The SFR Show

In this episode, we have Katrina Phillips from Investor HOA Services on to explain everything investors should know about investing in properties that are a part of HOAs. 

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Transcript

Tom:

Greetings and welcome to The Remote Real Estate Investor. On today's episode, we have one of the most knowledgeable persons I know on HOA. We have Katrina Phillips, who's the founder and CEO of investor HOA services. So are you, you are interested in investing in a property that is in an HOA. This is a great episode to listen to. All right, let's do it.

Theme Song

Tom:

Hey, Katrina. Thank you so much for jumping on with us.

Katrina:

Thank you. Thank you so much for having me today. It's my favorite topic to discuss.

Tom:

Perfect. Well, why don't we go ahead and start, give us a little bit of a background about yourself.

Katrina:

So I started in the single family industry back in 2012. Prior to that, I was actually a contractor and had several properties that we bought refurbished and sold. And so I spent about 20 years in construction learning it from every aspect so that I can learn it from. And then I started working with American residential property and really develop their operating platform or was their first hire on their operations team. And people really hadn't done this in the past.

The first multifamily, we were able to pull things from, but really we were writing the policies and procedures, the books and utilities and HOA were two things that people hadn't really thought about. It wasn't even a line item on people's profit and loss that they were considering in their, you know, when evaluating investments. And so we really began to build that piece of the process. How does that work? How does, you know, the fact that we own 70% of our properties are in an HOA? How do we interact with them and how does that work? So that's how I kind of got into this side of the business.

Tom:

Awesome. It's funny to think about 2012 and I was there too. It was the wild West where, you know, a lot of these companies such as yours and the ones that I was working at was raising a ton of money, buying these houses. And it's just kind of learning as we go and, you know, HOA and utilities, you know, came to be pretty important, parts of the details in doing this at scale.

Katrina:

It did. And it was so much fun. I thoroughly enjoyed every minute of it. And, uh, you know, we learned a lot and grew it, and here we are today.

Tom:

That's awesome. And you have since gone on to start a new company, right? Why don't you tell us a little bit about your company that you are running right now?

Katrina:

So I was actually sitting in a meeting and, um, we were working with a utility provider that function very similarly to what we have structured as well. We actually asked them the question of if they'd like to take on HOA as, you know, as part of their process and has it was becoming a really growing concern and issue and having some pretty significant impact on the bottom line for companies. So they said, absolutely not that they wanted to stick with what they specialize in and that really planted that seed for me.

And so that's where investor HOA services came into play, where, you know, we took a singular focus to build an operations platform around that that also integrates pretty seamlessly with other companies, systems and process. I knew I couldn't go in and say, throw away what you're working on right now and use what I'm saying to use. I also knew that we had to get it so that people could kind of go to one place to access information and things that they needed to manage the property. And so that's what we began developing back in 2017 is really an operations platform that can be used in several other areas. We just chose to focus on HOA because we could see it with a growing concern, making bigger and bigger impacts to the bottom line of companies. So we focused in there first, so that is investor HOA services.

Tom:

That's awesome. So to sort of paraphrase investor HOA services is a provider for investors to manage basically all things related to the hos for the properties that are located at those hos. Is that right? Is that a good summary?

Katrina:

That's correct. So everything related in the full life cycle of compliance, which could be a city code, HOA, rental, registration, municipal permitting, and all of those kinds of things on the compliance side of property management.

Tom:

Very cool. Very cool. Awesome. Well, let's go ahead and dig into some of the meat of this learning a little bit more about H ways and how they relate to investors who are evaluating. So why don't we take a step back and why don't you define what is an HOA and, you know, high level, what are they

Katrina:

So HOAs can be actually kind of several different things. And of course there's no consistency across the country of what an HOA physically is, but in general, in HOA is a nonprofit company that manages common areas, common elements within the community amenities. And there's also of course, condo owner associations, there's civic associations that are often voluntary membership, and we're starting to see more and more different types of HOAs, such as a borough and a neighborhood developments. Of course, in Florida, you actually see a lot of community development districts. There's some really fun, fancy development districts in Florida that have waterslides and water parks and all kinds of fun things in those. And so to be a member or participate and utilize those amenities items, then you pay your assessments fee on an, you know, either quarterly or annual or semiannual basis. And the HOA then kind of takes care of all those common area elements.

Tom:

Got it. And that's interesting about some of the, those new amenities that are poking up around water slides. I mean, he made it sound it optional at all to join the HOA, or is it like, you know, since your property's located there, or is it kind of built into the deed that you have to join the HOA? I'm curious about that.

Katrina:

Yeah. Civic associations are voluntary. Often they'll have a community pool or something that is shared amenity there or a park or something along those lines. We'll see a lot of lakes and that kind of thing within a civic. So that's voluntary. You also have something called a club membership, which will be, you can pay for different levels of membership within that. So for example, most often they include a golf course. You know, they might include a workout facility that's extra above and beyond what a standard membership would be. And so those are voluntary in regards to what the levels are that you can buy into. But in general, yes, if you're in an HOA, just kind of a standard HOA, then you are required to participate in their program.

Michael:

And it sounds like there's kind of numerous different styles of HOA. I know for me, when I hear HOA, I just automatically think of condo association, but what you're telling us is that they could apply to single family homes, town homes, you know, planned communities. Is that fair to say,

Katrina:

Yes, they can be commercials, commercial spaces. There's just all kinds of different options out there.

Michael:

Interesting. Got it.

Katrina:

There's probably about 10 that are standard that we see standard across the board. And then in different parts of the country, you see kind of different nuances within that. Like I said, you'll see boroughs, of course, in New York and New Jersey, that's a little, you know, structured similarly to a civic or community development, but they all have a little bit of different nuances to them.

Michael:

Okay. Interesting. And you touched on amenities a little bit, and I was curious if there is such a thing as kind of a common or a standard set of amenities that you get as being part of an HOA, or do they vary as drastic as the style of HOA that there could even be out there?

Katrina:

They vary very drastically. So we have especially see this a lot in Georgia where maybe it was built in the eighties, especially, well, pretty much any community built within the 1970s and eighties when HOAs first kind of started coming on the scene, they are just more of a planned community. So you'll see the coldest actual see similarities in regards to finishes on the exterior and, you know, mailbox requirements and that kind of thing. And then it's kind of more where it evolves as time went on. And that's where you kind of see some standardization on what I guess they were into in that moment. So then you hit into the two thousands and, and then now into the late two or 2020 range, and you're seeing these, you know, fun things like that are going on in Florida. So really it varies pretty tremendously. And that's a big part of what we do is we look at okay, what amenities are available, where that assessment money going to, and what's the benefit you're receiving from that.

Tom:

That's interesting. I never thought about it that way about, you know, the vintage of the property. Like what was the fad for developments in the way that they structure these communities? So depending on what year you bought it, it is kind of a different flavor of the way that they were structuring. Super interesting. So I got a question. So if you put your investor goggles on and just think this is very high level about evaluating a property with an HOA, what would you say generally speaking, like what are the good things about buying a rental property that's in an HOA and what would be some of the detractors of buying a property in investment property? That's at an HOA. So we'll start with the positive.

Katrina:

Yeah, let's start with the positive. So one of the things we learned and identified very early on is here, we are an investment firm and we're based out of Scottsdale Arizona. And our house is in Georgia and the HOA begins to function as kind of your eyes and ears and helping you monitor and keep an eye on that property. So I think as an investor, that's a huge value to you. You don't have to actually have people on the ground, you know, checking that property, the HOA is doing that for you. So I think that's probably the biggest positive as well as from a leasing perspective, of course, you know, you're leasing a property that has most likely some upgraded amenities and features that are desirable to people leasing. So, you know, it assist with that, it making it a home to that person occupying that property, not just a rental, they feel like they're part of a community and part of a home on the flip side of that, that can actually, that community sense is something that the HOA have expressed that they're concerned about when institutional investors come into their community, will there be that loss of sense of community because it's a renter there and they're not going to actually participate in the HOA itself.

So that can be a con I think one of the other issues that has occurred over the last several years and kind of my number one thing that I focus on is rebuilding communication bridges, because what happened was when institutional investors came into communities, the HOA did it kind of feared that and was a little concerned that the property values would degrade and there would be issues. So one of the things that has been, I guess, a missed out by the industry is that they didn't work to keep those communications open with the HOA and the HOA began to grow very frustrated. So what they've done out of their frustration is began to really Institute some rental restrictions to either prohibit institutional investment in that community, or really eliminate it and control it. So that's been kind of the, the other side of it that's evolved since 2012, when we first got into the industry, they were happy and they were excited about us coming into the communities. We were remodeling the property and making things better. And then that slowly started to shift in 2013 and 14, where they began to grow skeptical. So there's been a lot of work to alleviate that situation, but there's still some work to do there. So that's kind of the flip side of it, where the HOA is, are frustrated and they're kind of lashing out in these different ways to really essentially get some people's attention and get things cured. And together,

Michael:

You touched on it a little bit ago, Katrina, but I wanted to circle back to it for my own edification. We said that HOA is our nonprofit businesses, who is the HOA when we talk about HOAs.

Katrina:

So the HOA for the most part is a voluntary board of directors of owners within that community. So I we're seeing fewer and fewer of those, maybe it's because most HOA has gone out and decided to have a management company come in, such as associate or for service residential and come in and manage that. So the HOA is just meant to collect dues, cover the expenses of maintaining those common elements. And then that's pretty much it, that's all their job that's there. And then of course, to ensure that people adhere to the CC&Rs for that community and, you know, don't let their grass get to leave their garbage cans out, all that fun stuff.

Michael :

Okay. And so when you talk about the HOA members or board being frustrated with institutional investors coming in and looking to crack down on that a little bit, that's just a group of owners in that specific community that are feeling that way and expressing those frustrations?

Katrina:

Correct.

Michael:

Got it.

Tom:

Gosh, I love your point about, on the good side of thinking of as another eyes and ears. I think a lot of times, you know, we ask these questions, I kind of have an idea of which direction, you know, we're going to get a response, but I never thought about that way of thinking of the HOA as, as kind of part of your team love that. So you touched into a great transition point CC&Rs and, you know, making owners out here, what are some of the recourse that the HOA companies have and with owners that are not adhering, and I'd love for you to get into that and CC&Rs and rules around that.

Michael:

And Katrina for those of our listeners that might not be aware, familiar, what does CC&R stand for?

Katrina:

Covenants codes and restrictions? So it of course varies by state. Each state has some extra nuances. You know, Florida has some really interesting ones, New York, New Jersey as well. So the CCNR are put into place and in those CC and RS, it's really spelled out what the recourse is. We have some, we've had some interesting updates over the last several years in regards to what the HOA can charge you because previous to this, and it kind of started in an Arizona, which is where most HOA has, you know, kind of evolved from. But the previous to this legislation that came through the HOA, kind of do whatever they wanted in regards to getting your attention and having you pay fee. So we're seeing over the last five years or so where they're really standardizing that across the country, which is wonderful. We like standardization. And so they're making it so that they have to go through a very specific process to notify you of that violation, give you a period of time to cure.

If you don't cure, then it goes to the next step. And so usually it's a courtesy warning, one, two, and three, then by warning three are incurring a fine, and those generally start at $25. But in a lot of States, we also have, what's called a stair set process, which is another thing that investors, there's a way to work around this or work with the HOA to do what we call the clean slate program. So the HOA in some States, the fines violations and assessment costs falls the property, not the owner. So you have a new tenant move into that property. And the prior tenant kept violating with trash cans being sent out. And that violation was then go into a monitor status from anywhere from six months to one year. And if they re-violate within that timeframe, it, it goes right back to where it left off. 

So if you were at already at $75 in fines, it'll go to a hundred or it'll go to a hearing. So that's something that investors aren't aware of, but you can work with the HOA to, again, wipe that slate. Clean, say, we've had a new occupant in it. We're a new owner. We're going to do things differently now. And we promise you that we won't have those violations incurred. So like I said, it's been really interesting to see over the last several years where they've kind of standardized that with the HOA is, can do kinda maintaining some control. And that has to be documented in their CC and RS, what their fee schedules are now, which really helps you kind of plan for that and be prepared for what's going to come your way.

Tom:

So what are the more common? So talking about, you know, people, you mentioned putting trash cans out, what are the other kinds of issues where people incur fines from HOA, those would be all in those CC&Rs and what are the common issues that you think most investors deal with or violate?

Katrina:

So the number one thing, and we track this, we look at it, we break down and give a lot of granularity to the types of violations that are coming in. And number one on the list is always landscaping and specifically weeds, especially in April and October, when they're doing those inspections on that, and you can get almost weekly fines for that or notices of fine. So landscaping is number one, and I would say two is two and three are usually pretty close and it's trash cans and parking violation. So we have a lot of residents to try to park on the lawn, try to park, you know, on the street when street parking is not allowed.

Michael:

I own a property in an HOA and I get nasty grams all the time. Trash cans are still out. It's been a week. I don't think God, God, God, I got to get ahold of the tenants and pass the message along.

Tom:

Did you say nasty, nasty grams? Is that the nastygram?

Michael:

Exactly, but a letter informing me of a violation, I call the nastygrams.

Tom:

So how about when you do have some issue, can you guys push that to the tenants that are living at the property, if they're violating these rules? Like, are there any laws or registrations like around that? Like if they violate an HOA rule, should it be the tenant that has to pay it or fix it, or I'd love to hear your thoughts on that.

Katrina:

Yes, indeed. So what we call that the tenant charge back process. So we actually have a whole workflow that goes through, we've received a courtesy notice. It gets sent to the tenant. The tenant actually, um, for most of our clients has about seven business days to return photos to us and make sure it's care. We're trying to really alleviate that even courtesy notice from going any further than that is we're trying to alleviate aggravation that the HOA is feeling about institutional investors. So we really work on the front end, as well as tenant education to let them know you live in a HOA, here's the rules and regulations that you need to be aware of. And most of the hos are now taking their several hundred page CC&R document and really narrowing it down to the top things to be aware of. So we make sure that that is available at the fingertips of the leasing team so that they can educate the tenant. 

We find we have a much better experience with them. And so that all gets documented so that we can see very clearly, okay, is this an HOA issue or a resonant issue? The resident keeps leaving their trash can out every week. And now it's a thousand dollars in fines because they've been incurring daily fines, which always just makes me cringe because a thousand dollars just for leaving your trash can out, we see it all the time, but it's unfortunate to say the least. So there is a whole system and process where we educate the tenant. We notify the tenant every time we receive documentation and really keep them in the loop and engaged and involved with being part of that solution there versus, you know, ongoing continual issues. And then we also work with the leasing team so that they're aware of, Hey, I think you may need to have a conversation with us, this occupant here and see if you can alleviate that.

And then the third piece of that is of course, communication directly with the HOA is to let them know we have informed the resonant. We have received these photos. Do you consider this violation cured and closed? That's then the issue that I've spoken to, a lot of, of the SFR groups out there where they have that $8,000 mailbox, because they sent out a contractor to fix the mailbox post, but they didn't fix it according to what the HOA was looking for. So we make sure we really communicate with the HOA and let them know what the care was and how it was fixed and make sure that they're good to go with that. And then if they, if there is a fine, we establish with our clients a list of what will be a charge back versus not. So for example, a trainees trend and it's above seven feet where it needs to trend. Most of our clients don't want their residents getting on a ladder. So they'll not charge that back. But if they do, if it's under the seven foot mark, then, and there is a fine incurred, then that gets put onto the tenant ledger to hold them accountable for that.

Tom:

Got it. Jump just the other kind of aspect of the CC&Rs and the rules, not necessarily fines, but you know, percentage of the units that can be rented. So there's some other really important aspects of those rules that an investor would need to know that's in those CC&R. Do you mind touching on some of those,

Katrina:

Right. So we complete a review of all CC and RS that come into us and we're looking for a rental or leasing restrictions. We're also looking for sign restrictions. And other thing that people don't often think about is that certain hos don't allow you to put a sign for lease sign in the front yard, or they don't allow, you know, you can put it in the window, but you can't put it anywhere else, or it has to be a certain size. So we'll look through that, the CCNRs to identify any of those kinds of issues. And then the rental restrictions kind of break down into three categories, either have category one where they just do not allow leasing in their community. And we will recommend that you dispose that property or they'll have the second category. Is there some kind of restrictions where they require a background check and approval of your resident before they move in, or there's a cap in place of 10%? 

Usually there are things that you can work through on those rental caps, they're called hardship letters. And you can put in a hardship letter to that HOA requesting them to review and make an exception to that 10% cap. And then there's also in that category where you can't lease the property for anywhere from 12 to 24 months, it has to be owner occupied. So we then document that information in our systems so that you can see the breakout of that. And then they use third category is they just want a copy of the lease and to know who's renting the properties basically. So those documents are captured and sent over to the HOA,

Michael:

Shifting gears here a little bit Katrina, I want to talk about HOA fees because you mentioned at the beginning that are nonprofit bodies or organizations. If you will. I feel like me personally, sometimes that they might be for profit, but so what are the fees usually go towards paying?

Katrina:

So the piece should be going towards paying for those common area. Upkeep. There should be a capital reserve account noted on their budget. They should be issuing the budget to you on an annual basis and it should be reviewed and make sure that there, the other concern that I know a lot of investors have expressed is we keep paying these assessments, but the money is not going to what we've been paying into. And the HOA is virtually insolvent. So they're carrying a negative balance. They have some sort of debt again and against the HOA something's going on in their financial stability is in question. So that is what the money is supposed to be going to. And as well as management of that HOA collecting the assessment funds, paying for an inspector to go on and stacks for fines and violations and those kinds of things, that's where the budget should be going. And like I said, they should have a healthy capital reserve accounts to complete any upgrades that are needed to that age away.

Michael:

Okay. And so you bring up a great point about upgrades. Would upgrades be a reason for an HOA fee increasing from year to year?

Tom:

Yeah. Do they change? Yeah. I'd be interested to hear your feedback.

Katrina:

They do. And you know, 2020 has been interesting for several different reasons. But one thing we're seeing from the actual AEs is a lot of special assessments that are hitting people's accounts. And I have to say, this is the first year I've seen where so many are being instituted and put into place. And so there's actually two levels to that where they don't even have to have a board meeting to vote in a special assessment, depending on what the cap is of that, that amount. So that it could literally just show up on your doorstep one day that you have a $20,000 assessment do so generally speaking in a normal year, we'll see about anywhere from a three to 5% increase of assessments year over year. So several years ago when we started the company in 2017, we've actually seen quite a bit of increases over the last three years. 

And I think that's HOA is trying to make up for some of the depositions and things that they have in their capital reserve accounts. So what we're normally would see would be a three to 5% increase, but since 2017, we've seen average across the country of assessment dues go from three 30 to 440. So it's quite a good jump, healthy jump over the last few years, but know normal would be three to 5% where, you know, just cost of things have gone up. So cost of their power bills for the common areas. And those kinds of things have gotten a little bit more expensive. So, you know, on average, I would say anywhere from a $5 increase to about $25 would be pretty normal. Anything above that, then I'm starting to look at the budget and kind of see where that money is going. What's going on.

Michael:

And you mentioned special assessment. Can you talk a little bit about that? What that is?

Katrina:

So it's more common of course, in the condo world and the townhome world. Uh, but a lot of our SFR investors have condos and town halls and things like that. So that would be to replace a roof on ability repaint the exterior in a standard single family development. It would be to put a new roof on the clubhouse, replaster the pool, those kinds of things, where they should be putting aside a capital reserve fund. But what we've seen is, you know, with the change in the economy in 2008, 2009, I think a lot of hos did, you know, ended up dipping into that reserve fund to keep going and keep solvent. And so now they're kind of trying to make up for that. And so we're just seeing a lot more this year than we have in the past. It could also be to do with the average age. And most of our clients' portfolios are just kind of hitting that Mark where they're starting to need some major items completed.

Michael:

Okay. And is there a good ballpark or kind of range or estimate you would anticipate based on size or age of an association or community for how much reserve they should have? The reason I asked the question is I live my primary. Isn't an HOA. I have a condo and there was, I got, there was a study done that showed the financial stability of the association and it showed that they were way under-funded, but they had several hundred thousand in cash in reserve. And so I said, well, that seems like a lot, but I have no idea how much they should be. This, this company thought they were underfunded, but I feel like they're adequately funded. Is there a good ballpark or general rule for that?

Katrina:

No, because there's just so many factors that go into place there, you know, have they managed their funds over the last several years? I would say that HOA is probably managing pretty well with a couple of hundred thousand in there. I've literally seen some with nothing in their capital reserve budget. So I think as our housing inventory ages, uh, you know, it is just becoming more and more of an issue, but yeah, I don't think there's a standard number you guys can count on to tell your investors that, you know, set aside this much because you may, you know, have this come up at some point. It really varies wildly.

Tom:

If you're buying properties within an HOA, is there a way for you to get on the HOA, like a seat or, you know, if you get enough properties or I don't know, I'd be curious to hear your experience. If you can't beat them join, that's not the right way to say it. If yoou can't beat em, join em, but like basically getting on the inside, I would imagine like having multiple customers, like it's probably pretty big sway potentially within certain hos.

Katrina:

Yes, definitely. Especially with institutional investors, you could potentially own 30% or more of a community. So some have instituted in their CCNRs where even if you own several properties, you're still only get one vote, um, board items, but for the most part, yes, it definitely can help sway those voting items. I actually, one of the questions you guys had further down here was have I been on a board and, or joined a board of the company that I worked with previously? And yes, I was on a board in North Carolina and attended several board meetings. What we had done was we were doing a build to rent a pilot projects at the time. And so we were going in and doing infill in a community that was already established a really nice HOA. We did the same thing in Georgia as well. And we actually attended several of the board meetings just to say, this is who we are, what we're about. 

These are our goals as a company and what our know kind of core values as a company are. We're not just a nameless faceless corporation where, you know, people that really care about your community. And so it actually really, really helped. It was very, you know, contentious at first, they weren't really excited about us being there, but we were able to really turn that around and then, you know, create a really good relationship with that HOA in the longterm. So there is definitely benefits if they can get some notes, your company and the people at your company, you know, they don't sign you or, you know, put violations on unless you've broken the rules. But I feel that it goes a long ways to kind of alleviate how often they're going to, you know, hit you with those kinds of things, if they know who you are.

And, and then instead of doing a formal final email you directly before they even document that, so you can go in and get it taken care of and never even hit your account. So that was a lot of fun, but it had some pretty tremendous impact. And then we've been a member of a few different boards throughout the country and, you know, same kind of thing where you identify an HOA that seems to be a, maybe elevated in their feelings about your company and whatnot. And you want to, you know, stay in that community and not sell out of it and continue to lease your properties there. I think it's always a great idea to participate in board meetings and discussions with the HOA, because again, remember their biggest issue and concern was that they would lose the sense of community than an HOA brains because it's, you know, it's a corporation coming in and investing in here. So if you can kind of guide them to a different philosophy on that, it has a pretty tremendous impact. Yeah.

Michael:

That makes a lot of sense. Makes a lot of sense. Katrina, can you talk to us a little bit about the value that you've seen in your experience from a rental perspective and then maybe from a sale perspective as well that a well run HOA can bring to an investor? Of course the poorly run ones might harm the value, but as far as rentability and resell value for an HOA property, how have you seen that impact things?

Katrina:

It's definitely positive on both ends of it, right? Because you've got the tenant who now has access to a pool and other things that, you know, if they were to purchase a home, they maybe wouldn't have access to those same things. So by renting, they have that added benefit. And on the South side, you know, I haven't seen data on exact numbers of, you know, increases the value by say $5,000 because of course, then you're paying dues and stuff in there. And I haven't seen any data pull to see how it impacts the sale, but, you know, I definitely know, well run H ways you'll see them move a lot faster. We'll sell that home much faster. People are clamoring to get into that community and be a part of it. So, you know, especially like those really fun ones in Florida, you know, they almost have a wait list of people trying to purchase homes in there cause they want to be there.

Michael:

The water park in the backyard makes sense.

Katrina:

Yeah. I mean, how great is that? So, you know, it definitely impacts leasing, you know, several years ago, stock saw statistics that it definitely on average knocks several days off of the lease up timeframe. So it does seem to help.

Michael:

Interesting. Okay, great.

Tom:

Awesome. My last question I have right now, and this is, I guess, sort of an aggregation, probably of some of the topics that we've talked about, but just at a high level, if you're talking to a newish investor, who's thinking about buying a property, that's in an NHOA, what advice would you give them on how to go about evaluating and owning a property in an HOA?

Katrina:

I think they should definitely, and most people don't do this. I think one thing they should look at is is it, if this HOA is financially solvent and how is it being run because you're right. If that HOA is not being run well, it will certainly have an impact on your resident experience in that home. The very quickly start to feel like, you know, they're being picked on and you know, that's not the resident experience that any of us want. So, you know, as an investor looking at an HOA, I would definitely take a look at that. What does this HOA look like? Are they keeping up with things, are the common elements and go to order in good shape? Are they easily accessible? You know, is it kind of making sense? What if they're charging $300 a year? Can I see where that money is going essentially? So I think visually kind of inspecting the community would be really helpful. And, you know, in evaluating that decision to lease there or not,

Tom:

How would one get the financials related to an HOA?

Katrina:

So in when they're purchasing home, they should be asking for an estoppel. And in that estoppel gives you your statements, your CC&Rs, and ours, all of your documents that you would need. And I think also, like I said, I've spoken about tenant education before, but it's so critical again to the whole kind of overall experience and whether or not you're going to keep that tenant in that home longterm. And of course that's a goal for most SFRs is really going to keep them in the house, you know, two, three, five years. And so, you know, by obtaining that estoppel, now that becomes challenging when you're purchasing via auction or other avenues. But if you're purchasing through MLS and through I'm sure groups like yours, where you can have some of that documentation in place, then I would encourage everybody to go in and take a look at that because it definitely will have an impact to kind of the longterm viability of that investment.

Tom:

Great communication. Well, thank you so much for coming on. This has been super interesting, you know, hos there's so much value in having that kind of preset neighborhood look and feel that is desirable and a good standardization. And I love the feedback about getting to know the HOA and partnering with them on your team has been super helpful. And I want to thank you for coming on.

Katrina:

Yes, I've really enjoyed it. Thank you guys.

Tom:

Awesome.

Michael:

All right, thanks. Have a great one.

Tom:

Thank you to Katrina Phillips for today's episode, super knowledgeable. It got a lot out of that. If you liked today's episode, please subscribe to us on your podcast. Send us a note. My email is [email protected]. I love to talk investing. I love to talk podcast content. I love to talk investing education hit me up.

This episode was brought to you by Roofstock Academy. Roofstock Academy is a holistic program with one on one, coaching group coaching, over 50 hours of on-demand lectures covering getting started to scaling up. A special bonus Roofstock Academy is now giving $2,500 towards Roofstock marketplace credits. That's right. You can pay $1,250 for $2,500 of marketplace credits. All right. Happy investing.

Theme song

In this episode, Micheal, Tom and Emil take on some common worries that friends and family have when you tell them that you are considering taking up remote real estate investing and provide solid arguments for reasoned responses. 

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Transcript

Michael:

Hey, everyone. Welcome to another episode of their motor real estate investor. I'm Michael album, and today as usual, I'm joined by Tom Schneider and Emil Shour. In today's episode, we're going to be talking about kind of an interesting topic. Do those around you, not support your remote real estate investing dreams. We're going to be giving everyone today some tips, tricks, and fodder about how to speak intelligently about remote real estate investing. So let's jump into it.

Theme Song

Michael:

Alright guys, before we get into this episode, I just wanted to check in with you all, how are you guys doing? There's some new quarantine issues that just came out from the governor and wanted to check in how you guys are doing.

Emil:

Welp. Can't go surfing this weekend because LA beaches are locked down.

Michael:

Oh no!

Emil:

So that's unfortunate, but I got out there this morning in anticipation of not being able to,

Michael:

How was it ?

Emil:

It was crowded a little bit slow, but it was fun. You know? It's good. Anytime you start the day out on the water.

Michael:

Yeah, absolutely.

Tom:

Is a bad day on the surf. Better than a good day, not on the surf guys.

Michael:

Yes!

Emil:

Of course. Michael would say yes, because he's the eternal optimist, I would say. Yes. There's times. I get really frustrated. Sometimes I get out of the water and I'm like, damn it. And I'm just like huffing and puffing on my way to my car and just like, but yes, in hindsight, it's always like, at least I got out on the water and did something fun

Michael:

Without being too cliche. I think every time I get into the water, I'm able to think about stuff and I go in with problems and come up with solutions. Even if it's not a great day, it's way more fun. If it is a great day, given the choice between the two, I would absolutely choose better day, but I don't think I've ever had a bad day out in the water

Emil:

Hashtag no bad days.

Michael:

That's right.

Tom:

What I've been doing lately is our community pool… I live in this neighborhood that used to be part of an HOA and there are still some of the HOA amenities, but now it's just like people have the option to join. And I joined cause it's like a really cool feature, but they have really, they need a monitor at the pool just to make sure that people are not bringing in guests and they limit the number of people and a bunch of other County related restrictions. But anyways, so I've been doing that and I've been working from down there. There's really good wifi. I'm out in the sunshine. I've been having some of my meetings with my background, with Emil, Michael and Pierre, where there's like, you know, a pool in the background and every, you know, couple of hours instead of going on a walk, I'll do a Cannonball and a that's the latest little update. And it's been a really, I don't know, I think there's something about being outside and being creative and that feeds into that. So that's been my, my new thing work from pool.

Michael:

I'm curious to know what the HOA, you know, if they just everyone mutinied like, no more HOA!

Tom:

Right. I think it fell apart. I think in like the seventies or eighties, I gotta, I gotta get to the bottom of it, but uh, yeah, really just random, big pool. Um, I don’t know. Yeah. It's cool.

Michael:

Killer. That's awesome.

Emil:

How about you, Michael? What's new in your world?

Michael:

Um, not a whole lot. I've been staying up quarantining at the in-laws and just kind of hanging out in here. It's been hot as ever like the surface of the sun. They lived just outside Sacramento, so it gets really, really hot up here, but we've been playing a lot of tennis, which has been really nice, cause there's nobody on the tennis courts. Cause it's so hot. And I think people drive by and like what a bunch of schmucks, like who's playing tennis, it's a hundred degrees outside. So it's, it's been a lot of fun to just get out and sweat and be outside.

Emil:

Nice man.

Tom:

Pierre with so many hobbies. I'd love to hear. I think you might mentioned getting in some woodworking again.

Pierre:

Yeah. Yeah. I moved into a new place in Alameda and needed some furniture to fit my record collection in this little nook that we have. So I built like a little mid century modern table with some cubbies, for my records and a rack to hang my guitars.

Tom:

That's a fantastic quarantine hobby and practical!

Emil:

I give up, Pierre’s just the coolest out of all of us. Let's just,

Michael:

Oh, it's not even, yeah, it's not even close.

Pierre:

Now. I got the edge though. I want to build all my furniture. We were looking at buying some online but now it's not seeming as attractive.

Michael:

You can build a better.

Tom:

I love it.

Emil:

Awesome. And for anyone who's new to the show, wondering who that voice was. That is our producer Pierre.

Michael:

All right, guys. So I want to break down some of the very common aversions to remote real estate investing and then talk through some of the counterpoints to each of those. I think any real estate investor at some point in their investing career has likely come up against some aversion or caught some flack. So I want to talk about the first one that I think might be one of the most common ones. And that is how could I possibly ever invest in real estate remotely? I don't know anybody in inter X market here. Tom, do you want to take a shot at this one? And then, you know how you would respond to someone who's throwing this at you?

Tom:

Yeah, totally. And what a relevant first topic for the remote real estate investor. So I think a common misconception about real estate investing is that it, you are a lone wolf in and out doing on your own. And that is so far from the truth, especially, uh, as a remote investor. So what I would say for this is you should invest as a lot of time in building your team just because you are not in the region, you're specifically your local property manager. That's really going to be a key key point of being able to do this remotely. So a way to, you know, go about that is have a very thorough vetting process of identifying, sourcing and vetting your local property manager. And one of the great things that Roofstock does is when we open a market, what we'll do is we'll find from word of mouth and looking it up online, the top 20 local property managers.

And from there we'll do phone interviews. And from there, we'll cut more down to where we have about five of them. And then we'll go into the office and visit them, get their standard operating procedures, get their, a copy of their lease that they use, get all of these different and then say, okay, yup. These are good guys that we would recommend. Now me as an investor, if there's a company that's doing that, that's great. That gives me a head start, but I will still take the time to vet them myself. One of the aspects we have within Roofstock Academy is some pretty thorough interview templates for talking to property managers and identifying good ones. But to combat that is you have a really thorough process of building your team local there on the ground. So, you know, once you have identified that property manager that is going to be your remote eyes and ears is really not that different than doing any kind of local investing. Once you have that trusting partner

Michael:

And Tom breaking down that big rock into an even smaller bite sized rock, how do you go about finding these people? If you're not investing through Roofstock and they are not doing it for you, what's the actionable step that people can go take to go meet or start talking to these folks.

Tom:

I always put an extra points on referral from people that I trust and know. So I'd say if you can get referrals that way from either lenders or other investors, you know, that's a great place to start, but you should expect what you inspect. So you need to go in and expect it in, inspect it to now that is a mouthful.

Michael:

That's a tough one to say.

Tom:

Yeah, yeah. We use that saying a bunch of our, the last company that I worked at, but the gist is if you don't do the work to verify, you should expect that it's not going to be that awesome. So you need to put in a little bit of the work of talking to these partners. So I digress a little, I guess let's see. I'm going back to your question. What was your question?

Michael:

It was how can someone go find these people?

Tom:

How can they find people? So, okay. References number one, number two, don't shy away from looking on the internet of just searching the city of who are the major property managers. And you know, this, isn't making the decision on who you're picking. This is just building that initial list to widdle down with conversations on the phone and potentially in house visits to make sure that it's all buttoned up and such. But I'd say again, your greatest resource would be getting referrals. Bigger pockets, I think on their forums have some references of some potential local property managers, but I would definitely expect what you inspect. So make a point of doing that. Like work.

Emil:

One of the thing, I want to point out with this one, cause I remember getting this one a lot. When I first started investing, you know, people would be like, you're going to invest where across the country, like that's insane. What if something happens to the property? What if it gets vandalized? What if this and that? And the thing is, is those things happen, whether you're local or you're investing remotely, right? It's not like if you live 15 minutes away from the property, things aren't going to happen. Things are still going to come up no matter where you invest again, it's just making sure you have a partner. And that's why we keep talking about this property manager. Who's invested, who cares and who is a good member of your team. That's one of the big things we're going to be talking about is, you know, you hear a lot of real estate investors say you have to build a team. This is a team thing, especially if you're investing remotely. So that's the big thing is things will still happen. It's just a matter of getting the right partners to help you handle all these things.

Michael:

You guys nailed it. I have nothing to add. The one thing I would add is that it really forces you, which I see it as a pro. Some people might see it as a con, but it forces you to get really good at time management. Because then they'll just like you said, stuff's going to happen. Whether it's next door or whether it's across the country. So if it's across the country, you've got to rely on people to take care of that. You've got to have set the systems up and placed on, like you were saying, to be able to have that dealt with without you needing to become involved. So if it's next door, you're going to be tempted to go fix it yourself or go deal with it yourself. But if it's across country, you physically can't. So being really good at time management and task delegation is I see it as a big pro.

Tom:

I guess one last thing I'll say is, you know, ideally the home that you own and you're renting out is close to you, but there are so many benefits to investing remotely. Like you have access to so many more properties, so many different types of returns, such different like economies, like that makes it a little bit of barrier to entry is doing that extra homework of finding that great partner. So for me, being able to access these cash, flowing properties all over the US that extra work of finding the good property manager and then vetting them and building that relationship is worth it.

Michael:

Yeah. And to that point, I mean, what's the alternative here, not investing or not investing remotely. And if you're in a really expensive market, you might not ever be able to break through. So if it's invest remotely and learn a bunch of stuff or not, I'd say you can't afford to not learn how to do some of this stuff.

Tom:

Word.

Michael:

Okay. So let's move on to the next one. Uh, so many times I hear people say this, I know someone who tried to investing in real estate and they would take these midnight calls, fixed toilets. I don't want to do that. Why would you ever want to do that? Emil, you wanna run with this one?

Emil:

Yes. So this is another common one, right? So people say, okay, I get why you want to invest remotely, but are you going to handle fixes? What if someone calls you? And again, this goes back to what we were just talking about. It's this is why you hire third party, property manager, again, building the team, right? I would say the property manager is one of the most important pieces of your team. And the thing here is I don't know how to fix most problems, right? I would call a handyman or whatever anyway. Right? So the property manager is just, they're just your barrier. They're taking in those calls and they're finding a local specialist. Again, you're not going to be good at everything in your business. What you want to do is hire the professionals who are in the property. Management is the best that operating your property. 

I would probably do a much worse job and I'd spend way more time than a property manager who does this for a living. So the rebuttal to that question is while I'm going to hire a third party property manager, who's an expert in the area. Who's going to manage it for me. And in return, they take a certain percentage of my rent each month. The other thing is the important thing here is this frees up a lot of your time, right? If you're constantly dealing with your operational stuff, you're not going to be thinking about how can I grow this? How can I scale it? A lot of us who are doing this, we have full time jobs, right? Like instead of fixing things on the weekend, I could be thinking about how can I start a side gig, earn more money or whatever. So I can go buy more properties, which I would argue is more important than handling the day to day stuff.

Michael:

It's so interesting. I think people in the day to day world in life can really wrap their head around hiring professionals to do things, right. Nobody says, I'm not going to go buy a car because I don't know how to fix it. No, we all take it to the mechanic. I think it's the same thing with real estate and with investing where people are. So whatever reason can't get their head around that you might not have to do that, that kind of stuff. There are professionals that will take care of it for you.

Tom:

Right. It's such a great point. I, I love that, your, uh, isms, Michael isms. I think we'll say, I think in talking to a lot of people who are interested in investing in real estate locally, they're like, yeah, then I can go and I can run out and paint the house when, or do these things that happened. It's like, no, you don't have to do that. And you know, we were talking about these costs that you incur with either repairs or maintenance or paying your property manager, but those are good costs to pay. And also at the end of the day, it's going to help you on your tax basis. It, you know, there's just so many tailwinds in doing this.

Emil:

One last thing I want to add here is you can always later down the road, maybe you're ready to retire, right? Maybe you have X amount of properties. You have enough cashflow coming in. You want to retire. Maybe at that point, you feel confident enough where you do want to self manage. If you go back to episode five that we did with Chris Bennett, he talks about how he self his properties from thousands of miles away. I personally probably won't get to that point. I'd rather let somebody else deal with it. But it's always one of those things where I think you can even just observe your property manager for years, learn how they kind of run everything. And then if you want to down the road, you can switch back or switch to self managing. If that's interesting to you.

Michael:

Funny, I think the longer I invest, the less I want new self-manage. I realize how much goes into like yeah, no way.

Emil:

Yeah, same. I had somebody who I was talking about. Who's looking to buy a property on Roofstock and they were asking me the same thing. It's like, should I self man? He's like, I'm actually thinking about self managing first, just to like, get an idea of how all these things work and then handing it over a property manager. And I was like, if anything, I would do the complete reverse for all the reasons I just mentioned. Like, dude, you're brand new. Don't don't do it. It's going to be a nightmare. And you're never going to want to invest in another property again. Promise

Tom:

That's the Emil Shour guarantee.

Michael:

Awesome. Okay. So the next one I want to touch on is something I'm sure we've all heard a lot about, and it's that real estate is such a risky investment. Look at what happened in 2008. And so I'll take this one. If you guys don't mind, you know, my response is you're spot on don't invest. No, just kidding. I would say, you know, 2008 was the direct result of poor lending practices and those have definitely since changed. And so I don't anticipate seeing a financial disaster as a direct result of poor lending practices again. Don't misinterpret that as me having a crystal ball, that's just my personal opinion and be very may well see a financial disaster from other, but the poor lending practices seems to have gotten cinched up pretty tight. So I would actually argue that real estate is often a safer investment than the stock or the bond market. 

And I think so often people say, okay, real estate is risky, but these other things aren't, there is also people that say real estate is risky, put your money in the bank. And to that, there's all kinds of counter arguments and counterpoints that are all based in fact about inflation and how you actually lose money. If it's just sitting in the bank, if you're not earning at least the inflation return, but so in looking at growth, the comparison to simply stocks, bonds, and real estate. So with real estate, there's just such a higher degree of control. The tax benefits and potential returns are typically going to be better than your average year in the stock market. I think it's pretty well accepted that stock market returns average between six to 8% in any given year real estate, you can do significantly better with that from a pure cash on cash return perspective that doesn't even account for the tax benefits associated with it, as well as the appreciation and loan pay-down equity that you're essentially buying into your property. So I personally I'm drinking the Koolaid. I think there are tons and tons and tons of facts and figures that you can throw at someone that's saying, Oh, it's such a risky investment. My guess is that they probably haven't invested in real estate. And if they have, they aren't looking to do the same type of thing you're doing remote investing with a property manager. So I just want to make sure that everyone's comparing apples to apples. Whenever they're hit with something like this, you really want to understand what's being talked about.

Tom:

That's great and a good overview of like all the benefits of why, at least in our opinion, like the benefits outweigh the rewards. And what I love about drinking the Koolaid is there's so many different flavors of the Koolaid. So I kind of switch off on which one I'm most excited about. So the tax advantages is great. The immediate cashflow is great. The appreciation is incredible, but the Koolaid I've been sipping a little bit more of is the loan pay-down aspect. And it's just crazy. You can borrow like a hundred thousand dollars and someone else will pay it off for you. Like, I don't know, like wording it that way is really kind of mind boggling of how incredible investing is. So even if you're not cash flowing, say your cashflow is zero, but you still have a loan on the property. And you're not paying that loan. The person who was renting the property has paint alone. It's like obscene right property after you get a free property. So anyways, just kind of in your, going through your ran, I was just thinking of what is currently spinning through my mind a little bit heavier on like, wow, it's unbelievable. How much of an opportunity is. So anyways,

Michael:

I thought you were gonna say that you're really excited about sour green, Apple Kool-Aid flavor.

Tom:

That might be the loan pay-down is the sour green Apple.

Emil:

Oh man. Kool-Aid when you're a kid and

Michael:

The best, the best. How do you guys feel about Hawaiian punch?

Tom:

I think American tastes have gotten a little bit less sweeter. At least I could rant on this for a little bit, but I'll finish it. There's been a shift in American culture kind of going to more subtle. Like if you look at like Hintwater LaCroix, if you compare like the drinks that are consumed today, versus the drinks that were consumed like 10 years ago, it's like hummingbird water back then. So I think I have a feeling if you had some Hawaiian punch, like you would be like, what the heck is, this is this like, meant for like a hive of, of hummingbirds, like anyways,

Michael:

And it's that bright red too!

Tom:

But the great thing about Koolaid is you don't have to put all the powder in. You can make it culturally adjustable by just putting a little bit of it in and boom, welcome to 2020, just 10% of it and have it. All right, go ahead.

Emil:

I don't know how I can follow that up with something serious, but just to finish this section, I remember we had this blog post on the Roofstock blog talking about how did single family rental returns compared to stocks and bonds. And the Roofstock team did a little study. It was from 1992 to 2017. So a 25 year period. And if we found that single family rental returns were nearly identical to stock returns and the outperformed bonds with far less volatility. So that was one other thing I wanted to highlight here as well. Plus all the other benefits, like we talk about like tax advantages and all that, which I don't think was factored into this study.

Tom:

I'm almost sure it wasn't.

Michael:

Yeah, that makes sense. Because everyone's going to have a different tax basis.

Emil:

Yeah. This was just looking at returns.

Michael:

Okay, cool. So one of the last ones I want to touch on which we can all kind of tag team, but I kind of want to give it to Tom to give him a runway to rant. But so many people I've heard say owning real estate makes you a greedy landlord getting rich off the backs of other people. Tom, what would you say to all those people?

Tom:

I think that people need safe housing, people need housing, and this is just kind of part of the wheel of providing that. So like I think above all, and we've talked about this before an earlier episode, like at the end of the day, it's about like habitable safe places for people to live. And I think as an owner, that's like a key part of the responsibility, so sure. Their incomes earned. It's like a little business that you own with every single one of the houses. But at the end of the day, like at this, we're talking about people's where they live and being able to provide that is valuable.

Emil:

I think anyone who kind of believes this, I think you should a hundred percent become an owner because then you'll have a better idea of both sides of the coin. Right. You'll have owned, you'll have rented, I've rented, I've owned. I think having been in that spot right where you're a renter and you know, you've dealt with a landlord. I think it makes you more empathetic to your tenants. Like I want to provide a safe habitable unit, like Tom mentioned for those reasons. Like, if you're, if you're a good person, you care about other people, it's not like you're going to become an owner and all of a sudden just be like terrible person not providing for them. So I actually just, if you believe that, I think you should become an owner and just have experienced on both sides personally.

Pierre:

As a renter, I have to say that it's way better to have a cool landlord.

Michael:

Yeah. It's way better renting experience to have a cool landlord. Someone that's a real person as opposed to just a machine.

Tom:

Yeah. And I don't, it has to be so black and white at that. Like you're only trying to maximize your return at every single look. I think there's a lot of places where that makes sense, but there's this humanity aspect. So one of my tenants, you know, started just recently had some issues around payment on like an employment and stuff. And you know, I talked to the, reached out to the property manager and said, Hey, you know, is this, is this something, you know, that has to do with the virus or they cause I'm very open to helping them out. Like if we need to make some adjustments or some concessions, you know, as an owner in real estate, you don't have to put on the monopoly outfit and just, you know, drill people into the ground, like, like half a conscious, like this is a good business to build wealth, but it's multidimensional, right? Because you're owning a place where somebody's living at. I think that's a really important aspect to have some humanity as an investor. So it's not, you have to go down this one path, right. You can do business consciously.

Michael:

Yeah. And to anybody out there that thinks this or anybody out there that you know, is, is catching this type of comment from other people, I'd say, look, you need to understand what actually goes into real estate investing and real estate investors pay tons of money every single year to local school districts in the form of property taxes. So I'm not sure how that makes them greedy, but I would also follow that up with asking them how much money they contribute every year to their local school districts and see what they say. So there's so much money that gets poured into the local economy via real estate investors. And that comes in the form of real estate taxes, property management fees, paying local vendors for goods and services. So, so many investors spend a ton of money on these properties and local neighborhoods that actually are making them more attractive and welcoming, which can often lead to safer communities. So it's so easy for someone to just see one side of the coin and say, Oh, you you're collecting rents. You're making money off this person. Well, yeah, but also there's the other side where I'm contributing to society, paying taxes and making the schools better. So if you want me to stop doing that, that's a different conversation, but you really have to understand both sides of that coin to have an intelligible conversation about it.

Emil:

Bravo, sir, drop the mic, please.

Michael:

Mic drop it and walk away from that person. And just kind of in this same vein, I would also encourage anyone who comes up against any kind of resistance to really try to have a discussion with that other person about why they feel the way that they do. And try to understand why what they're talking about may or may not be applicable to your personal situation. Because I think real estate investing is this huge, huge topic. On the podcast, we talk about the remote real estate investing, which is one kind of niche of that, but there's so many other different topics and variances on real estate investing. So a lot of people here real estate investments like, ah, they're evil, they're the worst people in the world. Well, okay. Yeah. There might be some that are evil. It might be some of the worst people in the world, but you don't know me necessarily. And so let's try to understand what you're talking about and what I'm talking about. Cause so often they're not all the same thing.

Emil:

I like that well said.

Michael:

So just curious. I mean, have you guys ever run into any type of these comments? Have you gotten any flack for, you know, doing something that's maybe perceived as different from what your peers or others were doing?

Emil:

Yeah, definitely. I mean, I've mentioned on other episodes. My dad is a real estate investor here locally in Los Angeles and he thinks, you know, I'm kind of crazy. It's still, uh, when I was first starting, especially like what you're gonna buy property, where again, and it's common for people to feel that way because traditionally, everyone felt like, you know, my dad's whole thing is like, if I can't see it, touch it, feel it, there is no way. And that's fine. I think for some people, it just doesn't work mentally as just a blocker. But like Michael said, I think it's about being open to different things. And again, if the option is, do nothing or invest somewhere else to me, I'm not going to let that stop me personally.

Tom:

Yeah. I think so many people have preconceived notion of what it means to be a real estate investors. And they have this idea of them running out with a hammer and taking the call and it's like, no, it's different than that. It's way more passive. It is way more team-driven, which has kind of been a theme of this episode. So throw away or assumptions on what it looks like and, and come to Roofstock Academy. No, but throw away your assumptions on what it looks like and look at some of these different strategies that we're talking about. If you're looking to do it in a more passive way and not throwing so much of your time of trying to make it work. The other comment that I've heard from some friends is, and this goes again, I think the greedy landlord piece is, you know, someone teasing, I was talking about real estate investment, like, Oh yeah. Always money and being a slum-lord. I'm like, you know, get outta here. Like I think, as I said, like there's a wellbeing aspect and like having these safe habitable places and working with your property manager to make sure that's part of your brand at the properties that you have, you know, it's, it's not about cutting corners and like maximizing every dollar. There's so much more to that.

Michael:

Yeah. I totally agree.

Tom:

And several of my friends have now invested, so I, uh, won the day. So go ahead.

Emil:

And that was the point I was just about to make is I think when you network with other remote real estate investors and you realize there is an ecosystem of us doing it, it makes you feel a lot more confident. So if you don't know anyone else who's doing it, I highly recommend getting in touch with somebody network with them, talk, join groups, join, whatever. Just say, like build that network. I think it's, it's invaluable to have people around you who are doing things similar to you.

Michael:

Yeah, absolutely. You know, when I first started investing, like you both, I caught so much of that flak of you're going where to invest, you know, why, what, that's stupid, you're there. You're crazy. And I'm like, yeah, well it makes sense to me. So, and now most of those friends I haven't since invested to, Oh, they see what's going on here. But yeah, so much of it too was I felt like this lone wolf, I didn't know there was a community out there. I didn't know the other people doing this. I just heard, yeah. People invest in real estate, but I didn't happen to know very many of them to ask them, you know, am I crazy? Is this insane? But now I realize no I'm laughing all the way to the bank. All right guys, any final thoughts on this stuff?

Pierre:

I have a question in this vein of remote versus local investing. When would it make more investment sense to invest in your local market as opposed to remotely, if you live in an expensive area?

Michael:

Super good question. I'll let you guys take it first.

Tom:

I'll take the first stab at it. So excellent question Pierre of, when does it make sense to invest locally versus is remote. And I think it all has to start at what is your investment thesis? Like? What is your end game map? If I live in an area where I don't necessarily need the cashflow right now, and I'm pretty bullish on appreciation, I live in Northern California where properties are a little more expensive. Maybe it does make sense to invest in a property out here locally. If I'm looking for a property where there's a little bit more of a blend of appreciation and a bit more immediate cashflow, then maybe it would make sense to invest remotely. And to kind of get us to rephrase a little bit is, you know, what kind of returns are you looking for? Like if I had to make this analogous and that's right to like the stock market, like, am I investing in a growth company or am I investing in a new startup, but am I setting a value investing? Like what kind of strategy? And I think that will answer the question on where you're doing your investing at.

Emil:

The only other thing I would add there is I think comes down to your comfort level. If you just can't for whatever reason, get yourself to invest remotely. I don't think you should just not invest. I think if you can invest locally, go for it, right. If you just can't get over the remote factor and you know, like you could be making better returns elsewhere. The thing is, is there's people investing locally doing insanely well and there's people investing remotely doing insanely well, I don't think this is a, you have to go local. You have to go remote. I think it's just by your comfort level, how much money you have to invest, you know, just your strategy and that your thesis, like Tom mentioned

Tom:

Price point, great point. And also the volume of homes available. I mean, you're limited just in your own backyard of how many homes are for sale. Go ahead, Michael. I see you.

Michael:

Yeah. I see you too buddy.

Tom:

The light in me sees the light in you!

Pierre:

Namaste!

Tom:

Namaste

Michael:

You know, from avatar, we need to hook up our ponytails.

Tom:

Yeah. I'm touching the microphone.

Michael:

So the last, I think those are both really great points. The last thing I want to add too it, is what the goal is and what are you trying to accomplish? But one thing I don't think that it has mentioned is the idea of house hacking, which is kind of this concept of you buy a house bigger than you need or a place bigger than you need and you live in it and rent out the other room. So you're kind of getting the best of both worlds and a kind of hybrid approach with, I have a place to live now and I'm making some rental income alongside with that. And so if you do that well enough, you could absolutely see similar returns to a traditional investment property at distance, but get the benefit of living in a house locally. And so what I think is really important to look at as the true opportunity cost and true total cost, because if you're investing somewhere else and continuing to rent while there's a cost associated with that, versus if you buy a house hack locally and are living in it, well, there's a different cost associated with that, but you're not paying rent anymore. So look at the whole picture. And I think just like Tom mentioned, you know, look define what your goal is. So I think I ha how's hacking is a really, really great way to get started in real estate investing and kind of get two birds with one stone and then just like Emil said, what the price point is and what your, you know, you're only going to qualify for X amount of dollars in a loan if you're going that route. And so that's going to be a limiting factor as well.

Pierre:

What about buying from a family member would buying from a parent, make it more interesting in the way of tax benefits or anything like that?

Tom:

I mean, a huge way to get ahead in real estate is any kind of discount to valuation. So like if there's any kind of sweetheart deal with that, I mean, you don't want to take advantage of your parents, but like if they're like open to giving you a little bit of a discount, like, man, that could be an immediate, huge head start because you already have like a little bit of equity in the house where some of the tools that we talked about pulling out equity, like cash out refi or HELOCS or all of that stuff like that can give you an advantage there in just the question of like, let's say you're paying fair market value. It really depends on if that house fits your investment thesis. So looking at the type of returns that you would get, then if it fits that then great. That makes sense. I'd say just kind of like specific to your question around family members. Like if you're able to get a little bit of, maybe it's not sweat equity, it's love equity. That's a huge step up.

Michael:

One other thing too, that I've seen here that works really well. Especially if the house is owned free and clear is your family can finance it for you basically be the bank and you pay them a monthly payment as opposed to getting a mortgage. You can just get, you know, you guys decide what the terms are amongst yourselves. And it's so much easier. The one thing that I definitely would encourage people to look out for and I harp on this literally every day in the Academy is property taxes and especially if it's in California, because I asked my attorney once I was like, what if I just sell this house to my wife for a dollar? Because my property tax base is X, what my property tax has dropped to a dollar. And she's like, yeah, no, that's not how it works. If it's, if it's priced way under market, they're going to assess it at the fair market value and tax you on the fair market value. So even if you're getting a discount on the purchase price, that's great. You just want to be aware of what the taxes are going to look like after the fact. And especially with a lot of these family properties, they've been in the family for so long, they were purchased at such a low tax rate. So being aware of the tax rate and what that's going to jump to is really important for sure. It's going to move in California, but you just want to be aware of it. If you're in another state doing this type of deal, just be, you know, find out what that tax rate looks like. But great questions, man.

Tom:

I got one more for this. So in the theme of this episode of your friends being able to speak intelligently, when you're, when people try to talk you out of investing in real estate, why aren't you just buying somebody else's property? Isn't there like a reason they're selling it? Why, why, why, why

Michael:

Is it trash?

Tom:

Isn't it trash if somebody's selling it, it must be a bad deal or something wrong with it. Michael, would you like to lead this one?

Michael:

Yeah, it's a super great point and a really great question. I think I hear all the time in the Academy. I mean, it's just goes back to one. Man's trash is another man's treasure, but also you're probably not buying trash. I mean, people sell for any number of reasons. So we'd never know a motivation unless we ask. And so often sellers are selling out of desperation, whether that's, you know, divorce or they need cash for something. So it could be a really great property, could be really great deal. They're just selling it because they need the cash. They could also be selling because they got a nonperforming assets to be performing. And now it's really great. And so we talk about that a lot is adding value. You buy a crummy property, you fix it up. And now it's a really nice property. I mean, that's what turnkey is. Someone is selling a perfectly functioning and performing asset. And so giving people an opportunity to buy it means that they get to make some profit in the middle. So I definitely definitely disagree with that wholeheartedly. I think that people need to understand that there are so many reasons why someone could be selling a property.

Emil:

No, the only other one I would add is what we call a tired landlord. So someone who just been doing this for 30, 40 years, they're done right. They've maybe they've been managing it this whole time by themselves. And they're like, I'm just, I've made my money. My market has appreciated. I'm going to do well on the sell. I just want to get out of the business. So they're tired and they just want to move on. That's another one.

Michael:

I love how you said that. They're just, they're just exhausted.

Emil:

Just, just tired man. I could,

Pierre:

Did you have your dad in mind when you're commenting on this?

Emil:

My dad is such a, such a tired landlord. He's an exhausted landlord. He is. He is just like, pardon me. Thinks he loves complaining about being a landlord though. It's just like in him that he likes to compete. It gives him a discussion topic.

Tom:

Yeah. My comments would be on this is concerns around, you know, why is the sellers have a process and the way that you evaluate the homes that is consistent. So once the property goes through the ringer where you're looking at, you know, condition value, tenant, if they're, it is occupied, all that stuff, you can really make the assessment. If it's a good or a bad deal. And don't overthink seller motivations, just like Michael said, there's going to be any number of reasons within Roofstock there's all kinds of different types of sellers. There are individuals, there are bigger institutions, there are funds and sometimes the funds just expire or sometimes they move, you know, the geographic concentration, they might move to a different market. So I wouldn't overthink it and just do your homework and follow the right steps and doing your evaluation of the property.

Michael:

Okay. So now I've got a question for you guys kind of a fun one. And just so all of our listeners know, I didn't tell a meal pier and Tom, what the question was before we started recording this. So they are totally going to be blindsided by this. And it's a, it's a pretty traditional question. It's one that, you know, I think is asked pretty regularly of people, but I put a little bit of a spin kind of unique twist to it. So the question is you're stranded on a desert Island. There's the very typical question that I want to know the answer to of what two items would you sum into your location to help you escape to survive? But also I want to know where's the most ideal setting for said deserted Island,

Emil:

Bali, a surf board, because the waves are going to be amazing deserted Island. I'm just, I don't even know if I'd want to leave. Honestly. I'm not trying to get out of there if I'm just stranded in Bali, no one around amazing waves.

Tom:

Do you guys watch naked and afraid?

Michael:

Yeah. It's so good.

Tom:

What would your survivor score be?

Michael:

Oh, I would start it probably a six and end at a 7/8. Oh, underdog performing. Sorry. I interrupted. Go ahead.

Emil:

Alright, so I’d want to surf board item two…

Tom:

Are we picking locations or picking what we're bringing with us? What's the situation?

Michael:

Both!

A laptop that has a never ending battery and access to internet.

Michael:

No dude, we're not playing this “imagine if the best invention” game.

Emil:

You did, you did not give me any rules, constraints. It's up to my imagination. Creativity.

Michael:

All right. That's reasonable. And the first thing I would do is use said computer magical computer to get a ticket for my wife and daughter to come join me at the Island.

Tom:

So, if you're going down, you're dragging them with you.

Emil:

That's right. Tom, what would you, what would you bring and where would you be?

Tom:

I think I'd be on the oldest Island of the Hawaiian islands. I'd be in Kauai just because it's, you know, lots of fish around there. I would bring some Kool-Aid from 2000 just cause I know it's diluted. I could just use a little bit. That's going to last me a very long time to match my 20, 20 taste buds. It would last a very long time and yeah, I think I would somehow finagle my wife and son to come join me too with that magic computer that I would borrow from Emil. So there we go. I got Kool-Aid and magic computer.

Michael:

All right, Pierre, where are you stranded and what would you bring?

Pierre:

Hmm, maybe somewhere in the Mediterranean, like Malta and I would bring a guitar and a hatchet.

Michael:

Nice see. Pierre's the real survivor here.

Tom:

Which guitar?

Pierre:

I'd bring my acoustic. Probably my Taylor. Yeah, my guitar and a hatchet. Cause I forget what the saying is exactly, but it's with a pocket knife, you can survive, but with a hatchet you can live like a king. a nice I'd built some stuff for sure.

Michael:

Nice.

Tom:

You're already practicing. You're hurting right now. We go to peers does desert Maltin paradise and he's mid century. Nice couches beds built. Starts a popup shop.

Tom:

You're turn Michael.

Michael:

I would probably go to be in Bermuda because I hear some crazy stuff happens there. I'd be very curious to see what's going on. My two items would probably be a satellite phone so I could order all kinds of great stuff. And if I say anything other than hatchet, I'm looked like a chump. I think I should also bring a hatchet.

Tom:

Your survival skill just went down. Your Pierre’s survivors went down because you had advanced tools.

Michael:

I could have brought a chop saw.

Tom:

Yeah. You just went to a 5.5.

Michael:

Oh, it's such a ridiculous show. Naked and Afraid. But it's so interesting to see what people bring I'm waiting for the day with two people bring the same thing. Like they both bring a lighter and like, Oh crap. Like we didn't talk about this beforehand.

Michael:

Well, that was our show. Everybody. Thank you so much for listening. We hope you enjoyed it. Don't forget to give us a rating or review wherever it is. You listen to your podcasts, subscribe as well. And we look forward to seeing you on the next one.

Tom:

Happy investing.

Emil:

Happy investing.

Emil:

Hey Michael 

Michael:

Hey Emil whats going on?

Emil:

So right now we are doing something a little different than we normally do. Usually we have a full length episode, but what we wanted to do was do an AMA, an Ask Me Anything, where we want to take questions from you guys, our listeners, and answer them on an episode. So if you guys want to record your question, email it over to us, we will feature you on the episode and answer those questions live. So email those over to [email protected] and also send over to Michael who’s at [email protected]. Just grab your phone, open up the voice memo app and record your question and share it with us and we will feature you on the episode. Or, if that is too complicated, just send us your question in an email and we will answer those as well.

Michael:

Or if that seems like too much trouble and you’re not really tech savvy such as myself you can  go ahead and call us and leave a voicemail with your question as well. So the number is 415 343 5866. And just leave us a voicemail with whatever your question is and we will answer it on the episode. 

Emil:

And make sure you get us those questions by Wednesday July 8th, because we are probably going to record this on Thursday July 9th and release the episode on Tuesday July 14. So make sure to get us those questions by Wednesday July 8th. 

Michael:

Hey Emil I got a question, what’s your shoe size? 

Emil:

You’ll have to send me an email and I will answer it on the episode.

Michael:

Awesome, so anything you want to know real estate related, send us a question and we will answer it on the episode. Looking very forward to it.