Ask Us Anything #7: Smooth Scaling, Creative Financing, Multi-family Properties & Finding a Mentor

Join us for another Ask Us Anything of the topic smooth scaling. --- Transcript  Michael: Alrighty everybody. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by,   Tom: Tom Schneider   Emil: and Emil Shour.   Michael: And today we're going to be tackling another AMA, aske me anything or ask us anything. And these questions come to us from viewers from the our most recent webinar that we hosted last week about smooth scaling. So let's get into it.     All right, Tom, in the hot seat from the word go on last episode, you made a commitment to me, Elena, and all of our listeners at the remote real estate investor podcast that you are going to be making some moves, restructuring your insurance situation, where are we today?   Tom: Yes. So as I alluded to before, I don't have nothing to say.   So this is where I'm at, I'm coming to learn that it's not as difficult as it is, as I had put it in my head to update your property insurance. So well, I have not bound any new insurance, I have reached out to a wonderful member of the Roofstock Academy on updating my insurance, so I have no specific things completed. You know how you eat an elephant guys, one bite at a time.   Michael: From the trunk down.   Tom: One bite at a time, from the trunk down and from. So anyways, to make a short story long, I have reached out to my insurance broker that's going to help me play some new insurance. And I'm hoping we can get it done by the end of the year. It could be a little bit tight considering we are recording this on the 28th of December. But I can I don't know I'm feeling good, man. There's a little bit of momentum going on. I'm feeling okay. So not, as I said, not nothing to update.   Michael: Good, double negative. Yeah, keep us posted on the next recording. We'll check in with you again.   Tom: Yeah. And then also just, you know, what happened was my, for whatever reason, my payment to my original insurance didn't go through and they refunded me back. And then my mortgage company bought insurance on my behalf, which is you don't want to happen because they just they make it really expensive. And the coverage isn't that great. So I have insurance. I'm not like not insured on these properties on a subset of some properties. But anyways, remediating all those issues in the very near future. Okay, then it's done.   Michael: Awesome. Good update, keep them coming. Alright, so let's get into some of these ama questions that came to us from the last webinar. So Emil a question for you, because I know that you are just getting into this space. Someone's asking, what about apartment buildings as opposed to single family homes, they found one with 34 units with an average rent of $650, which would be an average revenue of 24,000 per month in revenue? Would it be better to have the higher return per month for less property? How should they be thinking about that?   Emil: So without knowing the purchase price, we're super limited here. It could be 34 units, and the rent is 650. And each unit is 40. k, and that'd be an awesome deal or the issue and it could be 100. k, and this would probably be a not so awesome deal. And it depends on where it is, what else is available in that market? So I'm not going to answer this question because I don't have enough information. I'm kidding, I'm kidding.   Michael: Let's take it a step. Let's take it a step further and maybe talk about just kind of more generic. So if someone was comparing multiple units for a lesser rent amount per unit, but a higher gross rent, versus a single family that had a lower rent should be a higher rent per unit, but lower gross numbers.   Emil: Yeah, this is something I'm personally starting to think about myself, like you can buy a lot of units with smaller rent, and you start to kind of realize the cash flow, and each one is maybe a little bit skinnier. All right, any maintenance that comes up, it kills that cash flow for that specific unit. But if you're spreading it out over a lot of units, it's probably unlikely that they're all going to have maintenance at the same time. So I think like, as you scale up bigger, that smaller rent makes more sense. And this is just kind of me as someone who's just starting to get my feet wet. I would love to hear this from somebody who has experience, you know, buying some bigger stuff that you know, they're all maybe one bed, one bath or studio apartments where you know, the rent is smaller. But I think what really what really matters here is comparing this against single family, right? If you want to go get a bigger building, go do that. But you shouldn't just buy a bigger building because bigger sounds awesome. What if it's like, what if in your market, everything is so expensive in multifamily? Because everyone's going to that wonder four units just produce a better return right now because there's less fuel going for that. So I think you just have to compare the two and know what's a good deal in the market you're you're looking at versus just saying, I blindly want multifamily whether it's a better deal in this market or not. I don't know that's kind of how I approach it.   Tom: I'd also say there's different muscles that you would need, I guess kind of overhead versus buying single family where single family, you can take advantage of the huge network of lenders that exists that just standard Wells Fargo, there's just tons of these types of lenders versus once you start getting into larger apartment buildings, it's your getting into commercial loans. So just a little bit more overhead or less available lenders to do that kind of lending. And typically, you're not going to get as good as rates as you can get with the lending, you can do now with a SFR, a one to four units. So I think that's a consideration. Michael, what do you see as the property management costs, differences between an apartment building and a single family? Are they pretty consistent apples to apples?   Michael: No, it kind of goes all over the place. But I think a pretty safe bet is the more units you have, the less your monthly expense is going to be for property management. So if you're at you know, one unit two units, three units, you might be at their highest monthly gross charge on rent collected versus you adding additional units, that monthly number tends to go down. And you can also negotiate to have a lower lease up fee as well, or at least renewal fee, you can also negotiate that down. So the more units you have, it's like buying in bulk, the cheaper that becomes. And I think also to Emil’s point, you want to be looking at the tenant pool that's renting that type of unit, because it's really tough to make an apples to apples comparison of a three, two single family that rents for 1500. And maybe a one one apartment unit that rents for 650, that type of tenant you have in those two assets is going to be vastly different. And so is your expense load your maintenance, repairs, vacancy, that's going to be I would argue drastically different between those two types of units. So be thinking about that it's not just an apples to apples comparison of Oh, well, this number is higher than this. Therefore it is a better investment.   Tom: Give a blanket statement with with no context, Michael, you think as overhead as an investor if I want to be you know, Mr. Mailbox money, don't do anything. Obviously, there's the work up front and doing the acquisition, would you say they're similar in the amount of ongoing overhead that you have to do multifamily? When I say multifamily like bigger apartment complexes for plus versus single family to a four Plex?   Michael: Oh, man, it's that's such a tough, it's so tough,   Tom: I would assume. I'll tell you my assumption that is my kind of in the dark, when you have units, and they are going through vacancies or things come up, you're going to be a little bit involved as an owner. And owning like a bigger complex, I would just assume that would be like a little bit more active. But I mean, I don't know if Go ahead, continue your your flow that I ruined.   Michael: It's interesting, because you know, you have the a bigger building with more units versus let's say, a 10 unit apartment building versus 10 single families. And we can kind of make the comparison that way. So if you have one building, you have just one building, one roof, one set of mechanicals, you know, obviously, there's 10 of them, but they're all in one centralized location. And so people can learn a building really, really well, fairly quickly. And so you have the same repair people going to that apartment building the same maintenance folks. And so it becomes a learned asset versus having to go to 10 different properties kind of running all over the place can be a bit onerous. So from a management perspective, I think having everything in one place often makes it a little bit easier. And that's probably why a lot of managers will give a discount for managing a single building with multiple units. Because everything is there. It's easy, it's so much more touchable.   And from a time perspective, someone doesn't have to go drive to all of these properties to take care of 10 different things. So once it's stabilized and running and kind of humming along, I think that multifamily is a super easy mailbox money type of asset. But it's getting to that point. And from this question, we don't know where that is. We don't know how much work has been done. We don't know what the tenant class looks like. So really tough to say, without answering some of those questions that Emil was asking at the beginning of the question. All right, we can touch on this one all day. And we did a whole episode about multifamily or single family the ultimate showdown. So if you want to learn a little bit more about that, go ahead and check out Episode 19 for the ultimate showdown single family versus multifamily.   So let's jump on to the next question. Tom, this is a good one for you. How does Roofstock make money on transactions?   Tom: Yeah, so we Roofstock acts as a broker. So rootstock makes money on the transaction, they make 3% that the seller pays. And then also when a buyer is buying a property on reflect, they'll pay an initial marketplace fee, which is a half of a percent, or $500, whichever is greater. So that's how Rooftock is making their money.   Michael: And as compared to like a traditional MLS type of sale. Can you give people an idea of what type of closing costs they might be expecting to see there?   Tom: If you're selling on the MLS, you're paying more you're paying typically about 5% versus 3% on Roofstock as a seller, it's worth noting that within reach Have stock there's two different types of listings, there are Roofstock exclusive listings. And those are the type of the properties where Roofstock is representing the seller and with those properties since Roofstock represent the seller, they do way more diligence before the property is listed. So before it's listed Roofstock will go do an inspection. If it's occupied, they'll look at the payment history as well as the lease. They'll publish that information in the diligence vault where a user can see the completed inspection. So those are exclusive listings. And then there are select listings and select listings are properties where Roofstock will represent the buyer on the transaction. And on those ones are identified on the MLS by our technology as well as our local brokers.   Michael: So next question, I'll take it. Are there creative methods to utilize a VA loan or other lower down payment methods to purchase rental homes that are set for cash flow instead of as a personal residence? Short answer is no. There is always creative ways to finance properties. And so one of the great ones that I like utilizing is just with a HELOC. So if you have a primary residence, you have an investment property that has some equity, you can establish a HELOC on the property which stands for home equity line of credit and utilize that as your downpayment.   Now, typically, there's going to be some seasoning requirements from lenders, which basically means they want to see the money you're using for your down payment sitting in the bank account several months in advance of the purchase. So if you know you're going to making a purchase, be thinking about seasoning some of those funds and drawing on that HELOC. Another way to do it is using a cash advance from credit cards. It's something that I've never done personally, but I know a lot of credit cards have a cash advance option, you just want to find out very specifically from your credit card company, what the payments look like back on that if you're paying, you know 18 to 20% interest like a typical credit card on that money. There's a typically a fee associated for drawing on that cash advance line. So finding out what that fee is. But that's another way to access quick cash. Any other thoughts for creative financing?   Tom: It just gives me the willies. The idea of taking a credit card advance that no it's a little bit above my paygrade of like taking risks with credit cards.   Michael: Yes. Yeah. It's not something I've ever done. I've heard about it. I you know, in theory, it could be done. But again, that's nothing I've ever done. Yeah. Any other creative financing tips?   Tom: Oh, the borrowing gets your 401k. You mentioned Oh,   Michael: No. So that's a really great one. So we record an episode with a certified financial planner. So check out Episode 73 for a deep dive with a certified financial planner to get access to some additional ideas to learn how to finance investment properties. Alright, so Emil question for you. I just made my first investment property purchase in Indiana, I live in California, how do I scale that property into more go?   Emil: Okay, your first one for it to allow you to do some of the things I'm going to mention it's going to take a while. So what you should do to scale currently is save more earn more like try to save up by the next one, right? But over time, how is that maybe the question here is like how does one property turn into more right or a couple properties turn into more. And there's a couple things that happen my second property with Indianapolis and so I'll talk about that. Now, this property we bought for, I believe, around 115,000 in Indianapolis in 2017. And when I bought it interest rates were at about 4.6%. And today they're at about three and a quarter. And in that time, it's appreciated from 115 to about 141,  150. And so what I'm in the process of doing right now, after three years is a cashout refi. Since the markets been good rates have come down, I'm actually going to be able to pull out most of my original investment and lower my interest rate so that my monthly payment isn't really going to change, I think it goes up $10.   So that is just some just luck of the environment appreciating and interest rates going down. And so I'm going to take hopefully 15, 20 grand, and now use that to go buy more properties. So that's one way you can scale up giving it time you're going to pay the debt down, hopefully appreciate. And then as interest rates change, you can take advantage of these different environments. That's one way.   The other way you could do it is again with time, instead of doing a cash out refi you could sell and 1031 exchange into something else. Maybe instead of a single family home you buy two single family homes or a duplex or a triplex or something that's another way you can scale up your one property in to more. Both those things require some time obviously.   The third way that I found that you're going to be able to to grow your portfolio from one or maybe a couple properties is the cash flow. So one thing I've done over the years, I've never touched a penny of my cash flow on these properties, except to reinvest in more property. So again, it takes a little bit of time but all these things are gonna add up and with more properties Get more of the effects of these things. And that's how a small portfolio is in my eyes and grow into a bigger one with just some consistency from using these three different methods.   Michael: Love it. Alright, Tom, question for you. What would your advice be to someone who is currently a renter? Should I focus on getting a place in my own? Can one reasonably manage that and getting a hand in real estate investing? And either tips to start thinking about how to start thinking about that?   Tom: Excellent question. So we actually had an episode on this episode 91. That was a showdown comparing renting versus buying you're buying your personal property first, or buying a rental property first. And I think this is very situational. Depending on where you live, it may make sense to buy a rental and continuing to rent, it may make sense to buy an owner occupied property, so or it might make sense to do both and do what's called a house hack, where you buy space that's a little bit bigger than what you need, and you rent out the remaining space. I personally bought a rental before I bought the house that I lived in. I before I bought an owner occupied house, it made sense to me, the properties were just so much more expensive, and the area that I lived in that I was fine having the flexibility of renting while finally starting to participate in all the upside of owning real estate.   So there's this really interesting fact I remember I worked at one of the very first publicly traded REITs. And in one of our slide decks, when we were raising money, there was this inverted relationship between homeownership and the unemployment rate. So if you look at countries like Scandinavian countries, they tend to have low homeownership, but they also have really low unemployment, versus a country like Greece, where they have high homeownership and higher unemployment. The idea is, in areas where you are not as tied down, this is a thesis behind that is areas where you have a lot of renters and you're able to move around to wherever the jobs are, there tends to be lower unemployment.   So I think driving that back to the original question about buying your own home versus buying a rental, I think there's just a lot of value of having flexibility as a renter, but you also want to participate in real estate investing. So the natural solution to that is to buy a rental property first continue to rent. But again, you know, it'll really matters where you're living at if the prices are not that expensive, then maybe it makes sense to buy house hack all that good stuff at the prices of homes where you live that are more expensive, maybe it makes sense to invest somewhere else.     Michael: Great points. So I'll take this next question. How do you find a mentor? So it's kind of a self serving answer, you can check out Roofstock Academy comm that education program comes basically with a one on one coach and a mentor and accountability partner, as well as tons of on demand learning and a bunch of other benefits that you can check out on the site.   But above and beyond that, you can reach out to your local network of people, you're kind of first sphere of influence and see Is there anybody else that you know, directly, or maybe even indirectly look at that second sphere of influence, and see if there's anybody doing what you're looking to do? Not someone talking about what you're looking to do, but someone actually doing what you're looking to do. And then you can check out websites like bigger pockets, there are tons of active investors on there, I would definitely check out your local real estate club, meetup groups, and that's probably virtually right now, that's still a great place to network online, check out Twitter, there's tons and tons of active real estate investors on Twitter, myself, and Emil and Tom are on there. And so I think those are all great places.   Kind of above and beyond that you can go work in the space, go work for a property management company, go work for an investment firm, go work for a read, get your hands dirty with other people's money, and figure out how the professionals do it and then go look to do it for yourself. You could also go volunteer for somebody, if someone's there's a big investor in your area, find out who they are, and ask if you can help them out and work for free. I think so many people throw up their hands about saying, oh, why would I ever go work for free? It's like you will, because you don't know how to do something. So to get somebody to teach you think about what you're asking them to do. You're asking them to give up their time to help you do something which might not have any kind of return for them. So be thinking about ways to add value when you're looking for a mentor, don't just run up to somebody that has more experience and be like will you be my mentor? It's a relationship. It's a friendship, hopefully. And so look to nurture that and blossom that and think about if you were in their shoes, how would you want to be approached as someone who's going to teach somebody else how to do something? So that's that's how I would approach that.   Emil: Can I add some real quick there?   Michael: Totally.   Emil: So sometimes you can feel really easy to get hung up on what value can I provide? If there is no like if I can't work for them. I just want some advice or something. I think a lot of people who will give you advice or offer some like initial mentorship. I think if you do what you're saying you're going to do or do what they tell you to do. It's such a good way to stand out because they probably give a lot of people advice and tips and stuff all the time, right. They go for coffee. And nobody follows up or follows through on what they're going to say, or that advice they gave them. And I think when you can show that person, like follow up in a month and say, Hey, I did what you said, Here's what's happened. I think people love that they love, like being part of someone else's story, right? They people, like when you reach a certain level of success, they like to give back. That's why they're meeting with all these people grabbing coffee, whatever. And you really stand out as someone that they should invest more time in, if you're actually doing what you say you're going to do, implementing the advice they give. So that's the other tidbit I'd give on, on people looking for mentorship out there,   Tom: I was just just, you know, agreeing with a meal on people, like want to help other people, you know, and if you're able to kind of follow through, it's been really enjoyable to see people be successful, who, you know, have helped them a little bit along the way. But being proactive and following up is really important to make it worth their time.   Michael: Absolutely. And then just to put a bow on this being teachable, and being open is I think, a huge, a huge thing here too. Because if you go to somebody looking for mentorship, looking for guidance, assistance, whatever you want to call it, and they give you advice, tips, tricks, whatever. And you're like, Yeah, no, I've already tried that doesn't work. Why would they ever want to help you again?   Tom: Totally.   Michael: So just don't go into this closed minded thinking you have all the answers, because if you did, you wouldn't need their help. So just be be super open and willing to receive feedback and guidance.   Tom: Leave your ego at the door.   Michael: Yep. Your ego is not your amigo.   Tom: Did you Just make that up right now?   Michael: I wish I did. I wish I could say, a buddy of mine said and I'm like, yeah, I'm gonna steal that for forever.   I'll take this next question. So if you buy property, all cash, can you refinance straightaway after closing. So with commercial properties, yes, I've done this 30 days after closing, I got 75% of my original purchase price, not the appraised value. Right after closing, for conventional for single family type stuff, residential properties tougher to do, most lenders have a seasoning period, in which they want you to own the property for anywhere from six to 12 months. So I would definitely have that conversation with the lender you plan on utilizing for your refinance ahead of purchasing that property, all cash, just so you get a very clear picture of, Okay, I've got to own this property for six months, nine months, 12 months, whatever it is, and I know what my cash flow is going to be. And I know when my how long my money is going to be tied up for. And after that I can get access to my cash. And here's the things I know I'll need to do to get that refinance here the document, I know I'll need to gather and just have everything primed and ready to go for when that time horizon does arrive.   Emil: I think conventional lenders will do the same on the purchase price after you buy, but not appraise. I think the seasoning period is for going off appraised value. So like if you want to make any home improvements, and you want to refi out, you have to wait that 6-12 month period that you're talking about.   Michael: That could be But yeah, I would just say to anybody listening, go talk to your lender, whoever you planning on utilizing, they'll tell you to get it directly from the from the horse's mouth so to speak. All right, Tom, Does Roofstock have recommended property managers? Or is it up to the investor to search one out on their own?   Tom: Yes. So whenever roof stock goes into a new market, what they'll do is they'll research the top, say 10 biggest property managers in that area. After doing that they'll do a phone interview. And for ones that pass that they'll actually do an in person interview, will they'll go to the office, they'll take a look at their lease, they'll ask questions, operating questions like what's their standard operating procedure as it relates to tenant screening, setting rent. So they'll go through this exercise in evaluating a local property managers.   But with that said, I would really recommend people do their own homework as well. If you're going to use professional property manager, it's a great head, start getting some feedback from via Roofstock or somebody else on a property managers but it's still worth your time to go through the exercise of talking to that potential vendor just because just as a remote investor is just such a key relationship to being successful.   The last thing I'll add related to property managers, as well Roofstock does do this exercise of finding preferred property managers, you are more than welcome to bring your own property manager if you want to self manage it think of Roofstock as the river guide where they'll help you out if you need to help. But if you know what you want to do, great, that's awesome as well. And it's the same thing with lenders as well, where Roofstock will find some preferred lenders, but you're more than welcome to use your own lender or all cash.   Michael: Emil, question for you. And then we'll probably take one or two more and then get out of here. What's the most important things you look for when sifting through properties?   Emil: That's a good one. Most important things I would say I start with market I think we've talked about this on other episodes but okay market I want to invest in or markets, whatever it is, I think it's easier to start with one but let's say you want a couple then within that market, which sub markets do I want to target, right maybe it's a couple zip codes, maybe it's just one zip code by learning more about it and saying these are the areas I'm okay investing in. That way. You can get to the third most important one which is yield right cash on cash however you want to look at I look at cash on cash The reason you do the sub market first is because if you just do yield, it could attract you to some places you may not be interested in investing in. Or if you're just looking at yield, typically rougher neighborhoods. So I choose the sub markets first talk to property managers talk to people local in that area to learn more about what those could be. And then it's then it's your right, I can buy cash on cash, I mean, my down payment plus any closing costs plus, what do I have to put in the property to get it rent ready, if it's vacant, or whatever it is. So all that divided by my cash flow divided by that amount to figure out my cash on cash?   Michael: I love it. All right. James from Washington is asking where can we get some of that Roofstock swag?   Emil: You got to buy a property and then we send you swag.   Tom: Buy a property or join our academy and buy property and we'll send you some swag.   Michael: We will overload you with swag, James from Washington.   Emil: How about, James, leave us a review on this podcast. If you're listening, and we will, that is another way we will send you some swag. So leave us a review. Send it over to us, email it and we'll get you some Roofstock swag sent out to you.   Michael: All right, Tom, this is a question for you. I know that Tom mentioned having a separate bank account as a pro tip. But if we have a current HELOC, could we use our cash flow to pay the HELOC own? basically paying it down for a future property emergency reserve? Not sure if that would be a detriment for CPAs. But perhaps property managers can give you a breakdown for CPAs? To understand that question,   Tom: I think I do I'm gonna take a stab at it. So you have a separate bank account. And then you have a line of credit and the HELOC, I would think of those as just as your bank account is serves a different purpose than the HELOC. So you would have them working in tandem. So you have your bank account, that is your source of equity, I think might be the right way to say it or just just kind of cash on hand. And then you have a HELOC, which is a source of debt. And if you were to draw a diagram of how all of these different pieces work together, you would have your nucleus would be your bank account. And then you would have funds coming in from your property manager. And then that funds from your property manager going into your bank account would pay off your HELOC or pay off your mortgage or whatever, it'd be a little hub and spoke, spoke and hub and spoke enough. So at the nucleus of this whole thing is that is that separate bank account that you have. And I don't think you need a different bank account for every single property. I use it for just a collection of properties. So there's no reason why you couldn't have a HELOC open and then pay down that HELOC from some Automated Transfer that you have in your bank account.   Michael: And I think at the crux of this question is probably with regard to mortgage interest and using that as a deduction on your income taxes. And so, if you can show that you use the HELOC to for real estate purposes, that interest may be deductible as well. But so at the end of the year, you'll get a 1098 I believe that shows all the interest you've paid on your mortgage for a standard mortgage and you should also get one from your he lock as well. If you don't get one automatically just reach out to your lender and ask them for it. And then talk to your CPA about your specific situation about hey, I use this for real estate. How can we deduct this against the income? Or is this a deduction in and of itself. Before we get out of here, I want to wish everybody I hope they had a Happy Happy New Year. Great safe, start to 2021 looking forward to kicking this year off in the right direction. Happy investing.   Tom: Happy investing!   Emil: See you later. Happy investing.   --- https://vurbl.com/station/2QEn72i0gHA/