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The SFR Show episodes

July 27, 2020 Ask Us Anything #2: Scaling, Wholesalers, Auctions & Foreclosure Sites, and Roofstock Market Selections
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.
40 min
July 24, 2020 How Michael Zuber Quit His Job on a Whim After Achieving Financial Independence
In this episode, Michael and Emil invite Michael Zuber back on to discuss the importance of learning your market very well, what he anticipates coming in the near future for the real estate market, and how he transitioned into retirement on a whim.
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Transcript

Emil:
Hey, everyone. Welcome back to another episode of The Remote Real Estate Investor. My name is Emil Shour, and today I'm joined by Michael Albaum and we're going to be interviewing another Michael Michael Zuber, who you guys might be familiar with. He was on another episode. We did, I believe it was episode 11 and it was a great conversation, really smart guy. And we wanted to bring him back for another episode case you guys don't know him. He's the author of a book called one rental at a time, which I highly recommend you read. I often cited as one of my favorite real estate investing books. All right. Let's jump in Michael, Michael zebra. I should say welcome back to the show because I'd have you again.

Michael Z:
Yeah, this, this should be fun. I love talking real estate love helping people. So that's what you do and I'm glad that the partner on another podcast.

Emil:
It sounded like the guys were telling you that your last episode, which if people miss that one, that was episode 11, that was like a hit. I still get messages from people saying I love the Michael Zuber episode. So, I'm excited. And I think we're going to have you as a regular. Hopefully we get you on like every other month to come and chat with our listeners and us.

Michael Z:
I'll be there anytime you ask, I really do enjoy this topic.

Michael A:
Awesome.

Emil:
So for people who are not familiar with you, can you give us the quick summary rundown of who you are and your story?

Michael Z:
Yeah, essentially, my story goes like this. I wasted my twenties, earning a bunch of money and spending it all I bump into rich dad, poor dad, it 30 years old realize I'm a complete idiot. I spend the next 15 years busting my butt during the day working a tech job. But I start sacrificing living below my means. And we start building a real estate portfolio, one rental at a time. It starts with houses. You know, I started investing long before the last crash. So a lot of the stuff we're kind of in the mix of now, I've seen before we moved out of houses into apartments, then the crash comes. All the banks say, no, we find a way to keep growing. Ultimately, we retired, my wife and I retired replacing two six figure incomes on rental properties. And you know, she's been out for about five years and I left February 1st of 2018. And haven't looked back, just enjoy this topic. Enjoy helping people see what's possible.

Emil:
I love your story and your book. I refer back to it all the time, one rental at a time. I think everyone who's listening should go read it. It's such a, it's a great story. I think a lot of other books I've read, you know, they don't get into the story as much and like the different challenges that arise throughout someone's investing career. And I love that you tackled those. So definitely recommend people go check that out.

Michael Z:
Yeah, I appreciate that because I, it's not a how to book. Right. You know, I don't, it's not a how to book. It is literally what I said. I read rich dad poured out and it changed my life. Here's a 15 year journey, which, Oh, by the way, happens to correspond to a crazy real estate cycle, both boom and bust. You know, lots of mistakes are included and ultimately success, but it was 15 years, one at a time, you know, some good days, some bad days. And you know, the book is really meant to create belief and confidence in people. I really hate that. I see a lot of people out there working to build a nest egg and then they give it to someone else. And in real estate that's often called a syndication. I want more people to learn their market. And you know, in this case come to Roofstock and, you know, make a selection, right. Bet on yourself. Don't take 50 grand and give it to some schmuck who goes, he has a big YouTube or yeah, YouTube presence. That's just stupid.

Michael A:
There are so many things that you just said that I want to touch on, that, I agree with one, I think, especially within the Academy, I talked to a lot of people about, you know, building a passive income portfolio and hitting X dollar mountain passive income. And they're like, Oh, there's no way I could ever do that.You know? Well maybe not today, maybe not tomorrow, but in a year from now at 10, 15, you're living proof that it is possible. And it took you 15 years to get there. So I love that. And then as far as the syndication stuff, I think that's so interesting because I think a lot of people use that as a crutch, right. I want to invest in real estate, but I don't want to go do the hard work to get there. And so I love that advice of, Hey, just go learn the market.

Michael Z:
Yeah. You only have to learn one. You know, learning a market is a skill it's researching. I talk and teach all the time about if you learn your market. And let's just, I don't know, pick a market like Fresno, where I am, right. It produces a 6% return and you can calculate it. It's easy math. Then your job is to go find seven and 8% yields. That's it. And sometimes the market's crazy like today, the market today is the strangest I've seen in 20 years. The supply of affordable housing is 30 or 40% below. What I am used to and the demand is high. And we're competing with owner occupants that can get mortgages now with a two on it. Right? My first mortgage on investment was almost 8%. So it's a very odd time. This is a time to learn a market, educate yourself, build confidence because it could change in a heartbeat. Come later this year or next year, I'm not saying it will. I'm just saying it could, this is the time to learn, learn, learn, learn.

Michael A:
There was, I think it was maybe a Warren buffet quote or something, but he talks about, you know, if you're not confident to go execute in a strong economy, there's no way you're going to feel confident to go execute in a weak economy.

Michael Z:
Oh yeah. I mean, yeah. I had not heard that one from Warren buffet, but he's so right. If you were to ask me, my best time to buy was 2010, 2010, we were buying houses for land value or less. And there were like literally houses on them. It wasn't just lots and nobody was buying it. It was crazy. You know, right after that financial company went out, Bear Stearns, I think. And it was a weird time and it wasn't hard to find they were in the MLS. Like any price excepted make an offer, like all capital letters. I'm like, okay, well I can write an offer and I'll write an offer, half of list and all that stuff. So our busiest year was 2010 and just nobody was around. It was just nobody. So yeah. I agree with you.

Emil:
Did people think you were crazy in 2010 for going and buying real estate? When it was kind of bottoming out?

Michael Z:
They did. When they, if they just heard right. If they just heard, Hey Michael and Olivia, Olivia is my wife named, just bought another house. They thought we were crazy until they realized, you know what, that was our hundredth or a hundred and fifth unit. Then they're like, Oh, they must be doing something. Right. But yeah, one of the reasons I still go to real estate meetups and I agree to talk is I want to see what the audience is doing because yes, I'll talk on any topic they asked me to, but I always leave like 20 minutes of questions and why I want this is I want the questions and all the questions in 2019, you're either a first time wholesaler or you were a syndicator who had never done a deal. And that's all I heard about. I'm like, Oh, we're near the peak. And I used that signal to sell 50 units of apartments in 19. So I have a bunch of cash ready to deploy if the market turns.

So I've danced through raindrops twice. We sold housing at the peak in Oh five Oh six.
And we sold apartments at the peak in 2019. So if you learn your market and you look every day, I've been doing it 20 years. And I still look every day. I look before this call and looking, does it mean by looking just as what's going on, what's new, what came off? What's been price drop, what came back on? It takes 20 minutes. Everybody can do it. The key is you can't do 17 different markets. You can't do 15 different types of real estate pick one. And for most of the people watching this, your most important thing to do during the day is work nine to five or eight to six or whatever it is. So find 20 minutes before after work to change your future. And you don't have to grow a portfolio to the size of mine. If you got to four or eight or 10, you're going to fundamentally change your life forever. And that should be good enough if you want more great. There's nothing wrong with four. Four is awesome.

Michael A:
I love that. I think, you know, keeping your finger on the pulse is so important because now you recognize change. Whereas if you're all over the place, like you're mentioning, you're not going to see it because you're not as involved. You're not, you know, embedded in that market so to speak. Yeah. So you mentioned something Michael, about how this is the strangest real estate market you've seen in 20 years. And curious to know, I mean, from everything that I've seen, I've experienced, everyone talks about, you know, we at the top of the market in 19 and now COVID hit and now there's this kind of impending kind of built up friction, but nothing I've seen really happen yet rates have dropped, but I haven't seen the prices come down like people were anticipating. What are you seeing? What are you anticipating? Obviously without a crystal ball?

Michael Z:
Yeah. Again, yeah, just, just one guy's opinion. I only know one market in any detail, but I think there's a couple of things, things that are very clear, there are sub markets everywhere. First and foremost, what I can already see happening in vertical cities, right? San Francisco, New York, LA right. Anywhere that's has towers. What we're seeing is space is good. So you're seeing class a tenants, which are always supposed to be the safest apartments to own. They're leaving because they have financial backing. They have a little nest egg, and they finally realized that, you know what? I don't want to live somewhere where I got to touch an elevator that, you know, 1700, hundred other people have touched. I want a backyard for my kids. I want an extra room for my office.

And you know, frankly, this health crisis has taught us space is good. So that's happening. San Francisco is going to be a totally different city in a year. It's going to be, it's going to be tent city. It's going to be, it's going to be disgusting. Like it was for me in the eighties and I've lived here 50 years. So I remember when San Francisco wasn't the shining stars. It's going to go back the other way. Unfortunately. So verticals out, that is already happening. Class A is not the safe place to be in major metros. The other thing we're seeing is suburban flight. It's already happening kind of localized right in the Bay area. You know, it's East Bay, that kind of stuff, but what's really going to happen. If the companies like Twitter and JP Morgan and all these others continue to say live wherever you want, which I'm not convinced they will.
They are certainly saying it now. But if they're still saying that in January, February, we're going to get the mass Exodus from New York and California because of high taxes, right? California's state taxes, 13.3%. I go three hours away to Nevada. It's zero, right? Eventually people are going to make those kinds of decisions. So this will fundamentally change the landscape. There will be States like New York and California who struggle for a decade, probably because they're going to be losing tax revenue and they're going to be having to cut services and people. And it's just going to be a different state, I think for New York and California. So, and then the last thing we're seeing is jumbo loans. Jumbo market is really turned off. Even if you're a Silicon Valley, RSU, IPO kind of stuff. It's hard to get a jumbo loan today. So that market, especially if you're out in the suburbs is slowing down like Fresno.

That's the one part of the market. That's building inventory. But that leaves conventional, right? Sub jumbo, affordable, good quality FHA, passable properties. That stuff is on fire. I mean like fire, there was a house I was interested in that just the other day for 199, my model said I could have paid 170 for it. So 1 69, it was bid up to two 19 because an owner occupant could come in with three and a half percent down. They can overpay my number one competitor. What I look at all the time as the consumer it's because if they are, they're either fearful or greedy. And if they're greedy, they're going to overpay. Because again, what's three and a half percent of 200 grand. It's like 7,000 bucks. What's three and a half percent of two 20. It's like 7,000 bucks, right? It's like not much more so they can overpay. And that's what's happening today. The below the median quality stuff is multiple offers in contract in 48 hours. It's nuts. I've never seen a market like this, not even Oh five Oh six was like this. This is nuts today.

Michael A:
Interesting. And something I want to circle back to Michael, can you help quantify and clarify for all of the listeners who maybe don't know what a jumbo loan is? That's not a loan for a jumbo jet is it?

Michael Z:
I'm sorry. Yes. So in the lending world, right? When you're buying a home, there is conventional and jumbo loan. So every city will have a loan limit where a conventional loan in. So let's just pick the Bay area. I think it's 5.10, or it's 5.08. So there are some limit. When you were looking to go get a first mortgage, you can't exceed or you're into what's jumbo territory. Jumbo loans are not traditionally backed by the federal government. They are put together by wall street and other lending institutions, a conventional loan, which is below that loan limit. It encourages home ownership. It does all these things. There are FHA typically back programs that say, if you meet this criteria, we will buy your loan. We will be the lender of it. So it's easier to get a yes answer. They're the cheapest loans. When you hear, you can get a 2.75% 30 year mortgage, it's always FHA conventional. They're talking about. So it's just basically what I boil it down to is where's the expensive homes. And where's the average home average homes are non jumbo, expensive homes or jumbo. And Oh, by the way, as a landlord, I never buy none of my properties or jumbo loans. Don't make great cashflow. It's just like the monopoly board, right? You don't buy park place and boardwalk is rentals typically.

Michael A:
Oh, I've been doing it wrong this whole time. I always buy park place, shame on me.

Michael Z:
Yeah. Well you, you got deep pockets.

Emil:
I want to circle back on something you mentioned, we're going to see potentially this flight for some of these major metros LA San Francisco, New York, a lot of people listening to this, it's called the remote real estate investor. A lot of people are looking to invest outside of California and New York. Do you see that meaning secondary markets are going to be more attractive?

Michael Z:
For sure. Like I said, I believe a lot of California is I can't speak for New York. I've never lived there, but I actually own a place there. It's where my daughter lives. A lot of us are thinking, you know, for I'll just pick on Twitter, right? Twitter was the one that came out and said, you live wherever you want forever. We don't care right. Until they said like 30 days ago. So if they keep saying that next year, and I think there's a general belief that they may or may not, if they do. Yeah. I mean, California is the most populous state for a reason. And if we lose even 5% of the population that says, I don't want to live in this high tax space with crazy homes, what I'm paying for a studio in San Francisco 4, 5,000 bucks a month rent, I can go buy something in Texas and have a yard and a front yard and all these other things.

Yeah. People make quality of life decisions. And then what's really going to hurt San Francisco. Why I'm down on San Francisco for the next decade is not only you're going to have the Exodus, but you are going to have people stop coming. That is what the feedback loop. That is the Silicon Valley, right? Computer science, engineers come, all the smart people come. They do whatever they do. Some of them win. Some of them lose. You know, it's just the history of the Silicon Valley. We're going to stop being attractive because we're going to have companies tell that 22 year old, 23 year old, no stay where you are. Stay in Nebraska, stay in Utah, stay in Texas, wherever it is, work remotely. So that input is going to turn off and then you're going to have the slow leak of people leaving. And yeah, I'm guessing the Bay area, real estate market sees a, you know, a double digit hit in the next year to 18 months. It's just why live here. If you don't have to.

Michael A:
Yeah. Something kind of taking it to the next step of, yes. We're going to see this mass Exodus. Do you now anticipate seeing some of these traditionally investment friendly markets becoming a lot more competitive now? Like what you're experiencing in Fresno, because now we are going to see maybe new owner occupants moving into the area.

Michael Z:
Yeah. You're only going to see new on occupants. You're gonna see new owner, new owner occupants with deep pockets

Michael A:
With money, yeah.

Michael Z:
Yeah. Right. They're going to be sitting there, like if you're an owner of anything in the Valley or LA you can sell it. And you know, if you bought it, you know, five years ago or more, you're sitting on a pile of equity, even if you have to take a small haircut, you're going to still have enough money to pay cash for pretty much anything you want in most of the rest of the country. So yeah, it's going to happen. And my guess is the States with no income tax that are warm weather are probably going to see even more flight from California. So close to us. That means Nevada and Texas, right? If you want to go out to Florida as well. So I think there's going to be a lot of quality of life decisions made in the next 18 months. And California is going to be a net loser. And there'll be some States that are clear winners. I think it's very logical to see how the dominoes go that way.

Emil:
I was just gonna agree with you that I think a lot more company we're seeing it, right? Like people, companies are being more open to remote and not only once companies realize we can work remotely, be as productive. They can also get away with, you know, if you live in Texas now, they're not going to pay you the same as when you were living in the Bay, right? Like you can afford a good quality of life for less. So I think knowing that, that makes more of like the business case for companies.

Michael Z :
Oh yeah. What I mean, just think about this, right? You're an engineer, right? And you went to a great college somewhere in the country. You can live where you're currently at for 75 grand a year for what it would take you to live for 150 or 160 K to live in San Francisco. They can hire two of them. You don't even have to be as productive. And they're going to come out ahead. If you're 75%... I mean, let's do the math, right? If you're 75% is productive and you cost half as much, you win simple math.

Michael A:
That's so true. It's a good, it's a really good way to put it. That's a really good wat to put it. So Michael, and your last episode, we had John, the main takeaway was single family homes, still the best way to go for the next 10 years or so, has your opinion changed at all as a result of the last couple of months?

Michael Z:
No, not at all. If anything, it's gotten deeper. I actually see again, excluding San Francisco, New York. And I think there's a very good chance that many markets actually see double digit price increases. Right? A lot of that's going to boil down to supply. This is a supply problem. And there are certainly, you could look at the chess board or domino's in see a branch that says, Hey, these forbearance requests that are out there, you know, double digit unemployment, a lot of that stuff. Could the necessitate more supply next year? You could certainly tie that together. I just don't see it. I see demand. So outpacing supply that the little trickle of Oreos or foreclosures that may come from forbearances that blow up, won't be there. I actually see most of the pain in apartments, which is again, why I think I was negative on multifamily in 19, but that was more just because cap rates got so low. What I'm seeing in 2020 is not only cap rates expanding, which means values come down. I'm seeing economic occupancy. I mean, just look at San Francisco mountain view rent last month, asking rents went down double digits in a month. That's freaking unheard of. Right? Economic occupancy is down double digits, right? So multifamily and…

Emil:
What is economic occupancy?

Michael Z:
Occupancy is how many heartbeats you have economic occupancies are how many heartbeats are sending you a check? So you can have occupancy at a hundred, but on economic occupied, stay at 50, which just means 50% of the people aren't paying you. Right? That's the fits in. And we're seeing occupancy go down economic occupancy, go down. We're seeing asking rent, go down double digits into a rising cap rate. I mean, I did some math the other day where like rents went down like 5% economic occupancy went down 5% in cap rates, went up a single point that values fall 30% fricking multi-families are going to get crushed, just crushed.

Emil:
Do you think that will be everywhere or kind of?

Michael Z:
I mean, there'll be exceptions, right? If you're in like a area where it's getting a lot of net migration and you're not high rises, I think any high rises in trouble. So your garden style, there will obviously be some winners just like there are going to be lots of winners in single family, but some clear losers, New York and San Francisco, there will be some winners like Texas, again could win because again, you're going to get net migration, no taxes. I think Florida could win. They got a little bit of a problem because of all their service sector and cruise lines and all of that stuff. So it's far easier to see single family winning than multifamily, right? I would say 90% of the country wins single family where maybe 30% of multifamily markets wind, because again, space is good. Everybody remembers the last crisis in today's space is good. Do you want to live in an 850 square foot, two bedroom, one bath apartment, or for the same cost? Do you want to move somewhere else and live in a, you know, 2200 square foot single story house. I mean, people are going to make these decisions over and over again. And right now space is good.

Michael A:
Yeah. So it's interesting. We talked about this projected growth in price for single family homes. I think so many of our listeners, and I know a lot of people within the Academy often ask, you know, what do I do? Do I sit and wait and sit on the sidelines? Or do I go by now? What our price is gonna happen? And of course, nobody knows, but you're anticipating prices to increase in the single family space. So having invested through the last recession, you know, what advice would you give to a new investor who is just coming to the game now?

Michael Z:
I would tell them again, I can speak to Fresno, right? I would tell a new investor coming to Fresno and I would tell them, this is the riskiest time to write offers because you're new, you're hungry, you're eager. You want to get a deal. And when you're in that state, you are very likely going to overpay. You are likely going to pay 220 because an owner occupant bid 219, and you're going to take a deal that I would have paid 174 and you're going to pay 221 and you're going to pay 50 grand too much. Yeah. So congratulations, you got a deal. You'll feel good for a week. And then you'll realize you created an alligator, which I write in my book, which is negative cashflow. So you need to learn your freaking market. Realize that patience is good. This is the most unusual market I've seen in 20 years. And if I'm saying that you should take that as a freaking grain of salt, because it's very easy to make mistakes. So that's what I would tell them. Do your freaking homework.

Michael A:
Love it.

Emil:
By the way we use the alligator all the time on the show. Now we always give you a shout out. Yeah.

Michael Z:
Thank you.

Emil:
So we always call out alligators and give you a shout.

Michael Z:
That's nice of you! It'd be so that's what I would tell them.

Emil:
That's great. I want to shift gears into something you actually talk about outside of. I mean, it's the ultimate goal of why we do all this, which is financial independence. And there were some questions I didn't get to ask you in the last episode that I wanted to ask you this time. I feel like a lot of us that's the goal, right? Like we're trying to build our real estate empire to either semi-retire or have financial independence. And take me back to when you actually retired, like how did it feel? Do you feel like anything really even changed? Is this something I think about all the time, like is anything you need even change? Am I just gonna want to keep, like, how did that feel?

Michael Z:
Alright so let's see if I can set this up for folks. So first and foremost, it was February, first of 2018, I worked at a place where that was the first day of the fiscal year. Right? Cause we just finished our year. We were off months. So first day of a new year, I'm 45 at the time. And all along, I'm telling myself I'll retire at 50 because I love my job. I'm having fun. I'm really freaking good at it. And I just, I love my team and all of these things, I go into the office. It's February 1st, I work in sales. So in sales every year they throw up the desk chairs and you reorganize and you get all these new things and your quota goes up a mile. And they had me reporting to an individual that I don't like respect or worse, trust.

This is not a secret to anyone. He has been at the organization longer than I have has a bigger list of friends. I find this as happening. I have about 10 minutes to think about it. I do play with in my head, the chess board that says, do I try to circumvent this, play every chip I've built over the last several years and make this something else? I quickly realized that that would probably be successful, but I'll lose the war. Right? I'll win the battle and lose the war. So we walk into the meeting, the schmuck starts talking and I'm like, I just can't work with you. Right. You're saying all these things and I can see the other side of your mouth moving. And I'm like, dude, you don't like me. I don't like you. This is not a secret to anyone. I suggest you create me a package and I will promise not to say anything nasty. That was it. It was a 10 minute thought. And so my wife, because again, I went to work excited, right? We just crushed it. We had a great year. I'm excited for the next challenge. Hoo, rah, get to the office, figure out, blah, blah, blah, blah, blah. I'm like, Ooh, don't think I could do that. Nope, really can't do that. So I just, I asked her, you know, I'm coming home, I'm done I'm out. And um, so I spend the next couple days, the day smiling so hard. My face hurt. I don't know if you've ever smiled that hard for that long. I called everybody in my phone. I mean A to Z, everybody got a phone call, but then problem set in. I'm a type, a person I've been running a thousand miles an hour since I was 12 years old.

I've had a job since 12, at least one job. Many times I had two or three and now it's, you know, Wednesday and then Thursday and then Friday. And I'm still up at 6:00 AM. Nothing to do. So after about two weeks of this, your mind's dangerous, man. You gotta watch out for your mind. I start to go into a depression. I'm 45. I'm financially free. I don't have any crazy wants or needs. So I'm good for the rest of my life. But I'm telling myself for hours a day that I'm a loser and I'm a failure and get off your ass and do something. So I was a weekend away from just getting a job, right. I'm pretty well known in the Valley. I could've gotten a job at another software place easily, but that's when I decided, I said, you know, I got to tell this story of one rental at a time.

I'm going to focus on that. And you know, that was something I suck at writing. It's hard to do. I'm not good at it, but that was going. And then I realized that, you know what? I want to help people. Right? I'm okay on the ladder. Right. That's where some people struggle as they get to a point where they're financially free, but they've done it keep climbing. And if that's you awesome, that is not me. Right. I'm where I'm at. I got a cushion. I'm good. So I want to reach down and pull people up. Cause I came from very, very humble beginnings. I have enough and don't need more. So I had to get I'm comfortable helping people up. And that's where the YouTube channel grew from now, nearly 8,000 subscribers. Over 2000 videos. I do four hours of original content every week, and that's been enough for me, but you know, being financially free at 45 and quitting in a whim, it felt good for a couple of days, but there were two, I've never been a person to see depression, but those two weeks were pretty dark.Your mind's a powerful thing and it could be used for good or bad. So I remember that timeframe. It was kind of scary.

Emil:
Yeah. Wow. I'm sure.

Michael A:
Thank you so much for sharing.

Emil:
Yeah. So did you, when you walk into that office, you already knew like I'm good. I've already reached where I need to. You just were working because…

Michael Z:
I thoroughly enjoyed what I was doing. I’d had done my job for free man. I had done it for free. I just love what I did.

Emil:
You're rare. You're rare in that. I feel like a lot of us are like building towards this place where it's like, I can't wait till I go in and I'm not in that camp. I'm not in that camp. I love you Roofstock, but like, like I like what I do. I do marketing and I like what I do, but it's like, there's a lot of people who were in the camp of like, I cannot wait to hand in my I'm quitting letter, but it's cool to hear that you were, you were still like going because you enjoyed it. And then you were in a place where you could change paths whenever you want to do. I mean, that's amazing. That's an awesome freedom.

Michael Z:
I probably could. I mean, if we wanted to, I mean like the earliest we could have been financially free and not suffer any kind of hardships financially with where we were, it would probably have been 42 or 43. So a couple of years earlier. So we were fine for a long time. Right. But yeah, again, I went to work that day. Excited is all get out because again, the best day of the year as somebody who just crushed last year is when you get to go attack the next year. And it didn't end up that way by 10 o'clock. I was like, Oh, I’m done.

Michael A:
Went sideways!

Emil:
Isn't it funny how your reward for a job well done is more work?

Michael Z:
Yeah, but I've been on that treadmill for 20 years. So one of my most frequent phrases in sales is we operate 90 day cycles. Right? I can get fired every 90 days for lack of performance. And you know, you do that long enough. You just, you become a callous to it. So it was exciting to me.

Michael A:
So many people I talked to, like Emil mentioned, you know, I feel like there's two kind of two types of people working towards financial independence. One is running towards something and you know, they like their job. But I think financially being free would be great or they're running away from something. They hate their job. They can't wait to be done with it. And for the folks that are running towards something that enjoy their job, I share with this again, I heard this quote somewhere, but it's dig your well before you're thirsty. Because for you, if you had said, you know what, I love my job. I never want to retire. Forget this whole investing thing. Why would I bother? I love my job. You wouldn't have been able to walk away, come that Monday morning.

Michael Z:
Oh yeah. Oh my God, you know how miserable I would have been? You're so right. If I couldn't have known in the back of my head that this idiot talking across the table from me has no idea that I don't need this place. Yeah. That would have, Oh man. That would have sucked. That would…

Michael A:
A shackle.

Michael Z:
Yeah. Oh, I gotta deal with you. Oh, I'm going to hate this every day.

Michael A:
Did you find Michael? Kind of sticking with human financial independence here that the, we just recorded a podcast the other week with a tax professional. And he was saying that, you know, someone, people who make a hundred grand equally, one from passive one from earned income, the guy who earns a passive for the person who runs a passively doesn't need to make as much because they'll actually going to be taxed less. So for your personal financial independence situation, did you find that you actually didn't need to replace the exact amount you were earning because of that? Because it was tax advantaged.

Michael Z:
Oh, absolutely. Yeah. I don't know what the exact math is. I'll be close, but yeah, I could probably, you know, bring in 30% less and live just the same because of different tax treatments, depreciation from a big portfolio hides a lot of top line income fall. He's absolutely right. And that's the beauty of real estate. Absolutely.

Emil:
That blew my mind when we did that episode, I had never thought about it. I had thought, okay, here's my income. Now that we're at a lifestyle where we like, I need to replace that, but it's totally different. Cause it's being taxed differently. So you end up with more of it at the end.

Michael Z :
Yeah. I mean depreciation, right? It's not a real expense, but it shows up on my tax statement every year and I'm writing off. I didn't look this last year, but it's gotta be almost 200 grand in depreciation that doesn't suck. That's awesome. That doesn't suck.

Emil:
That does not suck. I had one last question here. I watch your YouTube channel. I probably watch one or two episodes a week. And I forget who you were talking to. I think it was a guy named Matt and you casually kind of slipped in that you're planning in retirement, like full retirement at the end to like not have any property to sell it off and kind of have all this cash. And I was kind of like shocked. I'm like, yeah, I didn't know that was the plan.

Michael Z:
I'm not sure what the plan is. I remember that video basically. So we have a, my wife and I have a daughter and she is in New York as I think I shared earlier. She has no interest in real estate investing. So as we get closer to the end, it's going to be a choice on what we do. Cause one of the things we've always thought about is great. We'll give it all to her right now or at least most of it. Right. But she's made it very clear that she wants none of that. So my guess is we will probably sell off. Well, more than half of it later in life, you know, decades from now, we'll probably do some owner financing things such as that. So we get fair tax treatment, but she'll probably only end up getting 10 or 20 of the highest class assets just because she doesn't want them. But yeah, that's, that's a real possibility. I mean, if you would've asked me two or three years ago, it would have been a totally different answer, but yeah. She's like, yeah, she doesn't want him. She wants nothing to do with them. So we have to figure out something to do.

Michael A:
Interesting. Michael, is there a point that you foresee where you are only going to go into sell mode if you ever get to there where the buying the stop never see that happening for yourself? Never. I don't know what I shop till you drop.

Michael Z:
I mean, if I ever got like a health scare that said I had a year left to live or something, yeah, I'd be done because I think if your time horizon is longer than five years and you spend the time learning your market, you can't go wrong. If you only had a year left to live, you know, real estate selling costs cycles, it's possible to make a mistake. So as long as I see myself having five years of life left and that's the beauty of real estate, it doesn't have to be a young person's game, right? It's not like playing in the NFL or the NBA. I can take the skillset that I have and keep doing it in my market or heaven forbid get bored and move to another city and start over. I still have the same skill. So yeah. As long as I see myself living five years out, at least five years, I'll keep buying.

Michael A:
Awesome. And I'm just curious on a personal level. I love these interviews because we get to ask, you know, self-serving questions. You also have a portfolio invested in the equities market or stock market?

Michael Z:
Zero.

Michael A:
A hundred percent real estate?

Michael Z:
Yeah. I would say, gosh, 99.1% real estate and the rest is gold or silver.

Michael A:
Awesome.

Michael Z:
Yeah. The stock market, I read a little bit about in the book. I was big in the stock market. I was, you know, there's a lot of people day trading today rewind the clock 20 years. I was one of those idiots who were day trading and killing. Right. I reported a six figure profit year on my tax return day trading one year then by the tax time of the next year, I'd lost it all. And then some, because it will eventually turn, there's a famous guy out there now talking about stocks only go up. Yeah. Right. Yeah. I only go up when there's trillions of dollars being pumped into the market by the fed, just wait buddy. I'm so I've been there. I know what it feels like. Uh, and I've never been back. The casino is real. I mean, who would have guessed Wirecard German bank as a complete fraud with one point $9 billion. That was never there. You know, it's not a place for me. No, thank you. Never. Nope.

Emil:
That guy you're referring to, it's funny because he's like a media person. So part of it is like, he's just trying to get eyeballs and attention, but I wonder how many people kind of they're like, yeah, that sounds about right.

Michael Z:
I mean, he is clearly entertaining. I watch him. I actually follow him on Twitter. I think he's hilarious talks about the green hammer of death and all these things. I think he's hilarious. He has fun, but he is inadvertently bringing tens of thousands of 20 year olds in, tens of thousands of people taking their stimulus checks and gambling. And the worst thing is they're freaking winning. You go gamble at the roulette table and you hit the number first and you get paid out 12 to one or 18 to one the first time you are going to freaking stay at that table until you mortgage your house. Because you're going to remember that feeling the first time. And I don't know when it'll happen. It may go on for another six months. Right. But there will be a day and it will be nasty and it will come. And I say this as a person that has six figure scars on my back from when I did it 20 years ago. So I'm not going to be jealous. I mean, I know exactly how they feel. I know what it feels like to go to the craps table and win the first two times I get it, it's going to hurt.

Michael A:
Get that rush of adrenaline. And then you chase it. You chase it. Cause you remember the first time was so easy. Right?

Michael A:
Right. So I'm curious, Michael, if your daughter is not interested in real estate and you are strongly, you know, adverse to the equities market, what are you advising her to do? As far as investment income or passive income?

Michael Z:
I had this battle with my wife when my daughter chose her college degree. So here's the story. She's a senior in high school. She tells us that she wants to go get an arts degree, which as you might imagine, what we've just talked about did not sit well with me. I'm like, I'm like, okay honey. I remember. Cause I think it was monster was the dot was the job board at the time. I said, honey, maybe daddy doesn't know, go to monster and how me what kind of jobs you can get when you get out of school. Cause maybe dad doesn't know. So she goes to monster and she types in some arcane logic or words in like, I've never seen no searches, come back. No searches came back. It was like,

Michael A:
On the internet, nothing,

Michael Z:
Nothing. I'm like, I need this, you know, you're being too specific. Be more general. Right. And then she does it again. And I don't remember what they were, but I want to say like $12 an hour jobs or 15 hour, hour jobs come back. And I'm like, honey, realize that you're asking mom and I to pay 200 grand to get your education. Right. Which is the cost of her school for four years. I said, I can take you to in and out burger, that's a mile away. And they will pay you $18 an hour right now. Yeah. Help me understand. Well, that was a strategic error on my part. She started crying

She starts crying. She runs upstairs. My wife goes to see her. I can hear him poorer. Then my wife comes down. I've never seen her this angry. And she gets right up in my face and she's this little, and she starts beating on my chest. My daughter will go wherever she wants. She's not going to be like us. She's going to make do, which makes her happy, blah, blah, blah, blah, blah. We haven't worked this hard for all this time. She's going to be happy. Not like us basically. And I'm like, yes, dear. So I have not figure that out. Basically, my daughter's going to get a pile of money when I die. And I'm okay with that. That's my answer to that. I did not do that.

Michael A:
Right. Got it. Got it. Got it. Well, thank you again for sharing. This is getting real personal. This is great.

Emil:
What's that saying? Set it free, and if it's meant to be it will come back.

Michael Z:
We'll see. Not yet.

Emil:
I don't know if it applies here, but…

Michael Z:
There's always that hope that you know, that comes around and she says, well, what, tell me about that real estate thing, but she's 28 now. So it doesn't come around yet.

Emil:
All right, let's wrap this one. So we usually end episodes, we've been doing this thing lately where we kind of just have a random question outside of real estate investing. And I just thought of one I wanted to ask you. Okay. I know you can talk about real estate and personal finance for hours. What outside of those two topics, could you talk about with anyone for hours?

Michael Z:
So I was very good at running. What's called go to market strategies for software companies. I've repeatedly taking software from zero to a hundred million at many different companies once in as short as 30 months. So I'm very good at go-to-market building sales teams, finding someone's passion and really leading those kinds of teams. So that's where my passion started. Right. Was go to market strategy, all of that. So could certainly talk about that equally for hours and have in different speaking engagements.

Emil:
Wow. Do you think that has lended itself well to your investing career?

Michael Z:
Those skills? Not really in my investing career, no, but it has, since I've left work, you gotta be comfortable talking as we are, you know, my most valuable college class, which I get asked sometimes was actually in junior college, it was speech and debate by far that one class has made me millions of dollars by getting cause I was an introvert. If you can believe that when starting college I was an introvert and it was that class that kind of tried to break me out of my shell.

Michael A:
Awesome. Interesting. There's a show on HBO called Silicon Valley. Have you ever seen it?

Michael Z:
I have

Michael A:
I get a total kick out of it and I feel like it would be better if your alley being in Silicon Valley.

Michael Z:
Absolutely. Yeah. It's funny when they do the inside jokes, I've lived here long enough. I know exactly what they're talking about.

Michael A:
You're on the inside!

Michael Z:
I'm on the inside.

Emil:
It's pretty spot.

Michael Z:
It's remarkably accurate and, and embarrassing all at the same time.

Emil:
I love that show.

Michael A:
This was great. Michael, thank you so much for taking the time to come back on. I really, really appreciate it.

Michael Z:
Anytime guys.

Emil:
And we're excited to have you back on soon. Alright, everyone. Thanks again for tuning in and a big thank you to Michael Zuber as always such a great guy to talk to and has so much wisdom to share. Hope you guys got a lot of value out of this one. I know Michael and I did and we will catch you guys on the next episode. Happy investing.

41 min
July 24, 2020 How Michael Zuber Quit His Job on a Whim After Achieving Financial Independence
In this episode, Michael and Emil invite Michael Zuber back on to discuss the importance of learning your market very well, what he anticipates coming in the near future for the real estate market, and how he transitioned into retirement on a whim.
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Transcript

Emil:
Hey, everyone. Welcome back to another episode of The Remote Real Estate Investor. My name is Emil Shour, and today I'm joined by Michael Albaum and we're going to be interviewing another Michael Michael Zuber, who you guys might be familiar with. He was on another episode. We did, I believe it was episode 11 and it was a great conversation, really smart guy. And we wanted to bring him back for another episode case you guys don't know him. He's the author of a book called one rental at a time, which I highly recommend you read. I often cited as one of my favorite real estate investing books. All right. Let's jump in Michael, Michael zebra. I should say welcome back to the show because I'd have you again.

Michael Z:
Yeah, this, this should be fun. I love talking real estate love helping people. So that's what you do and I'm glad that the partner on another podcast.

Emil:
It sounded like the guys were telling you that your last episode, which if people miss that one, that was episode 11, that was like a hit. I still get messages from people saying I love the Michael Zuber episode. So, I'm excited. And I think we're going to have you as a regular. Hopefully we get you on like every other month to come and chat with our listeners and us.

Michael Z:
I'll be there anytime you ask, I really do enjoy this topic.

Michael A:
Awesome.

Emil:
So for people who are not familiar with you, can you give us the quick summary rundown of who you are and your story?

Michael Z:
Yeah, essentially, my story goes like this. I wasted my twenties, earning a bunch of money and spending it all I bump into rich dad, poor dad, it 30 years old realize I'm a complete idiot. I spend the next 15 years busting my butt during the day working a tech job. But I start sacrificing living below my means. And we start building a real estate portfolio, one rental at a time. It starts with houses. You know, I started investing long before the last crash. So a lot of the stuff we're kind of in the mix of now, I've seen before we moved out of houses into apartments, then the crash comes. All the banks say, no, we find a way to keep growing. Ultimately, we retired, my wife and I retired replacing two six figure incomes on rental properties. And you know, she's been out for about five years and I left February 1st of 2018. And haven't looked back, just enjoy this topic. Enjoy helping people see what's possible.

Emil:
I love your story and your book. I refer back to it all the time, one rental at a time. I think everyone who's listening should go read it. It's such a, it's a great story. I think a lot of other books I've read, you know, they don't get into the story as much and like the different challenges that arise throughout someone's investing career. And I love that you tackled those. So definitely recommend people go check that out.

Michael Z:
Yeah, I appreciate that because I, it's not a how to book. Right. You know, I don't, it's not a how to book. It is literally what I said. I read rich dad poured out and it changed my life. Here's a 15 year journey, which, Oh, by the way, happens to correspond to a crazy real estate cycle, both boom and bust. You know, lots of mistakes are included and ultimately success, but it was 15 years, one at a time, you know, some good days, some bad days. And you know, the book is really meant to create belief and confidence in people. I really hate that. I see a lot of people out there working to build a nest egg and then they give it to someone else. And in real estate that's often called a syndication. I want more people to learn their market. And you know, in this case come to Roofstock and, you know, make a selection, right. Bet on yourself. Don't take 50 grand and give it to some schmuck who goes, he has a big YouTube or yeah, YouTube presence. That's just stupid.

Michael A:
There are so many things that you just said that I want to touch on, that, I agree with one, I think, especially within the Academy, I talked to a lot of people about, you know, building a passive income portfolio and hitting X dollar mountain passive income. And they're like, Oh, there's no way I could ever do that.You know? Well maybe not today, maybe not tomorrow, but in a year from now at 10, 15, you're living proof that it is possible. And it took you 15 years to get there. So I love that. And then as far as the syndication stuff, I think that's so interesting because I think a lot of people use that as a crutch, right. I want to invest in real estate, but I don't want to go do the hard work to get there. And so I love that advice of, Hey, just go learn the market.

Michael Z:
Yeah. You only have to learn one. You know, learning a market is a skill it's researching. I talk and teach all the time about if you learn your market. And let's just, I don't know, pick a market like Fresno, where I am, right. It produces a 6% return and you can calculate it. It's easy math. Then your job is to go find seven and 8% yields. That's it. And sometimes the market's crazy like today, the market today is the strangest I've seen in 20 years. The supply of affordable housing is 30 or 40% below. What I am used to and the demand is high. And we're competing with owner occupants that can get mortgages now with a two on it. Right? My first mortgage on investment was almost 8%. So it's a very odd time. This is a time to learn a market, educate yourself, build confidence because it could change in a heartbeat. Come later this year or next year, I'm not saying it will. I'm just saying it could, this is the time to learn, learn, learn, learn.

Michael A:
There was, I think it was maybe a Warren buffet quote or something, but he talks about, you know, if you're not confident to go execute in a strong economy, there's no way you're going to feel confident to go execute in a weak economy.

Michael Z:
Oh yeah. I mean, yeah. I had not heard that one from Warren buffet, but he's so right. If you were to ask me, my best time to buy was 2010, 2010, we were buying houses for land value or less. And there were like literally houses on them. It wasn't just lots and nobody was buying it. It was crazy. You know, right after that financial company went out, Bear Stearns, I think. And it was a weird time and it wasn't hard to find they were in the MLS. Like any price excepted make an offer, like all capital letters. I'm like, okay, well I can write an offer and I'll write an offer, half of list and all that stuff. So our busiest year was 2010 and just nobody was around. It was just nobody. So yeah. I agree with you.

Emil:
Did people think you were crazy in 2010 for going and buying real estate? When it was kind of bottoming out?

Michael Z:
They did. When they, if they just heard right. If they just heard, Hey Michael and Olivia, Olivia is my wife named, just bought another house. They thought we were crazy until they realized, you know what, that was our hundredth or a hundred and fifth unit. Then they're like, Oh, they must be doing something. Right. But yeah, one of the reasons I still go to real estate meetups and I agree to talk is I want to see what the audience is doing because yes, I'll talk on any topic they asked me to, but I always leave like 20 minutes of questions and why I want this is I want the questions and all the questions in 2019, you're either a first time wholesaler or you were a syndicator who had never done a deal. And that's all I heard about. I'm like, Oh, we're near the peak. And I used that signal to sell 50 units of apartments in 19. So I have a bunch of cash ready to deploy if the market turns.

So I've danced through raindrops twice. We sold housing at the peak in Oh five Oh six.
And we sold apartments at the peak in 2019. So if you learn your market and you look every day, I've been doing it 20 years. And I still look every day. I look before this call and looking, does it mean by looking just as what's going on, what's new, what came off? What's been price drop, what came back on? It takes 20 minutes. Everybody can do it. The key is you can't do 17 different markets. You can't do 15 different types of real estate pick one. And for most of the people watching this, your most important thing to do during the day is work nine to five or eight to six or whatever it is. So find 20 minutes before after work to change your future. And you don't have to grow a portfolio to the size of mine. If you got to four or eight or 10, you're going to fundamentally change your life forever. And that should be good enough if you want more great. There's nothing wrong with four. Four is awesome.

Michael A:
I love that. I think, you know, keeping your finger on the pulse is so important because now you recognize change. Whereas if you're all over the place, like you're mentioning, you're not going to see it because you're not as involved. You're not, you know, embedded in that market so to speak. Yeah. So you mentioned something Michael, about how this is the strangest real estate market you've seen in 20 years. And curious to know, I mean, from everything that I've seen, I've experienced, everyone talks about, you know, we at the top of the market in 19 and now COVID hit and now there's this kind of impending kind of built up friction, but nothing I've seen really happen yet rates have dropped, but I haven't seen the prices come down like people were anticipating. What are you seeing? What are you anticipating? Obviously without a crystal ball?

Michael Z:
Yeah. Again, yeah, just, just one guy's opinion. I only know one market in any detail, but I think there's a couple of things, things that are very clear, there are sub markets everywhere. First and foremost, what I can already see happening in vertical cities, right? San Francisco, New York, LA right. Anywhere that's has towers. What we're seeing is space is good. So you're seeing class a tenants, which are always supposed to be the safest apartments to own. They're leaving because they have financial backing. They have a little nest egg, and they finally realized that, you know what? I don't want to live somewhere where I got to touch an elevator that, you know, 1700, hundred other people have touched. I want a backyard for my kids. I want an extra room for my office.

And you know, frankly, this health crisis has taught us space is good. So that's happening. San Francisco is going to be a totally different city in a year. It's going to be, it's going to be tent city. It's going to be, it's going to be disgusting. Like it was for me in the eighties and I've lived here 50 years. So I remember when San Francisco wasn't the shining stars. It's going to go back the other way. Unfortunately. So verticals out, that is already happening. Class A is not the safe place to be in major metros. The other thing we're seeing is suburban flight. It's already happening kind of localized right in the Bay area. You know, it's East Bay, that kind of stuff, but what's really going to happen. If the companies like Twitter and JP Morgan and all these others continue to say live wherever you want, which I'm not convinced they will.
They are certainly saying it now. But if they're still saying that in January, February, we're going to get the mass Exodus from New York and California because of high taxes, right? California's state taxes, 13.3%. I go three hours away to Nevada. It's zero, right? Eventually people are going to make those kinds of decisions. So this will fundamentally change the landscape. There will be States like New York and California who struggle for a decade, probably because they're going to be losing tax revenue and they're going to be having to cut services and people. And it's just going to be a different state, I think for New York and California. So, and then the last thing we're seeing is jumbo loans. Jumbo market is really turned off. Even if you're a Silicon Valley, RSU, IPO kind of stuff. It's hard to get a jumbo loan today. So that market, especially if you're out in the suburbs is slowing down like Fresno.

That's the one part of the market. That's building inventory. But that leaves conventional, right? Sub jumbo, affordable, good quality FHA, passable properties. That stuff is on fire. I mean like fire, there was a house I was interested in that just the other day for 199, my model said I could have paid 170 for it. So 1 69, it was bid up to two 19 because an owner occupant could come in with three and a half percent down. They can overpay my number one competitor. What I look at all the time as the consumer it's because if they are, they're either fearful or greedy. And if they're greedy, they're going to overpay. Because again, what's three and a half percent of 200 grand. It's like 7,000 bucks. What's three and a half percent of two 20. It's like 7,000 bucks, right? It's like not much more so they can overpay. And that's what's happening today. The below the median quality stuff is multiple offers in contract in 48 hours. It's nuts. I've never seen a market like this, not even Oh five Oh six was like this. This is nuts today.

Michael A:
Interesting. And something I want to circle back to Michael, can you help quantify and clarify for all of the listeners who maybe don't know what a jumbo loan is? That's not a loan for a jumbo jet is it?

Michael Z:
I'm sorry. Yes. So in the lending world, right? When you're buying a home, there is conventional and jumbo loan. So every city will have a loan limit where a conventional loan in. So let's just pick the Bay area. I think it's 5.10, or it's 5.08. So there are some limit. When you were looking to go get a first mortgage, you can't exceed or you're into what's jumbo territory. Jumbo loans are not traditionally backed by the federal government. They are put together by wall street and other lending institutions, a conventional loan, which is below that loan limit. It encourages home ownership. It does all these things. There are FHA typically back programs that say, if you meet this criteria, we will buy your loan. We will be the lender of it. So it's easier to get a yes answer. They're the cheapest loans. When you hear, you can get a 2.75% 30 year mortgage, it's always FHA conventional. They're talking about. So it's just basically what I boil it down to is where's the expensive homes. And where's the average home average homes are non jumbo, expensive homes or jumbo. And Oh, by the way, as a landlord, I never buy none of my properties or jumbo loans. Don't make great cashflow. It's just like the monopoly board, right? You don't buy park place and boardwalk is rentals typically.

Michael A:
Oh, I've been doing it wrong this whole time. I always buy park place, shame on me.

Michael Z:
Yeah. Well you, you got deep pockets.

Emil:
I want to circle back on something you mentioned, we're going to see potentially this flight for some of these major metros LA San Francisco, New York, a lot of people listening to this, it's called the remote real estate investor. A lot of people are looking to invest outside of California and New York. Do you see that meaning secondary markets are going to be more attractive?

Michael Z:
For sure. Like I said, I believe a lot of California is I can't speak for New York. I've never lived there, but I actually own a place there. It's where my daughter lives. A lot of us are thinking, you know, for I'll just pick on Twitter, right? Twitter was the one that came out and said, you live wherever you want forever. We don't care right. Until they said like 30 days ago. So if they keep saying that next year, and I think there's a general belief that they may or may not, if they do. Yeah. I mean, California is the most populous state for a reason. And if we lose even 5% of the population that says, I don't want to live in this high tax space with crazy homes, what I'm paying for a studio in San Francisco 4, 5,000 bucks a month rent, I can go buy something in Texas and have a yard and a front yard and all these other things.

Yeah. People make quality of life decisions. And then what's really going to hurt San Francisco. Why I'm down on San Francisco for the next decade is not only you're going to have the Exodus, but you are going to have people stop coming. That is what the feedback loop. That is the Silicon Valley, right? Computer science, engineers come, all the smart people come. They do whatever they do. Some of them win. Some of them lose. You know, it's just the history of the Silicon Valley. We're going to stop being attractive because we're going to have companies tell that 22 year old, 23 year old, no stay where you are. Stay in Nebraska, stay in Utah, stay in Texas, wherever it is, work remotely. So that input is going to turn off and then you're going to have the slow leak of people leaving. And yeah, I'm guessing the Bay area, real estate market sees a, you know, a double digit hit in the next year to 18 months. It's just why live here. If you don't have to.

Michael A:
Yeah. Something kind of taking it to the next step of, yes. We're going to see this mass Exodus. Do you now anticipate seeing some of these traditionally investment friendly markets becoming a lot more competitive now? Like what you're experiencing in Fresno, because now we are going to see maybe new owner occupants moving into the area.

Michael Z:
Yeah. You're only going to see new on occupants. You're gonna see new owner, new owner occupants with deep pockets

Michael A:
With money, yeah.

Michael Z:
Yeah. Right. They're going to be sitting there, like if you're an owner of anything in the Valley or LA you can sell it. And you know, if you bought it, you know, five years ago or more, you're sitting on a pile of equity, even if you have to take a small haircut, you're going to still have enough money to pay cash for pretty much anything you want in most of the rest of the country. So yeah, it's going to happen. And my guess is the States with no income tax that are warm weather are probably going to see even more flight from California. So close to us. That means Nevada and Texas, right? If you want to go out to Florida as well. So I think there's going to be a lot of quality of life decisions made in the next 18 months. And California is going to be a net loser. And there'll be some States that are clear winners. I think it's very logical to see how the dominoes go that way.

Emil:
I was just gonna agree with you that I think a lot more company we're seeing it, right? Like people, companies are being more open to remote and not only once companies realize we can work remotely, be as productive. They can also get away with, you know, if you live in Texas now, they're not going to pay you the same as when you were living in the Bay, right? Like you can afford a good quality of life for less. So I think knowing that, that makes more of like the business case for companies.

Michael Z :
Oh yeah. What I mean, just think about this, right? You're an engineer, right? And you went to a great college somewhere in the country. You can live where you're currently at for 75 grand a year for what it would take you to live for 150 or 160 K to live in San Francisco. They can hire two of them. You don't even have to be as productive. And they're going to come out ahead. If you're 75%... I mean, let's do the math, right? If you're 75% is productive and you cost half as much, you win simple math.

Michael A:
That's so true. It's a good, it's a really good way to put it. That's a really good wat to put it. So Michael, and your last episode, we had John, the main takeaway was single family homes, still the best way to go for the next 10 years or so, has your opinion changed at all as a result of the last couple of months?

Michael Z:
No, not at all. If anything, it's gotten deeper. I actually see again, excluding San Francisco, New York. And I think there's a very good chance that many markets actually see double digit price increases. Right? A lot of that's going to boil down to supply. This is a supply problem. And there are certainly, you could look at the chess board or domino's in see a branch that says, Hey, these forbearance requests that are out there, you know, double digit unemployment, a lot of that stuff. Could the necessitate more supply next year? You could certainly tie that together. I just don't see it. I see demand. So outpacing supply that the little trickle of Oreos or foreclosures that may come from forbearances that blow up, won't be there. I actually see most of the pain in apartments, which is again, why I think I was negative on multifamily in 19, but that was more just because cap rates got so low. What I'm seeing in 2020 is not only cap rates expanding, which means values come down. I'm seeing economic occupancy. I mean, just look at San Francisco mountain view rent last month, asking rents went down double digits in a month. That's freaking unheard of. Right? Economic occupancy is down double digits, right? So multifamily and…

Emil:
What is economic occupancy?

Michael Z:
Occupancy is how many heartbeats you have economic occupancies are how many heartbeats are sending you a check? So you can have occupancy at a hundred, but on economic occupied, stay at 50, which just means 50% of the people aren't paying you. Right? That's the fits in. And we're seeing occupancy go down economic occupancy, go down. We're seeing asking rent, go down double digits into a rising cap rate. I mean, I did some math the other day where like rents went down like 5% economic occupancy went down 5% in cap rates, went up a single point that values fall 30% fricking multi-families are going to get crushed, just crushed.

Emil:
Do you think that will be everywhere or kind of?

Michael Z:
I mean, there'll be exceptions, right? If you're in like a area where it's getting a lot of net migration and you're not high rises, I think any high rises in trouble. So your garden style, there will obviously be some winners just like there are going to be lots of winners in single family, but some clear losers, New York and San Francisco, there will be some winners like Texas, again could win because again, you're going to get net migration, no taxes. I think Florida could win. They got a little bit of a problem because of all their service sector and cruise lines and all of that stuff. So it's far easier to see single family winning than multifamily, right? I would say 90% of the country wins single family where maybe 30% of multifamily markets wind, because again, space is good. Everybody remembers the last crisis in today's space is good. Do you want to live in an 850 square foot, two bedroom, one bath apartment, or for the same cost? Do you want to move somewhere else and live in a, you know, 2200 square foot single story house. I mean, people are going to make these decisions over and over again. And right now space is good.

Michael A:
Yeah. So it's interesting. We talked about this projected growth in price for single family homes. I think so many of our listeners, and I know a lot of people within the Academy often ask, you know, what do I do? Do I sit and wait and sit on the sidelines? Or do I go by now? What our price is gonna happen? And of course, nobody knows, but you're anticipating prices to increase in the single family space. So having invested through the last recession, you know, what advice would you give to a new investor who is just coming to the game now?

Michael Z:
I would tell them again, I can speak to Fresno, right? I would tell a new investor coming to Fresno and I would tell them, this is the riskiest time to write offers because you're new, you're hungry, you're eager. You want to get a deal. And when you're in that state, you are very likely going to overpay. You are likely going to pay 220 because an owner occupant bid 219, and you're going to take a deal that I would have paid 174 and you're going to pay 221 and you're going to pay 50 grand too much. Yeah. So congratulations, you got a deal. You'll feel good for a week. And then you'll realize you created an alligator, which I write in my book, which is negative cashflow. So you need to learn your freaking market. Realize that patience is good. This is the most unusual market I've seen in 20 years. And if I'm saying that you should take that as a freaking grain of salt, because it's very easy to make mistakes. So that's what I would tell them. Do your freaking homework.

Michael A:
Love it.

Emil:
By the way we use the alligator all the time on the show. Now we always give you a shout out. Yeah.

Michael Z:
Thank you.

Emil:
So we always call out alligators and give you a shout.

Michael Z:
That's nice of you! It'd be so that's what I would tell them.

Emil:
That's great. I want to shift gears into something you actually talk about outside of. I mean, it's the ultimate goal of why we do all this, which is financial independence. And there were some questions I didn't get to ask you in the last episode that I wanted to ask you this time. I feel like a lot of us that's the goal, right? Like we're trying to build our real estate empire to either semi-retire or have financial independence. And take me back to when you actually retired, like how did it feel? Do you feel like anything really even changed? Is this something I think about all the time, like is anything you need even change? Am I just gonna want to keep, like, how did that feel?

Michael Z:
Alright so let's see if I can set this up for folks. So first and foremost, it was February, first of 2018, I worked at a place where that was the first day of the fiscal year. Right? Cause we just finished our year. We were off months. So first day of a new year, I'm 45 at the time. And all along, I'm telling myself I'll retire at 50 because I love my job. I'm having fun. I'm really freaking good at it. And I just, I love my team and all of these things, I go into the office. It's February 1st, I work in sales. So in sales every year they throw up the desk chairs and you reorganize and you get all these new things and your quota goes up a mile. And they had me reporting to an individual that I don't like respect or worse, trust.

This is not a secret to anyone. He has been at the organization longer than I have has a bigger list of friends. I find this as happening. I have about 10 minutes to think about it. I do play with in my head, the chess board that says, do I try to circumvent this, play every chip I've built over the last several years and make this something else? I quickly realized that that would probably be successful, but I'll lose the war. Right? I'll win the battle and lose the war. So we walk into the meeting, the schmuck starts talking and I'm like, I just can't work with you. Right. You're saying all these things and I can see the other side of your mouth moving. And I'm like, dude, you don't like me. I don't like you. This is not a secret to anyone. I suggest you create me a package and I will promise not to say anything nasty. That was it. It was a 10 minute thought. And so my wife, because again, I went to work excited, right? We just crushed it. We had a great year. I'm excited for the next challenge. Hoo, rah, get to the office, figure out, blah, blah, blah, blah, blah. I'm like, Ooh, don't think I could do that. Nope, really can't do that. So I just, I asked her, you know, I'm coming home, I'm done I'm out. And um, so I spend the next couple days, the day smiling so hard. My face hurt. I don't know if you've ever smiled that hard for that long. I called everybody in my phone. I mean A to Z, everybody got a phone call, but then problem set in. I'm a type, a person I've been running a thousand miles an hour since I was 12 years old.

I've had a job since 12, at least one job. Many times I had two or three and now it's, you know, Wednesday and then Thursday and then Friday. And I'm still up at 6:00 AM. Nothing to do. So after about two weeks of this, your mind's dangerous, man. You gotta watch out for your mind. I start to go into a depression. I'm 45. I'm financially free. I don't have any crazy wants or needs. So I'm good for the rest of my life. But I'm telling myself for hours a day that I'm a loser and I'm a failure and get off your ass and do something. So I was a weekend away from just getting a job, right. I'm pretty well known in the Valley. I could've gotten a job at another software place easily, but that's when I decided, I said, you know, I got to tell this story of one rental at a time.

I'm going to focus on that. And you know, that was something I suck at writing. It's hard to do. I'm not good at it, but that was going. And then I realized that, you know what? I want to help people. Right? I'm okay on the ladder. Right. That's where some people struggle as they get to a point where they're financially free, but they've done it keep climbing. And if that's you awesome, that is not me. Right. I'm where I'm at. I got a cushion. I'm good. So I want to reach down and pull people up. Cause I came from very, very humble beginnings. I have enough and don't need more. So I had to get I'm comfortable helping people up. And that's where the YouTube channel grew from now, nearly 8,000 subscribers. Over 2000 videos. I do four hours of original content every week, and that's been enough for me, but you know, being financially free at 45 and quitting in a whim, it felt good for a couple of days, but there were two, I've never been a person to see depression, but those two weeks were pretty dark.Your mind's a powerful thing and it could be used for good or bad. So I remember that timeframe. It was kind of scary.

Emil:
Yeah. Wow. I'm sure.

Michael A:
Thank you so much for sharing.

Emil:
Yeah. So did you, when you walk into that office, you already knew like I'm good. I've already reached where I need to. You just were working because…

Michael Z:
I thoroughly enjoyed what I was doing. I’d had done my job for free man. I had done it for free. I just love what I did.

Emil:
You're rare. You're rare in that. I feel like a lot of us are like building towards this place where it's like, I can't wait till I go in and I'm not in that camp. I'm not in that camp. I love you Roofstock, but like, like I like what I do. I do marketing and I like what I do, but it's like, there's a lot of people who were in the camp of like, I cannot wait to hand in my I'm quitting letter, but it's cool to hear that you were, you were still like going because you enjoyed it. And then you were in a place where you could change paths whenever you want to do. I mean, that's amazing. That's an awesome freedom.

Michael Z:
I probably could. I mean, if we wanted to, I mean like the earliest we could have been financially free and not suffer any kind of hardships financially with where we were, it would probably have been 42 or 43. So a couple of years earlier. So we were fine for a long time. Right. But yeah, again, I went to work that day. Excited is all get out because again, the best day of the year as somebody who just crushed last year is when you get to go attack the next year. And it didn't end up that way by 10 o'clock. I was like, Oh, I’m done.

Michael A:
Went sideways!

Emil:
Isn't it funny how your reward for a job well done is more work?

Michael Z:
Yeah, but I've been on that treadmill for 20 years. So one of my most frequent phrases in sales is we operate 90 day cycles. Right? I can get fired every 90 days for lack of performance. And you know, you do that long enough. You just, you become a callous to it. So it was exciting to me.

Michael A:
So many people I talked to, like Emil mentioned, you know, I feel like there's two kind of two types of people working towards financial independence. One is running towards something and you know, they like their job. But I think financially being free would be great or they're running away from something. They hate their job. They can't wait to be done with it. And for the folks that are running towards something that enjoy their job, I share with this again, I heard this quote somewhere, but it's dig your well before you're thirsty. Because for you, if you had said, you know what, I love my job. I never want to retire. Forget this whole investing thing. Why would I bother? I love my job. You wouldn't have been able to walk away, come that Monday morning.

Michael Z:
Oh yeah. Oh my God, you know how miserable I would have been? You're so right. If I couldn't have known in the back of my head that this idiot talking across the table from me has no idea that I don't need this place. Yeah. That would have, Oh man. That would have sucked. That would…

Michael A:
A shackle.

Michael Z:
Yeah. Oh, I gotta deal with you. Oh, I'm going to hate this every day.

Michael A:
Did you find Michael? Kind of sticking with human financial independence here that the, we just recorded a podcast the other week with a tax professional. And he was saying that, you know, someone, people who make a hundred grand equally, one from passive one from earned income, the guy who earns a passive for the person who runs a passively doesn't need to make as much because they'll actually going to be taxed less. So for your personal financial independence situation, did you find that you actually didn't need to replace the exact amount you were earning because of that? Because it was tax advantaged.

Michael Z:
Oh, absolutely. Yeah. I don't know what the exact math is. I'll be close, but yeah, I could probably, you know, bring in 30% less and live just the same because of different tax treatments, depreciation from a big portfolio hides a lot of top line income fall. He's absolutely right. And that's the beauty of real estate. Absolutely.

Emil:
That blew my mind when we did that episode, I had never thought about it. I had thought, okay, here's my income. Now that we're at a lifestyle where we like, I need to replace that, but it's totally different. Cause it's being taxed differently. So you end up with more of it at the end.

Michael Z :
Yeah. I mean depreciation, right? It's not a real expense, but it shows up on my tax statement every year and I'm writing off. I didn't look this last year, but it's gotta be almost 200 grand in depreciation that doesn't suck. That's awesome. That doesn't suck.

Emil:
That does not suck. I had one last question here. I watch your YouTube channel. I probably watch one or two episodes a week. And I forget who you were talking to. I think it was a guy named Matt and you casually kind of slipped in that you're planning in retirement, like full retirement at the end to like not have any property to sell it off and kind of have all this cash. And I was kind of like shocked. I'm like, yeah, I didn't know that was the plan.

Michael Z:
I'm not sure what the plan is. I remember that video basically. So we have a, my wife and I have a daughter and she is in New York as I think I shared earlier. She has no interest in real estate investing. So as we get closer to the end, it's going to be a choice on what we do. Cause one of the things we've always thought about is great. We'll give it all to her right now or at least most of it. Right. But she's made it very clear that she wants none of that. So my guess is we will probably sell off. Well, more than half of it later in life, you know, decades from now, we'll probably do some owner financing things such as that. So we get fair tax treatment, but she'll probably only end up getting 10 or 20 of the highest class assets just because she doesn't want them. But yeah, that's, that's a real possibility. I mean, if you would've asked me two or three years ago, it would have been a totally different answer, but yeah. She's like, yeah, she doesn't want him. She wants nothing to do with them. So we have to figure out something to do.

Michael A:
Interesting. Michael, is there a point that you foresee where you are only going to go into sell mode if you ever get to there where the buying the stop never see that happening for yourself? Never. I don't know what I shop till you drop.

Michael Z:
I mean, if I ever got like a health scare that said I had a year left to live or something, yeah, I'd be done because I think if your time horizon is longer than five years and you spend the time learning your market, you can't go wrong. If you only had a year left to live, you know, real estate selling costs cycles, it's possible to make a mistake. So as long as I see myself having five years of life left and that's the beauty of real estate, it doesn't have to be a young person's game, right? It's not like playing in the NFL or the NBA. I can take the skillset that I have and keep doing it in my market or heaven forbid get bored and move to another city and start over. I still have the same skill. So yeah. As long as I see myself living five years out, at least five years, I'll keep buying.

Michael A:
Awesome. And I'm just curious on a personal level. I love these interviews because we get to ask, you know, self-serving questions. You also have a portfolio invested in the equities market or stock market?

Michael Z:
Zero.

Michael A:
A hundred percent real estate?

Michael Z:
Yeah. I would say, gosh, 99.1% real estate and the rest is gold or silver.

Michael A:
Awesome.

Michael Z:
Yeah. The stock market, I read a little bit about in the book. I was big in the stock market. I was, you know, there's a lot of people day trading today rewind the clock 20 years. I was one of those idiots who were day trading and killing. Right. I reported a six figure profit year on my tax return day trading one year then by the tax time of the next year, I'd lost it all. And then some, because it will eventually turn, there's a famous guy out there now talking about stocks only go up. Yeah. Right. Yeah. I only go up when there's trillions of dollars being pumped into the market by the fed, just wait buddy. I'm so I've been there. I know what it feels like. Uh, and I've never been back. The casino is real. I mean, who would have guessed Wirecard German bank as a complete fraud with one point $9 billion. That was never there. You know, it's not a place for me. No, thank you. Never. Nope.

Emil:
That guy you're referring to, it's funny because he's like a media person. So part of it is like, he's just trying to get eyeballs and attention, but I wonder how many people kind of they're like, yeah, that sounds about right.

Michael Z:
I mean, he is clearly entertaining. I watch him. I actually follow him on Twitter. I think he's hilarious talks about the green hammer of death and all these things. I think he's hilarious. He has fun, but he is inadvertently bringing tens of thousands of 20 year olds in, tens of thousands of people taking their stimulus checks and gambling. And the worst thing is they're freaking winning. You go gamble at the roulette table and you hit the number first and you get paid out 12 to one or 18 to one the first time you are going to freaking stay at that table until you mortgage your house. Because you're going to remember that feeling the first time. And I don't know when it'll happen. It may go on for another six months. Right. But there will be a day and it will be nasty and it will come. And I say this as a person that has six figure scars on my back from when I did it 20 years ago. So I'm not going to be jealous. I mean, I know exactly how they feel. I know what it feels like to go to the craps table and win the first two times I get it, it's going to hurt.

Michael A:
Get that rush of adrenaline. And then you chase it. You chase it. Cause you remember the first time was so easy. Right?

Michael A:
Right. So I'm curious, Michael, if your daughter is not interested in real estate and you are strongly, you know, adverse to the equities market, what are you advising her to do? As far as investment income or passive income?

Michael Z:
I had this battle with my wife when my daughter chose her college degree. So here's the story. She's a senior in high school. She tells us that she wants to go get an arts degree, which as you might imagine, what we've just talked about did not sit well with me. I'm like, I'm like, okay honey. I remember. Cause I think it was monster was the dot was the job board at the time. I said, honey, maybe daddy doesn't know, go to monster and how me what kind of jobs you can get when you get out of school. Cause maybe dad doesn't know. So she goes to monster and she types in some arcane logic or words in like, I've never seen no searches, come back. No searches came back. It was like,

Michael A:
On the internet, nothing,

Michael Z:
Nothing. I'm like, I need this, you know, you're being too specific. Be more general. Right. And then she does it again. And I don't remember what they were, but I want to say like $12 an hour jobs or 15 hour, hour jobs come back. And I'm like, honey, realize that you're asking mom and I to pay 200 grand to get your education. Right. Which is the cost of her school for four years. I said, I can take you to in and out burger, that's a mile away. And they will pay you $18 an hour right now. Yeah. Help me understand. Well, that was a strategic error on my part. She started crying

She starts crying. She runs upstairs. My wife goes to see her. I can hear him poorer. Then my wife comes down. I've never seen her this angry. And she gets right up in my face and she's this little, and she starts beating on my chest. My daughter will go wherever she wants. She's not going to be like us. She's going to make do, which makes her happy, blah, blah, blah, blah, blah. We haven't worked this hard for all this time. She's going to be happy. Not like us basically. And I'm like, yes, dear. So I have not figure that out. Basically, my daughter's going to get a pile of money when I die. And I'm okay with that. That's my answer to that. I did not do that.

Michael A:
Right. Got it. Got it. Got it. Well, thank you again for sharing. This is getting real personal. This is great.

Emil:
What's that saying? Set it free, and if it's meant to be it will come back.

Michael Z:
We'll see. Not yet.

Emil:
I don't know if it applies here, but…

Michael Z:
There's always that hope that you know, that comes around and she says, well, what, tell me about that real estate thing, but she's 28 now. So it doesn't come around yet.

Emil:
All right, let's wrap this one. So we usually end episodes, we've been doing this thing lately where we kind of just have a random question outside of real estate investing. And I just thought of one I wanted to ask you. Okay. I know you can talk about real estate and personal finance for hours. What outside of those two topics, could you talk about with anyone for hours?

Michael Z:
So I was very good at running. What's called go to market strategies for software companies. I've repeatedly taking software from zero to a hundred million at many different companies once in as short as 30 months. So I'm very good at go-to-market building sales teams, finding someone's passion and really leading those kinds of teams. So that's where my passion started. Right. Was go to market strategy, all of that. So could certainly talk about that equally for hours and have in different speaking engagements.

Emil:
Wow. Do you think that has lended itself well to your investing career?

Michael Z:
Those skills? Not really in my investing career, no, but it has, since I've left work, you gotta be comfortable talking as we are, you know, my most valuable college class, which I get asked sometimes was actually in junior college, it was speech and debate by far that one class has made me millions of dollars by getting cause I was an introvert. If you can believe that when starting college I was an introvert and it was that class that kind of tried to break me out of my shell.

Michael A:
Awesome. Interesting. There's a show on HBO called Silicon Valley. Have you ever seen it?

Michael Z:
I have

Michael A:
I get a total kick out of it and I feel like it would be better if your alley being in Silicon Valley.

Michael Z:
Absolutely. Yeah. It's funny when they do the inside jokes, I've lived here long enough. I know exactly what they're talking about.

Michael A:
You're on the inside!

Michael Z:
I'm on the inside.

Emil:
It's pretty spot.

Michael Z:
It's remarkably accurate and, and embarrassing all at the same time.

Emil:
I love that show.

Michael A:
This was great. Michael, thank you so much for taking the time to come back on. I really, really appreciate it.

Michael Z:
Anytime guys.

Emil:
And we're excited to have you back on soon. Alright, everyone. Thanks again for tuning in and a big thank you to Michael Zuber as always such a great guy to talk to and has so much wisdom to share. Hope you guys got a lot of value out of this one. I know Michael and I did and we will catch you guys on the next episode. Happy investing.
41 min
July 21, 2020 Market Deep Dive: Birmingham Alabama with Matthew Whitaker
In this episode we do a deep dive with Matthew Whitaker from GK Houses on what makes Birmingham Alabama a unique investment market.

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Transcript

Tom:
Greetings and welcome to the remote real estate investor. And today we have a special episode where we'll be doing a market spotlight today. We're going to be focusing on Birmingham and we have a special guest today and Matthew Whitaker, and I'll be joined with my cohost Michael album. All right, let's do it.

Tom:
Matthew, thank you for joining us today.

Matthew:
Well, thanks for having me. I'm super excited about being on this new spotlight and excited about being able to present Birmingham to you.

Tom:
So Matt, why don't you tell us a little bit about your, your background and GK housing as well?

Matthew:
Yes. So I got into investing when I was 23 years old and bought my first house using a home equity line of credit off of a little house that my wife and I, or a girlfriend, fiancé at the time owned and started buying and selling houses and got really excited about it and quit my job, day job. I was doing it on nights and weekends and started flipping houses for a living thought. I was a big shot real estate investor at 23 and did that for about four or five years and pretty successfully we flipped about a hundred houses. I had some partners, I always joke that they had a lot of money and no time. And I had a lot of time and no money and we got married. So we formed a partnership. I was the operating partner that was out there buying and selling homes. We did about a hundred deals in four years. So for a 25 year old kid, that's out there wheeling and dealing. It was the good old days.

And I thought I had the tiger by the tail. And then as y'all know how the story ends in 2008, 2009 becomes the real estate market crash. And as Warren buffet says, when the tide goes out, you realize who was swimming, found any shorts on? And I looked down and I was one of the ones that didn't have any shorts on. So had I owned about 30 rental houses at the time or 30 homes that we were 15 of, which we were trying to flip 15 of, which were already rentals and we just moved everything into a rental portfolio. And so we started managing, we started out managing as a way to sell more homes though. We were kind of on the front end of turnkey world. And it was very new. The idea of selling homes or packages of homes to investors was very new at the time. And so we did that for three or four years and helped put together a big fund of local investors that bought up a bunch of Birmingham houses. But back in, let's see, 2013, we decided that we enjoyed managing more than the kind of deal of buying and selling.

We were more of a, we call ourselves grinders the more of the plotters. And so we enjoyed management. So we, I still invest on the side about, about 30 or 40 houses a year, still personally, with a partner. And, but my, my day job is I'm the CEO of a company called GK houses. And we started here in Birmingham and started, I always tell the story started with those 15 or 30 houses, depending on how you looked at it. And then started just growing that business. In 2013, we managed about 250 homes. And today we've moved out of Birmingham into eight different markets and manage about 26, 2,700 homes. But Birmingham is still my home. It's where our corporate offices it's where all of our back office accounting and all of our corporate team is. And so, um, Birmingham is the market. I know really well and, and still spend a lot of my time investing in

Tom:
Yeah, Matthew and GK houses are great friends of rootstocks and a great partner that we love to advocate for. And we actually are double dipping our podcast. We are having a podcast dedicated specifically to property management that is going to be coming out very soon with Matthew as well. But today, where is the market focus? So great partner.

Matthew:
I love anytime I get to get on and sing Birmingham's praises, it ha
36 min
July 21, 2020 Market Deep Dive: Birmingham Alabama with Matthew Whitaker
In this episode we do a deep dive with Matthew Whitaker from GK Houses on what makes Birmingham Alabama a unique investment market.

---
Transcript

Tom:
Greetings and welcome to the remote real estate investor. And today we have a special episode where we'll be doing a market spotlight today. We're going to be focusing on Birmingham and we have a special guest today and Matthew Whitaker, and I'll be joined with my cohost Michael album. All right, let's do it.

Tom:
Matthew, thank you for joining us today.

Matthew:
Well, thanks for having me. I'm super excited about being on this new spotlight and excited about being able to present Birmingham to you.

Tom:
So Matt, why don't you tell us a little bit about your, your background and GK housing as well?

Matthew:
Yes. So I got into investing when I was 23 years old and bought my first house using a home equity line of credit off of a little house that my wife and I, or a girlfriend, fiancé at the time owned and started buying and selling houses and got really excited about it and quit my job, day job. I was doing it on nights and weekends and started flipping houses for a living thought. I was a big shot real estate investor at 23 and did that for about four or five years and pretty successfully we flipped about a hundred houses. I had some partners, I always joke that they had a lot of money and no time. And I had a lot of time and no money and we got married. So we formed a partnership. I was the operating partner that was out there buying and selling homes. We did about a hundred deals in four years. So for a 25 year old kid, that's out there wheeling and dealing. It was the good old days.

And I thought I had the tiger by the tail. And then as y'all know how the story ends in 2008, 2009 becomes the real estate market crash. And as Warren buffet says, when the tide goes out, you realize who was swimming, found any shorts on? And I looked down and I was one of the ones that didn't have any shorts on. So had I owned about 30 rental houses at the time or 30 homes that we were 15 of, which we were trying to flip 15 of, which were already rentals and we just moved everything into a rental portfolio. And so we started managing, we started out managing as a way to sell more homes though. We were kind of on the front end of turnkey world. And it was very new. The idea of selling homes or packages of homes to investors was very new at the time. And so we did that for three or four years and helped put together a big fund of local investors that bought up a bunch of Birmingham houses. But back in, let's see, 2013, we decided that we enjoyed managing more than the kind of deal of buying and selling.

We were more of a, we call ourselves grinders the more of the plotters. And so we enjoyed management. So we, I still invest on the side about, about 30 or 40 houses a year, still personally, with a partner. And, but my, my day job is I'm the CEO of a company called GK houses. And we started here in Birmingham and started, I always tell the story started with those 15 or 30 houses, depending on how you looked at it. And then started just growing that business. In 2013, we managed about 250 homes. And today we've moved out of Birmingham into eight different markets and manage about 26, 2,700 homes. But Birmingham is still my home. It's where our corporate offices it's where all of our back office accounting and all of our corporate team is. And so, um, Birmingham is the market. I know really well and, and still spend a lot of my time investing in

Tom:
Yeah, Matthew and GK houses are great friends of rootstocks and a great partner that we love to advocate for. And we actually are double dipping our podcast. We are having a podcast dedicated specifically to property management that is going to be coming out very soon with Matthew as well. But today, where is the market focus? So great partner.

Matthew:
I love anytime I get to get on and sing Birmingham's praises, it has come from having a bad reputation for some certain things that happened in the past, but I'll tell you where Birmingham is a great place. And one of the things that people consistently say when they come here is number one, how green it is. So when you watch a movie about the state of Alabama, it's all red clay. And there are areas of Alabama that are certainly like that. But where I live is very green and very hilly. And they're amazed at how progressive, not just politically I'm, I don't want to get into that, but in terms of how it's moving forward. And we're really known for our food scene, our arts and culture scene. So very excited to get on and get to talk about the city that I live and have no desire to move. I get to travel a lot, obviously with my role as the CEO here at the company, but I have no desire to move because Birmingham is such a great place to live.

Tom:
Excellent. So the way that this episode is going to flow is we're going to start with some high level quantitative overview of the market. And then we're going to needle into math to talk about some of the specific qualitative of employer's points of interest and, and all that good stuff. So why don't we go ahead and start in our quantitative breakdown, and we're going to make this consistent for all the markets that we talk about first, the MSA. So the greater area of Birmingham, it has a population of 1.313 million, and this was based off of the last census data and map. What are the major cities that consists of the greater Birmingham area?

Matthew:
Great question. So Birmingham proper the city Birmingham is about 350,000 people, I think. And then it is made up of a group of municipalities. So one of the things that an investor would need to understand about Birmingham is it's not a County based government, but it's a very city-based government. So it's very fractured in terms of each little, like I live in Homewood, which is just South of Birmingham. And we have our own city government that manages our own school system, manages our own trash. Whereas somebody like a Nashville or a Kansas city would have a County based government. So that 350,000 people is Metro Birmingham. And then we have a bunch of municipalities in the kind of suburbs, so to speak what we call South of town and over the mountain area, which is all South of town. And then that also includes the Tuscaloosa area, which is where the university of Alabama is, which is about 45 minutes from Birmingham Southwest.

And obviously that area has grown a lot with, uh, with the university of Alabama, as most university towns are starting to grow. So that's where they make up that 1.3 million. There's probably 1.1 ish, a one to 1.1 in what I would consider really proper Birmingham. We don't manage specifically down in Tuscaloosa than Bessemer, which is about halfway between Birmingham and Tuscaloosa is the, is one of the other big towns or cities. And then Hoover, which is due South of Birmingham is another. So generally when you talk about the MSA, you talk about the Hoover Birmingham Metro area. And so Hoover and Birmingham are really the two largest communities in that MSA.

Tom:
Got it. I'm looking forward to needle again, a little bit on those specific, uh, as it relates to thinking about those areas as investors. So that area has seen pretty significant population growth. According to the information we have with census plus 2.8% over the last couple of years, it has a median household income of $57,500 as a medium household income. This is coming from the John Burns data, and there's a pretty significant amount of units. So when I say units, single family homes, there is 520,000 homes in this MSA where 26% of them are renters. And this is again, John Burns along with some census data. So continuing looking at some of these metrics that we have on Birmingham. So a major uptick in new permits to build single family residence. The last value in 2019 is 3,280, and that is up 17.2% year over year. A couple of other metrics to throw around the entry home value within Birmingham is about $134,800.

And this is coming from core logic. And the median rent, this is 1030 $2. Again, this is core logic where this is coming with a really steady rent growth. We'll actually have all the metrics, all the markets that I've seen as one of the highest that 6.5% increase in rent. The last couple of metrics I'll hit on before we get in to the quality of stuff that we'll talk with Matthew about is the rent tiers. So we see a rent tier, and this is again at John Burns metrics on the lower end of an $827, the mid $1032. That's that same median level and at the high tier $1,408. So those are the bands at which are identified in the Birmingham market. All right. So let's get back in talking about those specific main cities and other cities within the Birmingham market. So are the majority of the rental market, is it just an at Birmingham proper, or tell us a little bit about that. The distribution of rentals.

Matthew:
Let’s talk about Birmingham, because I think I need to kind of set the scene. So if you're listening at home and you wanted to bring up a map of Birmingham, what you will see is that Birmingham appears to flow from the North Eastern side of town down through the Southwestern side of town. And so one of the reasons for that is there is the start of the Appalachian mountains, just South of town and runs from the Southeast to the North are excuse me, from the Southwest to the Northeast, and then runs all the way up through South Carolina and in North Carolina. And, and so it starts here. And, and so if you think about when Birmingham was built, it was built in the early 19 hundreds, 1920s, and it was built because this was kind of the Pittsburgh of the South. It was a steel based industry.

So you had a lot of wealth here, and then you had a lot of workers to support that steel industry. There's a lot of mining happen up underneath the mountain. And so when you think about the housing stock, the housing stock started kind of from the Northeast and flows down through the Southwest. And that is the older housing stock that was built on flat land. So if you look at the map and you look at places like Bessemer, which I talked about going up, I 20 through midfield and Fairfield, and then the Western side of town is called West End. And then you get to the Eastern side of town, which is, and starting to head North towards the airport, Woodlawn, Terrant Roebuck. You're talking about, East Lake, you're talking about areas that were built a lot of times in the, uh, some of those areas started in the twenties and then were built through about the forties or fifties.

So when you think about investing in Birmingham, you need to kinda know what the age of the home is. And that's kind of the first thing I think is important is when houses are built and 19 hundreds, they were built with the idea, there was no air conditioning. And if you've never been to the South in the summer, it is really hot here. And we're, we're recording this during the summer. So I'm coming right out of the heat and it's a hundred and something degrees, heat index with almost a hundred percent humidity. And, and so that is really hot. So you can imagine the ceiling, sometimes in those homes were 12 feet tall so that the heat would rise. And so when you're investing, you want to make sure that either those ceilings have been lowered, because now you're going to be required to have air conditioning in them.

And if you buy this older housing stock, you just need to know that it's older housing stock. So your repairs and maintenance are going to be a little bit higher. And what you'll probably want to dig into some of those, but let me, I'll give kind of the 20,000 foot view. And then we can dig into some areas. As move Northeast. And as you move North, and as you move further West, you get into more homes that were built in the fifties and sixties. So there was another kind of housing boom, around that time, those are more of your brick ranchers, more of your wood, three bedroom, one and a half, one to one and a half, two bathroom homes. And these, I call these your tanks. I mean, they're built for modern amenities because we started to use an air conditioning back then, but they're very efficient.

They have closets, but they're not huge closets. They're just a very efficiently built house. So you might find a 1200 to 1400, 1500 square foot home in these areas. And they are great rental houses because again, their tanks, they just hold up really well. They're again, they're very modern people enjoy them. The one bedrooms obviously rent a little bit less than the two bedrooms. Anytime you get multiple, excuse me, not the one bathrooms, uh, rent less than the two bathrooms. Anytime you get multiple bathrooms. Very important. Now, one of the interesting things too, is what I would consider the more A-class housing stock is South of town. So imagine in the sixties and seventies.

Tom:
Is that Hoover?

Matthew:
Yes, you're talking about Hoover. You're talking about Vestavia, Homewood, mountain Brook, and these areas, these homes are hard to buy and make the rental numbers work, but these are all built up on the mountain. So when we say over the mountain, you had more, as technology came in along and building, you are building these homes on the side of mountains. And so the housing stock is much younger as you get more vertical in Birmingham. And now if you're listening to this in Denver, you might fly into here and wonder where the mountains are. There's all rolling Hills, but we call them mountains. And then as you get further North, just like any city, it grew out, right? You're going to get into areas like Fultondale and Gardendale North. You're going to get into areas like Trussville to the East. You're going to get into areas like Hoover and kind of the Indian Oak mountain Indian Springs area, where my wife grew up, where Oak mountain state park is. And then as you go West, you're going to get into Hueytown and pleasant Grove.

Now these are your B plus neighborhoods that are kind of out a little bit further great areas to buy for high appreciation, but there's suburbs there. People are going to be driving into the city to work. And so, you know, just like any town, you can pretty much dictate what the pricing is of the house based on when it was built and what the housing stock was built for.

Tom:
I think one of my favorite adjectives for a rental property is a tank property. That just goes on. You didn't mention what cities you said it was in the West or the Southwest. Is that like pleasant Grove and Fairfield or…

Matthew:
Yeah, Hueytown pleasant Grove. Our Fairfield's more of that first area that I was talking about that was built more of a C class neighborhood. But when you get into Hueytown and pleasant Grove, you're talking about B plus B plus properties with high possibility for appreciation, a lot of home ownership in those areas. So really if you talk to some of the local investors, those are some of the areas that they like to hit the hardest.

Michael:
Got it. Matthew, I've got a question for you. What I want to know is why are people living in Birmingham and are moving there? You know, there's gotta be job, pull job growth. Can you talk to us a little bit about who some of the major employers are and why folks are headed that way?

Matthew:
The biggest employer in Birmingham is university of Alabama at Birmingham, the hospital and the university. So when you combine that it is a teaching hospital, it's one of the, in the Southeast, it's probably one of the biggest teaching hospitals. So it has a huge draw. You can imagine from Mississippi, from all parts of Alabama. And so we have a bunch of doctors and students that are learning at UAB. And then of course the school university of Alabama at Birmingham, the next thing that's a huge employer is Alabama power, AlaGasCo, kind of the utility companies that service the state. And then another thing that's exciting is we have two, no, excuse me, three different car automobile manufacturers within about an hour and a half of Alabama. So to the Southwest, as you go towards Tuscaloosa, which we talked about earlier, there is an area down there called McCalla.

It is where I 459, which has kind of the bypass meets back up with I 20. And if you keep on going down, [inaudible] right there. That is where the Mercedes-Benz produces the M class Mercedes. So the SUV Mercedes, and so McCall is a great area to buy rental homes. You're talking about a lot of new builds going on. That is where a lot of, and they continue to add square footage onto that facility to build more M class Mercedes. And that obviously feeds jobs. People traveling from Tuscaloosa and people traveling from Birmingham. If you go East on I 20, you have the Honda Odyssey van is produced in Leeds. So great area. Trustful sees a lot of their executives that come in from Japan. One of my old partners used to rent to all Honda executives, and they would come in from Japan and live here for two or three years, and then go back to Japan.

So, and obviously the having building the Honda Odyssey van, there's a ton of you don't think of just Honda, but you also need to think of all the suppliers that have to support a big operation, like building that Honda Odyssey van, building that M-Class. And then if you go due South, you breach Montgomery and just South of Montgomery, and that's, this is only about 60 or 70 miles South. You find the Hyundai plant, and I'm not sure exactly what build there. I would imagine most of the Hyundai workers work in Montgomery, but you still have some of the suppliers that are supplying all three of those in and around the Birmingham area, just so they can be very centrally located. So we have a, so that's pretty exciting. I mean, Mercedes has been there probably 20 years, maybe a little bit longer, maybe 25 years building that M class Honda came about about eight, 17 or 18 years ago.

And then the Hyundai plant is newer, probably 10 to 12 years. There's just a lot of exciting things going on. Amazon is building a facility now in Bessemer. So there's a big kind of gold rush in the Bessemer area just because they know there's going to be, have to be a lot of people that are going to support that Amazon distribution facility. Birmingham has been doing a great job of investing in the city has built new hotels in and around the downtown area. And we're also building a brand new football stadium too, for the UAB blazers. And it's going to hold things like concerts. And so there's just a lot of money right now being invested in and around the Birmingham area. So really a lot of exciting things going on.

Tom:
That's awesome. You know, we already touched a little bit on education, major colleges, but UAB, as well as university of Alabama,

Matthew:
Yeah, University of Alabama is down in Tuscaloosa, which is about 45 minutes to an hour Southwest of Birmingham. You have, let's see, you have Sanford university in Birmingham. You have Birmingham, Southern college is also obviously located in Birmingham. Yeah, you Auburn is about an hour and a half to two hours, South East of Birmingham and a place called Auburn, Alabama, which is pretty obvious Auburn in Auburn, but it is almost a when you get to Georgia. And so there's a lot of kind of university life. You see a lot of university students in and around. And of course the medical school at UAB brings a lot of people in. We have rented a lot, especially when we have homes in and around the South. What we call the South side of Birmingham, which is basically South of the entrepreneurial district. We have a lot of med students, dental students that rent with us.

Tom:
And is that in the general Southern part? You said Southern part of Birmingham.

Matthew:
Yeah, It is. If you kind of zoom in on Birmingham and you look what I would call in between Homewood, if you look where Volkan is, which is a statue that was dedicated to the iron ore industry in and around their five points South, all of that is where a lot of the young people live that are going to those universities.

Tom:
Very cool. How about let's touch on transportation? So in looking at it, it looks like it is almost like an X from 65, 22, 20, 59. So it looks like a major central hub of a freeways in the South that all go through Birmingham.

Matthew:
It absolutely is a Nashville about two hours to the North. Atlanta's about two hours to the East Jackson. Mississippi is about two or two and a half hours to the West. And then Montgomery is about an hour to the South. So it's very centrally located. Half the people here are Atlanta Falcons fans. The other half are Tennessee Titans fans. And so it is a very centrally located city and very easy to get to. And then in transportation, within the community, most people drive everywhere here. It is not a, unless you just live downtown and work downtown, which is, it's not an overly big downtown area you're going to drive to work. So kind of the main corridor where a lot of the, where it gets clogged during the week would be that 280 as you go South and East is a very heavily traveled road. I 20, I 65 coming from the South and from the South West. And that kind of tells you where the people are, right. It tells you where the people are and what they're doing. And then I 65 South into Birmingham in the mornings is very busy. So Birmingham is kind of spread out just because it, as you moved across the mountain, it does flatten out a bit and it allowed for the city to kind of expand,

Tom:
I’m smiling as I'm hearing this, I'm so excited about this series of market spotlight. I'm learning so much about Birmingham and I'm like, so excited dip my toe into the investing market, continuing down. Well, there's also an airport right in Birmingham.

Matthew :
Yeah. We've got what we call an international airport. I'm not sure where that international flight flies. I think it flies at The Bahamas, which is good. I mean, everybody's got to go to The Bahamas, right. But what I tell people is we have major flights in from Denver, obviously, and from Atlanta into Detroit, into New York. So it really is a two flight place. We fly obviously Dallas and Houston direct, but unless you're going to one of those kind of major cities, you're really going to, it's going to be a two flight place, which is fine though. I mean, Birmingham so easy to get around. I always tell people, you know, Atlanta is one flight away from everywhere, but you took two hours to get to the airport. Birmingham takes me literally 10 minutes to get to the airport and then another five minutes to get to my gate. And then I can fly to Atlanta and in 45 minutes. So it really saves me. I get placed as faster than people do in Atlanta.

Michael:
And Matthew, speaking of getting places, do you all have traffic and understand you're speaking to a couple of California, so we gotta be careful here.

Matthew:
Look, I've been in Atlanta on the bypass, the two 85 bypass. And it is really bad. There's only a couple areas in Birmingham that are probably that bad or, or could even like sniff being that bad. That two 80 corridor is really tough in the morning. It may take you an hour to come 15 miles, 20 miles in, but a lot of people do it. Like it's amazing to me. We keep making it wider and wider and wider. And as you know, it also makes it worse before it gets better. And then by the time they finish it, it feels like it needs to be wider. And that's where I would say a lot of the housing growth is going right now is South and East down to 80. So you can see Chelsea down there in the bottom right hand corner of the map. If you're looking at it, Chelsea is a really growing thriving area.

Again, anywhere around McCalla is really growing. That's where they're building a lot of homes. I've got some great friends that are one of the largest builders in Birmingham, and they consistently build in those areas and build in Trussville, which is just East of town. So they're still building in the suburbs. There's not a lot of infill building going on right now. And they continue to sell homes. Even during this market, when we're recording, this is kind of coronavirus world, and they're still selling homes. They're still building them. They still have people that are interested in buying them. So we really feel like in Birmingham, we've got a little bit of a shortage in the housing.

Tom:
Yeah. I mean, it's one of the highest SFR applications for building new houses way up there. And looking at the beginning of some of those metrics, let's touch on investor friendly related matters. So is there any concepts of rent control or, you know, legal concerns around unlawful detainers or three-day notices I'd love just kind of, you're taking, you're probably an expert at this as a property manager, as a CEO of a property management.

Matthew:
Yeah. Unfortunately, sometimes, unfortunately, fortunately. Yeah. So Birmingham is a very conservative, well, Alabama let's say, cause because most landlord tenant laws are state specific. Alabama is a very conservative politically state. Birmingham is a very progressive city though. And so, but still most of the laws are driven, are state driven, landlord tenant laws. So evicting a tenant is easy technically to get done, but it does take a while to get done. And in Birmingham that's probably the biggest drawbacks to Birmingham is sometimes it takes as many as 60, sometimes as many as 90 days to get someone set out from the time you fall an unlawful detainer to the time you actually set them out. So that is a really long time, even in a place like California. I think that's a long time. The good thing about Birmingham though is again, it is a very landlord friendly laws. The landlord tenant law is very, is it really written landlord friendly. We have very low property taxes, relatively speaking. So as a percentage, it's way less than a lot of the other communities around the country. And look, there is no rent control. I don't ever expect that we might be one of the last places in Birmingham to have that. So it's again, pretty much landlord friendly, but you want to make sure you get a good resident in your home so that you don't have to evict them.

Tom:
Makes sense. My other kind of question on, I guess this is sort of landlord friendly. I know some areas have a lot of HOA ways and some of these hos, you know, they have sneaky little rules and the bylaws about being an owner occupant. And is that common in Birmingham?

Matthew:
It's not, we managed in places like Nashville and Atlanta where that's very common. So very familiar with that. Birmingham is not that way right now. It could come that way. As the housing stock that's being been built in the last 10 to 20 years, maybe it becomes more rental stock, but right now it is definitely not that way, especially in the areas where investors are buying.

Michael:
So it sounds like Matt, from the descriptions that you've been giving, this is a very seller friendly market. It's really a sellers market at this stage of the game. Is that fair to say,

Matthew:
Is it is an investor market. It is absolutely. You can definitely sell a house right now, but there's, I mean, it's just a really healthy, it's like very aggressive sellers and very aggressive buyers right now. But yes, if you're selling a home, you could even do a good job. You could make out really well selling homes right now, too.

Michael:
Okay. Great.

Tom:
Any other thoughts on points of interests? I saw there's the Birmingham barons, AAA baseball team.

Matthew:
They are AA, but yes, they are in downtown. They used to be down in Hoover and we moved them. They built a new facility that won a lot of awards in the downtown area. So that is down there much like many of the other communities, some of the things that draw people or we've, we've got a number of local breweries that are kind of fun places to hang out that a lot of people are enjoying doing. We have the food scene's really good here. So last year we had a Frank sta won the James Beard award for the best chef in the country or the best restaurant, excuse me. So we've got an, and then he's got, I always call it the coaching tree, but he's got all these other chefs that he's trained now that have gone out and started their own restaurants.

Tom:
Diaspora. What's the name of his restaurant?

Matthew:
His restaurant is called Highlands Highlands bar and grill. Nice. And so it's kind of an upscale, kind of a New York style bar and grill.

Michael:
Awesome. Man Tom, we gotta make it out there.

Tom:
I know

Matthew:
That's the one of my favorite places to go.

Tom:
Awesome. Michael, do you have any other questions?

Michael:
Yeah. Just curious, Matt. So for all of our listeners who were previously unfamiliar with the Birmingham market, hopefully now they're a bit more acquainted with it. What would be your final thoughts if some of those needs, what, what would you want someone's final takeaway to be from, you know, about the Birmingham market?

Matthew:
It'd be a long ending, but I think it's kind of important is our average rent somewhere in the $900 range. So you're talking about when you look at Birmingham, I would think more about investing in forties, fifties, and so homes in the forties, fifties, and sixties. If you're looking at investing in C class properties, maybe 60 seventies or eighties, or even some of the two thousands, we have some homes that are in the two thousands. If you're looking for B class kind of high appreciation, lower cashflow, where you're going to find those C class properties are in areas like East Lake was a, which is three, five, 206, zip code Western, the free five, two one one, Inslee three, five, two Oh eight. Midfield is three, five, Oh man. I own a house in Midfield. And I can't think of it. I'll think of in a second, but you're talking about Roebuck, which is three, five, two one five, Center point 35215.

You're going to talking about Grayson Valley area. Now you're starting to get into more B class neighborhoods that would be Trussville, Calera, a Chelsea, Hueytown, Pleasant Grove. So, and you're talking about rents now that are more in the $900 to $1,200 range. That's what we would consider B class, which kind of lines up with the statistics you were giving earlier in terms of just kind of a price brackets. We manage about six or 700 homes right now. And it is a great time to be in the rental business because we're at about 98% occupancy. We're actually north of 98% occupancy, which we've never been before. What we are seeing as a shift from people wanting to live in multifamily, to live in single family homes. So that's pretty exciting for us, obviously because the pandemic and I just don't see that going away anytime soon.

Like people just don't forget about the pandemic after it's over. They're not going to forget about it immediately. So I do think there's a shift to single family rental and in the South, this things may change, but the pandemic doesn't feel as bad as I, my friends tell me, you're experiencing in California where people are experiencing in New York, we are renting homes like crazy here. I know that our cases are up in terms of virus, but it doesn't feel that different than normal life down here right now. So all that may change, but I will tell you things are really good right now. And it's not like people are gonna stop paying rent. Obviously if they lose their job, that may be a problem. But everybody seems to have adjusted to kind of coronavirus world down here pretty well. So that's what I would say is most of our investments are in the C class and B class neighborhoods.

And look, another area I would want to highlight is Northwest, which is Forestdale and Adamsville another great area. One of my favorite areas to invest. If I could buy everything up there, I, I definitely would. And so, but I also want to be a reference for any of your potential clients. So, you know, if they have any questions, we obviously have people, I always say you, you date your real estate agent, but you marry your property manager. And so I want you to know that before we get married with any one of your clients, we want to make sure that they're buying the right thing too. So we don't, we have a vested interest in it's a longterm relationship. We can't just put somebody in any home, regardless of what that home is. So I know that was a long ending, but I thought it was important just to kind of give some numbers and some feedback on what's going on at the grassroots level.

Michael:
That was great.

Tom:
I love it. That's one of my favorite pieces of advice to give is, you know, leverage your property manager early and often, even in the acquisition process. I mean, it's a teamwork and you know, the earlier you can kind of start to build that trust, uh, so much value to it.

Matthew:
Well, our, all our incentives are right. I don't want you buying a bad house because I've got to manage it. Like you don't have to manage it. I know you've got to pay for it, but I'm the one that has to manage it. So I don't want you buying something that's going to cause me a lot of headaches in the future. Just like any business owner. Obviously we want to work really hard and earn our money, but we don't want to do extra work just because we put you in a bad property.

Tom:
Awesome. This is fantastic. Thank you so much for your time. This was super interesting. The Pittsburgh of the South. I love it.

Matthew:
We used to be called the magic city because we grew so fast. And so now it's starting to grow again and I'm super excited to be a part of Birmingham.

Michael:
Matt, before we let you go, if folks have any questions about the Birmingham market, where can they reach out to you? And a little birdie told me also that you've got a podcast of your own.

Matthew:
Yeah, no, I appreciate you mentioning it. We actually started a podcast that helps people just like you're, you're trying to help people with Birmingham's specific information. It's called the Birmingham rental investor and they can get that on Spotify or Apple or wherever somebody listens to their podcast. If they want to reach out to us specifically, we again would love to help somebody. We want to make sure that you're getting into the right house. And the best way to do that is to reach out to our support [email protected]. And what we have is essentially a support ticketing system that we'll get into our sales department and they can help you understand questions about our management services, but most importantly, make sure that you're getting into the right house so you can send them addresses. We'll give you rental reports of what we think that'll rent for. We just want to be a supplier of good information so that you can make the best decision possible. So thank you.

Tom:
All right. Thank you, Matthew.

Michael:
Thanks so much, Matt.

Matthew:
Thank you.

Tom:
Thanks again to Matthew, that was super informative. Learning about the Birmingham market. If you have any other questions, other markets for us to deep dive into, please reach out to us. You can hit me up at [email protected] and as always, this episode is brought to you by Roofstock Academy. It is your one stop shop to getting to the next level, from on-demand online educational lectures, coaching, the SFR playbook, all of that good stuff. So just check us out at roofstockacademy.com and happy investing.

36 min
July 21, 2020 Market Deep Dive: Birmingham Alabama with Matthew Whitaker
In this episode we do a deep dive with Matthew Whitaker from GK Houses on what makes Birmingham Alabama a unique investment market.

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Transcript

Tom:
Greetings and welcome to the remote real estate investor. And today we have a special episode where we'll be doing a market spotlight today. We're going to be focusing on Birmingham and we have a special guest today and Matthew Whitaker, and I'll be joined with my cohost Michael album. All right, let's do it.

Tom:
Matthew, thank you for joining us today.

Matthew:
Well, thanks for having me. I'm super excited about being on this new spotlight and excited about being able to present Birmingham to you.

Tom:
So Matt, why don't you tell us a little bit about your, your background and GK housing as well?

Matthew:
Yes. So I got into investing when I was 23 years old and bought my first house using a home equity line of credit off of a little house that my wife and I, or a girlfriend, fiancé at the time owned and started buying and selling houses and got really excited about it and quit my job, day job. I was doing it on nights and weekends and started flipping houses for a living thought. I was a big shot real estate investor at 23 and did that for about four or five years and pretty successfully we flipped about a hundred houses. I had some partners, I always joke that they had a lot of money and no time. And I had a lot of time and no money and we got married. So we formed a partnership. I was the operating partner that was out there buying and selling homes. We did about a hundred deals in four years. So for a 25 year old kid, that's out there wheeling and dealing. It was the good old days.

And I thought I had the tiger by the tail. And then as y'all know how the story ends in 2008, 2009 becomes the real estate market crash. And as Warren buffet says, when the tide goes out, you realize who was swimming, found any shorts on? And I looked down and I was one of the ones that didn't have any shorts on. So had I owned about 30 rental houses at the time or 30 homes that we were 15 of, which we were trying to flip 15 of, which were already rentals and we just moved everything into a rental portfolio. And so we started managing, we started out managing as a way to sell more homes though. We were kind of on the front end of turnkey world. And it was very new. The idea of selling homes or packages of homes to investors was very new at the time. And so we did that for three or four years and helped put together a big fund of local investors that bought up a bunch of Birmingham houses. But back in, let's see, 2013, we decided that we enjoyed managing more than the kind of deal of buying and selling.

We were more of a, we call ourselves grinders the more of the plotters. And so we enjoyed management. So we, I still invest on the side about, about 30 or 40 houses a year, still personally, with a partner. And, but my, my day job is I'm the CEO of a company called GK houses. And we started here in Birmingham and started, I always tell the story started with those 15 or 30 houses, depending on how you looked at it. And then started just growing that business. In 2013, we managed about 250 homes. And today we've moved out of Birmingham into eight different markets and manage about 26, 2,700 homes. But Birmingham is still my home. It's where our corporate offices it's where all of our back office accounting and all of our corporate team is. And so, um, Birmingham is the market. I know really well and, and still spend a lot of my time investing in

Tom:
Yeah, Matthew and GK houses are great friends of rootstocks and a great partner that we love to advocate for. And we actually are double dipping our podcast. We are having a podcast dedicated specifically to property management that is going to be coming out very soon with Matthew as well. But today, where is the market focus? So great partner.

Matthew:
I love anytime I get to get on and sing Birmingham's praises, it has come from having a bad reputation for some certain things that happened in the past, but I'll tell you where Birmingham is a great place. And one of the things that people consistently say when they come here is number one, how green it is. So when you watch a movie about the state of Alabama, it's all red clay. And there are areas of Alabama that are certainly like that. But where I live is very green and very hilly. And they're amazed at how progressive, not just politically I'm, I don't want to get into that, but in terms of how it's moving forward. And we're really known for our food scene, our arts and culture scene. So very excited to get on and get to talk about the city that I live and have no desire to move. I get to travel a lot, obviously with my role as the CEO here at the company, but I have no desire to move because Birmingham is such a great place to live.

Tom:
Excellent. So the way that this episode is going to flow is we're going to start with some high level quantitative overview of the market. And then we're going to needle into math to talk about some of the specific qualitative of employer's points of interest and, and all that good stuff. So why don't we go ahead and start in our quantitative breakdown, and we're going to make this consistent for all the markets that we talk about first, the MSA. So the greater area of Birmingham, it has a population of 1.313 million, and this was based off of the last census data and map. What are the major cities that consists of the greater Birmingham area?

Matthew:
Great question. So Birmingham proper the city Birmingham is about 350,000 people, I think. And then it is made up of a group of municipalities. So one of the things that an investor would need to understand about Birmingham is it's not a County based government, but it's a very city-based government. So it's very fractured in terms of each little, like I live in Homewood, which is just South of Birmingham. And we have our own city government that manages our own school system, manages our own trash. Whereas somebody like a Nashville or a Kansas city would have a County based government. So that 350,000 people is Metro Birmingham. And then we have a bunch of municipalities in the kind of suburbs, so to speak what we call South of town and over the mountain area, which is all South of town. And then that also includes the Tuscaloosa area, which is where the university of Alabama is, which is about 45 minutes from Birmingham Southwest.

And obviously that area has grown a lot with, uh, with the university of Alabama, as most university towns are starting to grow. So that's where they make up that 1.3 million. There's probably 1.1 ish, a one to 1.1 in what I would consider really proper Birmingham. We don't manage specifically down in Tuscaloosa than Bessemer, which is about halfway between Birmingham and Tuscaloosa is the, is one of the other big towns or cities. And then Hoover, which is due South of Birmingham is another. So generally when you talk about the MSA, you talk about the Hoover Birmingham Metro area. And so Hoover and Birmingham are really the two largest communities in that MSA.

Tom:
Got it. I'm looking forward to needle again, a little bit on those specific, uh, as it relates to thinking about those areas as investors. So that area has seen pretty significant population growth. According to the information we have with census plus 2.8% over the last couple of years, it has a median household income of $57,500 as a medium household income. This is coming from the John Burns data, and there's a pretty significant amount of units. So when I say units, single family homes, there is 520,000 homes in this MSA where 26% of them are renters. And this is again, John Burns along with some census data. So continuing looking at some of these metrics that we have on Birmingham. So a major uptick in new permits to build single family residence. The last value in 2019 is 3,280, and that is up 17.2% year over year. A couple of other metrics to throw around the entry home value within Birmingham is about $134,800.

And this is coming from core logic. And the median rent, this is 1030 $2. Again, this is core logic where this is coming with a really steady rent growth. We'll actually have all the metrics, all the markets that I've seen as one of the highest that 6.5% increase in rent. The last couple of metrics I'll hit on before we get in to the quality of stuff that we'll talk with Matthew about is the rent tiers. So we see a rent tier, and this is again at John Burns metrics on the lower end of an $827, the mid $1032. That's that same median level and at the high tier $1,408. So those are the bands at which are identified in the Birmingham market. All right. So let's get back in talking about those specific main cities and other cities within the Birmingham market. So are the majority of the rental market, is it just an at Birmingham proper, or tell us a little bit about that. The distribution of rentals.

Matthew:
Let’s talk about Birmingham, because I think I need to kind of set the scene. So if you're listening at home and you wanted to bring up a map of Birmingham, what you will see is that Birmingham appears to flow from the North Eastern side of town down through the Southwestern side of town. And so one of the reasons for that is there is the start of the Appalachian mountains, just South of town and runs from the Southeast to the North are excuse me, from the Southwest to the Northeast, and then runs all the way up through South Carolina and in North Carolina. And, and so it starts here. And, and so if you think about when Birmingham was built, it was built in the early 19 hundreds, 1920s, and it was built because this was kind of the Pittsburgh of the South. It was a steel based industry.

So you had a lot of wealth here, and then you had a lot of workers to support that steel industry. There's a lot of mining happen up underneath the mountain. And so when you think about the housing stock, the housing stock started kind of from the Northeast and flows down through the Southwest. And that is the older housing stock that was built on flat land. So if you look at the map and you look at places like Bessemer, which I talked about going up, I 20 through midfield and Fairfield, and then the Western side of town is called West End. And then you get to the Eastern side of town, which is, and starting to head North towards the airport, Woodlawn, Terrant Roebuck. You're talking about, East Lake, you're talking about areas that were built a lot of times in the, uh, some of those areas started in the twenties and then were built through about the forties or fifties.

So when you think about investing in Birmingham, you need to kinda know what the age of the home is. And that's kind of the first thing I think is important is when houses are built and 19 hundreds, they were built with the idea, there was no air conditioning. And if you've never been to the South in the summer, it is really hot here. And we're, we're recording this during the summer. So I'm coming right out of the heat and it's a hundred and something degrees, heat index with almost a hundred percent humidity. And, and so that is really hot. So you can imagine the ceiling, sometimes in those homes were 12 feet tall so that the heat would rise. And so when you're investing, you want to make sure that either those ceilings have been lowered, because now you're going to be required to have air conditioning in them.

And if you buy this older housing stock, you just need to know that it's older housing stock. So your repairs and maintenance are going to be a little bit higher. And what you'll probably want to dig into some of those, but let me, I'll give kind of the 20,000 foot view. And then we can dig into some areas. As move Northeast. And as you move North, and as you move further West, you get into more homes that were built in the fifties and sixties. So there was another kind of housing boom, around that time, those are more of your brick ranchers, more of your wood, three bedroom, one and a half, one to one and a half, two bathroom homes. And these, I call these your tanks. I mean, they're built for modern amenities because we started to use an air conditioning back then, but they're very efficient.

They have closets, but they're not huge closets. They're just a very efficiently built house. So you might find a 1200 to 1400, 1500 square foot home in these areas. And they are great rental houses because again, their tanks, they just hold up really well. They're again, they're very modern people enjoy them. The one bedrooms obviously rent a little bit less than the two bedrooms. Anytime you get multiple, excuse me, not the one bathrooms, uh, rent less than the two bathrooms. Anytime you get multiple bathrooms. Very important. Now, one of the interesting things too, is what I would consider the more A-class housing stock is South of town. So imagine in the sixties and seventies.

Tom:
Is that Hoover?

Matthew:
Yes, you're talking about Hoover. You're talking about Vestavia, Homewood, mountain Brook, and these areas, these homes are hard to buy and make the rental numbers work, but these are all built up on the mountain. So when we say over the mountain, you had more, as technology came in along and building, you are building these homes on the side of mountains. And so the housing stock is much younger as you get more vertical in Birmingham. And now if you're listening to this in Denver, you might fly into here and wonder where the mountains are. There's all rolling Hills, but we call them mountains. And then as you get further North, just like any city, it grew out, right? You're going to get into areas like Fultondale and Gardendale North. You're going to get into areas like Trussville to the East. You're going to get into areas like Hoover and kind of the Indian Oak mountain Indian Springs area, where my wife grew up, where Oak mountain state park is. And then as you go West, you're going to get into Hueytown and pleasant Grove.

Now these are your B plus neighborhoods that are kind of out a little bit further great areas to buy for high appreciation, but there's suburbs there. People are going to be driving into the city to work. And so, you know, just like any town, you can pretty much dictate what the pricing is of the house based on when it was built and what the housing stock was built for.

Tom:
I think one of my favorite adjectives for a rental property is a tank property. That just goes on. You didn't mention what cities you said it was in the West or the Southwest. Is that like pleasant Grove and Fairfield or…

Matthew:
Yeah, Hueytown pleasant Grove. Our Fairfield's more of that first area that I was talking about that was built more of a C class neighborhood. But when you get into Hueytown and pleasant Grove, you're talking about B plus B plus properties with high possibility for appreciation, a lot of home ownership in those areas. So really if you talk to some of the local investors, those are some of the areas that they like to hit the hardest.

Michael:
Got it. Matthew, I've got a question for you. What I want to know is why are people living in Birmingham and are moving there? You know, there's gotta be job, pull job growth. Can you talk to us a little bit about who some of the major employers are and why folks are headed that way?

Matthew:
The biggest employer in Birmingham is university of Alabama at Birmingham, the hospital and the university. So when you combine that it is a teaching hospital, it's one of the, in the Southeast, it's probably one of the biggest teaching hospitals. So it has a huge draw. You can imagine from Mississippi, from all parts of Alabama. And so we have a bunch of doctors and students that are learning at UAB. And then of course the school university of Alabama at Birmingham, the next thing that's a huge employer is Alabama power, AlaGasCo, kind of the utility companies that service the state. And then another thing that's exciting is we have two, no, excuse me, three different car automobile manufacturers within about an hour and a half of Alabama. So to the Southwest, as you go towards Tuscaloosa, which we talked about earlier, there is an area down there called McCalla.

It is where I 459, which has kind of the bypass meets back up with I 20. And if you keep on going down, [inaudible] right there. That is where the Mercedes-Benz produces the M class Mercedes. So the SUV Mercedes, and so McCall is a great area to buy rental homes. You're talking about a lot of new builds going on. That is where a lot of, and they continue to add square footage onto that facility to build more M class Mercedes. And that obviously feeds jobs. People traveling from Tuscaloosa and people traveling from Birmingham. If you go East on I 20, you have the Honda Odyssey van is produced in Leeds. So great area. Trustful sees a lot of their executives that come in from Japan. One of my old partners used to rent to all Honda executives, and they would come in from Japan and live here for two or three years, and then go back to Japan.

So, and obviously the having building the Honda Odyssey van, there's a ton of you don't think of just Honda, but you also need to think of all the suppliers that have to support a big operation, like building that Honda Odyssey van, building that M-Class. And then if you go due South, you breach Montgomery and just South of Montgomery, and that's, this is only about 60 or 70 miles South. You find the Hyundai plant, and I'm not sure exactly what build there. I would imagine most of the Hyundai workers work in Montgomery, but you still have some of the suppliers that are supplying all three of those in and around the Birmingham area, just so they can be very centrally located. So we have a, so that's pretty exciting. I mean, Mercedes has been there probably 20 years, maybe a little bit longer, maybe 25 years building that M class Honda came about about eight, 17 or 18 years ago.

And then the Hyundai plant is newer, probably 10 to 12 years. There's just a lot of exciting things going on. Amazon is building a facility now in Bessemer. So there's a big kind of gold rush in the Bessemer area just because they know there's going to be, have to be a lot of people that are going to support that Amazon distribution facility. Birmingham has been doing a great job of investing in the city has built new hotels in and around the downtown area. And we're also building a brand new football stadium too, for the UAB blazers. And it's going to hold things like concerts. And so there's just a lot of money right now being invested in and around the Birmingham area. So really a lot of exciting things going on.

Tom:
That's awesome. You know, we already touched a little bit on education, major colleges, but UAB, as well as university of Alabama,

Matthew:
Yeah, University of Alabama is down in Tuscaloosa, which is about 45 minutes to an hour Southwest of Birmingham. You have, let's see, you have Sanford university in Birmingham. You have Birmingham, Southern college is also obviously located in Birmingham. Yeah, you Auburn is about an hour and a half to two hours, South East of Birmingham and a place called Auburn, Alabama, which is pretty obvious Auburn in Auburn, but it is almost a when you get to Georgia. And so there's a lot of kind of university life. You see a lot of university students in and around. And of course the medical school at UAB brings a lot of people in. We have rented a lot, especially when we have homes in and around the South. What we call the South side of Birmingham, which is basically South of the entrepreneurial district. We have a lot of med students, dental students that rent with us.

Tom:
And is that in the general Southern part? You said Southern part of Birmingham.

Matthew:
Yeah, It is. If you kind of zoom in on Birmingham and you look what I would call in between Homewood, if you look where Volkan is, which is a statue that was dedicated to the iron ore industry in and around their five points South, all of that is where a lot of the young people live that are going to those universities.

Tom:
Very cool. How about let's touch on transportation? So in looking at it, it looks like it is almost like an X from 65, 22, 20, 59. So it looks like a major central hub of a freeways in the South that all go through Birmingham.

Matthew:
It absolutely is a Nashville about two hours to the North. Atlanta's about two hours to the East Jackson. Mississippi is about two or two and a half hours to the West. And then Montgomery is about an hour to the South. So it's very centrally located. Half the people here are Atlanta Falcons fans. The other half are Tennessee Titans fans. And so it is a very centrally located city and very easy to get to. And then in transportation, within the community, most people drive everywhere here. It is not a, unless you just live downtown and work downtown, which is, it's not an overly big downtown area you're going to drive to work. So kind of the main corridor where a lot of the, where it gets clogged during the week would be that 280 as you go South and East is a very heavily traveled road. I 20, I 65 coming from the South and from the South West. And that kind of tells you where the people are, right. It tells you where the people are and what they're doing. And then I 65 South into Birmingham in the mornings is very busy. So Birmingham is kind of spread out just because it, as you moved across the mountain, it does flatten out a bit and it allowed for the city to kind of expand,

Tom:
I’m smiling as I'm hearing this, I'm so excited about this series of market spotlight. I'm learning so much about Birmingham and I'm like, so excited dip my toe into the investing market, continuing down. Well, there's also an airport right in Birmingham.

Matthew :
Yeah. We've got what we call an international airport. I'm not sure where that international flight flies. I think it flies at The Bahamas, which is good. I mean, everybody's got to go to The Bahamas, right. But what I tell people is we have major flights in from Denver, obviously, and from Atlanta into Detroit, into New York. So it really is a two flight place. We fly obviously Dallas and Houston direct, but unless you're going to one of those kind of major cities, you're really going to, it's going to be a two flight place, which is fine though. I mean, Birmingham so easy to get around. I always tell people, you know, Atlanta is one flight away from everywhere, but you took two hours to get to the airport. Birmingham takes me literally 10 minutes to get to the airport and then another five minutes to get to my gate. And then I can fly to Atlanta and in 45 minutes. So it really saves me. I get placed as faster than people do in Atlanta.

Michael:
And Matthew, speaking of getting places, do you all have traffic and understand you're speaking to a couple of California, so we gotta be careful here.

Matthew:
Look, I've been in Atlanta on the bypass, the two 85 bypass. And it is really bad. There's only a couple areas in Birmingham that are probably that bad or, or could even like sniff being that bad. That two 80 corridor is really tough in the morning. It may take you an hour to come 15 miles, 20 miles in, but a lot of people do it. Like it's amazing to me. We keep making it wider and wider and wider. And as you know, it also makes it worse before it gets better. And then by the time they finish it, it feels like it needs to be wider. And that's where I would say a lot of the housing growth is going right now is South and East down to 80. So you can see Chelsea down there in the bottom right hand corner of the map. If you're looking at it, Chelsea is a really growing thriving area.

Again, anywhere around McCalla is really growing. That's where they're building a lot of homes. I've got some great friends that are one of the largest builders in Birmingham, and they consistently build in those areas and build in Trussville, which is just East of town. So they're still building in the suburbs. There's not a lot of infill building going on right now. And they continue to sell homes. Even during this market, when we're recording, this is kind of coronavirus world, and they're still selling homes. They're still building them. They still have people that are interested in buying them. So we really feel like in Birmingham, we've got a little bit of a shortage in the housing.

Tom:
Yeah. I mean, it's one of the highest SFR applications for building new houses way up there. And looking at the beginning of some of those metrics, let's touch on investor friendly related matters. So is there any concepts of rent control or, you know, legal concerns around unlawful detainers or three-day notices I'd love just kind of, you're taking, you're probably an expert at this as a property manager, as a CEO of a property management.

Matthew:
Yeah. Unfortunately, sometimes, unfortunately, fortunately. Yeah. So Birmingham is a very conservative, well, Alabama let's say, cause because most landlord tenant laws are state specific. Alabama is a very conservative politically state. Birmingham is a very progressive city though. And so, but still most of the laws are driven, are state driven, landlord tenant laws. So evicting a tenant is easy technically to get done, but it does take a while to get done. And in Birmingham that's probably the biggest drawbacks to Birmingham is sometimes it takes as many as 60, sometimes as many as 90 days to get someone set out from the time you fall an unlawful detainer to the time you actually set them out. So that is a really long time, even in a place like California. I think that's a long time. The good thing about Birmingham though is again, it is a very landlord friendly laws. The landlord tenant law is very, is it really written landlord friendly. We have very low property taxes, relatively speaking. So as a percentage, it's way less than a lot of the other communities around the country. And look, there is no rent control. I don't ever expect that we might be one of the last places in Birmingham to have that. So it's again, pretty much landlord friendly, but you want to make sure you get a good resident in your home so that you don't have to evict them.

Tom:
Makes sense. My other kind of question on, I guess this is sort of landlord friendly. I know some areas have a lot of HOA ways and some of these hos, you know, they have sneaky little rules and the bylaws about being an owner occupant. And is that common in Birmingham?

Matthew:
It's not, we managed in places like Nashville and Atlanta where that's very common. So very familiar with that. Birmingham is not that way right now. It could come that way. As the housing stock that's being been built in the last 10 to 20 years, maybe it becomes more rental stock, but right now it is definitely not that way, especially in the areas where investors are buying.

Michael:
So it sounds like Matt, from the descriptions that you've been giving, this is a very seller friendly market. It's really a sellers market at this stage of the game. Is that fair to say,

Matthew:
Is it is an investor market. It is absolutely. You can definitely sell a house right now, but there's, I mean, it's just a really healthy, it's like very aggressive sellers and very aggressive buyers right now. But yes, if you're selling a home, you could even do a good job. You could make out really well selling homes right now, too.

Michael:
Okay. Great.

Tom:
Any other thoughts on points of interests? I saw there's the Birmingham barons, AAA baseball team.

Matthew:
They are AA, but yes, they are in downtown. They used to be down in Hoover and we moved them. They built a new facility that won a lot of awards in the downtown area. So that is down there much like many of the other communities, some of the things that draw people or we've, we've got a number of local breweries that are kind of fun places to hang out that a lot of people are enjoying doing. We have the food scene's really good here. So last year we had a Frank sta won the James Beard award for the best chef in the country or the best restaurant, excuse me. So we've got an, and then he's got, I always call it the coaching tree, but he's got all these other chefs that he's trained now that have gone out and started their own restaurants.

Tom:
Diaspora. What's the name of his restaurant?

Matthew:
His restaurant is called Highlands Highlands bar and grill. Nice. And so it's kind of an upscale, kind of a New York style bar and grill.

Michael:
Awesome. Man Tom, we gotta make it out there.

Tom:
I know

Matthew:
That's the one of my favorite places to go.

Tom:
Awesome. Michael, do you have any other questions?

Michael:
Yeah. Just curious, Matt. So for all of our listeners who were previously unfamiliar with the Birmingham market, hopefully now they're a bit more acquainted with it. What would be your final thoughts if some of those needs, what, what would you want someone's final takeaway to be from, you know, about the Birmingham market?

Matthew:
It'd be a long ending, but I think it's kind of important is our average rent somewhere in the $900 range. So you're talking about when you look at Birmingham, I would think more about investing in forties, fifties, and so homes in the forties, fifties, and sixties. If you're looking at investing in C class properties, maybe 60 seventies or eighties, or even some of the two thousands, we have some homes that are in the two thousands. If you're looking for B class kind of high appreciation, lower cashflow, where you're going to find those C class properties are in areas like East Lake was a, which is three, five, 206, zip code Western, the free five, two one one, Inslee three, five, two Oh eight. Midfield is three, five, Oh man. I own a house in Midfield. And I can't think of it. I'll think of in a second, but you're talking about Roebuck, which is three, five, two one five, Center point 35215.

You're going to talking about Grayson Valley area. Now you're starting to get into more B class neighborhoods that would be Trussville, Calera, a Chelsea, Hueytown, Pleasant Grove. So, and you're talking about rents now that are more in the $900 to $1,200 range. That's what we would consider B class, which kind of lines up with the statistics you were giving earlier in terms of just kind of a price brackets. We manage about six or 700 homes right now. And it is a great time to be in the rental business because we're at about 98% occupancy. We're actually north of 98% occupancy, which we've never been before. What we are seeing as a shift from people wanting to live in multifamily, to live in single family homes. So that's pretty exciting for us, obviously because the pandemic and I just don't see that going away anytime soon.

Like people just don't forget about the pandemic after it's over. They're not going to forget about it immediately. So I do think there's a shift to single family rental and in the South, this things may change, but the pandemic doesn't feel as bad as I, my friends tell me, you're experiencing in California where people are experiencing in New York, we are renting homes like crazy here. I know that our cases are up in terms of virus, but it doesn't feel that different than normal life down here right now. So all that may change, but I will tell you things are really good right now. And it's not like people are gonna stop paying rent. Obviously if they lose their job, that may be a problem. But everybody seems to have adjusted to kind of coronavirus world down here pretty well. So that's what I would say is most of our investments are in the C class and B class neighborhoods.

And look, another area I would want to highlight is Northwest, which is Forestdale and Adamsville another great area. One of my favorite areas to invest. If I could buy everything up there, I, I definitely would. And so, but I also want to be a reference for any of your potential clients. So, you know, if they have any questions, we obviously have people, I always say you, you date your real estate agent, but you marry your property manager. And so I want you to know that before we get married with any one of your clients, we want to make sure that they're buying the right thing too. So we don't, we have a vested interest in it's a longterm relationship. We can't just put somebody in any home, regardless of what that home is. So I know that was a long ending, but I thought it was important just to kind of give some numbers and some feedback on what's going on at the grassroots level.

Michael:
That was great.

Tom:
I love it. That's one of my favorite pieces of advice to give is, you know, leverage your property manager early and often, even in the acquisition process. I mean, it's a teamwork and you know, the earlier you can kind of start to build that trust, uh, so much value to it.

Matthew:
Well, our, all our incentives are right. I don't want you buying a bad house because I've got to manage it. Like you don't have to manage it. I know you've got to pay for it, but I'm the one that has to manage it. So I don't want you buying something that's going to cause me a lot of headaches in the future. Just like any business owner. Obviously we want to work really hard and earn our money, but we don't want to do extra work just because we put you in a bad property.

Tom:
Awesome. This is fantastic. Thank you so much for your time. This was super interesting. The Pittsburgh of the South. I love it.

Matthew:
We used to be called the magic city because we grew so fast. And so now it's starting to grow again and I'm super excited to be a part of Birmingham.

Michael:
Matt, before we let you go, if folks have any questions about the Birmingham market, where can they reach out to you? And a little birdie told me also that you've got a podcast of your own.

Matthew:
Yeah, no, I appreciate you mentioning it. We actually started a podcast that helps people just like you're, you're trying to help people with Birmingham's specific information. It's called the Birmingham rental investor and they can get that on Spotify or Apple or wherever somebody listens to their podcast. If they want to reach out to us specifically, we again would love to help somebody. We want to make sure that you're getting into the right house. And the best way to do that is to reach out to our support [email protected]. And what we have is essentially a support ticketing system that we'll get into our sales department and they can help you understand questions about our management services, but most importantly, make sure that you're getting into the right house so you can send them addresses. We'll give you rental reports of what we think that'll rent for. We just want to be a supplier of good information so that you can make the best decision possible. So thank you.

Tom:
All right. Thank you, Matthew.

Michael:
Thanks so much, Matt.

Matthew:
Thank you.

Tom:
Thanks again to Matthew, that was super informative. Learning about the Birmingham market. If you have any other questions, other markets for us to deep dive into, please reach out to us. You can hit me up at [email protected] and as always, this episode is brought to you by Roofstock Academy. It is your one stop shop to getting to the next level, from on-demand online educational lectures, coaching, the SFR playbook, all of that good stuff. So just check us out at roofstockacademy.com and happy investing.
36 min
July 17, 2020 A Deep Dive With a CPA to Uncover All The Tax Benefits of Rental Properties
In this episode, we have Joel Jensen from Tax Sentry explain exactly why real estate is so powerful when it comes to tax benefits.
---
Transcript:

Michael:
Hey everyone. Welcome to another episode, The Remote Real Estate Investor, I'm Michael Albaum. And today I'm joined by Emil Shour. And today as our guest, we have Joel Jensen from Tax Sentry, and Joel is a tax expert and guru, and is going to be talking to us today about what we as investors need to know about income taxes and how to strategize and plan for our taxes so that we can come out ahead. So let's get into it.

Theme Song

Michael:
Joel, thank you so much for being here. Really appreciate you taking the time.

Joel:
Sure. I love to be here.

Michael:
Awesome. So can you give all of our listeners a little bit of background about yourself and how long you've been working in the tax space and kind of what you've been doing?

Joel:
You bet. So I graduated with my master's degree from Brigham Young University in the early nineties. So it feels like a long time ago, but from there I went to work for Ernst and Young, which is one of the, we'll call them the last four large service firms out there. When I was there, they were the big six. Now I kind of call them the final four, but I was with Ernst and Young for about 10 years working on large audits, large compliance, scc transactions, that type of thing. And after doing it for 10 years, the part of the job I really, really liked was working with people, you know, the interactions I had with people, the part I didn't like was feeling like that was just servicing kind of these large companies.

So what I decided to do was leave Ernst and Young kind of start my own firm. So I could actually have a significant impact on an individual's tax and financial circumstances where I felt it was much more gratifying for myself personally. And I've been doing that for almost 20 years now, became a real estate investor myself, probably back in 2005. So I've been doing that as well on the side, which I really enjoy some houses, own some rental properties. So since then, I guess I'm in the real estate game, but my full time job is CPA. Great.

Michael:
You know, it's so counterintuitive that you mentioned that the favorite part of your job working at one of the big six of the big four was interacting with people. Cause all the accountants I know the worst part of their day is when they have to interact with people.

Joel:
I know there's probably only lasted 10 years, right? I'm like, ah, this isn't for me. I gotta go, gotta get out. I gotta get out now while I can.

Michael:
Awesome. Awesome. So, and I love too that you're an investor because you drinking the Koolaid too. And so really talking and preaching and consulting on the things that you're also doing.

Joel:
Correct. Yeah. So I think it helps, you know, if you're dealing with a CPA, for example, that at least they have a working knowledge of what it is that you do. And since I am in the real estate game, obviously I have lots of real estate clients, even contractor clients, anyone, even within the field of real estate, whether they own it or provide services to people who own real estate, that kind of outlines a significant of my clients.

Michael:
Great, great. So I wanted to jump into the meat and potatoes of this tax discussion right away. And I'm gonna let Emil kick it off in talking about deductions and kind of what those are, what those look like, what people should be aware of.

Emil:
So the various types of deductions that real estate investors should have on their radar are property taxes, property insurance, mortgage, interest, property management, fees, property repairs, and maintenance, capital improvements, and ongoing maintenance and advertising expenses. So things like the cost to list a rental, to find a new tenant marketing your property for sale. Those things are also deductions as well.

Joel:
Let me go through maybe the aspect of wh
25 min
July 17, 2020 A Deep Dive With a CPA to Uncover All The Tax Benefits of Rental Properties
In this episode, we have Joel Jensen from Tax Sentry explain exactly why real estate is so powerful when it comes to tax benefits.
---
Transcript:

Michael:
Hey everyone. Welcome to another episode, The Remote Real Estate Investor, I'm Michael Albaum. And today I'm joined by Emil Shour. And today as our guest, we have Joel Jensen from Tax Sentry, and Joel is a tax expert and guru, and is going to be talking to us today about what we as investors need to know about income taxes and how to strategize and plan for our taxes so that we can come out ahead. So let's get into it.

Theme Song

Michael:
Joel, thank you so much for being here. Really appreciate you taking the time.

Joel:
Sure. I love to be here.

Michael:
Awesome. So can you give all of our listeners a little bit of background about yourself and how long you've been working in the tax space and kind of what you've been doing?

Joel:
You bet. So I graduated with my master's degree from Brigham Young University in the early nineties. So it feels like a long time ago, but from there I went to work for Ernst and Young, which is one of the, we'll call them the last four large service firms out there. When I was there, they were the big six. Now I kind of call them the final four, but I was with Ernst and Young for about 10 years working on large audits, large compliance, scc transactions, that type of thing. And after doing it for 10 years, the part of the job I really, really liked was working with people, you know, the interactions I had with people, the part I didn't like was feeling like that was just servicing kind of these large companies.

So what I decided to do was leave Ernst and Young kind of start my own firm. So I could actually have a significant impact on an individual's tax and financial circumstances where I felt it was much more gratifying for myself personally. And I've been doing that for almost 20 years now, became a real estate investor myself, probably back in 2005. So I've been doing that as well on the side, which I really enjoy some houses, own some rental properties. So since then, I guess I'm in the real estate game, but my full time job is CPA. Great.

Michael:
You know, it's so counterintuitive that you mentioned that the favorite part of your job working at one of the big six of the big four was interacting with people. Cause all the accountants I know the worst part of their day is when they have to interact with people.

Joel:
I know there's probably only lasted 10 years, right? I'm like, ah, this isn't for me. I gotta go, gotta get out. I gotta get out now while I can.

Michael:
Awesome. Awesome. So, and I love too that you're an investor because you drinking the Koolaid too. And so really talking and preaching and consulting on the things that you're also doing.

Joel:
Correct. Yeah. So I think it helps, you know, if you're dealing with a CPA, for example, that at least they have a working knowledge of what it is that you do. And since I am in the real estate game, obviously I have lots of real estate clients, even contractor clients, anyone, even within the field of real estate, whether they own it or provide services to people who own real estate, that kind of outlines a significant of my clients.

Michael:
Great, great. So I wanted to jump into the meat and potatoes of this tax discussion right away. And I'm gonna let Emil kick it off in talking about deductions and kind of what those are, what those look like, what people should be aware of.

Emil:
So the various types of deductions that real estate investors should have on their radar are property taxes, property insurance, mortgage, interest, property management, fees, property repairs, and maintenance, capital improvements, and ongoing maintenance and advertising expenses. So things like the cost to list a rental, to find a new tenant marketing your property for sale. Those things are also deductions as well.

Joel:
Let me go through maybe the aspect of what it is like to actually own a property. So I go out and I buy a rental property. I'm going to bring that in. I'm going to put a renter in there and I'm going to earn rental income, right? So that's kind of the basic premise of when I own a rental property. Now what's offsetting part of that revenue are some of the standard deductions, like you mentioned. So oftentimes when we buy rental real estate property, we're financing it. So we have mortgage interest, right? We're deducting against that revenue. We have insurance that we have to pay to insure the property that we're also going to deduct against that revenue. Oftentimes it's maybe it's our self, right? Maybe we're managing a property and we don't have a management company that's doing it. Or let's say the property is, I don't know, a hundred miles away from me.

So I have to get a property management company involved. So I got to pay them in order to do it. So I may have some of those types of fees, maybe some HOA fees for owning the property that are due, especially in kind of a condominium space, right? Condos or maybe apartments or multi-doors, rental properties, that sort of thing. I may have some of those fees as well. You know, advertising, whether I'm advertising something for a person to rent or whether I'm advertising for maybe a home to sell all those costs, kind of go in to offset my particular rental income that I'm earning. So if you can think of kind of, if I take, you know, lots of people have experienced with their personal homes, right? And they say, look at all these outgoing bills, you know, utilities, interest in my property, taxes, all those things, think of it in those terms, all those same expenses that you have for your personal home, you're still going to have for your rental property. Cause it is still house, right? In most cases, right? So you're going to have those expenses. Now, all of those things that you're paying out for that property become deductions against your revenue. So I would just look at it as kind of all the expenses that are associated with the property. I get to deduct to get any rental income that a renter is paying me.

Michael:
And that's so different than like you mentioned on our primary residence. If someone has a primary and they have a property tax bill, they don't get to deduct that against any income because there isn't an income, but they don't get to deduct that against them. So it sounds like pretty much everything on a rental property, if it's an expense as a deduction.

Joel:
Yeah possibly can be, yeah. So let's make it easy. So I got to go change a light bulb for someone because they don't have a ladder. So I go to Depot, I buy a light, I go over to my rental property. I put that light bulb in, I get the cost of that light bulb and I get a mileage deduction for driving down home Depot and for driving over to my rental property and then for driving back to my house. So that encapsulates two actual deductions that I may have going for me to offset some of that income. So I always tell people, look at what it took for you to make a dollar. Let's do it at the bare bones minimum. What did it take for you to make a dollar in conjunction with that rental property? How did you spend your time? How many miles did you drive?

What were you buying on behalf of that rental property? What were you buying in order to maintain that property or service that property? For example, you know, renters in there, I managing it myself, got to have a cell phone right now that's cell form becomes a deduction against the rental income. Probably got to have internet if I'm going to list something. Well, now I get to write off my internet as part of the operations of that rental property. So I always say really take a hard look. What did it take for you to make a dollar? Okay, what did it take for you make a dollar and that's probably what you're going to be able to deduct on your tax return as part of that real estate operation.

Michael:
That's great.

Emil:
So all those things we just mentioned are those fully deductible or is it only 50% or some partial amount?

Joel:
Ah, good question. Because of the new tax code limits as personally from our property tax perspective, right? So we can only deduct up to $10,000 worth of state or property tax on our personal tax return. But when it comes to my rental activity, I don't have those same kinds of limitations or I'm deducting property tax in full I'm, deducting my mortgage interest. I'm deducting, you know, the cost of the light bulb in full. Most of those aren't limited or don't have limitations as far as my deductability against the rental property.

Michael:
So then Joel, is it accurate to say, let's say I made $10,000 in rental income in the year and I spent $6,000 in these various expenses that we just mentioned, the delta, there is four, 4,000. So that I ended up with $4,000. But is that what's taxed?

Joel:
That is what's taxed. Yeah. It's your bottom line. Sometimes people get revenue. I an accountant right. So I kind of speak in the account language. So sometimes people think revenue, Oh, I'm texting revenue. This renter just paid me $24,000. Now I got to include $24,000 in my income tax return. And that's what I'm taxed on. But in actuality, what happens is you're taxed on the net. Okay. So I take maybe that $24,000 or in your case, the $10,000 I deduct the $6,000. I'm only taxed on the four grand, not on that top line number.

Michael:
Great, great, super, super powerful. And so that kind of leads in actually to the next point that I want to talk about, which is this thing called depreciation, which I think most investors have heard about maybe not sure how to use or what it actually means. So can you give everyone an idea and a breakdown of what depreciation is and how we can use it to our advantage?

Joel:
Sure. Now I will say If I own a rental, you must take depreciation expense. It's not something that you can leave off. I've seen tax returns that were given to me after the fact of rental operations for people that wanted me to review it. And then I look at depreciation and there's no depreciation. So know that you have to depreciate a rental property. And what that means is the IRS is giving us basically a useful life. If you will. They're saying that I go buy a rental property. It's useful. Life is 27 and a half years. So I'm going to define the cost of that property over that 27 and a half years. And I get a yearly expense of whatever that number ends up being that yearly expense is awesome because I'm able to deduct that. Let's take back your scenario of 16,000 worth of expenses, like with 4,000, right?

But those six thousands were hard, cash, outflow numbers or dollars. I still get to deduct my depreciation that gets that four grand. And now maybe I'm only taxed on $2,000. Right? So depreciation is a wonderful thing because it's also kind of a non-cash item. Okay. I bought the property, it has a loan on it, or maybe it doesn't. Maybe I was able to take the property down in full when I initially purchased it. But I still, even under that scenario, get to depreciate the property. So I'm not paying for the depreciation. It just happens automatically once I purchase it.

Michael:
And so you mentioned that it's based on the purchase price. Is that right?

Joel:
Based on the purchase price. That's correct. Yep.

Michael:
So, In our $10,000 rental example, if we bought the property for a hundred thousand dollars, I did the math really quick, here,

Joel:
Thank you.

Michael:
I wasn’t going to put you on the spot. And we say that residential property is 27 and a half years. Right? Commercial property is 39 years.

Joel:
Correct.

Michael:
And so if it's residential property, we divide the purchase price by 27 and a half. If it's commercial property, we divide the purchase price by 39 years. So let's take our a property. We bought for a hundred thousand dollars divided by 27 and a half years, we get $3,636 of depreciation every year,

Joel:
Every year until that 27 and a half years has passed.

Michael:
Got it. So going back to our $10,000 in revenue example, we had $10,000 in rental income, $6,000 in expenses. So it leaves us with $4,000 net gain. But now you're saying we get to deduct an additional 36 36 and meaning our taxable income is going to be like 40 bucks for the year?

Joel:
Correct? Yep. Holy smokes. Yeah. So that's the power of appreciation. That's why it's so great. So when I buy a rental property, a great position to be in because of depreciation is to be what I call cash positive. Meaning that the revenue that I'm earning is greater than the cash outflow for any expenses that I have. But because I have this depreciation figure, right, I can actually have a loss on my tax return yet still be cash positive in the real world. I mean, that's the power of real estate. So when people say, Hey, I want to go into real estate. There are tons of tax benefits. Oftentimes that's what they're referring to. That I can create loss on my tax return and offset. Maybe my wages, my w two wages from my employer, even though I'm cash positive when it comes to the actual activity of the property.

Michael:
So what another way of saying that be at the end of the year, I can end up with a thousand dollars in my pocket, but actually offset the income that I've earned from my W2 and get taxed at a lesser

Joel:
That's correct. Yup. Yup. I see it all the time.

Emil:
I love that you guys brought this up because this is why people tout the benefits of real estate, right? It's like everyone knows there's huge tax benefits and this is the biggest one where you can actually be making money all year cashflow positive, but because of depreciation, you're showing either no gain or a loss potentially offsetting your personal income, so.

Joel:
That's correct. Yep. Maybe you have that scenario, loss, cash positive. The other thing that happens with real estate is our gains, right? So our appreciation just to the value of the property over years tends to go up. So when I sell it, I'm going to sell it at a higher dollar than when I purchased it for, and the entire time I'm owning it, I'm showing all these losses, but I'm still reaping these cash, positive cash, positive cash flow numbers that are coming through. Yeah. It's a real powerful game when it comes to real estate. That's why I'm in it, right?

Michael:
That's right. That's right.

Joel:
Yup.

Emil:
Probably a little bit more tactical or advanced, but okay. Let's say I've owned the property for 27 and a half years. Right? I've taken full depreciation now I want to sell it. Right. One strategy we've talked about on prior episodes is using a 1031. So let's say 1031. So I have no capital gains on the sale. When I 1031 will my new property, will I be able to depreciate that one over 27 and a half years or what happens to this amount? I've depreciated all that time.

Joel:
So it depends on basis, right? And typically what happens in 1031 exchanges, if you held it for that long and then 10 31 to a new property. I mean, that would be a pretty phenomenal thing, but, but what we do is oftentimes people are selling something to get into something that's larger or bigger or creates more revenue. Right? So it depends on my basis. So if I had something that was worth 300,000 and appreciated at all 27 and a half years, I 1031 exchange that and do something that's 500,000, I've already depreciated $300,000 with my basis. So now I grabbed that additional 200 grand and now I'm going to start depreciating that once I own that new property. Yeah. So I don't depreciate the same thing twice.

Emil:
Okay.

Michael:
Got it. Got it. And so speaking of depreciation, something that I'm doing actually for the first time, this year is a cost segregation study. Can you share with everybody Joel, what that is and how that might be used to help?

Joel:
Yeah, that's really, I mean, that's really powerful because we're talking about depreciation, the benefits of appreciating a property now that 27 and a half years oftentimes can seem like a long time. And if you get into the commercial space with 39 years, can you imagine, you know, you're going to hold something through 39 years. That may seem like a really long time for most people. I think that it would be. So what a cost segregation does is it allows someone to go in and start piecemealing the actual individual cost of a property. Okay. So you may have cost for electrical wire, plumbing, drywall, roofing, wood, steel, nails, screws, light fixtures, you know, all of these different costs now. And realistically a life's not going to last 27 and a half years. So what a cost segregation does is it breaks down at home, into all its individual components and then assigns lives to those individual components.

So rather than depreciating a hundred percent of the cost over 27 and a half years, you may be able to have a bunch of costs that you're depreciating over five years or over 15 years, you're accelerating that depreciation. You're taking more of it upfront again to maximize that possible loss that you have. So when anyone buys a property, I say, look into cost-seg. I mean, it's a great way to accelerate those numbers, to get a whole lot of loss upfront because oftentimes people are looking at holding rental properties, you know, five years, 10 years, 15 years, then maybe they want to cash out for the appreciation or get into something else. But it allows during those holding periods to take advantage of as much loss as possible,

Emil:
Are there professionals who just help you do? Like how do you even do that?

Joel:
There are actually, yeah, there are professionals. You have to do it yourself. I mean, these things actually don't even cost that much. In fact, I had a client who, okay, it's all relative in terms of cost, but he purchased a $2 million commercial building, a $2 million. He did the cost segregation on that study. I think it only costs him about $7,000. And I was able to save him upwards of 60 grand on his tax return. Okay. So that's the power of that cost X study. They're not that expensive. And some peak times people say, Oh, I didn't buy a $2 million property. I just finding a residential home. It only costs me, you know, 350,000 or $400,000. If something still do the cost segregation study, you don't know how long you're going to hold the home. Right? Most people don't hold it 27 and a half years. So go in and do it. Accelerate your depreciation, take a bunch of those expenses up front while holding the property.

Emil:
Michael, can I ask you, why did you decide, I know you have several properties. Why did you decide to do a cost segregation on this one specifically? Yeah. So it's a great question. I was doing a bunch of rehab, like a ton of ton of ton of rehab on both the properties that I'm doing, these cost segregations on. And it was just reading about tax strategies and things to do with properties that you've rehabbed. And this came up as one of the best things to do, because like Joel was mentioning so much of the rehab is the stuff, the baseboards flooring, light fixtures, plumbing, all that kind of stuff. So if I can get some of those benefits back for the cost that I had to spend to do the rehab, that's huge. And so Joel, did I understand you to say that you can do a cost segregation study, even if you haven't done any kind of rehab, you can just go buy a property.

Joel:
Yeah. Even if you go buy a property, you can do a cost segregation on that property even without rehab. So I would always tell people know, look at that really, really give it a good look because it's probably going to be worth your while.

Michael:
That's great. And so we mentioned about how that depreciation is captured and addressed in terms of basis. When we do a 10 31 and step up into something else, but let's say someone's owned a property for 10 years. They've taken depreciation on it the whole time. And then they're just looking at being done with real estate investing. They sell the property, they're going to pay the capital gains. Cause it's been some appreciation what happens to that depreciation? I can't just go away. Right.

Joel:
It doesn't go away. So it's what we call it recaptures. So the appreciation that you take over time when you sell the property recaptures, or it comes back into income and I'm taxed on it and that's what ends up happening. Yeah. Okay. But it's a good trade off because as revenue is coming in and cash is coming in, I want those deductions. And when I sell my house for the gains that I'm going to make off of the appreciation of that house, that's when I have the cash and it's easier for me to afford then the tax on those numbers right on that recapture. So when I have the cash, go ahead and I'll take the recapture when I'm having that little bit of income come in. I want the expense to offset.

Michael:
That makes sense. Yeah. I was just wondering, you know, what's the difference if you're taxed on it now or taxed on it later,

Joel:
That's the cash flow projection. Right. So dealing with my cash flow, I want the cash flow as much as I can right now, you know, and then hit me with it later when I have a big abundance of a onetime cash coming in.

Michael:
Got it makes total sense.

Emil:
Okay. I want to shift gears here a little bit and talk about passive income versus pass through deduction. So can you walk us through that, Joel, and what the differences and why it's relevant for people?

Joel:
Yeah. So excluding capital gains, when we're talking about income from operations, really, I'm just going to narrow it down to two. We call them active and passive. Hey, passive income deals with the rental side of real estate. And the reason people like it so much, it's because there's no self-employment tax associated with it. So in essence, it comes to us as cheaper income. So if I have a retail operation or something where I'm just going out and I'm selling widgets, you know, that I put together, that's all active income. So if I make a hundred grand, I have to pay self employment tax on that a hundred grand, on the flip side with passive income rental real estate. Again, let's say I make $20,000 off of that rental real estate. I don't pay any self employment tax, which is roughly about 15% on that income. And that's on top of income tax by the way. So it comes to me cheaper. It's cheaper income for me to make. So people love it as much passive income as you can get because it's cheaper income take it.

Michael:
Interesting so if someone just to reiterate, if we got rid of the self employment thing, if I'm making a hundred grand at my w two job and somebody else is making a hundred grand in passive income after all of the expenses, right after depreciation, all that good stuff, that's their taxable income. And my W2 is a hundred grand. The person who has the investment income, the passive income is going to walk away with more dollars.

Joel:
Correct.

Michael:
If your head just didn't explode, go back and look that again.
Joel:
Yeah, that's exactly right. The person with the passive income will come out ahead every time.

Emil:
I'm so glad you made that point because I think a lot of, when we're thinking about our ultimate goal of how much passive income do I need to be financially independent or whatever, it's actually less than what you'd need from your W2. That's correct. If you're making whatever a hundred grand, 150 grand, whatever it is, you don't need to make that much in passive income. It's actually less because you're taxed differently.

Joel:
That's right. It's cheaper income. It goes a lot further

Emil:
Love that.

Michael:
Love, love that. Anything else we should know about passive income or passive deductions?

Joel:
No, that's probably the biggest thing. Just the difference between active and passive. I mean, that's kind of the best thing to know about those two. Yeah.

Michael:
Perfect. Okay. So Joel, now shift to talking about something that we've mentioned previously about capital gains instead of income taxes. And so can you tell us what is a capital gain and why is it important to know about and how has it taxed?

Joel:
Yeah. So what a capital gain just means when I sell an asset, they have a different tax classification for rates of how I will be taxed on the game that I make from the sale of that asset and rental real estate, when I own a property or rental income during the time that I own that property, when I sell that property, the gain that I make off that sell is based on the capital gains rates. And typically it's much cheaper. Okay. Then ordinary income again, or active income again right now. I mean, there are some beautiful things when it comes to capital gains or capital gains rates. I mean, I can't remember the last time they were this low.

Did you know that you actually will pay 0% capital gain if your other income is under $80,000? Now there is a great tax strategy and planning to go through for timing. And when maybe it may make a whole lot of sense to sell a rental property above $80,000 to about $500,000. You're only taxed at 15%. Now this is all based on if I held the property over one year, okay, okay. After one year I get longterm capital gains rates above $500,000. My other income sources are above 500 grand. I'm going to pay 20%. So you have, so it depends on your other sources of income to how much capital gains, how much longterm capital gains you're actually going to pay. So if you're going to sell a property, really look at how can I mitigate some of those other sources of income to ensure that I get the lowest possible longterm capital gains rates, lots of tax planning, opportunities that go into that. And

Michael:
Is this something new that you mentioned that, that this has changed recently?

Joel:
Yeah. So it's something new with the whole, yeah. With the, with the new tax change that happened a couple of years ago. It's, you know, they're always kind of fussing about when it comes to capital gain rates and how they want to treat them. This is one of the aspects that came out of it. If you think about just comparing capital gain rates to ordinary income rates where I may, let's say I had, you know, a nice job, I made 150 grand. I sold the property, made another a hundred thousand, that a hundred thousand is only gonna be taxed at 15%. Whereas if I'm married, filing, jointly, my other income is going to be taxed at 22%. Right. Roughly. And so it just comes at a lower rate. So it's, I mean, capital gains rates. I mean, it's so beneficial from trying to put money back in your pocket, especially from a timing perspective nowadays.

Emil:
So if I was retired and I have a property, so my other income is income outside of the rental property business.

Joel:
Yeah. Okay. So if of your rental property, so if you look at a 1040 tax return, you look at all the various lines, dividends interest W2 wages, business income from partnerships or escorts, or however that may be. So you look at the total of that. That's how they measure it. So what is your income sources? And that's, what's going to dictate the capital gain rate that you're going to pay.

Emil:
Got it. Okay. So if I've retired, I have a couple investment properties. I don't have any other sources of income. Right. It's just my rental properties. I go to sell that. I'm not paying, I'm making less than 80K, so I'm on…

Joel:
Yeah, so if you're under, so if you're married, filing jointly, you're under 80 grand. Yeah. So it also makes for some interesting tax planning as well. If you have a few rental properties and you're going to go, you know, let's say I have four or five and I'm going to go sell one. I may go to my rent and say, guess what? December is free. It's on me. Congratulations. I don't want your money. Right. Just cause I want to stay standard that 80 grand. So that's why I say there's all kinds of tax planning opportunities to do, especially timing wise when it comes to selling a rental property. So I'd sit down with a CPA, go through it, go through your scenario and then, you know, make some decisions.

Emil:
Interesting.

Michael:
That is awesome.

Emil:
Yeah.

Michael:
Is there a good time or if you know, Joel, you know, if I want to utilize your services. When would it be the ideal time to start planning strategically for their taxes, yesterday?

Joel:
Yeah. Yesterday and today. Because if you come to me, if you're coming to me now say, Hey, what can I do for last year? I'm going to say, well, you kind of handcuffed me. There's not a whole lot I can do for you last year because we're all cash based taxpayers. So when we report our kind of activity for the year to the IRS and to the state, it's based on January through December, right? So effectively, I need to make all my decisions and spending and do what I need to do between January and December. And when you come sit down with me to do your tax return or the compliance aspect of your operation, then we're just looking back and saying, okay, what did you do? How did things go? Right? That's the easy part. That's just basically reporting. It's nothing more than that. But the actual savings happens throughout the year. It happens throughout the year.

Michael:
Okay, great.

Emil:
You can see, obviously when you have multiple properties, it makes so much sense to work with a tax professional. Do you think, even if I'm just starting out, I have my first property, I've traditionally done my own taxes. Should I really enlist a CPA's help. So it's kind of a loaded question for them.

Joel:
I'm going to self promote myself bias maybe slightly, but okay. But I'm going to give you a real example for this one. Okay. That it has nothing to do with taxes really. I mean really. So when I left Ernst and young, this would have been, you know, 20, some odd years ago. I decided because I'm an accountant and then cheat by nature, right? I mean, most accounts are cheap. You've met us, you've met, you've met my fellow people, right. We're cheap by nature. So I thought that I would save money if I built my own computers rather than going out and buying from Dell, maybe it was only saving a couple hundred bucks, but I thought, Oh, that's a great way that I can set. I can save some money. Then after building my own computers, I thought I was a smart little guy. And I would build my own server, which I did, which led me to building my own phone systems, which I did, which led me to try and to build my own website, which I failed miserably at.

But what would happen is during tax season, when everyone was working, we would do our most billing and our invoices words the highest throughout the year. And someone's computer broke. Guess who? The first person they called us, it was me. Hey, come fix my computer. So I leave my desk, go down there. I may spend two, three hours trying to fix their computer. But guess what I wasn't doing during those three hours during the highest billing rates that I have throughout the entire year, collecting money, right? I wasn't billing anyone. I wasn't doing anything that I could collect money. And at the end of the day, it ended up costing me way more to do it myself. Then it was to hire all that stuff out. And I like to call it team stacking, right? So you gotta look at what is your team? How am I stacking and putting all that together?

So now I have someone that deals with my phone system that deals with all my it, stuff that I need. I have a lawyer that deals with this I'm in real estate. So I have a general contractor that deals with all that stuff. So I don't have to do it so I can focus on what it is that makes me the most money, which is tax planning and tax compliance, doing tax returns. So I would suggest that as well, to someone even new and real estate team stack yourself, put people in place that will allow you to focus on what it is that you want to do and how you want to make money. Because I can promise you, you will never see as many tax things as I do. You'll never have those discussions or read all those wonderful IRS bulletins that even put me to sleep, right? So you wouldn't be doing all that stuff like I would be doing it. So team stack yourself, focus on what it is that make you money, put all those other things together and let them worry about that stuff.

Emil:
I fully agree with you. I have a full time job. I'm trying to focus on the actual real estate investing and all these things have a family. I would much rather leave it to somebody who knows what they're doing. Who's living and breathing it all the time, rather than trying to learn it myself. And this is also one of those things where it's a high ROI thing to me, like a good tax professional is going to be able to figure out how to save you more money than you can go figure out into yourself. So I am with you and I have no bias.

Joel:
Exactly. So the question should be when you go down and sit with someone isn't can I deduct this right? The question should be, how do I deduct this? Right? And then you leave to someone like me to go through and say, give you the house, okay. This is what you need to do. This is the support and documentation that you need to have. And this is how we can structure it, right. That's where tax planning comes in. And that's why it's so important. So even if you're just starting, I would make sure that I get connected with someone who understands the business that I'm doing, understands the real estate game and can start advising me upfront what to do and not making stumble over. Maybe some of those mistakes, someone who tries to do it on their own would find

Emil:
Absolutely agree.

Michael:
It's so good. Yeah. I concur with you both. Not nothing like that. That's great stuff. Okay. Last couple of things I want to touch on Joe, before we get into some high level questions, but can you talk really briefly? I know we had another episode of 1031 exchanges, but can you just touch on 1031 exchanges and opportunity zones?

Joel:
Yeah. So I'll just touch on them really briefly 1031 exchange allows me to sell a property and re-invest all the gains I make off that property into a new one and not pay any tax. So essentially it improves my buying power, right? So I'd say I own something for 200 grand. I sold it for 300 grand. That a hundred thousand dollars worth of gain, I just invest the whole 300 grand into a new property. And it reduces the cost of that property effectively improving my purchase power. So it's a tax deferment strategy that can work really, really well for people.

Michael:
Great.

Joel:
From an opportunity zone standpoint, though, that can get really complicated. So let me just, uh, let me just leave you with two points and maybe, and maybe people can remember this. First of all, opportunities zones are for those economic distress communities. I mean, often they are identified and you can find them. You can do searches online to find out where the opportunities zones are located. But what the IRS tries to do is give you some type of benefit. If you're willing to go into those opportunities zones and make investments into businesses, the issue that you need to be aware of is that first 50% of your income has to come from the opportunities zone for that company. Okay. 50% of it has, which means that if you're a manufacturer doesn't work really well. If you want to go into an opportunity zone, however, if you're a real estate investor works really, really well because I can go into an opportunity zone, buy a building and earn all my income, my rental income from inside the zone, which means that if I hold onto that property for 10 years, I get to sell it tax free. Yeah. So that's the benefit. I'm going to give you a benefit when you sell it right when I sell it, because it can be tax free, but there are lots of rules surrounding how I need to go about buying that property, holding that property, making income from that property. So opportunities don't get really complicated, but just sit down with someone who understands that they can walk you through it, but it can make a really, really great investment from a rental property standpoint.

Michael:
Fantastic. One last question for you, Joel, is what are some common mistakes? You see new investors making?

Joel:
Common mistakes?One is that they lacking in documentation for support of how they spend money. Because oftentimes when it comes to let's say audit, okay. If the IRS was going to look at someone's activity and they wanted to audit it, a lot of your ability to support the expenses that go into your tax return is based off of documentation. The other one I would say is most people don't include all their expenses. They look at them very, very narrowly, right? So if I own a rental property, there are some big ones that just stand out. Insurance, mortgage, interest, property taxes. I mean, those are some of the big ones that are just there. But if you go back to our conversation earlier, when I talked about going to home Depot, buy a light bulb going over, I'm looking at mileage, what did it take for me to actually earn a dollar? People never really take a step back and look, maybe go through your credit card statements, your bank statements, you know, even cash that you spent dealing with. If you have a general contractor or someone like that, like what was the money I spent with you? You really have to take a hard look at all of your expenses that went into the activity of that rental property, because that's where you're going to see your benefit. I mean, taxes. Oftentimes we call it death by a thousand paper cuts because it's all these little things that kind of, I miss miss, miss, miss. And when I accumulate all of them, it's a really big total, right? So really look at how you're spending your money and spending your time.

Pierre:
I have a question.

Michael:
Shoot Pierre
Pierre:
What would be sufficient documentation for driving Home Depot? Is taking a spreadsheet and counting your miles good?

Joel:
Yeah. Spreadsheet could work. You can go onto Google maps. It's a beautiful thing. Get some directions and just print that out. There also lots and lots of apps that will help you identify your mileage, where you went that are really, really useful. Like my like Mile IQ or Tax Bot. It's almost like, you know, the right swipe, left swipe. So it tracks all your mileage. And you're just going through swiping personal, personal business business business. And it's really easy to do it creates the log for you. So I would always tell people to use technology to your advantage, especially when it comes to tracking what you spent and doing your documentation for anything that goes into your tax return. But this spreadsheet would work just as well.

Michael :
Great. Okay. So now we'll move onto the section of the show that we call the quick fire questions. So these are going to be kind of yes or no either or type questions. You ready Joel?

Joel:
Go ahead.

Michael:
High property taxes or high income taxes?

Joel:
High property taxes.

Michael:
Because you can deduct them, right?

Joel:
Because I can deduct them.

Michael:
I love it. High rent growth or low vacancy.

Joel:
Low vacancy, it's easier for me to manage my cash.

Michael:
Nice consolidation or diversification.

Joel:
I like diversification because I just think it's more fun.

Michael:
Cashflow or appreciation?

Joel:
I take cash flow. I want a dollar today.

Michael:
Love it. Local or remote investing?

Joel:
Ooh, that's a good one. I go where the deal is. So I don't care.

Michael:
Right. Single family or multifamily?

Joel:
Multifamily. Because basically in that instance, I've just adding zeros, but doing the same thing.

Michael:
Yep. Turn-key or master project?

Joel:
Oh, that's another good one. I'm going to say, well, nowadays based on the situation, I'm going to do turnkey, but under normal circumstances, I would like a master project just again, because I think it's more fun.

Michael:
Okay. Great. Last two. Midnight oil or early bird worm?

Joel:
Early bird worm, for sure.

Michael:
Awesome. And then text message or email?

Joel:
Text message. Yeah. My email inbox gets over flooded with emails.

Michael:
Yep. I know how that goes. Awesome. Well Joel, thank you so much for taking the time and spending the time with us. This has been really great. What's the best way for someone to get in touch with you if they've got tax questions or tax needs?

Joel:
Yeah. So if they want to get in touch with us, I would actually go to taxhive.com/roofstock. You can sign up. We'd love to talk to you for 30 minutes. We'll give you a free consultation. Maybe we can improve some of the stuff that you're doing. Give you some suggestions, whatever it is that you would like to do, but we're happy to help and give you any advice we can on an individual basis. I think it can be a little more relevant that way.

Michael:
Fantastic. And again, the name of your company is?

Joel:
So we're Tax Sentry, but if you go to taxhive.com, that's where you can find us.

Michael:
Fantastic

Emil:
H-i-v-e?

Joel:
H-i-v-e.

Michael:
Great. Emil, any final thoughts?

Emil:
No. Joel, thank you so much. I actually, I learned a ton about real estate investing taxes myself. So thank you so much for coming on.

Joel:
Sure. Love it. Happy to be here.

Michael:
Always a pleasure looking forward to hopefully chatting again soon.

Joel:
Thanks guys. Okay, everyone. Well, that's our show. Thanks so much for listening. Hope you enjoyed it as much as we did. I know both Emil and I got a ton of knowledge and golden nuggets out of it. So again, a big thank you to Joel and we can hopefully have him on again. Thanks so much for listening and happy investing.

Emil:
Happy Investing

25 min
July 17, 2020 A Deep Dive With a CPA to Uncover All The Tax Benefits of Rental Properties
In this episode, we have Joel Jensen from Tax Sentry explain exactly why real estate is so powerful when it comes to tax benefits.
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Transcript:

Michael:
Hey everyone. Welcome to another episode, The Remote Real Estate Investor, I'm Michael Albaum. And today I'm joined by Emil Shour. And today as our guest, we have Joel Jensen from Tax Sentry, and Joel is a tax expert and guru, and is going to be talking to us today about what we as investors need to know about income taxes and how to strategize and plan for our taxes so that we can come out ahead. So let's get into it.

Theme Song

Michael:
Joel, thank you so much for being here. Really appreciate you taking the time.

Joel:
Sure. I love to be here.

Michael:
Awesome. So can you give all of our listeners a little bit of background about yourself and how long you've been working in the tax space and kind of what you've been doing?

Joel:
You bet. So I graduated with my master's degree from Brigham Young University in the early nineties. So it feels like a long time ago, but from there I went to work for Ernst and Young, which is one of the, we'll call them the last four large service firms out there. When I was there, they were the big six. Now I kind of call them the final four, but I was with Ernst and Young for about 10 years working on large audits, large compliance, scc transactions, that type of thing. And after doing it for 10 years, the part of the job I really, really liked was working with people, you know, the interactions I had with people, the part I didn't like was feeling like that was just servicing kind of these large companies.

So what I decided to do was leave Ernst and Young kind of start my own firm. So I could actually have a significant impact on an individual's tax and financial circumstances where I felt it was much more gratifying for myself personally. And I've been doing that for almost 20 years now, became a real estate investor myself, probably back in 2005. So I've been doing that as well on the side, which I really enjoy some houses, own some rental properties. So since then, I guess I'm in the real estate game, but my full time job is CPA. Great.

Michael:
You know, it's so counterintuitive that you mentioned that the favorite part of your job working at one of the big six of the big four was interacting with people. Cause all the accountants I know the worst part of their day is when they have to interact with people.

Joel:
I know there's probably only lasted 10 years, right? I'm like, ah, this isn't for me. I gotta go, gotta get out. I gotta get out now while I can.

Michael:
Awesome. Awesome. So, and I love too that you're an investor because you drinking the Koolaid too. And so really talking and preaching and consulting on the things that you're also doing.

Joel:
Correct. Yeah. So I think it helps, you know, if you're dealing with a CPA, for example, that at least they have a working knowledge of what it is that you do. And since I am in the real estate game, obviously I have lots of real estate clients, even contractor clients, anyone, even within the field of real estate, whether they own it or provide services to people who own real estate, that kind of outlines a significant of my clients.

Michael:
Great, great. So I wanted to jump into the meat and potatoes of this tax discussion right away. And I'm gonna let Emil kick it off in talking about deductions and kind of what those are, what those look like, what people should be aware of.

Emil:
So the various types of deductions that real estate investors should have on their radar are property taxes, property insurance, mortgage, interest, property management, fees, property repairs, and maintenance, capital improvements, and ongoing maintenance and advertising expenses. So things like the cost to list a rental, to find a new tenant marketing your property for sale. Those things are also deductions as well.

Joel:
Let me go through maybe the aspect of what it is like to actually own a property. So I go out and I buy a rental property. I'm going to bring that in. I'm going to put a renter in there and I'm going to earn rental income, right? So that's kind of the basic premise of when I own a rental property. Now what's offsetting part of that revenue are some of the standard deductions, like you mentioned. So oftentimes when we buy rental real estate property, we're financing it. So we have mortgage interest, right? We're deducting against that revenue. We have insurance that we have to pay to insure the property that we're also going to deduct against that revenue. Oftentimes it's maybe it's our self, right? Maybe we're managing a property and we don't have a management company that's doing it. Or let's say the property is, I don't know, a hundred miles away from me.

So I have to get a property management company involved. So I got to pay them in order to do it. So I may have some of those types of fees, maybe some HOA fees for owning the property that are due, especially in kind of a condominium space, right? Condos or maybe apartments or multi-doors, rental properties, that sort of thing. I may have some of those fees as well. You know, advertising, whether I'm advertising something for a person to rent or whether I'm advertising for maybe a home to sell all those costs, kind of go in to offset my particular rental income that I'm earning. So if you can think of kind of, if I take, you know, lots of people have experienced with their personal homes, right? And they say, look at all these outgoing bills, you know, utilities, interest in my property, taxes, all those things, think of it in those terms, all those same expenses that you have for your personal home, you're still going to have for your rental property. Cause it is still house, right? In most cases, right? So you're going to have those expenses. Now, all of those things that you're paying out for that property become deductions against your revenue. So I would just look at it as kind of all the expenses that are associated with the property. I get to deduct to get any rental income that a renter is paying me.

Michael:
And that's so different than like you mentioned on our primary residence. If someone has a primary and they have a property tax bill, they don't get to deduct that against any income because there isn't an income, but they don't get to deduct that against them. So it sounds like pretty much everything on a rental property, if it's an expense as a deduction.

Joel:
Yeah possibly can be, yeah. So let's make it easy. So I got to go change a light bulb for someone because they don't have a ladder. So I go to Depot, I buy a light, I go over to my rental property. I put that light bulb in, I get the cost of that light bulb and I get a mileage deduction for driving down home Depot and for driving over to my rental property and then for driving back to my house. So that encapsulates two actual deductions that I may have going for me to offset some of that income. So I always tell people, look at what it took for you to make a dollar. Let's do it at the bare bones minimum. What did it take for you to make a dollar in conjunction with that rental property? How did you spend your time? How many miles did you drive?

What were you buying on behalf of that rental property? What were you buying in order to maintain that property or service that property? For example, you know, renters in there, I managing it myself, got to have a cell phone right now that's cell form becomes a deduction against the rental income. Probably got to have internet if I'm going to list something. Well, now I get to write off my internet as part of the operations of that rental property. So I always say really take a hard look. What did it take for you to make a dollar? Okay, what did it take for you make a dollar and that's probably what you're going to be able to deduct on your tax return as part of that real estate operation.

Michael:
That's great.

Emil:
So all those things we just mentioned are those fully deductible or is it only 50% or some partial amount?

Joel:
Ah, good question. Because of the new tax code limits as personally from our property tax perspective, right? So we can only deduct up to $10,000 worth of state or property tax on our personal tax return. But when it comes to my rental activity, I don't have those same kinds of limitations or I'm deducting property tax in full I'm, deducting my mortgage interest. I'm deducting, you know, the cost of the light bulb in full. Most of those aren't limited or don't have limitations as far as my deductability against the rental property.

Michael:
So then Joel, is it accurate to say, let's say I made $10,000 in rental income in the year and I spent $6,000 in these various expenses that we just mentioned, the delta, there is four, 4,000. So that I ended up with $4,000. But is that what's taxed?

Joel:
That is what's taxed. Yeah. It's your bottom line. Sometimes people get revenue. I an accountant right. So I kind of speak in the account language. So sometimes people think revenue, Oh, I'm texting revenue. This renter just paid me $24,000. Now I got to include $24,000 in my income tax return. And that's what I'm taxed on. But in actuality, what happens is you're taxed on the net. Okay. So I take maybe that $24,000 or in your case, the $10,000 I deduct the $6,000. I'm only taxed on the four grand, not on that top line number.

Michael:
Great, great, super, super powerful. And so that kind of leads in actually to the next point that I want to talk about, which is this thing called depreciation, which I think most investors have heard about maybe not sure how to use or what it actually means. So can you give everyone an idea and a breakdown of what depreciation is and how we can use it to our advantage?

Joel:
Sure. Now I will say If I own a rental, you must take depreciation expense. It's not something that you can leave off. I've seen tax returns that were given to me after the fact of rental operations for people that wanted me to review it. And then I look at depreciation and there's no depreciation. So know that you have to depreciate a rental property. And what that means is the IRS is giving us basically a useful life. If you will. They're saying that I go buy a rental property. It's useful. Life is 27 and a half years. So I'm going to define the cost of that property over that 27 and a half years. And I get a yearly expense of whatever that number ends up being that yearly expense is awesome because I'm able to deduct that. Let's take back your scenario of 16,000 worth of expenses, like with 4,000, right?

But those six thousands were hard, cash, outflow numbers or dollars. I still get to deduct my depreciation that gets that four grand. And now maybe I'm only taxed on $2,000. Right? So depreciation is a wonderful thing because it's also kind of a non-cash item. Okay. I bought the property, it has a loan on it, or maybe it doesn't. Maybe I was able to take the property down in full when I initially purchased it. But I still, even under that scenario, get to depreciate the property. So I'm not paying for the depreciation. It just happens automatically once I purchase it.

Michael:
And so you mentioned that it's based on the purchase price. Is that right?

Joel:
Based on the purchase price. That's correct. Yep.

Michael:
So, In our $10,000 rental example, if we bought the property for a hundred thousand dollars, I did the math really quick, here,

Joel:
Thank you.

Michael:
I wasn’t going to put you on the spot. And we say that residential property is 27 and a half years. Right? Commercial property is 39 years.

Joel:
Correct.

Michael:
And so if it's residential property, we divide the purchase price by 27 and a half. If it's commercial property, we divide the purchase price by 39 years. So let's take our a property. We bought for a hundred thousand dollars divided by 27 and a half years, we get $3,636 of depreciation every year,

Joel:
Every year until that 27 and a half years has passed.

Michael:
Got it. So going back to our $10,000 in revenue example, we had $10,000 in rental income, $6,000 in expenses. So it leaves us with $4,000 net gain. But now you're saying we get to deduct an additional 36 36 and meaning our taxable income is going to be like 40 bucks for the year?

Joel:
Correct? Yep. Holy smokes. Yeah. So that's the power of appreciation. That's why it's so great. So when I buy a rental property, a great position to be in because of depreciation is to be what I call cash positive. Meaning that the revenue that I'm earning is greater than the cash outflow for any expenses that I have. But because I have this depreciation figure, right, I can actually have a loss on my tax return yet still be cash positive in the real world. I mean, that's the power of real estate. So when people say, Hey, I want to go into real estate. There are tons of tax benefits. Oftentimes that's what they're referring to. That I can create loss on my tax return and offset. Maybe my wages, my w two wages from my employer, even though I'm cash positive when it comes to the actual activity of the property.

Michael:
So what another way of saying that be at the end of the year, I can end up with a thousand dollars in my pocket, but actually offset the income that I've earned from my W2 and get taxed at a lesser

Joel:
That's correct. Yup. Yup. I see it all the time.

Emil:
I love that you guys brought this up because this is why people tout the benefits of real estate, right? It's like everyone knows there's huge tax benefits and this is the biggest one where you can actually be making money all year cashflow positive, but because of depreciation, you're showing either no gain or a loss potentially offsetting your personal income, so.

Joel:
That's correct. Yep. Maybe you have that scenario, loss, cash positive. The other thing that happens with real estate is our gains, right? So our appreciation just to the value of the property over years tends to go up. So when I sell it, I'm going to sell it at a higher dollar than when I purchased it for, and the entire time I'm owning it, I'm showing all these losses, but I'm still reaping these cash, positive cash, positive cash flow numbers that are coming through. Yeah. It's a real powerful game when it comes to real estate. That's why I'm in it, right?

Michael:
That's right. That's right.

Joel:
Yup.

Emil:
Probably a little bit more tactical or advanced, but okay. Let's say I've owned the property for 27 and a half years. Right? I've taken full depreciation now I want to sell it. Right. One strategy we've talked about on prior episodes is using a 1031. So let's say 1031. So I have no capital gains on the sale. When I 1031 will my new property, will I be able to depreciate that one over 27 and a half years or what happens to this amount? I've depreciated all that time.

Joel:
So it depends on basis, right? And typically what happens in 1031 exchanges, if you held it for that long and then 10 31 to a new property. I mean, that would be a pretty phenomenal thing, but, but what we do is oftentimes people are selling something to get into something that's larger or bigger or creates more revenue. Right? So it depends on my basis. So if I had something that was worth 300,000 and appreciated at all 27 and a half years, I 1031 exchange that and do something that's 500,000, I've already depreciated $300,000 with my basis. So now I grabbed that additional 200 grand and now I'm going to start depreciating that once I own that new property. Yeah. So I don't depreciate the same thing twice.

Emil:
Okay.

Michael:
Got it. Got it. And so speaking of depreciation, something that I'm doing actually for the first time, this year is a cost segregation study. Can you share with everybody Joel, what that is and how that might be used to help?

Joel:
Yeah, that's really, I mean, that's really powerful because we're talking about depreciation, the benefits of appreciating a property now that 27 and a half years oftentimes can seem like a long time. And if you get into the commercial space with 39 years, can you imagine, you know, you're going to hold something through 39 years. That may seem like a really long time for most people. I think that it would be. So what a cost segregation does is it allows someone to go in and start piecemealing the actual individual cost of a property. Okay. So you may have cost for electrical wire, plumbing, drywall, roofing, wood, steel, nails, screws, light fixtures, you know, all of these different costs now. And realistically a life's not going to last 27 and a half years. So what a cost segregation does is it breaks down at home, into all its individual components and then assigns lives to those individual components.

So rather than depreciating a hundred percent of the cost over 27 and a half years, you may be able to have a bunch of costs that you're depreciating over five years or over 15 years, you're accelerating that depreciation. You're taking more of it upfront again to maximize that possible loss that you have. So when anyone buys a property, I say, look into cost-seg. I mean, it's a great way to accelerate those numbers, to get a whole lot of loss upfront because oftentimes people are looking at holding rental properties, you know, five years, 10 years, 15 years, then maybe they want to cash out for the appreciation or get into something else. But it allows during those holding periods to take advantage of as much loss as possible,

Emil:
Are there professionals who just help you do? Like how do you even do that?

Joel:
There are actually, yeah, there are professionals. You have to do it yourself. I mean, these things actually don't even cost that much. In fact, I had a client who, okay, it's all relative in terms of cost, but he purchased a $2 million commercial building, a $2 million. He did the cost segregation on that study. I think it only costs him about $7,000. And I was able to save him upwards of 60 grand on his tax return. Okay. So that's the power of that cost X study. They're not that expensive. And some peak times people say, Oh, I didn't buy a $2 million property. I just finding a residential home. It only costs me, you know, 350,000 or $400,000. If something still do the cost segregation study, you don't know how long you're going to hold the home. Right? Most people don't hold it 27 and a half years. So go in and do it. Accelerate your depreciation, take a bunch of those expenses up front while holding the property.

Emil:
Michael, can I ask you, why did you decide, I know you have several properties. Why did you decide to do a cost segregation on this one specifically? Yeah. So it's a great question. I was doing a bunch of rehab, like a ton of ton of ton of rehab on both the properties that I'm doing, these cost segregations on. And it was just reading about tax strategies and things to do with properties that you've rehabbed. And this came up as one of the best things to do, because like Joel was mentioning so much of the rehab is the stuff, the baseboards flooring, light fixtures, plumbing, all that kind of stuff. So if I can get some of those benefits back for the cost that I had to spend to do the rehab, that's huge. And so Joel, did I understand you to say that you can do a cost segregation study, even if you haven't done any kind of rehab, you can just go buy a property.

Joel:
Yeah. Even if you go buy a property, you can do a cost segregation on that property even without rehab. So I would always tell people know, look at that really, really give it a good look because it's probably going to be worth your while.

Michael:
That's great. And so we mentioned about how that depreciation is captured and addressed in terms of basis. When we do a 10 31 and step up into something else, but let's say someone's owned a property for 10 years. They've taken depreciation on it the whole time. And then they're just looking at being done with real estate investing. They sell the property, they're going to pay the capital gains. Cause it's been some appreciation what happens to that depreciation? I can't just go away. Right.

Joel:
It doesn't go away. So it's what we call it recaptures. So the appreciation that you take over time when you sell the property recaptures, or it comes back into income and I'm taxed on it and that's what ends up happening. Yeah. Okay. But it's a good trade off because as revenue is coming in and cash is coming in, I want those deductions. And when I sell my house for the gains that I'm going to make off of the appreciation of that house, that's when I have the cash and it's easier for me to afford then the tax on those numbers right on that recapture. So when I have the cash, go ahead and I'll take the recapture when I'm having that little bit of income come in. I want the expense to offset.

Michael:
That makes sense. Yeah. I was just wondering, you know, what's the difference if you're taxed on it now or taxed on it later,

Joel:
That's the cash flow projection. Right. So dealing with my cash flow, I want the cash flow as much as I can right now, you know, and then hit me with it later when I have a big abundance of a onetime cash coming in.

Michael:
Got it makes total sense.

Emil:
Okay. I want to shift gears here a little bit and talk about passive income versus pass through deduction. So can you walk us through that, Joel, and what the differences and why it's relevant for people?

Joel:
Yeah. So excluding capital gains, when we're talking about income from operations, really, I'm just going to narrow it down to two. We call them active and passive. Hey, passive income deals with the rental side of real estate. And the reason people like it so much, it's because there's no self-employment tax associated with it. So in essence, it comes to us as cheaper income. So if I have a retail operation or something where I'm just going out and I'm selling widgets, you know, that I put together, that's all active income. So if I make a hundred grand, I have to pay self employment tax on that a hundred grand, on the flip side with passive income rental real estate. Again, let's say I make $20,000 off of that rental real estate. I don't pay any self employment tax, which is roughly about 15% on that income. And that's on top of income tax by the way. So it comes to me cheaper. It's cheaper income for me to make. So people love it as much passive income as you can get because it's cheaper income take it.

Michael:
Interesting so if someone just to reiterate, if we got rid of the self employment thing, if I'm making a hundred grand at my w two job and somebody else is making a hundred grand in passive income after all of the expenses, right after depreciation, all that good stuff, that's their taxable income. And my W2 is a hundred grand. The person who has the investment income, the passive income is going to walk away with more dollars.

Joel:
Correct.

Michael:
If your head just didn't explode, go back and look that again.
Joel:
Yeah, that's exactly right. The person with the passive income will come out ahead every time.

Emil:
I'm so glad you made that point because I think a lot of, when we're thinking about our ultimate goal of how much passive income do I need to be financially independent or whatever, it's actually less than what you'd need from your W2. That's correct. If you're making whatever a hundred grand, 150 grand, whatever it is, you don't need to make that much in passive income. It's actually less because you're taxed differently.

Joel:
That's right. It's cheaper income. It goes a lot further

Emil:
Love that.

Michael:
Love, love that. Anything else we should know about passive income or passive deductions?

Joel:
No, that's probably the biggest thing. Just the difference between active and passive. I mean, that's kind of the best thing to know about those two. Yeah.

Michael:
Perfect. Okay. So Joel, now shift to talking about something that we've mentioned previously about capital gains instead of income taxes. And so can you tell us what is a capital gain and why is it important to know about and how has it taxed?

Joel:
Yeah. So what a capital gain just means when I sell an asset, they have a different tax classification for rates of how I will be taxed on the game that I make from the sale of that asset and rental real estate, when I own a property or rental income during the time that I own that property, when I sell that property, the gain that I make off that sell is based on the capital gains rates. And typically it's much cheaper. Okay. Then ordinary income again, or active income again right now. I mean, there are some beautiful things when it comes to capital gains or capital gains rates. I mean, I can't remember the last time they were this low.

Did you know that you actually will pay 0% capital gain if your other income is under $80,000? Now there is a great tax strategy and planning to go through for timing. And when maybe it may make a whole lot of sense to sell a rental property above $80,000 to about $500,000. You're only taxed at 15%. Now this is all based on if I held the property over one year, okay, okay. After one year I get longterm capital gains rates above $500,000. My other income sources are above 500 grand. I'm going to pay 20%. So you have, so it depends on your other sources of income to how much capital gains, how much longterm capital gains you're actually going to pay. So if you're going to sell a property, really look at how can I mitigate some of those other sources of income to ensure that I get the lowest possible longterm capital gains rates, lots of tax planning, opportunities that go into that. And

Michael:
Is this something new that you mentioned that, that this has changed recently?

Joel:
Yeah. So it's something new with the whole, yeah. With the, with the new tax change that happened a couple of years ago. It's, you know, they're always kind of fussing about when it comes to capital gain rates and how they want to treat them. This is one of the aspects that came out of it. If you think about just comparing capital gain rates to ordinary income rates where I may, let's say I had, you know, a nice job, I made 150 grand. I sold the property, made another a hundred thousand, that a hundred thousand is only gonna be taxed at 15%. Whereas if I'm married, filing, jointly, my other income is going to be taxed at 22%. Right. Roughly. And so it just comes at a lower rate. So it's, I mean, capital gains rates. I mean, it's so beneficial from trying to put money back in your pocket, especially from a timing perspective nowadays.

Emil:
So if I was retired and I have a property, so my other income is income outside of the rental property business.

Joel:
Yeah. Okay. So if of your rental property, so if you look at a 1040 tax return, you look at all the various lines, dividends interest W2 wages, business income from partnerships or escorts, or however that may be. So you look at the total of that. That's how they measure it. So what is your income sources? And that's, what's going to dictate the capital gain rate that you're going to pay.

Emil:
Got it. Okay. So if I've retired, I have a couple investment properties. I don't have any other sources of income. Right. It's just my rental properties. I go to sell that. I'm not paying, I'm making less than 80K, so I'm on…

Joel:
Yeah, so if you're under, so if you're married, filing jointly, you're under 80 grand. Yeah. So it also makes for some interesting tax planning as well. If you have a few rental properties and you're going to go, you know, let's say I have four or five and I'm going to go sell one. I may go to my rent and say, guess what? December is free. It's on me. Congratulations. I don't want your money. Right. Just cause I want to stay standard that 80 grand. So that's why I say there's all kinds of tax planning opportunities to do, especially timing wise when it comes to selling a rental property. So I'd sit down with a CPA, go through it, go through your scenario and then, you know, make some decisions.

Emil:
Interesting.

Michael:
That is awesome.

Emil:
Yeah.

Michael:
Is there a good time or if you know, Joel, you know, if I want to utilize your services. When would it be the ideal time to start planning strategically for their taxes, yesterday?

Joel:
Yeah. Yesterday and today. Because if you come to me, if you're coming to me now say, Hey, what can I do for last year? I'm going to say, well, you kind of handcuffed me. There's not a whole lot I can do for you last year because we're all cash based taxpayers. So when we report our kind of activity for the year to the IRS and to the state, it's based on January through December, right? So effectively, I need to make all my decisions and spending and do what I need to do between January and December. And when you come sit down with me to do your tax return or the compliance aspect of your operation, then we're just looking back and saying, okay, what did you do? How did things go? Right? That's the easy part. That's just basically reporting. It's nothing more than that. But the actual savings happens throughout the year. It happens throughout the year.

Michael:
Okay, great.

Emil:
You can see, obviously when you have multiple properties, it makes so much sense to work with a tax professional. Do you think, even if I'm just starting out, I have my first property, I've traditionally done my own taxes. Should I really enlist a CPA's help. So it's kind of a loaded question for them.

Joel:
I'm going to self promote myself bias maybe slightly, but okay. But I'm going to give you a real example for this one. Okay. That it has nothing to do with taxes really. I mean really. So when I left Ernst and young, this would have been, you know, 20, some odd years ago. I decided because I'm an accountant and then cheat by nature, right? I mean, most accounts are cheap. You've met us, you've met, you've met my fellow people, right. We're cheap by nature. So I thought that I would save money if I built my own computers rather than going out and buying from Dell, maybe it was only saving a couple hundred bucks, but I thought, Oh, that's a great way that I can set. I can save some money. Then after building my own computers, I thought I was a smart little guy. And I would build my own server, which I did, which led me to building my own phone systems, which I did, which led me to try and to build my own website, which I failed miserably at.

But what would happen is during tax season, when everyone was working, we would do our most billing and our invoices words the highest throughout the year. And someone's computer broke. Guess who? The first person they called us, it was me. Hey, come fix my computer. So I leave my desk, go down there. I may spend two, three hours trying to fix their computer. But guess what I wasn't doing during those three hours during the highest billing rates that I have throughout the entire year, collecting money, right? I wasn't billing anyone. I wasn't doing anything that I could collect money. And at the end of the day, it ended up costing me way more to do it myself. Then it was to hire all that stuff out. And I like to call it team stacking, right? So you gotta look at what is your team? How am I stacking and putting all that together?

So now I have someone that deals with my phone system that deals with all my it, stuff that I need. I have a lawyer that deals with this I'm in real estate. So I have a general contractor that deals with all that stuff. So I don't have to do it so I can focus on what it is that makes me the most money, which is tax planning and tax compliance, doing tax returns. So I would suggest that as well, to someone even new and real estate team stack yourself, put people in place that will allow you to focus on what it is that you want to do and how you want to make money. Because I can promise you, you will never see as many tax things as I do. You'll never have those discussions or read all those wonderful IRS bulletins that even put me to sleep, right? So you wouldn't be doing all that stuff like I would be doing it. So team stack yourself, focus on what it is that make you money, put all those other things together and let them worry about that stuff.

Emil:
I fully agree with you. I have a full time job. I'm trying to focus on the actual real estate investing and all these things have a family. I would much rather leave it to somebody who knows what they're doing. Who's living and breathing it all the time, rather than trying to learn it myself. And this is also one of those things where it's a high ROI thing to me, like a good tax professional is going to be able to figure out how to save you more money than you can go figure out into yourself. So I am with you and I have no bias.

Joel:
Exactly. So the question should be when you go down and sit with someone isn't can I deduct this right? The question should be, how do I deduct this? Right? And then you leave to someone like me to go through and say, give you the house, okay. This is what you need to do. This is the support and documentation that you need to have. And this is how we can structure it, right. That's where tax planning comes in. And that's why it's so important. So even if you're just starting, I would make sure that I get connected with someone who understands the business that I'm doing, understands the real estate game and can start advising me upfront what to do and not making stumble over. Maybe some of those mistakes, someone who tries to do it on their own would find

Emil:
Absolutely agree.

Michael:
It's so good. Yeah. I concur with you both. Not nothing like that. That's great stuff. Okay. Last couple of things I want to touch on Joe, before we get into some high level questions, but can you talk really briefly? I know we had another episode of 1031 exchanges, but can you just touch on 1031 exchanges and opportunity zones?

Joel:
Yeah. So I'll just touch on them really briefly 1031 exchange allows me to sell a property and re-invest all the gains I make off that property into a new one and not pay any tax. So essentially it improves my buying power, right? So I'd say I own something for 200 grand. I sold it for 300 grand. That a hundred thousand dollars worth of gain, I just invest the whole 300 grand into a new property. And it reduces the cost of that property effectively improving my purchase power. So it's a tax deferment strategy that can work really, really well for people.

Michael:
Great.

Joel:
From an opportunity zone standpoint, though, that can get really complicated. So let me just, uh, let me just leave you with two points and maybe, and maybe people can remember this. First of all, opportunities zones are for those economic distress communities. I mean, often they are identified and you can find them. You can do searches online to find out where the opportunities zones are located. But what the IRS tries to do is give you some type of benefit. If you're willing to go into those opportunities zones and make investments into businesses, the issue that you need to be aware of is that first 50% of your income has to come from the opportunities zone for that company. Okay. 50% of it has, which means that if you're a manufacturer doesn't work really well. If you want to go into an opportunity zone, however, if you're a real estate investor works really, really well because I can go into an opportunity zone, buy a building and earn all my income, my rental income from inside the zone, which means that if I hold onto that property for 10 years, I get to sell it tax free. Yeah. So that's the benefit. I'm going to give you a benefit when you sell it right when I sell it, because it can be tax free, but there are lots of rules surrounding how I need to go about buying that property, holding that property, making income from that property. So opportunities don't get really complicated, but just sit down with someone who understands that they can walk you through it, but it can make a really, really great investment from a rental property standpoint.

Michael:
Fantastic. One last question for you, Joel, is what are some common mistakes? You see new investors making?

Joel:
Common mistakes?One is that they lacking in documentation for support of how they spend money. Because oftentimes when it comes to let's say audit, okay. If the IRS was going to look at someone's activity and they wanted to audit it, a lot of your ability to support the expenses that go into your tax return is based off of documentation. The other one I would say is most people don't include all their expenses. They look at them very, very narrowly, right? So if I own a rental property, there are some big ones that just stand out. Insurance, mortgage, interest, property taxes. I mean, those are some of the big ones that are just there. But if you go back to our conversation earlier, when I talked about going to home Depot, buy a light bulb going over, I'm looking at mileage, what did it take for me to actually earn a dollar? People never really take a step back and look, maybe go through your credit card statements, your bank statements, you know, even cash that you spent dealing with. If you have a general contractor or someone like that, like what was the money I spent with you? You really have to take a hard look at all of your expenses that went into the activity of that rental property, because that's where you're going to see your benefit. I mean, taxes. Oftentimes we call it death by a thousand paper cuts because it's all these little things that kind of, I miss miss, miss, miss. And when I accumulate all of them, it's a really big total, right? So really look at how you're spending your money and spending your time.

Pierre:
I have a question.

Michael:
Shoot Pierre
Pierre:
What would be sufficient documentation for driving Home Depot? Is taking a spreadsheet and counting your miles good?

Joel:
Yeah. Spreadsheet could work. You can go onto Google maps. It's a beautiful thing. Get some directions and just print that out. There also lots and lots of apps that will help you identify your mileage, where you went that are really, really useful. Like my like Mile IQ or Tax Bot. It's almost like, you know, the right swipe, left swipe. So it tracks all your mileage. And you're just going through swiping personal, personal business business business. And it's really easy to do it creates the log for you. So I would always tell people to use technology to your advantage, especially when it comes to tracking what you spent and doing your documentation for anything that goes into your tax return. But this spreadsheet would work just as well.

Michael :
Great. Okay. So now we'll move onto the section of the show that we call the quick fire questions. So these are going to be kind of yes or no either or type questions. You ready Joel?

Joel:
Go ahead.

Michael:
High property taxes or high income taxes?

Joel:
High property taxes.

Michael:
Because you can deduct them, right?

Joel:
Because I can deduct them.

Michael:
I love it. High rent growth or low vacancy.

Joel:
Low vacancy, it's easier for me to manage my cash.

Michael:
Nice consolidation or diversification.

Joel:
I like diversification because I just think it's more fun.

Michael:
Cashflow or appreciation?

Joel:
I take cash flow. I want a dollar today.

Michael:
Love it. Local or remote investing?

Joel:
Ooh, that's a good one. I go where the deal is. So I don't care.

Michael:
Right. Single family or multifamily?

Joel:
Multifamily. Because basically in that instance, I've just adding zeros, but doing the same thing.

Michael:
Yep. Turn-key or master project?

Joel:
Oh, that's another good one. I'm going to say, well, nowadays based on the situation, I'm going to do turnkey, but under normal circumstances, I would like a master project just again, because I think it's more fun.

Michael:
Okay. Great. Last two. Midnight oil or early bird worm?

Joel:
Early bird worm, for sure.

Michael:
Awesome. And then text message or email?

Joel:
Text message. Yeah. My email inbox gets over flooded with emails.

Michael:
Yep. I know how that goes. Awesome. Well Joel, thank you so much for taking the time and spending the time with us. This has been really great. What's the best way for someone to get in touch with you if they've got tax questions or tax needs?

Joel:
Yeah. So if they want to get in touch with us, I would actually go to taxhive.com/roofstock. You can sign up. We'd love to talk to you for 30 minutes. We'll give you a free consultation. Maybe we can improve some of the stuff that you're doing. Give you some suggestions, whatever it is that you would like to do, but we're happy to help and give you any advice we can on an individual basis. I think it can be a little more relevant that way.

Michael:
Fantastic. And again, the name of your company is?

Joel:
So we're Tax Sentry, but if you go to taxhive.com, that's where you can find us.

Michael:
Fantastic

Emil:
H-i-v-e?

Joel:
H-i-v-e.

Michael:
Great. Emil, any final thoughts?

Emil:
No. Joel, thank you so much. I actually, I learned a ton about real estate investing taxes myself. So thank you so much for coming on.

Joel:
Sure. Love it. Happy to be here.

Michael:
Always a pleasure looking forward to hopefully chatting again soon.

Joel:
Thanks guys. Okay, everyone. Well, that's our show. Thanks so much for listening. Hope you enjoyed it as much as we did. I know both Emil and I got a ton of knowledge and golden nuggets out of it. So again, a big thank you to Joel and we can hopefully have him on again. Thanks so much for listening and happy investing.

Emil:
Happy Investing
25 min
July 14, 2020 Ask Us Anything #1: Selecting Markets, Advice for First Time Buyers, Loan Types & Flipping Costs
This is our first ever AMA, where we answer listener submitted questions.
---
Transcript:

Emil:
Hey, everyone. Welcome to another episode of the remote real estate investor. My name is Emil Shour and I am joined by Tom Schneider, Michael Albaum. And today we are doing our first ever AMA, ask me anything. So we posted an episode, a short episode last week, asking you guys to submit any questions you have to us. And, we also posted on social. So we've got a combination of people dialing in people asking us questions on social that we're going to tackle in today's episode. So let's start answering some questions.

Theme Song

Emil:
All right, guys, tell me how excited are you to answer these listener submitted questions today?

Michael:
Before Tom goes, I'm the most excited I win.

Tom:
Aah, I'm really excited. And honestly, I think this can be kind of a recurring segment. So some of the stuff that we all do is we also do webinars with rooftop webinars, go check it out. Really great webinars. Anyways, we just like save time at the end for questions. And there's always so many good questions that we don't have time for. It's like it could be its own segment. So I think this whole AMA thing on the podcast could have some legs and be as core sort of a recurring thing. Like maybe we throw an episode in the middle of the week or talking about this before. So with that said, do not stop submitting questions. Just keep firing them in, and we will get to them. I think it could be a longterm thing that we do on the podcast.

Michael:
We're going to start a question bank, so to speak. So it keeps sending the questions like Tom said, and we will get to them as soon as we can. Whenever we have time on these AMA episodes, I think it's just so great because the whole point of this podcast was to give the people what they want. And so now that we're getting questions directly from listeners, I think that's super, super valuable. And chances are, if you have a question, somebody else has it as well.

Tom:
And I mean, what's fun about it is we as the host, like have some experience, but if there's stuff that's like outside of what we know we're going to bring in folks to help answer those questions. We have access to a lot of resources and a lot of smart people, so do not be shy about if it's a question, a little more novice or it's a little more advanced, we will get the right people in front of the microphone.

Emil:
Yeah. And we actually, we've got a lot of good questions. A lot of these I'm curious about myself, so I'm hoping maybe you guys can help answer them. Cause I'm like, Hmm. Some of these are really good. I don't have experience with these. So, all right. Let's start, let's start tackling. Some are the first one we have is submitted by Shailen. Let's, listen to that question right now.

Shailen:
All three of you have spoken about how you live, I think in Southern California, but you manage properties all over the country. How are you familiar with those other areas? Have you lived there before? If not, is there, do you travel there to figure out what a good neighborhood is? Rootstock has neighborhoods, but it's hard to know exactly what these mean for renters. If you've never lived there or visited there, can you elaborate more on the remote investing concept? Should you have three to five properties in one city or town before you go to the next town? Or are there some locations where you only have one property that you own?

Emil:
All right. So great question all around. How do you choose a market as a real estate remote real estate investor? So this is a massive topic and we actually covered it on a previous episode, episode 21 called the art and science of choosing a real estate market, where we do a deep dive on how do you actually choose a real estate market? It's a long conversation. We spent about 40 minutes talking about it. So Shailen, definitely recommend you go check that one out. Some of the other things you asked about, do you choose one market and buy one property there or do you choose a market and buy several from personal experience? I have, but single properties in different markets. I have markets where I just have one property and I actually recommend people not do that. Now, just from my personal experience, I think it's probably better to choose one or two markets get really knowledgeable on that. Know what properties sell for. You're just, it's harder to be good at many markets versus choosing one or two and, and getting really good there. So even though I've done the one property in multiple markets, it's not necessarily what I recommend for other people. You guys have anything else to anything that there?

Tom:
Yeah, you don't necessarily, I mean, just, you know, we had that episode, but to kind of just a Tom note on the topic is you don't necessarily have to go to the market, but have some parameters in the way that you're selecting a market. Be it population, be it like what type of economy is going on and diverse economy. So don't do the, throw the dart at the map method, like have some insight on how you select a market, but you know, you definitely don't need to, necessarily to go there and also to get educated on the market with regards to the different pockets and know what kind of expected returns that you would get be it gross yield. So when you're evaluating a deal, you have some context of this is a good property based on this area, or just wherever you decide to do an investing in market, just get educated on the market. Okay.

Michael:
And just to echo that Shailen last thing that I'll add is if you're going to be remote investing, you're going to be relying on a lot of people to be your eyes and ears. Anyhow, most notably is probably going to be your property manager. So this is a great opportunity to start putting that relationship to the test and utilizing people that are remote. Anyhow, because if you go, if you need to go and physically be there in order to make decisions, well, anytime a big decision needs to be made. If you need to go get on a plane or get in the car and go drive there, that makes for just a tougher ownership process. So just consider that when you're thinking about investing at a distance property, managers can be your best friend

Emil:
And Shailen asked about the Roofstock neighborhood rating. And so for people who aren't familiar with that, Tom, can you give a background on that? I know you have on previous episodes and you always describe it very well.

Tom:
Neighborhood score, excellent point. So I think in a future episode, we're going to bring on someone from the data science team to get a little bit more into the weeds, but at a very high level, Roofstock pays a bunch of money for data. A data that has to do with historical population changes, changes in the economy, crime school, as well as forecasting out. So the neighborhood score is the synthesis of all that data that Roofstock collects. And it presents a simple one to five star score of five being, wow, this is a neighborhood that we think would make a great investment with regards to lower risk and better opportunity for appreciation where a one-star would be higher risk though. So that is the neighborhood score at a super high level, but I'm writing down as a note, we're going to bring on the data science team on an episode and grill them into the details of the Roofstock neighborhood score.

Emil:
Awesome And again, for anyone who wants a real long, deep dive of how to choose a remote market, make sure you listen to Episode 21 called The Art and Science of Choosing a Real Estate Market.

Tom:
All right, Robin from Wisconsin says, I love the show. You guys are super helpful in past episodes. You guys have mentioned you prefer investing in Metro areas versus suburban. How do you define Metro and why is it your preference? Do you consider cities with populations close to 200,000, like Akron, Birmingham, Greensboro to be Metro areas? Is there a population cutoff? So I'll take the first stab at this when I think of a Metro and I'm sure there is like a technical definition for that, but I think of a collection of cities that would like make an area. And also just to be clear, like, I don't think suburbs are bad. I think rural areas are a little bit risky just because there's typically not a very diverse economy, but I think suburbs are great. And actually a lot of my investments are in the suburbs of big cities, but back to kind of asking about defining a Metro, I think of it as a greater area. So if I'm thinking about Dallas, I would be inclusive of Arlington Fort worth. They're all kind of like within striking range of each other. I live over in Northern California in the suburbs of San Francisco. And I would say the Metro of that, you know, San Francisco would be Oakland, San Jose, Walnut Creek, Concord. So I think of Metro as kind of the broader, this wouldn't be too crazy of a drive to do, you know, maybe like an hour to drive across that area.

Michael:
To piggyback off Tom's point. I don't have a population cutoff. I don't really think about Metro in the traditional sense because in different parts of the country, it can mean different things to different people. And so I'll usually call a property manager and say, Hey, if someone's going to work in the main employment corridor or whatever that looks like, whether it's financial district, that's the downtown area I'll ask, where is someone willing to live? Where are people that are working here living? And if the property manager tells me, Oh, and these areas great, that's my radius. If you will. I've invested in pretty rural areas, several hours outside of st. Louis. And there wasn't a whole lot of economy there, but there was a military base. And so that for me said, okay, this is good enough. Granted, I was pretty green, not, I don't know if I would make that investment again, but I got really lucky. So I'm less scientific when it comes to identifying a Metro and looking for markets to invest in and the population regard.

Emil:
Yeah. I'm with you guys. I mean, for me, it's not even about urban or suburban. I dunno if that was part of the question, more so it's choosing a market that I think is good. And so like you mentioned St. Louis, St. Louis is one I invest in as well, and I'm in a suburb. That's probably like 20 minutes outside of the city. And I'm okay with that. As long as, like you said, people are usually commuting from the suburbs into the city as well. What I care more about is how is that city doing overall in terms of population growth are the returns there for what I'm looking for, those kinds of things. And so one thing that Tom had mentioned in one of our previous episodes that I really like is, is it a big enough city where there's at least one professional sports team? I think that's kind of like 1% rule, 2% rule. I think that's a great just first sniff test to make sure a market is even worth investing in, at least for me, I know people will invest in some of these, some tertiary markets let's call it like a Birmingham or something where there isn't..

Tom:
We're going to count AAA base And the Birmingham bombers or whatever they're called. That counts, their in.

Emil:
They're going to break through to the MLB soon

Tom:
AA baseball is smaller, but AAA, it counts. Yeah!

Emil:
So, you know, there are people investing there who are doing really well, but just for me personally, I've always liked that as a good test. Like, is there even a professional sports team? Is this a big enough city to have a professional sports team? And those are the kinds of cities I choose to invest in.

Tom:
And just to correct myself, it's the Birmingham barons and they're affiliated with the Chicago white Sox from 1986 to the present. Yeah. So go ahead. Continue.

Emil:
That's it. I'm done.

Michael:
All right. Let's move on. Alright, Maddie from Facebook is asking and big shout out to Mattie. She's a friend of mine. She says, what is your advice for a first time home buyer looking to invest in real estate or buy their first property? So I talk a lot in the Academy about this and something that's kind of a hybrid of the two, because it's not necessarily a black or white decision of, I have to invest in rental property, or I have to purchase a property for me to live in is a house hack. And so if you are willing to kind of be a bit of a landlord in your own home, how's, that can be a really great way to go. And for those of you who don't know what a house hack is, basically what it involves is buying a property that has more space or rooms than you need for yourself or your family and renting out the other space or rooms.

So whether that's buying a four bed house and renting out their three rooms or buying a duplex triplex or quad, you can live somewhere and make cashflow alongside living potentially for free. So it's a really great way to get involved with real estate investing as well as tackle having a to live. And so if that's not within your budget, something that I talk a lot about is that I invested out of state for 10 years and was renting the whole time. And so in my market that just made sense to do. And so I said, you know what? I'm going to invest in, invest and invest and generate enough cashflow to ultimately at one point in time, purchase a property and have my cash flowing assets pay for that primary residence, which is something I've been lucky enough to have done.

Tom:
Yeah. Similar situation I rented for a while, while owning rental properties. I think you're right, Michael, in that it's a product of where we live in that getting into a house to own and live in is just wildly expensive versus being able to buy an investment property. But my piece of advice would be two parts. One have a process, have a buy box. And so you're making these decisions, not subjectively. And the second one would be to have a bias for action. And I've been saying there's a lot lately. I think a lot of people get into paralysis by analysis. They overthink it. They're trying to make their best deal, their first deal. But that's, I guarantee you, that's not going to be the case. And there's just so much value to getting into the game.

Michael:
Put me in coach, give me a chance.

Tom:
Yeah.

Emil:
Yeah. I love what you guys mentioned here. My only addition here, and this is a personal opinion, a lot of people might look at their primary residence as an investment. And I never look at it like an investment. I think it's a place where you call it your own. It's a place to raise your family. And there's a lot of benefits of owning your own home. It might end up being an investment, right? You could choose somewhere that appreciates. And if you think about it, your mortgages in a way, like some for savings as you pay down your loan and you build some equity, but considering that they front load a lot of the interest in your principal, payment is low in the beginning. I don't see it as much of an investment. So if you're looking at this as which one is the better investment, I think you're better off going and buying rental properties. Cause those are, you treat those like an investment, whereas your home, it's a personal decision that you make because you want a home. You want to, for whatever reason. So that's the only thing I'd add here.

Tom:
I'm going to digress just a little bit. It's really funny. The offer making process of an investment property versus your personal residence. Cause like with an investment property, it's like, you know, I feel really good saying no and walking away, this is my firm number. Oh, you don't want, I'll get outta here. And then with your personal property, it's like, you know, you have your significant other. And it's like, Oh, they countered this much. I'm like, Oh, we should probably do it. I really want that house. The psychology of the negotiation process is just, I'm not good at doing it on my personal property, but for like my investment properties, I'm pretty disciplined. It's just really funny how the psychology of it is pretty different.

Emil:
A hundred percent

Michael:
Just to add to that. The primary property that I bought, I knew that it would one day become a rental. So I evaluated it like a rental. And so I was able to go in with the offer because I would have that same issue Tom so I treated it like a rental throughout the entirety of the process.

Tom:
Incepted yourself

Michael:
That’s right!

Emil:
It's such an emotional decision buying your primary residence. You know, you walk in, you're like, we love this. We love the location. We love the kitchen, the layout. And you're like, it's, it changes things. It becomes an emotional purchase, not one that's necessarily rational. All right, next question is from an anonymous voicemail. We bats. So let's listen to it on that one.

Anonymous:
Hey there Roofstock. What's the best type of loan or a short term, single family home, an arm, a balloon loan, 30 year fixed, what would you guys recommend. Thanks.

Tom:
All right. So good question. So when you say short term rental, that could mean a couple different things. Is it a short time horizon that you're owning the property? Cause I think that's really relevant for the type of lending that you're getting. If you're talking about short term rental, as in just like a vacation rental, I would say, get, you know, whatever best terms you can get, I'm going to riff for a second on your hold period. Cause you can get a lot of cost savings in thinking about what type of loan to choose if you know, how long you want to hold the property for. So if you're planning to hold this with like a five year time horizon, that could be a good scenario where you would get an adjustable rate mortgage like you were referencing, just because the rates that you can get with an adjustable rates, those during that initial period can be significantly less expensive.
There's risk in that if you're planning for a longer hold time, say like a 10 or 30 or whatever, how long, just because after that initial teaser period, the rates will jump up to whatever market rate is. So you get yourself in a little bit of risk. So my answer to your question and to paraphrase really quickly is if you plan to hold for a short period of time, it would definitely be advantageous to look at what kind of rates you can get with either a five to one arm or a 10 to one. But if you're planning to hold for a longer period, I wouldn't recommend that just because it's hard to say where interest rates are going to go and you're going to be subject to wherever the market rates are at. And if it is like a short term, as in like a vacation rental, I'd say get whatever best rates that you can get according to your planned hold time.

Michael:
Piggybacking off Tom's answer. I think whole time is really the end all be all the determining factor here. And what's going to dictate kind of looking backwards. What type of loan you should get. I would say that if your whole time is five years, look at a seven year arm. And if your whole time in seven years look at a 10 year arm, because we have no idea what the market conditions are going to be like in five years from now. So you don't want to be forcing yourself to sell a property in five years because well, the market's in the tank. And so you can't sell for... Can't make a profit on your deal and interest rates have gone up. And so that will often lower sales prices and purchase prices because their purchasing power has been diminished. So give yourself a little bit of breathing room. I would say above and beyond what your plan hold period is. And also a lot of times the savings to be held on arms aren't materially significant. And what I mean by that is if you're different than monthly payment is 50 bucks a month, you've got to decide for yourself, okay, is that $50 a month savings with a lower interest rate, worth it to have a shorter term interest term versus getting the 30 year fixed, which you know is never going to change the life of that loan. You could always refinance if rates drop that kind of thing. So the 30 year long time horizon should be significantly more expensive in order to deter you into an arm, I would say.

Emil:
All right, next question is coming from Elan, who submitted on Facebook, Elan is asking, how can we estimate flipping costs? How deep should we go into flip? I, how much should we spend on a remodel? All right. So Elan's question is around flipping costs. How do you estimate those out?

Michael:
There's a really great book that Bigger Pockets put out that's titled Estimating Rehab Costs. I'm pretty sure that's the title. And I think that can be a really great place to start. Um, and there's no substitute, I would say for getting a quote, an estimate from contractors and get numerous quotes and estimates and bids from numerous contractors, because everybody's going to have a little bit different price. That would be your best way as to how to estimate those costs. And then also chatting with local investors, local property managers, as to ballpark costs, they're going to have rough ideas of what things cost in that given market. And that's going to vary from market to market. So we can't say, Oh, do we have a house in San Francisco is going to cost the same to rehab a house in Northern Kentucky. Those two markets just aren't the same.
And as far as how far to go on your rehab or on your remodel, that also, I would suggest talking to your property manager because they're going to be able to give you some insight into what upgrades are going to bring you the most rent. Also chatting with an agent about what upgrades are going to bring in the most resale value. Once you've targeted your demographic, who you're going to sell to whether that's owner occupants or whether that's in other investors, because an investment flip is very different than an owner occupant flip. So that's what I would say on that.

Tom:
Yeah. And my feedback, a really common process for these type of flippers is you partner, you have a general contractor who knows exactly what you're doing that you trust and you have some sort of relationship with, and you get a property in contract and during your inspection contingency, that's when you can have him go and price everything out. So you have that contingency to get out. If the deal doesn't pencil out, but the real key takeaway is don't buy a property and then try to figure out what the costs are like, have that as a part of your process is during your transaction contingency. So you can get out if it doesn't pencil, you know, you make your best guess when you're submitting an offer on what you think the costs are going to be. And that's where the, you know, books like Bigger Pockets books is really great. But once you actually have money, skin in the game with an earnest money deposit and you're in a transaction, you want to get that number of what it's going to be. And sure, there's sometimes going to be surprises of when they open up a wall or whatnot, but you're putting your best foot forward during the transaction period of getting an actual cost from contractor partner or, you know, vendor that you're using, that you can use real numbers when making that decision to close the transaction. So that would be my feedback.

Emil:
Cool. And then, yeah, last thing is, you know, if you're working with an agent in the area and they're going and looking at homes for you, depending on how you're buying. So one thing I like to do when I'm vetting agents is ask them if they are not like, can they walk through the property and give you at least some idea of estimation, right? Like, okay, a new floor, this much square footage, how much is that going to cost? A lot of them will actually be pretty upfront with you. They'll say I'm not really good at that, but I have a general contractor I work with who can come with me when we inspect it and look at it and do all of that. So that's kind of one thing I like to vet and ask for. Just cause again, we're relying on a team boots on the ground there. So leveraging their knowledge and experience to help us make all these estimates. All right. So we still actually have a lot more questions that we didn't get a chance to go through today that we're going to cover in a future episode, like Michael mentioned, keep submitting these questions. We'll just keep doing future AMS to tackle whatever questions you guys have. And with that, we'll catch you guys in the next episode.

Tom:
Happy Investing

Michael:
Happy Investing

23 min

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