REAL TALK RENTALS

Investment Properties: What to Look for

BEN: Coming up on this episode of Real Talk Rentals, we're going to talk investment properties. How do you know when it's a good deal? What should you look for when you buy? Welcome to Real Talk Rentals, a podcast brought to you by On Q Property Management. We're here to give you all the tips and tricks of owning a rental property and everything that goes on behind the scenes. My name is Ben and I'm your host. And with me, as always, is my co-host, Mr. Eric Dixon, the expert on all things property management, and especially pertaining to this episode, real estate. So little spoiler. We're talking about investment properties. What goes into purchasing one, making the right decision should you buy? And Eric, when I brought this up to him, he said, This is a passion of mine, so you know it's going to be good. Yep.

ERIC: No, I'm passionate about real estate. Yeah, that's kind of where my where my career started in terms of even how I ended up in property management. Yeah.

BEN: All right, so. So let's kick it off then. Let's say your phone rings. I'm calling you because I've got cash. I want to buy an investment property to rent out.

ERIC: Yeah. Now what?

BEN: Now what? What do we do? Where do we go from there? No.

ERIC: And so I actually get this question a lot. Not just from clients, but even from my personal sphere. Right. Friends, neighbors, You know, people I go to church with stuff they know I'm in real estate like, Hey, Eric, how's the market going? What should I do? I'm thinking about buying a rental. And one of my biggest you know, as I've been thinking about it, preparing for this and also just just thinking about it as you're asking is people need to I need to understand your why. That sounds kind of like a cliche. Sure. Ben. What's your why in life? But why why are you wanting to invest? You know, is it just is it because you came across, you know, some money? Have you been saving? Is it just your goal in life? And so understanding your why helps me come up with a plan to say, hey, this is the type of investment that will work for you, whether it's a condo, a townhouse, a home, a fourplex, a multifamily complex. Maybe it's a partnership. Hey, Ben, maybe you're maybe you'd be a great minority partner of a big portfolio of homes that we're selling or whatever. So understanding why? Is it because you want to diversify your investment? Maybe you're heavy in stocks, your 401. K index funds and you're like, do you know what? I just want some real estate. Maybe. It's like I said, he came up with some cash from a loved one or you're the beneficiary of something or, you know, your CD matured and you've got $50,000 and you want to buy real estate. Maybe you just found out you can qualify for a mortgage.

ERIC: And so that's exciting, right? You're like, Hey, I can qualify my credit. My income, my debt to income ratio is great right now. Let's invest in real estate. You know, there could be all these reasons. So finding out your why is the biggest thing. So again, then you ask say, hey, what's the first thing I should do? Hey, let's get on the same page. The second thing I tell people, so right now, it's whatever, December 20th, 22, the market's changing. You could be listening to this and rates could be high or low or indifferent, right? The fact is, don't I just want people to know, don't buy just to buy, right? I want to buy. Let's buy a lot of agents out there, great agents. But they're forcing the the issue and they're like, no, you said you want to buy an investment. Here are your options. Boom, buy, right. Um, you know, don't buy just to buy. I've gotten in my own life, I've done this with cars, with real estate, with stuff. And it's just like, well, I've got the ability to buy this. Let's just buy it. So I want our buyers to know too. Don't buy just to buy. Make sure it makes sense financially. Make sure the location makes sense. The age of the home makes sense. The the repairs, the maintenance, the way it's been taken care of, all that makes sense. And then the third thing I just want to know, and this could be tied to part of the why you're you're investing is I don't want you to depend on the income from this rental to survive your day to day life.

BEN: And that's an important one. That's an important that all the time.

ERIC: No. And I was telling Ben and I'm just going to reiterate it because this is fresh. So fresh. Um, one of our property managers here at on Q manages my personal portfolio. And in the last three weeks I've gotten three different scenarios, just one after another after another. One is it's Christmas time. The tenant can't pay rent. And I'm being asked by the property manager, Do you want me to push for an eviction? I'm like, Oh man, you know, it's the 20th of the month, you know, So I've got, you know, I've got an eviction less than like 3 or 4 days later. Hey, another one of your properties gave a 30 day notice. They're going to be out at the end of December like, oh, man, I got a plan for that vacancy. And then the third one was, Oh, it's earlier in the month was, Hey, they can't pay, but they're working in rental assistance. They can pay both months. Next month maybe. Yeah. It's like, so my whole point with that is like, I'm not I'm not going to get rent on two or probably two of these properties in December, but I've got two mortgage payments that's still got to be made. Two payments got to be made right. Um, and they may or may not both be vacant in January, you know, so unplanned. As of 30 days ago I had all our tenants current on rent. Everything's great. Yeah. Do you jump 30 days and boom, three of the seven are possibly moving or possibly being forced to move and so forth. So I can't depend on that income to live my day to day life. You know, I've got to have the slush fund savings. I've got to I've got to not rely on that cash flow. Yeah.

BEN: So, I mean, it's it's important to the word investment is in there for a reason, an investment property. Um, you know friend of the pod Matt talking to him he always says he'll get calls from people that say I have to rent this in 30 days or I can't pay the mortgage. And it's like, that's not that's not a good position to be in and that's not how you would treat any other investment. Yeah, you wouldn't invest in the stock market and say, if I don't make money on this in 30 days, I'm going under. Yeah, it just doesn't work like that.

ERIC: And I actually think it's a good, a good. Exercise that if you want to buy a rental, call it an investment. Like I want to buy an investment property, right? It is an investment and it's a long term investment. Very rarely are you going to get rich quick investing in rental properties. It's going to be this long, consistent road and you're going to see ups and downs, but over time, you're going to reap the benefits. Right? And we'll talk about some of those benefits as we go. But like you said, similar to stocks or crypto or, you know, index funds and stuff like that, you don't invest money into there and hopefully you're not depending on the monthly return or dividend to live. Usually you'll reinvest those those dividends or those those returns or maybe you'll take some take some profit, but you'll reinvest it or whatever. With real estate, it's also harder to sell quickly. It's like, Oh man, we've had a bad month, let's sell. It's like, man, first of all, it's expensive to sell, you know, with commissions, closing costs, time on market vacancy, utilities. It's expensive and it doesn't happen fast. Yeah, it could take 90 days. It could take, you know, whatever. So, um, so making sure, you know, getting back to your original question, what would I first tell you, it's it's really just let's understand why you want to buy it. Let's make sure you're not having to live off of it and that financially it makes sense, right? And then from there, kind of the fun, the fun begins. It's like, oh, well, you qualified with these these qualifying questions. Let's go find a place.

BEN: All right, So let's say I did that. I qualify. I gave you a great reason why that I'm doing this. Um. What makes a good investment property. What's going to make you point out certain properties over other ones?

ERIC: So they're basically I break it down to 4 or 5 things. Number one, that's popular is cash flow, right? So whether you're paying if you're paying all cash for the property. People wonder, well, there's always going to be cash flow. Not necessarily the case. Like you could buy a place cash with no mortgage and still be negative cash flow every month. If you're dumping all your all your money into repairs or improvements or, you know, because it's in a bad area. So cash flow is one I like to see depending on the market and stuff, it could be anywhere between 2 and 6% cash on cash return depending on you might have a lower cash on cash return in a great appreciating area that's like, hey, I'll take less cash on cash return today, but in 5 to 10 years I'm expecting it to be higher based off these things. You don't want to speculate. Too bad. Another good investment is somewhere that will appreciate over time. So there's there are areas to invest in that are going to have higher cash on cash return, but low appreciation potential or there's others that have lower cash on cash return and high appreciation potential. And so you want to look at a lot of that plays into age of the property. You know, I was telling you yesterday, like it's funny because a lot of my rentals are 40 or approaching 50 years old.

ERIC: Yeah. Not not horrible right now, but in 20 or 30 years, you know, a lot of that's 70, 80, 90 years old. I mean, you're talking house, you're talking about having to redo plumbing and electrical systems and panels and roofs and, you know, all that stuff. And so there's the appreciation side. Another good investment is if you can if you're leveraging with a mortgage, is making sure that there is positive cash flow so that the tenant can pay down your debt over time. Right. You know, if you get a 30 year fixed mortgage and you have a tenant for 30 years. Your tenant is literally going to pay your house off. Yeah, you came up with the down payment and you qualified for that mortgage. You're responsible for it either way. But for the most part, that tenant paid your house off. Like, it's an incredible opportunity and a good investment. And then we won't talk about it a lot because we're not tax professionals. But there is a huge tax incentive to owning rentals as well, right? You know, the all the property management fees, the tax, the insurance, the capital improvements, the maintenance, all of that stuff is tax deductible and can really actually help you on your taxes.

BEN: Awesome. Um. Next question then, is what? Those are all things, you know, to look at. What should you avoid when looking for an investment property? Well.

ERIC: Again, bringing up Matt because he he just we talked to him all the time. But one issue we're having right now in a changing market is that people made big assumptions about rental rates. So a big a big do not do is don't assume. An astronomical or a high rent is what you're going to achieve. You need to look at it conservatively. Check with a couple people. Again, I was a real estate agent for years before I got into property management at all, and so I was one of those agents that was like, Oh yeah, probably rent for like a thousand bucks or something. And at the time I'd help them buy the property and then they'd get a property manager and they're like, Dude, this is like an $800 condo. You told them a thousand. And I kind of was like, Oh, I just Googled it. I looked on Zillow, I looked at whatever, and they didn't run deep rental comps and look at upgrades and condition and density of how many rentals are in that community and really dive deep into it. So check with your property manager. If your real estate agent that's helping you buy is not a property manager or in the property management space. Check with your property manager. Yeah. You know, for us, rental.

BEN: Market changes so fast.

ERIC: Oh, so fast too. And it's very agile and you know, you would think, hey, interest rates are going up, houses prices are going down, rents are probably going down. And it's like, well, across the nation, they're still going up, but in Phoenix they're going down. It's just it can change, you know, everywhere. Um, another do not. Oh, and actually, one more point on, on rental rates. What I do personally is I say, hey, this is a conservative rental rate. Say it's $1,500. And I'm like, okay, that would give me okay, cash flow. What would it look like if rents went down or up 25% over time? Right. Because I was selling real estate in 2008, 910, when the market was just tanking. I mean, it was going down and rents were going down. And it was it was pretty bad. But, um, some investors they bought knowing, hey, rents might go down 25 or 50%. I can still hang on to this thing, but there are some people, to your point about the mortgage payment, it's like if don't get top rent in 30 days. Yeah, I can't make the mortgage payment. Like, that's not a spot you want to be in. So I make assumptions when I'm buying that, hey, rents could go down 25%, values could go down 25%. But I'm still in a 30 year fixed mortgage. I've got a reserve. Okay, cool. It could be vacant for four months and I'm totally fine. Or I could rent it for $500 less and I'd be totally fine.

ERIC: So you want to make when you're making assumptions, just be conservative about it. Um, the other thing is take into consideration HOA fees and property taxes. So I say that because there are a lot of investors that call us because we've got a whole we've got a full blown real estate division where we can help you buy, help you sell, help you. I'm even managing member on different LLCs that buy different investment groups and properties and so forth. Um, and some of them are like, oh, don't buy condos or I don't buy townhouses because the HOA fees are higher. But in the other thing that high HOA fees bring sometimes is very low property taxes. So for example, we just sold a condo in Mesa. It has a $200 a month HOA fee pretty high. But the annual property taxes are less than $300. So it's like, yeah, you'll pay more in HOA, but you'll pay way less property taxes. So take that in consideration. Sometimes it has no HOA or a very low HOA fee, but it's located in a, you know, a zip code where the property taxes are astronomical. So it's like you think it's a good deal because you did no HOA, but really they're going to property taxes or HOA. One thing I will say on that Hoa's, they're always going to go up. So you do have to factor in like, okay, every year or every five years they're going to go up a percentage.

ERIC: So we help you factor all that in as well. And then the other thing I take into consideration that I brought up two minutes ago was Age of the House. Yeah. Um, I have no problem buying older homes and remodeling them, but I'm in the I'm in the industry. I work with my hands. I'm handy myself. I work with contractors all the time, so I don't care. But a lot of people aren't. And the last thing you want is, hey, this needs a gut remodel because it's 40 years old. Um, I always think, like, if Ben, you're asking me to buy, say, Okay, Ben, how long do you want to own this house? If you say you want to own it the rest of your life and you're 35 years old and you want to own it till you're 70, probably don't buy a 40 year old house today, right? You know, because in 40 years it's going to be 80 years old, you know? Yeah, maybe buy something in a newer area that's up and coming that's ten years old. And then in 40 years, it's only 50 years old, you know, and it's more manageable. Um, and so I take age into consideration sometimes that means you will buy for a little bit more and you will get a little bit less cash flow, but you will do less maintenance and you will do less capital improvements and so forth.

BEN: So let me let me ask you to that. Is it worth I see a lot of times people will be pitching a house for sale as like it's tenant occupied, like it's ready to go. It's already got people living there. Is that a plus or a minus in your mind?

ERIC: So it can be it can be a big plus. Don't say a big minus, but it could be a minus for a couple reasons. So I'll go over that. A plus is and this goes to even us right on cue where we have dozens of pocket listings that are tenant occupied that aren't listed for sale. But the owners have kind of raised their hand and said, hey, look, if you have a buyer, you know, contact us and we'll totally sell the tenant. It's tenant occupied. It is a more difficult home to sell because of showings and just bothering the tenant. Like no one really wants to do that. But to your point, we have families, they'll go on Zillow or whatever and it'll say Tenant occupied house, no showings until it's under contract or showings only Saturdays from 8 to 9. Right. And so they'll they are sometimes more difficult to sell. But on the buying side, you could inherit some big pluses. Sometimes you'll get it at a discount because the seller is like, hey, I got to get out of this thing mid lease. Um, oftentimes you'll inherit a tenant that's been there for many years, right? So it's like, Hey, they've been there for three years.

ERIC: They're paying market rate. This is awesome. Day one, I'm collecting rent. Yeah, I don't have to deal with vacancy and fees to remarket it and and lease it out. Um the so I love that like I'm thinking back the last couple personally that I've bought have both been tenant occupied and they've both turned out okay. One of them, they moved out quickly after I bought it and which was fine, they weren't really paying market rate. So a lot of times after you buy it, the tenant realizes like, Man, I've been getting away with an awesome rate. I hope this new owner doesn't bump my rate, you know? But I wouldn't shy away from it. Okay. Uh, it kind of it almost is kind of like the listings that realtors don't like showing, right? Because you have to schedule with tenants. They need a 48 hour notice. Tenants don't want you to be there. I mean, it's it's their home. You know, it's a big.

BEN: Unknown for them.

ERIC: And they're just like, Dude, who's this new owner? What are they going to do? So I would I would just take into consideration some of those things. Um, the. I'm trying to think there really aren't big negatives with that. Yeah. So yeah, I mean, definitely consider it.

BEN: Okay, cool, Cool. So then to wrap up, I want to ask you, what do you think the number one mistake people make when they buy an investment property or when they're looking at investment properties?

ERIC: Well, so the one thing that came to mind is an investment A lot of people will even look at like wholesale or a fix and flip or something. We're more talking about a long term investment that you're going to rent long term unfurnished kind of your standard rental property, right? And so in that the number one mistake I've seen is you're buying. Maybe without an inspection period or without a due diligence period, It's like you still want to have your due diligence and still have your your ability to do inspections and get an appraisal and or whatever the things are that your that are important to you. Um, the other mistake I see people even doing right now in a changing market is they're like, I want to try and time the market and it's like time in the market is impossible, you know, like right now, sure you could say, hey, the market's on its way down, but so you're waiting until it hits rock bottom. Well, you're not going to know it's the bottom until it's in your rearview mirror. And you could have been collecting rent for eight months while you're waiting. Right. So and I'm not saying buy just to buy again. You kind of want to balance it out, right? I'm of the mindset.

ERIC: I'm an opportunist where I'm just like, hey, I'm I'm always willing to buy. It just has to be a good deal, you know? And it's got a pencil. It's got to make sense. It's got to be financially sound. I'll buy in a high market with high interest rates, maybe with a seller that's willing to give you a 10% break on the price. And it's like, okay, prices would have to drop 10%, rents would have to go down with this for this to be a bad investment. And it's like I could be collecting rent in the meantime, tenants going to pay off my mortgage, the tax benefits I'm building my my portfolio. And it's kind of the the mindset. I can't I can't think of it offhand. What do they call that when you're buying stocks and it's going down and your dollar cost averaging is what they call it? I'm not a big stock guy, but in fact, I lose money. Yeah, Robinhood has killed me. But, um, it's your dollar cost averaging, right? You're just like, Hey, I bought high, I bought low and I bought in between. And you're kind of just. Just letting it flow, right?

BEN: If you wait for that perfect magic one that no one's ever found, it's just never going to come. Yeah. That. That investment doesn't exist.

ERIC: It doesn't. And then you catch yourself. Dude, I've got a couple of friends that are just like, Man, I've been telling myself I'm going to buy for ten years waiting from 2010. They missed it. 2012 they missed it. 14, 15 now 20. Now it's 2022 and they're like, Dude, I should have bought man. Yeah, this is silly, you know? And and it's okay. Like, not everybody is made out to be a landlord. Um, the other, the other one you mentioned and then I doubled down on it and I would triple down now is make sure because we see it all the time, don't depend on the rental income to survive. Right? I mean obviously you're not going to set yourself up to have a vacant house for six months. Sure. But if you can't have vacancy for a month or two or if it's going to kill you to get an email from the property manager that you have to evict them or hey, they're late on rent this month like or you.

BEN: Got to replace a AC or something or a.

ERIC: Roof or a, you know, whatever. Obviously none of that's great news, but in the long scheme of things over 20 years, those are just going to be blips on the radar. You know, it's like, oh man, remember 15 years ago we had to replace that roof? Well, the good news is you don't have to do it for 20 more years, you know? Right. And so just make sure that you don't have to live on that. I'd say that's one big mistake. Um, for accidental landlords. That's a hard that's a hard one. They inherit a property or they get transferred out of state to move and now they have to rent their house and they're like, Dude, I did not want to be a landlord. This is crazy. Yeah. And I literally cannot miss rent or else I can't make my payment and then I can't make my own house payment. You know, that's a tough, tough situation. And then I'd say the the last thing that'd be a mistake is having a short term mindset versus long term. And we're kind of insinuating that without saying it. But look at the grand scheme of things. Um, I keep actually a, it's a fun little spreadsheet. I call it my net worth spreadsheet, but I, I calculate the value of my property, the mortgage balance, um, and the current rent every month. And then I'll just look and it's funny because the payment you make, it's like a very small percentage of it is going towards the principal, right? But when you add it up over 12 months, over two years, over three years, you're like, Dude, that tenant paid off $15,000 of my mortgage the last three years. Yeah, that's incredible. Like that $15,000 did not make it in my bank account as far as like profit, you know. Right. But, but it's like, man, it is a long term gain. It's just like a 401. K or like an index fund and it's like it's a long game. Yeah. You know, that you're going to see.

BEN: I think all those that you just listed to relate back to that first thing you said, which is knowing your why. Yeah. You know, knowing why you're getting this property and why you want to do this.

ERIC: More times than not, I find myself kind of talking people out of it if I don't think they're ready. That's right, dude, you might not be ready, but save up a little bit more or Hey, don't just cash out your 401. K and buy a property unless that's what you want. I mean, some people just come guns blazing. Sure. And if they're going to buy, we'd love to help you buy like no question. But we also don't want to force you to be in a spot that's going to be uncomfortable for you as well. This is a it's a long term. Hopefully, if we're helping you buy, it's a long term relationship of we'll help you buy, we'll help you sell, we'll help you 1031 exchange into something else. We'll help you buy your third, your fourth, your fifth, right. Um, and that kind of is a recap. App is just kind of the the overarching message is whether it's us or if you're a property manager, if you have a property management company in another state, talk to them. Oftentimes they're like us and they've got pocket listings. You know, they manage thousands of homes and they have sellers that need to sell and they've got buyers that need to buy, and we can kind of pair you up and and make it work Like we have a full real estate investment team that can help you buy or sell or invest or, you know, whatever you want to do. So, um, it excites me. Honestly. I could talk about it forever. Just I love the math and the numbers and the spreadsheets and the return on investment and the the tax benefits and, you know, all that stuff. But for some people, it's just simple. It's like, Look, man, I just want to buy a rental and I want my property manager to handle it. We can do that too. You don't need to get into the weeds of it if you don't want to.

BEN: Yeah, best case scenario. All right, well, that's it for us this time. Be sure to follow the podcast and leave us a five star review if you can. It really helps out. And we will see you guys next time.