Ask Michael Anything: 401K loans, choosing markets, property management and disclosures

In this episode, we cover questions submitted by attendees of a recent webinar. We talk about using 401K loans for investing in real estate, how to choose strong rental markets, inspections on remote properties, property management, and how disclosures work in different states.   We love hearing from you, and taking on topics that you are curious about. Feel free to submit your questions as comments on YouTube, in a review on the podcast, or tweet at us: @RemoteEstate.   --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Hey, everyone, welcome to the remote real estate investor.     My name is Pierre Carrillo and today I am with     Michael Albaum.     And today we are going to be going through some listener submitted questions. So let's get right into it.   Alright, Mike's up for this first question here. This one came off of a YouTube comment. Jeremy asked, how do you use a 401 k loan for a down payment on a rental or an S short term rental? Do they have lower interest rates so that you can pay yourself back especially now that the market is down? What do you have to say about that?     Yeah, it's a super good question, Jeremy. So this is something that I've actually done in the past on my second rental ever I did this, and it's all dependent on your 401k administrator. And so who holds your 401k what the company is, and so mine at the time happened to be through Fidelity. And at that time, they say you can take a loan up to $50,000 or 50% of your balance in your accounts, whichever is less. I think that was how it worked. And then the interest rate at the time was four and a half percent.   Now this is back in like 2014 2015, something like that. So it's been a while. And so every interest in, the interest rate is going to be set by the Accommodator or by the facilitator. And the cool thing about it is that interest is actually paid back to yourself on a monthly basis. And so you can actually choose and again, this is specific for Fidelity and for my situation at the time, but I was able to choose the period in which I wanted to pay back the loan. So I can pick one year through five years in one year increments. So once you have 1 2 3 4 5, and so I chose the longest period possible because I wanted the payment to be as small as possible. So that way I could cash flow as maximum ly as possible. And the lender had no problem with this whatsoever, because they saw that the cash was coming from my 401k, they will often count that treat it as a cash equivalent, because we have access to them through these 401k loans and through other vehicles as well. So I made monthly payments to myself, it got automatically deducted from my paycheck on a, again on a monthly basis. So they took out half, I was paid every two weeks, I took out half the payment, and it went back into my 401k.   And so it's your again, you're paying yourself back the interest. So it's a really cool way to be able to get actually more dollars into your 401k account. Now the tax implications of this definitely not going to get into you're definitely gonna want to talk to a tax professional to understand how it's gonna affect you. But again, I would definitely look into your 401k Accommodator and see what the rules are around 401k loans because they can be a great, great, great tool to access.   Now keep in mind, the one thing that I think is super important to highlight is that if you end up leaving that company or that job, the entire loan balances due back. And so you just want to keep that in mind. That's uh, that can be kind of a sticky catch all. So that you don't want to get caught off guard with but again, every every Accommodator is going to have likely a little bit of a different way that they handle it. So reach out there, there's probably someone in their loan department that you could call and just start asking around these questions. But again, really great question, Jeremy, and a super, super powerful way to gain access to cash and quickly.     So follow up on that a little bit more, are interest rates on these type of loans the same as what's going on in the market? Or are these calculated differently?     It's a really good question. You know, I really haven't looked into it in a while since I haven't needed one. But you could very easily like, again, mine through fidelity, you could go online today and walk through this exercise and see what the interest rate you're quoted is. Yeah, I mean, it varies at the time, I think mine was like four and a half percent. And I think I got a four and a half percent loan on the investment property. So if that's an indicator of of kind of par for the course, I would I would say that yes, I would, I would think we could we could extrapolate that and say yes, that the loan you'll see on your 401k is likely going to be what you're seeing in the market. But again, remember this interest gets paid back to yourself so that the true like quote unquote, cost of it becomes a lot more tolerable. It just has to look at what your cash flows look like.     Okay. And are there any property types that are best for this strategy, or is it does it not matter?     You know, I really don't think it matters. Most 401 k loan accommodators will tell you you can take a loan for really any number of reasons, I don't, I don't know, if you have to specify you might. But I think if you wanted like a new TV, you could go take a 401k loan and do that. I don't recommend that. Because that is not an asset, that's a liability. And so I would say any type of cash flowing asset is going to make sense or could make sense for a 401k loan. And I know some of you listening are out there thinking, well, the stock market is a cash flowing asset, or a dividend stock is a cash flowing asset. And so I would just be very cautious around investing those funds in the stock market, because they're very correlated.   And so if you see your, if you see a stock market dip, now your balance in your 401k has dipped, and the amount that you have invested in the stock market, because you use loan proceeds to go invest in the stock market has taken a dip and so your proceeds to pay off the loan that you took is taking a dip, so it can just get very dirty very quickly. And so that's why I think real estate is a great investment to use those funds for because they are, I would say pretty uncorrelated, if just because the stock market dips doesn't mean the real estate markets taking a dip the next day.     All right, Mike, I know we've seen this question before. But let's hit it again. Because it's a really common question that people have is what advice do you have for selecting a strong investment market?     Yeah, it's another super great question, Pierre. So I think that it needs to come down to a couple of things. And I think people need to get really clear on what's important in a market for them, and what makes them believe in a market? For me, it's like five things. It's is there population growth? So are people moving to that market? Is there job growth, so the people that are moving there are have jobs to work, so they can pay rent and pay their mortgages? There it is, as their wage or salary growth, people that are moving there that are now working there are getting paid more to do so. And then is it diversification of employment? So are there multiple sectors supporting the local economy? Or is it exclusively manufacturing or exclusively entertainment? I like to see that it's it's diverse, so that if we do you have a pandemic-like occurrence, the entire market doesn't evaporate. And then last, but not least, for me, I like to see a plethora of deals that I would invest in, I want to see several deals on the market, you know, through the MLS through Zillow, wherever you're getting your deals from, that you could say, Yes, I would be happy investing in all of them. And they all make sense.   And for me, that's because I like to go deep into a market, I used to go wide, I used to buy one or two properties in multiple markets, and then it got really overwhelming and cumbersome. And so I like to go deep into a particular market. And so I don't want to go buy the one good deal in Atlanta, Georgia, I wanted the process to be repeatable. And so that's what I look for. And so I'd say people should get clear on what it is that's important to them. That is an indicator that the market is going to be around and healthy for a long time for the duration of their investment, and then some.   And so if you can find markets, and I can almost guarantee you, you will find multiple markets that check all of your boxes. I know for me, I have. And then it's just about picking one and picking one could be I interview property managers in four of the markets that I found that work for me, and who do I have the best working relationship with? Who am I getting the best vibe from? Where am I finding the best lenders? And so now that we found kind of the macro high level things, and we've also found the micro deal, let's start expanding and say, Okay, who are we going to utilize, who's going to be part of our team on the ground, because you can find a great market with great deals. And if you can't find a good property manager, you can't find a good lender. It's tough to transact there. And it's tough to own in that market.   So I think once you find the market and the deals now we got to start building up a team and seeing who makes sense to work with Who do you like working with? And then I would execute based on that.     When you say look for these deals, where are you looking?     You can look all kinds of places. So you can work with a local real estate agent. You could look on roof stock on the marketplace, you can look on Zillow, you could look on you know, any housing, like website that lists properties for sale, it's just pulling information from the local MLS. And so every every major metro is going to have multiple MLS is that are local to that Metro. And so that's where the listings agents are posting listings. And that's where they're showing you listings from, maybe you get off market stuff, you know, there's there's all kinds of ways to source deals, and so many different places to look, try all of them and see what you come up with.   And if you're working with an agent, I would say make sure you're working with an investor friendly agent and investor focused agent and make sure they understand when you say cash on cash return and cash flow, that they know what you're talking about. A lot of agents out there are residential agents that are used to working with owner occupants, not knocking them, but they just may not know and be familiar with the terms and key financial metrics that we as investors are interested in and looking for. And if that's the case, it's not necessarily your job to educate them. And so I would, I would maybe shift gears and look to go find an agent that understands our lingo. And the things that we're trying to accomplish.     What are some questions you can ask a potential agent to? I'm sure they like to say like, oh, yeah, I'm investor friendly. Let's do a deal together. What are some questions you can ask to kind of get to the bottom of it and see if that real they really are?     Yeah, totally kind of put them through their paces a little bit? What's the typical cap rate in your market? How long? You know, what's typical cash on cash return? In your market? What's the average monthly cash flow? In your market? What kind of value add projects? Are you seeing people doing? And are you an investor yourself? Do you invest in rental real estate? And if they say yes, well, I mean, there, you can kind of skip all the other stuff, if they if they tell yes? Or how many investors have you worked with? And can I get some recommendations? Can I get some references from you from some of your investor clients?     When you're buying a property remotely? How does the inspection process work? Do I know you get an inspection from a third party inspector? But can you also get a video walkthrough? Like how do you get all the information that you need to feel comfortable moving forward?     Yeah, it's another great question. And so for most people, if they are buying a property locally, I would be interested to know if they go and walk the property with the inspector. If they do great, it's, it's a good way to put eyes on and be able to really talk through what you're seeing with the inspector, when you're doing it remotely. I always have my agent go first and do a video walkthrough before I go ahead with the inspection, because it burned me once where I had the inspector go in and be like, this place is a mess. It's terrible, yada, yada, yada. And then my agent was like, oh, yeah, you don't want anything to do with this. And I said, Why don't we reverse that process and save me the couple hundred bucks that I just spent on the inspection.   Because all this stuff you could call out, you could see it doesn't take an inspector to recognize, hey, there's a massive crack in his foundation. Anybody who has who has site can be able to see that. And so I always get my agent, give me a video walkthrough. First, give me their opinion, then we'll schedule the inspection. After I get the inspection report, I usually call the inspector and say, Hey, what scares you about this property, if their inspection looks pretty clean, they'll tell me they'll be honest with you, they often don't have a dog in this fight, so to speak. And so they their job is to be honest. And their job is to find all of the stuff that's wrong with the property. And so sometimes we get an inspection report back, and it sounds a lot scarier than it actually is. Because that's their job, they have to find all of the stuff that's wrong or not working, or it could be a potential safety hazard.   And so it's something like some things could be like a missing light switch cover, right, that's going to be called out as a safety safety issue. But like, the reality is as a 75 cent repair, it's really not a big deal. But when you start seeing a lot of these things stack up as a laundry list. And maybe you're not familiar with the light switch cover, and that it isn't 75 cent repairs, you're like, oh my gosh, look at all these things I have to fix, it's gonna be so expensive.   So I think understanding and really talking through with the inspector, hey, what was actually scary, and what's just, you know, some stuff I need to take care of down the road or immediately, and really having a conversation, because a picture's worth 1000 words, but also getting the words. But the backstory behind the picture, I think is also really important and really valuable. And so most of these inspectors are very happy to talk to you. So have your agent, walk through the property, get pictures, if you can't get a video walkthrough, and then get the inspection and then have a conversation, and then make your decision. Don't let yourself get all hot and bothered and really bent out of shape over the inspection without first having a conversation with the inspector or with a property manager or a contractor. Someone who really knows. Okay, what is this going to take to correct? Or is it even needing correction right now, maybe this is a problem for down the road.     Okay, and say like in this inspection, certain repairs are noted. And you want to get a quote from local contractors for fixing it is there like a Kelley Blue Book of what certain services cost for real estate? Or, you know, I kind of have to know?     I wish there was you after doing this two or three or four times, you'll get a fairly good ballpark idea of what costs are in your market. And it's important to recognize that it's market specific. So a plumber in San Francisco charges, I'm going to bet more than a plumber in Topeka, Kansas, right? Just cost of living is different trades get priced differently. Materials even cost slightly different amounts. And so understanding Okay, there is going to be a difference for maybe what I'm used to in my market where I live. And so let's go get quotes for those things.   A lot of property managers have in house personnel that can do a lot of those repairs for you. And so they can be kind of your one stop shop for Hey, go get this inspection report. You can give it to them. And which I think you absolutely should, like hey, give me your thoughts and then give me quotes to get this stuff repaired. And they might have a plumber or electrician or a handy person in house that they can say, Okay, this is going to be $300 It's gonna be $200 It's gonna be $2,000 Whatever the cost is, if they don't, they might be able to put you in touch with some contractors or go get those quotes on your behalf with outside vendors.   Depending on the size of the job, I always like to go get three quotes. If it's you know, more than 1000 bucks, go get a couple additional quotes just to see where things are coming out. For anything under 1000 bucks, I've just found that, you know, it might not be worth someone's time to delay the repair, or to send a property manager chasing around trying to get quotes from people for, you know, a $75 repair or $100 repair, the savings that you get in dollars don't necessarily equate or are equivalent to the time savings that you put that you ask that person to do something. And so they might start to get a little bit annoyed with you.     Okay.     But I would definitely do that before your inspection period ends, like go get hard numbers, because that way you can you can use that to negotiate with the seller on the price or to make the repairs themselves or what have you can decide what makes the most sense.     Okay, so what should people know about managing the property themselves? So they don't want to skip professional property management and keep that extra cash? What should they know?     They should know that you shouldn't do it? No, just kidding. I think I think self management makes sense for a lot of people. It's just not for me. So Coach Dean over at Roofstock Academy with me, he self manages all of his properties, and he lives in a different country. So it's absolutely possible. And that works really well for him. It's just not something that's worked really well for me in the past. So I manage I self manage a short term rental that I own on the central coast of California. And then I self manage my my house hack, the upstairs unit and the house that I live in. And so I think if you're going to be self managing, you need to have a really good team around you, just like you would if you were using professional property managers.   If you're using property managers, they likely have those plumbers, electricians, handy people, like we were just talking about. And if they don't, they know who they can call in the event of an emergency repairs needed. Because you're not using those property managers, you kind of need to put yourself in that role and say, Okay, well, they're not going to call the plumbers, electricians handy people for me, I need to do that. And so having a network of service professionals to be able to call on a moment's notice, I think is really important.   Also, having someone that can be a go check on the property on kind of a moment's notice. And just put eyes on is also important. Because you can imagine if the tenant pays, doesn't pay rent on the first of the month, and they skip town on the second, you might have no idea that your property is vacant for quite some time. If you can't get a hold of the tenant not returning phone calls. Like there's just like you want to have eyes on physically, if not yourself than someone who represents you if you're not using a property manager. So again, building out your team is so so so hypercritical, even more critical if you're self managing.     Okay, so next question here is if you're buying a property that is currently tenanted, is there a way to get in touch with the current property manager, before, you know to find out more information about it before making a decision?     Yeah, it's a really good question. Sometimes, if you can find out who the property is managed by, of course, then you can just give them a call and start asking them questions. I don't know if property managers have a legal fiduciary responsibility to anyone. If they do, my guess is that it's going to be with their, their owner. And so you might, you know, if I, if you own a property that has a tenant in place, and I call your property manager and say, hey, you know, I know that there's probably 123 Main Street, do you guys manage that? Yes, we do. Tell me about all the problems that you've had with that property? Well, we probably can't do that, because we know it's trying to get sold.   So yes, you might be able to find out that information, but you might not be able to find out all of the warts, if you will, all of the kind of nitty gritty associated with that property. That's really what the inspection is for. And that's what you your due diligence period is for you get to ask the questions, you get to get answers to those questions. And if you're not satisfied with the answers, you get to walk away for free.   Yes, it can be helpful sometimes, but it's it might not be the silver bullet that I think a lot of people think it might be, because they might just refuse to answer your questions and say, you need to talk to the seller, you need to get that information from the agent, the selling agent.     Alright, Mike. So the next question here is on disclosures. Every state seems to have different requirements around what needs to be disclosed. How do you handle that in states that don't require disclosures?     Yeah, it's another really great question fear. And it's tough. Like if the state's not going to require the seller to tell you everything they know about the property, we have to go find that information out for ourselves. And the best way to do that is by piecing together kind of you have to make this story for yourself with pieces of information that you can get access to. So first and foremost, I would say look at the seller's taxes if you can get a hold of them for the last two years for that particular property. I'm interested to see, okay, you've told me you're getting this much in rent you've told me that the property performs like this? Now let's see what you told the IRS and make sure that those two things are the same. Oh, there's a discrepancy. Let's go ahead and reconcile that either in terms of price or figuring out what what it is that you weren't telling me before.   Also with the inspection, I mean, the physical inspection is going to show up, turn up a lot of stuff if there's water leaks, if there's foundation issues and so I think that's also important not to skimp out on or not to skip, unless it's a full teardown or a full gut renovation anyhow, there's not a whole lot to be gained from knowing that, hey, the roof leaks if you're planning on replacing it entirely anyhow.   But I think you start to have to gain different pieces of information and piece it together for yourself to have the story come to light, as opposed to the seller saying, oh, yeah, there's a leak in the roof. Well, if there's water stained, and the leak hasn't been replaced, you'll see that from a physical inspection. The other thing to keep in mind is that in a state like California, where disclosures are required, like the seller just says, I don't know, I don't know, I don't know, it's every single answer. And that's a totally valid response. And so am I any better off than if I didn't have the disclosures to begin with? In my opinion, not really.   And so of course, we are relying that this person is being honest and telling us about the things that they do know. And I have seen sellers be super honest and super transparent about the things that they do know, which is wonderful, because now you're armed with some additional pieces of information to help you make your decision, both around whether to proceed with the purchase, or the purchase price itself. But when a seller says yeah, I don't know, like you figure it out. I genuinely don't know, because it's been a rental for 10 years, I you know, live there for a year. And that was, you know, there's all kinds of things that sellers can say that muddy the waters that don't really give us any insight into what the answers are, the true answers are, and so we have to go find that out for ourselves.     All right, Mike. So like a state like Alabama, where it's a, they don't have to disclose something, if you ask them? Are they legally required to tell you? Or is? I don't know, good enough for in that case as well?      It's a really good question. I think legally, they have to tell you, I think don't quote me, I'm definitely no no legal experts. So I would definitely get a hold of a legal expert in the state in which you're transacting and ask that question. I think it comes down to if you ask them a question, and they lie, and you can prove it, there could be ramifications for the seller. And so I think it all comes down to proving that they knew about what you're asking about was not the truth. That I think is always the hard part. So there, it's very easy for someone to say, Yep, I don't know. And then how are we going to prove that they knew that they actually did know and that the thing was an issue for their property? So it gets kind of murky pretty quickly, as you can see. But yeah, just understanding what your state requirements are in the state you're transacting is really important.     Okay, cool. I think we will leave it at that we have a bunch more questions, but we're running out of time today. So want to leave us with any final words Mike?     No, keep the questions coming. These are great. We love to see how engaged our members are in community are and we love getting answers out to your questions as best we can. So please keep them coming.     Alright, everyone, we're gonna leave it at that. Leave your questions as comments on YouTube or comment on the podcast. Leave us a review. Give us a rating that helps us out a lot. And we will catch you on the next episode. Thank you so much for listening. Happy investing.