Hey everyone, and welcome to Passive Real Estate Investing. I’m Melissa Nash, your guest host jumping in for now. Let’s dive in. Today I am going to be going over a question that I received from a client of mine. Now he is a new investor and he’s buying an out-of-state rental for the first time. Now they are very excited and in education mode, they are doing all the things that they’re supposed to do. Now, I helped recommend this market and particularly this team that they’re investing with because I know that they do a really great job on the renovations and property management.
So the question that he asked me recently, now he’s already signed the sales contract, he’s going through his due diligence and he asked me, is there something that I should be looking for as far as risk factors? So that is what we are going to dissect right now.
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I’m gonna tell you what I told him. Now, I’ve been doing this for a long time over a decade, and I’ve owned a lot of properties in a class areas. I’ve owned properties in what you would call D class war zone, and I’ve owned properties in C class, B class, I mean basically every you know, type of property in six different states. And you can have a bad tenant in an A class property. You can have a bad tenant in any of the different neighborhood grades. You can also have a really good tenant in any of those grades. I had a tenant for seven years in what I would call a D class or war zone type area, and she was the best renter I’ve had, and I would gladly take her back to any of my properties. So how do you as an investor look at different types of risk and what your risk levels are?
So if you can’t necessarily define it by neighborhood grade, because this example is a perfect example of that, how else can you limit your risk in an investment property, especially when you don’t live near it? In fact, most of my clients and most of my properties, 90% of my portfolio is in another state. So how do we define that? First, we have to start with define your risk. Now, everybody has different risk tolerances. Some people would define risk as tenant risk. Some people would define risk as major rehab needed on a property. Some people would define risk as not enough cash flow, they want more cash flow. So first of all, you have to think about the types of things that would keep you up at night. I call it the sleep factor. If there’s something that’s really going to stress you out when you’re buying a property far from where you live, what would bother you or what would make you stay awake at night and think about.
So everybody has different reasons based on their experience. As you become a more experienced investor, you’re going to add things or take away things from that list. So that is where I am coming from when I am answering. So I have helped over 2,500 investors buy properties and I am an investor as well and have a good size portfolio at this point. So my definition of risk might be a little bit different than one you’re thinking about as a new investor because the way that I look at my portfolio today is all of my properties support each other similar to a stock portfolio. So when you look at a stock portfolio at any given time, you can have one stock that’s doing better than another. Now is that reason to sell one of your stocks because it’s not doing well? No, the same goes for real estate.
Now, at different times, you’re gonna have different things going on with your properties. And one thing that I know for certain, most likely, I won’t say a hundred percent, but I will say pretty darn close to certain, at some point you will have a vacancy and at some point you will have a maintenance call, even on a newly renovated property or even on a new construction. Now that is because you have tenants living in your home and they are putting on normal wear and tear on a property. If you think about your own house, do you live in a perfect house with nothing going on? I’m sure that most of you can say that you do not. So that being said, there are certain things to expect even if the tenant is taking the best care of your property, there’s still going to be some things like that.
So when I look at that, my ties support each other. So at any given time, I could have one vacancy or two vacancies, or at any given time I could have a maintenance call on a property. Right now I have a maintenance call on one of my properties. There was some leaking underneath from a storm and there wasn’t proper gutters or they had came off or there was some debris that was overgrown in the yard and it was causing this pooling of water. So when it rained, the rain was coming into the house. And so it is what it is. It didn’t have that problem two, three years ago when I bought it, but it is now. It is what it is, but I’m not that worried about it. Yeah, I don’t like paying for that kind of stuff, but my other properties have enough cashflow that is covering things like that, so I’m not too worried about it.
So you can think about risk level in that way. So the more properties that you own, probably the less you’re going to be worried about each and every maintenance call or vacancy. So as you can imagine, if you had one property, and let’s say that was the only property I had and I get this maintenance call, I’m gonna be like, man, that sucks. I’m probably gonna have to come out of pocket to pay for that expense because I’m no longer getting the cash flow from that property. Or it ate up, you know, four or five months worth of cash flow because that was an expensive fix. So I’m just giving you an example of how you might want to think about risk levels. It’s actually, in my opinion, less risky to own more properties. So if that makes sense. Now, to go back to my client’s question about what should he be looking at for different types of risk levels.
So the risk is always most likely going to be the tenant. The tenant is the variable we can’t really control. So number one, the market. You can do a lifetime of research and just picking the perfect property. Now, I am talking directly to you, you people in analysis paralysis, particularly engineers out there, I have been talking to the same clients for years and years and years, and they just get so hung up on picking the wrong property. So they will spin themselves out and research and research. You guys, there is no amount of research that you can do to not have any risk in real estate, okay? There is always going to be some risk, as I was talking about earlier with that example of having a vacancy or a maintenance call. At any given time, you can literally pick the most perfect property. Let’s say you did your research for months and months.
You found the perfect state, you found the perfect neighborhood, the perfect property came up. And man, you’re just so excited about it. And let’s say you found what you feel is the best property manager. Well, what if you had that property manager place, a really great tenant, and all of a sudden they were a great tenant until they weren’t, let’s say everything on paper looks great, and then all of a sudden they lost their job and they couldn’t pay rent. So whose fault is that? Well, it’s really nobody’s fault. It’s honestly part of the risk of real estate. Now, you could also pick a property and a lot of things can go wrong. You can pick a property in a really good state, in a really good neighborhood, but you didn’t do your due diligence. And there was a lot of problems with the property.
It wasn’t newly renovated, it wasn’t under warranty. And you can have a lot of problems, you know, repairs, you know, same thing like you buy a lemon of a car, you could be stuck with a lot of ongoing repairs. You can also get stuck with a really bad property manager who either doesn’t place a good quality tenant or they just nickel and dime you to death. So I have a property manager right now in one of my properties, and apparently there’s been this leaking issue that I was just telling you about where the water’s coming in, this has been ongoing, and the tenant has been calling the property manager over and over and over and saying, Hey, this problem is happening. And the property managers was not taking it seriously and somehow it got put back on the to the tenant that the owner didn’t wanna pay for it.
And that’s not the case at all. So I did want to pay for, I didn’t realize that it was this big of a problem. I didn’t realize it was going on. I didn’t realize that their bedroom was literally flooding out. And so because it was delayed for so long and not taken care of, as you can imagine, water causes damage. And so it made the problem a much bigger problem than it was had my property manager reached out to me immediately and said, Hey, we’re taking care of it. We’re getting bids for you. We’ll send you the bids for approval, then it wouldn’t have escalated. So the tenant now is not happy because they weren’t listened to and they want to leave. I’m not happy because now I have damage in my property. That didn’t have to be this way. Now I will say I inherited this property manager.
This was not a property manager that is in my network. This is not a property manager that I handpicked. This was a property that I bought from somebody else and they just kind of passed their property manager over to me. And I just went, ah, I don’t have time to deal with this. And so I just used the property manager, lessons learned, and yes, I am still learning my lessons. Sometimes I get too busy and I just wanna take the easy route and push that easy button. And in this case, I am learning a lesson because now to keep that tenant who does pay on time, I am going to have to give them a month of free rent. And I am paying a substantial amount in repairs because of that water damage sitting there for so long. So that was a risk. Does that mean it’s a bad property?
No. Does it mean it’s a bad tenant? No. Does it mean it’s a bad area? No, it was negligence from the property manager. So do you guys get where I’m going with this? So property management, essential good communication with your property manager. Essential, most of the risk is going to lie between tenant risk and property management risk. Okay? Yes, there are things that can happen with your property and the market, which is why you need to put in your due diligence before, okay? You wanna look at landlord friendly laws, you wanna look and make sure there’s jobs. We wanna see a lot of employers in a market. We wanna see who the jobs are for, what type of tenant are you trying to attract? And are there jobs, you know, if you’re trying to attract that blue collar worker in a B class neighborhood, what are the jobs around for that person?
Are there hospitals, universities, distribution, transportation, those sort of things. I have a really great example of what happened during COVID. Now speaking on my properties and where I help most of my clients buy properties. We’re talking about really affordable states in the Midwest or the South, and we are in those kind of B class areas where there generally are more jobs. And what happened during COVID, we know at the very beginning a lot of businesses shut down. A lot of people lost their jobs. And so the smart property managers that we were working with at that time would post lists of places that we’re hiring where people could go get jobs. So that was really awesome and wow, good on those property managers or foreseeing a potential problem where people could be losing their jobs when they shut down and giving them options where to go.
They would say, go to this link file for unemployment, go to this link file for this. When you get your unemployment check, make sure you’re still paying rent. Just because you don’t have a job doesn’t mean that you get to live in a house for free. So when you get your unemployment check, let us know. We’ll make payment arrangements with you if it’s gonna be a little bit delayed, and oh by the way, here’s 10 places in the area hiring. You don’t have to just sign with a property manager and then fall asleep and take a nap. You can engage with them. In fact, you know, the whole idea of passive real estate investing in these turnkey type properties are so that you don’t have to communicate with your property manager all the time, but it’s really good idea to check in with them every once in a while.
Hey, how are things going? You know is the tenant taking good care of the property? Are you driving by? Do we need a maintenance cleanup? You know, different things like that you can request and you can ask them to do. Yeah, they might charge you if you say, Hey, can you do a drive by for me? I just wanna kind of get visuals on the property. They will do that for you. So I think those things are really important for deferred maintenance so that you’re not surprised with things down the road. You know, if there happens to be a tree that’s overgrown a little bit, certainly the tenant most likely is not gonna cut it down. That’s your responsibility. And so it’s up to you to ask your property manager about those types of things. Sometimes they’ll let you know, but not always. So anyways, all right, well I’m gonna wrap this up and I’m gonna bring it back around to the point is think about the things that you think are risky in an investment and then you need to go look for that investment or that opportunity that has that risk kind of narrowed down.
You know, like I said before, there’s always going to be a little bit of risk in any investment. I don’t care what you’re investing in, there’s always some type of risk. You just have to figure out what your risk tolerance is. And then at the end of the day, real estate is the best asset class out there. When you’ve got an asset that goes up in value, you’ve got a tenant paying down the mortgage for you, you’ve got a property that’s cash flowing, you’ve got a property that is hedging inflation. You’ve got a property that is giving you tax benefits, there is nothing else out there like it. And you can go to a bank and say, Hey, give me 80% of this investment. I’m only gonna put down 20%. You guys. There’s nothing out there like it. If you have any questions or wanna have these types of conversations with me, I love it. Please reach out to me. I’ve got some links in the show notes, I’ve got some awesome freebies for you. I’ve got my contact information, ask me questions. I will throw it up on the show and I’ll see you on the next one.
Thank you, Melissa, for today’s episode. If you have any questions or topic suggestions, please do submit those via our NORADA contact form. Please remember to subscribe. We put out content every week. Again, thanks for listening. We’ll see you in the next episode.
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