Real Estate Rules for Beginners | REIal Talk | EP. 85

Hi, guys. Welcome back to our podcast. This is Real Talk for real estate investors. I'm Lauren, our marketing coordinator for Freedom Real Estate Group, family of companies. I'm here with C.J.

Hey, you guys.

He's our investor relations specialist. Today we're going to be talking about real estate rules for beginners, the skinner of someone who, you know, didn't have a lot of knowledge for real estate investing in the past. These are really interesting questions to me to find out where I can start or if I have friends or family who are interested, where they can start, how they can jump in and just dive right into the whole process. So, yeah. Cool. You ready to get into the question, C.J.

Let'S do it. Yeah. And I think, like you said, Lauren, like, there is so much to learn when you're first starting, you know, And I think my biggest piece is you just got to dive in and try to learn, and you're not going to know everything from the very beginning. But, you know, for me personally, I bought a duplex a couple of years back, and Now I have 21 rentals and investments and syndications and absolutely obsessed with it. So I'm excited to talk to that.

That's exciting. I was actually about to ask where. Where your real estate investment journey started, but I think what a lot of people do, I know some of my friends, they've got. Got duplexes, lived in one side, rented out the other, and then finally decided to move out, rent out both sides, and the whole process just starts from there. It's pretty exciting.

Yeah. Yep.

Yeah. All right, so starting off with the questions for you. Where does one person begin in starting the process to invest in real estate?

Yeah. So I think the best is to begin to educate yourself. Right. As we said, there's a lot to learn. So. But, you know, with this day and age, there's so many resources out there from just following people on social media like Instagram and stuff like that to get small tidbits. But for me personally, it was podcasts. So BiggerPockets is the main forum for real estate investing, and they have a number of podcasts, but also their online forum is great. People can go in there and ask questions or just research topics that have been talked about before to probably get almost any answer, you know, for any question that you may have. And then there's obviously books and other sorts of education, but I think, you know, reaching out and starting to just understand the basic terminology ARV and, you know, so many different things that are, you know, just everyday lingo it's nice to kind of get that and then maybe talking to someone who, in your market or where you're looking to invest personally to hear from their experience.

Yeah, I like that. I definitely agree with the terms like arv, rei, cap rate, stuff like that. When I first started in this job, I didn't know any of that. I've learned so much in these last two years. And one of the things was the, the content, the, the, the words, you know, because when you're listening to these podcasts, they're going to be mentioning cap rate, arv, cash on cash return rate, stuff like that. And so knowing those terms definitely helps in that process of being able to understand it, what they're talking about, kind of.

Yeah, certainly.

Yeah. Next question I have is what should I keep in mind when diving into real estate investing?

Yeah, I think we mentioned this earlier, but I think there's a lot of. It's easy to get overwhelmed and feel like there's. Because there's so many different ways to make money with real estate. Wholesaling, flipping, live in, house hacking. Right. Syndication investment, like private money lending. There's so many different ways turnkey investing. So you have to kind of figure out what makes most sense for you and your lifestyle and maybe your goals and what you're trying to achieve. Because if you're just looking to start slowly building passive income, then maybe buying a single term key is the best option. Right. Something that doesn't require a lot of time, but you can start building equity via an asset versus someone who's like wanting to quit their day job in a year. Then maybe you need to start flipping so you can really get some big stacks of cash. But that's going to take more time. So you got to kind of figure out and understand what your objective is and that will determine kind of how you.

Yeah, that kind of jumps into our next question of like, what are some things I should prepare for when switching from like a regular 9 to 5 corporate job to jumping into real estate? Like how long should you stay in the 9 to 5 while having properties? You know, the switch kind of.

Yeah, that's a great question. And I think I would advise trying to utilize your W2 or your 9 to 5 to kind of start funding either your flips or your, your rentals that you are trying to purchase. Right. Because. So it may not necessarily be the answer that you want to hear, but I think there's two main reasons. One, to have like a regular income source is nice to like live on. And with all your expenses. I think with real estate your paychecks can become very lumpy because you're really getting paid out only when you sell a property or you refinance, which doesn't happen every two weeks. Right. That your normal paycheck probably occurs. But also your bankability, if you are self employed or maybe a new real estate investor, it's going to be a lot harder for you to get loans for these properties than if you have had a stable W2 income for the last two years. Reason being, right, you're, you're less risky in the eyes of the bank to be able to continue to make those payments.

That makes a lot of sense. I think what tends to happen with a lot of people who want to start investing is that they, they want almost like a quick way to get cash. When you know, investing, it's a process, it's learning, it's understanding and it's also, you know, being safe with it. Maintaining that regular income that you get at your 9 to 5 job until you have enough properties to, you know, cover expenses and support yourself or a family, if you have one.

Yeah, exactly. And I think, you know, the average, you know, turnkey or just rental in general is probably only producing $200 after all the expenses, a couple hundred bucks. And so you're going to need a lot of those rentals. Right. In order to probably completely replace your income. Now you're making money different ways. Depreciation, appreciation, debt, pay down and then the cash flow. But that pure cash flow to live off of, you're going to.

Yeah, exactly. That makes sense. I guess in talking about, you know, careers and a job and stuff like that. Would you say that I would need to become an agent to start a career in this field? Or are there other different kinds of careers in real estate investing that can produce that kind of cash flow?

Yeah, that's a great question. I actually recently got my license, but you know, I purchased a number of homes, made my own off market offers on properties without an agent or with an agent prior to that. So it's definitely not something that you necessarily need to get started. And I wouldn't, you know, I think there are probably plenty of people who use that as an excuse to not get started. So I would just encourage, you know, reaching out in your local area to get you connected with a real estate agent because that's going to be again, that's a very heavy sales and marketing type role where you're marketing yourself to help sell and, or purchase properties for people. So, you know, There are a lot of agents who, similar to myself, may get it just so they can write their own offers or you know, get those checks for the properties they're purchasing. But I guess speaking to the other ways that you can invest or kind of produce that cash flow, you can flip properties. So buying a property, whether you're living in it or not and just improve it via the comps in that area and then sell it, you're going to have a lot of capital gains with those. Right. So you're going to be paying a lot of taxes if you do flips, but that's just part of the strategy or you, you work that into your numbers. There's rentals obviously, which is a much longer term, slower gain typically because you're buying that for the long term and it's going to just pay you monthly, a smaller amount. Some people will do wholesaling. There's, there's a lot of different ways you can get involved.

Okay, that makes sense. That makes sense. I guess another question is what would someone like need to expect in the first six months to I guess a year of their first rental or turnkey property?

Yeah, yeah. So for your first year I would say, you know, don't expect that you're, you know, you're buying a $100,000 property or you know, something like that, you're not going to end the year making $50,000 probably unless maybe like in this last year where you, you know, you come in and you know, just really improve the property and had a lot of appreciation in that area, it's probably not going to happen. So I think expectations of being realistic like with what you're going to ending up netting in a year. So if you are making a couple hundred bucks per month, that's really only two to $3,000 a year in straight cash flow on a property. But you may make another thousand dollars in debt, pay down another couple thousand dollars in appreciation. You're also going to have a lot of write offs with all that income. So just understanding how to, I would say in your first six months to a year, figuring out how you're going to do deductions or do the taxes on those property on that new rental property. So that's probably going to, you know, include either talking to a CPA or a tax advisor. You may require that if you've before always just done TurboTax, I would find a way to organize yourself. So if you're using a turnkey, they're probably have a property manager but and you're Getting a monthly P and L. But just understanding, are you going to do any additional bookkeeping in addition to what your property manager is sending you? Just because you're probably having mortgage insurance and taxes that they're not paying, you're, you're making those payments and you may have other business expenses that go along with that. But I guess my biggest advice is like I talk to a lot of investors or wannabe investors, right? Everyone who's coming to us to kind of ask questions. And I will have conversations with people who have spoken to 10 turnkey companies, right? And I say, well, why didn't you pick any of the nine before speaking with us, right? Like they almost want me to pitch us and I would, you know, I always just say the best thing to do is just to start, right? Because so many people will, you know, they call it analysis paralysis, right. Looking at so many deals, looking at so many operators, always finding an excuse, right. And I think if you put the perfect deal in someone's hand, right, they still may not take it because they're not ready or don't feel like they're ready for one reason or another. So just taking that initiative and understanding, you're not going to know everything. But you're again playing a long term game with this type of investing.

Yeah, yeah. I guess in terms of being like what you said, ready and some people, they don't feel ready but they want to get into it, they don't feel ready, I guess, I guess a way to get ready. How much would you say you need to prepare in time? In, in terms of time as well as money, how long do you think someone should research and stuff? Years, months or in terms of money, how much money do you think someone needs to save up? I guess.

Yeah, yeah. So from a time perspective, I would just say until you feel comfortable that you like really can run numbers. And that's probably just going to come after a repetitive this like kind of running your numbers, you know, a couple dozen times just to see different properties and how. And then you'll kind of understand the particular market you're investing in from a dollar value investment amount. If you're just buying a regular turnkey with a conventional 30 year mortgage, you're probably buying an investment property that's priced 75 to 150,000 and you're going to need 25% down. So let's just take 100,000 for easy numbers. You're probably going to need $25,000 for the down payment, maybe a couple thousand dollars for the Closing costs and then you probably want to have a couple thousand dollars in reserves. So I would say, you know, you're typically looking that you're going to want to have around $30,000 for that first property. We typically say 30, 35 for us, just depends on that specific property. But there's also other ways to go about it. Right. We kind of talked about house hacking. Right. Because if you're going to do a house hack on a duplex, that's maybe $300,000. If you're putting only three and a half percent down, then you really only need $10,000, maybe 15 closing costs. So that's a way to get into a house much cheaper, even if it's a much higher purchase price because you're able to leverage more of the bank's money than your own.

That makes sense. Yeah, I like that. I guess in terms of reviewing deals, what's. As an investor yourself, what are some things that you look at when reviewing deals?

Yeah, that's great question. So you know, some people build out their own calculators, bigger pockets on their website. You know, I would say when you're getting started, just going onto their website, they have something that you know, has calculators for short term rentals, midterm rentals, long term rentals and fix and flips, all these different things. So I would just utilize theirs and you could always create one if you wanted later. But from what you look at, for me, my strategy is buying small multifamily here in Dayton, Ohio. And I am typically looking at, you know, I want to see where rents are at currently. Currently. But what rents are commanding in that area for, for that type of home. Right. So if it's a duplex, three bed, one bath, what are other duplexes, three bed, one baths going for in that area? A great tool for that is called rentometer.com you can just plug in the address, what number of beds of that is and understand what the rents are looking like for that area. I would say also understanding the properties like the big ticket items. Right. Are you going to need to paint the exterior, put in a new roof, new age back like those high ticket items that are over a thousand, couple thousand bucks. Because that's really going to eat in the profit or just how, how much you need to do to that property once you purchase it. And then, you know, it takes a little while to get used to what the taxes are, what's the insurance for a certain type of property. But you should be able to get estimates for those and Then you know, you just, it's kind of a repetitive.

Yeah.

Once you've done it enough times, you can kind of see a property, see a purchase price, understand, like, okay, I know I can rent these out for $800 a month or something like that. And you can kind of start, you know, quick backhanding. Some people like the 1% rule, right. So you're buying it for $110,000. You should be able to rent it for 1100 dollars a month and then it should be able to cash flow. Now that's been a little harder with the interest rates and how they doubled in the last six months or so. But that's, you know, that's a good rule of thumb for some people is that 1% rule just for easy.

Yeah, that makes sense. I guess if you want to go in the turnkey route specifically because we've talked about, you know, house hacking live and flip that stuff like. Stuff like that.

Yeah.

Want to go the route of turnkey. How do you find a turnkey provider that you trust?

Yeah, that's a great question. You know, I would say you can probably again go on to bigger pockets or just kind of do some Google searches to kind of see different turnkey operators in your area or wherever you're wanting to invest in and then kind of read the reviews and I would just get on the phone and have those introductory calls with the different providers. Providers and understanding what, you know, which one maybe you get along with. Maybe you care about a certain type of reporting that they do or you want to be in a certain type of neighborhood. Right. So some turnkeys, you know, serve lower end neighborhoods. Some, you know, are only doing B plus, you know, B neighborhoods. So maybe that's something, you know, you're trying to maximize cash flow or you're trying to have good tenants. Right. Something like that. You know, just having those questions. The number one question I get for our us, you know, that I would advise that's not a good question. The number one question I get is what is your property management fee? And it's 10%, which is pretty standard, you know, 8 to 10% for PMs. But they won't go any deeper than that. Like that's their number one question. But then they don't ask, well, how do they manage the property? How do they handle maintenance requests? Are they outsourcing that? Are they doing it in house? You know, all these different questions that like, more like how are they actually going to take care of your home?

Yeah, yeah.

Which is wild to Me, because, you know, a lot of these people are, they're chasing financial freedom and they just have their spreadsheet and they're plugging in their numbers. Right, right. That's what they care about. But I think it's more important that you, like you said, you trust the provider, that they're trying to, you know, create a long standing relationship. I know for us, you know, we want to sell multiple homes, right. We want to create a long term relationship. We're not just trying to make a quick buck flipping a property. We're really trying to, you know, help others achieve financial freedom.

That makes sense. And you definitely do have to take care of the tenants too. So I think that's, it's a good question asking like, what's your property management fee? But diving into that to see how they take care of the tenants to create that long relationship with your residents to keep that cash flow going. So it's a cycle of, you know, how does your property management company do with your tenants? Because you want that cycle of they'll keep renting and producing more cash flow. Yeah, yeah. So the last question I have is, is kind of related to investing in general. How would you say that a investment property differs from a regular investment, like, say different kinds of investments? I know there's different kinds, like stocks or bitcoin, stuff like that. How would you say that?

I bet in crypto I used to be really big into the stock market, real estate. And so there's a lot of differences between this type of investment versus the, you know, let's just take the stock market, right? Which is probably the number one investment vehicle for people, whether it's a mutual fund in their 401k or IRA or just a taxable brokerage account. So what I would say is for the stock market, it is more, much more liquid, right? So you can go in, right. In three minutes you can buy a stock and then a minute later you can choose to sell that stock if you want. Right. You're going to have some, probably some fees associated with that, but it's extremely liquid. From an investment perspective, it's also going to go up and down in value each day, whereas, but it's also a purchase, $1, you get $1, $1 of stock. Now for real estate investment, you're able to leverage your money. So if you are putting $1 down on a property, you're able to typically leverage that into $5 of real estate because you're putting 20 to 25% down on a property. So you're able to use leverage, which is awesome because you can use $25,000 to buy $100,000 property. So if that property goes up, you know, $20,000, you get all of that, right. You've got 80%, 100% return on your money, which is, which is incredible. I would just say that with turnkey investing versus the stock market, it's a lot more longer term. Right. Typically if you're buying the turnkey property, your plan is not to sell it in a year. You know, it's a longer term commitment. You're also benefiting a number of different ways versus a stock you make or lose money if that price goes up and down. Right. That's how you make, that's how you make or lose money. Whereas for a turnkey investment property, there's really four main ways you're potentially benefiting from that property. So number one, which we talked about a while, cash flow. So after, you know, rent minus all your expenses, hopefully it's spitting out, there's some profit at the end. Second would be the appreciation. So, so hopefully In a year, five, 10 years, that property has appreciated, you know, significant amount. Typical amounts depending on the market are 2 to 5% annually. And again, that's from a leverage perspective, that's making that return 4x5x that from your original capital. Third is the depreciation or the tax benefits that come along with that. So you are getting to deduct all of the expenses against the revenue that you're earning, which is also a huge benefit. And that's a reason a lot of people invest. And then fourth is the debt pay down. So your tenants are paying down your mortgage each month. Right. So on that $100,000 property at the front end, it may be only 100 bucks a month, but 10, 20 years down the road it may be $300 a month. Right. So it can really snowball as that asset continues. So all those reasons plus the leverage I think is what makes real estate investing so, so attractive.

Yeah, yeah, that makes sense. Would you recommend real estate investing over the other investing strategies or.

I would say it depends what type of person you are and how you want. Right. Some people like knowing they can get all their money tomorrow and or maybe they are just wanting the most hands off investment strategy, which is probably just buying mutual funds. Right. And every off of every paycheck. As a W2 employee, I'm going to throw $500 into the stock market, which is not a bad strategy because it's very effortless and mindless. I Think if you're trying to maximize the return or retire early, it's going to take a of lot. Little bit more active of a strategy. Right. And that is real estate investing. There's still very much passive ways to do that via private lending or syndication investing, but it just depends what your strategy is.

I would say that makes sense. Yeah. Yeah. That's all the questions I had.

I feel like, lord, what do you think? What do you think someone should do?

Well, I feel very well prepared. I feel like now, after talking to you, to jump right into real estate.

Yeah, I love it. I think you should. I think everyone should. You know, I think when you're looking at it from an investment perspective, 90% of, you know, millionaires have made it through real estate. So there's obviously a reason for that. And I think everyone should try it out. Right, right. Even if you decide a year later the stress isn't worth it or whatever that case may be, I think knowing that so much wealth is created through this tool, everyone should give it a chance and, and really try it out.

Yeah, yeah, I've. I've thought about. There's other investment strategies, too, in terms of owning property. So, like, I've heard people who just own parking lots and they get paid for owning the parking lot or like a vending machine or. I mean, that takes work because you do have to, you know, fill it up again or like a laundromat, stuff like that. Those take work. So it's not, I guess, essentially passive income, just another form of investing in the community and getting money from the community that way. But, yeah, I've seen all those. But, you know, being in real estate, in the business, it's helped me learn a lot, and it's been very enjoyable because it seems like it's just a fun strategy. You know, it's fun to get into.

It is addicting.

Yeah, that's funny. That's a good way to put it. All right, well, that ends our podcast. Thank you for joining me today. And if you guys, if the viewers have any other questions, reach out to us. Put in the comments below. If it's on YouTube, we love to dig into other questions. Everyone has. I know I had a lot of questions.

So, yeah, I love this topic, love talking about it. So please reach out.

Yeah, love it. All right, guys, well, we end these with Invest Smart, Live Happy.

Thanks, you guys.

Hi, everyone.

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