Cash Flow vs. Appreciation Markets: Which We’d Choose (Rookie Reply)

Ashley:
How do you pick the right market as a new investor? Today we’re answering questions just like this to help all of our rookie investors make sense of real estate investingFrom making sure your contractors aren’t overcharging to knowing how to price your property. This episode could be exactly what you need to help you make your next.This is the Real Estate Rookie podcast. I am Ashley Kehr.And I’m Tony j Robinson. And with that, let’s get into today’s first question. So our first question today comes from Oscar and Oscar says, is it unusual to ask your property management company to get multiple bids for repair work? I’ve always found that contractor pricing can vary significantly, and getting a few estimates helps me make a more informed decision. In this case, I’m getting some pushback from my management company after requesting a second bid on repairs. Just curious, how do others handle this? Is it standard to expect multiple bids or am I a crazy out of state investor who has no idea what he’s doing, which also may be true? So fair question, Oscar and I know what the experience is like for me, Ashley being a long distance investor, but you’ve actually got a lot more experience here. So what’s your take? Is Oscar in the right for wanting his PM to get multiple bids or is he a crazy out-of-state investor?So I have two different takes. So when I was running a property management company, our rule was always three bids for over five things. That would be over $5,000. If it was a plumbing thing that would be $200 or whatever, we would not go out and bid out different plumbers for capital improvements mostly, or apartment turnovers that needed a remodel, things like that. We always bid out. But when I had a property management company, I also got pushback. They would do it. They would also take consideration as to my preferred vendors that I would want to use. But it was a very difficult process and there was a lot of pushback and just kind of groaning to have to go and do that because a lot of property managers have their preferred vendors. And actually what I came to realize was that there was some kind of with the, I think it was a plumbing company, they had, the owner of the property management company had an ownership interest in the plumbing company also.So there was huge benefit to using that contractor to the owner of Bolt. That could definitely be a part of it, which there’s nothing wrong with that. I mean, you see lots of real estate investors build out multiple arms to their real estate business, but that could be a piece of it. But I think stick to it. If you want multiple bids, go ahead and ask for the multiple bids, especially if it is a big project. I don’t think if it’s replacing a toilet or even anything under a thousand dollars replace a hot water tank that you should give much pushback because with it being at that lower price point, it’s not going to be a huge difference. And preferred vendors of the property management company most likely are going to make the properties of the property manager a priority. Like the plumbing company we work with. We can text them on a Saturday morning and say, we have this property with no heat, they will be there because we give them so much business. So you also have to look at it that way too, that it actually can be a benefit that your property manager has these preferred vendors that do a lot of their properties that you might get better service and that definitely is a huge benefit.My experience was pretty similar to what you shared, Ashley, the property management company that I worked with also owned a maintenance and home improvement company. And as part of the property management agreement, it was very clearly stipulated that their management or their maintenance arm would be responsible for all of the repairs. And if we wanted a bid outside of that, that was fine, but it was our responsibility to do that. So they would send us the issue and say, Hey, here’s our maintenance company’s bid. Do you approve? Do you reject or do you want to get your own bid? So they put the onus on me as the owner to say, well, hey, it’s fine if you don’t want to use us, but then you’ve got to go out there and source the right person to do this job for you. So that is an approach, and I think to Ashley’s point, it probably is a little bit different, but I think that’s why it’s important for Ricky Investors to just ask those questions upfront of, Hey, how do you handle maintenance?What is your process for bidding out jobs? Is there a threshold where if it’s under X amount then you’re going to do Y? If is above X amount, you’re going to do Z. And just asking all of those questions and getting that clarity upfront I think is what’s important. But obviously as a Ricky investor, you don’t know what you don’t know. So I think that’s the purpose of this episode is to start laying those seeds. But Oscar the one who asks this question, I think if you are feeling this and there was never clarity from the PM about what their process is, I think it’s totally fine to address it and say, I feel like I’m getting a lot of pushback every time I ask for multiple bids. Is this going to be an issue? Or Hey, what is a better process that we can agree on to make sure that when there is an issue, we all know what to expect? But I think not posing that question to them could just cause more pain and more turmoil down the road.And I think go over your property management agreement and see does it clearly state what this process is? And it just wasn’t clear to you when you signed. But also like Tony said, reach out and be completely honest instead of just continuously fighting it, just saying, I want to understand why you don’t get a second bid on repairs and ask them to enlighten you. And maybe you can agree with the decision or not, but at least you’re giving them the opportunity to explain, well, we get a 10% discount for you, which also can be common because we have a good relationship with them. We know it’s not going to be better, whatever. But I think if you really want that multiple bid, keep pushing for it. Don’t give up unless it clearly does stay in the property management agreement that you signed that they actually don’t do that.And Ashley, I think just one last thing to add here is that these sound like small things, but they really can add up over the course of a year, let’s say that you’re netting maybe 300 bucks a month on your rental, but every single month there’s an expense from your PM’s maintenance company for $100, $150. And every month it’s just small things, but they keep sending their company out there. That’s half of your cashflow potentially being gone to these little maintenance things. And if you can reduce that by 25% or 50% or 75%, or maybe you realize it’s not even needed, that adds money straight to your bottom line. So I think sometimes we think about saving money as an investor in these big capital expenses, but oftentimes it comes down to these little leaky holes and how can we fill those little leaks and how can we make improvement around the margins, around the edges? And that’s how you end up with more money at the end of the year.Honestly, I was thinking about this the other day that I think one of the hardest parts of being a landlord is not the big maintenance expenses or repairs and handling that and finding someone to do it. It’s the little odds and ends handyman stuff like little things that a plumber isn’t going out to do or if they go do it, it is expensive because they’re charging just $150 just to show up the toilet handle to flush falls off like, okay, that’s not a huge thing to, that’s an easy thing to fix, but your tenant could be that one that’s like, I’m putting in a maintenance request for this, I’m not going to do it myself. And so I’ve found little things like that or a drawer falls off or is breaking or whatever. Just I think of all these little things, I feel like that is literally the hardest thing to do when you’re self-managing is find a really good handyman that will take care of those little things for you and still not charge you an arm and a leg for it.And I think the big convenience of having a property management company, as they usually have somebody in-house or have someone they work with that will go and take care of those repairs and take care of those little minuscule things, but then those things start to add up and they can be expensive just to have them go out. So I think that the way that I’ve gotten by in my portfolio is partnering with people that are actually good at that kind of stuff as in like, okay, I’m doing everything in the property management software. I’m making sure rent is collected, I am handling that. I coordinate things with the bookkeeper. I send our tax stuff. But your job is if there is something that is not worth paying one of our big contractors to come in and do, you’re going to go and take care of it because it’s something within your wheelhouse and you actually have experience and knowledge.And yes, this isn’t the most effective way to grow and scale because I’m highly dependent on them, but they’re also highly dependent on me to do all the admin and the behind the scenes stuff. So I’ve just really been thinking about that lately is how once you find a really good handyman, hold onto them because that can be a really hard piece. So I guess the whole point of this is that you may be paying more, but if you were doing it on your own, it may actually be more expensive or more difficult to find people to do some of these smaller repairs and in a timely manner too.Ash, I think it’s so interesting because it’s finding reliable people is such a big challenge for real estate investors. It’s interesting to me that no one has found a way to really solve that challenge. I mean, we have Facebook groups, there’s Yelp, there’s Thumbtack, but the best handymen typically aren’t even on those places. And it’s like you’re finding them through referrals, you’re finding them through your agent or from your PM or wherever. So I don’t know, for everyone that’s out there listening, if you can solve that issue, you’d have a line of people banging down your door to find the right person.And because it’s not only about finding someone who’s good at it or that they’re cost effective, but also availability. Somebody doesn’t want to be sitting at home waiting for you to call them and say, Hey, we need maintenance done at this property. Can you drop the TV remote and go and fix it? No, most people need other sources of income than waiting for your $100 service call. That may happen once a month, five times a month. So availability is also a really big thing where most contractors or handyman are working on jobs that are actually paying them to live, rather than waiting for a little maintenance request to come up, that will take five minutes andMaybe it’s like an Uber for the trades person. It’s like you open up your app, you punch in what you need, it gets shot out to all the different plumbers that are available and in your area, they can all electronically bid on that job. And then you can hire someone through the app. There’s a billion dollar idea for someone right now. I just want my stake whenever you build it out.Up next, how do you select the right market for your first investment, especially when funds are tight. But first a word from our show sponsor. Okay, you guys, welcome back. We are here with our second question. So this question comes from Sean in the BP forums. I’m an aspiring investor from Los Angeles. Tony again, is this your son priced out of local investing? So now I’m stuck at the stage of choosing a market. I’ve saved $60,000 expecting to reach 70 to 80 k soon and will earn 10 to 30 5K monthly selling solar. My fiance qualifies as a real estate professional, which helps tax wise, my goal is transitioning to full-time investing within five years. I’m considering burrs in Detroit for affordability and capital recycling or buying in Tampa for appreciation, potential and short-term rental opportunities. Tampa fits my budget, but limits renovation options and cashflow.I’m open to market suggestions or alternative strategies to optimize this first investment as I finalize savings. Okay, well first of all, we always have to applaud anybody who is diligent with saving their money and doesn’t outlive their income and overspend. So congratulations, Sean, on being able to save some money. And the first thing that I think of here is Detroit doing a burn in Detroit. We actually just did an episode with an investor, rookie investor who invested in Detroit. He was an out of state investor, I can’t remember where he lived, but he was investing long distance into Detroit.I think the biggest thing though is, Sean, what is your goal in investing? What are you trying to get out of it? Because you mentioned two different ideas here, Buring in Detroit for cashflow it seems like, or buying for appreciation. And those are two competing goals, cashflow versus appreciation. And it’s very rare that you find a market that gives you an equal dose of both of those. So I think the first question is, what is more important to you right now? Are you just looking for a safe place to park the excess money that you’re earning? If so, appreciation maybe is a better play. You said your goal is to transition to full-time investing in the next five years. So I’m assuming it’s cashflow. And if that’s the case, then who cares about the appreciation play in Tampa? I don’t know if your properties will appreciate enough in five years where you can realistically use them to walk away from your day job. So in my mind, the burr approach seems to be maybe the better strategy because to your point, you can recycle the capital that you have, start stacking multiple properties on top of each other. Maybe you’re leveraging different strategies like midterm rentals or renting by the room to supercharge the cashflow. So I think just hearing where you are at and what your goal is, your timeframe, I would probably lean more so towards the burr than buying a turnkey property in Tampa. What’s your take ash?So I think one of the other things to really consider with this outside of what is your goal, what are the opportunities, is to analyze a deal in each of those markets and what does the actual outcome look like? So if you’re going to do a short-term rental, we have the short-term rental loophole where you can write off 100% bonus depreciation of the property with a cost seg. So I think not just looking at the cashflow or doing a burr or the equity in each property, but also other benefits that can come with it too, such as the tax benefits. Also too, look at appreciation. So you did say Tampa has more appreciation, play look five years down the road for either property. So does one have a bigger potential down the line looking, comparing the cashflow that it would make plus appreciation in the property?So I’ve had properties that have cash flowed very good, but they literally have had no appreciation. And I compare that to the properties that cashflow somewhat decent and had great appreciation. I’m way better off playing the appreciation route. It’s been nice having that little bit of cashflow, but looking back in the 10 years I’ve been investing, I would pick the appreciation, play over more cashflow every day, especially since you are still working that you’re not going to be fully reliant, but you could take this property that you’re buying for appreciation, have a little bit of cashflow, and then plan to sell it three years, five years, do a 10 31 exchange into something bigger that generates more cashflow and more appreciation. So just from my own experience, I like the option of the appreciation play more.And it’s interesting, Ashley and I are coming to this from kind of two different angles, but I think at the end of the day, Sean, what’s most important is what aligns best with what it is that you want. And I feel like a broken record sometimes I go back to that so often, but I do that because I think it’s a mistake that a lot of investors make is that they just jump in without really having a strategy. And it’s like the ready, fire, aim strategy where you shoot first and ask questions later and sometimes that works. But when we’re talking about laying a good foundation, I think it really is important to understand what is it that you’re trying to get out of this? What do you want? What are your resources? What are your skill sets? Put all of those things together. And oftentimes when you do that, it gives you more clarity on what makes the most sense.And honestly, the truth is both of those strategies could work. Maybe you do buy a bunch of properties that are appreciation heavy and maybe instead of it being five years that you’re out of your job, maybe it’s 15, right? Maybe it’s 10, somewhere in that ballpark. And you’ve got enough equity built up over that 10 year timeframe where now you can start refinancing, you’re getting money back to fund your lifestyle or buy more deals. But I think either strategy can work, but it’s which one can you execute better? Alright, we’re going to take a quick break before our last question, but while we’re gone, be sure to subscribe to the real estate rookie YouTube channel. You can find us at realestate rookie and we’ll be back with more right after this. Alright guys, let’s jump back in. Our final question today comes from Kyle and Kyle says, I just closed on my first rental property and have it posted on Zillow. It’s in a desirable area and I price it competitively when directly comparing it to other listings. It’s been posted on Zillow for four days. I have a ton of views on the post, but only one contact in person that’s interested. It’s making me ask myself the question, when should I lower the rent? I would prefer to have as low a vacancy as possible, but don’t want to be too eager to drop the price. Looking for some general guidance here.Tony, I know you’re going to refer this to me. Oh,I mean, I’m just curious, right? I mean four days, that seems like such a short timeframe to start maybe overreacting. What’s your thoughts on him pushing the panic button four days in?No, trust me, I am here to revive myself as the long-term rental queen that I’ve disappointed you time and time again. I have to say I have never ever decreased the rent price that I was charging on a property. And so as you were reading that, I was thinking about that and as to why. So I think the first reason is is that I, IM never listing at the top of the market. When I’m running my numbers on a deal, I’m always very conservative as to what I’m going to charge for rent. Okay? I am listing it at market value or maybe even a little tiny bit below market value, and that is going to draw more people into it. I have the opportunity to increase the rent after a year, so I lock them into a year lease, and then I can go ahead and increase the rent or I can do a non-renewal.They’re not a great tenant and I can list it or they don’t want to pay the rent increase, which honestly, I’ve never had anybody move out not wanting to pay a rent increase and moving out for that reason. But that’s the first thing is when you’re running your numbers, make sure you’re very conservative on what you’re actually going to do for market rent. The next thing is is be patient. Because I have had properties sit for 30 days waiting for somebody. I’ve had it sit for a week. I’ve had actually a property not too long ago that I listed.It got two showings over the course of two weeks and one person put an application. And so far they are wonderful. She seems to be a great tenant taking care of the property, even asking if she can do a little gardening and stuff out front and things like that. So just because there’s not a ton of showings doesn’t mean that the right person isn’t out there because you just need the right person to see the property. So maybe is there more places that you can put the listing out there? Another example is I have this really, really tiny, tiny apartment, but it is beautifully remodeled, completely redundant, a tile shower, a beautiful kitchen in, but it was so small. So you really just need the right type of person that doesn’t need a lot of space, but they want something really nice and also affordable.So I think giving it time, don’t right away cut your price because just like when you’re listing a house for sale, I think that kind of draws a red flag as to what’s going on. I think try and figure out what’s going on with your marketing. If you’re using property management software, what websites are they putting it to? You mentioned having it on Zillow, but where else do people in your area look for apartments? I don’t do this anymore, but I used to when it was a lot harder. Right now, apartments are renting really, really fast in our area, but when it was harder to get people, I would list on Facebook marketplace and you get a ton of spam ton, but that’s more eyeballs, more people, and there could be the right person that’s looking on Facebook and not looking on Zillow. And there’s a million different platforms that you can push out your listing to, especially if you’re using a property management software.As you bring up a lot of good points, one of them being that your price on the onset is competitive enough to draw the right amount of interest. And again, Henry and Dominique on episode six 12, they talked about flipping, they mentioned the same thing where it’s like they’re intentionally pricing slightly below where they know they could sell to make sure that the property moves even faster. And it sounds like you’re leveraging a similar strategy here on the rent side. So I think maybe that’s the first question is are you right in line or maybe are you right below? I think the second thing too is, and as you can maybe add more insight here, but every real estate investor, well equipped enough to market their own property, making sure that they’ve got good photos, their listing description, all the information they’re putting into it, like you said, across the right channels. And would it maybe be more advantageous for someone who’s not necessarily good at that to hire a leasing agent who’s doing the showings and helping with the listing and getting the distribution? Have you ever leveraged someone just to focus on your lease ups?Yeah, so when I was working with the two 40 unit apartment complex, we used a leasing agent, and when I left there, we hired someone else to kind of take over, but I had set so much stuff in place that it was a lot of it was automated using AI to generate the descriptions off of the information we had about every single unit and every single property. So we do that. But yeah, having really good photos and make sure you’re providing as much information as you can, washer, dryer, hookups, what’s the parking situation, what floor is it on? Are there any additional fees? Do you allow dogs? Do they have to be under a certain weight? Is garbage included? Who pays for what do they have to pay for? So I think including as much as possible. So it’s laid out because there could be things that are different about your property than somebody else, and they could go and look at the other one not realizing that your property actually includes garbage internet and different things that the other one doesn’t, and they’re going to end up paying more.Or it could be that yours has a common area where there’ll be able to store stuff in or something like that, I don’t know. But make sure you’re including every single thing that would seem as a benefit, and even if you don’t think it would be a benefit and maybe a benefit to somebody else too. Also, we always include what it’s near because someone could look at a property and maybe see the address, but especially if it’s a longer road, not realize that that’s the one that’s actually right near the laundromat, that there’s no hookups or something. But being as descriptive as possible in your listing will really help a lot, but also make it very, very convenient for somebody to get more information on the property. So whether that’s you just putting your phone number on there for them to reach out, whether in multiple ways to contact you. Some people don’t like to make a phone call. They’d rather fill out a form online and fill out the application online and really never have to talk to you. So having multiple ways to actually contact you too,There probably is though a point where dropping the rent makes sense. You’re four days into it. So I think it’s, again, maybe too early to press the panic button, but let’s say that your rent or your mortgage payment, even better. Let’s say that it’s $2,000 a month, and let’s say right now you are thinking about dropping the rent by 50 bucks. You’re like, man, if I drop by 50 bucks, I’ll be lower than most of my comparable properties and I’ll probably get rented. But you’re like, man, I don’t want to lose that 50 bucks, but 50 bucks over 12 months, $600 for that entire year. Your mortgage payment is 2000. If you’re empty for 30 or 45 days, you just racked up almost $3,000 of cost for yourself to cover that mortgage to save yourself $600. Right? That’s a losing equation. So I think looking at those two things, how much of a discount are you trying to offer? What is your current cost just to keep the lights on in that property and seeing, okay, where is that tipping point where it maybe makes more sense just to drop the rent so I don’t end up paying this mortgage by myself?Yeah, I think a big parts that is figuring out what you could drop it to, and then also if there’s a way to make up for that in additional fees or something like that. But if it gets to the point where you’re getting more, like, I’d say 30 day mark, if you’re getting to that 30 day mark is to go ahead and drop the price. But instead of dropping the price, I would take the listing down and I would make a brand new listing and put it up so it looks like it’s a new property that’s up. And then I would do some of the things that maybe you didn’t do in the first listing of being more descriptive and for better photos maybe, and marketing out to different places, different ways to contact you. But yeah, I mean, I would say 30 days, but really if you’re worried about that mortgage payment that’s coming up, then maybe just take the listing down and go ahead and re-list it again with the new price.But just remember that that doesn’t always guarantee that you’re going to get someone and also be cautious that decreasing the price. That could also bring in a different quality of tenant too. So if yours becomes very affordable and the cheaper rental in the area, even though you’re in a good market, it could bring in people who maybe that’s the very top of their budget, but they want to live in that neighborhood, but yet they’re going to struggle to make payments because it is the top of their budget too. So make sure that includes doing proper screening and things to make sure that the person can afford it too. I mean, either way you should be doing that.Ashley, you have a resource hub thing on tenant screening?Yeah, I do. I got tons of resources, biggerpockets.com/rookie resource, and there there’s a ton of ’em. There’s a tenant screening one. There’s due diligence checklist, all kinds of resources for you guys. But yeah, they actually collaborated with French ready on the tenant screening guide and went through a lot of the things that I’ve learned from their software even of ways to properly screen a tenant. And you think it’s just reading off the reports, but some people, they don’t know how to read a credit report because they’ve never had to before. I didn’t know when I first started as to what am I looking at at a credit report. I had never even looked at my own credit before at that time. So I think it’s a pretty long guide that I put together of step-by-step of the screening process and how to do it properly. Well, thank you guys so much for joining us today. I’m Ashley, he’s Tony, and we will see you guys on the next episode.