The Good Stewards Real Estate Podcast

Myths of REI Part 1

Episode Summary

The real estate investing gurus of the late and early 2000s spun off a bunch of myths to real estate investing. We’re going to debunk why it’s not a get rich quick scheme, why the 2% rule isn’t realistic, why cash flow won’t make you rich, the myth that rehabs will come in on budget and why third-party property management isn’t a cure-all.

Episode Notes

Myth #1: Get Rich Quick Scheme:

2:15: Flipping can get you quick access to cash if you do it right. Generally speaking, you’re probably not going to do it right early on and should expect to lose money on your first flip.

4:27: The word “passive” has become catchy. But there is legitimate passive opportunities for real estate investors. Passive investing is like investing in the stock market, but less risky. But unless you’re a trust fund baby, you’re not likely going to be one to have a “passive” opportunity to building wealth with real estate.

7:10: One key thing to building wealth over the longterm is hiring people in key roles that are smarter than you in those areas. You need to determine if you’re going to be an investor that keeps every dollar by doing it yourself.

Myth #2: The 2% Rule:

8:25: As the market has matured from the crash, the 2% rule is practically a joke. The properties that will actually work in this rule are in what we call “warzones”. Good luck collecting $600 monthly rent on a $20k house.

12:10: Homes in these areas are boarded up, never repaired after a fire simply because it’s not worth it, etc. You can succeed in these areas, but you really need to be a specialist that grew up in a similar neighborhood.

13:51: Even if the rule has evolved to the 1% rule, you simply need to focus your goal toward good cash flow after all expenses while being fully financed at the same time.

Myth #3: Cash Flow Will Make You Rich:

17:14: Granted $100 per unit is pretty good for cashflow, but if you have debt on a property, you’re not going to cashflow that much. Mindsets need to shift toward the debt paydown being the main source of building wealth, not immediately using the cash flow to fund your daily life.

20:10: What makes you rich is that refinance at the 20-year mark. It’s tax-free, as long as you let someone inherit the property at the end of your investing career. If you were to sell the property, you still owe the tax on your purchase plus what you’re into it.

21:47: If you’re pulling all the cash flow to fund your lifestyle, keep in mind that when the times come for another upgrade or renovation, where is that money going to come from? Your reserves.

Myth #4: Rehab’s Will Come In On Budget:

25:53: If you’re trying to cut your budget before you buy the deal to make it work, you shouldn’t buy the deal.

Myth #5: Third-Party Property Management Is A Cure-All:

29:10: There are some great property management companies out there, but remember that managing them is NOT a passive task. It needs to be an active effort of vetting them deeply, make sure they’re screening properly, collecting rent, proper rehab turnovers, etc.

32:00: Try not to select a property management company on the basis of price. It’s hard work. We do it ourselves and doing that alone costs us more than 10%, but we’re our own best managers.

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Episode Transcription

Andrew: And you can see the evidence of that going down these areas. You can see those houses that are boarded up, those houses that had a fire and were never repaired. You see those one after the next, after the next. I mean that you can succeed in these areas, but you need, it's the opposite. A lot of newbies, the 2% rule pushes new investors into it. You need to be a specialist, like this is your niche.

[00:00:23] Intro: Welcome to the good steward podcast, the only podcast dedicated to seasoned real estate investors who want to maximize the cashflow potential in their business. We are buy and hold investors with a thousand plus properties and markets across the U S, who bring an insider's view into the nitty gritty details of real estate investing. If you're looking to develop the mindset teams and systems that can dramatically build your real estate business and net worth, you're in the right place.

[00:00:55] Ryan: Welcome to this episode of the good stewards podcast. I'm Ryan Dossey.

[00:00:59] Amanda: I'm Amanda Perkins

[00:01:00] Bill: I'm Bill Syrios.

[00:01:01] Andrew: And I'm Andrew Syrios.

[00:01:03] Hello everyone. Welcome to the good stewards podcast. We are going to be diving into all of the myths of real estate investment, all the things that people believe that just answer. So, but first of all, please remember to, uh, to go to our website, thegoodstewards.com download our free ebook. And also if you could, if you enjoy our content, please share our podcast with, uh, on Facebook, on the social media. We'd really appreciate it.

[00:01:25] So, without further ado, let us dive into the topic at hand and the first myth, I think a real estate. It's sort of a myth that, uh, you know, has been perpetuated by the gurus of sort of, particularly the, the gurus of the late nineties and early odds, which we'll, we'll, we'll go on named, we won't name the guilty. Uh, but that is that real estate investment is, is basically a get rich quick scheme or it's, it's something that you can reach financial freedom, like that. And it's not real estate investment is the ultimate get rich slow scheme. It takes a long time to build up wealth with real estate. And I mean with flipping and things like that, you can make a large profit in a, in a fairly short period of time. But even then, it takes a while to ramp up your operations. It takes a while to, uh, to go through the whole process, you know, to start marketing for a flip, uh, to get it under contract, to do the rehab, then to sell it. And generally speaking early on, you're probably not going to do it right. You're probably gonna struggle with Josh Dorkin of Bigger Pockets, says, you know, you should expect to lose money on your first flip.

[00:02:30] I mean, so it's, it's technically possible to make a very large profit. But it's very unlikely that you're going to make such a large profit that all of a sudden, boom, you're rich. And again, we are, we are strong on the buy and hold side and believe that that is the, the way to wealth with real estate is buy and hold. And that requires, yes, getting some equity up front on a good deal, but it also requires paying your principal down over the years. And if you look at an amortization schedule, even a 20 year amortization, you don't pay off that much principal up front. It accelerates as you go past some, and that's great, but again, you're just, you're chipping away at it. Market appreciates, generally speaking, but we're talking a couple of percent a year, maybe. I think the average over the history is about 4% so that's nice, but this is a slow process of building wealth, not a quick way to get there. And I think those who, those unnamed gurus of the late nineties and early odds in particular, but there, there are some still around a have done a great disservice to aspiring real estate investors by perpetuating this myth.

[00:03:33] Ryan: Yeah. I think, I think on that kind of perpetuated myth with the get rich quick is the word passive, right? I'm like, Oh no, like everybody. You know, I think it's funny cause a lot of people who get into real estate investing or people that like. They always pay their bills. So they couldn't fathom that somebody would just not pay their rent. Right? Like, so, uh, I know for me anyway, early on in property management, I was like, you know, this is, um, one of the guys in our office has described it as sometimes it feels like herding cats, right? Like you're trying to get people to do something that really they should do, but that they're not. So I think that's another thing to address is that it's, it's not really this like, you know, fairy tale of cut a check and maybe buy a turnkey property or something and it just, it just mailbox money and it's a, it's still is work.

[00:04:27] Amanda: Well and just to clarify, there are passive investors out there. Those are people that already have money, they have lots of money, and they get to say, here, do something with my money. I'll sit back and wait for my returns. But.  our audience, and probably us. I'm not probably as for sure us, we're working in this business every single day, and yeah, sometimes we, you know, we consider our passive investors to be our private lenders, but on a bigger scale, there are, that does exist. It doesn't exist for somebody who's trying to grow their business.

[00:04:59] Ryan: Who's trying to build a portfolio.

[00:05:01] Andrew: Yeah. Passive real estate investing is like investing in the stock market, and that's when you'll see those articles that say like, okay, real estate, the returns on real estate will be in between. There'll be higher than the bond than bonds, but lower than stocks over the longterm, because real estate is riskier than bonds, but less risky than stocks. And that'd be like investing in a reach or investing passively in a syndication. Or something like that, and that's all well and good. We're not trying to dissuade that type of thing, but it's not the type of active real estate investing that we're discussing most most of the time on this show.

[00:05:35] Ryan: You need to start with a few million cells less.

[00:05:37] Well,

[00:05:38] Bill: trust fund babies have an easy. Easy way to earn millions and millions more because they start with that. But I think the...

[00:05:47] Andrew: How to become a millionaire start out as one

[00:05:50] Bill: or according to a sir Richard Branson, how to become a millionaire, start with $1 billion and then buy an airline.

[00:06:00] So that was his...

[00:06:02] Amanda: Easy-peasy, let's do that.

[00:06:04] Bill: But I think the key here too is that oftentimes passive investment is kind of seen as a solo-preneur, or where you kind of have this independent millionaire mindset person. But I don't know a lot of millionaires,. I don't know a lot of millionaires, but the ones that I do have large organizations, they've built an infrastructure and that infrastructure is expensive. Uh, you know, every person that you hire on, every rent that you pay, every utility you have to pay for yourself to get into business. Uh, your phone lines, you know, on and on and on. It's all expensive. So you have to factor that in as you're growing a business in terms of what it's going to cost. And often buy and hold investment, I think is survive till you thrive. I would put it that way.

[00:06:58] Ryan: I think it's also one of those, um, to kind of touch on that. If you wanted to do it all yourself and work a hundred hour weeks, you know, you could quote unquote cashflow, you know, ten thousand twenty thousand dollars a month. But like. You know, I, I use the, I've got the expression like you can build businesses that serve you or enslave you, it's your choice. And I feel like that's kinda how this goes of, are you going to hire people that are smarter than you in the roles you're hiring for? Or are you going to try to keep every single dollar and do it all yourself? And you know, um, I, I agree, Bill, I haven't, I haven't met many people who are very successful, are very affluent, who are control freaks that do everything themselves. Now. I've met some control freaks that are very successful that have staff. Um, but I, I think that's a good differentiation to make.

[00:07:48] Bill: Yeah. You want to do what you do best. I mean, this is getting into, uh, other myths possibly, but, and what do you do best? And then you hire the rest or you sub out the rest because you can't do everything. Being a Jack of all trades is really a kind of a recipe for mediocrity is what it is. So focus in on what you do best. And let others Excel in what they do best, but find those people as fast as you can.

[00:08:17] Andrew: That being said, uh, finding those people involves growing one step at a time and not becoming rich quickly. Real estate takes, uh, it takes time. It's, it's a matter of patience and, uh, and a perseverance. But let's move on to topic number two. The second myth of real estate, this is a buy and hold myth, and it's the, the dreaded 2% rule. Um, this rule is kind of gone out of favor as the markets continue to appreciate. Um, but it should have gone out of favor from the very beginning. She just died on arrival cause it's garbage. Um, the 2% rule says that you should invest in buy and hold properties and rentals, that the rent is 2% of your all in cost. So if the rent, if the all in cost is $100,000, you're rent should be $2,000. Now. Anyone familiar with most markets knows that this is just simply unattainable. And nowadays it's pretty much a joke. But even five years ago, six years ago, it really was a rule, because rents go up slower than prices. And the reason this is the case is because, especially when you start to get into a homeowner markets or markets that have homeowners and investors, the rent the. The, basically the income potential of a property becomes less and less relevant. You're now competing against people who need a rental income and also against the people who want to just buy the house because they want to live in it, and so they're willing to pay more for it, and that bids up the price of the property above what is simply will rent for.

[00:09:46] In the lower end. So rents go up slower than, than prices. Uh, generally speaking, what the rule does then is push people towards the worst areas, especially new investors. It pushes them towards just these areas where, you know, you know, the crossroads of warzone and skid row. You know where that, where that intersection meets by the house right there that's boarded up and dilapidated and hasn't been occupied for 17 years.

[00:10:11] Bill: Make sure it's on a busy street too, because that's a really important,

[00:10:16] Andrew: yes,

[00:10:16] Ryan: I think Ben Leibovich calls these $30,000 Midwestern pigs

[00:10:21] Andrew: No, he doesn't have good things to say about them.

[00:10:23] Amanda: And, they don't work out well.

[00:10:26] Ryan: Yeah. You want to talk about the passive piece? Good luck collecting rent from somebody paying $600 to be in a $20,000 house.

[00:10:32] Andrew: Yeah. That's the problem. These properties only, they look good on paper, but they only look good on paper. The issue, like a roof costs the exact same on a, on a $50,000 house as it does on a $200,000 house. You know, you know, square foot per square foot. Some items might be cheaper, the countertops might be cheaper. They're free, you know, the refrigerator, right? Which even the furnace isn't going to be cheaper. You know, a square foot per square would, it actually might be more, you know, the, the, you know, replacing a, a, a wall might be more expensive cause it's old plaster and lath and not new, newer drywall. Same. You know, he might have to replace plumbing cause it's old galvanized plumbing. Not newer stuff like Peck. So they're actually by being more expensive in that regard. So your expenses. You know, you're basically, your operating income will not cover your operating expenses on these properties and the only way to make, and so every month you're bleeding there, it's harder to find good resident or plenty of good residents in rough areas, but it's harder to find them and it's more likely you'll have one who's trashed at the house and one of those on a $50,000 house that rents for $500 or whatever. Um, it's going to take a lot longer at $500 a month to cover. Five, seven, $10,000 turnover than it would a $1,200 a month or something like that.

[00:11:44] Amanda: And one thing is, I feel like when you're trying to make those, um, you know, you're a landlord struggling, um, or maybe you're not struggling, but you're making those repairs and you're like, ah, I have to replace the plumbing in this house, and that's $15,000 in my house is worth $20,000. Like, that's a tough pill to swallow. So some points you're like, well, I'm just going to walk away. I mean, it just. It's not. It's not something that's worked out for us.

[00:12:10] Andrew: And you can, and you can see the evidence of that going down these areas. You can see those houses that are boarded up, those houses that had a fire and were never repaired. You see those one after the next, after the next. I mean that you can succeed in these areas, but you need, it's the opposite. A lot of newbies, the 2% rule pushes new investors into it. You need to be a specialist like this is your niche. And...

[00:12:31]Ryan: In my experience, the people that do well in these areas grew up in these areas. They live in these areas. They know the people. Or there's somewhere like a cross between like a, you know, a, um, a mafia, bookie collector and a slumlord. Um, Bill and I looked at a portfolio of these and, you know, the, the guy actually told us when we were looking at 'em, you know. Well, people know if they don't pay me that bad things happen. And it's like, well, that's not how we run a business, so this portfolio is not for us.

[00:13:04] Bill: Then I remember looking at a multifamily in a similar way, ryan, where, uh, the, uh, we were met by the property management company and they said, well, we always come down here to collect rent in cash in person. That wasn't a real good sign for me that this was a longterm hold that I wanted to get a hold, that I wanted to get a hold of myself if that was necessary, that's not the area of town I want to be in.

[00:13:28] Ryan: Yeah. We Bill and I looked at one here in Indy that the. Quote unquote property manager met us at, and it was one of the tenants who was making a tuna casserole. That was going to be what he ate for three meals a day for the week, but what made it even better was he met us in a robe and had a giant pair of tweezers and was smoking cigarette butts. He picked up from around the grounds, he called it short butting it.

[00:13:52] Andrew: That's economical. That's saving money.

[00:13:55] Ryan: I don't think this is the property for us.

[00:13:57] Andrew: I wouldn't mention one more thing about the 2% rule before we move on. And that is some people have changed the 1% rule or things like that. You know, the 1% rule is certainly better. Um, but generally speaking, the best thing about the, the 1% or whatever rule is to compare properties in the same area. So if this property is very similar, like is in the same general areas as this other property. This one's a 1% , that one's a 1.2% is sort of a way of doing a rental comp on that area. Comparing across areas is generally a bad idea. And so, um, because it's again, like certain areas, operating expenses will outrun your operating income and you're just going to bleed every month. And so they're not really comparable. And so I would use them as a way to compare properties in the same general general region. Um, and even even be careful with things like the 1% rule, um, because they, they can be misleading.

[00:14:51] Amanda: I mean, I would say throw that out the door and do a, your own analysis every time you're looking to purchase a property and be realistic, look around, you know, kick the tires, figure out what really needs to be done. So you're not, you know, I think we've said this before, but I'll say it again. Don't always go in with best case scenario as your expectation.

[00:15:11] Andrew: Don't ever go in.

[00:15:13] Bill: I think the goal, the ultimate goal is to cashflow being fully financed. And that may not be up front. Obviously when you're doing value add and you're rehabbing the property, and maybe you have a higher interest loan on the property from a private lender or hard money lender, but ultimately when you BRRRR the property out and you come around to refinance that property at the lowest possible interest rate from a likely from a local bank or regional bank, then you want to be in a position where you actually are making cash flow and you're fully financed. Or could be fully financed and still make cashflow. That's, that's your goal. And when I got started, and when, you know, the pinch came to shove, uh, you know, and things were tight, no question about it because you had to add up all your, your management expenses, your maintenance expenses, and now all those expenses had to go along with your PITI, principal interest, taxes and insurance. So, you know, I felt like. If I could, if I could make $1 cash flow and everything was paid, actually every single expense was definitely paid, then. That was something to consider. Other people have a higher margin and I understand that, but when you're, when it's tight, that's, that's something to consider.

[00:16:32] Andrew: Good words of wisdom, and we should probably move on to the next point before we run out of time here. So the next point is cashflow. Uh, cashflow by itself. We'll make you rich. And I think there are some people who believe like, Oh, I'm just going to build up a portfolio and live off of $5,000 a month and cash flow and cash flow is nice. It's a good thing, and it eventually can get there, but it kind of goes back to the first one. Takes it's time. Real estate is a bill is a slow method of building wealth.

[00:17:04] Amanda: Well, especially if you're following what bill just said and you're getting $1 of cash flow,

[00:17:09] Ryan: 5,000 properties

[00:17:14] Andrew: That'll take some time, they'll take some time. I would generally push more for closer to $100 per unit, but um, even still, if you have debt on properties, you are not going to cash flow that much. I mean, on a large apartment complex with cashflow, some sure. At least you'd better. I'm on houses, small multi's, it's going to be fairly tight. Even if you, I mean, even if you're cashflowing 50 to a hundred dollars a month per unit, we just thinking of that conceptually, how much money do you need to live off of? Have a family, I mean, it's probably starts at like 25 $300 and that's extreme, absolute bare minimum in a Midwestern cheap town. And so that's 25 units. Most people, that's quite a few for most people. So.

[00:17:55] Ryan: I, I think the, the thing we're discussing here is really kind of a mindset shift from a small mom and pop investor to looking at this on a larger scale. And that's on the larger scale where you're really making your money and building your wealth is in the debt pay down. It's in the property, cash flowing enough to pay for itself, and maybe you get some appreciation, but as that, that gets paid down and pay it off. If you have $10 million worth of real estate and you finance it on a 15 year am. Paid off in 15 years, you now own $10 million worth of real estate. That's appreciated, free and clear. I think most people would argue you are now wealthy, but I think it's different if you're, if your goal is like, well, I'm going to get $5,000 and then quit my job in first off. Is that really all you want out of life would be my first question, but I think it's also, you know, do you want to ultimately have to do everything yourself. Because you can't afford to hire because you're living off it.

[00:18:57] Bill: Yeah, and I think when you combine the idea that this is a get rich slow scheme, so if the myth is, is that cashflow, you're going to have lots of cashflow in real estate. I think the unmyth is that the way you get rich in real estate, and I think you touched on this, Ryan, is through refinancing, and that means you've got to see it as a longterm. Get rich slow scheme because refinancing is not going to happen for five, 10 years down the line.

[00:19:25] Amanda: Best case scenario. Likely more than that

[00:19:27] Bill: best case scenario. Yeah. And that's if you have an appreciating market, uh, if you don't, then you're just paying down your mortgage, which you will over time. And many Midwestern markets, uh, are, you know, lenders are on a 20 year amortization cycle, which sucks at the beginning, but it's pretty good when you get towards that 20 year Mark. But at that point. When you refinance, that's when you get rich. And that's when you bring in cash that yes, you increase your indebtedness again, but you bring in cash that is not taxable. So it's like, Oh, 100,000 here, 100,000 there, and I don't pay any taxes on it.

[00:20:04] Amanda: And I just want to add one little caveat. When you go and sell the property, you still owe the tax on your purchase plus what you're into it. And recapture that depreciation and the difference between your sales price. And if you refinanced it many times along the way and took out lots of money, you're going to owe the debt. So just. Yes. When you pull our refinance money out initially it's not taxable. At some point down the road, there will be tax to pay on it. It just depends on who's paying it.

[00:20:35] Bill: So another thought is to...

[00:20:37] Andrew: The goverment always gets it's money.

[00:20:39] Bill: or let somebody else inherit that property. So the basis, the tax basis goes up to zero. And they can start all over again, which is pretty cool situation.

[00:20:50] Ryan: Bill's a fan of buy and hold for any of our listeners and buy an old forever at that.

[00:20:56] Andrew: I think we've moved a little bit off the original point, but the original point is that cash, the, the. The mindset of I'm going to live again back, since I'm going to live passively off of my passive income from these real estate real estate. I mean, eventually, eventually you can get there, but it's a very longterm thing and really the way to get high cashflow, particularly from single family and small multis is having no debt or paying off your debt. And that's why I get high cashflow. But of course, as you just mentioned, that, uh, pulling out, refinancing out that equity is the way to get a large amount of cash. So there's different ways to play real estate in the long run, but, um, the idea of living off their cashflow in the near future or even in the intermediate future is really kind of a pie in the sky thing and not something you should expect going in.

[00:21:47] Ryan: I think the other thing to keep in mind too, is. If you're pulling out all the cashflow and you decide you want to upgrade a property, where does that money come from? Right. For me, I would rather, you know. Flip, wholesale, wholetale, do some other things to pull in some cash to pay my bills. That way our properties can be upgraded by our, by our portfolio. Right? Cause it's, you know, we may have done a rehab now and that's, that's all fine and dandy and the property looks great, but 10, 15 years from now, we're going to need another remodel. And if I've pulled out and lived off of every dollar of cashflow. Where am I gonna wear 'em where's that going to come from? So I think it really, I don't know. I'm, um, maybe it's like the Southern California prices that have, you know, ruined my expectations of what's reasonable to live off of. But, you know, when I started, it was like, man, if I could just get 3000 a month, I could like retire. Right. Um, you know, now it's like. I don't know total, uh, what we're collecting in rent, but it is way more than I used to make a year per month. But it's, it is a business. This isn't something that I think it's like any other business. If you suck all of the liquidity out of it, um, you're gonna bankrupt it on itself. So that's, that's my personal opinion.

[00:23:11] Bill: is the unmyth need here is, even though the I of ideal, which longterm buy and hold rental properties, uh, is, it's an I-D-E-A-L investment, but the income, which is the I, is something that you need to defer and to put back into the business just like any new business that you would start, you want to put every resource you possibly can, which kind of moves into the idea of living modestly. Uh, and, you know, having a mindset that, uh, I would rather, um, oh, there's a great, uh, I think a great movie out called Broke, which should talks about professional athletes who many of which by three years after they're finished with their careers, go broke and a line in that said by one athlete who did it the other way. He did it the right way. He said, I'd rather live like a Prince for a lifetime, the than a King for a year. So you have that kind of mentality. Look, I'm going to say, say what I have. I'm going to live modestly. I'm going to invest what I have. Prudently, so that in the long run things will go well in my financial life.

[00:24:29] Ryan: Bill is not getting bottle service at the club.

[00:24:34] Bill: What club, what club?

[00:24:39] Andrew: Let's keep on, keeping on here and we'll move on to myth number four. Myth number four is one we've touched on before. You can check out our episode on rehab, but the myth is that. Rehabs will come in on budget. I guess that's the best way, particularly early on. Rehabs they can, they can come in on budget if you, especially if you really go through a property diligently. Creating, a long a specific scope of work, add in contingencies for add ons, things you didn't see, give inspections before and do due diligence upfront. But they will not come in under budget. They can, they, they often go over budget. I've heard plenty of people complain about budgets going over. I think we all have experienced with that having happened, I have never yet once heard from a real estate investor of any sort saying, yeah, I have a problem with, you know, I'm always budgeting too much. I'm borrowing too much to do my rehabs. I'm, I, you know, or anything like that. I'm not getting good enough via, I'm not going to get enough deals because I'm too, uh, I'm always, uh, I'm bending too. Too low cause I put too much in there for rehab. Nobody ever, I've never heard that complaint. I've never even heard it with specific properties like we'll have like, Oh this one came in a little under budget. That's great. But I never hear like it we just had all this...

[00:25:53] Ryan: Extra cash sitting around. What I typically find is if you're trying to cut your budget before you buy the deal to try to make it work, you should not buy the deal. Um, I have a few in mind that it's like looking back, you know, I don't know that we should have bought this one. And they were ones that, it was like, well, you know, if we just do this and this and you know, maybe if we go with like lower ends, like if you're trying to sell your contractor on charging you less, so you think you can make a deal work at the end, you're either not going to finish the project. You're going to run over budget or you're going to have a property that you're just not totally thrilled with the condition of.

[00:26:31] Amanda: There's is a word for that. I'll cut my budget. It's called change order. When they come back and add back in what they told you in the first place with the cost, you'll pay for it.

[00:26:43] Ryan: I think the other thing too is not underestimating what you want the finished project to look like. Bill and I have had a few that we initially bought and we're like, okay, it's, you know, on a boiler and that's fine. And then we decide, or in the one I'm thinking of, our boiler started having issues and it was, okay, we're going to move to HVAC, which was an electrical upgrade. Plus the HVAC, and then it was like, well, we've got these really nice units that have everything but washer and dryers. So I guess we'll put it in washer and dryers now. So I think go in with, um, begin with the end in mind. Is that a, that's a, that's a quote. Bill likes. Thank you. Stephen Covey. If you go into it thinking like, okay, we're just going to carpet and paint it. You gotta be pretty careful. Like what is the rest of it look like? What are the mechanicals look like? Otherwise you're gonna end up with stuff that, I mean, you're pretty much a slumlord by accident.

[00:27:34] Bill: Rehab by its very nature, gets uncovers things that even a diligent, uh, property inspection doesn't see. We were just, uh, two days ago, some guys, uh, some guys who work for me called me up and said, Hey Bill, you gotta come over here cause they were putting up a fence. I hate to get those calls. You know, that. And as they were putting up this fence to the side of this fourplex, uh, they had noticed that the siding was really, really spongy right there in the corner. And then was we looked at it more closely. Oh yeah. It's kinda diving into that corner. As a matter of fact, and we realize that over many, many years, there had been a water seepage behind this area. And so. What do you do? Well, it's, it's on the, on the agenda to get it fixed, but that all costs money.

[00:28:23] Ryan: Flex Seal.

[00:28:25] Amanda: Yes, you always seal that moisture in. It always works out the best.

[00:28:28] Bill: so, so budgets grow, they don't shrink when you're doing rehab. Generally.

[00:28:35] Andrew: Yeah. So it's just, no, this is one of those things where it's not like, it's not one of the, you're aiming for the middle and the, you know, you're trying, you're trying to hit the golf ball straight down the course, and you could either, uh, hook it or. Oh God, we'll just slice it, slice it. You can get a hook or a slice it. No, it will always be a slice unless you're right down the middle. So think of it in that way. Mistakes are almost always in one direction.

[00:29:00] Ryan: Put in a few percentage of cushion.

[00:29:01] Andrew: Yeah, make sure to put a contingency in there. Um, let's go to the, the final one here to wrap up the show. And that is that third party property management is a cure all or it's just a way that you can pass it. Kind of going back to this. The mindset of things. You can be passive. You can buy properties, buy and hold and do it passively. Now, I don't want to diss all third party property management guys. There are good ones and there are ones that can do very well by you, but it's not a passive experience. First of all, you want to find them and that needs to be an active effort of, of asking for references of calling, several of, of interviewing them, of interviewing their, uh, interviewing some of the, you know, getting references, interviewing their clients and, and kind of going through all of that. Then you want to follow up on them, get the good reports, uh, from them on a regular basis about the rent roll your income. You know...

[00:29:54] Ryan: You still have to manage them.

[00:29:54]Andrew: Make sure that you have to manage that. Make sure that they're screening properly, make sure that they're collecting rents, maybe go check on the vacants, make sure that they did proper rehab turnovers and things like that. Check off on their bids when they're doing those turnovers. And so you have to manage a manager. If you're going to, you're about to be one diligent, finding one, you have to manage them well and you have to be willing to leave them if you're going to use them. And so. And, and also there are there. Unfortunately, there are some ones that, there's some bad ones. There's some ones that are over their head. Um, and very well might be better. Like we manage ourselves and generally recommend that. Um, and that obviously isn't an easy thing with third party property manager. It's not just something to turn the keys over and. It's done.

[00:30:35] Ryan: I think it's a moving target of like, even if you hire a property management company, that's great that everything's awesome with, it's still a people based business. So as people turn, as people come and go, policies and stuff changes, your experience may start to go downhill. A lot of property management companies, I'll see reviews that were like, Oh my gosh, these people are best thing ever. And then like all the recent reviews are downhill. So I think it's. You have to do the same thing in your own business with your own staff of like, it's a moving target. You have to stay on it, you have to manage it. It's not going to, I think the biggest lesson I've learned in property management and property management has kicked my teeth in over the past few years is like you have to stay on top of it. Just because you told somebody it's like trust, but verify. Same thing, whether it's your own staff, whether it's a property manager, you have to be in there looking at it and knowing what's going on. Um, and I would argue actually the larger you get, the more dangerous this gets. Have you let things slide for a few months on a, you know, 400 unit portfolio. That can cost you a lot of money.

[00:31:44] Bill: And I think you want to be committed to get inside your property at least once a year, even if it's out of state. Uh, just thinking of yourself on cruise control is a really a recipe for disaster in business. You're still a business person.

[00:32:00] Amanda: The other thing i'd add to this is if you're going to go and interview and look for property managers. Try not to try not to do it as getting the best deal. Try not to do this about money. Cause in full disclosure, it costs us more than 10% to manage ourselves. But we're willing to do that because we do a really good job with it and we can make up with it in other ways. Lots of people wouldn't negotiate that down. And you know, there's not a lot of money in property management when you go and do the math, especially if you look what they're doing. And so if you're just really just trying to get the best deal out there. Well, it might cost you more than that percentage point that you're trying to negotiate.

[00:32:40] Bill: I consider, and this isn't pejorative, but I would consider property management as the blue collar work of real estate investment and blue collar work is really, really important in our society in general, but it is grinding it out type of stuff. It is taking lots of phone calls, being involved with people are upset at times and dealing with disappointment and. Uh, situations that you'd just rather not deal with. Uh, but so it's a tough business. And do those people should be paid well for it and appreciated for what the, when they do a good job.

[00:33:16] Ryan: I think the last thing to keep in mind with it is that these are still people. Um, I hear a lot of real estate investors talk about their property managers. Like they're just like, you know, this, the scourge of the earth, or that it's somehow the property manager's fault. That a tenant didn't pay rent, or you know, you, you have to look at these as this is a working relationship. If you go into a property management relationship with the understanding of like they're going to handle everything, it's going to be perfect. I'm not ever going to have to deal with anything. I'm just gonna get a check in the mail. You're setting yourself up for failure. You need to realize like it's going to be a working relationship in which problems do come up.

[00:33:53] Bill: You make your money when you buy, but you retain your value when you manage well or have somebody manage well for you

[00:34:01] Ryan: or manage your managers as well.

[00:34:03] Andrew: And on that, we will wrap up here. Those are some of the myths. There are more. Maybe we'll have a follow up episode on additional myths, but for the time being, please again, thank you for joining us. Please see us at our website thegoodstewards.com, download our free ebook, and if you enjoyed this, please share our content. We'd very much appreciate it. Thank you.