16: Wealthbuilding Tip - How to build your investment buy box!

Welcome to the Purpose Driven Real Estate podcast. This is where passion meets purpose in an ever changing real estate market. I'm your host, Steve Valentine, former real estate agent turned real estate entrepreneur, speaker and guide to all things real estate. And this is my co host, Paige Tons, former D1 college athlete turned real estate adultrepreneur. Whether you work in the industry or you are a consumer of real estate, with each episode we intend to raise the bar in our industry and show you the purpose behind every piece of real estate in your life. What's up everybody? Hey everybody, we're back. What's going on? Paige, how's it going today?

Pretty fabulous.

Really?

Really?

Really? Really?

Alright, today we have a wealth building tip and the wealth building tip is how to build your investment property buy box.

I love wealth building tips, they're awesome.

So sentimental.

Well, you know what, it's just the wealth building takes the emotion out of real estate. It's really about, you know, what are we doing to I guess add value to the consumer, the people that listening and to help them grow their wealth so that they can have a better life, you know, now and down the road. So it's, that's why I kind of like it. So stop giggling.

It's like kind of what I do for a living.

We'll check back in with you in 10 years and see how those tips worked out for you.

Okay, so what is a buy box?

Ooh, the buy box. So the buy box is something I kind of framed in starting with my own stuff. Just because there was certain things that I think if you draw the buy box, it's kind of like that law of attraction of hey, you know what, if I know what I'm looking for, then when it hits me smack in the middle of the eyes, I won't miss it. Because I think a lot of people, if they knew what they were looking for, it's a plan.

Oh my gosh, you plan.

Stop it. Just because you don't think I plan anything. I know you think I fly by the seat of my pants constantly, but stop it. She's laughing at me. So when Wendy started creating our investment portfolio, it was a buy box. So it's a geographical location, you know, so for us if you're in Phoenix, you know, it's inside the Loop 101 for the most part and from, you know, 19th Avenue or 7th street to the one on one in the west and you know, pretty much northern and anywhere north. And then there's also some other things where people don't put into perspective when they're creating a buy box for investment properties. So they start thinking that maybe I can get a cheaper house further out west that's bigger. That would be a better rental property because it's newer and that isn't always necessarily the case. So I'll give you a quick scenario. Client of ours that does some deed of trust investing for us on some rental properties. We went through and did this for him and he did really well buying the house out in Buckeye. But here's what happens when you buy 4,000 square feet or anything that's a big house and trying to think that that bigger house is going to make you more money at the end of the day versus a smaller house. So we're going to compare 1400 square foot house in Glendale to a 4000 square foot house in Buckeye. So just so the listeners know, that's about a 40 mile spread as far as where it goes and the prices vary. So when you get into Glendale, they're a little bit higher. For smaller and older properties, you get out to Buckeye, a little bit further out west, but you're going to be newer properties. Not as much maintenance when it comes down to that. But here's what happens. Wendy and I created a buy box that has mostly older homes, mostly inside the 101. And they're smaller, single level, no pools. We have one with a pool. I lied. It came with a deal. Nothing I can do about it. Reason being was having the smaller homes. Their rents are roughly in that twelve to fourteen hundred dollars a month. For these smaller homes that pretty much range from 1100 square feet to about 1800 square feet is probably our average rental property. Okay, so what you get with that buy box is I only have one AC unit. I have a roof that's typically a composition shingle roof and I typically have an older home that's going to continue to be rented because it's inside the 101. So if gas prices rise, different things that happen, it's going to be inside the loop and it's more practical for people even though they're smaller. And they're typically three to four bedrooms with a two car garage. That's our typical rental and most of them we've gone through and renovated. And again, when you have a tenant move out, we have what we call a turn. So what happens in your buy box if my average house is 1400 square feet? And let's just take a couple of different things. If we planned for this house to be a rental and we did all tile flooring everywhere but the bedrooms. So I just have carpet in the bedrooms. Well, if two rooms are okay and one room is not carpet wise, I can get a carpet real similar dye lot that you won't be able to tell the difference between the rooms. But if I had carpet in all those areas, I'd have to replace all of it because it technically wouldn't match because dye lots are different. You know, kind of one of those random useless things that my wife keeps in her head. And so that's one way of looking at cost longevity. And so we put that tile in. Well, if we just have to paint, pretty much the paint is about $1,400. So about a dollar a square foot just to touch up the paint, kind of get through that process of turning it, make a few minor repairs. Okay. So that's one of the reasons we stayed with that smaller, smaller home. That's what cash flows. That's where our price is. So now let's compare, you know, our clients 4,000 square feet in Buckeye. So every time. And his tenants were constantly turning over. So you're 4,000 square feet. So now let's look at what this house entails to maintain. You have two AC units, you have a tile roof. What some people don't see is that after about 20 years, a tile roof will have to be pulled back in. The underlayment or the black paper that waterproofs it will have to be replaced. A lot of people don't think in that. And I know we just did it on our personal house. It was a super expensive undertaking. And a lot of people don't think, they think, well, it's tile roof, it'll last forever. Well, it doesn't because it still has to be maintained underneath the tile. Tile is cosmetic.

Right.

It's not necessarily the protection. So. And that'll cost about as much as a comp shingle roof. The difference is, is that, you know, once you put a comp shingle roof on something, it's probably good for 30 years. Unless, you know, hailstorm comes in like 2010, which everybody was, yeah, haboobs. Yes, we have those there. They're big walls of dust, so you can't see anything. So you compare that 4,000 square foot house. So you look at the two houses over a 10 year period of time. So that 4,000 square foot house carpet paint, that alone is like $10,000 every time it turns over. If the house only renting for 14 or $1,500 a month and the tenant leaves every two years, you're getting one year of income every time it turns because of the size of the house, one AC unit goes out.

Screwed.

Screwed. Yeah, I mean that's what it looks like. So some people are so, you know, I think part of that is that it's perception is reality. Wendy's favorite saying is that you perceive that, well, if I have a nicer, newer home and it's bigger, I'm gonna get more rent and I'm going to have less repairs. Those types of things to where if you do the comparison between the two, even if the prices are exactly the same, the house in Glendale, like the one that he owns now produces $1,300 a month rent. The house in Buckeye was almost three times the size, producing an extra hundred dollars more a month. Fourteen hundred dollars a month rent cost to turn that four times every time it turns versus a smaller one. So people don't compare that. So the buy box is really important that you don't get, you know, too over complicated with looking at the bigger properties thinking they're going to produce more rent. Unless you're going to go do something like what we've done on some things where you're doing VRBOs and that's a whole different strategy. So you want to figure out what your buy box is for long term and understand what the cost to maintain that property. Because a lot of people buy rental properties and forget, oh yeah, I got to maintain this thing. It's like they have a kid and go, oh, I was supposed to feed it. And so it's the 10 moves in and the tenants going to cover majority of your cost. But it's an asset and the assets still have to pay to be maintained. And a lot of people when they invest, they forget that that's got to go into it.

Right. So can you change your buy box or does your buy box ever evolve? Oh, I think it's like for. In my own situation as I have, you know, goals to increase my income as I get older and have more experience. My. When I first started out with looking at the rental situation, my buy box was definitely a little bit, was definitely below 200,000, actually even below that.

Right.

So that I felt comfortable with the investment. And eventually I think maybe in like about a year, it'll maybe increase a little bit.

Right.

So that was just something I was thinking about.

So I think, I think your buy box. Yeah, your, your buy box is going to evolve because it's going to. There's a coup things that create the evolution. So we have a buy box of our long term which are the things that we bought typically.

I guess yours has changed too a little bit.

Yeah, it has because the numbers change. So these are all under $200,000 homes which we refinance that we own at, you know, $0.70 on the dollar or $0.60 on the dollar right now that are renting and majority of them are cash flowing. And so once the numbers don't make sense or you're, you know, in our case we're out of loans. You know, you can only do so many conforming loans before you have to do something else. So right now, you know, we've, we've acquired as much as we want to right now. But now we kind of switched over to a different type of investment that fits. It definitely goes out of our geographical buy box because it's a different investment. So when you look at our south Scottsdale home that we have, it's a vrbo, so it's a fully furnished rental that does very well income wise. And you also look at our VRBO up in Muns park, which is a vacation community during the summer, gets some snow, those types of things. And yeah, those evolved out of looking at different types of investments and different types of cash flows. So it's kind of a mixture where you start seeing maybe one super tight on cash, but we have something else like our Munds park property is providing a better cash flow, you know, than something else. So it's kind of a law of average where all these things work together to create that long term wealth. And it was all done with a plan. It wasn't done by accident. It was a strategic placement of this is what I want it to look like. And based on the data that we had from the property management company, I know what neighborhoods do really well and I know where I want to be and I know where my clients need to be based on their wealth building blueprint.

Right.

So we start looking at all that stuff.

So you mentioned something earlier about how one of yours has a pool which isn't like totally ideal for your rental investment.

Right.

So what if opportunities come up where like you can't resist an opportunity. It's that great of a deal. But it doesn't fit your buy box.

Oh, I think, I think you always have to be open for anything when it comes down to it, as long as the numbers work and you're prepared for it to be outside your buy box. So for instance, I'm not comfortable yet, you know, my buy box is here. Locally and geographically, because it's tangible. I know it like the back of my hand and I know how to move it around if I need to. If I had a great opportunity, say I'm buying something at 70 cents on the dollar, it has a tenant in it and it's in Mesa, would we take something like that? Yeah, probably as a placeholder though, like it would probably be something down the road that I would sell. So for instance, it's, you know, initially condos and townhomes weren't part of our initial buy box. So right now we've actually sold a couple of the condos that were in there because we bought them because they were a great opportunity.

Right.

So I think you're always looking for opportunities and if they're outside your long term box, they may be great short term opportunities. And 12 months, you know, if you're buying something with a tenant in place, something of that nature. So yeah, you don't ever want to forego the opportunity just because it doesn't fit your box. But you do have to look at it from your long term and go, is this really what I wanted? Does it really make sense?

Yeah.

When it comes down to making that choice.

All right, so to wrap up our wealth building tip today, how can our listeners determine what their buy box should look like?

I think the buy box goes back to, you know, going in and subscribing in the investor section@valentinegroupaz.com and that there is really about giving them the tips and asking the questions of, again, it goes back to the wealth building blueprint. What do you want to do? And hey, based on the information we provide in this podcast, does it throw a spin into what you want? Some people may think that having a newer house in an HOA is better. And the reality is it's actually more cost, more management to have something in an HOA because the tenants are parking on the lawn, which they're getting letters and the management company has to manage that. So it's costing you. So there's a lot of different ways to look at things that people don't think about. So I know that you're vested in the lower price range when it comes down to like the townhomes and stuff like that. And it's gonna work because there's a trade off in a townhome based on what you're doing. Owner occupant. So you're going from owner occupant to the next one. And you know, the trade off is you have some HOA fees, but Those are exterior maintenance. You know, they give you a pool. Some of those other pieces that are definitely a benefit to your rental. Now when you get into the single family, you know, I think that the HOA fees are actually a waste of money and they cost you more money on the management side. Because if you think about the average HOA is about 50 bucks a month, right? Mm, $600 a year. Yeah, sorry, I'm rolling my eyes going. Is my math right? I don't want to look like an idiot, but. So it's $600 a year when you go through that process. Well, 600 or 6 times 3, that's $18,000 over a 30 year lifespan of the property. If the HOA fee never raises.

Right.

It's $18,000 that you paid that you didn't get shit for. It's just simply a fee that you paid to be in that community. But what you don't see is, hey, what else did I pay for? On top of that, $18,000 with fines, with legal fees, with anything that the tenants you paid the management company to help you manage that hoa. That's why we typically stay away from the.

I really thought about those different HOAs like that.

Yes. That's why we typically try to. I mean, we have a couple of homes that are in hoas because we got a good deal. So if you got a good deal, it's there, no big deal. But I'm just saying that when you're strategically looking at things, we try to stay away from those neighborhoods because it's one more big brother looking out. Like, you know what? Yeah, I want my houses to be nice. No, I don't want the tenants parking in the lawn, but I don't need the HOA telling me that the tenant parked in the lawn.

Right.

You know, it's one more thing. They're not damaging anything unless they're running over my plans. So you just kind of look at the investment. So if I had, If I had 30 houses, you know, at 20 grand per house that went out in HOA fees over the life, it's like $600,000.

That's crazy.

Over a 30 year time period in HOA fee. So what did that $600,000 get me?

Right? Nothing.

Didn't get me shit. It didn't buy me three more homes.

Yeah.

So that's, that's my point is that one, you're not going to feel it, you're not going to see it, but go across 30 and tell me what that looks like. Yeah, over a long period of time. So again, it goes back to strategy and it goes back to the thought process and the questioning of how do you want to invest and what's the best way to do it. And, you know, again, our wealth building blueprint helps you create that strategy, and it also gives you the hints and tips of what's going to be helpful and what's going to be the smartest thing going forward. Right?

Mic drop.

Boom. Mic drop. All right, we're out. That's wealth building tip number 8,959. Who knows what that was? But hey, you know what? We do this just to add value to you. We're hoping you guys are enjoying this podcast and hopefully you'll like it. Share it. I'm sure you hear this in a minute on the outro, but hey, have a great day. Thank you for listening today. If you loved this episode, please share it with somebody you think would also love it, like, or be inspired by it. Without you guys, we can't create more purpose. Please leave us a review and a truthful comment or thought. And until next time, this is Purpose Driven Real Estate.