Common Investor Questions (Part 1) | PREI 044
We get asked a lot of great questions from real estate investors and our clients. On this episode I invited one of our Investment Counselors where we both provide answers to some of our most common investor questions.
And if you missed last week’s episode, be sure to listen in to better understand how to predict real estate prices.
Enjoy the show!
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Common Investor Questions (Part 1)
On today’s show, we’re going to do something a little bit different. I’ve never had one of our investment counselors on the show before. This is the first time we’re going to do that. I’m going to bring on one of my investment counselors. His name is Steve. A very sharp, smart individual. He’s helped a lot of our clients to date. We thought we’d do something a little different. I think what I’m going to do going forward is have the occasional frequently asked question podcast episode. What we’ll do is we’ll cover three or four questions on each one of those episodes that we get asked by our clients on a regular basis.
Steve, welcome to the show.
Good to be here. Thanks for having me, Marco.
It’s my pleasure. Steve, tell us a little bit about yourself and just share a little bit of your background with our listeners.
I’m Steve. I love real estate. It’s probably the first thing I think about every morning when I wake up. That might be a bit of a problem. I like it that much. I’ve been in real estate my whole career and involved in a lot of different capacities. A lot of buy and hold on single-family. I’ve even done some assignment deals on raw land. I’ve done a ton of wholesaling. Back then, I used to own a franchise that all we did was wholesale and flip properties. I learned a lot doing that business. It brings a lot of value when I work with Norada clients on what to look for and what to watch out for in a property because I’m good at reading inspections and pointing out what matters, what doesn’t matter and sorting through all the things that happen in a real estate deal. It’s pretty amazing. On a typical turnkey deal, you’ve got ten, eleven, twelve people that all have their hands on that deal. It’s a miracle it turns out as well as it does, as often as it does considering all the moving parts. That’s what we do. I enjoy that, I enjoy making deals and helping people acquire properties. I’ve been in this business literally my whole career in one capacity or another.
You have a lot of experience. I think you’re being a little bit humble because I know you have done a lot more than what you’re talking about and you’ve done a lot of rehabs from a remote distance. You’ve been an active real estate investor in a market that’s not local to you. You’ve been very successful with that. You’ve seen all those moving parts and you’ve seen the good, the bad, the ugly, dealt with bad contractors. I don’t know if you ever lost money on a particular flip, but I think we’ve all experienced that at some point if you’re in the game.
Losing some right now.
I’m sorry to hear that.
It’s not a lot, but sometimes they just don’t go the way you planned. It’s a particular property in Memphis, Tennessee. Probably you’ll lose a little bit of money, a couple thousand dollars, but that’s part of the risk that you take. I’ve heard a lot of people say this and I totally agree with it: Flipping properties and wholesaling properties really is a job. You have a job. I don’t know that you’re necessarily investing when you do that because the outcome depends on your efforts and what you actually do. Whereas a buy and hold, that’s an investment. You put your money in and for the most part let the market do its thing. You do have some involvement there. I’ve been able to get a lot of good experience and a lot of good stories doing that kind of business. I do enjoy it. Now, on the flipping side, the wholesaling side, I just take them as they come. I have a little bit of marketing in play still where I’ll do those deals as they come along. I did learn when I was really aggressive in that, that I didn’t like having that be my career. I didn’t like living and dying by the wholesale. I much would rather prefer to be in the buy and hold space.
That’s why we talk to so many people who want to be a “passive real estate investor” because on the flip side, when you’re an active real estate investor, you’re the one who’s taking on all the risk. You’re the one responsible for the property, the capital, the crew, you take on the risk. Granted there’s potential upside in making a transactional chunk of cash on that flip. Or if you hold it, that chunk of cash ultimately becomes the equity you own. But a lot of people don’t want to be an active real estate investor. Those are the people that we typically talk to on a day after day basis.
I will openly admit, in the last twelve months, through some of the acquisitions and renovations that I’ve been personally involved in, I’ve lost on three of those properties. One of them was only about $200, but one went really, really sideways. I ended up having to write a check to close escrow on that for close to $18,000. That was an absolute big hit on a property, so zero profit, $18,000 loss. But I was fortunate enough to make it up on other deals that came thereafter. That’s the risk people take when they want to do the buy, fix and flip or buy, fix and hold method.
I think you would agree with me Marco, especially after you just wrote a check for $18,000, that none of these flips are at all like the flipping shows on HGTV. It’s so glamorized and the problems are so minimized on those shows. They say, “I thought I was going to only spend $3,000 on tile, and now it’s $5,000” and they dramatize it. They make it like this big thing. They really simplified the numbers and the process. It’s not like that at all. It’s a grind. You’ve got to be very good at holding contractors accountable, holding people’s feet to the fire.
You can’t buy low enough. You just have to buy these things at a very, very steep discount to get profit out of them because really there’s so much unseen that happens and a lot of hidden costs that people don’t think about when it goes into flipping. It’s not as glamorous as you think it is. It can be very fun. I’ll admit, when I get an offer accepted on a house, I get pretty excited. That’s fun. But it’s all the aftermath and all the detail work that I just really didn’t prefer.
The reality TV that you see on TV is not always reality. The reality is when you actually roll up your sleeves and do it yourself and then you realize, “Oh my God, this is a lot of work. Oh my gosh, that’s an expensive rehab and the scope of work is bigger than I thought. Now, it’s taking me two months longer to sell the property. Therefore, I paid so much more interest on the money that I’m using to acquire and renovate the property,” and on and on and on it goes. Or you could just choose the more passive approach and purchase turnkey properties and build your portfolio with the help of a company like ours or maybe another one and do it much more hassle-free and stress-free.
You should do what you’re really good at. Do what you’re good at making money at and then put those profits into
buy and hold real estate. If it so happens to be you’re a really good wholesaler or a really good flipper, then there you go. If you’re really good at being an attorney or a doctor or a marketing director for a company, just make the money, just make it and put it into passive real estate. I think you’ll be really happy.
Steve, let’s get into some of these FAQs that we get from our clients. We literally speak to people every day. We get calls and emails from our website and requests for information and whatnot. Ultimately, we get on the phone whether sooner or later with prospective clients, real estate investors all around the country and even in other countries, from Canada all the way down to Australia. Some of the questions come up on a fairly frequent basis. What we’ve done is we just randomly picked three or four here. The first one I have here is I think fairly common. People will ask, “Will that property that I’m looking to purchase be fully occupied with a tenant and have a property management in place when they close?”
When I hear that question, I need to back out and learn about what the person may be talking about. There’s a lot of information online about these kinds of topics. People use the term turnkey and the problem is they’ll have different definitions of that. The answer is, yes, sometimes. Sometimes, they are fully tenanted. Sometimes, they’re not. That depends on what property you pick, as the client. What market are you interested in? What kind of properties do you want? What kinds of neighborhoods? Some of these properties are in shorter supply than others. When you get a chance to get a property, it might have just barely been acquired by one of our market providers. Maybe it’s not even acquired yet, they just haven’t accepted offer on it. You can see that as the timeline unfolds here, they’re going to be rehabbing the property, then they’re going to be looking for a tenant. Most of the time, Marco, I found that by the time they rehab it and they find a tenant, we’re usually still waiting on the lender. The lender is almost always the bottleneck here in my experience.
Usually, it’s going to have a tenant lease signed prior to your close. If it doesn’t, we try to let you know in advance. If you’re picking a property, we try to let you know, “Look, there is a chance with,” when they’re scheduled to close on this and how detailed the scope of work on the rehab is, that there might not be a tenant in place. Then you, as the client, gets to decide, “I don’t even want to deal with that. Or I’m willing to take that chance.” Because it’s really not that big of a risk at the end of the day. Your downside is, you may end up paying a tenant placement fee, a lease fee. That’s how I answer that question.
My canned response to this, and these are just round numbers, I don’t have actual statistics. I will usually tell people that about 80% of the time, by the time they close escrow, there will be either a tenant in place, living in the property, or there will be a tenant that has secured a lease and maybe has not physically moved into the property because they’re already living at another residence and they have to coordinate their move. But there will be a tenant that has secured that property, signed a lease and they’re just moving in on the first of June or whatever the case is. It’s just the same as having a tenant. They just put a deposit, they’ve signed a lease, they haven’t moved in.
I’d say, loosely speaking, that’s probably true 80% of the time. Then I’ll take that one step further and I will tell investors that if you’re looking at a property that’s under renovation right now, you like the market, you like the neighborhood, you like that property, you like the cashflow, it’s basically what you are looking for because it meets your investment criteria, however, there’s no tenant in place just yet, that’s okay. Let’s just get it under contract so you take it off the market, you have it reserved. When the time comes where it’s ready for you to close escrow on, chances are pretty darn good that you’re going to have a tenant in place or your property management company will have a tenant for that property. Even if that doesn’t happen, usually within one to two to maybe a maximum of three weeks, you’re going to have a tenant in that property or a tenant lease signed. By the way, that’s probably 95% of the situation that I come across.
The only caveat I would throw out there is this: if you’re looking at a lower price property in a low income area that I would probably classify as a C+ neighborhood, maybe a C, which we don’t have a lot of those type of properties, you may see that there is a longer turnover or lease up cycle when it comes to those properties. That’s just been my experience. Yours might be different. Michael’s, Ron’s might be a little different. But that’s typically what I’ll tell an investor just to set their expectations properly right from the beginning. Obviously, we all want the properties leased with tenants in place the day we close. That usually happens, but not necessarily every single time.
That’s true. On those C class type neighborhoods where the rents are cheaper, it’s more of a working class tenant. They have that less expensive lease for a reason, that’s what they can afford. I found that the property managers are a lot more careful. Not that they’re not careful on an A class property. When you’re leasing those, it’s more important to get the right tenant than it is a warm body. They can get you a warm body in two weeks, but you’re also going to be in court evicting that warm body two months later. You don’t want that tenant. It’s important to let the property manager find the right tenant, somebody that didn’t have a history of evictions, somebody that’s got the right debt-to-income ratio, verifiable employment, all that kind of stuff. Somebody who’s like to pay the rent because you just have to be careful on those kinds of tenants.
Marco, you and I, over the next ten days, two weeks, everybody listening to the podcast, we’re all going to have some kind of unaccepted financial event in our lives. Had to go to the doctor, flat tire, car needs repairs, house needs to be fixed, something. We save for that stuff. It’s not going to be a huge deal to us, but to a tenant who’s paying $700 a month in rent, they’re just as susceptible to those things as us, but that’s a much bigger portion of their income. That’s why you will see a higher vacancy rate on that stuff if the property managers aren’t careful about who they lease those properties to.
You need a property manager that’s going to do a proper qualification and screening. We just, in the last few months, fired two of our turnkey property providers. One of the reasons why we had to let them go is because they were outsourcing the lease up to another property manager. They’re only interest was to put a body into the property. They didn’t care much about that tenant’s ability to stay for the long term because they weren’t going to be the property manager managing that property. We just saw over the period of four, five months that these tenants were constantly getting evicted. That’s just not the right way to go about it. We’ve had conversations, we’ve tried to rectify the situation and we’ve given them a second chance, but that just didn’t pan out. Then there were some other reasons why we eventually let them go. I’m just stressing the point of how important it is to get the right tenant in there. It’s more about quality, not so much speed.
Going on to the next one here. Some people ask us, “Are the figures on your website accurate?” We post a lot of information on our website. There’s a very good financial breakdown, the year one numbers and then a projection for the next 30 years. For the most part, all of that is going to be pro forma. It’s going to be what the property should and could and probably will look like at the end of the first year, second year, third year. But you always have to make some assumptions.
Before I go any further on that question, Steve, I’m going to throw it over to you and let you answer that however you answer it on the phone. By the way, for our listeners, we didn’t go over these questions before we started recording this episode. I’m hearing Steve’s answers for the first time. I’ve never heard him on the phone. I don’t know what he says. I’m learning as you are. Steve, I’m throwing it over to you. What do you tell people when they say, “Are your figures correct on your website?”
Investors need to understand you’re buying a house, you’re buying sticks and bricks with a person in there and that person has a life and things change in life. You’re not buying a bond, you’re not buying treasury bills where the return is absolutely guaranteed. That being said, we do our best to give you some figures as to how we think this is going to turn out. Sometimes, when you’re looking at the pro forma or the figures on our website, I get a lot of questions about, “What is the raw cashflow?” You’ll see when you click on a property, it says forecasted rent and then it’ll have management taxes, insurance less. The end figure there is the raw cashflow. Obviously, it doesn’t take into account vacancy, maintenance or mortgage. Those figures, like insurance and taxes, are typically based on a percentage of what the purchase price is.
Our team loads the property on the website and there are various assumptions that calculate those figures. They’re usually pretty close, but sometimes, they could in theory be a little off. One reason is, taxes are calculated not necessarily based on purchase price of a property. That’s based on what the county assessor of the county where the property is located assesses your property at. I think Marco, you’d agree with me that most of the time, the county assessor will assess it for less than the “market value.” That’s usually the case. That is the rate that your taxes are calculated based off of. That’s a different rate in every single county in America. We can get pretty close, but sometimes it varies. One that is a constant snag, when you’re talking to your investment counselors be sure to bring this up. Indianapolis always presents an interesting curve ball here, where we’ve had talks with providers before where they have these taxes that are obviously too low. It’s because they’re looking it up with the county assessor in Marion County, Indiana. You can get your property taxes homesteaded if you’re elderly or handicapped or something like that and they put those property taxes really low. I’m talking a couple hundred bucks a year low is all the taxes are.
A lazy provider could put those up on a pro forma and you’re thinking, “This thing is a grand slam,” but in reality, when you close on that eventually the assessor is going to figure out you’re not homesteaded and they’re going to put those taxes at 2% of assessed value. Be sure to ask us about that. We try to verify accuracy. Just know, because we’re dealing with so many different counties here, one formula of a percentage price might be something to watch out for. Ask us about property management insurance too. That’s going to depend on what kind of insurance policy you pick. Marco’s done a lot of episodes on this, what are the possibilities. Generally, we’re assuming you’re going to do a little bit higher deductible insurance. If your insurance quote comes back way higher than what we’re saying, you got to look at what kind of deductible you have, what kind of policy do you have? Because that’s probably what’s affecting that. Those are some of the things that I would mention as to accurate figures on the website. What do you say to that, Marco?
My response is a little different. Although, it’s not different to what you’re saying, I just approach it a little differently. Basically, what I say is this: We try to make the figures on our website as accurate as possible, but we have to take those figures from the information we’re given. We obviously make the assumption that the information that our providers in each of our markets are giving us are accurate. What we’ll do is we’ll take that property tax and insurance information, the rent and the purchase price. Those are the core numbers. There’s maybe some other things involved. We’ll post and publish that information and assume it’s correct.
More often than not, the insurance is going to be about the same. There’s not a lot of deviation with that. We’ll usually estimate that to be between $50 and $70 per month per door. The property taxes is the one that sometimes we find somewhat off. It could be a typo. Fortunately, what we do is every time an investor says, “I like that property. I’ve done my due diligence. You’ve answered my questions. I looked at the scope of work. I’ve researched the neighborhood. I’ve walked it on Street View, etc.” They say, “I’ll take it.” One of the first things we do is we actually take a snapshot of the numbers of that property, send it back over to the provider and just say, “We have a buyer interested in this property. A, is it still available? B, can you confirm the following the numbers are still correct?” What we want them to check is that the rent is the same because that rent could have been a target rent at the time they gave us the property, but now it’s leased and it could be $25, $50 more than the number they gave us or it could be $25 to $50 less than the original target rent that they gave us. Usually, that number is pretty accurate, but more often than not, it’s going to be very close to what the real number is. If the property is already leased, there is nothing to change.
All we’re doing is confirming that that number is the actual number. If it’s leased at $1,000 a month, we’re confirming that it’s leased at $1,000 a month. That doesn’t change, but that could deviate a little bit. The rent is one thing that we have to confirm and the property taxes is the other thing we confirm. That’s what we do before we’ll put it under contract just to make sure there was no error, misunderstanding, typo when it went into the system. That’s the process that we go through to confirm the accuracy of the figures.
We also have financing figures as to what we think your closing cost and your interest rates and things are going to be. That’s typically based on what we’re seeing most clients get on a conventional financing at that time. You’ve got to make sure. We always refer you to a couple lenders. You could use your own if you want to, if they know how to do investment properties. You’ve got to confirm what your fees are going to look like, what you should reasonably expect.
One thing I see that surprises some investors is that many lenders are going to require full year’s prepayment of
taxes and insurance. That’s going to be a little chunk more out of pocket that you may have been expecting. Make sure that that’s a question that you ask your lender.
We’re giving what most people can get, but then again we don’t know what lender you’re choosing necessarily or what you’ve asked them. That’s something that you need to communicate with your investment counselor on.
Lending is always a variable. The interest rate is going to change. If you decide to go with a fifteen year amortization over 30 year fixed rate mortgage, obviously your debt service will be higher, your cashflow will be lower. That’ll impact what you see in terms of the numbers on our website. All those figures can be changed and updated in real time. When you click the orange button underneath the photo of the property that you’re looking at, you can go in there and change any of the numbers or figures within the blue boxes. That will update everything else on the tables and charts in real time. You could really play around with it. Again, that’s a variable that now you are controlling and you are changing. When you shop your financing around, obviously you’ll get a certain set of terms based on the loan that you want to use to finance your property. Obviously, that’s going to be a constant variable. I don’t know if those two words should every go together, constant and variable.
Probably not, but there they went. They’re together now.
Every once in a while we get asked, “How do you guys get paid?” I have a quick answer to that. I’ll throw it over to you and then I’ll chime in.
It’s pretty easy. You don’t have to worry about Norada ever sending you an invoice, you’re never going to pay us a dime. That’s not how we make our money. Essentially, these local market providers that we use, we have these pretty close relationships with, they will just give us the money that they would’ve given to a local realtor. They’ve already got budgeted in their projects. I know that when I flip properties, I always have to budget for marketing costs. That’s how we get paid.
What I say is more or less the same thing. I just tell them that you’ll never see a bill from us before, during or after the transaction, even though we’re involved before, during and after the transaction with you. Our services are what I’ll refer to as value add. We’re here as your advisor, confidant and counselor. We want to help you make the right decision, but we don’t bill you for that because our compensation comes from the sale side, the seller’s side not the buyer’s side. It’s much like a traditional real estate transaction or relationship where you have a broker in the middle, a buyer on one end of the transaction, a seller on the other. The seller, almost always, is the one putting up the commission or the fees to compensate the seller’s agent and the buyer’s agent. This is very similar to that. That’s why you as a buyer, our client, our investor, will never pay a fee. That’s the long and the short of that one.
Sometimes we get asked, “What is your role after the close?” This is a very, very good question because I can tell you from just hearing stories from past and current clients that have dealt with other companies, often the relationship with other companies, they sometimes feel like they’re being thrown over or kicked over the fence. They’re still involved, but they’re more engaged with the local provider than they are with the real estate agent or the turnkey provider or the turnkey company that they’re working with. That’s before the close. After the close, it seems like most companies, at least this is what I hear and it doesn’t surprise me, but they disappear. They’re more or less done with you, done with the transaction, there’s nothing else that they really need to do so the communication dies off and that’s about it.
Our role after the close is that we will stay in touch with you as our client, our investor. We’ll follow up, we’ll actually request a survey from you so you could rate us and the lender and the provider and other parties involved in the transaction because we keep dibs on all our providers. We also want you to realize that there’s an open door, you can call us or email us anytime you have any question. If you have any issue, definitely let us know because we want to know what’s going on. This is how we keep a finger on the pulse of what’s going on out there.
If you have slow communication with your property manager or a breakdown in communication or there’s some other issue going on or whatever it is, you can contact us anytime. We’re here to just make sure that the transaction continues to run smooth. If we have to step in and call up the property manager or any other party that’s been involved to say, “What’s going? Did you forget to send the copy of the lease over to the client?” Whatever it may be. It’s hard to make some stuff up because this doesn’t happen too often. I’m stretching to give examples. The door is open, you can call, email us, whatever, anytime. We’re always here to help you. Steve, what do you say to that?
My answer is usually very blatantly transparent. I would tell clients that, “Look, it’s in our best interest for you to have a good experience here. We’re going to work for you to have that. Because if you have a good experience, you’re going to come back to us for more properties and we make more money.” That’s why it’s blatantly transparent. We want you to. We want you to cashflow because that’s good for everybody. We will be involved, like you said, Marco,
before, during and after the transaction as much as you want us or need us to be. For some people, they don’t reach out to me much. Other people, I’m talking to a lot. I’ve never had to file a restraining order yet, don’t worry about it. Feel free to get in touch with us because it’s okay.
I think that the less we talk about your property after the close, the better. It’s not that we don’t want to talk to you, it just means everything is going according to plan. In an ideal world, you’re just cashing the checks and that’s all there is. Remember, like I said, these are sticks and bricks with people living in them. Eventually, the property manager is going to send you a question or sends you a bill or something and you’re going to need somebody that knows what they’re talking about to discuss with this. A lot of times, we can jump in, we can help clarify things.
Along the lines of what you said, Marco, it doesn’t happen a lot. Most of the time, these things go pretty well, they go the way people expect them to. But if you ran into a snag, we’re here. We want to help you. We want you to be a successful investor. We’re happy to help.
We’ve covered four questions today. That’s I think a good start. We’ll do another episode like this in a few weeks and talk about some more frequently asked questions. Any last comments, Steve, that you want to say?
Feel free to use us. There are no dumb questions. We get a lot of the same questions over and over again, that’s fine. Ask us whatever you want to. We know that you’re not in this world every day like we are, so some things that we might take for granted or might seem obvious to us are just totally new to you as a client. Don’t be shy, ask us anything you want to. We will give you the best answer that we can. If there isn’t an answer, we’ll tell you, or if we don’t know it, we’ll find it. That’s what we’re here to do, is to streamline this process for you.
Steve, I appreciate your time. Let me just quickly say to our listeners, if you haven’t downloaded The Ultimate Guide to Passive Real Estate Investing, be sure to do that. It’s a free download on our website. Just go to NoradaRealEstate.com, download that report. Steve, I appreciate your time today. We’ll have you back on in another month or so and we’ll pick it up where we left off.
Sounds good. Take care.
Steve, thank you.
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