When you’re new to a particular industry, it’s always nice to have a little voice in your ear telling you what you have to do in order to be successful. In the field of investment, there are investment counselors that give new investors a better idea of the path they have to take. Melissa Nash, an investment counselor at Norada, answers some of the most common questions about working with an investment counselor as well as investment in general. Investment can be a tough, complicated business, but with an investment counselor by your side, you might just find the strength to go about it confidently. Looking to get your start in the industry? This might just be your shot at it!
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Common Questions Answered With Investment Counselor, Melissa Nash
This is the second episode where I have one of our investment counselors on to talk about some common questions, concerns, fears that our clients have. Even not our clients, even people who are thinking about investing in turnkey real estate or just barking on their own journey to become a real estate investor with their own team, in their own markets, doing whatever they want. We want to share some common questions, fears and concerns that investors have, as well as questions around how to work with us, how to best work with us? What do you need to know? How much cash do I need? I recorded an episode before this with one of our other investment counselors. It was a great conversation. I was left with a bunch of questions that I wanted to bring up and discuss that never got answered because we were going along. I’m going to maybe pick up from that last episode conversation as well as maybe as some of the common questions that I’ve already asked in the previous episode to flesh it out and get some other people’s perspectives. With me is one of our investment counselors. It’s Melissa. Melissa, welcome to the show.
Thank you, Marco. I’m excited to be here with you.
It’s great to have you on. It’s been a long time since I did an episode with one of our team members. I’m planning to do at least three, if not more. One each with a different investment counselor of our six. I want to start by asking you, how would you describe your role as an investment counselor and your role with our investor clients here at Norada?
I would say that my role is to have a system in place where I like to talk to my potential investor clients first about them and their goals. What are they looking to do? Maybe it’s short-term, maybe it’s long-term, maybe they want to invest for retirement. Maybe they want to invest for their children’s college costs or a number of things. I like to start with that first because that’s going to help us know where to take direction and how to take direction. My role is number one, helping them think about their goals. Number two is taking action. That’s how I view my biggest strengths. How do they take action? We do a lot of things here. We’re going to counsel them on the strategies and the different markets. We’re in a lot of different markets and it can get very confusing out there. You listen to a lot of people and people are listening to other podcasts, other forums or their friends and they’re saying, “You should invest in this market because I am.” They’ll hear somebody else saying, “I’m going over here because someone told me to go over here.” There’s a lot of noise. There’s a lot of confusion, especially for somebody new who is investing out of state and another market.
What I like to do is to simplify it. Let’s break it down, cut out that noise. Let’s talk about them and their strategy. What is it they’re looking to do? What aligns with their goals? Let’s talk about the markets individually and what those markets are doing. Let’s place the markets that align with that person directly. I like to work with them a little bit backward. We’re doing a lot of strategies. Our systems are in a place where we literally help them do it all from the basics strategy to the end closing. I like to keep investors on that path. They’re setting the goals for themselves. We’re strategizing with them every step that they need from the lenders through identifying a property, how to read the pro forma, what the numbers mean. I’m here with them working on that.
Once they identify a property and they want to put it under contract, I’m still here with them. I’m holding their hand, we’re ordering inspection reports, we’re reviewing the inspection reports. Their lenders are in place getting the appraisals. Finally, in the end, when they’re getting close to closing and they’re getting ready to set up their accounts with their property manager, there are more questions there. My philosophy is I’m here to help them succeed using not only my experience but also everybody on our team’s experience and knowledge. I’m more of, “Let’s keep you on that straight line. Let’s do it. Let’s get you going.”
That was great, Melissa. That was an excellent overview. I’m not even sure if there’s anything I can add to that, but the comment I want to make is that the takeaway of everything you said is that we are figuratively holding your hand through the whole process. We’re there as your primary point of contact. It’s not that we “throw you over the fence” and hand you off to a lender or one of our builders or one of our property providers or anyone else for that matter. We’re going to introduce you to them. You’re going to have conversations with some of these people because you’re going to need to talk to your lender or to a couple of lenders. You’re going to need to talk to the property manager at some point in time.
You’re going to need to have a conversation, possibly with our team, our boots on the ground, be at that builder or property provide, but never at any point are we essentially handing you off or relinquishing you to someone else. We are always going to be your primary point of contact. We’re always going to be helping you go through this journey with each and every property that you’re purchasing and adding to your portfolio. We want to be in that position. We want to be that counselor, that guide, that unbiased adviser to help you essentially be successful with each and every transaction as you build your portfolio and work towards whatever your investment goals or your life goals are. That’s the way I look at it from a distance is that we’re there to be that point of contact before, during and more importantly, after. Sometimes we get asked the question, “You’re going to work with me in the beginning. After the transaction closes, are you still there? Do I need to work with you anymore or are you going to be there for me?” The answer to that is yes, we’re going to still be here for you because you’re going to have questions after the fact. Last but not least, we don’t expect you to invest in one property and go away. We expect investors to build their portfolio, be that 5, 15 or 50 properties.
In fact, I say that to my clients sometimes, we are working together as a team. I look at myself as their wingman and we have to communicate. Communication goes both ways. I’m here as much as you need me or as little as you need me. Sometimes we have a more experienced investor that doesn’t need as much handholding and that’s fine. I let them know, “If there’s anything you need, I’m here. You reach out to me throughout the closing or after.” We have some newer investors that want a little bit more hand-holding and a little bit more explaining. I got an email from an investor who has a property under contract. It’s a simple, quick question. It worked out that it happened to be by email. I’m literally here. I don’t think I’ve ever heard an investor call me and say, “Melissa, I’m only going to buy one property. That’s it.”
Everybody has goals to buy multiple properties and build a portfolio. I definitely like to be involved after closing because I love hearing when someone says, “My properties are doing great. Let’s talk next quarter for my next one.” Even if somebody called me with a question like, “This happened. Do you think that’s normal? Do you think I should expect this?” I love helping with that because that information is valuable for me when they do call me next quarter and say, “I’m ready for property number two.” It’s nice to have been able to communicate between that so that if we know we’re going to re-strategize for the next one or maybe we want to stay in and buy another one in that exact same strategy. I love that open, continuous communication. That’s important.
Melissa, I’ve decided to ask you some of the common questions that we get that I did not ask Oliver in the previous episode, which is similar to this. I figured that if we can cover a set of questions with Oliver and a different set of questions with you, there’s little overlap. Whoever’s reading this episode can go back and read to the one with Oliver and vice versa. They’ll have complementary, but different answers to some common questions. The first question I’m going to throw out there that you can answer and we can both comment on is, how long does the process take? I know that seems a very generic or simple question, but I know people wonder about this. In fact, I was asked this question from an investor who’s becoming a client. They asked, “How long does this take?” Some people don’t know how long the process takes. What would you tell them?
I get this question a lot too, Marco. There are two ways I can answer it. First of all, if I talk to somebody and they say, “Melissa, my goal is to buy a property at the end of this quarter.” Maybe they want to take advantage of some of those tax benefits before 2020. In that regard, if we put a property under contract and that property is completely done and it’s finished, it’s ready and we can get in there. Your lender’s going to order the appraisals. We can get inspections done. All that good stuff is about 40 days on average. If we look at it a little bit different, if a new investor called me and said, “I’m thinking about doing this, maybe I’m not ready to buy until quarter one. In January, we’re going to talk.” The first thing I do is I encourage them to start talking to lenders now because even though they might not be ready to buy with their funds in hand in January, it’s a great idea to start the process to make sure that everything is going to be clear and okay with the lenders.
Lenders can typically get an investor or a potential investor approved fairly quickly in a week. If you’re a little bit more complicated, you’ve got to upload a lot more documents and you don’t have a straight W2, they might need a little bit more time. On average, if you have a simple W2, it is under a week to get that prequalification. That’s usually the first stage, making sure that your finances are in order, you’re pre-approved, we’re ready to go. If we got a week on that timeline, then from there we’re going to start looking at properties and identifying properties depending on how quickly we find you the property that you want. That’s the unknown. Literally, I could find somebody a property now. We have a great inventory. We’ve got inventory in a lot of different markets, a lot of different strategies, a lot of different price points. I’m confident that the inventory we have is all good. If somebody sent me a prequalification or preapproval letter now, theoretically we could find them a property tomorrow and put it under contract. We’re looking at about, on average, a 40-day closing.
To paraphrase what you have said, if someone is coming to us and they’re preapproved, even if we’ve been talking to them for a few months. At the point that they are preapproved for financing, they’re ready to pull the trigger on a contract, on a property that they have shortlisted and have identified as being the one, then essentially put it under contract. You’ve already got your financing approved. You’re looking at 40 days, plus or minus, to go through the process of the appraisal, the inspection, the review. Finish working with your lender, mortgage broker and essentially goes into a clear to close with the lender so that you can sign your closing docs and you can take title.
Sometimes it’s 30 days, but let’s go with 40 days. That’s pretty average.
Let me say this, a lot of lenders and mortgage brokers are very optimistic when you talk to them. A lot of the guys we work with will tell you closer to 45 days. They’re being realistic with you. If you’re talking to a lot of the banks, institutions and mortgage brokers out there, they’re going to be aggressive in an effort to “buy your business.” They might tell you, “We can do this in 30 days or less.” That may be true but always bank on it being closer to 40 to 45 days. If it’s less, fantastic. If it takes, longer, you have to expect that it does happen from time to time, but 30 days is aggressive.
I’ll even add a little bit more to that, Marco. Depending on your lender is going to affect that timeline. I’m assuming that this investor that has the preapproval is working with one of our recommended lenders, who we know we do loans with all the time. We know they can do them quickly and efficiently 40 days with them. If they brought on some unknown lender that we’re not familiar with or it’s a larger bank, it can be a lot longer.
This is a very generic question. I think I got this from you and that is, how specific or detailed should an investor be? Let me clarify that a little bit. I think what your intention was with this question is simply that some people are very analytical. They methodically comb through everything and it slows them down and slows the process down. I also read this question as being something of, how involved and detailed should I be? How deep do I need to go in each phase or step of the process? I’ll throw it out to you as a very open and generic question.
We absolutely want our investors to be educated. This show is a great place for education. There are a lot of places to learn about real estate investing. We’re here to help with that. With that being said, I think analysis paralysis is what we call it around here. It’s very easy to get stuck in that. At the end of the day, there are a couple of variables in real estate that you can’t control. The biggest one is the tenant. We know that you can do everything possible. You can find the perfect property, the perfect location. The numbers are perfect. The property manager’s awesome. Everything is great and then you get a tenant and life happens. You can’t guarantee that you’re not going to have a vacancy. We know that you will. We want you to be prepared for those. That’s why we recommend putting assumption money aside every month or having an account to cover those things. Yes, it’s important to look at the data. It’s important to know how to read the pro forma, but we have every tool that you’ll need. I ask my investors to ask me where they need help. Ask me where they’re struggling.
It’s not rocket science. The numbers are the numbers. You can look at a pro forma and we can verify the rents in the area. There are a lot of great websites to verify rents. The property managers themselves verify rents. You shouldn’t need to spend a lot of time on that. The taxes are the taxes. We can look at the counties and look at the rates that they are and verify the number. There are so many easy ways to quickly look at a pro forma and you can verify the numbers. Other than that, you either like the numbers or you don’t. It goes back to, “What are your goals? Let’s find the property that aligns with your goals and then let’s do it. I will show you the properties. Here are the numbers.” There isn’t too much, the need for you to dive into the deep to analytics because you get stuck where you never take action. You never do and then you never grow that portfolio like you were going to. We do say, “Lean on us from our experience and we’ve been around these markets for a long time.” I probably dream of looking at inspection reports and pro forma because that’s all I see all day long. I love crunching the numbers too. I love a good spreadsheet, but at the end of the day, verify the information and then let’s do it.
That’s all good information. I certainly agree with you. You made me think of three things. First, we are in the process of migrating and launching a brand-new website that will replace our existing website that’s been around for a good number of years. The reason I bring that up is because although there are lots of properties that are posted on the website and that could literally be 100 or more, the reality is that at any given time, we probably know of it and have access to somewhere between 100 to 200 almost ready to go turnkey rental properties across twenty or so markets in the US. The point of me bringing that up is that a lot of the properties are not on the website and will never see the light of day. They’ll never make it to the website because when you’re working with Melissa or whoever your investment counselor is, they already know what your investment criteria are. They can identify and pull out the property that meets that criteria. They’ll present that to you. It may never hit the website.
It will go under contract with you or someone else before it even goes on to the website. That doesn’t mean that the properties on the website are not good quality properties or not good investments. They are. It’s certain investors working with our counselors will have a specific request or specific criteria that when we know it’s coming down the pipe, we can essentially let you know about it in advance. It may not be fully ready or renovated, it’s a turnkey rental yet because it’s in the process of being renovated. At least, you’ll know about it in advance. You could put it under contract f it’s something that meets your criteria and you’re good with it. That was the first point.
The second point is that you were talking about the numbers in a pro forma or on a spreadsheet or in our case, on the website. It’s pretty easy to be accurate with expenses because you know what they are. They’re verifiable, whether it be HOA fee, utility, property taxes or insurance. That stuff is pretty tangible. It’s not hard to screw that up, but where I see deviation and fluctuation is with market rents. We may post on the website the rent, whatever the lease amount will be for that property. If it’s already leased, it’s a given fact. If it’s $1,200 a month, it’s $1,200 a month. For a lot of properties that go under contract while the renovation is being done, we know from the property manager and/or through a couple of different websites what market rents are in that area because there are rent comparables. Whatever that number is, if the target rent is $1,200, the target rent is $1,200.
It could end up renting or being leased for $1,150 or $1,100 but on the flip side, it could also go for more. I’ve seen this happen many times where we anticipate or expect $1,200 to be the monthly rent. What ends up happening is we see it going under contract or lease for $1,250 or $1,300. Keep that in mind that when it comes to market rent, we may not be able to nail it down specifically until it’s leased, it’s not leased and we don’t know exactly what that is. That’s not a function of what we do or what you do as a client. It’s coming down to what is going on in that local market and what can the property manager lease it for to a qualified and screened tenant. I’m being long-winded, but those were my comments about everything you said about being specific or detailed in the process. Do you have anything to add to that, Melissa? Otherwise, I’m going to move on.
Our website, especially the one that I’m excited about that is coming up, there’s going to be a little bit more data involved for the investor who wants to get a little bit more analytical. Things to look at that are important are rental increases. What would have been the rental increases in the area? I like to look at that because we’re looking at the numbers for a property, but what about in 2020? Maybe the property manager rented the property for $1,150, but the market went up pretty well with rental increases. Everybody’s raising them, maybe 4% to 5%. In 2020, if that tenant doesn’t decide to renew, then your property manager can raise the rents a little bit more.
That’s an interesting number to look at. That data is going to be available on our website, which I’m excited about. Even without the website, we have access to that type of information. Anything that an investor needs, we can get answers for you. At some point, I do want you to take action because if you set goals for yourself, I want to help you hit those. I definitely want to make sure that I’m also saving time for you and not sharing properties with you that don’t align or don’t fit. Why would you waste an hour of your day analyzing a property that you’re never going to intend to buy because it doesn’t align with your goals anyway? That’s why it’s important to work with us as investment counselors to help you identify the strategies and the goals that are the bottom line of what you want to do. We’re going to share with you the properties that fit that so we’re not wasting your time and you can take action sooner.
A key takeaway from everything we talked about is that don’t get trapped in analysis paralysis. Don’t be your own worst enemy and get in front of yourself and get in your own way. Some people get caught up thinking they don’t know enough or that they need to figure out everything that they’re not possibly asking or looking at or maybe something that they’ve overlooked and they don’t even know it. They freeze. They get in their way. They don’t continue to go to the next step, whatever that next step is. Let us hold your hand and walk you through this process and make sure that you don’t step on landmines. Ask the right questions and look at the things or materials that are important. That way you can continue to take steps, whether that’s baby steps, crawling or walking. Unless you’re moving forward, you’re not moving forward. Don’t get stuck in analysis paralysis. I think a lot of us do that.
One more thing that I would add about that. I spoke to an investor. We were covering the different markets and what’s going on in the markets, the price points, some of the strategies. Some of our markets have more cashflow than others. Some have a little bit more growth and appreciation potential than others. As we were going through it all, he said, “You just told me in about twenty minutes the things that I’ve been researching for the last four months. I came to the same conclusions that you’re telling me right now.” One thing that I took from that as well is, I wish that he would have called me, Norada or called somebody and spoke with us a little bit earlier. We could have saved him a lot of time on the research too. He finally went through his analysis paralysis and got through it all went, “I’m ready to call and talk to somebody. I guess at the end of the day, you solidified everything that I already had learned this whole time.” I definitely encourage people to reach out to us sooner than later. Maybe we can help you get through some of that data and make your life a little bit easier and save some time.
What I’m about to ask you is going to sound like it’s coming out of left field to some degree. People might be thinking, “Why would you ask a negative question?” It’s probably a question that people ask themselves subconsciously and that is, what should we expect to go wrong in a real estate transaction?
Do you mean during the closing transaction process or after closing?
That’s a good question because it could be either one. It could be both. Why don’t we hit one or two before closing, during the due diligence selection and closing process and then we’ll hit maybe one or two after that?
I will say first and foremost, property sells very fast with Norada. I like to set up expectations where we’re analyzing properties. Once you’re getting through that process, understanding the numbers and you feel good about it. If you see a property you like, let’s jump on it. Let’s put it under contract because if you don’t, somebody else is going to have it up and then you’re going to be disappointed because you lost that property. Not to fear though because we have more properties behind it. We always have good properties. I’ve had a few investors that had been disappointed that they didn’t jump on something quick enough and then a couple more properties come by and they finally found a good property.
Once the property is under contract, we have a couple of things in place. The first one is we want to make sure we have a contingency for inspections and a contingency for appraisals. What that means is for any reason during the process you don’t like what you see on an inspection report, you can cancel the contract and walk away from the property. It is the same with the appraisal. If there’s an appraisal problem, let’s say the property for whatever reason doesn’t appraise, you always have that out to cancel. We don’t see that happening a lot, quite honestly. The first stage is we’ve got a time window, a due diligence phase to get your inspections done. During that process, we’re going to help you line up an inspector to go through the property. His job is to find everything wrong with it.
When you have a property that was newly renovated, this is very vital to get this done because things can get missed. We want to make sure that you’re buying a good property and there aren’t any major issues. I would say that would be an area where things could go wrong or could go right. Let’s say you’ve got the inspection report back and for some reason, he uncovered something that nobody saw or nobody caught previously. That’s upsetting. At the end of the day, you can walk away from the contract and you cancel it or what most likely is going to happen and what we recommend is allowing us to go back to our local team and let them review that item and give that contractor an opportunity to fix that item.
If you’re going to request that item to be fixed, most likely, the next buyer is going to request that item to be fixed. We want to make sure that they’re taking care of it if it’s a serious issue. We’re going to request a list of items that should be fixed or taken care of and then we’re going to make sure that those are done before closing. When you say what could go wrong, it can delay the closing a little bit because we want to make sure that, “We’ve got to get the contractors back out there. They’ve got to fix those items. We’ve got to verify that they’re fixed.” We don’t want you to close until they’re fixed. Sometimes, there are certain circumstances. If you have a tight deadline for a 1031 where we might have to close on it as fast as possible but for the most part, we want those items fixed and taken care of before closing. That could be possibly one hiccup.
The other one is the appraisal. Your lender is ordering an appraisal on your behalf. Trust me, we’ve seen it where sometime there are appraisers out there that can be lazy and don’t pull all the comps. In that regard, what we do is we’ll question the appraiser and especially we’ll say, “It looks like you missed a couple of comps right down the street.” We’ve had that before. The appraiser will choose to decide if he’s going to include that comp or not. We will definitely work with you on that. They don’t happen often. It’s very rare. When they do, we’re here with you. The worst-case scenario actually ends up benefiting the investor. That’s where we go back to our provider and we’re saying, “The appraiser isn’t going to budge on this. Let’s negotiate on the price.” They’ll drop the value of the price sometimes. The investor ends up getting a better deal at the end. I was telling people, “Don’t be afraid. If you get that low appraisal on, it doesn’t necessarily mean it’s a bad thing. It might benefit you.” That’s something you can look at if that were to happen.
As we go further in the closing process, everything else has been taken care of for you. You’ve got a title company, making sure that there are no title issues on the property and it’s clear. If there is a title issue on the property, they’re not going to let you close that. Your lender is putting up 80% of this loan. You’re only putting up 20%. The lender is going to make sure that they’re protecting that asset. That’s why the they’re picky about the appraisal and also making sure you have a free and clear title. Other than that, I think those are the only issues during the closing process that could potentially come up. Your property manager takes over at closing and it’s a very seamless transition.
The one comment I would add is regarding appraisals. The thing with appraisals is it’s definitely a science. There’s a methodology for doing an appraisal, but there’s also a portion of it that is art. It’s part science, part art and because of that, we will see appraisals sometimes come in at the purchase price. Sometimes they come in a little lower and sometimes, surprisingly or not, they come in a little higher. That’s obviously to the benefit of the investor. If you’re looking at it from what is the market value, keep in mind that you can get ten appraisals done by ten different appraisers at the same time. Odds are that they will not all be exactly the same. Some of them will be spot on to whatever the purchase price was. Some of them will be a little higher. Some of them will be a little lower. You have to keep that in mind that it’s not an exact science.
If it’s a little bit lower, we’ll definitely have a conversation between you and the builder or the property provider and see where there’s a meeting of the minds. Interestingly enough, if the appraisal comes in higher, the price has never changed. Nobody’s going to come back to you and say, “It appraised for more than we thought it would. We should raise the price after you have it under contract.” That’s not going to happen. Go in and understand that it could be a little higher, it could be a little lower or it could be spot on. There’s going to be a margin of error or a margin of deviation. That’s an expectation that everybody should have to go in. That way there’s no real or perceived surprises after the fact.
I like how you said that expectations because that’s one of the things that comes up a lot with new investors. We want to be real and very transparent about real estate transactions. There’s no point in fluffing things up. It’s very frustrating sometimes because there’s a lot of misinformation about investing in real estate. Some people sell it like, “This is the best thing since sliced bread. You’re never going to have a vacancy. You’re always going to have a tenant. You’re going to have all this cashflow. Life is great and everything is perfect. This is the best thing.” Literally, it’s passive that you can take a nap and wake up twenty years later and you can retire off this income.
There’s that vibe out there and I like to be very transparent and real and say, “This is a real transaction. This is a business transaction. This income on this property should be looked at like that.” Let’s talk about the realities of what can come up because we have a solution. We have the experience. We have the people that we work with that have been through this. Even from our lenders, some of these lenders that most of our investors use are great. I don’t even know how many transactions a year they do. I don’t think there’s a situation they have not seen, especially with appraisers. They work with a lot of appraisers and they’ll see really quick if that appraiser is missing something or did a poor job. They will take it on and go directly to that appraiser’s desk and say, “There’s a problem here.” They’re very experienced and they’ll definitely work with us to resolve any issues.
Let’s ask the second half of this question and I have a final question to ask you, which I think is good for everybody to know. I asked the question, what could go wrong before and after the purchase? We talked about that before. Let’s throw one or two things in the ring here as far as what could go wrong after the transaction closes after the investment is made.
My thoughts on that is one of the variables that we can’t control is the tenant. Life happens and we’ve seen a number of circumstances where you do everything right. The property manager has vetted out of the tenant. They’ve got the income. Everything checks out on paper. They’ve got a great job. Something happens and the tenant is gone six months early of their lease. We can’t control that, but we can be prepared for it. Let’s be real about that. You will have a vacancy at some time when you own that property. You will have a maintenance call at some time at that property. We don’t know when. We don’t know how much it’s going to be or how long it’s going to be, but let’s be prepared for it. Let’s not be shocked and surprised when you do have a vacancy or a tenant who’s paying late. You’ve got a renter in there and they might pay you late, one or two times. You have to expect it. You can’t be shocked when it happens. That’s being transparent and being real.
We’ve got to look long-term. You might have had a vacancy on your property for a couple of months. There are many more benefits. The benefits are so long-term and you’re looking very short-sighted. If it’s upsetting to you that you can’t sleep at night because you had a tenant move out early. Maybe you shouldn’t be an investor if it’s keeping you up at night because something like that happens. Let’s be honest about it. You’re going to have a vacancy at some point and you’re going to have a maintenance call at some point, but we’re going to be prepared for it because we know it’s going to come at some point and we’re going to have funds set aside to cover those types of things.
Everybody does that a little bit different. Some people will put specific amounts of money aside each month from the rental income and put it in a separate account. Everybody does their accounting a little bit different. It doesn’t matter. As long as you have the expectation that it’s coming and you’ve got funds set aside to cover it, I don’t see any other major issues after closing. Another expectation of something that might come up is you don’t get along with your property manager. We feel like our property managers are really good. We have some awesome vetted teams in place. Maybe you don’t jive with everybody. That’s okay. There are other property managers that we can recommend to you in the area. Other than that, I think that’s about it.
I like to categorize it in two very basic ways. The things or problems or benefits, whatever you want to call it, they fall into two categories. It’s either people or the property. It’s the two-piece. You’re going to have people problems from time to time, whether it be occasionally with a property manager, but more often than the property manager, with the tenant because people tend to move. They might be moving up or down, in and out of a market. They may have a job transfer, job loss. There might be a family issue. Things happen. When you’re dealing with people for example, your tenants, who are your customers, you’re going to have move-ins and move-outs. You’re going to have tenant issues that come up.
Fortunately, they don’t happen very often. The reality is it’s not a question of if it’s going to happen. It’s a question of when. You have to prepare for that and budget for that. That’s why we budget in our pro forma and our calculations of vacancy allowance because we are preparing ourselves for the fact that it will happen at some point in time. We don’t know when. It can happen once a year. It could happen once every five years. I know of tenants that have stayed for five-plus years, they don’t want to move. They love where they live, but things do come up with people. That’s the first category.
The second category is the property. We’re going to have issues with a property. Faucets will eventually start to leak. Toilets might start to leak. A dishwasher may stop working or a fridge. It’s an appliance. It’s going to last 7 to 10 years, maybe more. Ultimately, these things are going to need to be fixed or replaced. It’s the same thing with the HVAC system or the hot water tank, which may last 15 to 20 years, depending on what you have. You’re prepared for that. It’s not a surprise. It’s an expectation. You’re going to have a people problem. You’re going to have a property problem. That’s why you have insurance.
You insure your property for the big events, the big catastrophes, the things that are major events, but you also budget for things that are going to happen that can be a maintenance or repair expense or long-term capital expenditure, such as the hot water tank or HVAC system or whatever it may be. You know it’s going to happen. It’s a question of when, not if and you budget for it. These things are expected. They shouldn’t take you by surprise. They’re going to come at some point. You hope for the best and prepare for the worst. That’s the way I look at it in terms of what could go wrong after the purchase. It’s a people or property problem but you’re prepared for it, you know it’s going to happen. My last question is what should investors do before they contact us here at Norada?
It’s a great idea to spend some time on our website, especially with the website coming up that I’m excited about. There are going to be more for investors to look at. We have a great tool there. I don’t know if it’s going to be labeled the same. It’s called Analyze This, it’s an orange button. Spend some time on that tool. You’re going to learn more using that tool. The more you use it, the more comfortable you get with it. You can go on there, you can pick a random market and pull up that tool. There are features in there that you can change the numbers around. I don’t recommend changing around too much because what we have in there is pretty good. If for some reasons you want to mess around and say, “Instead of 20%, what would it look like if I put 30% down? What would it look like if my interest rate change?” You can change those things. You can mess around with what Marco said, the assumption numbers, vacancy maintenance. Mess around with those. Get familiar with it because that data is going to spit out and is going to show you some cool numbers. The one we have is you can verify. It’ll give you projections for the next 20 to 30 years on there if the property rents go up, 2% a year or this is what it’s going to look like and your equity’s going down.
It’s exciting to see because that’s where the power of real estate. It is exciting for me with my own portfolio because I’m also an investor. I want to see not only what the property is going to do, but what is the property going to look like in twenty years when am looking to retire? It’s very exciting and very motivating to look at those numbers and see what the potentials are. Spend some time messing around with those numbers, checking out the markets, getting familiar with what’s there. When we finally get to connect, we can narrow down your strategy and fit the markets to what you’re looking to do. It will all make more sense when we get into sending you the properties and the pro forma and you’re looking at them, you’ll already be familiar because you’ve been reviewing them for a little while. You don’t have to know everything. Don’t get stuck in that analysis paralysis and feel like you have to know everything before you call us. In fact, I created a quick cheat sheet on how to read the pro forma numbers. What is the cap rate? It’s a quick thing. I’m more than happy to send that to anybody or we can discuss it on the phone. You don’t need to be an expert or super knowledgeable, but be aware of what the markets we’re in and then mess around with that analysis tool. I think that’s a great start.
Knowledge is great and people should continually educate themselves and learn as much as they can, but you don’t need to be an expert. Continue to build on your knowledge base and experience is going to be one of your best teachers. Have the right team, build the right team or work with the right team to help you achieve whatever level of success you want. As you grow, you’re going to continue to learn and become a better, smarter investor. Let us help you as best as we can, but regardless of what you do, educate yourself and take action. Unless you take action, you’re not going to get anywhere. It’s all about execution. Melissa, thank you for your time. Thanks for coming on.
Thank you for having me. This is fun. We’ll have to do it more often.
We’re going to make this a regular feature by bringing on investment counselors at different times. Everybody, download the free report on our website, The Ultimate Guide to Passive Real Estate Investing. If you haven’t had a free strategy session, get on our website, fill out the form. We’ll connect you to Melissa or one of our investment counselors. You can have that initial conversation to map out where you are and where you want to get to. Let’s turn that into a plan of action so you can execute on that and get your portfolio growing.
If you have any questions about real estate investing, just go to one of our websites. You can go to the PassiveRealEstateInvesting.com website and click Ask Marco! and I’d be happy to answer those questions that we didn’t cover on the show. Remember to subscribe. If you haven’t clicked that little purple button on iTunes, help us spread the word. Visit us on iTunes and leave us a rating. If you have the time, we would love a review. We do read them. In fact, I read every single one of them. Thank you for being a reader. We will see you all on our next episode.
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