Why Most House Rentals Fail (HA 009)

Steven Butala:                   Steve and Jill here.

Jill DeWit:                            Hi.

Steven Butala:                   Welcome to The Land Academy Show, entertaining real estate investment talk. I'm Steven Jack Butala.

Jill DeWit:                            And I'm Jill DeWit, broadcasting from sunny Southern California.

Steven Butala:                   Today, Jill and I talk about why most house rentals fail. And like everything on this show we're going to talk about why they fail and we're going to talk about some very real world working examples about why they work.

Jill DeWit:                            I was going to say and like everything on this show we are going to be brutally honest.

Steven Butala:                   Yeah. Yeah.

Jill DeWit:                            Because we don't know how not to.

Steven Butala:                   The cards are stacked against you as a new landlord, beginning landlord.

Jill DeWit:                            I thought you meant as a new listener.

Steven Butala:                   Well that's for sure. That goes without saying.

Jill DeWit:                            We will be honest. We do not have filter buttons and there's many times that we need them.

Steven Butala:                   That's how we should open this whole show. Like you chose this.

Jill DeWit:                            Yeah.

Steven Butala:                   You chose to turn this on.

Jill DeWit:                            That's right. We didn't. You know what and this is going to be 20 minutes you'll never get back.

Steven Butala:                   Well you know what if it makes you feel any better, we won't get it back either.

Jill DeWit:                            Yeah it's true. 20 minutes I'll never get back.

Steven Butala:                   Before we get into it lets take a question posted by one of our members on the houseacademy.com online community, it's free.

Jill DeWit:                            But unlike me you can turn it off right now. I'm just kidding. Jefferson asks, what do you do when the property inspection part comes back and it's a mess?

Steven Butala:                   That's a good question.

Jill DeWit:                            That is a good question because it happens.

Steven Butala:                   Okay so bear in mind you sent an offer to an owner that called back heck yes I'm going to sell you this property for that. You order an inspection report, sign some stuff. The inspection part comes back and it's a mess. Foundation in California's case, foundation's cracked probably beyond repair.

Jill DeWit:                            Termites.

Steven Butala:                   Termites, there's something in the attic that was so disgusting that the inspector couldn't go up there and get it. What else happens? Oh the electricity wasn't turned on so we really couldn't test that.

Jill DeWit:                            Maybe some plumbing leaks.

Steven Butala:                   There's water damage.

Jill DeWit:                            Yeah. Hole in the roof.

Steven Butala:                   In a perfect world, if these things come... happen like this, you have a phone in one hand and you're getting this bad news, you look down on your desk and there's a stack of purchase agreements that you have there signed because you sent out that many offers.

Jill DeWit:                            Mm-hmm (affirmative).

Steven Butala:                   For every 1,800 offers that we send out, we buy a house. You should budget for every 3,000 if you're brand new, but eventually we will get it to 18 or even lower.

Jill DeWit:                            I want to add, when we say buy a house that means we had more, that we did our due diligence and reviewed to get down to that one. So it's not like I have 18, you know only I have to sell out that many to just get one to review. No that means we get all the way through that process and we actually act on it.

Steven Butala:                   Yeah you might review five...

Jill DeWit:                            Ten.

Steven Butala:                   ... five to eight maybe. Maybe 10 in some cases.

Jill DeWit:                            Exactly.

Steven Butala:                   So this is one of those houses where you might just take the purchase agreement and throw it away and go to the next one.

Jill DeWit:                            Exactly.

Steven Butala:                   In a perfect world you have so many deals that what you should do. But more often than not I think you're probably going to work through this situation, maybe go back to the seller and say, hey that price didn't work, doesn't work as well.

Jill DeWit:                            Yeah.

Steven Butala:                   But what you're doing is passing along a problem to your customer so more often than not if you have an established, hopefully you have an established buyer group or maybe one or two buyers, you're going to ask that person, hey does this stuff work for you.

Jill DeWit:                            Exactly. Is this a deal killer?

Steven Butala:                   Yeah. They'll tell you.

Jill DeWit:                            And if it is, then you move on. If it's not a deal killer, now you go back and get it at the price that works, taking all that into account and that's it. Usually there's no surprises.

Steven Butala:                   Yeah.

Jill DeWit:                            Everybody gets it to by the way. If I'm selling something and I didn't know that the... I'm selling a car and I didn't know that, because I never use my air conditioning because where I live, and now I find out the air conditioning doesn't even work, I am going to adjust the price. I know that.

Steven Butala:                   Yeah.

Jill DeWit:                            It's not a surprise. I'm not going to say you know.

Steven Butala:                   When the house is vacant you're going to see these problems that like what we just described, but if the house is... you're buying it from somebody who is moving, you won't see this kind of stuff. You'll see horrific decoration and way too much stuff in the garage or the basement and...

Jill DeWit:                            Awful carpet.

Steven Butala:                   ... rotten cars in the back [inaudible 00:04:15] yard and stuff like that.

Jill DeWit:                            Yeah.

Steven Butala:                   So all those things a very easily fixable. So every deal's different.

Jill DeWit:                            Mm-hmm (affirmative).

Steven Butala:                   Just have to take a look at it. Today's topic, why most rentals fail. This is why you're listening.

Steven Butala:                   Here's how people become landlords and file bankruptcy.

Steven Butala:                   You're sitting around one day because you hate your job, and you decide that you want to become a landlord because you spent a week on bigger pockets, and it looks pretty easy. So you call your sister-in-law who's a real estate agent, and she's only ever done two or three deals in her whole life and those were for relatives, and you say, "I want to buy a rental house." And she says, "Oh my gosh, that's perfect because I have 16 of them right here." And what she means is, I have access to the [MLS 00:05:10] but so do you, you just don't know it because you only spent a week in bigger pockets instead of a month.

Jill DeWit:                            This is so good. I love this. This is a story and I'm just sitting back enjoying this, how it unfolds.

Steven Butala:                   Your sister-in-law finds the cheapest priced house she can find in the market that you've chosen or maybe she talks you into a market that you haven't even researched and you buy it. You go to the bank, you get a mortgage just like you're going to live there. The mortgage company requires an inspection and an appraisal and all kinds of stuff and you collect your 20% or if you're lucky 10% down payment. You drain your savings or probably you're actual checking account, not even your savings.

Steven Butala:                   And everybody's getting paid except you. The real estate agent got paid, the inspector got paid, the lender got paid, the escrow agent got paid, the appraiser got paid and the mortgage broker themselves got paid. So now you have a mortgage with Bank of America that's a thousand bucks a month and you turn your utilities on and you got insurance. You had to call an insurance agent to get renter's insurance and you put a for sale sign in the window. And there you sit.

Jill DeWit:                            Or for rent.

Steven Butala:                   Yeah sorry. Where you put your rents...

Jill DeWit:                            A for rent.

Steven Butala:                   Thank you. Rent sale or however you market it, and a person drives up with more garbage in their car than you've ever seen anyone have in their car, and they rent this house.

Jill DeWit:                            I love how you tell these [crosstalk 00:06:39]. Your stories are so vivid. It's really good. She drives up with big gulp in one hand...

Steven Butala:                   Yes a big gulp.

Jill DeWit:                            ... and orange cheesy fingers in the other hand.

Steven Butala:                   And she lights a cigarette.

Jill DeWit:                            And lights a cigarette. What is she driving?

Steven Butala:                   She's driving a 1989...

Jill DeWit:                            Ford Taurus.

Steven Butala:                   No.

Jill DeWit:                            Oh no.

Steven Butala:                   I don't think a Ford Taurus. I think like a 1989 Cadillac Deville.

Jill DeWit:                            Oh. Okay.

Steven Butala:                   And then the ashtrays packed full of cigarettes with lipstick on it.

Jill DeWit:                            How many kids are in the back?

Steven Butala:                   No kids.

Jill DeWit:                            Oh.

Steven Butala:                   But there's a Saint Bernard back there.

Jill DeWit:                            Oh okay. [inaudible 00:07:23] this is good. Keep going. Who's meeting her at the rental house here?

Steven Butala:                   You are.

Jill DeWit:                            Oh great.

Steven Butala:                   You are.

Jill DeWit:                            Okay.

Steven Butala:                   You quit your job for this.

Jill DeWit:                            By the way because your sister-in-law's long gone. She's out man. She got her commission she's gone.

Steven Butala:                   Yeah. You quit your totally lucrative job because you're going to be a landlord.

Jill DeWit:                            Oh right. Oh okay got it.

Steven Butala:                   You got a thousand... now you're in for like, with the utilities and stuff and insurance and everything, you're in for 1,100 bucks a month and you're going to rent the house for 1,600. And you for whatever reason decide to rent it to the Saint Bernard lady, who by the way, doesn't look that different than her dog.

Jill DeWit:                            But she's the first one that came along and is willing to pay.

Steven Butala:                   Right.

Jill DeWit:                            That's really how it goes. You're excited and you're making all the wrong decisions.

Steven Butala:                   You don't need to check the credit.

Jill DeWit:                            Oh no.

Steven Butala:                   And you don't need to...

Jill DeWit:                            She told you it's great.

Steven Butala:                   Yeah.

Jill DeWit:                            Oh yeah. She told you she was looking at the big one around the corner but she liked this better. It just fit her needs.

Steven Butala:                   And she really needs to rent a place because she's at the end of her relationship with her abusive boyfriend.

Jill DeWit:                            A doctor.

Steven Butala:                   So you rent it and you get your first and last months rent and you're high. You just got whatever, almost $4,000 cash and she makes her first months rent payment and then she never pays again. But that's not the real problem here. Let's say for sake argument in this story she does pay.

Jill DeWit:                            Okay.

Steven Butala:                   It cost you 1,100 bucks every month. You're collecting 1,800, that's $700. Not bad until the roof falls in.

Jill DeWit:                            Yeah.

Steven Butala:                   And all kinds of other maintenance related stuff that goes on.

Jill DeWit:                            That's right.

Steven Butala:                   You never really talked about who's going to do the landscaping.

Jill DeWit:                            By the way. All her cigarette butts just clogged up the garbage disposal.

Steven Butala:                   Yeah. Oh you're getting calls in the middle of the night.

Jill DeWit:                            Yeah. Washing machine doesn't work.

Steven Butala:                   Yeah. So you get to the point where you have a conversation with yourself like this. Like, I'm probably making 250 to 300 dollars a month on this.

Jill DeWit:                            Right.

Steven Butala:                   If I only had 30 of these...

Jill DeWit:                            Yeah.

Steven Butala:                   ... then this would be great. So, but this first deal's probably going to kill you because you can't sell it now, because your sister-in-law got you into a property that sucks.

Jill DeWit:                            Yeah.

Steven Butala:                   Financially and everything else. So you're done. It's like gambling.

Jill DeWit:                            And by the way, you quit your job, right. So you can't get another loan now.

Steven Butala:                   You gambled until you lost all your money and you're out.

Jill DeWit:                            Right. Can I go get another loan if I find a great deal?

Steven Butala:                   You can but now you're border luck in a tight rope on ethics and all kinds of stuff because you told the lender that you're going to live there, just to get the best deal.

Jill DeWit:                            Oh.

Steven Butala:                   But you're not.

Jill DeWit:                            But you also [inaudible 00:10:01] you don't have the income now.

Steven Butala:                   All of these things by the way, minus the Saint Bernard, have happened to me. So hopefully you're listening to this and you're thinking about doing this and I've talked you out of it now.

Jill DeWit:                            Yeah.

Steven Butala:                   Because I don't want to go way over on time, here's the right way to do this.

Jill DeWit:                            Okay.

Steven Butala:                   You're a very smart person and you have an accounting background or an engineering background or some type of comfort in spreadsheet background. You might even be a real estate agent that hates being real estate agent and wants to be an investor. Maybe you're an air space engineer, I don't know, our land group is all packed full of people like this. I don't know, for some reason we attract these kind of people.

Steven Butala:                   So you understand the value of raising capital and being in a group where there's lots of people with lots of money and you look at deals. You also understand that and none of these people that I just described deserve a dollar out of you. Not the insurance agent, not the real estate broker, none of them. You should spend your money on real estate [inaudible 00:11:07] interest, not on soft cost fees and all kinds of stuff like that.

Steven Butala:                   The best working example that almost happened overnight of a landlord situation is this. This is a real situation. Jill and I have a mutual friend that, his wife's sisters husband, his brother-in-law sold a company, a medical device company and netted like 50 million dollars. That guy went and got a line of credit for 30 million and came to my buddy and said, my buddy's been in real estate his whole life buying and selling notes, “I got to invest this money. It can't just sit there.” So he went and paid cash for like 40 or 50, up to 100 houses on the west side of Phoenix.

Jill DeWit:                            Mm-hmm (affirmative).

Steven Butala:                   And he became an instant landlord for these 100 houses, set up a property management company and hired a guy, a maintenance guy. He has no debt. He paid cash for all of these houses and he sent letters out like we do so there's no real estate commissions. He had his own guy inspect the houses and now he's got, I think he charges average rent, lets just say it's 1,000 bucks, I think it's more than that but lets just say he's got a hundred houses at a 1,000 bucks a month. He's got a million dollars of cashflow and he doesn't pay this guy, his money guy, interest payments, he's a partner.

Jill DeWit:                            Right.

Steven Butala:                   He's 50% partner on the [stale 00:12:26]. So every month now he's got $100,000 coming in and he buys another house after they pay their salaries and whatever they need to live on. So now his companies growing. He doesn't have any debt. He's only got equity interest. His money partner won. His wife's happy. His wife's sisters are happy and that's how you do this. And if two or three or ten of these things explode one month, because they will, the deal will explode or people will stop paying rent. That's how you become a landlord. You don't do it the way that we've all been taught to do it and me included.

Jill DeWit:                            Right. Thank you.

Steven Butala:                   Story time with Steve.

Jill DeWit:                            It is. I don't know what to say. My only note was passive income, really.

Steven Butala:                   Yeah.

Jill DeWit:                            Because it's not.

Steven Butala:                   It takes a lot of planning.

Jill DeWit:                            Yeah.

Steven Butala:                   And the underlying issues... there are two underlying issues of being a landlord, number one, where are you getting the property. If it's in the MLS represented by a real estate agent stop right there.

Jill DeWit:                            Mm-hmm (affirmative).

Steven Butala:                   Your chances of failure are like 90%.

Jill DeWit:                            But somebody got there first.

Steven Butala:                   And then they're just going to get you into a big, a myriad of, you might as well... well nevermind.

Jill DeWit:                            Thank you.

Steven Butala:                   That's a terrible analogy.

Jill DeWit:                            That's another show.

Steven Butala:                   And number two conventional financing doesn't work for that. You have to get rich people like our groups are packed full of us included that understand real estate and believe in you. And if you're new at this it's real easy. Find some money people you do all the work.

Jill DeWit:                            Mm-hmm (affirmative).

Steven Butala:                   That's all Jill and I do all day when we put our investor hat on, is try to find people that do our deals.

Jill DeWit:                            Yep and hand them money.

Steven Butala:                   That's it.

Jill DeWit:                            Yep.

Steven Butala:                   Hey we know your time's valuable. Thanks for spending some of it with us today. Join us next time for the episode called Wholesaling Houses versus Mobile Homes.

Jill DeWit:                            And we answer your questions. Post it on our online community foundedhouseacademy.com. It is free.

Steven Butala:                   You are not alone in your real estate ambition. Was a good story.

Jill DeWit:                            It was great. I feel bad and I didn't have a lot to add. I was just kind of letting you go.

Steven Butala:                   You [crosstalk 00:14:30]. It was just my show. Sometimes it's your show.

Jill DeWit:                            Thank you. I appreciate that. Wherever you are listening or wherever you are watching, please subscribe and rate us there.

Steve and Jill:                     We are Steve and Jill.

Steven Butala:                   Information

Jill DeWit:                            And inspiration

Steven Butala:                   To buy under valued property.