company is okay with it, right, they're happy to write both my LLC property and my property owned in my personal name on the same policy. Can someone look at that and say, Hey, look, he's insuring these two things on the same policy just cause the insurance company is okay with it. Does that mean it's, I'm safe from a legal perspective.

Kellie:

That is one that I have not encountered before. I believe you would be okay. Simply because you are, you're listing them separately as separate entities. I mean, if you want it to be perfectly safe, have no, you know, gray line. I wouldn't have them completely separate because obviously that's the easiest way to never have it come up in court. There's even an insurance policy that's owned, but I don't, we're looking at the commingling is whether we it's, what's called pierce the corporate veil. And I don't think that the insurance policy would do that on its own. You would have to also be doing additional things. So if that's the only thing you're, you're doing that it shares an insurance policy. I don't think it would be a problem. I don't think that would be enough for the court to look at you and say, Hey, he's treating this corporation or this entity as if it's his own personal bank account as if it doesn't really exist. However, if you're also buying all of your groceries out of the bank account and paying your, your home mortgage and buying all of your diapers, that's going to be like completely different analysis. From the court's perspective.

Michael:

I thought I told you, I haven't worn diapers in years.

Kellie:

I didn't know. You know, it's this whole quarantine thing.

Michael:

This is kind of a nice segue into bank accounts.

Emil:

Okay. So if I'm using an entity structure like an LLC, do I need a separate bank account for that?

Kellie:

Yes, it's very quickly. So the biggest thing that you want to do, and then the purpose of the corporation is going to call corporation LLC interchangeably. Unless we're talking about structure, purpose of the entity is to protect you. And we have to create the corporate veil. We have to create the entity and maintain it as if it is a real thing, because it is. So one of the things, the most basic thing to do to do that is to create a bank account, which is very easy to do. They usually want what you filed with the secretary of state. And what's called an EIN number, employer identification number, which is it's very easy to obtain, or your attorney can do it. You can really do it. It's a little dicey. One of those things that might be worth having your tax professional or attorney do and the bank will create it.

That shows that you are intending to treat them separately. You are intending to honor the law and keep things separate. So it's the first line of defense that I just show that you have created the entity. It also makes me, so you set up your entity, you create your bank account and now, you know, what's coming in and the most basic level, you put all your income for the business, they're all your rent checks. And then you pull all of your premiums for insurance or whatever you need out. And then you can pull your hat when the time comes. So, I mean, I told her the first thing that I recommend the clients do and I recommend they do it.

Michael:

I often get the question, you know, how do I pull money out of this LLC account? Cause I'm the LLC owner. I'm ultimately the owner, but I'm setting up this corporation a structure to limit the liability exposure. So once I received the rent, all the expenses get paid out of that account. Can then I just move that money from the account into my personal bank account.

Kellie:

Mhhmm. So by putting it in the business bank account, first, you're creating a record. You're saying, Hey, this money, this check that I cash was right. And here's where I put it in. And here's where I pulled it out. And this is my thing. So if you are non-graded record keeping and your accountant is not going to, it's going to make it easier for them to do their job for you to pay your taxes. And it also from a legal perspective, shows that you are, you know, you're, you've created an entity in your needs, so you have honored it. You've used it. You've put it in there. You've pulled out the money to yourself. You're not using that business account as nerd ATM or debit card.

Michael:

Okay. So if I wanted to take $50 from my business to go buy groceries, instead of going to use my business debit card at the grocery store, I should simply move the $50 out of my business account into my personal account and then pay for it with my personal debit card.

Kellie:

Yeah. Or put it on your personal credit card and then use the business account down the road. So you pay yourself and then you can pay that off. Okay. Now, if we had a CPA on or an accountant, they'd be saying, well, what are you buying? You know, are you buying, you know, the business expense can now, can we have them leave? I mean, that's my dream. CPA is trying to figure out how exactly they can make it work with business expense. But the point is that you are not intermingling your day to day life with your business life. You're keeping them separate.

Michael:

Got it. You touched on it a little bit ago and I just want to circle back to it. So let's say somebody is interested now in setting up an LLC, what do they do? Who do they call? I mean, they can obviously call you, we'll give everyone your contact information at the end of this, but what are the steps involved with setting up an LLC?

Kellie:

Yeah. So this is an ongoing debate. And I love talking about this because in the most common thing I hear is why can't I just go out and buy this package that I found online for $95, that's going to do it all for me. Why would I pay you? And it's as simple as you just need to file the required documents with the state that you want to create your entity. That's what you have to do on the most basic level that creates your entity. And then from there, you need to build off. So depending on whether you have an LLC or corporation, there are certain documents that need to go into place. So when you file either your articles of incorporation or articles of organization, so organization is the LLC corporation is corporation with the secretary of state. From there, you're going to need that EIN number to help you set up the bank account.

You're going to need the documentation to support and show that you created. So just like we create the business account and we don't intermingle funds where we're showing we've created it by having that business account. We're also showing we've created the entity by having the paperwork that supports it and actually creates it in place. It's fairly common that I have clients come in and all they've done is file. Well, I created it and I'm paying my yearly fee and that's all I have. And when I asked them, you know, who's in charge, if you die or what happens if you and your partner disagree or who, you know, who's the treasurer, who's this, then people go, I don't know. I didn't do that. In that time I bought packaged. I didn't thought paperwork, or I just signed it. I bought that, but I didn't read it.

I don't understand it. Yeah. They have the skeleton in place, but not the details. So I mean, ideally what you're setting up when you, when you do it, you're filing and you're setting up the background paperwork and getting all of the documents. You need to have a successful business going forward. If you do it right at the beginning, you build on it and you have, and you're confident in this round foundation. So if you're going to invest the money to do it at all and the best, the annual fees, then why not just do it a little bit more into it. Right. So that you don't ever have [inaudible].

Michael:

Yeah and if we did have an accountant on the show, they would tell us that that's a startup expense. So keep track of it.

Emil:

I think we need a follow up with an accountant and Kellie!

Kellie:

Love that.

Emil:

Imagine the nuggets we're going to get out of that one.

Michael:

Oh, the fireworks will be flying.

Kellie:

I'm sure. Just agreeing with each other. I'm sure.

Michael:

Right, right, right.

Emil:

I actually want to run through my personal scenario. I think there's some stuff we can pull out for listeners. So when you and I started working together, I had almost all of my properties in my personal name. And I got married a couple of years ago, had a daughter and realized everything sitting in my name there's issues with that. Right. There's… if something happens to me, obviously that doesn't happen. But something happens to me. There's something called probate that I wanted to avoid. Can you really quickly just touch on what probate is?

Kellie:

Yeah, so it's the thing people don't like to talk about.

Emil:

I'll explain where I'm going with this after.

Kellie:

Super important, because I mean, so probate in its most simple form is a court monitored administration of an estate, of somebody's assets. Once they die, it is not the state taking a percentage of what you want. That's the most common thing I hear probate is a nightmare for a host of reasons, mostly being that it's lengthy, it's public, so everything you all is public and open to really looking at it. And in some situations, if you have nothing in place, it goes according to law. So it's going to your kid. Right. And who's getting it in the meantime. You know, if your kid is, you know, one or two, like I know I have, you know, who's watching it for her and do I want my 18 year old getting access to everything that I own at 18 years old? No. So probate is a little bit, but a fun nightmare.

Emil:

Yeah. And I had a family member deal with it and which is why the alarm sounded off for me personally. And so that's why I decided to put these properties in a trust again, moving them out of just my name, avoiding any headaches. If anything happened to me, you touched on what an LLC is just real quickly again, what is the advantage of the trust?

Kellie:

Yeah. So the trust is going to say where everything goes when you die and it avoids probate. So they work together a trust and an LLC. They're not a trust is not going to give you liability protection. I wish it could. I could save my clients so much money. I can trust you liability protection, but a basic revokable trust does not. And really for anybody young, that's all I'm recommending because you don't want to buy property you can't sell. The trust is going to allow you to say, if something happens to me, here's where I want it to go. I want it to go to my daughter. When she reaches the age of 25. If she goes to college, I want everything paid for, you know, she needs a car.

She can have a camry she doesn’t need a Ferrari -- because her dad likes cars. And you know, she graduates from college. She can have 10% or it's a little incentive if I'm not there to help her. But if you don't have kids, it can become even more important. You know, where do you want it to go? You want parents to have it. Do you want your siblings to have it? Do you want your girlfriend to have it? Do you want a charity to get half? You can be super creative. And then from, I think a more important level, if you are in an accident and you're in a coma, who's maintaining everything that you have. And so we want to make sure someone's collecting the right on your property. So once paying your insurance premiums so that you're in a coma, and if you have the worst year ever with 2020, you never know you're in a coma and your property catches on fire. We want to make sure that your transplants are paid and everything is contained. So when you wake up, your life is the same.

Emil:

Awesome. Yeah.

Michael:

And are there any financial benefits to not going through probate?

Kellie:

Yeah. So probate, the fees are set by law. So especially here in California, a percentage of your estate goes to your attorney and a percentage of your States into the person that's running it. So it's an executor administrator. They get it generally is about two to 3% of your estate goes to your administrator. And two to 3% goes to their attorney, being an attorney that practices this all the time. I don't handle a probate that I don't pick up. The probate code. There is always something weird. There's never, and it's kind of a running joke about people that do this area of law. I don't think it's boring and it's, it's shocking how not boring and bizarre. And it's so it's hard to go through without an attorney. So I've worked for firms that they get great deals on wills because a will is perfect.

The trust is not people go, wow, you paid $300 for a will. Or I paid 3000 for a trust. That's ridiculous. I'm getting a will. And the reason attorneys are doing that is because down the road, they're going to be making a lot more money off of you, probating your will. Then they're going to now, if you set up your trust and do it right the first time, not a little attorney, we of, we joke in our, in our industry kind of about, you know, people oftentimes will go do it themselves. And I always tell clients, great, go do it yourself. And then let's have a free consultation. I'll read through what you put together and I'll tell you, honestly, you know, I'm not going to charge somebody money if I don't need you. That's not why I'm in this area of law. But a lot of times people will do it themselves. Think they've done it and they don't execute it. Right. They put something in there. They don't intend. So we hear their properties going where they don't want it to, or it's not valid at all. And the attorneys then making more money than they would have the probate, because now we're fixing what you did wrong through whatever software was cheaper around, seemed like it was cheaper, I should say.

Michael:

So. I mean, we just kind of glided over that fact, but I want to circle back to it. If I have a will in place that does not help me avoid probate, I might be able to dictate where things go and to whom and when, but I still got to go through probate. Well, my, whoever is around has to go through probate. If I've got a trust, I can also dictate where things go to whom and when. And I can avoid paying that two to 3% fee

Kellie:

In the probate. It's attorney's fees and administrator executor fees. So probate is if I have nothing in place, then it's probated and it goes disposition or where it's going. My state, it goes according to law and the law assumes your kids are going to get it as soon as their legal is in 32. And if I don't have to, it goes to my parents. And if I don't have my parents, because my is, and news is full. That's how you hear these people that didn't long loss, fifth cousins or whatever.

Emil:

I remember when we were going through the process of doing this with you. And I'm like, after this person, I just don't know who else at this point

Kellie:

We always, so in that case, what we always do and you'll see in any well drafted will, it will always say, and if everybody's gone to their heirs at law, because if I'm going to keep making, like, I call it like the worst car accident. So if you tell me, okay, I want it to go to my wife and my daughter. And then I go, okay, well, great. You know what? If they're dead and you say, okay, well then I want it to go to my brother and sister. And I go, okay, great. What if they're dead too? And it doesn't matter how many people you tell me I'm going to kill them. Everybody loves talking to lawyers and everyone loves talking about death. So people love talking to me.

Because I, I try to joke with clients and make it light. Cause it's a hard topic. A lot of times, you know, if there's a, everybody that you can name, I'm going to stick them on an airplane or some terrible accident. Cause these things happen. Right. And not super uncommon. I like to use the example of, do you ever go to dinner and do you drive in the same car? And if the answer is yes, then you need a second person or you need to be okay with it going, you know, if I'm off. So if you have nothing in place, the law has something is simple. And if you put together a will, so in a little can be as simple as you can write out, depending on your state, you can write out before you get on the airplane and you sign and date where you want things to go, or you can pay $10,000 to the best attorney in the world and have a 50 page will. And it's still going perfect in that case to go back to my example of, well, I want my daughter to get it at 25 or if she graduates from college, 10% early, she can do that in a little. I can do that through probate, but I have to wait through that year and a half long process.

I'm paying about three to 6% depending if the administrator has an attorney of my estate and what am I gaining? You know, I could've put that same energy and that money into a trust fund given more than my daughter down the road. So it makes total sense. The trust is that I think a gift to the family.

Emil:

I agree. Yeah. That's why I decided to do that. And I know Michael, you've done the same. So my next, and probably the last question on this one is, okay, so right now I have all my properties in a trust. Let's say I go out at some point and I start buying properties in an LLC. Do you move the LLC into the trust? How do you get those properties into the trust as well?

Kellie:

Yeah. So your, your LLC is going to own the property. And then your trust is going to own the LLC, or you can assign your LLC interests into the task. So in that case, it would take effect. If something happened to you down the road, we're pulling it in to the trust itself. So we're avoiding probate by doing it that way. So if I could draw it out, I would have the trust at the top. Well, really you're at the top. And then I'd have a line down. Then we bought a bubble with your trust, uh, the, a mill trust. And then we've got a line down to a bubble with the mill LLC. And now it shows ownership who has control of what? So it doesn't go the other way. So the LLC doesn't have control over the trust and the trust doesn't have control over you.

You have control over everything. And so for each complete protection, really for you and your family, you have the LLC to protect you. Somebody sees you, they can't go past that first bubble, unless you are buying your diapers every single day out of your LLC, you're breaching the corporate veil. So it stops at the LLC level. And then if something happens and you pass away, then we've got everything in place to protect your family. So you're covering both sides and I joke with clients, but this is the scary truth is that none of us get out alive and in a trust, in a will or nothing or probate, we're all headed in that direction. There's, you know, in this crazy world, everything that's going on, the one thing we all have in common and people don't like to talk about it, people don't like to acknowledge it, but accidents happen and aging happens. And so it's something that if you put it together right now, you can build on it for a lifetime and never have the expense.

Emil:

Yep.

Michael:

Awesome. I just wanna ask a clarifying question. When a meal says that he owns the trust, owns his property. What's the name on the title? Is it a meals trust or is it Emil as a person?

Kellie:

When, and your trust owns the property? So when I bought my house, I had Ellie Chrisman. I was married. So Kellie Chrisman and married woman as joint tenants with the husband. Now, when we put our trust together, which as any good attorney does, I want you to talk with me before I close and to put together, I then transferred. Once we closed into Kellie Chrisman as trustee of the Chrisman family trust, those are the goals of the words that place it into the trust. So when you want something to be owned by the trust, when there's a title document to it, what we do to accomplish that is that you own it. You, the individual as trustee of your trust.

Michael:

Okay? Yeah. So if I already own five rental properties and I want to see in my own personal name, and I want to now put them into a trust, we're going to have to change the title of those five properties.

Kellie:

Yep. That could be a whole podcast in itself is if I want to try and do this on my own, where am I most likely to mess up? Titling is number one. So you created a trust or you kind of attorney create it for you. That's half the battle. Now we need to fund it. So now we need to make sure your title to your properties and anything that can be retitled is federal correct. So we're transferring it from you as an individual to us trustee and the deed has to be done correctly. It has to be recorded and usually that's included. And so a lot of times you'll see, Oh, this trust is a hundred dollars and this attorney's 1500, this attorney's 5,000. What's the difference. And it's what they're including for you within the trust package. So the funding should, in my opinion, always be included in done for you. I mean, that's the last thing you want to do is spend the time to go through all of this legal stuff and then have a ton of homework to do, including a legally complex thing like titling.

Michael:

Okay. So Kelly. So just so I understand. So if I've got those five properties in an LLC and I want assign, you know, put all those into the trust as well, I don't have to change the title on those five properties. I can simply assign the interest of the LLC to the trust. Is that right?

Kellie:

Yeah. You don't want to change the title. So if you move it out of the LLC, the issue then becomes that. Now you don't have that protection. It's no longer owned by the LLC. So you want the trust to own the LLC. And whether you do that by assigning it, or, I mean, so I always have a good veteran best, right? So good is listed as an asset. It's find your schedule of assets of your trust. Better is you assign the LLC to the trust itself. And that is the workable solution for most of my clients. Best is within the LLC paperwork itself, the setup of the entity, you have the trust. So you as trustee of your family, trust, owning the LLC interest itself, and that will get the LLC and therefore, anything else you own. So those five properties into your trust,

Michael:

Man, we could go on with this stuff for like probably days, but we're getting along. And the two that I want to be very conscientious of your time. I think the last question that I want to ask, and then I'll give them a chance to ask is, you know, where do you see new investors getting into trouble legally?

Kellie:

Yeah. So saving the penny. And I hate to say that that seems like such a lawyer answer to, Oh, hire me, but it's not just that. I mean, obviously that's ultimately how I make my money, but, but the reason I did this area of law is that I feel like the law gets in people's way so often. And it prevents somebody that has a great idea or a great investment portfolio from protecting themselves correctly. And then people either say, I'm just not going to worry about it. I'm just going to jump over this hurdle of law. I don't have time to deal with it or they try and do it themselves and it makes it worse or they skimp on what ends up being the most important thing and putting everything else on the line. So if you're setting up a investment strategy and you're going to buy hopefully hundreds of thousands of dollars in property and be making significant income, why not invest in an attorney's time?

And it doesn't have to be a lot of attorneys will offer a free consultation and the right attorney is going to work with you to make it affordable. And it's the best investment, the best foundation you can do. And I think the thing that saves people the most money over time, you will end up spending more fixing it, but then you will just doing it, right. I mean, UCLA Bruin. And I like to quote John Wooden as we all do. And then he said, if you don't have time to do it right the first time, when are you going to have time to do it over? And that's something that I always try to put into my own personal, my personal life and my practice. But I think a good attorney is going to work with you. They're going to make sure that you're comfortable. They're going to make sure that you're not surprised. And that's the goal is to make sure that you're empowered to do what you can do, what you can do, right. And then hire when you need to.

Michael:

Awesome love that.

Emil:

I don't know if it's a question, more of a clarification. I know we didn't get to one thing I think people should think about as they're considering personal LLC, all those things. If you're going out to get financing, it's a little bit different with an LLC. Most of the 30 year fixed rate, Fannie Freddie government backed mortgages. Those aren't available. If you take the property in an LLC, C I'll usually have to go to a different type of lender, commercial lender, different type of product, but just something else I think is important to consider as you're evaluating all this and navigating it.

Kellie:

I found with clients that I've worked with in the past. So having an attorney that's read through your stuff, or, you know, if I have a client that I'm helping, I can work with the lender, my dad's a small business lender. So I kind of heard that my whole life in my ear. And so I will work with lenders to do whatever we need to do. And sometimes it's, you know, you're going to take the property in the mortgage in your own name, and we're going to let the lender know, Hey, we're transferring it into an LLC. And they're going to give us a letter that that's okay, or they're going to tell us their procedure, or they might want something else from me. So they might just say, Hey Kellie, can you give us, you know, a letter on your letterhead with your signature that says, you know, they have an entity, here's all the information. It's kind of their way to be past liability to me. But also sometimes it's ridiculous as it is just having the, the Esquire, the attorney at law, after my name, I can write the things you need to do and note that it more weight, but it's just that extra team player in your pocket so that you have all the tools that you need [inaudible]

Michael:

Yeah. Great. Awesome. So Kellie, this has been so awesome. Thank you. So, so, so much if people have additional questions, want to form a trust, need help with an LLC, how legal type questions what's the best way.

Kellie:

So email's always great. Or, you know, check out my website Avvo is a nationwide attorney referral website. It's kind of like a Yelp for attorneys, how exciting!  But taylorchrismanlaw.com. Um, and then my email is just my name. I tried to make it easy. Kellie, K E L L I E @ taylorchrismanlaw.com . And I always liked to have a conversation. I always tell clients, don't be afraid that I'm going to charge you. I'll tell you before I charge you. I never want to surprise clients with a bill. That's my worst case scenario.

Emil:

Yeah. I can attest to that

Kellie:

I'll talk to you about the weather. Kellie. How much are we paying you for this? And maybe it's because I'm a little selfish and I like to know my clients, but you know, always happy to have a conversation and then no, somebody doesn't go with me or they go with legal zoom or they do it. I'm always happy to look at what they've got. And I mean, to me, the biggest compliment is down the road. If they refer me to somebody else, you know, that's huge. And so whatever I can do to help, I'm more than happy to be there. And I'll tell you if I charge you and if I don't do it, I'm going to send you to somebody. I'm not just going to say, Oh, sorry, good luck. I'm going to try and find you that person that can help you wherever you are.

Michael:

Great. And can you just spell your last name? So everybody ensures they have the proper spelling

Kellie:

It’s like a Chris and a man stuck together. So it's C H R I S M A N.

Michael:

Kellie. Thank you so much for sharing your contact information. You're a California attorney. We've got listeners all over the country and I think a lot of international as well. Can those folks reach out to you if they don't live in California for help with their legal type stuff?

Kellie:

Yeah. So my restriction is, you know, I know California law the best, and if I'm ever uncomfortable, I'm going to send you or refer you to somebody in your own state. But I regularly handle stuff for clients that either live in California and are investing in property, out of state for clients that live out of state or investing in property in another state. And then I'm helping them through the legal process. So I can draft deeds, you know, all over the country in a trust. You're just going to pick California law. And in this area of law, it's not really that dissimilar from state to state. And so it's something I can help people with and have a conversation. And if it's ever something I can't do it's I refer you out and I'll let you know that I can handle whatever it may be.

Michael:

Fantastic. And before we let you go, what is your favorite kind of pizza?

Kellie:

So pepperoni, jalapeno. And now I want pizza.

Michael:

I've never heard of that combo, but I like it.

Kellie:

Aye. That's what Adam and I used to order

Michael:

Pepperoni and jalapeno. I've got a quick follow up for the group. A question for the group. How do we feel about pineapple on the pizza?

Kellie:

No, that’s a strong no.

Emil:

So a little bit of a long winded answer. I used to work at my first job in high school was Domino's. I worked at Domino's

Michael:

Awesome.

Emil:

Both making pizza and delivering. So I have tried every single type of pizza. You could imagine, like triple Decker, pizza and Kelly. You just reminded me how good pepperoni jalapeno is. I haven't had that since I, I worked at Domino's in high school and it's incredible. I'm gonna have to get that next time. I order some pizza. I do not like pineapple anymore. I think I got pineapples out at Domino's back in. That might happen.

Michael:

I'm a strong pineapple advocate. I just like the sweet and the salty together. Pierre, what's your take pineapple on pizza, yea or nea?

Pierre:

I'm just not into pizza.

Michael:

I don't like pineapple and I don't like pizza.

Emil:

Pierre's too shredded for, for pizza.

Pierre:

No it's one of those things where I never crave it, but I'll enjoy it when it's there, but I will always make a choice over pizza if it's me choosing, but I don't see what the big rage against pineapple is either though. I'm…

Michael:

Kellie's face is make a barf.

Kellie:

It's not supposed to be hot. It's just not.

Pierre:

But barbecued pineapple is pretty darn good. I got to say, got to say, but I agree jalapenos on everything. I eat a jalapeno a day. Every single day. I have a fresh one,

Michael:

Keeps the doctor away.

Pierre:

I don't know. Yeah. I mean probably.

Michael:

Awesome. Kellie, thank you so much for coming on and we will have to have you back at some point down the road because there is just so much good meat here to dig into. Emil any final thoughts before we let Kellie out of here?

Emil:

No, thank you so much, Kellie. I know you've always been very helpful for me with all the legal questions I send you. So thank you on a personal level. And thanks for coming on the podcast.

Kellie:

I can always tell when I’m in the right area. Cause I'm exciting.

Michael:

Awesome. Well, Kellie, I'm sure we'll be chatting soon, but until then have yourself a great one stay safe. Alright.

Kellie:

Thanks guys.

Michael:

Well, everyone, that was our episode. A massive, massive, massive thank you to Kellie. As we mentioned, the sheer number of time we could go on for hours, days, maybe even years about this stuff. I think that's why law school is so long, but we would absolutely love to have Kellie back another episode. Hopefully everybody got a little bit of value out of this and realize just how complicated things can get and how quickly. So I've always touted it. I think Emil would agree. Go get legal advice, go get tax professional advice. Don't try to do this stuff yourself. Just like you're taking your car to the mechanic. They're professionals. Let the professionals handle it. Feel free, if you'd like the episode, to give us a rating and review wherever you listen to your podcasts, go ahead and subscribe. If you want to get automatic downloads on the episodes that come out twice a week. Thanks again for listening. We'll see you on the next one. Happy investing.

Emil:

Happy investing.

In this episode, Michael and Emil speak with real estate lawyer Kellie Chrisman about the pros and cons of LLCs and Legal entities in regards to protecting your investments. 

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Transcript

Michael:

Hey, everybody. Welcome to another episode of remote real estate investor. I'm Mike Albaum and as always, I'm joined by..

Emil:

The good ol’ Emil Shour

Michael:

And today we've got a very special guest in Kellie Chrisman, who is actually a real estate attorney. So today we're going to dive deep into all things LLC and trust related. And Kelly is going to answer a ton of our questions. And for those of you who can't make it through the episode, cause it does get a little bit long, make sure to listen to the end of the episode where she gives her contact information in case you have any real estate specific questions for Kellie. So let's go ahead and jump right in to it.

Michael:

Kellie. Thank you so much for taking the time for joining us today. We really appreciate it.

Kellie:

Yeah, no problem. Thanks for having me guys.

Michael:

Absolutely. So I was hoping you could give our listeners a little bit of background on you, you know, where do you come from? What kind of law do you practice and we'll start with there.

Kellie:

All right. Sounds good. So I'm originally from Northern California, Chico and I have been practicing in California for seven years college at UCLA and couldn't leave LA and we stayed down there with Loyola Law school lived in Santa Monica, practice down there, my first, probably four or five years, and then moved back to Sacramento to be closer to family and go all over California and practice all sorts of exciting law that no one usually likes to talk about unless I get real estate people, or unfortunately somebody's going through a hard situation. So I do trust the States business planning and then estate planning as well. And they all kind of intermingle and go together. And it's interesting.

Michael:

It's very interesting. And in full disclosure, Kellie and I have done quite a bit of work together in the real estate arena and the trust arena. And now I think Emil has now as well, right?

Emil:

Yes. From your referral. So thank you.

Michael:

Another convert to team Kellie.

Kellie:

That's right. But I can’t confirm unless you guys can confirm. Attorney client privileges.

Michael:

Awesome. Well, Kellie, I was hoping we could jump into kind of the meat and potatoes of what we want to talk about today and start with some definitions to give folks, because I think so often in the real estate realm/arena, people throw around terms without really defining what they are. So for those of our listeners that have no idea, I would love to just run through some definitions of maybe sole proprietorship, LLCs, S Corps, C Corp and trusts. Can you break down for everybody? What those are?

Kellie:

For me, I am a visual learner, which doesn't work necessarily here, but I can at least try and break it down. And I always have to give the disclaimer, I'm not getting legal advice, getting general recommendation based on things that I know. And we can always talk more detailed than I can get legal advice. I see those as two different things. So a trust is, is in its own category from the sole proprietorship partnership, LLCs, Corporations S Corp C Corp, cause they're really accomplishing two different things. So on the most basic level, the trust is something that's going to plan for worst case scenario. So something bad happens, who's in charge where everything is going and what you want that. Then we get onto the other side, the entity side, every other kind of thing we've mentioned. And that's the type of business or entity protection liability protection. So sole proprietorship is if you are going to own a rental property and you don't do anything, you are automatically. So if there's nothing you want to do, you can of course draft stuff and make it more.

But on its most basic level can do nothing. That's what, no, if you do nothing with someone else, then you are a partnership. You can automatically be a partnership. If you do nothing, or you can spend a lot of money to draft beautiful documents and be a general partnership. They're taxed at the individual level, LLC is a limited liability company. And a corporation is both of those. Together are something you file with a secretary of state, whatever state you live in and they give you liability protection so they can have one member. It can be just you, it can be you and a sibling or you want a friend or it can be in corporations and Apple has countless shareholders. So it can go from there, LLCs, the incorporations provide that protection. And then within a corporation you can be two different texts, escort, which is a closely held corporation or a C Corp, which is what we're most commonly used to. So like an Apple or a year, it can be somebody small.

Michael:

So if I'm hearing you right, if I just bought the property and do nothing, I take title in my personal name. I'm a sole proprietor. Yep. Okay, cool.

Kellie:

And if you do nothing with a friend, then you're a partnership.

Michael:

Got it. Okay.

Emil:

Yeah. I was going to ask. Okay. So I think for people listening, what are you potentially opening yourself up to? If you're a sole proprietorship owning real estate, what are the risks?

Kellie:

Okay.

Michael:

How deep do we want to go down that dark dark?

Kellie:

Don't ask the lawyer that question. So I don't like to scare people, but I always like to be realistic and everybody has their own comfort level. If you are a sole proprietorship, you are leaving everything on the line. So to put it in real estate terms, you, if it's a commercial property, somebody walks into your tenants property and they slip and fall on the curb. You are technically responsible in certain situations, most situations for keeping that curve maintained and safe. So if you get sued, everything you own is on the line, your home, all your other property, your retirement, your income, and it can follow you. So you can get a judgment that you might not have a lot now, but in a little while. Well, so the risk, if you have nothing, that's huge is everything. However, how common that? It’s not so, but not so uncommon. I mean, it can be something as simple. If you have a rental property, I had clients that their tenant had a party to make people on the balcony and somebody moved on the ledge. And once we went over and got hurt, whether they're reliable or not, they're included in the lawsuit. So there can be a lot of expense just to prove you’re not liable.

Michael:

Versus going the LLC or corporation routes. Now that's a very different scenario that we're looking at.

Kellie:

Yeah. So then we're looking at the only thing on the line is what's owned in that corporation or LLC. So you cap your liability and we'll talk, I'm sure a little bit about how that happened and how to maintain that. But if I don't have something in place, everything you own is on the line. If you do have a corporation or an LLC, then just whatever is held in that corporation of the LLC. And so a lot of times you'll see corporations or LLC get sued and then they go bankrupt because they're not going to put more assets into that and they'll have to be other risks. If you just have to go back to the most question, if you just have a sole proprietorship or partnership, you know, if you don't get along with with your partner, if you die, what happens to it? If something tax wise, there's a lot of stuff you can do within this corporation, that instruction. So it gets very strategic and fun if I can say that.

Michael:

Yeah. So it just sounds like you have, from a very high level inside an entity structure, as opposed to a sole proprietorship, more options and more liability protection than if you're just a sole proprietorship, is that accurate or fair to say?

Kellie:

Yeah, I think that's fair to say. There's a lot more that you can do and there's a level of comfort that comes with it.

Michael:

Sure. Okay. And so I get the question all the time of Michael, do I need an LLC to invest in real estate? And I think in the real estate community, there's this very hotly debated topic of pro LLC. No, LLC. So it sounds like we touched on, you know, what the pros are of having an LLC. Are there any pros to just being a sole proprietorship that you really lose out on if you have an LLC?

Kellie:

Yeah. So, and it's funny cause I I'm preaching all of this and, and I just went through it as an attorney. You know, whether I want to become an LLC, a limited liability corporation or whether I want to stay the sole proprietor. And when I talk with my accountant, who is usually my they're usually the person that I work with clients tax wise, there can be consequences. So if you do create an LLC, obviously the first thing is that there's a cost associated with it, just filing it with the state. The state has asked me, um, to create it. Usually you're, you're going to need to either pay somebody to do it, or you're going to buy a package online to do it. And there's some things that come within each state that you have to do. So in California, for example, you have to then start paying payroll taxes. So rather than in a sole proprietorship where I just pull my stake and then I get taxed at my own level, I now have a couple of additional tax requirements, but at a point it becomes worth. So that's where I always recommend working with a CPA or a tax professional.

Michael:

Okay, great.

Emil

Like let's say I buy a property in Florida. I decided to put an LLC, you can set up the LLC in Florida, but California will still require you pay like the franchise tax fee. Like you're an LLC, here right?

Kellie:

The problem is, the government writes the law, um, and they always find a way to get their fingers on a little bit of something. So if you have a corporation or an entity in another state and you live in California and you're essentially running it out of California, which is, I own a rental property that I rent, but I received my rent and my California bank account, you have to register as a foreign entity and you pay a small fee to do that. But that's one of the costs of doing the upside of that liability protection.

Emil:

Totally

Michael:

Wait. So did I, maybe I misunderstood that. So if I own property in Ohio, but I live in California and I registered my, I created my LLC in Ohio and registered it as a foreign entity in California. Should I be paying the $800 annual California franchise tax fee?

Kellie:

You do what it is for a foreign corporation, whatever they require for that.

Michael:

I got, I got to take a closer look at that. Cause if I've been overpaying, I got to talk to somebody that's ridiculous.

Kellie:

That's why I say, talk to your tax professional.

Michael:

Right, right. Right. All right. Cool. Well, I will definitely have to look into that then, but so for, in California, I mean, there's really no way to get around telling California that we have even a foreign entity in California if we're living here, right?

Kellie:

Yeah. They're going to figure it out because the second you file your income taxes, you're going to have that income from the corporation. And they're going to say, Hey, right. So it's a small price. You take my lawyer hat off. And $800 is not a small price for me, but I put my lawyer hat back on and I say, this is $800 is a small price to pay. But when you're looking at the amount of money that you're investing in, what you're building and hoping to gain from creating an entity in front of investing in multiple properties, it's really a drop, hopefully, in the bucket in the grand scheme of things.

Michael:

Sure. And kind of getting back to that original two camps, right? The pro LLC, the new LLC. I think the biggest argument that the no LLC camp makes is that, Hey, I can get the same type of asset protection of liability protection with high liability insurance limits and then get an umbrella on top of that. What are your thoughts around that?

Kellie:

Yes, super common. It just… This is such a lawyer answer. It just depends. So I worked with a medium sized firm here in Sacramento and that's what the partner is. He would tell clients, you know, why spend $800 a year when I can buy you a hell of an umbrella policy? And I agree with that in some situations, and I don't agree with it and others. So there's no the person that, you know, maybe they bought their first house and they're going to keep it and buy their next house. Never going to be a longterm investor. That makes sense. You know, if it's a single family home that you're renting, that's a good amount of insurance. But if somebody slips and falls in that house, I mean, slip and falls was one of many things that can happen. It's just common place. Example. You're hoping, and you're, you're gambling that you bought enough insurance to cover that lawsuit and your lawyer fees.

Because if you didn't, then now everything was on the line. Now that dream home you bought is on the line for this rental home that you have. A lot of times it works in, comes down to, and I'll probably touch on this throughout. It's how risk averse, how well you're going to sleep at night. Wonder, I always use the example of my husband. And so I I'm a little bit of a gambler. We had one property. I don't know if I put it in an LLC. I probably would seeing, having seen other things that I had done and worked on my husband is extremely risky because he's an engineering he would, before we bought the property, he would have an LLC set up. He would make sure everything was like perfect and Excel and everything. And it would be, everything would be in separate LLC, which I'm sure we'll talk about too. So it depends.

Michael:

Yeah. I love that answer. Cause I think so many people approach it with a one size fits all, but it sounds like you can't look at it through that lens.

Kellie:

No. And every situation is different. Every set of facts, if it's commercial property and they're going to be multiple people on this property every day, if there's going to be any kind of manufacturing, any kind of longterm structure to me, that's a no brainer. I would advise my clients to immediately do it and have an entity in place. But it just depends if there's an accident.

Emil:

Yeah. So one of the questions we wanted to ask you is how do you handle insurance if you're using an LLC, does it differ if you're a sole proprietor versus LLC, do insurance companies look at those differently?

Kellie:

So you talked to your insurance agent and each insurance company is going to handle them differently. A lot of times you will insure the LLC itself or the entity LLC, or corporation, and then insure yourself separately. So you can, I mean, if you're extremely risk averse and we send it, my husband would probably have insurance on the LLC and then we'd have an umbrella personally, over ourselves as owners of the LLC as well. So you're, you're double protected, but each insurance company saying that a little differently.

Emil:

So you don't insure the property, you insure the LLC. So if I acquire more..

Kellie:

So you would insure the property, but the property is going to be owned by the LLC itself. So if you're insuring you can insure business and then you can insure the property, but you're likely going to do both. And if you have a mortgage on the property, they're likely going to require that you meet the minimum requirements, ensuring that properties.

Emil:

Right. Got it.

Michael:

So let's just take an example. I've got two properties, both in the same city, both currently insured with the same insurance carrier and I move one of those properties into an LLC. Can I use that same policy, so to speak, that'll cover both properties or do I need now a separate insurance policy for the LLC property and then a separate insurance policy for my, the one I own my personal name.

Kellie:

Yeah. So I'm going to punt to your insurance agent, i’ts going to depend on what they want to do. So, and it's interesting because this area of law is something that's rapidly developing and becoming more common. I think that a lot of smaller investors are becoming more sophisticated. And so now they're looking into these LLC avenues and now lenders and insurance agents are catching up. So I've had clients who, that's not a problem. They're able to do that and just list the entity as a second finer or additional party. And then some insurance companies will say no way, you're not touching separate policies now. So it's just gonna depend on your insurance agent.

Micheal:

Okay. Something that I know we've talked about in the past, Kelly is commingling funds and we'll kind of get there in a minute, but I want to talk about maybe commingling insurance. So if the insurance company is okay with it, right, they're happy to write both my LLC property and my property owned in my personal name on the same policy. Can someone look at that and say, Hey, look, he's insuring these two things on the same policy just cause the insurance company is okay with it. Does that mean it's, I'm safe from a legal perspective.

Kellie:

That is one that I have not encountered before. I believe you would be okay. Simply because you are, you're listing them separately as separate entities. I mean, if you want it to be perfectly safe, have no, you know, gray line. I wouldn't have them completely separate because obviously that's the easiest way to never have it come up in court. There's even an insurance policy that's owned, but I don't, we're looking at the commingling is whether we it's, what's called pierce the corporate veil. And I don't think that the insurance policy would do that on its own. You would have to also be doing additional things. So if that's the only thing you're, you're doing that it shares an insurance policy. I don't think it would be a problem. I don't think that would be enough for the court to look at you and say, Hey, he's treating this corporation or this entity as if it's his own personal bank account as if it doesn't really exist. However, if you're also buying all of your groceries out of the bank account and paying your, your home mortgage and buying all of your diapers, that's going to be like completely different analysis. From the court's perspective.

Michael:

I thought I told you, I haven't worn diapers in years.

Kellie:

I didn't know. You know, it's this whole quarantine thing.

Michael:

This is kind of a nice segue into bank accounts.

Emil:

Okay. So if I'm using an entity structure like an LLC, do I need a separate bank account for that?

Kellie:

Yes, it's very quickly. So the biggest thing that you want to do, and then the purpose of the corporation is going to call corporation LLC interchangeably. Unless we're talking about structure, purpose of the entity is to protect you. And we have to create the corporate veil. We have to create the entity and maintain it as if it is a real thing, because it is. So one of the things, the most basic thing to do to do that is to create a bank account, which is very easy to do. They usually want what you filed with the secretary of state. And what's called an EIN number, employer identification number, which is it's very easy to obtain, or your attorney can do it. You can really do it. It's a little dicey. One of those things that might be worth having your tax professional or attorney do and the bank will create it.

That shows that you are intending to treat them separately. You are intending to honor the law and keep things separate. So it's the first line of defense that I just show that you have created the entity. It also makes me, so you set up your entity, you create your bank account and now, you know, what's coming in and the most basic level, you put all your income for the business, they're all your rent checks. And then you pull all of your premiums for insurance or whatever you need out. And then you can pull your hat when the time comes. So, I mean, I told her the first thing that I recommend the clients do and I recommend they do it.

Michael:

I often get the question, you know, how do I pull money out of this LLC account? Cause I'm the LLC owner. I'm ultimately the owner, but I'm setting up this corporation a structure to limit the liability exposure. So once I received the rent, all the expenses get paid out of that account. Can then I just move that money from the account into my personal bank account.

Kellie:

Mhhmm. So by putting it in the business bank account, first, you're creating a record. You're saying, Hey, this money, this check that I cash was right. And here's where I put it in. And here's where I pulled it out. And this is my thing. So if you are non-graded record keeping and your accountant is not going to, it's going to make it easier for them to do their job for you to pay your taxes. And it also from a legal perspective, shows that you are, you know, you're, you've created an entity in your needs, so you have honored it. You've used it. You've put it in there. You've pulled out the money to yourself. You're not using that business account as nerd ATM or debit card.

Michael:

Okay. So if I wanted to take $50 from my business to go buy groceries, instead of going to use my business debit card at the grocery store, I should simply move the $50 out of my business account into my personal account and then pay for it with my personal debit card.

Kellie:

Yeah. Or put it on your personal credit card and then use the business account down the road. So you pay yourself and then you can pay that off. Okay. Now, if we had a CPA on or an accountant, they'd be saying, well, what are you buying? You know, are you buying, you know, the business expense can now, can we have them leave? I mean, that's my dream. CPA is trying to figure out how exactly they can make it work with business expense. But the point is that you are not intermingling your day to day life with your business life. You're keeping them separate.

Michael:

Got it. You touched on it a little bit ago and I just want to circle back to it. So let's say somebody is interested now in setting up an LLC, what do they do? Who do they call? I mean, they can obviously call you, we'll give everyone your contact information at the end of this, but what are the steps involved with setting up an LLC?

Kellie:

Yeah. So this is an ongoing debate. And I love talking about this because in the most common thing I hear is why can't I just go out and buy this package that I found online for $95, that's going to do it all for me. Why would I pay you? And it's as simple as you just need to file the required documents with the state that you want to create your entity. That's what you have to do on the most basic level that creates your entity. And then from there, you need to build off. So depending on whether you have an LLC or corporation, there are certain documents that need to go into place. So when you file either your articles of incorporation or articles of organization, so organization is the LLC corporation is corporation with the secretary of state. From there, you're going to need that EIN number to help you set up the bank account.

You're going to need the documentation to support and show that you created. So just like we create the business account and we don't intermingle funds where we're showing we've created it by having that business account. We're also showing we've created the entity by having the paperwork that supports it and actually creates it in place. It's fairly common that I have clients come in and all they've done is file. Well, I created it and I'm paying my yearly fee and that's all I have. And when I asked them, you know, who's in charge, if you die or what happens if you and your partner disagree or who, you know, who's the treasurer, who's this, then people go, I don't know. I didn't do that. In that time I bought packaged. I didn't thought paperwork, or I just signed it. I bought that, but I didn't read it.

I don't understand it. Yeah. They have the skeleton in place, but not the details. So I mean, ideally what you're setting up when you, when you do it, you're filing and you're setting up the background paperwork and getting all of the documents. You need to have a successful business going forward. If you do it right at the beginning, you build on it and you have, and you're confident in this round foundation. So if you're going to invest the money to do it at all and the best, the annual fees, then why not just do it a little bit more into it. Right. So that you don't ever have [inaudible].

Michael:

Yeah and if we did have an accountant on the show, they would tell us that that's a startup expense. So keep track of it.

Emil:

I think we need a follow up with an accountant and Kellie!

Kellie:

Love that.

Emil:

Imagine the nuggets we're going to get out of that one.

Michael:

Oh, the fireworks will be flying.

Kellie:

I'm sure. Just agreeing with each other. I'm sure.

Michael:

Right, right, right.

Emil:

I actually want to run through my personal scenario. I think there's some stuff we can pull out for listeners. So when you and I started working together, I had almost all of my properties in my personal name. And I got married a couple of years ago, had a daughter and realized everything sitting in my name there's issues with that. Right. There's… if something happens to me, obviously that doesn't happen. But something happens to me. There's something called probate that I wanted to avoid. Can you really quickly just touch on what probate is?

Kellie:

Yeah, so it's the thing people don't like to talk about.

Emil:

I'll explain where I'm going with this after.

Kellie:

Super important, because I mean, so probate in its most simple form is a court monitored administration of an estate, of somebody's assets. Once they die, it is not the state taking a percentage of what you want. That's the most common thing I hear probate is a nightmare for a host of reasons, mostly being that it's lengthy, it's public, so everything you all is public and open to really looking at it. And in some situations, if you have nothing in place, it goes according to law. So it's going to your kid. Right. And who's getting it in the meantime. You know, if your kid is, you know, one or two, like I know I have, you know, who's watching it for her and do I want my 18 year old getting access to everything that I own at 18 years old? No. So probate is a little bit, but a fun nightmare.

Emil:

Yeah. And I had a family member deal with it and which is why the alarm sounded off for me personally. And so that's why I decided to put these properties in a trust again, moving them out of just my name, avoiding any headaches. If anything happened to me, you touched on what an LLC is just real quickly again, what is the advantage of the trust?

Kellie:

Yeah. So the trust is going to say where everything goes when you die and it avoids probate. So they work together a trust and an LLC. They're not a trust is not going to give you liability protection. I wish it could. I could save my clients so much money. I can trust you liability protection, but a basic revokable trust does not. And really for anybody young, that's all I'm recommending because you don't want to buy property you can't sell. The trust is going to allow you to say, if something happens to me, here's where I want it to go. I want it to go to my daughter. When she reaches the age of 25. If she goes to college, I want everything paid for, you know, she needs a car.

She can have a camry she doesn’t need a Ferrari -- because her dad likes cars. And you know, she graduates from college. She can have 10% or it's a little incentive if I'm not there to help her. But if you don't have kids, it can become even more important. You know, where do you want it to go? You want parents to have it. Do you want your siblings to have it? Do you want your girlfriend to have it? Do you want a charity to get half? You can be super creative. And then from, I think a more important level, if you are in an accident and you're in a coma, who's maintaining everything that you have. And so we want to make sure someone's collecting the right on your property. So once paying your insurance premiums so that you're in a coma, and if you have the worst year ever with 2020, you never know you're in a coma and your property catches on fire. We want to make sure that your transplants are paid and everything is contained. So when you wake up, your life is the same.

Emil:

Awesome. Yeah.

Michael:

And are there any financial benefits to not going through probate?

Kellie:

Yeah. So probate, the fees are set by law. So especially here in California, a percentage of your estate goes to your attorney and a percentage of your States into the person that's running it. So it's an executor administrator. They get it generally is about two to 3% of your estate goes to your administrator. And two to 3% goes to their attorney, being an attorney that practices this all the time. I don't handle a probate that I don't pick up. The probate code. There is always something weird. There's never, and it's kind of a running joke about people that do this area of law. I don't think it's boring and it's, it's shocking how not boring and bizarre. And it's so it's hard to go through without an attorney. So I've worked for firms that they get great deals on wills because a will is perfect.

The trust is not people go, wow, you paid $300 for a will. Or I paid 3000 for a trust. That's ridiculous. I'm getting a will. And the reason attorneys are doing that is because down the road, they're going to be making a lot more money off of you, probating your will. Then they're going to now, if you set up your trust and do it right the first time, not a little attorney, we of, we joke in our, in our industry kind of about, you know, people oftentimes will go do it themselves. And I always tell clients, great, go do it yourself. And then let's have a free consultation. I'll read through what you put together and I'll tell you, honestly, you know, I'm not going to charge somebody money if I don't need you. That's not why I'm in this area of law. But a lot of times people will do it themselves. Think they've done it and they don't execute it. Right. They put something in there. They don't intend. So we hear their properties going where they don't want it to, or it's not valid at all. And the attorneys then making more money than they would have the probate, because now we're fixing what you did wrong through whatever software was cheaper around, seemed like it was cheaper, I should say.

Michael:

So. I mean, we just kind of glided over that fact, but I want to circle back to it. If I have a will in place that does not help me avoid probate, I might be able to dictate where things go and to whom and when, but I still got to go through probate. Well, my, whoever is around has to go through probate. If I've got a trust, I can also dictate where things go to whom and when. And I can avoid paying that two to 3% fee

Kellie:

In the probate. It's attorney's fees and administrator executor fees. So probate is if I have nothing in place, then it's probated and it goes disposition or where it's going. My state, it goes according to law and the law assumes your kids are going to get it as soon as their legal is in 32. And if I don't have to, it goes to my parents. And if I don't have my parents, because my is, and news is full. That's how you hear these people that didn't long loss, fifth cousins or whatever.

Emil:

I remember when we were going through the process of doing this with you. And I'm like, after this person, I just don't know who else at this point

Kellie:

We always, so in that case, what we always do and you'll see in any well drafted will, it will always say, and if everybody's gone to their heirs at law, because if I'm going to keep making, like, I call it like the worst car accident. So if you tell me, okay, I want it to go to my wife and my daughter. And then I go, okay, well, great. You know what? If they're dead and you say, okay, well then I want it to go to my brother and sister. And I go, okay, great. What if they're dead too? And it doesn't matter how many people you tell me I'm going to kill them. Everybody loves talking to lawyers and everyone loves talking about death. So people love talking to me.

Because I, I try to joke with clients and make it light. Cause it's a hard topic. A lot of times, you know, if there's a, everybody that you can name, I'm going to stick them on an airplane or some terrible accident. Cause these things happen. Right. And not super uncommon. I like to use the example of, do you ever go to dinner and do you drive in the same car? And if the answer is yes, then you need a second person or you need to be okay with it going, you know, if I'm off. So if you have nothing in place, the law has something is simple. And if you put together a will, so in a little can be as simple as you can write out, depending on your state, you can write out before you get on the airplane and you sign and date where you want things to go, or you can pay $10,000 to the best attorney in the world and have a 50 page will. And it's still going perfect in that case to go back to my example of, well, I want my daughter to get it at 25 or if she graduates from college, 10% early, she can do that in a little. I can do that through probate, but I have to wait through that year and a half long process.

I'm paying about three to 6% depending if the administrator has an attorney of my estate and what am I gaining? You know, I could've put that same energy and that money into a trust fund given more than my daughter down the road. So it makes total sense. The trust is that I think a gift to the family.

Emil:

I agree. Yeah. That's why I decided to do that. And I know Michael, you've done the same. So my next, and probably the last question on this one is, okay, so right now I have all my properties in a trust. Let's say I go out at some point and I start buying properties in an LLC. Do you move the LLC into the trust? How do you get those properties into the trust as well?

Kellie:

Yeah. So your, your LLC is going to own the property. And then your trust is going to own the LLC, or you can assign your LLC interests into the task. So in that case, it would take effect. If something happened to you down the road, we're pulling it in to the trust itself. So we're avoiding probate by doing it that way. So if I could draw it out, I would have the trust at the top. Well, really you're at the top. And then I'd have a line down. Then we bought a bubble with your trust, uh, the, a mill trust. And then we've got a line down to a bubble with the mill LLC. And now it shows ownership who has control of what? So it doesn't go the other way. So the LLC doesn't have control over the trust and the trust doesn't have control over you.

You have control over everything. And so for each complete protection, really for you and your family, you have the LLC to protect you. Somebody sees you, they can't go past that first bubble, unless you are buying your diapers every single day out of your LLC, you're breaching the corporate veil. So it stops at the LLC level. And then if something happens and you pass away, then we've got everything in place to protect your family. So you're covering both sides and I joke with clients, but this is the scary truth is that none of us get out alive and in a trust, in a will or nothing or probate, we're all headed in that direction. There's, you know, in this crazy world, everything that's going on, the one thing we all have in common and people don't like to talk about it, people don't like to acknowledge it, but accidents happen and aging happens. And so it's something that if you put it together right now, you can build on it for a lifetime and never have the expense.

Emil:

Yep.

Michael:

Awesome. I just wanna ask a clarifying question. When a meal says that he owns the trust, owns his property. What's the name on the title? Is it a meals trust or is it Emil as a person?

Kellie:

When, and your trust owns the property? So when I bought my house, I had Ellie Chrisman. I was married. So Kellie Chrisman and married woman as joint tenants with the husband. Now, when we put our trust together, which as any good attorney does, I want you to talk with me before I close and to put together, I then transferred. Once we closed into Kellie Chrisman as trustee of the Chrisman family trust, those are the goals of the words that place it into the trust. So when you want something to be owned by the trust, when there's a title document to it, what we do to accomplish that is that you own it. You, the individual as trustee of your trust.

Michael:

Okay? Yeah. So if I already own five rental properties and I want to see in my own personal name, and I want to now put them into a trust, we're going to have to change the title of those five properties.

Kellie:

Yep. That could be a whole podcast in itself is if I want to try and do this on my own, where am I most likely to mess up? Titling is number one. So you created a trust or you kind of attorney create it for you. That's half the battle. Now we need to fund it. So now we need to make sure your title to your properties and anything that can be retitled is federal correct. So we're transferring it from you as an individual to us trustee and the deed has to be done correctly. It has to be recorded and usually that's included. And so a lot of times you'll see, Oh, this trust is a hundred dollars and this attorney's 1500, this attorney's 5,000. What's the difference. And it's what they're including for you within the trust package. So the funding should, in my opinion, always be included in done for you. I mean, that's the last thing you want to do is spend the time to go through all of this legal stuff and then have a ton of homework to do, including a legally complex thing like titling.

Michael:

Okay. So Kelly. So just so I understand. So if I've got those five properties in an LLC and I want assign, you know, put all those into the trust as well, I don't have to change the title on those five properties. I can simply assign the interest of the LLC to the trust. Is that right?

Kellie:

Yeah. You don't want to change the title. So if you move it out of the LLC, the issue then becomes that. Now you don't have that protection. It's no longer owned by the LLC. So you want the trust to own the LLC. And whether you do that by assigning it, or, I mean, so I always have a good veteran best, right? So good is listed as an asset. It's find your schedule of assets of your trust. Better is you assign the LLC to the trust itself. And that is the workable solution for most of my clients. Best is within the LLC paperwork itself, the setup of the entity, you have the trust. So you as trustee of your family, trust, owning the LLC interest itself, and that will get the LLC and therefore, anything else you own. So those five properties into your trust,

Michael:

Man, we could go on with this stuff for like probably days, but we're getting along. And the two that I want to be very conscientious of your time. I think the last question that I want to ask, and then I'll give them a chance to ask is, you know, where do you see new investors getting into trouble legally?

Kellie:

Yeah. So saving the penny. And I hate to say that that seems like such a lawyer answer to, Oh, hire me, but it's not just that. I mean, obviously that's ultimately how I make my money, but, but the reason I did this area of law is that I feel like the law gets in people's way so often. And it prevents somebody that has a great idea or a great investment portfolio from protecting themselves correctly. And then people either say, I'm just not going to worry about it. I'm just going to jump over this hurdle of law. I don't have time to deal with it or they try and do it themselves and it makes it worse or they skimp on what ends up being the most important thing and putting everything else on the line. So if you're setting up a investment strategy and you're going to buy hopefully hundreds of thousands of dollars in property and be making significant income, why not invest in an attorney's time?

And it doesn't have to be a lot of attorneys will offer a free consultation and the right attorney is going to work with you to make it affordable. And it's the best investment, the best foundation you can do. And I think the thing that saves people the most money over time, you will end up spending more fixing it, but then you will just doing it, right. I mean, UCLA Bruin. And I like to quote John Wooden as we all do. And then he said, if you don't have time to do it right the first time, when are you going to have time to do it over? And that's something that I always try to put into my own personal, my personal life and my practice. But I think a good attorney is going to work with you. They're going to make sure that you're comfortable. They're going to make sure that you're not surprised. And that's the goal is to make sure that you're empowered to do what you can do, what you can do, right. And then hire when you need to.

Michael:

Awesome love that.

Emil:

I don't know if it's a question, more of a clarification. I know we didn't get to one thing I think people should think about as they're considering personal LLC, all those things. If you're going out to get financing, it's a little bit different with an LLC. Most of the 30 year fixed rate, Fannie Freddie government backed mortgages. Those aren't available. If you take the property in an LLC, C I'll usually have to go to a different type of lender, commercial lender, different type of product, but just something else I think is important to consider as you're evaluating all this and navigating it.

Kellie:

I found with clients that I've worked with in the past. So having an attorney that's read through your stuff, or, you know, if I have a client that I'm helping, I can work with the lender, my dad's a small business lender. So I kind of heard that my whole life in my ear. And so I will work with lenders to do whatever we need to do. And sometimes it's, you know, you're going to take the property in the mortgage in your own name, and we're going to let the lender know, Hey, we're transferring it into an LLC. And they're going to give us a letter that that's okay, or they're going to tell us their procedure, or they might want something else from me. So they might just say, Hey Kellie, can you give us, you know, a letter on your letterhead with your signature that says, you know, they have an entity, here's all the information. It's kind of their way to be past liability to me. But also sometimes it's ridiculous as it is just having the, the Esquire, the attorney at law, after my name, I can write the things you need to do and note that it more weight, but it's just that extra team player in your pocket so that you have all the tools that you need [inaudible]

Michael:

Yeah. Great. Awesome. So Kellie, this has been so awesome. Thank you. So, so, so much if people have additional questions, want to form a trust, need help with an LLC, how legal type questions what's the best way.

Kellie:

So email's always great. Or, you know, check out my website Avvo is a nationwide attorney referral website. It's kind of like a Yelp for attorneys, how exciting!  But taylorchrismanlaw.com. Um, and then my email is just my name. I tried to make it easy. Kellie, K E L L I E @ taylorchrismanlaw.com . And I always liked to have a conversation. I always tell clients, don't be afraid that I'm going to charge you. I'll tell you before I charge you. I never want to surprise clients with a bill. That's my worst case scenario.

Emil:

Yeah. I can attest to that

Kellie:

I'll talk to you about the weather. Kellie. How much are we paying you for this? And maybe it's because I'm a little selfish and I like to know my clients, but you know, always happy to have a conversation and then no, somebody doesn't go with me or they go with legal zoom or they do it. I'm always happy to look at what they've got. And I mean, to me, the biggest compliment is down the road. If they refer me to somebody else, you know, that's huge. And so whatever I can do to help, I'm more than happy to be there. And I'll tell you if I charge you and if I don't do it, I'm going to send you to somebody. I'm not just going to say, Oh, sorry, good luck. I'm going to try and find you that person that can help you wherever you are.

Michael:

Great. And can you just spell your last name? So everybody ensures they have the proper spelling

Kellie:

It’s like a Chris and a man stuck together. So it's C H R I S M A N.

Michael:

Kellie. Thank you so much for sharing your contact information. You're a California attorney. We've got listeners all over the country and I think a lot of international as well. Can those folks reach out to you if they don't live in California for help with their legal type stuff?

Kellie:

Yeah. So my restriction is, you know, I know California law the best, and if I'm ever uncomfortable, I'm going to send you or refer you to somebody in your own state. But I regularly handle stuff for clients that either live in California and are investing in property, out of state for clients that live out of state or investing in property in another state. And then I'm helping them through the legal process. So I can draft deeds, you know, all over the country in a trust. You're just going to pick California law. And in this area of law, it's not really that dissimilar from state to state. And so it's something I can help people with and have a conversation. And if it's ever something I can't do it's I refer you out and I'll let you know that I can handle whatever it may be.

Michael:

Fantastic. And before we let you go, what is your favorite kind of pizza?

Kellie:

So pepperoni, jalapeno. And now I want pizza.

Michael:

I've never heard of that combo, but I like it.

Kellie:

Aye. That's what Adam and I used to order

Michael:

Pepperoni and jalapeno. I've got a quick follow up for the group. A question for the group. How do we feel about pineapple on the pizza?

Kellie:

No, that’s a strong no.

Emil:

So a little bit of a long winded answer. I used to work at my first job in high school was Domino's. I worked at Domino's

Michael:

Awesome.

Emil:

Both making pizza and delivering. So I have tried every single type of pizza. You could imagine, like triple Decker, pizza and Kelly. You just reminded me how good pepperoni jalapeno is. I haven't had that since I, I worked at Domino's in high school and it's incredible. I'm gonna have to get that next time. I order some pizza. I do not like pineapple anymore. I think I got pineapples out at Domino's back in. That might happen.

Michael:

I'm a strong pineapple advocate. I just like the sweet and the salty together. Pierre, what's your take pineapple on pizza, yea or nea?

Pierre:

I'm just not into pizza.

Michael:

I don't like pineapple and I don't like pizza.

Emil:

Pierre's too shredded for, for pizza.

Pierre:

No it's one of those things where I never crave it, but I'll enjoy it when it's there, but I will always make a choice over pizza if it's me choosing, but I don't see what the big rage against pineapple is either though. I'm…

Michael:

Kellie's face is make a barf.

Kellie:

It's not supposed to be hot. It's just not.

Pierre:

But barbecued pineapple is pretty darn good. I got to say, got to say, but I agree jalapenos on everything. I eat a jalapeno a day. Every single day. I have a fresh one,

Michael:

Keeps the doctor away.

Pierre:

I don't know. Yeah. I mean probably.

Michael:

Awesome. Kellie, thank you so much for coming on and we will have to have you back at some point down the road because there is just so much good meat here to dig into. Emil any final thoughts before we let Kellie out of here?

Emil:

No, thank you so much, Kellie. I know you've always been very helpful for me with all the legal questions I send you. So thank you on a personal level. And thanks for coming on the podcast.

Kellie:

I can always tell when I’m in the right area. Cause I'm exciting.

Michael:

Awesome. Well, Kellie, I'm sure we'll be chatting soon, but until then have yourself a great one stay safe. Alright.

Kellie:

Thanks guys.

Michael:

Well, everyone, that was our episode. A massive, massive, massive thank you to Kellie. As we mentioned, the sheer number of time we could go on for hours, days, maybe even years about this stuff. I think that's why law school is so long, but we would absolutely love to have Kellie back another episode. Hopefully everybody got a little bit of value out of this and realize just how complicated things can get and how quickly. So I've always touted it. I think Emil would agree. Go get legal advice, go get tax professional advice. Don't try to do this stuff yourself. Just like you're taking your car to the mechanic. They're professionals. Let the professionals handle it. Feel free, if you'd like the episode, to give us a rating and review wherever you listen to your podcasts, go ahead and subscribe. If you want to get automatic downloads on the episodes that come out twice a week. Thanks again for listening. We'll see you on the next one. Happy investing.

Emil:

Happy investing.

In this episode Tom and Emil go head to head to debate which investing strategy is superior, local or remote investing. 

---

Transcript

Michael:

Hey, everybody. Welcome to another episode of their moat real estate investor. I'm Michael album. And today I'm joined by my usual hosts,

Tom:

Tom Schneider

Emil:

And Emil, The Real Deal, Shour.

Michael:

Ooh, I love that self-proclaimed nickname. Love it. And today we're going to be doing another show down. We've got a lot of feedback from our listeners that showed on episodes were well received. So today we are going to be debating the pros and cons of remote investing versus local investing dunked on done. Well, guys, let's jump into it.

Emil:

That was actually a nickname that someone I went to college with gave me.

Michael:

Okay. So it wasn't self-proclaimed.

Tom:

Emil, The Real Deal.

Emil:

We were in the same frat and we had like boxing night and…

Michael:

that's so good.

Emil:

He introduced me as Emil, The Real Deal!

Michael:

I would never go on a boxing match with anybody that had that intense of a nickname.

Emil:

Those people went down. Went down hard.

Michael:

Okay. So for any of our new listeners out there, my name is Michael Albaum and I'm the head coach with the Roofstock Academy, Roofstock’s education arm, and Emil, do you want to tell us a little bit about yourself and who you are?

Emil:

Yes. My name is Emil Shour. I work on the marketing team here at Roofstock, which if anyone's not familiar, it's a marketplace where investors come to buy and sell single family rental homes. And so I work on the marketing team. I actually invested through Roofstock’s marketplace before I was employed here. And now I have the joy of getting to spread the word.

Michael:

So you're drinking the Koolaid.

Emil:

That's right.

Tom:

An evangelist!

Michael:

That’s right. And Tom, who are you my friend?

Tom:

That is a deep question.

Michael:

Start at birth!

Tom:

Start at birth. So I am an investor. I'm a California broker. I work here at Roofstock on the investor education team. I initially worked at one of the very first publicly traded REITs, doing single family rental, kind of in the wild West of 2009. And then our CEO went and was a co founder and starting Roofstock. So I jumped over and joined him at Roofstock on the product side and the operations. And now, as I mentioned on the investor education side.

Michael:

Awesome. Love it.

Tom:

Before we get into the meat of the episode, a quick announcement as usual, this episode was brought to you by Roofstock Academy. Roofstock Academy is Roofstock’s education program to get you to the next level. We include over $2,500 worth of marketplace credits on demand lectures, one-on-one coaching group coaching, all kinds of benefits. And we have this new benefit that we put together that Michael is leading it's our book club.

Michael:

Within the Roofstock Academy, we actually do a monthly book club. We get together and read the same book over the course of the month that has some takeaway, some motif, some applicable things to real estate investing. And we get together at the end of the month and we have a chat about it. And cause now it's COVID, we're doing that all virtually, but hope to be able to do that in person at some point down the road. And this upcoming months book club book is Michael Uber's, one rental at a time. And as an added bonus for this month book club, we're actually going to have Michael Zuber on that call with us as kind of a fireside chat. And as we're going to be discussing his books, we get to hear it from the source himself about some of the reasons he wrote the book and some of the takeaways from the book as well. So now is the opportune time to join the Roofstock Academy roofstockacademy.com. So you can join us for that monthly book club and take advantage of all of the other advantages the Roofstock Academy has to offer as well.

Emil:

For people who aren't familiar with Michael Zuber, he's been on the podcast twice. Good friend of the podcast episode 11 was the first one we had with him, the power of four rental properties and how it can change your life. And most recently, I think we, we dropped an episode with him this past week called how Michael Zuber Quit His Job On a Whim After Achieving Financial Independence. So if you're not familiar with who he is, go back and listen to those episodes. He's a super, super smart guy he's been investing for. I think 20 plus years. Now he knows a lot and has a really, really awesome message for other investors.

Michael:

So today for our shutter and episode, we're going to be taking two sides of this argument and splitting it up a meal. Why don't we give you remote? We'll give you a remote and Tom, you're going to have to defend local investing.

Tom:

Yeah. A classic episode, a classic discussion for the remote real estate. We're going to, you know, try not to be too biased…

Michael:

But it is called The Remote Real Estate Investor,

Tom:

But it'll be fun. It'll be fun. I don't know. Yeah. It's fun going to the other side of the table. So..

Michael:

I think it's important to address and acknowledge both sides of any topic of any discussion because it's two sides to every coin and there is no one size fits all approach, even though remote real estate investing is far superior, but we're going to get to that in the episode. So a meal, would you like to go first or second

Emil:

I'm game for either Michael?

Michael:

Okay.

Emil:

You're the moderator.

Tom:

Go first Emil. That way I'm giving you a heads up. I'm handicapping you alright,

Michael:

Emil, the floor is yours.

Emil:

All right. So I have three points I want to hit here. That Tom is going to have a very hard time rebutting. So the first one is that with remote investing, you buy where it makes sense. So if you're a local investor, you're looking around at your local market, you're geographically constrained to just the deals around you. So if you live in Los Angeles or the Bay area, like we do, prices have gone out of control. Prices have gone up a lot and rent has not been able to keep up with that. So in certain markets, it's very hard to find cash flowing properties, unless you have a lot of money, put a lot of money down. It's very, very hard to make those work. There's still good markets. It's just harder to make the cash flow work. So when you're a remote investor, you buy where it makes sense.

You look at different markets, you look at where deals are, where the fundamentals are good and you invest there. You're not geographically constrained to only where you live. You go to where the deal is. Makes sense. The second point I want to touch on is you get to build a team instead of doing everything yourself. I know personally, if I was investing locally, I would want to do a lot of things myself, instead of relying on other people, finding the right team. And I think that's an advantage in building a team because these people are professionals. I'm not, I'm not a professional property manager or inspector any of these things, but being the person I am and liking control, I feel like I would try to get my hand into too many of those things. Whereas when you're remote again, you have to rely on the fuel.

You have to build a team. And so I think that's one of the advantages of going remote is you're required to build that team

of professionals. The last one I want to touch on before I get on the floor is I think with remote investing, it's a lot less emotional and more about the numbers. I think when you go and view properties all the time in person, it's hard to ignore some of the blemishes that you bring to the property, right? You have some bias. You're like, Oh, would I live here? And with rental properties, especially for cashflow, that's not what matters. It's do the numbers make sense in a market that I like. And is this an area that I'm comfortable with? The risk it's not about is this somewhere I could see myself living. And I think if you're doing the local investing, you bring a lot of that emotion in looking at a lot of the properties you look at.

Michael:

Wow. Tom, come back from those man.

Tom:

I like it. I'm so confident. I'm going to slow roll a little bit. I'm actually just going to compliment a couple of your points before I stepped back and do the fade away three while kicking my leg out for you to run into it for me to get an extra free throw. So yeah.

Emil:

Okay. James harden.

Tom:

Okay. So to honor my comment there, I love the point about how it allows you to not kind of get in your own head and just be super data-driven about it, but okay. Onto the good stuff, I'm a good stuff. So investing local is definitely the way that you want to do it. So I think the first point that I'm going to make, which could be the most relevant is you're never going to know a market better than your own market. And me personally, I've been studying the market since I was about eight years old. I'd go to Safeway, I'd get the homes and land magazine. And I would just study comps. And I had this long trend of analysis. I know the different markets, different property types, how they're trending. Heck I even know the agents, right? The Kerses family out here, great agents. So you're going to know a market a lot better just from, you know, kind of hounding your local Zillow or Redfin or whatever. Basically the adult version of the homes and land magazine from the Safeway. All right. The next point is, man, what value is it to be able to touch and feel the house, you know, to go up to the house and touch the walls and kind of like smell it. You can't do that remotely. And one of the reasons people like investing in real estate is because it's a tangible asset. It's, it's something, you know, you're not buying some future of gasoline because the price of crude is low.

You know, it's an actual asset that some people actually use using by doing it remotely. You're kind of getting away from that. You're getting away from that touchy, feely wonderfulness of buying a house that you can actually see and walk into. And you know, you get out of the ethereal, if I steal a word from Michael here, it's a nice to the realleal, so, you know, you're being there. So that's number two is the tangibility of it, of actually being there, getting to go see it. It's pretty awesome. And lastly is you're not going to get taken advantage of, you know, doing things over the phone. You're going to have these quick talking sharks, selling you snake oil and all kinds of trouble. So I like to shake somebody's hand or I guess nowadays is you do an elbow bump of, you know, getting, if I'm going to do business with somebody, I'm going to want to get to know them.

I'm going to want to look them in the eye and touch elbows or whatever we do now with COVID and you can't do that in zoom. It's just super awkward. So there you go. That's why you want to invest locally.

Michael:

So, Tom, what would you have to say to some of the meals points that he brought up?

Tom:

All right. Let's do it so well, I, I quite agree with a lot of appeals points. I totally agree. I mean, I don't want to waste my, you know, momentum for when we switched sides of the argument, but there is a lot of limitations on only looking into your own area, but you know, just when we say local, that doesn't mean you have to do everything, you know, within five miles of your house, roll it out a little bit further, you know, go 30 miles go a couple hours. So we were talking before the episode where we were talking about our experience with local investing and I have done some stuff working for fun, not with my own money, doing local investing, but Michael has invested locally. I would consider, you know, within that three hour range that kind of counts as local. So to address that point about, you know, not being specific things in your area, you know, rollout the distance, the radius, spread it out a little bit further. You can still do things locally. You know, if you're uncomfortable going 2000 miles away go 200 miles away like within striking distance. So that would be my point number one.

The point number two, about being comfortable about using other folks is, you know, it's a muscle and if you're uncomfortable, you know, going a hundred percent building a team, that's okay. Just kind of pick points and spots and build that muscle of getting trust in getting good at letting go of things. And honestly, that's a big problem. I know for a lot of people, especially investors who are pretty generally pretty type a kind of go getters is to consciously make an effort of letting go of certain aspects of the business. So you can focus on where you have higher ROI.

Michael:

I've got a question for you, both that you both kind of touched on Amelia, you mentioned that if you're going to invest remotely, that you can't go see the property and that that's difficult to do. And Tom, you mentioned, you know, being local, you're able to go touch and feel and see the property, but couldn't someone who's investing remotely still go touch and feel, see, and smell and taste. I think you included in there, the property,

Tom:

If you're good, you will.

Emil:

That's right. Always want to lick the walls before you sign those docs.

Michael:

Check the lead based paint disclosure before licking the walls.

Emil:

Correct. Actually, I think the right thing to do is to lick it, to make sure that there isn’t lead.

Michael:

That’s right.

Tom:

It's your tongue turns blue then…

Emil:

Trust the verify.

Tom:

No, you're totally right, Michael. I mean I've for some of the house that I've bought, I've seen them, but for most of them might have nod and what the ticket is, is having an inspector because honestly, if I go to the house and my ability to assess, you know, issues is not going to be better than an inspector who like does this professionally. So, you know, having the idea that, Oh, me going out there, I'm going to be able to do a better job than some inspector is a little bit of a stretch. So, you know, having confidence in the credentials and you know, where these inspectors are coming from, and then also looking at their homework. So like when an inspector goes and does an inspection on a house, they're filling out a super thorough report on what was identified. And that is including pictures and descriptions and as well as adding any followup items that are on there. So I'm not really sure where I'm arguing on this. I got, I got going, but you know, to the point, like I think it's, yo u know, going to see the property before buying it, you could totally do that. Even if it is remote, you know, there's no reason why you couldn't do it. And it makes you get comfortable to be able to get in the game. You know, that's an expense that you can use as a writeup. I'm not a tax professional, but for that in there,

Emil:

Thank you, Tom, for further arguing my remote point but no, I think you're right. I think you can, like, let's say you put an offer on a property you're in escrow. You can go visit that property, put some eyes on it, make sure everything looks good. Yes. You know, I rely on pictures and video and things like that to like before the offer process. But I actually want to make that part of how I operate going forward. Obviously with COVID, it makes it a lot tougher, but the markets I invest in, I want to be visiting those more regularly. I haven't at all, but I want to be. And I think it makes a lot of sense if that makes you more comfortable go visit the property before you finish escrow.

Tom:

Yeah. I think I personally kind of like Seesawed a little bit on like, you know, needing to be in the market where kind of when I was in it, I think it was really important to go and check it out, to go in the other way of seeing like, nah, you don't need to see it at all. I think it's been to find a happy balance. Like if you buy a property and it hits those check boxes that you're looking for with regards to population and schools and other kind of local dynamic economy, like great. I think it's some people need to be comfortable by taking a look at the market. Great. Go be comfortable and do that. Just know that, you know, there isn't necessarily a one size fits all answer.

Emil:

Yep. And one last thing you mentioned being local, you know, your market way better than being a remote investor. I think that's true. I think that that'll always be the case you live there, you just, you know, what's happening. One thing I really trying to do though in the markets that I invest in is like get more ingrained in local news outside of just real estate. So I'll set up Google alerts and get the top things happening in that city to just like better understand what's going on. And I think this is where talking to your property manager regularly, again, visiting those markets regularly doing drive-through of different neighborhoods. It's just going to get you better and better at these different markets.

Michael:

That's a really great point Emil. I'm going to piggyback off what Tom said. I always talk in the Academy with members about if going to the market is what's stopping you from investing then by all means go, but you'll have to kind of face the reality of everybody has personal biases and you're not going to be able to unsee undue, unexperienced, the things that you see and do and feel, and experience in that market for better or for worse. And so the ideal scenario is you pick a market that has good numbers, has good metrics and you go see the property and you love the property and you love the market, but that's not always the case. Just like you said Emil is that it doesn't necessarily matter how it makes you feel because you might not be living there. If the numbers make sense and the facts are there to support the market, it could still be a great investment independent of the fact of whether or not you enjoy it. And so if you go somewhere and think, wow, I would never live here. I don't want to invest here. Now we're mixing emotion into the decision making process, which can really be dangerous. And so if we can go with the guys of understanding that it doesn't really matter how I feel, if I feel great, that's kind of a cherry on top, but I should still be willing to invest. Even if it doesn't make me feel good. That's something to think about.

Tom:

That's a great point. I mean, so much of this is an introspective exercise where it's like, okay, what do I need to do to know that, you know, I feel good about investing in this area. And I think it's a great point, Michael, that it comes to a point where you need to be a little bit just focused on the numbers. But if you know that you're going to need to kind of touch it and take a look just at the market in general, then there's no reason that you can't do that. And I like the happy balance of, you know, if there's a market, you know, going to take a look at the market and not necessarily, if there is a property to look at great, go look at a property, but you don't necessarily have to look at the one that you are investing in, but you have like a general kind of taste of the area. If that's something that's important to you, there's no reason why you can't do that. But to Michael's point, like at the end of the day, the numbers are really what carry the day trust in the process.

Emil:

All of us kind of agree that the numbers, aren't the only thing that drive us, right? If it's like awesome cabaret cash on cash, but it's in a really rough neighborhood where we don't see that neighborhood turning around or whatever it is. I don't think any of us would invest there just because the numbers on paper look really good. There's a lot of other factors that we also take into account as well.

Michael:

Yup, absolutely. Alright. This was really great. And I want you guys to flip flop, Tom, why is remote investing far superior than local investing in meal? You've got to defend because you got to go first, last time. So now Tom's on the offensive. Fight!

Tom:

Emil, welcome to 2020. The world is your oyster. Get out of your little hole, get your head out of the sand, you Flamingo is that the animal does the…

Michael:

Ostrich.

Tom:

You're, you're being an ostrich. And you know, there's been some advents in technology that has allowed us to invest remotely. One of them is cloud computing that allows for you to have access to incredible amounts of data outside of your backyard. So cloud computing, that's one, the other is, uh, mobile phones. Uh, there's all kinds of cool technology that didn't exist before that Roofstock leverages and other, you know, potentially brokerages. Um, have you guys seen, have you heard of the 3d walkthrough? Right? So inside maps, Matterport, very cool companies that allow you to basically walk through the house as if you are there. Not only are you being more psychogenic, you're just working smarter, not harder.

So you're able to check these houses out at a really in depth level without needing to go there. You're saving gas mileage. Think of, you know, you're being green, okay. Cloud computing, tons of data, cheap data on markets and evaluating other markets. Number two, mobile applications, mobile devices. And with that is the ability to have these really cool 3D walkthroughs to have a proliferation of inspections available. I know at Roofstock we use some cool mobile phones in using for our inspection capture leading to my third point, this ecosystem, right, that has developed around companies. So one such as Roofstock that basically does all the work ahead of time. All the benefits you would get from local investing in that, you know, being able to find these local partners, you can do really easily through platforms like Roofstock, which will connect you to all the partners that you need.

Be it insurance, be it in lenders. Now I'm not saying you can't use that same grit that you would be using locally, remotely. You should still apply that and apply it in a very diligent way, but all the drawbacks of doing it remotely that used to exist no longer exist, just because of the way the technology has advanced the way the cool companies like Roofstock has advanced. And the proof is in the pudding. I know just off the top of my head, I think there's been, you know, over over $10 million of transaction within the Roofstock Academy community, over $2 billion worth of transactions on the Roofstock community. So the proof is in the pudding. It's, you know, if you're not doing it right now, Emil, remotely investing you're behind. So, so get on the train.

Michael:

Tom, what do you have to say about the interwebs, the online, the www online's making remote real estate investing easier?

Tom:

Uh, you mean the connected tubes?

Michael:

Yeah,

Tom:

It honestly it shrinks the world. It's fantastic. And the big value points I think in there is just access to data. So being a data driven investor, I want to know what are some reputable sources for evaluating the local schools. I want to do a walk around on that block. Oh, wait a minute. I, can I go to Google maps and do a little walk around? That's fantastic. And honestly, again, you get a pretty good taste of, of being able to do it that way and getting the curb appeal and all of that good stuff. So the internet, I mean, it, it honestly would not be possible without it, but just as we've, since we've come so far since AOL and 56K modems or whatever, it's like, you know, on my phone, I could do a diligence on a property that honestly, the top private equity or top real estate investment companies could do it, it would cost them thousands and thousands of dollars to do on an individual property that I could do for free, just on my mobile phone while I am walking in my living room, in a local area. So the cost of doing the kind of diligence at an incredibly thorough level has gotten so cheap and so accessible. That there's just no question that remote investing is here and jump on board toot toot. Get on the train toot toot.

Michael:

Alright Emil, you need some ice. Are you feeling okay? Are you ready to start swinging back?

Emil:

I'm ready. You know what? I think Tom just convinced me to become a remote real estate investor. You opened my eyes.

Michael:

You didn't know this other world existed.

Emil:

I had no idea about this, what podcast are we on?

Michael:

Someone get this guy, a mobile phone.

Tom:

Yeah get him a mobile device connected to the internet.

Michael:

To the interwebs.

Emil:

All right. I'm going to try not to rehash too much of what Tom mentioned. Hold on. Let me get my dog to shut up, one second. Zeke!!

Tom:

So Mr. Michael Album, I hear you are doing some remote investing to the extreme. I've been following you on the Twitter world and yeah.

Michael:

That's… No one should do that. That's a scary thing to hear.

Tom:

Yeah. Doing remote in the United States is one thing, doing remote on the, across the Atlantic?

Emil:

Portugal!

Going very far East, stopping once I hit Europe, I'm actually currently investing in some properties in Portugal. There is something called the golden visa that I'm looking to take advantage of. And one of the ways to get a golden visa, which is basically permanent resident status, and then ultimately a passport after a five year period is by investment in the country. And so that can take the form of a few different ways. And so one of the options is investing in property. And so I'm looking to actually flip a property right now and then purchase a property for a long term buy and hold to get me access to that golden visa.

Emil:

[sings] You go the golden visa, you got the golden visa. It’s made up, it’s fairy dust that someone sold Michael

Michael:

And so you, Oh, that's right. That's right. Yeah. Speaking of buying snake oil.

Tom:

Was this specifically for the golden visa.

Michael:

It is, it is. So the returns are not anywhere near as attractive as what you can get in the States. And so the fact that you can buy an investment property and have it generate some kind of return is really a cherry on top. The real premise and the real Genesis is to get a golden visa and ultimately a second passport.

Tom:

Wow.

Michael:

So just being able to travel work, live, receive healthcare in the EU, any of the EU countries essentially for free. And so having the benefits of an, of an EU citizen and potentially be an EU citizen after five years.

Tom:

Wow. So you would be a Portuguese and an American citizen. Yes. Very cool. Yup. Nobody knows any Portuguese out there that wouldn't mind tutoring me a little bit. I would love the help because I am pretty useless.

Tom:

Portuguese is a difficult language. I went to Brazil for a little bit and Holy moly. I do not. Yeah. It was a…  

Michael:

It's so foreign and it's so fast.

Tom:

Obrigado!

Michael:

Yeah. Yeah. That's right. That's thank you for anybody listening. Nobody got it. Alright. Emil you're ready to punch back?

Emil:

Alright. Knowing your market. I think that's a big advantage. If you're local, when things happen, you can go visit. That's another big one. The other three I wanted to mention are I think it's a lot easier to project manager rehabs. A lot of times when you're, you're doing a rehab or any type of any type of rehab from distance, you're trusting a lot of people project managing it. Isn't the easiest. Sometimes property managers will do it for you. It's a service they will provide. Sometimes they don't, but you're relying on pictures to kind of make sure each interval of the rehab process is happening. And a lot of times the little details are harder to see through pictures or anything, right. You want to make sure that it work is done right. And I think when you're local to be able to go and see the work that's being done, it's a huge advantage to make sure the little things weren't skipped or things that show up in picture that look okay, but you actually view it in person.

You know, the paint is splotchy or things like that. You can verify those things in person, much easier to do when you're local. The other one is this kind of ties into knowing your market, but where you live and where you are locally, you, you probably believe in that area. You probably believe in that economy. That's probably why you're there. You have a job, whatever it is when you're local, you probably have a sense that this area is going to do well for years to come. And you're trying to ride that wave of appreciation. Whereas when you're going remote harder to know all those things, you don't live there. You're not living and breathing and in that place and knowing what the local economy's doing. So I think when you're a local, you just have a better sense of is this place on the rise? I think most people live somewhere where you think things are going well. So that's another advantage to local, I would say. The last thing I talked about building a team, when you're remote, you have to build a team. I think when you're local, you build a team too. People will find your deals, property management, all those things. But the advantage of when you're local is you can actually go meet those people face to face, interview them a lot easier than when you're remote and you're just calling people. There's less of that personal connection. And I don't know when you meet people in person, you take them more seriously. They take you a little more seriously, not always, but I think it's actually easier to build a team when you're local. You do it for remote and local. And I think it's just easier to local. And that's it. Tom, go ahead.

Tom:

Alright. Last couple of points I'll make on yours. You know, talking about investing in a market that you kind of believe in, you live in something we've learned over the last, I don't know, 30, 30, 40 years of investing is diversification is key. And a lot of people, their biggest investment that they make is going to be the house that they own and live in. And if you're making your biggest investment, obviously in an area that you live in, cause you live in it, why would you, you know, basically just double down on that same area, when you can diversify a little bit and put that money to work in an area that, you know, there might be some correlations with the economy because there generally is, but is subject to other upside and other kind of benefits. So being able to place your chips around. So instead of owning multiple houses in the same area that you live in already, where you have your biggest investment, the benefits of mixing it up and putting it into a different area, there's lots of value to diversifying that play.

Michael:

Would you say Tom, that you would peanut butter spread the risk?

Tom:

I love peanut butter spread. So my wife has started getting groceries from this place called Thrive Market and they have peanut butter in a spreadable packet. Pretty sweet.

Michael:

Different than Justin's?

Tom:

I don't know if it's Justin's I don't think it is, but anyways, it's not in a jar. It’s like toothpaste packets. It's like toothpaste

Michael:

Just on the go packs. Those things are great. Yeah.

Tom:

I think I'm kind of violent about it. Cause I like burst a hole, like in the side. So peanut butter spread the risk, right? Just like spreadable peanut butter. You spread it apart. I guess the last kind of general point that isn't necessarily arguing to one way or the other remote or local investing is with all of this. It's not a one size fits all. I think all of us agree that, you know, while there is a little bit of unique requirements for investing remotely, ultimately the different types of returns it gives you access to and the diversification it gives you access to is it's worth that little bit of overhead. And as we mentioned before, then this episode, there's, there's different ways that people can get comfortable in different areas. For some people, they just get it right away and they can jump right in and invest.

And that's awesome. That's great. For some people they want to be a little bit more hands on and go and visit the area, perhaps even talk to property managers and that's okay too. Just kind of know where you sit and know what you need to do to get there either to move forward with an investment or to move on to some other type of investment. So I'd say as a theme in this podcast and real estate investing in general, have a bias for action of getting yourself into a position to either make the investments or to move on. Let's see the last little recurring theme that I think probably talk about every other episode is, as a remote investor, there really is no one as important as your property manager. So even if you're doing it locally too, and using professional property manager, your investment is gonna live and die by how well someone's going to be able to manage that for you and get, at least if you're not self managing and using professional property manager.

So, you know, it doesn't matter if you're doing remotely or locally, but you know, especially if you're doing remotely, since you're not going to be able to visit the property that often do not sleep on the work that it takes to assess and qualify a property manager because you know, buying right can take you so far, but ultimately, you know, winning the operational metrics and keeping your overhead low is going to be on getting a good property manager. Who's going to keep that property occupied. So those are my final tidbits on it.

Emil:

Well done. I know I don't get a rebuttal, but I thought those were all very strong.

Michael:

I thought you both had strong points nicely done to you both. I'll share a little bit.

Tom:

I'm excited for the Michael tidbits.

Michael:

I was just going to share that I've done some, you alluded to it previously, Tom, but some quote unquote local investing. It was really, my first investment was down in Southern California, which we talked about on a previous episode, but I couldn't fathom investing remotely or out of state or really at much of a distance just because I was so green. So new to this space, you know, Roofstock wasn't around this whole education piece for a, Roofstock Academy wasn't around. And so that's all I knew. And so it was about three hour drive away from my grub. So it was semi local and I went and touched and toured a bunch of properties and met with my local agent who is a family friend who is also my property manager. So to Neil's point, we could touch a shake, hands, have visual rapport, physical rapport, which I'm kind of old school in that regard.

I would always prefer that. I think it's much more meaningful than the remote over zoom or over the telephone. And so I was able to be very hands on with that investment. And it's gone really well, given a long enough time horizon for anyone who listened to that first episode where it just like that property has been through several road bumps, several hiccups and speed. So the fact that it was local did not have any bearing on how difficult it was as a first property. It did not have any bearing on how bad or how sideways things could go. And that's been by far probably the worst experience I've had with any of my other investments. And so you can have good people and bad neighborhoods and bad people in good neighborhoods in local markets and at distance markets. So it's, you know, again, I think we said it before, it's not a one size fits all.

You just, every investor has to figure out what makes the most sense for them and Tom, you were just touching on it. I think if you need to baby, step your way into investing and start local or semi local, do it. If that's what it's going to take for you to start getting into the real estate investing arena, you know, start where it makes sense for you. Some people have no problem letting go of control and just doing it at a distance and setting up a team and kind of taking a back seat so to speak. But if that's not, you figure out how you operate as a person and figure out what's going to make the most sense for you. And then just go do it.

Emil:

So for anyone who was curious about Michael's first deal, we covered that in episode 12, Here's What Our First Deal Looked Like and How They're Doing Today. That was the name of that episode. But I think, you know, the, the main theme, I'm glad you touched on that is there's people who are successful doing both right. There's people who are just local investors in expensive markets who are doing really well. People who just do remote investing, who are doing really, really well. And there's some people who do both, right. They do some local, some distance. And I think that's like the main thing we want to highlight. I don't think one is necessarily better than the other. It kind of just depends on your situation. And I think there's people doing well and doing both,

Michael:

I think I want to just double down on that statement Emil. It is so dependent on who you are as a person and where you live. Because if someone's living in the Midwest right now, listening to this, so like I'm surrounded by deals. Why would I ever go remote when there's tons in my backyard, us being all Californians were, you know, semi-forced to go remote and you know, forced to go invest at a distance. So if that's not, you don't think that, Oh, I have to go invest remotely because of everything they talked about in the podcast, maybe, you know, our remote is your local, Oh, that's a trademark, Michael Albaum,  July 28, 2020.

Emil:

Our remote is your local.

Michael:

Yeah. So just go find where the deals make sense. I think is the one of the biggest takeaways because they could be read under your nose and you might not even know it because you're so focused on remote. I absolutely looked at local as a first opportunity semi found it and then how to go remote after the fact.

Michael:

All right guys, I think that was a great rap battle for remote versus local investing. And before I let you guys go, I've got the question of the episode for you. Are you ready?

Tom:

Let's do it.

Emil:

Always. I'm rabbit, baby. I'm winning this rat battle.

Michael:

What's your favorite breakfast cereal and why?

Tom:

I'm ready.

Michael:

Tom go. It's called Magic Spoon. It's not made with normal sugar. It's made from the sugar of raisins. So it's actually being promoted on a lot of podcasts. We're not being paid to promote magic spoon here. We have no affiliation with any royalties, but we're not opposed to it. And so magic spoon is basically children's cereal for adults. It is delicious. It doesn't have carbs. It's full of protein. What's great about not being, you know, I could just kind of say, say the good things about it and not necessarily have a check, a reference check on it, but it's, it's really good. Magic spoon, peanut butter. It's great raisin sugar.

Michael:

So if it doesn't have carbs, like what is it like, what is it made of?

Emil:

Fairy dust.

Tom:

Magic spoon.

Emil:

I've heard of that. It's expensive. It's not cheap.

Tom:

I can't believe how expensive it is. Don't get me going on that.

Michael:

There was this like frozen yogurt place that came out. I don't know. Maybe this is like going back 15, 20 years and kind of dating myself. But it's got like golden spoon, in Southern California, but I like the name gives you no indication of what the thing is. Like you would never think that's an ice cream place because it's called the golden spoon. Am I the only one that thinks that, sorry, golden spoon… If…

Tom:

Spoons got range. Alright Emil, how about you, favorite cereal?

Emil:

Does granola. It's like a granola cereal kind of thing. It's called Autumn's gold. I found it recently a Costco and it's like all nuts and cinnamon. So kind of same deal. It's paleo. No carb. I try to eat paleo during the week, at least. So that's probably like the only cereal these days I eat. But if we're, if we're aligning the clock, favorite cereal growing up, it's gotta be them Lucky charms, man.

Michael:

They're always after me Lucky charms.

Tom:

Are you a guy who eats non marshmallows until the very end? And then you just go all marshmallow.

Emil:

Is there any other way to eat Lucky Charms?

Michael:

I don't trust anybody that eats Lucky Charms any other way?

Emil:

Yeah.

Tom:

Yeah. And remember that like promotion. They are like, oops, we made a mistake and just marshmallows, man, that person on the factory line. What a moron!

Emil:

Or a genius dude. He sold so many Lucky Charms boxes and he was promoted to like vice president.

Tom:

VP of product.

Michael:

That was like Playdo. Wasn't that? A mistake invented by mistake. So many of the greatest things.

Pierre:

Sticky notes.

Tom:

Sticky notes.

Michael:

Yeah. There you go. Alright, Pierre, what's your favorite breakfast cereal? And please don't say like the last pizza episode. I don't like breakfast cereal.

Pierre:

Well, okay. I don't eat breakfast cereal for breakfast. It's more of a dessert. If I'm going to eat cereal, it's going to be before bed.

Michael:

I don't always eat breakfast cereal, but when I do it before bed.

Emil:

I'm with Pierre man.

Tom:

I like that tip. I like that take, unless it's magic spoon. Go ahead.

Pierre:

Hmm. Chocolate granola, chocolate hazelnut granola.

Michael:

Nice, particular brand?

Pierre:

Oh man. It doesn't matter, really. I was raised on coupons, so whatever's on sale.

Tom:

Michael, you got one?

Michael:

You guys are all healthy. I'm like cocoa puffs fan. I like my milk, but I prefer it to be chocolate. So that's really all it is. It's just a vehicle to get more chocolate milk. I don't really care how it tastes.

Emil:

That is true. Just gives you chocolate milk at the end.

Michael:

That's right.

Tom:

I had a roommate, shout out to Carson Mobly. His, uh, he had this quote about food is just a vehicle for sauce.

Michael:

I've always felt that way about carrots and celery. It's just like, how do I get bar ranch into my mouth in a faster, more efficient way.  

Tom:

It's just a vehicle for sauce.

MIchael:

That's great. All right, everybody. That was our episode. Thank you so much for listening. If you liked the episode, feel free to give us a rating or review wherever it is you listen to podcasts. Also feel free to subscribe so that you get the most up to date episodes automatically downloaded to your listening device. We look forward to seeing you on the next one. Happy investing!

Tom:

Happy investing.

Emil:

Very formal, happy investing.

---

Transcript

Michael:

Hey, everyone. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum. And today I'm joined by Tom Schneider and Matthew Whitaker with GK Houses, Matt and GK Houses is one of our preferred property management partners at Roofstock. And so we're going to be talking to Matt today about what it's like to be a property manager. What are some things that we as investors can do to make their lives easier? And give us a little bit of insight into what a day in the life of a PM looks like. So let's get into it.

Theme Song

Michael:

Matt Whitaker. Thank you so much for joining us today. Really, really appreciate you taking the time to be with us. How are you doing?

Matthew:

Yeah, I'm doing great. I'm excited to be here and excited to do this with you.

Michael:

Awesome. And you're down in the Southeast, right?

Matthew:

I am. Yeah. I'm in Birmingham, Alabama. That's where our corporate office is and we're in eight different markets. So we're in three markets in Colorado and then we are also in Birmingham, Nashville, Atlanta, Chattanooga, and Little Rock.

Michael:

Awesome. Awesome. And for those of our guests who might not know you, can you give us a little bit of background about yourself on GK houses, help everyone get to know you a bit?

Matthew:

Yeah. I'd love to some, the CEO of GK houses. I started it about 13 years ago during the last recession. And during that kind of, 07, 08, 09 time when the market crashed, I owned about 30 rental houses at the time and had a hard time selling those once the market crashed. Most of those were in the low to moderate income world and the ability to sell that went away. And I started a property management company, converted all those 30 over into rentals and was able to get some of my investor buddies to also let me manage them. So I got up to about 70 houses pretty quickly, and that was kind of how I lasted through that recession through 08, 09, 2010 was by managing homes in about, we also were selling homes. So we were doing some turnkey stuff at the time, kind of original before it was very popular.

And, but in 2013 we really started off focusing on the management business. And we decided at that point we managed about 250 homes right here in Birmingham. And at that point we decided that we wanted to get to 25,000 houses under management. And so we've been growing that ever since 2013.

And today we manage somewhere around 26, 2,700 homes in those eight markets that I talked about earlier.

Michael:

Great. And did you have any personal management experience in the real estate arena or did you go straight from owner to manager?

Matthew:

I always swore I would never be a property manager or a real estate agent…

Michael:

You’re in good company.

Matthew:

And a lot of companies did that same thing. Yeah. And so never, never say that to yourself, but now I'm a real estate agent and a property manager. And so I managed my own homes. So I had been doing it ever since I first got started, even my first house I ever bought, I still own, and I have rented it ever since. And that was a disaster story. So it's amazing that I'm in the property management business. So yes, I did have a little bit of management experience. I had been in the buying and selling business for about seven or eight years. So I was very familiar with what a manager did. I had some other third party managers that manage some homes for me for some time and found all the things that I didn't like about a property manager. And so I decided to just do it ourselves, with GK Houses.

Michael:

That's great. I love that. You've got that personal experience that you did it for yourself and then went into business, helping other people do it because it just shows that you understand the business kind of from the ground up, which I think is so huge. And you're able to treat the rentals as if they were your own.

Matthew:

Yeah. There's nothing that replaces knowing what it's like to have a $500 bill come through, or a $2,000 air conditioning, a replacement come through where you're expecting that cashflow to pay the mortgage. And now all of a sudden you've got to figure out some other way to pay that mortgage. So it definitely gives us empathy for our owners. And that's something that we've tried to communicate and teach to the team members that work for us is, you know, and I'll often say to them, what if on Friday you found out that I was going to pay you $500 less with your paycheck. And they, you know, that would be disappointing to them if it was a surprise. And that is the same surprise that we were calling up from time to time. And unfortunately having to deliver bad news to owners because inevitably things are going to break when an owner buys a rental house they're in business and you're going to have expenses for that business.

And so we've learned a lot over the years about having reserves and making sure that you can afford to pay for the lumpy expenses that are in this business, but it still requires a bunch of empathy from our team members when they're communicating with owners and having deliver, you know, have tough conversations.

Michael:

That's great.

Tom:

You touched on reserves. I'd love your thoughts, Matt, on, you know, what do you think an appropriate like reserve level is?

Matthew:

Yeah. If I was in new person getting into the business and I bought a foot, let's call it a fully renovated home. I would probably stay about. And obviously depending on the age or the vintage of the house, I would stay about $3,000 out. So I would keep at least $3,000 available at all times. And then as I got to a bigger portfolio, obviously the per house number would come down because you could dilute that across the portfolio. But getting started, I would say somewhere around two to $3,000, just available to make sure that it doesn't affect your lifestyle. And if you do have one of those expenses that comes through

Michael:

And in that same vein, most lenders are going to require a cash reserve amount for PITI. Would you consider that a couple thousand dollars to be that same pool of the reserve bucket? Are you saying above and beyond this? The reserve?

Matthew:

Yeah. I'm just talking about expenses and then capitalizable type items. I mean, I may even start as you started to build a portfolio and this is one of the reasons I always tell people don't buy one rental house. I mean, certainly try it on dip your toe in the water, but it's way easier to own 10 rental homes than it is to own one because you all these expenses start to get diluted amongst your cashflow of your portfolio. And then it doesn't become as big of a deal when you have a $500 bill come through. If you have a rental house, a $500 bill comes through, you're literally writing a check out of your back pocket. Sometimes if you have 10 rental houses and a $500 bill comes through, it's just another number on your statement. And you're just calculating your return based on that. So I think of that in excess of that, I'm just thinking of, in terms of repairs and maintenance,

Michael:

Tom like you always say peanut butter spreading that across.

Tom:

Peanut butter spread the risk. I love that quote yeah, 10 properties, a lot easier than one property.

Matthew:

It is, and absolutely if you're not having to manage all of them, any, even if you are, obviously you're spreading that risk across multiple residents with different jobs and different industries. And if somebody invests through you, they can even do it across different markets. So 10 seems to be the magic number in my opinion.

Michael:

Great

Tom:

perfect segue talking about, you know, as long as you're not managing it, and let's talk in a little bit about the roles and responsibility of a third party property manager that you would hire, what are the different things that services that they would provide in the process?

Matthew:

I really think the services of a property manager fall into two buckets. There is the accounting bucket and the communication bucket. And obviously under that communication comes execution, but let's talk about accounting first. Part of our operations is accounting for our homeowners. We want to make sure that the money comes in on time, that the resident's abiding by what the lease term says in terms of money paid. And so we're going to kind of hold the resident to making sure financially that house is getting taken care of. And then we're going to account for all the dollars that come in and of course paying any expenses that we need to pay out of that money that comes in. And then the other side is just operations and communication around those operations. We're obviously going to make sure that the house is taken care of. One of the interesting things, especially around small multifamily and single family.

There's a lot of logistics involved in that. I always say it's a communication challenge and a logistics problem. So it's about, you know, having a one house, one owner or one vendor, you're always communicating with somebody. So you need to be really good at communicating. And our property managers become more like air traffic controllers. They're making sure the vendor knows where to go. What time to be there has the resident's information. The resident knows that the vendor's coming. The owner knows that there's a problem at the house if it exceeds a certain amount of money. And so you're having to keep all of these people in the loop and make sure that the planes aren't running into each other while you're that. And so, again, it just boils really down to accounting and making sure that I's are dotted and T's are crossed and then operations and communications.

Michael:

Matt, you said something that I want to circle back to that the owner knows if there's a problem, if it's above a certain dollar amount. So from folks who have never purchased a property, what do you mean by that? And why is that important to highlight?

Matthew:

Yes. So you hire a private manager to basically take care of the problems and you don't want to know that something small has happened at your house. That's not really going to affect your lifestyle. It's just kind of brain damage for somebody to call you over a hundred dollar issue. So we have, what's called a $500 kind of threshold. And if one of our maintenance guys goes out there and he sees that this thing's going to exceed over $500, we're going to contact the owner before we do anything and provide them an estimate. But if it's below that $500, we're generally just going to take care of that issue. And then the owner's going to see that happen. You know, see that payment on their statement. You hire a property manager and you will be circled in on all the big issues, but we want to handle all the small issues. That's why we feel like you hire us is for a turnkey solution, not to have to sweat the small stuff.

Michael:

Awesome. Thanks for clarifying and Matt, in your opinion, you know what separates the good from the great property managers?

Matthew:

Yeah. We go back to accounting and communication again, getting the numbers right. Is so incredibly important and you'd be surprised at how many property managers get that wrong. The other, again, communicating, it's so hard in our business to communicate and trying to make sure as an owner. And of course I was in this position. So I know exactly how they feel. If you don't know what's going on, it's not like you expect the best is happening. And so you want to make sure that you're clearly in the loop and you have the confidence and the trust of your property manager, that if something bad is happening, that you're going to be well aware of it. And also communicated with what we call uncomfortable transparency, which means I'm not going to withhold information from you to make it easier to tell you or more palatable or, you know, easier on me really, because I don't want you to get mad at me.

So we want to make sure that we're giving our owners the truth. And we call that also entering into the danger and telling them, being willing to tell them exactly what's going on with their house so that they, if it is a big issue, they can make the best decision for themselves. And also try to remain as objective as possible when we're communicating, because money can be very emotional for people. And if we can kind of steer them towards the best solution, then we want to make sure that we're doing that based on our experience as a property manager, you know, we do have the benefit of, and especially in the South right now, it's getting really hot and air conditioners are breaking well. We have the benefit of knowing that air conditioners break and things we've done in the past and mistakes that we've made in the past. So, you know, when it becomes a, should I spend 600 or $700 to fix this air conditioner and it may last another couple of years or a $2,000 replacement or a $2,500 replacement. Well, we can give them kind of some objective advice based on what we've seen in the past. And then the owner can make their own decision based on that information.

Tom:

That's a great example of being proactive in informing the most decision and using some of the information that you guys have as an investor. We want to get the top dollar. We want to manage the least amount of vacancy as possible. What were some things that you would advise that the owner, the investor can help achieve those?

Matthew:

Yeah, the biggest expense and investor's going to have is turnover. You know, you can have a picky tenant that calls in a lot of maintenance work orders, or it feels like they're calling in a lot of maintenance work orders, but truly turnover in my opinion is the biggest expense you have. I think of it and you played football, Tom. It is like going in to score a touchdown. And instead of you throw an interception on as you're about to score, and then they run it back for a touchdown, it's like a 14 point swing that somebody moves out because, and the reason I say that is not only do you have loss of rent, so you're not having money come in, but you're also having to pay money out on deferred expenses when that happens. And so it's very important that you keep residents in homes and the way you do that is you do it through good communication with the residents.

You do that through handling maintenance work orders. One of the things we found was our residents started staying longer when we internalize maintenance because our maintenance team is not out there just fixing a problem. Our maintenance team is tasked with making the resident happy because they're a GK team member. And so if you think about kind of the change in that, if a maintenance team member thinks his job is to just fix something, well, that's a problem if ultimately in the owner's best interest is that resident staying alone time. But if the maintenance team member is out there with the idea, I want to make this resonant as happy as possible, then it makes the resident happy. It's in the owner's best interest because the resident stays a whole lot longer.

Michael:

That's great.

Tom:

Oftentimes decisions, especially those big decisions that you'll make with an investor it's the repair or replace, or do we want to focus on vacancy or rent growth? And I don't know, I guess one of you just elaborate a little bit on those two important decision points that can make or break deals.

Matthew:

Let's talk a little bit about rent growth, because I think what I've always thought of it, the way I mentally look at it is staying a little bit behind the curve. Like I don't want to be on the bleeding edge and I don't think investors want to be on the bleeding edge of pushing grants. And I know there's some institutions out there that will actually do that for us, I think. And I like to stay a little bit behind the curve because I think it's so important that that a doesn't move out. I don't want that resident to feel like they can get a better deal somewhere else. And so what I like to do is stay a little bit behind, but definitely be in tune with rent growth and be focused on it. In our leases, we have some rent growth built in, but that also gives us the ability to go to the resident and say, Hey, you know, the owners being very generous, wants you to stay another year and has decided only to raise it 1% instead of the three to 5%, which may be in our lease or even better, they've decided not to raise rent. And because, you know, they think you're an awesome resident and normally they would raise it 5%, but they're not going to raise it at all. So it gives us the ability to even if you only raise it 1%, it gives us the ability to basically say, Hey, the owner's doing you a favor because you signed up for three or 5%.

Michael:

That's great. I think, yeah, like you mentioned Tom investors where they want top dollar and you know, as much as we can push the envelope, we'd like to, but that's really great advice. Cause I think something that I chat a lot about with Academy members is when it comes to pushing rent is do the calculation, do the math for if this tenant leaves and you've got three weeks of vacancy, what does that cost versus what do you stand to make with the 10, 15, 20 bucks a month? You're going to increase the rent. The math kind of works itself out pretty clearly.

Matthew:

Yeah. I would think if I'm an investor and I am on a number of rental homes, I think in terms of seven to 10 years, how can I maximize the most amount of money over that seven to 10 years? Not now. And this gets into having reserves too, because if an owner is making short term decisions is going to affect his or her longterm seven to 10 year plan then, and that's a problem. If you have reserves, you can make clear objective decisions based on how much, what the best longterm getting the most money in over that seven to 10 years. And so I think as your clients and investors operate, they need to be thinking longterm because this is a, this is not a get rich quick game. It is a consistently make good decisions over the long period so that they can over the course of owning that rental home, whether it's seven to 15 years, then they end up in a much better place.

Michael:

Tom, Matt set you up so nicely for your T-ball swing. What do you like to say? Be what?

Tom:

Oh, longterm greedy, be longterm greedu.

Matthew:

Yeah, that's great.

Michael:

Matt, I want to ask you a question about property management fees specifically around vacancy. And I get the question a lot in the Academy that says, Hey, you know what? It seems like property managers, aren't incentivized to actually keep tenants in place because of the new tenant placement fee being 50% or 75% or a hundred percent of one month's rent versus a lease renewal is typically less. So what would you say to someone that had that question?

Matthew:

Yeah, I think it's a great question. You definitely don't want to incentivize your property manager to do something that's not in your best interest. And so when you're thinking about property management fees, what I would tell somebody is make sure that the fees are in line as well as you can with your incentives or with the incentives of the property manager, because you just don't want anybody to have to make this kind of moral decision that affects their income. And so what I would say is the way we look at it is we do need to make money when we're leasing, because we do a lot of work. The way we look at GK Houses is we want it to be an annuity business for our owners and for us. And the way to do that is to keep residents in homes. And that allows us to do certainly we're doing a lot of work while the residents in the house, but as soon as that resident moves out, I mean, it's like a full time job trying to get that home back on the market as quickly as possible.

And so we often talk about, and we've structured our fees so that we don't want people moving out. We want to build this big annuity snowball. And so to me, you need to make sure that your property managers fees align with your interests and your interest of being an annuity. So I would say incentivize the manager to renew the lease over a leasing fee. Now the leasing fee may be higher, but what kind of work did they have to do to earn that? I would much rather earn a couple hundred dollars, 200 $5,300 renewal fee that is, that, you know, requires two to three hours worth of work versus the, you know, maybe 20 plus hours of work. I would pour it into a turn.

Michael:

And can you give somebody who's listening a real high level overview of what work does go into a turn because I think that's such a great point is there is so much work that goes on into placing a new tenant, but that goes on behind the scenes. Most folks don't have any idea.

Tom:

The Duck's legs under the water. That's another episode where we riffed on that for a minute. So, sorry. Yeah, go ahead.

Matthew:

Well, we think about this about 60 to 90 days out. So we're trying to renew the resident almost, you know, six to eight months into their lease. We're trying to do it as quickly as possible. And so when they submit their notice and they start to move, you know, we start communication. So we communicate with the unit or, Hey, your resident is submitted. Notice just wants you to know. And then we give them an idea of what we're going to do when they move out. When the resident finally does turn in keys and moves out, we're going to do, depending on the market, we're in, we're going to do a walkthrough. And generally that happens not the same day, but within 24 or 48 business hours of that resident moving out. And we do a full writeup with pictures and it is amazing how many pictures we take, but we really feel like this is part of taking pictures, is communication with the owner.

They can see the pictures and kind of feel what the house looks like. And then one of the things that owners forget is we also have a requirement with the resident to account for their security deposit. So we have all these logistics going on and all this communication with the resident and communication with the owner, we send out a statement or an estimate, the owner that basically dumps all the expenses into three categories. One is these are the expenses we want to charge the resident for anything above normal wear and tear. So, you know, if the carpet has been lived on you can't really charge a resident for that because you expect the carpet to be lived on. But if there's a hole in the wall for some sort of misuse, or you can tell that the home has been misused there, we're going to charge that resonant for that.

And then there's a column that we say are required repairs. And so required repairs are, there's a hole in the wall and we need to fix this before the next resident moves in. You just can't leave a hole. Nobody's going to rent a house with a big hole in the wall, or then the next column is recommended. So maybe there's a room that is kind of in between. It's kind of in a gray area. May if you paint this room, it's going to run faster or you're going to rent it for more money. But if you don't paint it, then it's not going to keep us from renting. So we divide our estimate into those three columns and we'll send it to the homeowner and the homeowner will either approve the required or add on the recommended on top of that, and then approve whether the resident's security deposit. They're happy with how we account for that.

Then we have to basically do the accounting of the resident security deposit and then mail that to the resident. Now, oftentimes sometimes the resident disagrees with how we accounted for that. And the resident obviously did a move in when they, when they, and we did a move in before. So there's some time there's some kind of go back and forth between them and us on it. Was this a definitely misuse or was this like this when you moved in? And so sometimes when we inherit leases, we deal with some issues with that, but we do a really good job of a moving walk through. So we have pictures of the house before it moves in and we can easily compare those to the move out, walk through. Then once we we're done with the resident and everybody's happy there simultaneously, we're going back and forth with the owner on the work that needs to be done to get the house on the market.

And to me, owners love speed. And so that's one of the things we try to do is there is an anxiety that happens with an owner as soon as that resident moves out, that money stopped coming in and the expenses start, but it also makes an owner feel better if it gets done very quickly. So we're trying to renovate that house, turn that house as quickly as possible, and then put it back out on the market as fast as possible. And so, you know, depending on how long it takes to do the work, you know, our goal is to get that house back on the market, just literally as quickly as possible. And the only downtime being the time it takes to get the work done. We also start pre-marketing. So we try to start building some excitement. Some of our markets, we actually pre-market even when the residents about to move out, I just kinda made it hard recently with the pandemic, but you know, kind of a normal world will pre-market and we've been leasing a lot of homes.

We're starting to use some video tours. We're using a Matterport camera and we've been pre-leasing homes without people actually even walking through them. We've done a really good job with these Matterport cameras. And then again, getting it out on the market and getting as many people through it. One of the things that we found though, is if you take somebody through and the work's not done, sometimes there is a misunderstanding of what work needs to be done or what work is going to get done. And there's some disappointment from time to time. So we like to get the work done first, build the excitement, and then generally your first people through are your best opportunities to rent that house. Cause there's a, they feel that sense of urgency. And then we signed the lease and hopefully they move in as quickly as possible so that we get the rent coming back in and stop the expenses from flowing out.

Tom:

I had like two questions I was going to, but you kept hitting him. I was, you know, I was gonna ask, Oh, you know, what changes have you guys made with the pandemic? And that's cool. So you guys are doing video tours and

Matthew:

Yeah, we're using a Matterport camera now, which is basically you set it up in the middle of the room and it allows somebody to virtually walk through the house and it is really cool and it shows it's got a fish eye on it, fisheye camera on. It allows people to really see what it's like to live in that room. And the other thing is it's really a touchless and we're not using leasing agents as much as we did any more. Now, some areas are starting to let some leasing agents back. Colorado's allowing us to use leasing agents again, but it's still a opened the door. Let somebody go through and kind of obviously socially distancing the whole time. But we also use Rently a lot boxes on our homes, which allows a resident to check themselves in with a credit card and their ID. And they can go through the home by themselves without us having to be there.

There's some, obviously some accountability and the fact that we have a credit card and we have their ID and we know who they are, we have their cell phone number, but then we're proactively following up. So one of the things that we found in the past, we went a little too automated where we wanted somebody just never to talk to us to the point where they just leased our house without ever talking to us. But now we've found that proactively reaching out and talking to somebody on the phone, right after a showing, is that great way to get somebody comfortable enough to submit an app. And we're receiving right now, somewhere around three in some markets and somewhere around five times as many applications, part of that is pandemic driven. I think there's a move right now from multifamily to single family, just cause people don't want to be on top of everybody, but in part of it is the summer, but we're more occupied right now than we've ever been before.

Tom:

That's really interesting.

Michael:

Yeah. Very interesting. Matt a question. I get a lot in the Academy, especially of folks who are looking at Roofstock inspections is I've got all this repair work that needs to get done. Is this something that I have to do that I have to coordinate? Or is that going to fall on the shoulders of the PM? Are they able to assist in helping coordinate that work repair work to be done?

Matthew:

I can't speak for all PMs, but I love it when we do the work in full transparency. So we do make money when we do the work as the general contractor of that work. But when I can control the process for the owner and I can control the communication and I can control what gets done and I have vendors that know how I work and I can get them in and get them out. I always think of it again, it says value and speed. I can get it done so quickly and there's not a lot of coordination and communication. If you're in a market, you could certainly try to do that because you may have the time, the drive over there. And it makes sure that the contractor is getting the work done. The biggest challenge we have is contractors and relationships with contractors. So for somebody to remotely hire a contractor and get the work done for not only cheaper, but on time and all their work done appropriately to me is just too big of a risk to take.

And what ends up happening is they end up putting the burden on the property manager to go make sure that we're gets done. So then it ends up costing them more because we're going to charge them for some of that oversight. So we just say, look, just let us handle it. And we're happy to give people an estimate to get that work done. And then we'll contract it out to the people that are vetted vendors that are insured. And if somebody falls off the proverbial roof, then they're not going to Sue you. And so we just think it's in the owner's best interest to let the PM handle that.

Michael:

Great. And what would you say the most difficult part of being a property manager is what do you wake up everyday and go, Oh man,

Matthew:

Not to use another football reference, but I am going to, there is no Superbowl in our world. There's no, we won the super bowl and now we can take two or three weeks off when the 31st hits and we collect a hundred percent of our rent. The first comes the next day and then all our rent's due again. And owners need to know this too. It is a thankless business. The whole point of the job is to deal with problems. And so when you're communicating with your property manager, you need to know that they are doing nothing but dealing with the exceptions, all the problems that have happened that day. And so I have a lot of empathy and sympathy for my team because it is hard. You have to keep them excited and it's hard not to get burned out. And so when an owner gets mad or a resident gets mad at them, obviously that takes an emotional toll.

And generally our PMs are not the ones that made the mistake or when something happens and listen, we're people, we're human. We try to execute as well as we can, but we are going to make mistakes. But when an owner kind of takes that out on a PM, because that's the person they see as kind of the face of the company, you know, that takes an emotional toll on people. So the whole, and when you're communicating with a resonant about not paying rent, you're talking to them about their home and the money, you know, money it's, everything emotionally is tied into this one thing that we're doing. So we have a lot of hard conversations. And so that's, what's so hard about being a PM. And I would say, that's, what's so hard about self managing too, you have the ability to be objective in an emotional situation?

Going back to the first rental house that I bought, I had a six month kind of agreement with an insurance company on a house that had burned down or somebody's house had burned down and they moved in for six months. The insurance company paid me additional money over above what I was asking. Well, the house person was living in the house. Couldn't afford the house normally. And when their house wasn't ready, they'd never moved out of my house. And so here I am self managing I'm 23 years old, and I need that money. I am very emotional about needing that money. And so I was probably the worst person to be dealing with that situation because I was overly emotional making bad decisions. Here I am. This is my first rental house I got paid for six months. Everything was great. I thought I was a real estate guru.

And all of a sudden, now my resident's not paying, I'm paying a mortgage and it's not like I just have tons of money left over every month. And so I was just in an emotional place. And what I would say is, if you can't be objective, you can't treat that relationship like a business or even worse. Maybe you do have a lot of money or the ability to float things. And you allow things to go on too long because a resident may tell you a story. You know, it becomes very hard to be objective in those situations because either you're emotional about your own finances or you become emotional about the resident situation. And it really is like running a business. Well, listen, we do have a lot of sympathy and empathy for our tenants. We're very resident friendly, cause we know we want them to stay a long time. We want good residents to stay a long time, but you also have to be very objective when you're dealing with them. And, and so if somebody can't separate themselves from the situation, it becomes a lot of conflict. You know, personally, you're not going to do the right thing consistently to self manage.

Michael:

I think that’s such great insight into property manager, being a thankless business. You know, I personally am going to make this admission on the podcast. I don't think I've ever called my property manager wants to thank them for a full rent collection month, but I know I've called them and asked why the rent was late. So less than to everybody listening go, thank your property managers for the good stuff. Don't just highlight the bad stuff.

Matthew:

And we do have some owners that are kind enough to thank us. And we do have some really great owners, but you're right. I mean, the expectation of the owner is full rent collection and no expenses. So as long as that happens,

Michael:

Right, right.

Matthew:

The bar is at a hundred percent.

Tom:

Everybody's good.

Matthew:

So anything below that is us not meeting expectations, even though, you know, it's not our house. If the toilet breaks, I've never used that toilet. Right. It wasn't you. Right. But I do understand too, that it's kind of funny, like an owner may move out of the house and then a new resident moves in and immediately owners because they are emotional about, especially a house that they lived in and owner will become very well that toll, it never broke when I was there. And I'm like, well, I don't know what to tell you.

Michael:

I don't know what to tell you! Tom, You got any more questions?

Tom:

Yeah. I guess, you know, kind of continuing on this theme of, you know, helping this thankless job, how would you say investors could help put their property manager in a better position to be successful?

Matthew:

One of the things I would say is around communication is a lot of people want, expect like an email to go out and then an immediate email to come back and we do have RPMs or full time communicating. So we do have the ability to do that, but there are times when they need to be a little flexible about how fast we get back to people, because we do have other fires that are raging from time to time that a PM may be very focused on getting another owner's property fixed. So just having a, you know, not an unrealistic expectation around how fast we're able to get back with people. And look, we that's. One of the things that we measure is we do measure how fast we get back with people.

So we are getting back with people fairly quickly. The other thing is, again, having reserves really helps us out because it gets us into a situation where we're doing the right thing. We're playing the odds. We're placing good bets with these homes and allowing us to help you manage for the long term. So those are two things an owner can do. And then also when they do communicate with us, I know you're going to get frustrated when something happens bad and look, we're frustrated too, but know, it's every bit as hard to make that phone conversation and make that phone call and just know that the PM has been dreading calling you and telling you that there's this $500 expense or whatever it is. And so just having some empathy for that person that is making that phone call is helpful and being problem solvers together. Let's Hey, we're on the same team. We didn't cause this problem, but we're going to both fix it as teammates

Tom:

Love it.

Michael:

It's such a good point about around the communication timing. I was chatting with a student in the Academy. I won't say from where I was just say it rhymes with smooshmork. And they said, you know, I can't deal with this property manager. I said, what happened? He goes, well, I emailed them 20 minutes ago and have her back. I said, well, that, that might be how you're used to communicating, understand that it's different around the country. And so what I was recommending folks is just ask, when you're chatting with property managers, vetting property managers, ask them what their communication style is and ask them what a reasonable response time is, because the expectation should be set on the front end.

Matthew:

Other thing I would add around communication. If you start to get up to, let's say five to 10 rental properties, what you need to is set up a regular monthly call with your property manager. We have found these calls to be so helpful. Again, getting back into being objective. You really solve problems together for the longterm. There's no emotion around it. There's no surprises when you have five to 10 rental properties and it's worth the manager spending an hour with you and kind of making sure that you're on the same page on a regular basis. It would be hard to have those calls for anybody below five houses let's say. But if you're starting to get up into five and continuing to grow, it makes sense for you to have a regular monthly call. And if you get to a point where you have 20 to 25 houses, it may be a weekly call that you would want to have. But I can't tell you how these regular calls have really helped us with our communication with owners, because you're not just hearing about the bad problems. You're also hearing, Hey, we collected this. We collected that. And you're starting to kind of get a better picture of what your portfolio is doing.

Michael:

I've got to go set up weekly call. That's a really great idea.

Tom:

I know. I love that as a takeaway from today's session... Yeah, I love that. That is a great idea. I really like that.

Michael:

Tom, you got anything else?

Tom:

That's good for me. Yeah. That's super insightful.

Michael:

Love it. Awesome. Well, Matt, we've got some quick fire questions. We'd like to end our episodes with, if you don't mind, it's kind of a yes, no one answer to the other.

Matthew:

All right, I'll do it. Alright.

Michael:

So high rent growth or low vacancy?

Matthew:

Low vacancy.

Michael:

Angry resident or angry investor?

Matthew:

Ooh, Whats C?. Yeah, definitely angry resident. Although none of those are fun.

Michael:

Cashflow or appreciation?

Matthew:

I am a cashflow guy.

Michael:

Concentration or diversification?

Matthew:

I am a concentration guy and I think this is an important thing too, is probably a good nugget for the people that are going to be listening to this, become an expert in an area. First, in my opinion, before you try to diversify too much, I have found that when you become an expert in one area like a Birmingham or even a neighborhood in Birmingham, then you are way more successful at buying than trying to diversify and not being an expert in one area. Sorry. That was more than one word, but..

Michael:

No, that's super great insight. Super great insight. Local or remote investing?

Matthew:

I think you can do both with technology today. I mean, I would hate to say one over the other because I think if you have access to all the technology that I have living in Birmingham, so it makes no sense for you living in California or in New York or wherever you're living, not to invest in Birmingham because I have the access to the exact same information as you do.

Michael:

Great. Single family or multifamily.

Matthew:

I'm a single family guy. I think, I think the best opportunities and the biggest opportunities to exploit what is still incredibly inefficient market is in the single family world. I think your points about like the pandemic people wanting a little bit more breathing room, like single family, really great way to go. I'm telling you, Tom we're at over 98% occupied. I've never been on. I've been doing this now almost 13 years. Never been that high and never gotten the amount of applications that were getting approved residents. Great residents are moving into our homes. It is really a good time to be in the single family world. Great turnkey or massive project. Definitely turnkey. Okay. Text message or email. I'm a text message guy. My emails, I forgot like 50,000 unread emails. That's a true story. I can, I can show you.

Michael:

That's great. Last one. Olive oil or butter?

Matthew:

I'm an olive oil guy.

Tom:

Love it. Awesome.

Michael:

Awesome. Well, Matt, thank you so much for taking the time to view with us today. If folks want to reach out to you at GK houses, you know, what's the best way someone can get in touch with you or someone on your staff?

Matthew:

Yeah. I would say email me, but obviously…

Tom:

The jig is up!

Michael:

50,001, right?

Matthew:

Listen. The best email to email is [email protected] and we are monitoring that through a help desk type system. And then that'll get assigned to the right person in our office that can handle that. You can also look us up online and call any one of our offices. So we're a Roofstock preferred vendor in Atlanta and in Birmingham. And am I allowed to say the other two coming down?

Tom:

Of course, growing markets all the time.

Matthew:

So Little Rock, y'all are in Little Rock now and we're also a property manager there. And then we had a conversation with one of your team members this week about y'all are opening up in Denver, which is super exciting. So glad we're going to be a preferred vendor there too. So just y'all are growing and allowing us to grow right alongside of you. So we appreciate you so much.

Tom:

Onward and upward.

Matthew:

Yeah.

Tom:

Thank you so much for coming on Matt.

Matthew:

Yeah. Thank you for having me.

Michael:

You got it, take care.

Michael:

Okay. Everyone. That was our episode. Thank you so much to Matt Whitaker for coming on today. Really, really appreciate it. If y'all liked the episode, feel free to give us a rating or review wherever it is you listen to your podcast and we look forward to seeing you on the next one.

In our second Ask Us Anything, Tom and Michael bring on guest host, Mark Woodling to tackle listener submitted questions on buying from wholesalers, the difference between auction and foreclosure sites, preferences between umbrella policies and LLCs, tax liens, how Roofstock selects markets and more. 

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Transcript

Tom:

Greetings and welcome to The Remote Real Estate Investor. And today's episode, we're doing another ask me anything. And on today's episode, we have myself, Tom Schneider. We also have one of our hosts, Michael. Michael, say hello.

Michael:

Hey everybody, how's it going?

Tom:

And we also have a guest host today with some special expertise in the auction world, as well as some experience on tax liens of wholesales and all that good stuff. So we have Mark with us today. Mark Woodling say hello.

Mark:

Hey, thanks for having me on.

Tom:

All right, let's do it.

Theme Song ♫

Tom:

Welcome back. We have another ask me anything episode, super excited about it and let's jump right into it. So, as we mentioned before, with some of these questions that we saw, you know, they might not be in our wheelhouse, so we wanted to bring in experts and that's why we are fortunate to have Mark Woodling on today. So, Mark, do you want to give the 32nd kind of pitch on all the interesting stuff that you've done in the real estate space to give a little bit of background? Uh, you've been on an episode before, but maybe a brief reminder to folks who haven't listened to that episode.

Mark:

Sure, sure. Thanks for having me on guys. I work as the director of local market growth for Roofstock. So really it's a unique role where I work on opening up new markets and how we can really bring new supply into those markets, but it's kind of a unique role. So having a unique background was really why they picked me for this cause I used to go around the country, traveling to tax lien, auctions. I would go and bid for a private equity firm around the country about 26 different States every single year. So a young buck out of college really had no limits, I guess you could say, but learning the real estate game, I've also worked at Fannie Mae in the recession. I was there in their auction group. So we're selling about 18,000 properties a year, just through auction in all 50 States in DC. And then after that worked at a company called Xome X-O-M-E and was their chief auctioneer and with selling glide, the Countrywide portfolio that was kind of leftover toxic asset group after the recession. So, you know, became licensed as an auctioneer in 27 different States and it was doing everything online. So have a bit of a marketplace background as well as just a ton of unique kind of distress real estate background.

Tom:

Awesome. Love it. Well, well, let's jump right into it. So our first question we have came in from LinkedIn. This is from Dave and Dave asks, what's the best way to scale your portfolio in the smallest amount of time. And let's see, Michael, do you want to take the first pass at this one? Or do you want me to lead the way?

Michael:

Yeah, I would say just get a bunch of money.

Tom:

Honestly. The way that I was thinking about this question is kind of twofold. It's like if you have a bunch of money, that's a different answer, right? So if you have a lot of money already, like, okay, getting into portfolios, just buying portfolios outright, or, you know, building a fund with an actual like employment of like acquisition folks like that works really well, but let's go ahead and assume this question is if you don't have a money machine in your basement and you're just scaling and scrapping, what would be your feedback on the quickest way to scale in the shortest amount of time with the limitation on funds?

Michael:

I think that there's going to be no quicker way to scale than by partnering with people that have what you don't have. And so if money is tight, you don't have the money go out and make a name for yourself as someone who can put deals together and acquire doors. And I would rather there's this very famous, I don't know how famous it is, but a lot of people say, you know, I'd rather have 50% of one deal than a 100% of no deals. And so if acquisition scaling is the name of the game, go find people that don't have the time or the knowhow or the ability to put deals together and bring them to those people who are looking to get into the real estate game and have the money to do so. That would be my advice. Mark, what do you think?

Mark:

I think you're right in line where going to portfolio route really is the easiest way, because then again, you're dealing with one property manager in one city, you know, if you're spreading yourself too thin, you can buy a lot of properties in different markets, but then again, you're having to manage all these property managers and that takes a lot of time. It takes a lot of resources of your own. So I think if you're going to get right to it, you really need to focus on a concentrated area of figuring out diversity, maybe within one market or a few markets, and really figuring out, you know, how to leverage your time when you only have so much time.

Tom:

My last little tidbit I'll add on this is the best way to scale your portfolio. My recommendation is really tapping into your, any appreciation and equity that you have in ramping up your leverage as much as possible. Now there's some downsides and risks. If values go the opposite way. And you're only planning on holding these a short period of time. There's some risks for getting under water where the loan is worth more than the property. But if you're trying to squeeze as much dollar as you can into scaling and building acquisitions, it would be basically getting the most leverage that you can. So every single dollar of equity you can have, you're using to scale scale scale. So excellent. Let's go on to the next question. And we have a shout out to Michael on this question, Michael, why don't you read this question?

Michael:

This next question comes to us from Ricardo from Walnut Creek and Ricardo is a good buddy of mine. So the question is what's up Roofstock, shout out to my boy, Michael Albaum. This question has to do with working with wholesalers, from what I've seen, you can get some pretty spectacular deals with less competition, but it seems you assume much more risk as far as condition of the property, as well as constraints with financing. What has been your experience working with wholesalers? And what advice would you tell to a new investor who are the wholesalers and what do they do? How do they make money and how do you find them? So, Mark, do you want to take a stab at this one with your background?

Mark:

Yeah, absolutely. I go to a lot of mastermind groups and you know, these mastermind groups are really for more advanced real estate investors and many of them are actually wholesalers, but they also and hold. And then, you know, they have their fix and flip models and so forth, but wholesaling could be a very lucrative business because when you put a property under contract, right, you're tying up the contract, that buyer who tied it up under contract is then going to sell their equitable interest, right. They're selling that contract and assigning it to someone else. So they really don't have a specific range of, you know, how much they can make and they don't need to be a real estate licensee. So anybody could be a wholesaler. Really so if you want to get to really who the wholesalers are and what they do, you need to go find guys that are doing this for a living. They go really find great properties that are going to be marketable to the masses. And they will tie up that property. They'll sit down, visit the property, take pictures, you know, run some after repair value type values.

And then they present it to the market as off market deals. So, you know, their job is really go out there when I call bird dog, right? They're the boots on the ground. They're spending a lot of money on marketing and then tying up these opportunities to then sell it without having have any risk or money down besides a small earnest money deposit. So it's not that they own the property ever. They only have it under contract and how they make money. So they'll say at closing, I'm going to make a certain amount of money or they can say, Hey, you're going to have to put $5,000 down and I'll give you my contract. And so they're going to make money one way or the other. And the thing is, you're never connected to the person actually selling the property at the beginning. So, you know, things go a different direction, you know, it can get kind of sticky.

So you really need to know who you're dealing with and really have some trust and not just chase after deals because the property may not be in great condition. And you may never even see the property before you tie it up under contract by how you find them. I'll just finish up on that. You know, the interesting part about that is you can go to Facebook and get on investment groups and say, Hey, I am a qualified buyer. I have cash rate of spend in a specific market. And here's my email address, put me on your buyer list. So you're kind of putting yourself out there and into the worldwide web a little bit and exposing yourself, but that's a great way just to get on these lists and see what kind of flow comes through. But again, these don't sit on the market for very long. So you really need to be able to act quickly in order to take advantage of those opportunities. But yeah, wholesaling's a wild West game. So, you know, proceed with caution.

Tom:

Sure. I'm going to paraphrase a little bit. So at a super high level wholesalers, they're out looking for distressed or people need to sell right away. That's right. And they basically get it in contract this wholesaler, and then they sell that contract and never actually take ownership. Right. They almost, it's almost like an arbitrage position. Am I accurately depicting that?

Mark:

Exactly. That's exactly the way to put it.

Tom:

Awesome.

Michael:

Tom, have you ever bought a wholesale deal, a deal from a wholesaler?

Tom:

I have not. You know, I definitely have been approached to sell to wholesalers. Their marketing is relentless.

Michael:

We buy homes for cash!

Tom:

We buy ugly homes. Those guys are all the wholesaler ecosystem. And it's funny, the list of people that they're looking to potentially buy from. It's a kind of a rough list. They're like looking for death divorce, like whatever, kind of like quickly to sell. So, you know, as an investor, there's some potential to buy some off market deals from wholesalers, but you know, to Mark's point, you know, you got to still have a really good diligence process and know the deal. Yeah, no, your buy box. Awesome. All right. So this next question we have is from Andy Dobbs in New Jersey. So Andy asks, does Roofstock provide property management or do we need to find one ourselves? Mark, do you want to take the lead on this guy?

Mark:

Sure. So Roofstock doesn't actually provide the property management, but we do guide you through the process of how to find really qualified property management companies. So we take a significant amount of time when we bring on what we call our preferred property managers, we certify them and vet them to make sure that they really do work well with outside investors. So, you know, being an investor from out of state, you do have a different level of expectation with property managers because you will never see that property. You, you may not even be able to drive by it, right? So they can really be your eyes and ears. So we establish that network. So that really transitions to investors, having higher levels of confidence. So we will always guide you in that direction and have great profiles on our website, but you are always free to manage with an outside vendor, but you know, these are always great vendors that we're dealing with on a massive scale. So we do see, you know, how they're acting around other investors and that's great data to make sure that we're always working with the best.

Tom:

Yeah. And you know, I think it's great that Roofstock does this initial diligence, but I highly recommend as an investor doing that extra step and giving them a call and asking for some references and making that decision and you don't have to use one of Roofstock's property managers that has gone through this process. It's just available for you as a resource. And if you want to, you can self manage or you can find a different third party, property manager, you have options. It's just kind of giving you a step ahead in that process. Excellent. So this next question we have is from Steve in St. Louis. So Steve asks, so he's seen auction sites, auction.com, an example Xome where Mark used to work at are these sites like actual foreclosure sites and how do they different? What are considerations if I were to buy on one of these auction site, could I use financing? Is there contingencies? What are some of the unique risks? So Mark, this is right in your wheelhouse. So do you want to spiel for a little bit on some of these different auction platforms?

Mark:

Absolutely. This is an area that I stumbled into my first job, right out of college back in 2001. So, you know, there there's a lot of different types of auctions in the sense of there's tax lien, auctions. There's an actual foreclosure auction, which is what most people will understand what the courthouse steps. And then there's also REO options that even retail auctions. So kind of walking through, you know, the foreclosure and the REO, meaning real estate owned. That means the property has already been foreclosed on when it's an REO, it's typically bank owned, but what's happened in the last, last real decade is that, you know, after the recession that banks were realizing that there was less inventory available. And there earlier on in the process of buyer can kind of get the edge to buy that property the quicker they can get it off their books.

So again, if a property has been foreclosed upon it, typically in certain States will go to the courthouse steps and you can buy it as a foreclosure. The actual auction is like the final step of the foreclosure process, but in this instance that it doesn't matter there. Then it would go back to the bank and then they can sell it with full ownership. So let's just go into, you know, the foreclosure aspect. If you want to go to the courthouse steps and buy, I mean, it's a great time to be able to buy, but typically you're buying sight unseen. So you really don't know what's on the other side of that door and you cannot use financing. So there may be some really creative ways to get financing, but you're going to need to pay for that property, either at the courthouse step with a cashier's check or you put a certain amount down and then pay the rest soon after.

So that part you're going to have to be really buttoned up for. And these are nowadays being conducted even by auction.com, Xome or Hubzu, which are actually at the courthouse steps and working as a third party to really replace the attorneys who are doing these foreclosure auctions before. So you may see like the full on auction going on, where there's a big tent, big TVs, you know, there's a level of organization that's happened in the last, I would say five, six years to really make those more friend link to anybody coming in from the outside so that they actually have customer service representatives there to answer questions. So if you're really curious about those, I always suggest go, it is fun. It is really exciting. And there may be multiple auctions, like I'm in Dallas. So in Texas, they have what they call super Tuesday and you go to the courthouse steps.

There could be four different companies out there doing four different auctions. So it's really something that you need to get comfortable with and ask a bunch of questions that you'll meet people there they're wholesaling, you'll meet people there they're buying for their own. And then you'll have major institutions that are there and they probably won't talk to you about their strategy. That's kind of holding the cards close to the vest, but I would just say coming from an auction background, the risks, that's really something that you need to understand your own risk appetite because there's online auction portals, where you could go in and bid on properties that may have either been foreclosed upon or are just about to get foreclosed upon. And they're trying to sell it before it goes to foreclosure. So if you are going to take the risk, really understand, you know, what kind of websites you can go to and dig in deep, because if it's going to foreclosure, there may be other liens, whether it's federal liens or just other kind of sticky liens that you may have to navigate through.

So you really need to be prepared for that. But most of the time at the foreclosure, you know, any other liens are wiped out. So study, study, study, understand your risk, understand buying sight unseen, you know, have numbers in mind, don't get caught up in the auction. Cause that's something a lot of people get caught up in because it's that active bidding. It's a lot of energy. That's what the auctioneers do. I come from that background. I only have done online, but I have watched and studied the live auctions and they are entertainers. They want to squeeze money out of you. So go in, know your numbers, understand your risk, understand your rehab, know your numbers, know your numbers, know your numbers, and then proceed with that strategy that you've been putting together.

Michael:

Mark, I've got a question. Did I hear you right in saying that the banks might want to get these things at auction before the final step of foreclosure, but did I miss hear you?

Mark:

Yeah, well the banks have a few different plays sometimes. So if they bring it to foreclosure auction, they get to set a bid and they are the ones that say here's the amount that I would be owed and that I would set as the reserve. And so if they're going to go in and they are there and somebody is going to bid on that property, they need to meet that certain amount. And if that amount is not met and they can foreclose at that point on the property and then bring it to sell any other way that they would want, they could put it into a retail platform like MLS, or they could bring it to another auction site and try the auction again, because typically these are properties in distress situations, but the bank's goal is typically to sell the property as early on in the process. So they don't need to do all of these asset management post foreclosure, which means they have to have staff. You know, they have a lot of costs to get the property cleaned up and presented and ready for market. So they typically want to dispose of that as early in the process. And some of them don't even let it go to foreclosure auction. They'll sell alone in a 90 day delinquency just to say, Hey, I'd rather sell this off to someone else rather than have to go through this longer timeline, even though they could potentially make more money. It just makes more sense to them to take the money and, you know, let somebody else take care of the risk.

Michael:

Got it. Thanks.

Tom:

All right. This next question, I think is a good one for Michael here. Gilbert, from LinkedIn asked, what parts of the team should in can be local and what doesn't really matter in your, in your own state, or just thinking about locations of that real estate team that you have, where they should sit.

Michael:

Yeah, that's a great question, Gilbert. So I'll just share kind of how my team looks on a personal level. And so I've got property managers and agents and insurance agents local to the property out where the property is physically located and my CPA and my attorney are in California. And so that's kind of how I've set up shop. Now. I was chatting with an attorney, uh, excuse me, with a CPA. We had Joel Jensen on from Tax Sentry on the podcast a few episodes ago, and he's out in Utah and prepares returns in all 50 States for investors. And so I'm realizing now that you know, more and more of your team can likely be remote. I think having an attorney local to where you live in your state, because you're going to be subject to local laws. If you're setting up LLCs in your state, I think it's important to have an attorney locally, but it could also be beneficial to have a local attorney to where the property is since if you are going to get pulled into a lawsuit resulting from that property, the local laws to where the property are, are the ones that are going to be applicable. So understanding how to cover your bases in that state is I think important as well.

Tom:

I think an interesting point you make is having the insurance agent be local to the property. I'd love your thoughts on that. It's just, you know, being able to squeeze out the best deal on insurance or

Michael:

Yeah just having access to local markets, which isn't the case across the board. So for example, I work with a company in California that doesn't write that, that doesn't write insurance in the Midwest. And so the, a lot of the Midwest insurance agents just have access to different carriers and these carriers are gonna know the markets inside and out. There's a reason why the California insurance companies aren't participating in the Midwest because they don't know the market. And so very similar to having a local lender to the property. They can often be more creative because they know the market better allows them to be more competitive. So again, that's another part, a team member that I left off is lenders. So I have lenders local to the property in which the property is located. I also have lenders that work on the national level and I give them both a shot at it and whoever can come up with the best terms and financing usually gets the cake. So I think it's important. Your property manager obviously should be local. Your real estate agent, I think should also be local, pretty much everybody else. It could go either way. I think it's very beneficial to have local people to the, so at least you can ask those questions as a comparison to the folks that you have locally to where you live.

Tom:

That makes sense. You know, one of the markets that Roofstock operates in, in Florida and for properties that go through our certification process, we come up with an insurance quote that is an insurance quote. That will be, that is bindable, right? That a company is willing to agree to. But oftentimes we found that Florida, the national provider that we use is rates are a little bit higher than some of the local ones. So I guess in markets work and be a little bit more tricky and there's more potential liability on the insurance side really worth going in and getting the local quotes. And even if it's not that tricky, I like that. That's a great point. This goes in very nicely to the next question that Corey from Austin is asking. So, Hey, Roofstock a long time listener. First time caller. I'm about to acquire my third SFR with you guys. Awesome. Congrats Corey. And I'm wondering when is hazard insurance enough versus getting an umbrella policy, a related question that we got from somebody else as well, a good umbrella policy help replace the LLC. And I think kind of the hardest question is, you know, at what point do you start kind of bundling properties into umbrella versus like individual? So Michael this is right in your wheelhouse. What are your thoughts on this?

Michael:

Yeah, I would say Corey again. Great question. We just recorded a podcast with actually my California attorney and we asked this exact question. So I would say, definitely give that episode of listen. That episode should be released in about two weeks or so, but so again, I'll just share kind of my personal anecdote. When I first started investing in single family homes, there was a couple thousand dollars in cashflow a year coming off each property and to have an LLC in California, it costs $800 a year just simply to have it. So that expense wasn't justified given the amount of cashflow these properties were generating. So I bought three properties prior to opening up an LLC and then put everything, wrapped, everything up, did a quick claim deed and transferred everything to the LLC. Now there's two very distinct camps. There's the pro LLC camp and the no LLC camp.

And the pro LLC camp argues that, Hey, if you can bundle everything, put it into a silo and segregate your assets from your personal stuff. That's really great. The no LOC camp argues that you can get that same type of coverage, that same type of asset protection with a high liability insurance policy and an umbrella policy. Who's right, will only be determined once there's a lawsuit. And so it's all comes down to your comfort level, your comfortability, you can get very high liability insurance limits on the underlying policy itself on each specific property policy itself. And couple that with an umbrella policy and umbrella policies are very inexpensive for the amount of coverage that you're getting. And so you've just got to decide for yourself, Hey, how much do I have personally? And how much am I going to be putting at risk with this investment property that will often lead you down the right decision path to what makes the most sense for you?

But I think a lot of people really hung up on is, Oh, I need an LLC though, they’re pro LLC camp. And they think I need an LLC before I ever start investing. I would say that soften backwards. And I would say focus on getting the property first, making sure that the property is a good fit, then look to see how that LLC plays into the picture. And what's important to note here on this long soapbox rant is that a lot of lenders won't lend to LLCs if they're purchasing single family homes. So have a conversation with your lender, have a conversation with an attorney about what's involved with setting up and maintaining an LLC in your state. And just look to understand what the implications are of having one and have not having one. And then look to make your decision because it's really not a one size fits all approach Michael out.

Tom:

Well, you know that the benefit of the LLC is you can name it something. Cool. Did you name yourself a cool LLC Michael?

Michael:

I named… no. I just, well, it's tough because a lot of the cool names are already taken. And so you've got to make sure that it's not a, you know, that name is available. All the cool ones like surfer dude23 was already taken. I was pretty bummed.

Tom:

Sounds like your AOL chat bot.

Michael:

That's how I got my inspiration from.

Tom:

Awesome. Our next question is from front of the show, Bobby from Seattle asks, I've heard of investors making money, buying tax lien. What does this really mean? And is this a viable strategy for investing in real estate? Mark Mr. Tax lien? What are your thoughts there?

Mark:

Yeah. Right up my alley. Gosh, you've teed up these questions very nicely. I'm going to sound like the smartest guy. Well, here's really what it comes down to a tax lien is, you know, a municipal tax lien means that you owe money to the government. And that's really what when tax liens are purchased, it's typically because somebody didn't pay their County taxes. Right. And what's interesting about tax liens is a tax lien is a municipal tax lien sits in front of any other liens, like a mortgage. Okay. Now, you know, there's a caveat to that. Like federal tax lien, that's a whole nother story, but most properties don't have a federal tax lien if they have delinquent County taxes. So really what happens is every single state has different state statutes of what they're supposed to do with delinquent taxes, right? Because the County needs money to pay for schools, to pay for police officers, to pay for so many more things.

So they need that money and they sell off those tax liens just like at the County courthouse. And the person that buys them basically is paying the delinquent taxes on behalf of that homeowner. And in turn, they're going to earn a percentage of interest off of those tax liens. And so when you buy a tax lien, you don't just buy the property, but you're sitting in that first position, even beyond a mortgage. So in the event, let's say the, what they call redemption period. It's typically one, two or three years when that redemption period goes by. And if you're still the tax lien holder, you have the right to foreclose on that property and own the property. So when you used to hear about all these old infomercials about buying properties for pennies on the dollar, I guess they would say that's what the tax lien buying was all about.

So what people don't realize is that probably 99.5% of the time, somebody has got to pay off those tax liens. And you can earn anywhere typically between eight to 24% on that investment. And so look at it as almost like buying a note where you're very passively investing in real estate, but the kicker is you may have the ability to foreclose on that property, take ownership and own that property for potentially pennies on the dollar. But again, those stories are the rare ones it's like watching Storage Wars and finding that, you know, old school Bronco sitting in, you know, if the storage unit, you're the guy that bought that yeah. That is made for TV, but it does have, so the tax lien industry, um, it can be safe in some ways, if you're doing your due diligence and really understanding, Hey, if this property takes two years to what they called redeem, or when that redemption period expires, is it going to be in good enough condition where they're still valuing the property? And if you feel comfortable, you can invest knowing they're going to probably get that interest. If not, you could potentially foreclose on that property and own it for very little.

Michael:

So we should have a new segment on the show called confessional corner.

Tom:

Yeah.

Michael:

So I did this, I purchased tax liens, read a book and thought, Oh, this is easy. So I've purchased some tax liens out in Arizona. And the auction is while it was an online auction. And so I did some due diligence and understood, okay, what counties and, and Arizona, what States I should be looking at. So I decided on Arizona. And so I ended up purchasing a bunch. I ended up winning a bunch of these tax lanes and probably 80% of them paid us. And I was like, this is the easiest money I've ever made. This is so awesome. But so what I'm wondering Mark is, so the 20% that haven't paid off, this was probably three, three and a half years ago that I did this. The ones that haven't paid off, I think the redemption period in this County, Arizona is two years. What should I go do now? Because my understanding is that if I decide to for clothes in order to, for clothes, you need to pay off all the existing liens on the property. And so if someone had purchased the tax liens from four, five and six years prior to me, there are still these existing liens on the property that I would need to pay off in order to foreclose on the property. Is that accurate? Or do you know, what do I do now?

Mark:

Yeah. So two things I would do. Number one, I would send somebody out there to look at the property. Number two, I would, you know, really understand what the timeline looks like and understand if it's a judicial or administrative state where, you know, when the foreclosure happens, you know, like let's say you can actually file to get the tax deed. You need to know, you know, what all those steps are. And sometimes it's an admitted straight of approach. It's just paperwork. But if you have to go to the judicial approach, it means that you would have to actually have to go before a judge in order to earn those rights and earn the tax deed, where did that person would lose the property? So for you, you just need to understand what positions are out there, where do you fit in? And so a title search would show what other liens are out there.

Or you could go to potentially, yeah, I would say run a simple type of report, but also understand the condition of the property because it's something that you're like, man, I do not want that property. I want to I'll even pay my own taxes off. You can get yourself out of that position. If you happen to be the front runner, I would say, or if you happen to be in a position kind of buried in the middle, you may end up getting paid off at somebody ends up foreclosing and taking ownership of that property plus the interest, of course. So I would just understand your position and then if you need to spend some money to go out there and take a look at the property, because there's a chance you may get it. I would know what you actually are holding the golden ticket to.

Michael:

Sure, sure. And let's just say as a thought experiment that I'm in first position that they paid their taxes prior to when I purchased them. And, you know, I decided that I don't want to foreclose on the property. It's a mess. It's something I don't want to get involved in. Is there any risk to me having paid those taxes and kind of being that first position lien holder that I need to then do something or pay additional fees as a result of being that first lien holder?

Mark:

Yeah. Every state's going to be so different. I mean, these are state statues written back in like, you know, this 17, 18, 19 hundreds, like early, like way back when, so..

Michael:

Four score and seven years ago..

Mark:

It doesn't hurt to pick up and review on your own and really get to know, Hey, if I am the first lien holder, you know, and there's no other mortgages and this thing is clear to go, you know, what do I need to do? Do I want this? So there's a lot of questions that come with it. But I mean, if 80% of paid off, you'll probably find as it gets closer to actually redeeming during that period where you could potentially take the property, most of the delinquencies get paid off. Right, right. At the very end. So it may turn into that 99% kind of statistic that I gave you before.

So there's a lot of who knows at this point, but as you get closer, I would definitely want to know more information about, you know, what the condition is, where you fit in, in the front runner position. And it could be something that you could be that a half a percentile that ends up really good. So you never know. I mean, the story I used to tell people was we ended up doing a tax lien in Hilton Head, South Carolina. And it was a condo sitting on the water. I think we had 35 into it with this private equity firm and the kids that they have just lost a father who owned the property. None of them wanted to pay the property taxes there. They were just had a fight. Well, it went all the way through the foreclosure process. We ended up with a tax deed to that property and had 50, I think it was 58,000 into a $700,000 property. It happens, but don't expect it to happen.

Michael:

Right, right, right. I think there's a, I just had a couple aha moments. And the vast majority of them is that I had no idea what I was doing and for those listeners, but go get educated. Good. Don't do what I did.

Tom:

What is it like, ready shoot aim?

Michael:

That's right. That's right. Yeah. That was a good learning experience.

Tom:

Gosh, love this tangent right here. All right. Well, we're going to jump into the question.

Michael:

Great question. Bobby.

Tom:

Bobby K the man. Last question we have from Jessica out of Boston is how does Roofstock choose their markets and a related question, why is restock not available in all States? Mark, do you wanna take a quick pass at this guy?

Mark:

Yeah, absolutely. This is a kind of what I work on every day, just for those listeners out there. Uh, you, but Roofstock when we started, they really went to markets with a specific intention and that was around cashflow. Right? That's what most of our investors are always chasing is really quality cashflow. But what we're realizing is that, you know, appreciation may be a different play that other investors are more interested in and, or maybe even a blend of the two. So as Roofstock went to markets from like the st Louis is to the Cleveland's to Memphis and Birmingham, kind of the typical suspects, right?

Those are just very highly demanded markets because investors require a certain amount of cash flow. You can get 10% plus cap rates in some of those markets. But what we're trying to do is really balance out different investment strategies for all the different, uh, investors out there. So when it comes to, how do we choose our markets? We want to go to markets where we feel the real estate economy is definitely going in the right direction. That not only from a macro level, but also from a micro level, that there's really healthy local markets where the risk and return really feels good from, you know, the areas compared to what you can make in that cashflow. But we're also looking at kind of expanding that logic where we're saying, Hey, let's just make sure we're going to markets where there's enough supply. Right. And there's some affordability because certain markets like here in Dallas, I mean, it's gotten really tight.

And so there's just not much supply that we can source because there's so many other exit strategies that I would say are more geared towards owner occupants, right? So fix and flippers are sourcing properties and going towards those exit strategies rather than investors, because they think they can get more money. So being a marketplace, we have to really grant it, we have to react to the market and let it ebb and flow where we're trying to be the guys in the middle where supply and demand meet. Right? So that just goes to the whole, whole logic of it. You know, we're not available in every state, you know, Washington state, Oregon, California. Those are very much appreciation markets and you're just not going to have the same level of demand from investors. So we're always trying to cater to our network, but please reach out, be vocal, tell us where you want to go. And it really is a conversation point between what Tom and I talk about all the time. And he gives me a lot of feedback where the demand is. So if there's enough demand, the markets make sense. Like we're about to open up and De Moines, Iowa in Richmond, Virginia. And we feel really good about these markets. They're kind of economics. Those are areas we want to go to, but we want to hear your feedback so we can open up in more States and cities like that.

Tom:

Love it, love it. And opening up new markets all the time. Excellent guys. Well, thanks for the questions that everybody's been sending in and please continue to fire them in and don't be shy on how either advanced or how novice the question is. We're going to bring in the right folks. If we can't answer the questions ourselves, I think that's a fun thing about this network that we have. And Mark, thank you very much for joining us today.

Mark:

Thanks for having me on always a pleasure.

Michael:

No, the pleasure is ours.

Tom:

The pleasure is ours. Storage Wars. That was such a great show. My favorite part is when they, that one guy Darren. Yeah. And he's like, Oh, that's a $3 bill or, Oh, that's a $50 bill or a nonsensical bill. $50 is a real bill, like a $45 bill. Anyways. Okay. Enough of that. All right.

Mark:

I'll leave you with a good story if you wouldn't mind. So talking about storage Wars. So I had to go to auction school to become an auctioneer, right? And they actually have an auction school where you show up and for eight, you have to do 80 hours in Texas. And for two hours every day, we had to do tongue twisters and we had to do, you know, counting up, counting down five, 10, 15, 20, 25, 30 to 35, 40. What do you do around the rough and rugged rock, the ragged rascal ran, right. And do it all day long. And I'm just scratching my head like, teacher, I'm going to be an online option that really make a difference. So funny enough, but they always did a charity auction at the very end. And guess who walks into my auction school in Texas? It was Walt Cade of Texas storage Wars. I'm like, get out. This is, this is like living in a weird world, but the auctioneer world is really interesting, different real estate to watches, to tobacco and cattle. And there's all kinds of things you learn. But again, I kind of raised my hand, like I'm just here for the real estate online course. We don't have that. Get back to your tongue twisters Mark. So if you really want to talk about some funny stories, it's a great world. Auctioneer's are fun, but you know, there's kind of a new regime coming through more online auctions, which is a fun way for people to kind of get comfortable with, you know, buying from anywhere in the world. Very much like what Roofstock is doing with our marketplace. So yeah. Full of fun stories, but had to share that one.

Tom:

Awesome.

Michael:

So cool.

Michael:

Alrighty, everybody. That was our episode for today. Thank you so much for listening in a big, big, big, thank you to Mark Woodling. Always a real pleasure to have him on as always. If you liked the episode, feel free to give us a rating or review, or even if you didn't like the episode. No, don't give us a rating review if you didn't like the episode, wherever you listen to your podcasts, we look forward to seeing you on the next one.

Tom:

Happy investing.

Michael:

Happy investing.