This Matters More Than Cash Flow (Most Rookies Ignore It) (Rookie Reply)

Ashley:
If you ever wondered if you really need a realtor to buy an investment property, or have you ever thought about putting 40% down and self-managing making it a smarter move? Well, today we’re going to break that down along with what do you do when a borrower ghosts you? This episode will help you avoid costly missteps and move forward with confidence. This is The Real Estate Rookie Podcast. I’m Ashley Kehr.

Toni:
And I’m Tony J. Robinson. And before we jump into the first question, let’s just give Ashley a big shout out from being so hip that she knows what six seven is. And if you don’t have a kid between the ages of probably, I don’t know, eight and 18, you might not know what that is, but look it up, give yourself a good laugh of going down the wormhole, trying to figure out what it means because we don’t even know what it means. We just know that we should be saying

Ashley:
It. We don’t. But also, Tony brought up too, because before I said I want to say the episode number for this, he said, you do realize this release is in January and it’s probably an old trend by now. So everybody is probably rolling their eyes and every kid that’s sitting in the back of your car right now listening to this is probably like, “That’s so yesterday, that’s old.”

Toni:
That is so yesterday. We’re such millennials.
So my son’s almost 18 and he called me Unc the other day. So I’m like officially my Unc phase. Well, let’s get into the first question for today. Today’s first question comes from McCauley in the BiggerPockets forms. And McCauley says, “I’m looking for guidance on whether or not I am required to use a realtor to buy my second property or not. I hear all of these success stories from so many people about buying rental properties, but no one has ever mentioned if they use a realtor or not. I assume some state laws require you to have a real estate agent in order to close on a house/investment property. My question is, do I need a realtor to buy on/off market deals? And if so, what are some good questions to ask to make sure their expertise aligns with my investment strategy?” It’s a great question.
And it’s the perfect kind of beginner question that I think can maybe put to rest some of the misconceptions that exist out there. As far as I’m aware, and obviously I haven’t purchased in all 50 states, I don’t know of any states that require you to use an agent to transact on real estate. Now, I know there are some states asked like where you’re at in New York where you have to use an attorney for a closing, but attorneys are not agents. So I’m not personally aware of any states that require you to use an agent to transact on real estate. Do you know of any, Ash?

Ashley:
No. The only thing I would think is kind of an iffy area is if the seller has an agent and then you go to buy the property. How would that work? Because anytime I’ve done that, it’s been like a dual agent and they get the 6% commission or whatever, but you sign a form saying they’re representing both of you. So I’ve never experienced or heard of anyone that has went and bought a deal off the MLS and not used an agent, whether it’s the seller’s agent and you’re using that person to represent both of you, or if you’ve gone and gotten your own agent to represent you. So that’s actually a piece I don’t know the answer to.

Toni:
I don’t know either. I’ve purchased quite a few where I’ve gone directly to the listing agent, but I just always offer it to them like, “Hey, I don’t have an agent. You can double in the deal if you want to. ” I don’t need you to, but you can if you want to. So yeah, I don’t know if maybe there is a law or a rule around that. So if you’re watching on YouTube and you have the answers to that question, drop it in the comments and cite your source so we can all go back and double check that.

Ashley:
And don’t cite ChatGPT.

Toni:
Yeah. My good friend Chat said. Even

Ashley:
Though it probably does have the answer.

Toni:
Yeah, it probably does. But I think maybe the main point of this question is just like, is there value? So I think the first part, no. Generally speaking, it is not required to work with an agent. Now, I do think for a lot of new investors, honestly, that there’s value in working with an agent. I think about the first deal that I bought and my agent was an amazing resource, both in terms of getting a better understanding of that area because I was investing long distance, having a connection to other vendors in that market that I was going to need, namely my general contractor that I ended up hiring. So my agent as a first time investor was incredibly valuable, not so much for, I don’t know, like the transactional side, but just their overall knowledge of the market and their connections to other people.
So yeah, I would maybe even just encourage you, McCall, if you’re investing in a market where you’re not super familiar, there is value maybe in having an agent working with you.

Ashley:
And I think too, really sit down and understand what you’re not confident in so you can look for an agent who knows that well. So when I go to a new neighborhood or a new area, I rely on my agent a lot to tell me about the comms, to tell me about the area, what’s up and coming, what’s the bad parts of here, what streets should I stick to, things like that. And I think that has tremendous value. If you need help actually analyzing the deal, make sure you’re working with an investor friendly agent because I work with an agent that does a lot of selling primary homes and not a ton of investment property. And I think I don’t really rely on her at all to actually analyze the deal. I go and do that myself and I feel very confident in that, but I do rely on her.
I rely on her for showings and for a lot of the market analysis. If it’s like a different area of town that I don’t have rentals in, I really, really appreciate the information that she has and she provides for me. And I also rely on her for negotiation as in what are people negotiating in the current market? If I add in a contingency that they need to have the whole house cleaned out, broom swept and leave the appliances, is that going to cut me out as a contender because everybody else is saying, “Leave all your junk. We’ll take care of it. ” So I also rely on her for a lot of the negotiation piece. And as issues come up, even the inspection, I will rely on her as a part of what’s going on in the current market. Are buyers going to take care of this or the sellers take care of this?
So I think there is a lot of value in using an agent, but you have to know going into it, what do you need help on? Because you could get an agent that has no idea what the rental comps are and you needed help on that. And then it’s not going to be as valuable to you as you thought using an agent was.

Toni:
Yeah. Great point, Ash. That nuanced information they have about the market is really important. I met an agent once who sold property in Florida and she told me to not buy homes in her city that were built in the ’90s. And she’s like, “Any other decade, you’re fine. But the ones in the ’90s, she’s like, I bought and sold a lot of houses in this market. Those ones always suck when it comes to getting flood insurance.” She’s like, “I don’t know why, but insurance companies hate the homes from the ’90s.” You only get that kind of knowledge if you’ve done a lot of deals in a market and agents sometimes have that expertise. And then on the other side that I mentioned of just their network and their contract or their contacts, I went out to Oklahoma City. I’ve talked about it a few times in the podcast over the summer and I met with an agent who I found through the BiggerPockets Agent Finder and she gave me the lay of the land, but then she introduced me to, “Hey, here’s an insurance agent for this market.
Here’s a contractor, here’s a handyman, here’s some property management companies.” Literally gave me an entire Rolodex of people that I could then go out and network with to build my team of people to be able to do this remotely. So the right agent I think can make your first deal exponentially easier because of their knowledge and their Relodex of folks they can introduce you to. And then the last part of that question was what questions as a rookie investor should I ask an agent? First, find your agent from the BiggerPockets agent finder because those are typically folks who know and understand what it means to work with an investor and not general retail buyers who are looking to buy their dream home or their starter home. So first just make sure you’re going to the right place. But second, ask them, “Hey, how many transactions did you do last year?
Did you do five or did you do five a month?” And of those 60 that you did last year, what percentage of those were sold to real estate investors or were you working with a real estate investor? And if it was one out of those 60, okay, that’s kind of telling. If it was 49 out of those 60, then maybe that’s a different story. So I think just getting a sense of what percentage of their current client base is an actual investor will give you a better sense of if they’re the right person for you to work with as well.

Ashley:
Okay. We have to take a short break, but when we come back, we’re going to go over running the numbers and deciding how much to put down on a property. We’ll be right back. Okay. Welcome back. This question is from Abdul and the BP forums. I’ve been running numbers for a while now and came to a conclusion that in today’s market and going through conventional investment loan, which is a half or a percent higher depending on your LTV and DTI, it is better to put 40% down and self-manage to generate cash flow. Does anyone else run into this situation? I think this is a great example of not comparing apples to oranges. So when we talk about down payments and we talk about generating cash flow, Tony can say, “I have this property and I generate $1,000 in cashflow and I can say I have the exact same property, but I generate $500 in cashflow.” And then I think, “Ugh, Tony’s doing better than me.
Tony’s got a better deal, blah, blah, blah.” But you have to know the insides of the deal as to, well, Tony paid cash. He doesn’t have a mortgage payment. That’s why he is cash flowing $1,000. I have a mortgage payment, so I’m paying the mortgage. That’s why my cashflow is less. So you have to look at other factors to actually determine how these deals are comparable. And one of those things to look at when you’re deciding on putting a larger down payment is your cash on cash return or any down payment in general as to will the deal still make sense not only to generate more cash flow because Tony could be generating more cash flow, but he could have way less return on his money and could have done better investing that money somewhere else instead of dumping it into this property. If he bought a $500,000 property in cash and he’s only generating $1,000 per month, that’s actually not that great of a deal, in my opinion.
So I would say look at the cash on cash return and not just look at the cash flow that the property is generating. And if you are going to self-manage, I would still look at the numbers if you outsource it. If there is some kind of change in your life that requires you to outsource it or you get burnt out or you just don’t like it, bake it into your numbers so you know going into it, you can still generate some cash flow and keep the property afloat if you were going to hire out the management piece.

Toni:
Ash, let me ask you, because I think that there’s always nuance to this, but I mean, for Abdul to say very matter of factly that it’s better to put down 40% and self-manage, that’s a very case by case basis on how we can actually respond and answer to that question. A lot of it comes down to the market that you’re buying in. A lot of it comes down to the buy box that you’re going after, the strategy that you’re going to employ with that property. But I think to say that as a rule, 40% in self-managing is always the best option is a hard thing to state. If in your market updal and for the specific type of property, buy box strategy that you’re going after you find that to be true, then maybe this solution is not necessarily putting down 40%, maybe it’s putting down 20%, but going to a different market.
If you’re in an area where only 40% down works, well then go find one of the other 20,000 cities that do allow you to put down 20% and still get meaningful cash flow with having a property manager. Maybe try a slightly different strategy where instead of buying a single family home, maybe you’re buying a small multifamily and maybe instead of doing a traditional long-term rental, maybe you’re doing rent by the room or midterm rental to short-term rental. So I think if what you want is a less down payment and to have a property manager, don’t box yourself into looking at the same places you’ve been looking at because it’s not working there. It doesn’t necessarily mean that it won’t work in a different market somewhere else.

Ashley:
I think the last thing too is the emotional piece to it. If you’re going to put 40% down as us wiping out every dollar you have in your life savings and all your money is going to be tied up into this property. Are there other opportunities that you can use some of this money that may be a better opportunity? Also, would you actually sleep better at night if you had more equity in the property and did put that 40% down? Would you feel better not having so much debt and so much a leverage on the property? So I think there’s definitely an emotional piece. And also, would you actually want to self-manage the properties and do you have the time to do it? Do you have the skillset? Do you have the tools and resources to actually self-manage? It is 100% doable, whether you are a stay-at-home mom or you have a demanding W-2 job if you put the right systems and processes in place.
We actually have a really great book on BiggerPockets. It’s called the Self-Managing Landlord, and you can find that in the BiggerPockets Bookstore by going to biggerpockets.com/abookstore. Okay, we’re going to take our last break and we’ll be right back. Okay, let’s jump back in to our last question here. This question comes from Craig and the BP forums. So I sold a property to someone and I carried the loan as in they did seller financing. This person stopped making payments and I foreclosed on him. The property is now in my name, but he walked away and left everything from furniture to clothing and everything else. It’s like he never left, though according to neighbors, he hasn’t been seen on the property for a good six months about the time I started the foreclosure proceedings. This is all new stuff too, not junk. I’m in Northern California and we’ll be getting legal advice, just getting educated before I dig deeper into this.
The man I’m dealing with has a history of frivolous litigation and dishonesty, which is why I haven’t contacted him yet. What could he be up to and what are my responsibilities? Tony, once again, your backyard causing problems for landlords because they’re so worried about- What’s going to happen? … what you could legally do.

Toni:
Yeah. It’s funny, we had a somewhat similar issue with our hotel in Utah where in addition to the hotel, it actually also came with 13 storage units and we’ve had such a hard time tracking down who owned the things that were in these units because we weren’t getting paid for about half of them. And the previous owners didn’t know. They just didn’t even worry about it. They’re like, “Hey, it’s been there for years. We’ll just leave it there.” But obviously we want to be able to maximize that revenue. So we actually reached out to an attorney in Utah and explained the situation and got guidance from them on what steps do we need to take to do this. Now, obviously this is a self-storage unit, which is different from a single family home where you had a lease and they didn’t pay, but basically we had to go through this process where we put a public notice in a newspaper.
We had to get them a certain amount of time to reach out to us and contact us. And if they didn’t, we had a date that we’d be auctioning off their things or selling their things or disposing of their things, but there was a very clear legal set of steps we had to take to dispose of their items without breaking the law. So Craig, I don’t know what that process is in California, but I would assume there’s probably some sort of path you can take given that you’ve already foreclosed and this property now belongs to you of what you can do with those items. It could be as simple as like, “Hey, you own the property, you own everything that’s inside of it as well.” That could be the simple answer or it could be, “Hey, maybe the previous person still has some claim to it.
” But I would probably just reach out to a good attorney, explain the situation and let them give you their best advice.

Ashley:
My guess is that you’re going to have to do an eviction proceeding because in New York, I know if you bought a property that was foreclosed on from the bank, you buy it from the bank. If there are people occupying that property, you have to actually evict them. Even whether they own the property or they had a lease or not, you have to do an eviction on the property. You can’t just kick them out and throw their stuff out. And with this person being completely dishonest, and this is one thing we always make sure to do is even if another tenant tells us like, “Oh, that person moved out, they’ve been gone, blah, blah, blah, they left.” If they have stuff in there and it’s not super evident that they have left or they haven’t given us communication that they left the property, we go through the foreclosure process of having them served.
And obviously if they’re not there, we have it slapped to their door. We always use a third party to serve the affidavit, and then they sign an affidavit saying that they tried three times, a person didn’t answer, so they put it onto their door. And then when it’s still no communication, nothing, whatever, then we go through and start the eviction proceedings. So I’m assuming California probably has a long eviction period just like New York does, but that is probably, I would guess, what the recommendation is going to be is to start that eviction proceeding that you want them out of there. And obviously it wouldn’t be for nonpayment, it would just be like you’re giving them notice that you’re no longer renting to them. And I know some parts, I don’t know if it’s all California or some parts, but there’s something about if you can’t not renew their lease, so there has to be something where this person doesn’t even have a lease that you can go ahead and evict them from the property, but I’m going to guess that’s what your first step is going to be is actually going through the eviction process.
But I would say it wouldn’t hurt to reach out to the person and to ask, “Did you vacate the property? Did you move out? ” And if you can get them, I would put this into an email and have them respond in an email. I wouldn’t do this over the phone, but if you could get something in writing or better yet, send them something to e-sign or have them sign something that’s notarized saying they have vacated the property. So you say, “Okay, they vacated the property. Next step, you’re getting dumpsters, you’re throwing out all their stuff. They left it behind. They have moved out. ” And then you have something that’s notarized that’s stating that they moved out of the property, they’re gone, whatever, if they do try and come back after you for throwing in all their stuff, you have some kind of notice.
But again, talk to your attorney, but I would guess that’s kind of where you’re going to be at is starting the eviction process.

Toni:
So Ashley, let me ask, because obviously you know landlord tenant laws far better than I do. In this case, he sold the property to that person. So it doesn’t seem like there was a lease in place. So you’re saying even though there wasn’t a lease, the simple fact that they had tenancy there would still force you to evict them even if the foreclosure had already closed? That’s interesting. I wouldn’t have thought that.

Ashley:
Yeah. Think about squatters. You could have not owned the property, you could have not had a lease and you could literally go into the property and just say, “Hey, I live here now.” And still the person, the owner would have to go and evict you. So yeah, especially in California, I would say that that’s probably even more lenient of being able to, that person have a claim to the property still.

Toni:
Yeah. Some things just seem backwards, right? It doesn’t seem right that someone could not pay me money, completely not fulfill their obligations, and then I’ve got to rent the cost of getting them out of my property that they already weren’t paying for. So I don’t know. We’ve got to find a better solution for that.

Ashley:
Well, thank you guys so much for joining us today on Ricky Reply. I’m Ashley. He’s Tony. And we see you guys next time.