How To Analyze Your First Turnkey/Rental Property | Real Estate Investing | REIal Talk | EP. 48

Hi guys. Welcome back to another episode on Real Talk. We are on episode 48. We're almost to 50. Oh my God. We're here with Mark Woodring, our director of investments. I'm Caitlyn, the marketing coordinator for the Frag family of companies. And, and today we are going to be talking about analyzing your first rental property and going into some of the things that you should be on the lookout and how it differs from buying like a home for yourself. Sure. So the first thing that I want to start off with is how much cash should you have, whether it's for down payment and in reserve?

Yeah, absolutely. So sometimes this question is more along the lines of discussing that with your lender. Do you want to do the 20% down, 25% down? I don't think that you want to go any higher than that because again, you want to try to keep as much cash on hand as possible. For like, as we had discussed, you know, earlier was, was rainy day situations. But you know, when you're looking at the difference between what your principal and interest are on 20% versus 25%, maybe not that much of a difference in your monthly. So, you know, I have always worked with lenders that say put down the least amount as possible.

Okay.

But then, so, you know, then factoring all that in, I don't know if there's a real hard or fast number that you can come up with like a save 10% or 5%. Like, I don't think that there's anything like that. But I think some of the things, and we had talked about this earlier is, you know, things that could come up. Like, you know, if something happens to the property, you know, do you have money to pay for it out of pocket versus maybe making an insurance claim. Things like what happens on the turn of a property. I mean, is the down payment that you've collected from your tenants enough to cover that? So there's just some of those questions. So again, I don't know if it's like a couple thousand or whatever, but whatever makes you feel comfortable. But what you don't want to do, and unfortunately we've seen this is, is investors maybe or first time investors are using pretty much all the money that they have just to come up with the down payment.

Okay.

And then what happens then, you know, if something arises all of a sudden they're like, you know, very either upset, you know, usually it's, you know, but something like, yeah, I want to say, you know, with us or with them or however. But again, definitely be prepared Definitely be prepared.

Definitely that. And I think that's something too, you know, if I wasn't as well versed or didn't really know, you know, that's something that I would probably not think about as having a reserve for a rainy day. If something happens, like turns, that's something you have to factor in. Don't know when they'll happen or if they happen, but having that cash reserve is going to be huge. Especially like you're saying if something were to ever happen and you needed to file an insurance claim, you're gonna have to pay that down payment for the insurance.

Yep.

So that reserve is a huge game changer for you and setting yourself up to succeed.

Yeah, absolutely. I mean, in fact, I'm sure some of us have had their parents tell them the old adage of, you know, make sure that you have a couple months of your bills in. So same thing. If you're looking at your investment property and, and you know that say your monthly payment is fifteen hundred dollars or something like that. Let's just use that. For example, Maybe you have $4,500, three times the amount, just to make sure that you're covering that expense, you know, that you can live and it's not going to take food off the table.

Yeah, yeah. My parents have actually always told me, they said, always have three months worth in your savings. That's funny that you brought that up. I thought that was just my parents who said that. That's funny.

That's the hard and fast rule.

Yeah. Okay, so when you are looking at your first investment and trying to figure out what to do, what would you say are the key things to look at and then the most important thing to look at?

Yeah, absolutely. And so just talking right out of the gate as to what the most important is, it's what's most important to you. So each investor maybe looks at things a little bit different, whether it's the cash on cash or whether it's the cap rate. But I know that our team does a great job in getting the most amount of information that we can. Very realistic information. So that when we build these pro formas that you can see as an investor taking a look at our properties, you have the class of the neighborhood. Sometimes that's important to people. They want to buy B or C classes. I mean, here we don't buy in war zones or things like that. And you know, we have realtors on staff, so we can buy A class properties if that's something that people are looking for. Different kind of Investment, but primarily B and C. And some people really like multiple bathrooms. Yeah, I mean, we sell bathrooms that three beds, one bath. Some people really need that other half bath or two full baths. I mean, you know, it's whatever you like to buy, but we're going to have that in our pro formas. We're also going to have like, what are your, your taxes, your property taxes look like in that particular county? You know, we shop in multiple counties. Those, those tax rates could vary. I know that, you know, Montgomery county obviously different than Warren or Butler County. So it could be as simple as like the taxes, you know, what are you responsible for? And then of course, you know, I mean, like, you're looking at the cash on cash. And so, you know, for cash on cash, I mean, that's your annual cash that you have divided by the cash that you've used for the investment. And sometimes that's an important one for people. And cap rate again, so you have your net operating income, so your gross money in minus your expenses, so your net operating income and divide that by what you paid for the property. So both of them are good in determining factors for investors. But it's so hard, you know, to say what's important to that particular investor.

Yeah, good point. I like how you said realistic numbers. I know that's something that when we're putting performance together, there's been many times where you're like, I'm, we need to re evaluate these numbers, especially like rent. You've said on countless occasions, let me get with Chris, who's our senior property manager, and see what he thinks. If this rent is realistic and if not, we will adjust the numbers and we'll adjust them to where the numbers still make sense for the investor and make sure that they're still getting the most out of it that they can.

Sure. And you know, just us being the company that we are, I know that, you know, we double check with Kris. We use other metrics in determining that rent, whether it's the neighborhoods and some of the proximity to some of the different things that may make that property look good to the investor or I'm sorry, to the renter. But yeah, definitely realistic numbers. I mean, if we can get more rent, obviously we will. So that's what I like to do is we offer a really good product. It's, you know, our signature series is completely done. So when you're looking at house A and then right next door to us is, you know, us and we're house balance and we might be $100 higher, of course. I mean, when you look at the craftsmanship and the work that we do. Yeah, you'll definitely pay that extra $100. So we command the market. And so that's kind of nice.

Yeah, definitely. And it's also nice too. I know we've said it in other podcasts or vlogs that we are all under the same roof. So if anything were to happen, I think between your office and Chris's office is maybe like four or five offices in between. So it's literally on the same.

It was longer.

Right. So it's nice that we're all in house and that we those answers in real time or as quickly as possible if they're in a meeting or something. And I think that too is different from other providers. They may not have that opportunity. So that's good Note. So now another thing to look at. This was more of a question that I thought of. Just trying to look at it from my point of view. You know, should. Is a question they should be asking is if they want to self manage or hire a property management company. You know, that's something too that you'll have to factor in your budget when you're looking. Do you have anything on that at all that you want to add?

Well, again, those are numbers that we will supply to them so that they can factor into their total cost and what they're going to be making as a monthly cash flow. But again, that also comes down to investor preference. I'm sure that there are apps and things that you can in today's technology world get if you wanted to self manage. That just comes down to how much time do you have to do that? You know, hiring a property management just takes the ease.

Yeah.

Or makes it easy and takes the difficulty out of having to worry about. If something happens at the property, who do I call? You know, how do I collect this rent, all of the things. Me personally, I mean, even though we have investments here in the Dayton area, I definitely have Chris manage them because why not? That's what he does all day, every day. So why wouldn't you trust an expert? It's, you know, do you go to CPA for your taxes or do you do them yourself? It's, you know, what do you want to do?

Yeah, good point, good point. Are there any other things that you can think of that an investor might or for some investor might not think of that maybe they should when they're looking?

Well, I think that, you know, right now with real estate and you may have touched on this earlier is that it is a hot market and we all know it. So the scarcity of properties are out there and we can all see that. But then that also means then you realize that you're going to be gaining appreciation over time in your house.

Yeah.

Now, whether it's 3 or 4% appreciation, I mean, there's some neighborhoods that are getting close to 10% appreciation. So, you know, as other home renovators are going into neighborhoods like we are, and they're, you know, building up the value of these homes, of course, the appreciation over time. So again, and that's real hard, and if you had a crystal ball, which unfortunately don't, to take a look at that and say, okay, here's what the house is worth right now in the year 2022. And what is it going to be in the year 2032?

Yeah.

Do you do 3% every year over year? Do you take 5% over those 10 years? Like, I don't think that there's any way to really gauge that. Just knowing though that in time most real estate goes upwards.

Yeah.

And so as you maybe pay down your mortgage and you start to build equity into that house and then using that house as your down payment for other houses, there's just so many things that you can do using this vehicle for different money options. And so those are things to take into consideration too, for first time investors looking at neighborhoods, making sure that you feel comfortable in them. And again, we buy only in neighborhoods that we feel safe in as well. So, I mean, just think of that. Imagine you buy a house that over time just starts to build, build, build, build, and you have 20, $30,000 in equity that you can pull out and put on something else.

Now, I know, and you kind of touched it a little bit just then, but we also touched on it in the vlog last week about the difference between looking at a retail property and a turnkey property. Can you explain kind of the differences when you're looking at that and kind of what to expect?

Yeah, I mean, just, I mean, just real quick, when you're looking at those numbers, when you're buying a turnkey or, you know, an investment property, you're probably going to be putting down at least 20%. So you have 20% equity in that house right out of the gates.

Right.

When you buy your primary residence, you may be doing an FHA loan. So a 3.5%. Some of our investors are veterans and thank you for your service. Zero. Yeah. I mean, putting down zero dollars. So you may not have any equity in the house right out of the gates. And so buying your primary residence versus buying this as you're in a possibly. I mean again, some people buy conventional loans and put down the full 20% so that you don't have PMI. But for the majority, maybe not. And so but these, you have 20% or more in equity right out of the gates. And I know that we've talked on other episodes before that if you can consider purchasing one of our other series, whether it's the Instant Cash Flow or the Equity Advantage series, these are properties that you buy that offer a greater yield of equity. You're buying one like say the Instant Cash Flow. You're buying one that's already being rented. Yes. That one have a bigger reserves of funds later because there's been no rehab to it. So you are going to be rehabbing that. But that's okay because those dollars that you put into that are going to be write offs for you later. You're improving the value of your property, probably commanding more in rent. And then again, you have this tremendous amount of equity there. And so then for the Equity Advantage series, of course, these are properties that you are going to rehab, that they are vacant, that you're going to rehab. And because you're taking on the doing this for that property, you're the one that's going to reap the benefit of having the equity in that house. Again, make sure that you have far more reserves for that. But if you have those reserves, I mean, those are definitely awesome positions to be in.

Yeah, definitely. And, and that too with the properties. Like, you know, when you're looking at a turnkey property, you know, you may not find the carpet in there either or the granite countertops, what have you. You can, but I know those are going to have higher expenses and interns, you know, carpet, that's something that is you're going to have to rip out and replace. Not always, but a lot of the times.

Right.

Whereas here with our signature series, we do the lvp, which is luxury vinyl planking, which is much more durable and lasts longer. And that will help extend the longevity of your asset from within.

Yeah, no, I'm glad that you touched on that because that, that is something to keep in mind when you are buying an investment property. You are purchasing this property not as your primary residence.

Right.

This is not for you. Don't worry about whether this has the flooring that you like, the fixtures you like the granite countertops or Italian marble. This is a rental property. This is a property that you Are you're putting it in. Of course you want it to look beautiful because you want it to get rented. You want it to have things that are going to survive the test of time. Again, having the LVP in there versus the carpet. Great choice.

Yeah.

I mean versus replacing carpet every time on the turn. You know, is carpet cheap, cheaper? Yes. Replacing it, you know, every two years. Yeah, it'll add up. So yeah, just keep in mind, you know, as an investor, we're going to do a really good job on the rehab. It's going to survive the test of time. There are things that are going to happen. You do own the house. You are going to eventually have to replace a water heater, you are eventually going to have to tune up the furnace. You are eventually going to have to put a new roof on. In your timeline, depending on again, these are buy and hold strategies.

Right, Right.

So hopefully that's what you're gearing towards. But yes, yeah, being realistic. I mean, I think that's what it ultimately comes down to when you're analyzing your first property is, is being realistic. You know, you want to buy a nice house. I mean there are obviously other providers throughout the United States, but Dayton is such a growing market. I mean look at all the businesses going to be coming to Dayton and Cincinnati area. It's just a great place, has that one to one rental to value. There's just so many things that I could just say, I mean I think I've said on different occasions about this is the place to be and I.

Mean, yeah, I want to backtrack a little bit because you started talking about that one to one ratio. So we talked. No, that's okay. Actually, it sparks some things. So you were talking about cash on cash and cap rates.

Yep.

Ideally, what is like an ideal range that investors should look for? Is there an ideal range?

We'll see. And again, and that's, that's also a great topic, you know, of conversation here is that I don't think that there's any number and I'm sure that there are people out there that tell you like, you only buy if the cap is X and you only buy if the cash on cash is X. And I'm sure that anybody can present the. Why, you know, of course. Yeah, like I want to, you know, the highest cap rate possible. I want the highest cash on cash. Like who doesn't?

Right.

But I mean again, when we're talking about the other factors to take into consideration what's happening in that area.

Yeah.

What's happening in that market, if I have, like, say, a lower cap rate. And so I guess to answer your question, you know, it could go anywhere from 5% to 10% on cap rates and maybe even higher. And then cash on cash. I mean, 7%, 20%. But if you're looking at the area and say you're looking at this property and it's a lower cap rate, let's just call it 6% for. For argument's sake. But it's in a good neighborhood. It constantly is being rented. You know, you're going to have great tenants. There's lots of industry coming to the area. Imagine that house moving higher, you know, and giving you more equity over time. And, you know, the appreciation value of the house is going up. Does that low cap rate really mean that it's a bad investment?

Right.

Versus, you know, I buy a property that has a 9% cap rate, but the value of the property is not going to go as high.

Yeah.

What do you want to do as an investor? What makes more sense to you? What makes you feel more comfortable having the appreciation and equity play or having that, you know, high cap rate right now?

Yeah, definitely.

So it's hard. It's definitely hard. But, you know, I know that. I think Aaron and I had talked about this on an earlier series about, you know, the toughest one's the first one, but you just have to get in it. Once you get in it, I think, you know, have you talked to a few seasoned investors? They come up with their own way of how they think about properties, and it's definitely going to be different than the first time.

Yeah. And it's definitely a learning experience. You know, what you do on your first one, you're more than likely not going to do the exact same thing on your second one. You're going to learn from it and you'll grow from it. And that goes back to a podcast and blog that Erin and I also did on taking risks. You know, like you said, you're just going to have to jump in and get your feet wet and learn and experience it and find out what works for you and what doesn't work for you and go from there. And what the most important thing is going to be to look out on your next investment.

Right.

I mean, and there's a lot of factors to consider. I know you've touched on a lot of them. So there's different things to look at. And like I just said, figuring out what is the most important thing to you.

And again, there's no right, wrong way Right. And like when we were talking about the residential properties, you know, again, some people, you know, after you bought your first house, you're going to look for something that's probably different.

Yeah, that's a good point. Yeah.

You know, you're going to be like, ah, you know, do I need that extra bedroom? You know, I mean, because I need it as an office. Do I, do I want a house that has two climate zones? You know, it could be anything. And so it's the same thing when you're investing. Like I said, some people like that three bed, one bath, you know what I mean? Because some investors may say less plumbing, less potential problems. You know, when you get into a three, two, now there's two bathrooms with two plumbing issues. So, you know, it's, it's, it's. There's so many, I guess, variables that go in, but it's whatever makes the investor the most comfortable.

I've learned a lot in this. I never, I never would have factored in the three bedroom and how many baths. But that, I mean, that makes sense, you know, with the plumbing thing.

Yeah.

But I never would have, I never would have thought about that. I mean, now retail, of course, when you're looking for your home, like, I want at least, at least a bath and a half.

Exactly. I mean, just even from. Think of it like, all right, you're renting a house.

Yeah.

I mean, do you want to clean two baths or just one?

It's true, too.

Yeah, yeah, it's, there's, it's. And you don't know what people are thinking. Yeah, you don't know. And so again, I think that's why we do the great job really examining rent. What are other places in that area renting for? What do we have? I mean, we have close to 500 doors. What are our other people renting for? What feedback do we get?

Yeah, feedback is huge. That is definitely one thing that we factor in and that we are asking from on the property management side, from potential residents something to talking about rent is we're not just looking at comparable rents in the area, we're looking at comparable rents. That's at the quality that we are at. You know, you have to factor that into. You can't just look at, oh, well, that one's running for 500. Yeah, it is, but it's not updated. So you have those come into factor in play too. So.

Yeah, absolutely.

All right, well, I don't have anything else. Do you want to add anything or do you have any questions or anything?

No, I mean, I guess the only thing that I'd like to add is, you know, if you have questions, you know, after taking a look at these performers that we put together, and you want us to do a deeper dive on it, by all means, please let me know. That's. That's what we're here for, is to help you evaluate your first and future purchases with us to make sure that this is property you feel comfortable for.

Yeah, definitely. And if we didn't touch base on all your questions on Cash on Cash and what cap rates are, there is another vlog episode. I believe it's around 6ish minutes long, that it is just talking about what cash on cash is, what cap rate is, and how different things affect those numbers and how they're determined. I will link that in this video if you want to check that out, but I don't have anything else. We always end this with Invest smart, Live happy. Thanks, guys.

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