Real State

Should I Switch Markets? (Why You’re NOT Finding Deals)

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How important is the real estate market you’re investing in? You could be searching for deals for months, not finding anything worth buying, and may want to call it quits. But are you following the same steps that expert investors practice, or are you hoping a new housing market will magically give you the deals you need? If you’re struggling to find property with a profit in your housing market, today’s episode will help you out!

Welcome back to another Rookie Reply! In this episode, we tackle a handful of key topics—including when it makes sense to buy a property on your own and when to find a partner instead. Tony even shares about his own recent experience with partnerships and how he ended up pulling out of a deal that was headed towards a syndication! We also discuss the differences between real estate investing and REITs, as well as moving on from markets when you aren’t finding deals. Finally, we talk about inheriting tenants and when it’s better to buy a fully vacant property instead!

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley Kehr:
This is Real Estate Rookie, episode 282.

Tony Robinson:
What I tell people that are just starting out is give yourself 90 days. 90 days, analyze 100 deals, and if you can analyze 100 deals over 90 days, you’ll know without a shadow of a doubt whether or not that market is a good market or not. So there has to be a certain threshold that you hit, I think, before you rule a market out. And a lot of it just comes with grinding it out, analyzing the deals and doing the hard work to make it happen.

Ashley Kehr:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.

Tony Robinson:
And welcome to the Real Estate Rookie podcast, where every week, twice a week we’ll bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And man, we got a really good rookie reply today. I liked it because the questions today were a little spicier, a little different from our normal variety of questions for the reply episodes.

Ashley Kehr:
Yeah, and we go through three questions, but I feel like we went pretty deep into them really breaking things down. One of the things we talk about, buying properties with tenants in place, or how to get that property vacant if there are tenants in place when you do want to close on the property.

Tony Robinson:
Yeah. We also talk about REITs versus investing on your own. Ash and I share what we believe is the most passive way to invest in real estate investing, and one of the things that we both aspire to do.

Ashley Kehr:
And also how my side hustle is currently a loan shark. So if you have credit card debt contacting, and then we also touch on partnerships. And for some of you that maybe haven’t heard yet, Tony and I do let out a little secret of something that we’re working on when we do talk about partnerships, but we go through doing a first deal by yourself, doing a JV agreement, which is a joint venture agreement, or creating an LLC with a partner.

Tony Robinson:
Yeah, cool. So I just want to share a quick shout out to someone from the rookie audience, leaves a five-star review on Apple Podcast goes by the username VinceLR, and Vince says, “Inspiring and useful.” So it’s a little bit longer review, but it’s a good one. So Vince says, “Ashley and Tony do a great job bringing in unique content and people to learn from. They helped me build up the confidence to start my investing journey last year and are an inspiration. I’m in a position now with the things I’m learning from BiggerPockets to leave my nine to five and start building my own real estate investing business full-time. The content they provide was a big catalyst to make this possible and I’m so thankful.” And Vince finishes by saying, “Added bonus, Tony is also an inspiration for being ripped while doing what you love. Maybe one day I’ll have a six-pack like him.”
Vince, I appreciate that, man. I’m actually in my off season right now, so I’m far from being ripped, but I’m hoping one day you can be on stage with me, brother. That’d be a fun thing, Vince, too, together.

Ashley Kehr:
I mean, I was really loving that review, but then I felt personally victimized that my guns were not mentioned in the review.

Tony Robinson:
Well, Vince, I appreciate that, man. That’s good news.

Ashley Kehr:
Yeah, thank you, Vince. Let’s get into our Rookie Reply questions. Okay, Tony, I have the first Rookie Reply of today’s episode ready to go. And the first thing, so this question is from Tommy Burridge and he says, “Dumb question…” You guys should have learned from your teachers in elementary school, there’s no such thing as a dumb question unless you’ve already asked it several times and you did not listen to the answer. So that is my only exception. That is my only exception.

Tony Robinson:
What someone told me one time, Ashley, it’s like either you can not ask the question for the fear of feeling dumb or you can actually not ask the question and really be dumb.

Ashley Kehr:
Yeah, great way-

Tony Robinson:
So when I heard it that way, I was like, “Okay, that that’s fair.”

Ashley Kehr:
Okay. So Tommy’s question is, is investing in rental properties better off done alone or is it possible to JV, joint venture on something like this? Has anyone ever done this, and how did it work? So Tony, this is actually how you did your first deal, correct, was a joint venture with OMID?

Tony Robinson:
Yeah, so it was actually my second deal. So our first deal I did by myself, and then the second one, I did with a partner. And to answer the question, Tommy, it’s definitely not a dumb question like Ashley said, and yes, there were tons of people-

Ashley Kehr:
Okay. First of all, I did not say it was a dumb question, that was written in [inaudible 00:04:30]

Tony Robinson:
No. When I said like Ashley said, I meant it’s not a dumb question like how Ashley said, it’s not a dumb question. But anyway, the point Tommy is that, yeah, people partner in real estate all the time. You see partnerships on smaller deals, people buying single family homes, people partnering to flip houses, people partnering were one’s the private moneylender, one’s the person borrowing the money, and then you see partnerships on larger scales. Most of the apartment complexes or big commercial facilities that you see, it’s usually not one person that’s buying those, it’s an investor who’s raising funds from a bunch of different people effectively creating a partnership with those people to get access to all of that capital and then going out and buying the deal that way. So Tommy, you see partnerships in JVs across real estate in every way, shape, or form. So I think it definitely has the potential to work out positively if you do it the right way. There’s so much we can talk about, Ashley, but just what are your initial thoughts on Tommy’s question?

Ashley Kehr:
My first deal was with a partner. We didn’t do a joint venture agreement, we actually created an LLC where we are 50/50 partners on the deal. So you do have that option too if you are partnering to actually form an entity together. There are pros and cons to both. If you’re doing a JV agreement, you’re a lot less liability towards each other, you’re not completely committed to each other, you’re just tied together for this one deal. If you do do an LLC together, you are filing a joint tax return together, you are holding onto this business where you’re doing the accounting for it together, all these things, and you can run more deals through this. So I would say if you just want to do one deal with somebody, a joint venture is the way to go. If you want to keep buying deals with this person, you can still do the joint venture method every single time, but you’re actually going to build a business together, and LLC is also an option for you getting started.
So Tony and I often talk about pieces of the puzzle to get started in real estate and maybe you are missing something and that’s why you haven’t taken action yet. So maybe, Tommy, in your scenario, you have the money, you’ve been researching about real estate, but you just don’t have the time to actually go out and find a deal. So if that’s what’s holding you back, find somebody who can do that for you, who can go and find the deal and bring you that piece that you’re missing to actually start becoming a real estate investor. And this isn’t only just for somebody who’s trying to get their first deal, this continues on through your life of being a real estate agent as to like, “Okay, I want to do this.” For example, Tony is going after a campground in West Virginia and he is taking on private money partners for this purchase and you’ve done something similar but never to this extent.
So it was Tony as an experienced investor looking at this deal and saying, “Okay, I need to figure out how to partner with people to get this deal done.” So you’ll see this continuously as a huge advantage of leveraging other people and their resources. My partner right now is the first really hands-on partner that I’ve had. The other two were maybe hands-on for some deals, pass it for others or just completely passive in general. So I think look at what you want out of a partner, because that can make a big difference too. So if you just need somebody’s money and you can find the deal, you’ll do all the work, you don’t care, then make sure you’re going to find somebody who’s just going to let you keep that control and not say, “Oh, here’s the money, but I think I know best and I’m going to meddle in what you’re actually trying to do.” So there’s so many things to look at in that situation.

Tony Robinson:
And I just want to touch on for Tommy, and really for everyone that’s listening, the different things to consider when you’re structuring that partnership. First is that you should 1,000,000% get your partnership formalized in some kind of written document. Like Ashley said, it could be that you form an LLC together and that it’s your operating agreement that kind of establishes a lot of these things. Or if it’s a joint venture in the JV agreement, make sure you establish these things. But I’ll give a quick rundown of the things you should consider when you are creating a real estate partnership. So there’s two pieces to this. There’s the sweat equity, kind of the work portion, and then there’s the actual capital that goes into the deal.
So I guess I’ll talk about the capital first. So when you’re structuring a partnership, there’s the down payment, there are the closing cost, there are the mortgage that needs to be carried if there’s any rehab or if you’re maybe doing an Airbnb or set up in your furnishing costs. So there’s this money that needs to be used towards all of these different purposes, and you should identify who’s responsible for bringing what percentage of each one of those different buckets. You guys could say, “Hey, we’re just going to split everything 50/50 down the middle.” Or maybe one partner’s in charge of the down payment and the closing costs while the other partner is going to carry the debt, and then you split the rehab or furnishing whatever it is to get the property up and running. There’s so many different kind of scenarios there, but I think it’s super important to identify who’s responsible and at what percentage for each one of those different financial buckets in terms of how you pay each other back.
If one partner maybe is the full capital partner and the other partner is just bringing the sweat equity, what are the terms of how that other partner will get paid back? Is it, “Hey, they’re getting paid back just with the cash flow and we’re going to split the cash flow 50/50,” or is there some additional agreement that says, hey, if there’s $500 a month in cash flow, 50% of that’s going to go towards the capital partner until he or she gets repaid and then the remaining 50% will split, or maybe all of the cash flow goes to the partner that brought the capital until they get paid back. So there’s different ways you can think about that “capital recapture.”
And then on the equity side, there’s the sense of who’s doing what work. I’m going to use short-term rentals as an example because that’s where the majority of our portfolio is. For short-term rental, there’s so much that goes into it, there’s the initial setup, which could take several days to maybe a couple of weeks depending on the size of the property, where you’re out there building furniture, getting the property ready for the guest, and then whether it’s short-term or long-term, once you take that property live, you have to now deal with the folks that are coming into that property. It’s either going to be your guests on a short-term rental side or maybe tenants if it’s a long-term rental, and who’s going to manage that property on a long-term basis, actually being the person that’s interfacing with the guests or the tenant.
And there’s also the repairs and maintenance. Maybe you’re a handy person and you want to help the property save maybe a little bit of cost by doing the repairs and maintenance yourself. So all of these different kind of sweat equity pieces that go into maintaining that property, you all should identify who’s going to be doing what, and think about how you’re going to be compensated for that sweat equity. Here’s a mistake that a lot of new investors make, Tommy, is that they undervalue the sweat equity, they undervalue the sweat equity because if I’m the person that’s bringing the capital, my job is done once we close that property. All I’m doing is writing a check, maybe signing some loan docs and then my job is done.
But the person that’s going to be doing the sweat equity, their work persists for as long as you own that property. So you want to think about, how should I be fairly compensated for that work? So it could be, “Hey, my compensation is just going to be part of my equity, so I’m going to get X percentage of the cash flow and that’s going to cover my time that I put into managing this property.” Or maybe you do something like recharge a property management fee, which you’re doing the repairs and maintenance, you’re charging an hourly rate for the repairs and maintenance. So a lot of things to consider, Tommy, and this is just like the tip of the iceberg, but think through those questions and make sure you get it down in writing before you move forward with the partnership.

Ashley Kehr:
Yeah. I think to summarize all of those great points that you touched on, Tony, is to really think of now in your partnership what’s happening now, but also into the future, what are some things that can happen that you need to be prepared for. The second thing is roles and responsibilities as to who is doing what. But also if you’re saying, “You know what, neither of us are doing maintenance or the repairs, somebody else is going to do that,” somebody has to at least take ownership of hiring that maintenance person, overseeing that maintenance person, paying that maintenance person. And I think that’s oftentimes overlooked as, yeah, you’re going to outsource these things, but you have a bookkeeper doing of it, but all of a sudden she needs some information from you, who’s going to be the one to take the time to respond to her email? There’s all these little admin things and all this oversight that needs to be done even if you are outsourcing a lot of roles, getting financing done.
If you hire all these people on your team, the loan officer still may need your Social Security number, your tax return, that may be your property manager, your maintenance guide, they don’t even have that or you don’t have access to it. So definitely think about those things when going into building out your agreement too. And the last thing is the exit strategy. Maybe you need to pivot and you need to change from a long-term rental to a short-term rental or vice versa. What happens there? What happens if you sell the property? What happens if you refinance the property? Are you going to max out what you can get for the appraisal or are you just going to refinance to pay the current loan to maybe get a better rate?
But you have to have some kind of decision maker in there, especially if there’s something that comes up and you don’t agree on. So maybe one person wants to max out the loan to value based on this new appraisal and the other person doesn’t, what happens if you’re 50/50 partners or equal partners and there’s some decision that needs to be made? What is that kind of tiebreaker? And I’ve seen it where people have a designated third-party, maybe it’s their attorney or their accountant or somebody close that they trust, maybe even a mentor that comes in and actually looks at the facts of both sides and then makes the decision. Or it’s based on what, Tony, he handles all the maintenance, this is a maintenance decision as to whether we go and put a new roof on this property. He gets the final say in what we actually do in this situation. So there’s definitely a lot to think about. And good thing Tony and I will be releasing this summer our book on partnerships. So make sure you guys keep an eye out for that.

Tony Robinson:
Yeah. I guess just one personal update, because you mentioned it, Ashley. So we had that West Virginia campground that we’ve been working on and it was a partnership structure, but not equity. We were essentially raising debt from a pool of investors and we actually had to pull out of that deal, Ashley, on Friday.

Ashley Kehr:
Oh, wow.

Tony Robinson:
Yeah, and I think this could be instructor for all the rookies, so I’ll quickly share what happened.

Ashley Kehr:
Yeah, please do. I think it’s so beneficial

Tony Robinson:
Yeah. And it’s such a bummer because it’s like the second time this has happened to us, and I feel like every time we get close, something happens that gets us off track here, but when we initially put this property under contract, we needed to raise about $1.5 million or so, and we raised the funds, we had capital commitments from all of the lenders that were going to participate, but we did this as a traditional private money relationship. So each lender was going to have a promissory note and then a deed of trust that secured that note to the property. Now, we had already asked a syndication attorney months ago like, “Hey, if this is debt and it’s secured by real estate, is this a security and do we have to follow what securities laws and run this as a syndication?”
And he said, “No, you don’t because it’s a note secured by real estate.” So cool. So we go down the path, and eight weeks later, we start getting pushback from the closing attorney in West Virginia saying, “Hey, with a number of people that are lending on this deal, I feel like it’s going to be security.” And we said, “Look, we already cleared this with the security’s attorney, they said, no.” And he’s like, “Hey, I really think you should double check with them.” So we hopped in the call with our security’s attorney, we walk him through and he’s like, “Yeah, no guys, you’re fine. This is not a security, so move forward.” An hour later we get an email from our attorney saying, “Hey guys, I did a little bit more digging, and it actually does seem that this will qualify as a security even though it’s dead, even though it’s secured by real estate, it’s still going to be security.”
So now there’s the additional cost of it becoming a syndication, which you probably could have dealt with. But the bigger issue was that because we’d already talked about the deal publicly, and I’ve already mentioned on the podcast, now we’re at the point where we can only solicit that deal to accredited investors. And now the issue was that almost 80% of the people who had committed to participate in that deal were not accredited investors. So we essentially would’ve had to go out and re-raise another $1.2 million to try and close that deal. And we just didn’t feel that the timing was right or enough time to really get it closed in the window that we had committed to with the seller. So we had to pull out of that deal on Friday.

Ashley Kehr:
Well, I’m really sorry to hear that, especially since it was not receiving the right information that caused that. So I guess the follow-up question I have is, is there a certain amount of people that if you would’ve stayed under, would’ve triggered that or not triggered?

Tony Robinson:
There was no black and white number like, “Hey, if you’re under X,” but it’s just like, “Hey, once you get to, it seems like you might have too many cooks in the kitchen for this knot to be a security.” So there’s some lessons learned for us, and we specifically had wanted to keep it as a non-security so that we could market it to non-accredited investors. So just more lessons for us as we go about this for the third try.

Ashley Kehr:
I mean that’s what real estate is is lessons learned, getting to reach that point. And it shows, Tony, you are an expert in short-term rentals, the operations of them, buying in the markets that you’re in, Joshua Tree, the Smoky Mountains, you are an expert in that. But it just goes to show you, just because you are an expert in those things doesn’t make you an expert in everything, and you have to lean on other people like attorneys and accountants and even just different partners to try to figure out, “Okay, well, I want to scale and grow, this is the next thing I’m going to do.” And you’re not an expert anymore trying to step into how you set up the deal a new way to do that, or even if you were going to change and go into a syndication, you would still be a rookie syndicator, I guess.
And I just want everyone to remember that just because someone is experienced and an expert in one thing doesn’t make them experience in an expert in everything else, and the way that they do become experienced is because of educating themselves, leaning on others, doing the legwork to get to that point. So Tony, I’m really sorry to hear about that deal. It did sound really, really awesome and I was excited to follow the journey, but I know you’ll get another one.

Tony Robinson:
Yeah, and that’s the goal, we want to get that first commercial property under contract before the year is over. So dusted ourselves off and just to try and make things right with the seller. Our MD was still refundable, but we just let him keep it because we had tied that deal up for, I think, 45 days and we’re now getting into busy season and he wasn’t really doing what he was supposed to do with it. So just trying to make sure that we’re putting good karmic energy out into the universe, but fingers crossed, the next one will work out for us.

Ashley Kehr:
Yeah. And it’s just kind of that ethical thing and to keep that, if there was a better business bureau rating about you.

Tony Robinson:
Right. That it all says good things.

Ashley Kehr:
And also I think it kind of helps you sleep at night too. It’s knowing that you did what you could I guess when you had to, that kind of the deal.

Tony Robinson:
Yeah, and that’s what I told them. It’s like, at the end of the day, I feel like especially for me being a host on one of the most popular real estate podcasts out there, it’s like my reputation precedes me in a lot of places and I want to make sure that I’m protecting that more than anything.

Ashley Kehr:
Okay. Let’s go on to our next question. This one is from John Rodriguez. What’s the difference between REITs and regular real estate and investing?

Tony Robinson:
Ash, do you own any REITs?

Ashley Kehr:
No, I don’t. I never have. Yeah.

Tony Robinson:
Yeah. So John, think about when you’re a real estate investor, in a lot of situations you are purchasing the property and you own a share or you own that property in its entirety. So when Tony buys a property or Ashley buys a property, it’s our names or our LLCs names that are on title that are carrying the debt. We are the ones making the payments. If something goes wrong, it’s us talking to our property managers, to our maintenance crew. We own the property, we oversee the execution and the management of that asset, and then we collect our cash flow on a monthly basis or whenever we want to take those distributions. When you invest into a REIT, it’s almost the same thing as going on into E*TRADE or Robinhood and buying a stock. When I buy a stock in Apple or Amazon or Tesla or whatever company, I own a small ownership, but I have almost zero control over how that business is being run on a daily basis.
Instead, what I’m doing when I buy that share is I’m putting my faith in the leadership of that company and their ability to give me a return on my investment, either through dividends or through the stock price increasing, and then maybe I’m able to sell off some of my shares to realize that that gain. A REIT is essentially the same thing, you’re buying a share of a company that invests in real estate and you’re able to buy it and sell it just like you would a stock, but the downside is that, A, the returns are typically significantly lower than what you would get by doing it yourself, and B, the ability to control the asset isn’t there because instead you’re putting your faith in the leadership of whatever REIT you’re investing into.

Ashley Kehr:
Hey, Tony, I think that’s a great explanation and it really comes down to how passive do you want to be in your real estate investing. So the thing I love about real estate is there are so many different ways to actually do that. I mean, you can be completely hands-on making calls every single day to try to wholesale a deal, or you can invest in a syndication or invest into a REIT. So I have seen that a lot of large syndicators that some of them, their actual end goal, their exit strategy is to sell to one of these big REITs to just completely buy their whole portfolio. And then that’s kind of like their cash cow, they’re cashing out.

Tony Robinson:
Honestly, that’s part of my exit strategy as a real estate investor too, it’s like I want to build this massive portfolio of short-term rentals and the management layer on top of that and hopefully sell that portfolio off down the road to either a REIT or some kind of fund or someone. But actually, I just looked up the data, and this is from the Motley Fool, so hopefully this data is accurate, but it says over the last 20 years, the S&P 500 has had a total annual return of 9.5%, and REITs are at 12.7%, so it’s actually not bad. Now, I’d have to dig through this data, I would have to assume that that 12.7% doesn’t account for the fees that the REITs are taking. So REITs make money the same way that a lot of these companies in the stock market do, where they charge fees for managing the assets and there’s all kinds of other stuff. So you as the investor probably aren’t getting a 12.7% return, it’s probably something less than that once you account for the fees.

Ashley Kehr:
Yeah, because if you’re investing in an index fund like say Vanguard S&P 500 index fund, I think your fees are 0.05%, very, very minimal because there’s no management of it where if you have a fund where maybe Morgan Stanley or wherever, they have a guy that’s picking the stocks like, “Okay, in our fund, we have these five different stocks because we know they’re going to do great, invest in my fund.” Or if you look at your 401(k) and you see the different options, a lot of times with the financial provider, they’ll give you, if your target retire date is in 2040, 2045, it usually goes in five year increments, it’ll say, “We suggest you invest in this fund because all of the stocks that we’re picking for this fund will be doing good by then so you can cash out your retirement.” And it’s maybe low or a little bit higher risk now because it’s pushed farther away where if maybe your retirement date is in five, 10 years, they’re low risk stocks that they were putting into that fund.
But if you look at the fees, and you should get a disclosure every single year showing what the fees are for each of those funds that you could select, I mean, some of them are outrageous. I just did this the other day for Darrell, he was in a union at his last job and they have a couple pensions he was in, and I’m like, “Just so you know, this is how much you’re paying in fees a year.” So within an hour, I had already hacked into his account for it, and I changed it all to index funds. I’m like, “This is how much money I’m saving you.”

Tony Robinson:
And I think that’s the thing that a lot of people don’t realize when they invest into some of these well-known funds, the mutual funds, whatever it may be, is that the fund return might be X, but your return is the actual investor is going to be X minus whatever fees are there, and those fees can compound over time. Ash, are you doing anything, any type of passive? Well, you got your index funds, it’s like your passive investments, I guess, right?

Ashley Kehr:
Yeah, I have a Roth IRA, and then I still have a 401(k) from a W2 job, but they’re pretty much it. Yeah, it’s all index funds.

Tony Robinson:
The only socks I have are from the company that I’ve worked for before, and I’ve been like solo liquidating those over the last couple of years. And my goal is just to put pretty much all of it into our real estate portfolio. But I do want to get to a point where just almost my own hard moneylender, because I feel like that is the best kind of return that you can get on your investment because if I lend someone whatever, $500,000, I get maybe two points upfront. So I’m going to get, what’s two points on $5600,000? What is that $10,000 upfront? I’m going to get $10,000 upfront, which is already a great return. And then say I’d give that money for a year, say I charge them like 10%, that’s another $50,000 on top of that. That’s great. That’s a great return, but you got to have a big stockpile of cash to really make that a livable income. But I would love to get to the point where the majority of my income is just from lending out money privately.

Ashley Kehr:
I actually am a loan shark in a sense. My friend has some credit card debt and I paid off all of his credit cards, and he’s paying me lower interest than he would the credit card, but still a good interest rate so [inaudible 00:29:27].

Tony Robinson:
Who’s your fixer, who’s going to hit him up if he’s late on the payment?

Ashley Kehr:
Oh, that’s me.

Tony Robinson:
Oh, you’re doing it yourself.

Ashley Kehr:
I still got my crutches from when I tore my ACL, so I hobble over, you got the money and then take them all, crack to the back of the legs.

Tony Robinson:
What the audience doesn’t know is that your knee, your ACL tear wasn’t actually from a snowboarding incident, it was just Ashley was tied up, she owed somebody to some very bad people, and we’ve just been planted off as a snowboarding incident.

Ashley Kehr:
So then I looked at that scenario that happened mean, and I’m like, “I could do this.” And now I am the loan shark.

Tony Robinson:
Right. So that’s the real key to wolf guys, forget real estate investing, become a loan shark. There you go.

Ashley Kehr:
Okay, let’s go to our next question. This one is from Michael Marrero. After how long would you wait after not being able to close a deal to make the decision to try a different market? That is a good question.

Tony Robinson:
Yeah.

Ashley Kehr:
Tony, let’s start with you because I pretty much only invest in the same market, outside of Buffalo, New York, but you started in the Smoky Mountains and then you went to Joshua Tree. So maybe talk a little bit about that transition for you.

Tony Robinson:
Yeah. I guess before I even talk about myself, I think I just want to preface this question by saying we don’t know enough about Michael’s situation to really be able to answer this question with, I think, the right kind of detail that we would need to. Because, Michael, if you just started looking in that market two weeks ago and you’ve analyzed four deals, that is nowhere near long enough for you to confidently state that, “Hey, this market does not make sense.” What I tell people that are just starting out is give yourself 90 days. 90 days, analyze 100 deals, and if you can analyze 100 deals over 90 days, you’ll know without a shadow of a doubt whether or not that market is a good market or not. So there has to be a certain threshold that you hit, I think, before you rule a market out, and a lot of it just comes with granting it out, analyzing the deals and doing the hard work to make it happen.
But to answer your question, Ashley, we knew that we wanted to scale quickly, and we had already been analyzing a lot of deals in the Smoky Mountains where we first started with our short-term rental portfolio, and we weren’t finding enough that met our investment criteria in terms of cash on cash returns. So what we did is we just opened up the purview to say, “Okay, what other markets are similar to the Smoky Mountains where we can find good deals?” We landed on Joshua Tree and we just quickly scaled things up from there. So I think for us, it’s always, can we find deals that meet our return requirements? And are we being aggressive enough in our terms of acquisition? Are we being aggressive enough in how quickly we’re analyzing deals or we building relationships with the right people? And if we’re pulling all of those levers and we still can’t find the deal, then maybe we move on to another market.

Ashley Kehr:
I think a couple things to summarize there is thinking about if you can handle more. So like you said, you weren’t getting enough deals and you had the actual capacity to be closing on more deals, so that was a big decision as to why you were going to the other market. And then also finding the resources that you have too, so whether are you taking some of your resources? Maybe you’re staying in the same state, but going to a different market, are you going to be using the same real estate agent? Are you going to be using the same attorney? Are you going to maybe use a property management company that’s nationwide too and these are the other markets that they’re in? So you already know that you have that kind of team already in place. When actually looking at other markets, start with where other people are investing and then break it down from there.
First of all, just because other people are investing there, doesn’t mean that it is a good market for you. Their strategy, their reason for investing, what they look out of buying real estate, maybe it’s appreciation, but you’re looking for cash flow. Those things could be very different from what you want, so you need to verify information. But it’s a great way to start BiggerPockets.com. If you’re a pro-member, you get access to pro-exclusive articles, and this is where Dave Meyer from On the Market podcast actually breaks down and does analysis on different markets for you. He’ll pick cities, I don’t know if they’re random or how he picks them, but every once in a while he’ll just be like, “Let’s do an analysis of the market in St. Louis,” and he’ll do, “Here’s the price to rent ratio. Here’s what the job growth looks like.”
And you can also use these as starting point because you’re getting so much data. In my bootcamp, I have amazing, amazing students in the bootcamp. One person took the sheet that I create for the bootcamp with all the things you should be looking at when you’re doing a market analysis, and he put it into an AI chat. So I don’t know exactly which one he used, but he asked the AI to actually go and pull these data points for different cities, and it generated all the data, it gave the resources where it actually found the data, and now he’s just able to repeat that for every market that he wants to start investing into. I thought that just blew my mind, it was so cool to just see how I’ve wasted so much time looking at data when all I could been doing was that.

Tony Robinson:
Man, I love the application of AI, and honestly, we should have an episode where we just dive into how real estate investors should be leveraging all of the AI tools that are coming out to better systematize the processes in their own business. But yeah, I love that approach, Ashley. You mentioned something I don’t want the rookies to gloss over is leveraging your relationships to understand where other investors are being successful. That’s what took us to the Smoky Mountains originally. The deal in West Virginia that I just talked about, it was a relationship, another investor I knew in that market that took us there. When we were looking at that bed and breakfast in Western New York, it was a friend of mine who invested in the Finger Lakes that took us there. So we definitely lean on our relationships to help point us in the right direction. And then obviously we do our own due diligence afterwards to solidify that this market does make sense for us.

Ashley Kehr:
Okay. Let’s knock out one more question here, Tony. This one is from Melanie Schmidt. I’m looking to purchase our first investment property, hopefully a duplex or triplex. What are the pros or cons to obtaining a property that has tenants versus a vacant property? Thanks in advance for any advice. When you bought in your first property in Treeport, Freeport, whatever it is, I didn’t know for two years what city it was, but were there tenants in place or was it vacant?

Tony Robinson:
So all of our long-term rentals we had purchased, we bought four, they were all vacant when we purchased. And even now when we buy a lot of our rehabs, our flips, I still want to make sure that they’re all vacant when I purchase as well. And that’s a personal preference, but for me it was because pretty much every long-term rental that I bought or every rehab, we’re going to go in and we need to gut the whole thing in order to execute our business plan. So for us, having a tenant in place just didn’t make sense for what we were trying to do. Our first long-term rental, we wouldn’t have been able to command the rents that we wanted, had we left it at the pre rehabbed value. And the way that my debt was structured, I almost had to rehab that property to increase the ARV so I could get into it with no cash out-of-pocket. So I was almost forcing every situation to make sure it came vacant. But what about you, Ash? I know you’ve seen a mix of both.

Ashley Kehr:
Yeah, I’ve purchased properties with tenants in place, and honestly, the ones that I have purchased with tenants in place, I’m pretty sure all of those tenants are still there, they’re very long-term tenants.

Tony Robinson:
So the only tenants you’ve had to evict are the ones you chose yourself?

Ashley Kehr:
Yeah. Basically we’re a property management company. Yeah, I’ve never evicted an inherited tenant, I’m pretty sure. Yeah, there’s one person that’s been lived there when I bought it. She had lived there for 30 years. Well, that maybe five, six years now. But what we did in that scenario is she was paying very low rent. She was paying $300 for a $500 apartment, so we did a step-up. So every month we did a $25 increase until she got to that $500 amount. And the property, we bought it, there was six units in there, two needed to be updated, one was vacant that needed to be updated, but the four that had inherited tenants in them, they were all nice already redone and good condition. So we didn’t have to do that. But yeah, I think what you said about doing the rehab and what your strategy is, if you are purchasing with inherited tenants in place, make sure you know when their lease ends and what kind of notice you need to give them if you do plan on going and doing a rehab.
What I have seen some people do, especially in a duplex or a triplex situation, is they’ll go in and they will rehab one side of the property and they will give the tenant from the other side first dibs at that new unit and say, “We’re going to rehab this property, make it nice. Your rent is going to increase to this amount, but we’re going to let you guys have first dips.” Obviously if they take good care of their apartment, you don’t want to let someone into your new apartment that’s been trash. But then this gives these people a reason to move into this very nice new apartment, and then you can go ahead and rehab their unit now. And this kind of you don’t have to evict them, you don’t have to terminate their lease, it’s kind of a win-win for each person if they do agree to do that. So that’s one thing you can do.
But really looking at what your strategy is going to be for the property, if you should put tenants in or buy it with tenants in place or not. And you can always put that as kind of a contingency. I sold a property where there was tenants that I inherited in it, and then I ended up selling the property and they were still there, and the new people purchasing the property wanted it vacant. Well, this was last year I sold it, and just evictions are so backlogged that they were afraid that with their lease expiration, when I sent the notice that their lease renewed, what if they didn’t move out because it was after the closing date. And so we actually held money in escrow in case they did have to proceed with an eviction to get the tenants out. So that’s always something you could do too is ask for money to be held in escrow in case those tenants don’t move out. They ended up moving out and then I got my money back.

Tony Robinson:
Yeah, that’s a really creative way to solve that issue, and I actually took it from the other angle. One of the rehabs that we recently purchased, there was a tenant inside and we essentially just left escrow open until they were able to get the tenants out. So you can do it either way, you can close on it and then work with the other person to get them out, or for us, just because I didn’t want to deal with the headache, I was like, “Look, well, we still want to buy the property, just let us know when they’re out and then we’ll move forward afterwards.”

Ashley Kehr:
Okay. Well, thank you guys so much for joining us this week’s Rookie Reply. I’m Ashley at Wealth From Rentals and he’s Tony at Tony J Robinson and we will be back on Wednesday with a guest.

 

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