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Should You Ever Buy a Rental Property with Negative Cash Flow? (Rookie Reply)
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What if you've been doing all the right things to find deals such as driving for dollars, cold calling, but you're still coming up empty? We're going to tell you exactly what to try next.
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And once you do land that first property, you'll have to answer one of the most debated questions in real estate. Do you self manage or do you hand it off to a property manager?
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Plus, can a property that doesn't cash flow actually be a smart investment? We're breaking down all three of those questions today on Rookie Reply. This is the Real Estate Rookie podcast. I'm Ashley Kerr.
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And I'm Tony J. Robinson. And with that, let's get into our first question of the day. So today's first question comes from the Bigger Pockets forums and it says we just recently sold our house and finished our first deal. We've been looking for deals and haven't had much luck. Cold calling or driving for dollars. We're getting into the end of the year and heading into what feels like more of a buyer's market. Any other strategies that, that have worked for finding off market deals? We keep coming up short and are not sure if we're missing something or we just need to be more patient. This is great. I think first, let me say we've interviewed Henry Washington, Dominique Gunderson, James Zainard. I'm trying to think other folks that we've interviewed who like do a lot of off market transactions and they've all kind of said a very similar thing, that as the real estate market has shifted, as interest rates have gone up, the, the volume of good deals has, has gone down and they're, they're saying yes less often than they were maybe three years ago. So maybe it's not necessarily a bad thing that, that some of these deals aren't working out because all of those experience flippers that, that I just mentioned, they're all super surprised sometimes at what some of these deals do end up going for because they're like, how is anyone going to make money on that? So I think the fact that, that you are saying no shows a certain level of constraint that maybe a lot of other rookies don't have. Now that said, what are some other strategies that we can leverage? I think first, before we even talk about like other strategies, let's just talk about the two that you've done. You said cold calling and driving for dollars. I think my first question is have you actually, have you actually like maximized both of those strategies? If you're a cold calling, how many actual Cold calls have you made? Is it, you know, 100 cold calls or is it 10,000? Right. Driving for dollars. Have you spent four hours doing this or 400 hours doing this? And I think for a lot of people, if, if with the right obviously execution, but if we just increase our volume in a lot of ways that can solve a lot of our issues. We just do more. Right? Like that'll solve it. So I think the first thing that I would ask is have you really optimized, have you gotten the volume there? And then the second piece is, okay, well what does your actual execution look like? Cold calling, for example, if you're cold calling homeowners and let's say the volume is there. Well now let's, let's talk about what does your script look like? How are you opening up that conversation? Are you saying, hey, this is Tony, I want to give you a really low offer on your house? You know, like, are you open to that? Of course you're going to hang up the phone on you. But if you're like, you know, hey, this is Tony. Hey, I know this is like super out of the blue, but I was looking at your property on 123 Main Street. I'm just curious, like, like, do you still have that? Or like what are your plans for that? Oh, I could, I get these calls all day, you know, what do you want? Well, hey, hey, I'm just curious, are you even interested in maybe entertaining an offer on that property? Well, what's your best offer? Well, hey, I probably have to ask a few questions before I can really give you an honest answer about what I think the property is worth. I'm really just trying to understand if you're even open to having a conversation. Right. So like, like, what is, what does the actual scripting look like as you're having those cold calls? And so I think first, volume. Do you have the, the requisite amount of volume for each one of these strategies? And then if you do have the volume, are you actually spending the time to increase your efficiency within each of those? And I would probably focus on that first before I go out and start doing a whole bunch of other ways to try and drum up some drum some additional off market deals?
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I actually think there could be a lot of success just on the MLS right now in a lot of markets. It is really, really a buyer's market out there. Houses are sitting, sitting, sitting low price reductions. I looked at this house the other day that it's been sitting on the market for six months and I think it was originally listed at 600,000 and they've already dropped the price to like 465,000 like over six months. That's a huge reduction in price. So I think on the MLS there's tons of opportunity, you know, depending certain markets. Like I was just in Ponta Gorda, Florida and in that market it is buyer's market galore. Like properties are not selling, people are getting them discounted. I actually have a great uncle there that just purchased a property there and he got it for $200,000 off of the asking price that they had. And he was their top offer. They got other lower offers even than that. But so I, I think in some markets there really is a lot of opportunity to not even have to do off market deals. The next thing is like, you know how you had said like you keep coming up short and you need to just be more patient. Like Tony hit the nail on the head is like you need to be consistent and making sure that you're following up and that you're consistently going and finding deals. But I think getting, you know, making connections with real estate agents, you know, whether that's cold, calling the agents and say hey I an investor in the area, this is what I'm looking for. Going on bigger pockets and going to agent finder, connecting with agents in that market and maybe you'll get some pocket listings or maybe they already have some listings that they know that are coming up or you know, they have a property that's been sitting but they know that their seller would take less on the property. They just don't want to do the price reduction. So I think there is a lot of opportunity and still using agents for our on market deals are guys coming up.
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One of the most debated questions we get from Ricky is should you self manage your first rental or hire a property manager from day one? We'll give you our honest take right after this.
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all right guys, welcome back. So our second question, also from the BiggerPockets forum, says I'm about to close on my first investment property and cannot decide if I should hire a property management company or self manage. I have a full time job and I'm not sure how much time this will actually take. The upfront cost and monthly fee for property management seem steep to me, especially on the first deal. What have other people done and what do you wish you had known before making this decision? Ash, obviously you know you've, you've got a lot of experience in the traditional long term rental side on management. So I'll defer to you on this one. But just my quick two cents is that number one with the just sheer volume of management tools that exist today, a lot of the, the kind of grunt of, of what used to make people hate property management has been solved in a lot of ways by, by all the technology that exists today. So even as someone who's working a full time Job managing a traditional long term rental is probably a pretty straightforward task. You know, like, you know, I know a lot of folks who manage multiple short term rentals while still working a full time job, which is significantly, you know, a larger time burden than a traditional long term rental. But a lot of it does come down to do you have the right like software tools, automation, do you have the right systems and processes in place to deal with a lot of those things? But then the other piece too is just like I think desire. If the idea of you actually managing your own portfolio makes you just want to pull your hair out, then maybe don't do it because you're just never going to be as good as someone who's, who can actually maybe not enjoy but can get through that process with less pain. So is it possible? Yes, absolutely. I think so. I think the bigger question comes down to you as an individual. Is it something you can see yourself actually doing at a high level or is it something you'll actually hate that might make you enjoy real estate investing even less? So those are the first few things for me. But Ash, I'm curious what your take is.
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Yeah, so I started out self managing where I was doing everything and then I went to building out a property management company and then hiring some people, then I outsourced the property management and then I went back to building out a property management company where I was more removed and had somebody else doing everything. And then I went back to self managing so I could say I've done it all. The worst is when you are self managing and doing it all and have no help and have no systems or processes or have no software. And that's how I started out was it was I used QuickBooks and that was it. And I had the only way for someone to submit a maintenance request was to contact me directly and it was awful. I wanted to rip my hair out. I cried all the time. But I really think that you can find a happy medium. So if there are parts that you want to take on, do your research as to what's actually involved in that. Okay. So if you are going to be managing the property and say you think that you would like to enjoy leasing out the apartment and showing people you know, the apartment, okay, that means you're also going through applications, you're also setting up the showings, you're also screening tenants, you're putting the lease agreement together, you're meeting them to give them the key, do their move in inspection, when they move out, you're doing a move out inspection, you're refunding their security deposit, things like that. So make sure you understand everything that the job entails. Also look at your property. Do you have a property that you know it's a little bit older, there's probably repairs and maintenance that are going to come up or is this a brand new build where you know, maybe it's under warranty or you know, there's not a lot that's going to happen that will definitely make your life easier the less maintenance you have to respond to and coordinate. I do think if you have one property work full time at W2 you can kind of set that expectation with your tenant. You could tell somebody when they move into this property here is when or even at showings and say hey I just want you to know I work a full time job. I am available from this hour to this hour. So just when you set that expectation before they even rent and you have it right into the lease agreement, you are agreeing to rent this apartment. Knowing that I am Only available from 6pm to 9pm on weekdays, on weekends, feel free to contact me when you're not working. So I think that you know, if you set boundaries or set the expectation that you're not going to be available 247 or you have property management software in place like Rent Ready or Turbo tenant where you can go ahead and submit the maintenance request. I prefer having being self managing because you have more control over the property. You are going to care about it more than your property management company but you also have to make sure that you are going to make time for it and you're going to actually follow through through with getting things done that needs to be done for the property. But also so much software and automation that a lot of it can be automated and a lot of it can be done remote where you can be on vacation, you can be at your job, you don't have to be sitting at a desk to actually manage your properties at all. You can do it from your phone.
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Ash, let me, let me just ask one final question there. As someone who's maybe doing this for the first time and I've heard various investors say different things but some folks are like still always underwrite with property management there just in case there comes a day when you want to step away from it. We actually did not take that approach in our short term rental portfolio where we knew that we were going to build out management in house. And to this day we still do, but that was like a strategic decision for us. What's your Take on the, on the long term rental side.
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Yeah, I think that you definitely should. If you are going to build out a property management company, you're going to want to pay the company and bake that in. So I would still 100% put that into your numbers because worst case scenario, you don't actually need to do it. Someone in your family could get sick, you could, you know, move out of the country. Some areas near me have like, especially on the short term rental side, some of the towns you have to have a contact person located in that area. You cannot manage your own property in that area. It has to be a local number, a local address of someone who is managing and maintaining your property. So like if you were to move out of that town and you could no longer be that point of contact, you would need to pay somebody else to be that point of contact. So I think it doesn't hurt to bake things in if it is really, really killing your deal. And you're like, this would work if I didn't have that property management fee, then I need you to take it out. But put a plan in place that you're going to know that your insurance and property taxes are going to increase X amount per year, but you're also going to be super diligent about increasing your rent. And say you set like, I know that it's for three years I have to manage this property, but after that my cash flow will be more because I have increased the rents, my mortgage payment has stayed the same, my insurance and property taxes has not increased as much as I have increased the rent. And now I have more of a buffer three years from now to go ahead and implement property management software. So you could do it that way. But I would make sure that you have a, you know, it's not a long Runway of like, oh, I have to manage this property for 10 years, then I'll be able to afford the property management. But you know, also consider that maybe break even wouldn't be the worst case scenario if you're getting the tax benefits, doing a cost seg, you know, just normal depreciation on the property and things like that and appreciation also on the property. We have one more question after the break and this one might challenge how you think about cash flow, especially if you're investing in an expensive market. So don't go anywhere.
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All right guys, welcome back. So our last question today is one that constantly comes from investors in more expensive markets and it might be the most controversial thing we talk about on Ricky. Reply so the question says, after hearing lots of episodes about negative cash flow, I've got a question. I'm currently living in my primary residence and planning to purchase an investment property that is going to be negative cash flow. It's in the Bay Area of Northern California, a very expensive market. But I am of the opinion that as long as the rent on the investment property is at least going to be greater than my current primary residence mortgage, it can still be considered as a positive cash Flow investment, the investment property is going to be in a much better location than my primary. I might be totally wrong in my thinking. What am I missing? Well, first, you know, I guess this is a somewhat creative way to think about real estate. You know, he, he's, and let me know if I'm, if you're reading this the same way, Ash, but he's basically saying that the, the rent on the investment property is higher than the mortgage on his current primary. So like, if you compare those two things that it's still like a net positive. That's how I'm interpreting it. And I, I guess while that might be true, I don't know if I would necessarily compare those two in that way. Right. Because even if your investment property is generating a rent amount that's higher than the mortgage on your primary, the rental property still has a, a mortgage itself. Right. I guess if you were maybe paying in like all in cash for this thing and there's no mortgage on the, the rental, then maybe we can compare those two. But assuming that you have some sort of mortgage on the investment property, it's still producing negative cash flow. So I would, I would separate the primary residence math from the investment property math. Though. What I think where maybe there is a case for negative cash flow is the reason that you're actually choosing to invest in real estate. Bay Area of Northern California, you know, if history kind of is any indication, you'll probably continue to see relatively strong appreciation in that market. And if that is the case, well, maybe in 10 years from now, even if you were spending, you know, 100 bucks a month or a couple hundred bucks a month to kind of COVID whatever negative cash flow there is. If you're spending 2500 bucks a year, do that over 10 years, you've invested an additional 25k into this deal. But let's say that your appreciation has grown by $250,000, you know, or $500,000 in that same timeframe, does it make sense mathematically to give up that 25k to get 500k in appreciation? Maybe. Right. So I, I think maybe that's the math that I would focus on is the, the negative cash flow compared to the other benefits, the appreciation, any, any tax benefits, things of that sort. And then I think the final piece is maybe, is, is there a different strategy that you can layer on to actually make this deal work from an appreciation standpoint, but also work from a cash flow perspective instead of it being a traditional long term rental? Can you do something like co living where You've got multiple people renting out the space. Can you do maybe a midterm rental where you're renting out to, you know, professionals coming into the Bay Area? Can you, do, you know, we just interviewed someone who, who does assisted living facilities. Can you do that? We've interviewed folks who have done sober living houses. Can you do that? Or just are, are there other strategies you can maybe layer on? So you, you, you still get the property in a great part of California, but you also get some positive cash flow.
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I think the way that you're, that you should be looking at it is instead of the, as in, like, oh, this is covering my primary is if, if you are looking at it that way, that means that your, your, let's say your primary residence is. This is California. So I know it's probably more than this, but let's say your primary residence is $2000 a month and your investment property is 3000, and your tenant is going to be paying 2000. That means that your tenant is paying $2000 to live in a property that is probably worth more if it has a $3,000 mortgage on it. While you are living in a property, let's just say it's not as good of a property because you're, you're, it's not as much, but you're going to be now paying $3,000 to live in a lesser property, let's say. So, like, that's how I actually saw it when you said that is your tenant is getting the better house and paying less than you, and you're getting the lesser house and pay more than your tenant. So the way I would look at it as the, like Tony said, as to some of the other benefits of actually holding onto this property, and the way my brain would wrap around this is, okay, you have your primary, you're paying your mortgage. Let's say you have the investment property, your Tenant is paying 2,000, you're paying a thousand. That's $12,000 a year. Can you offset that with saving in taxes? So if you were able to do your cost sag, you were able to, you know just what the standard depreciation would be. Would you be able to offset that by keeping more of your tax dollars in your pocket each year that you're actually getting that $12,000 back or maybe even more instead of having to pay taxes on the property? So that's how. Or taxes on your income. That's how I would actually look into it and compare it more. And that's where tax planning is so important and can be key in helping you figure out if that is worth it or not. Well, thank you guys so much for joining us today on this episode of Real Estate Rookie. This has been a rookie reply. I'm Ashley, he's Tony, and we'll see you guys on the next episode.
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Hey rookies, if you're watching this, we want you to apply to be a guest on the Real Estate Rookie Podcast. That's right. Ashley and I are looking for amazing stories just like yours to be a part of our Real Estate Rookie Podcast. Now look at you don't need to be an expert. You don't need to have done thousands of deals. Even if you've done one deal, your story could help inspire the next listener
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as a rookie investor. Especially if you just got your first deal. It is all fresh in your minds and you are the best person to tell your story. Give your experience on how you got it done to help someone else get their first deal.
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So head over to biggerpockets.com guest if you want to be a part of our show again. That's biggerpockets.com guest and we'd love to have you on.