Afford Anything - Ask Paula - Should I Be an Out-of-State Airbnb Host?

Episode Date: September 25, 2017

#96: Today I tackle 4 real estate questions that come from the listeners. Chris, age 25, says: Over the next 30 years, I'd like to acquire 15 rental properties. Then, at age 55, my wife and I can retire and travel. To begin, I'd like to buy a duplex, live in one unit and rent the other on Airbnb. Once I gain some equity and save enough for another downpayment, I'd like to purchase another duplex, move in, and repeat this process. However, I'm reluctant to get started for one reason. There's a decent chance that I'll need to move out-of-state within about a year or two. I don't want to be an out-of-town Airbnb host. Should I follow this plan, even though there's a good chance I might move away soon? __ The next caller, who remains anonymous, says: I love your rental property income reports; they give me a great understanding of your numbers. But you have economies of scale on your side. Your payments to your accountant, attorney, bookkeeping software, etc., are spread out across 7 rental units. When I start investing, I'll only have one unit. How well would your worst-performing property fare if it was your *only* property, and you had no other economies of scale? __ The third caller, "Anonymous from Orlando," says: I own my house free-and-clear, and I'd like to buy another one. Should I take out a conventional mortgage on my second home? Should I cash-out refinance the equity in my first home? Or should I open a HELOC? __ Finally, our last caller asks: I'm interested in rental property investing, but I don't want to deal with any hassles. Should I use a turnkey company? Tune in to find out the answers! - Paula Find resources to things mentioned in this episode at http://affordanything.com/episode96 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything, but not everything. Every decision that you make is a trade-off against something else. Saying yes to one thing implicitly means you're saying no to another. And so the question is, what do you value most? And how do you align your actions to reflect those values? Answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pan, host of the Afford Anything podcast.

Every other week, I answer questions that you, the community, the listeners, have sent in. In some of these episodes, I answer general questions about any money or work or productivity related topic. And in other episodes, because I tend to get a lot of real estate questions, I will occasionally dedicate a full episode to specifically real estate related questions that you all have sent in. That way, if you're interested in the topic of real estate, you can tune in. And if not, then that's cool. You don't have to listen to every episode. So today is a day in which I'm answering specifically questions that you've sent in about real estate. And our first one comes from Chris.

Hey, Paula. My name's Chris. My wife and I moved to Orlando in the beginning of the year. My wife works as a manager for a YMCA after-school program, and I'm a flight instructor building my time to become an airline pilot. Our dream is to build passive income through rental properties over about the next 30 years, and so that by the time we're about 55, we want to be financially independent. have about 15 or so buy-in-a-hold-type investment properties for me to retire from the airlines at that

point with flight benefits and from there out be able to travel and see the world without any job obligations outside of those rental properties. The thought or the plan of how to do that has always been to purchase a duplex, live in half of it, run out the other half, pay it down enough to be able to buy another one and repeat. Several years ago I read about your Airbnb experiment, though. And while the timing when I read it wasn't right for us to do that, the idea came back up to me once we moved down here just because we have a little bit more time on our hands to manage something like that.

We have enough money right now saved for a down payment, and my work is sometimes slow enough that it gets me antsy to get my hands. on something to do like that. Unfortunately, we're not sure if we'll stay in the area for more than another year or two. And I do see some value in having your rental properties close to you, especially something like an Airbnb. So I'm hesitant to buy anything here just in case we don't end up staying. But on the other hand, I'm 25 and I do feel my life ticking away in front of me with me not being in the investment. property game. Anyway, penny for your thoughts. Chris, first of all, good for you for starting at this age. I mean,

you've got an ideal plan. You're 25 years old. Over the next 30 years, you want to acquire 15 properties. So an average of one property every two years, which is totally reasonable and doable. You know, that's something that you can easily balance with full-time work, with a family. One property every two years is absolutely a reasonable goal. So congratulations for formulating that, particularly at that young of an age. Listen to me, when I was your age. Now, to your specific question about Airbnb hosting, what I would recommend is buying a property

if the numbers make sense as a long-term rental. So in other words, run the analysis as though you are renting out that unit on a traditional 12-month lease, base your rent estimates off of that. And then if you choose to Airbnb it out and subsequently make a higher income as a result of being an Airbnb host, that higher rent is icing on the cake, but it is not necessary in order to make that investment a viable option. The simple way to describe this is that rental property investing is the real estate industry and Airbnb hosting is the hospitality industry. When you are a rental property investor, you are simply offering somebody a commodity, which is four walls and a roof. And you are also offering the long-term repair and maintenance and upkeep of that commodity. It is in that sense not too dissimilar from renting out a car or renting out a forklift or a trailer.

There are lots of different rental businesses. This one happens to deal in houses, but lots of things. of people rent out all types of tangible assets. And the service that you provide is that you acquire and maintain those assets and somebody else gets exclusive short-term use of said asset. If, however, you are running a hotel, which is functionally what you do as an Airbnb host, you're creating a guest experience. When the guest arrives, they are going to expect toilet paper and clean towels and linens and maybe little bottles of shampoo and conditioner and soap. They may expect some coffee waiting for them. Dishwashing liquid, a fresh sponge. Perhaps

even if you want to go above and beyond, perhaps you might leave them a box of chocolates or a bottle of wine. Those are all of the things that a hotel would do in order to create a guest experience. You know, they might really appreciate it if you set out a little booklet that has some of the activities in your area. Those aren't things that a tenant would ever expect or ask for. A tenant is never going to call you to say, hey, the toilet's backed up. Could you please send us a toilet plunger? Or better yet, could you please show up with a toilet plunger? That doesn't happen in the world of renting out a commodity. But it does happen in the hospitality industry, in the hotel industry, which is essentially what you are in as an Airbnb host. And so making the comparison between

rental property investing versus Airbnb hosting, I think is a little bit of a flawed premise. It's a little bit apples and oranges because they are fundamentally two very different industries with different demands and different expectations. You can, assuming that you have a decent occupancy rate, you could make more money as an Airbnb host, but that's because you're in an entirely different industry. And it is far more work to be an Airbnb host. So anyway, TLDR, buy a property if the numbers work for it to be a rental property investment. And then if you choose to Airbnb it out, because you have extra time on your hands and you want to make more money, that's awesome. That's icing on the cake, but it's totally optional. You're not required to Airbnb it out. You can still kick it back over to the rental investing industry. And the number still make sense and you're still able to totally execute your strategy based on that and that alone. Cool. Thank you so much for asking that question.

Our next question comes from Anonymous. Hi, Paula. I've been following your real estate income report and I have found it super helpful in determining if real estate is a good fit for me. Since I'm starting out, unlike you, I don't have the benefit of economy of scale on my side, meaning I would be starting out with one unit. So I was wondering, using your biggest loser property. and that's loser with an air quote, would you still be profitable?

Because certain things like your time, an accountant for taxes, bookkeeping software, I assume that that doesn't increase all that much above one property. And perhaps for your contractor, property manager, insurance, etc., you're probably getting a discount because of multiple properties. If it wasn't for all the economy of scale benefits, what would your numbers look like? Sorry, that's probably a big request to ask, but I think it would be something of value. for your newbie listeners like me that would be starting out with one property. Thanks. That is such a good question. Okay, so I was actually really curious about this. So I went back and I looked at my two

biggest loser properties. And those two are houses number three and number four. The way that I calculate that is I look at the price to rent ratio of the property. And the way to calculate that is really simple. The price of the property is the numerator and the gross yearly rent. of the property is the denominator. Now, a word about this numerator when I say price, what I'm referring to is the purchase price plus any upfront repairs that are required to get it rent ready for the first tenant. So, for example, for house number four, we bought it for 120,000. We had to put another 3,000 into it up front in order to get it rent ready for that first tenant.

So that price, that numerator, is 123,000. So that's what I use as the numerator. and then I divide that by the gross rent, the total rent that I collect before any expenses over the course of a year. Now, house number four, at the time that we bought it, rented for $1,500 per month. So this gives us a price to rent ratio of 6.83. And of all the properties that I've purchased, that is my worst price to rent ratio. So that house number four is the biggest loser.

Now, the numbers on that house have changed because approximately a year ago we did a renovation on that house. That renovation cost exactly $13,648. I take better notes these days. And now that property rents for $17.95 a month, which is actually worse than what we were expecting. When we first did the renovation, we'd listed it for $18.95 a month, and we received two applications at that rate. But then, long story short, we found these tenants who were willing to sign a multi-year lease. And so they negotiated the rent down by $100 a month in order to stay there for a longer time. Anyway, that's neither here nor there. Point is the numbers on that house have changed because we added value through a renovation,

and so that makes the price to rent ratio. Actually, hold on. Let me calculate this right now. All right. Let's see. $123,000 plus $136 gives us a numerator of $136,000, $136,000, $136,600. Divided by $17,000,000. Five times 12.

Oh, okay. So that gives us a new price to rent ratio of 6.34. So anyway, zooming out, the bigger picture of what I'm trying to say is that the biggest loser property was house number four when we bought it. Okay, that was a long tangent about PR ratio. So let me get to your actual question, which was how do economies of scale influence this? So let's try to figure that. And I'm figuring this out within the answer as much as you are.

So what I'm going to do in order to figure this out is let's take property number four, the biggest loser property. Let's take it pre-renovation, so when it was getting worse returns. And let's figure out what the cap rate on that one would have been. We'll walk through this example with the assumption that I don't have any economies of scale, which means that all of these ancillary expenses, such as bookkeeping, attorney's fees, CPA fees, all of that gets consolidated into just this one property. So starting assumptions, biggest loser property with all of the operating overhead consolidated into just this one. All right.

So here's how this shakes out. Potential gross rent is $18,000 per year, which is $1,500 times 12. Less 5% vacancy rate gives us effective gross rent of $17,100 per year. Now, utilities, utilities and water that tenants pay for, but of course when a property is vacant, then why, to keep the utilities on, you want to keep the lights on when you're doing showings. So I'm going to put in $10 a month for utilities in order to amortize out one month's worth of utilities over the course of a year. Trash, by the way, instead of looking up precisely what my trash bill is, I'm using, like, basically, what are reasonable ballpark figures for any trash service, municipal trash

service nationwide, right? So trash, 20 bucks a month, 240 a year. Repairs and maintenance. The ballpark estimate for repairs and maintenance when you're doing a CAPEX estimate is about 1% of property price per year. So that doesn't assume any type of discount through your contractor. So repairs and maintenance at 1% of a, and I'm going to use 123 as the purchase price, you know what, actually, screw it. Let's say that I paid a double for the upfront renovations. So let's assume that I put in $6,000 instead of $3,000 up front. So we're going to use $126 for the purchase price. In other words, we're going to artificially create a higher purchase price in order to really err on the conservative side and really adjust for economies of scale.

So let's assume, in other words, I bought the house for 120, which I did. And instead of putting 3,000 up front, let's assume I put 6,000 up front. We're going to double that initial cost. And then we're going to base a lifetime worth of repairs, maintenance, and CAPEX off of that. So repairs and maintenance at 1% of 1226 is 1260 a year. CAPX is an additional 1260 a year. Management, flat 10%. I don't get any management discount for the number of properties that I have. It's at my level, seven units, it would be unusual to get a property management discount. Typically, because property managers don't make that much, honestly, like the pay that they get relative to the work they do, it's not a, I mean, it's not a lucrative profession. Yeah, I mean, they're not like eating cat food in the streets under a bridge or, anything like that, but it is, you know, it's not a profession where they have a huge amount of margin to make big discounts. And so typically what a lot of investors will do is when they get up to the point where they have, you know, 20 or 30 or 40 units, at that point, it can make more sense to just hire somebody to do property management in-house or to start your own property management company at that point. But the long and short of it is I get no discount from my property manager. So property. property management, 10%, that is 10% of effective gross rent. That's 1710 per month.

Bookkeeping, $36 a month for me that spread out over all of my units. But for you, for this question, we're going to consolidate the entire bookkeeping fee into just this one property. So that bookkeeping is $432 per year. For CPA, I pay $1,400 per year to my CPA to cover all seven units. For you, I'm going to estimate $1,000 to your CPA per year, and I'm going to put that entire $1,000 into just this one property. So a $1,000 CPA fee annually, and we're going to say $500 annually to an attorney as well. Now, property insurance, the rule of thumb for homeowners insurance when you're trying to estimate what that's going to be is to divide the home value by $1,000 and then multiply the result by $3.50.

So we're going to say that the home value is $126,000. So that divided by $1,000 times $3.5 puts our property insurance annually at $4.41 for this estimate. Property taxes is a big wild card. That's going to depend on your county, of course. But for $120,000 house, I'm going to put property taxes at $3,000 a year. And liability insurance, I'm going to put it another $200 a year. So all of that being said, you're operating overhead at this point. comes to $10,043 per year.

And again, that is assuming zero discounts. And it is consolidating all bookkeeping CPA, attorney's fees, all of that into just this one property. So with all of that, with the zero economies of scale, your operating overhead under this set of assumptions, is $10,0.43 per year, which means your net operating income would be $7,050. $27 per year. So your net operating income is your unleveraged cash flow. In other words, it's your effective gross rent minus your operating overhead. And so now that we've arrived at that, we can calculate the cap rate, which is the NOI divided by the purchase price of the property. Again, we're going to use the figure of 126 as the purchase price. That puts your cap rate at 5.6. So a 5.6 cap, what that means is that you are essentially getting a dividend payout

from this house at a rate of 5.6. So imagine having a blue chip stock. Let's say that that blue chip stock keeps pace with inflation but nothing more. So the capital gain on the investment is equal to approximately the rate of inflation. And then in addition to that, that asset pays out a dividend at a rate of 5.6 per year. That's essentially what you're looking at under this set of assumptions where you, let's say, have higher contractor fees and zero economies of scale using my worst house, using the set of numbers that came from my biggest loser house. So your total returns on that would be 5.6 cap plus if you assume inflation is about 3% annually, the total return would be approximately 8.6, the majority of which would come in the form of

that dividend, that 5.6 dividend, which is your cap rate. Again, I can't tell you what a good or bad cap rate is because, of course, that's subjective and that depends on the risk-reward ratio of that neighborhood itself. But I'll just say I would buy a house with these numbers, assuming that the neighborhood was decent. I would demand a higher cap rate if it was a Class C neighborhood. But for something that's Class B-plus, as this house is in, yeah, I think that's totally cool. So I hope that answers your question. I guess to zoom out a little bit, and let's look at the assumptions around what economies of scale am I getting. I'm not getting any economies of scale benefit for property management. I may be getting a slight benefit for my contractor.

And I'm definitely getting a huge economy of scale benefit when it comes to CPA fees, bookkeeping software, and attorney's fees, because those are spread out over the seven units. And a little bit of one in insurance as well. But all of the numbers that I ran within this calculation strip those economies of scale out. So yeah, that's my answer. And that's a very good question. You know, the way to get started is to get good returns. And as you do so and as you continue to do so, your returns will hopefully over time continue getting better and better, partially because you have economies of scale. And partially, frankly, also because over time you're more experienced, you know what you're doing more. I was having a conversation with somebody about this the other day. Any time that you start something new, any new thing, whether it's playing tennis or. or cooking or driving, anytime you begin a new task, there is going to be that beginner's learning curve. And I think that even more so than economies of scale, one of the big components of uncertainty, particularly when you get into your first rental property, is that you will make

some beginner mistakes. That's true of anything that you do in which you're a beginner, whether it's juggling or driving or cutting hair for the first time. No matter how well you train, yet there's always going to be beginner mistakes and sometimes those can be expensive. And so that's just sort of par for the course, you know. But the longer that you're in the game, the less of those beginner mistakes that you commit. That's why 25-year-olds tend to have better driving records than 16-year-olds. Even though 16-year-olds, arguably, may have better hand-eye coordination just as a result of their youth. But the experience is what makes a 25-year-old or a 30-year-old a better driver, despite. our declining hand-eye coordination over time. So anyway, fantastic question. Thank you so much for asking it. And I hope that helps. We'll come back to the show in just a second.

But first, let's talk about credit. Regardless of whether or not you're carrying any debt, maintaining healthy credit is important if you want to buy houses, regardless of whether that's a personal residence or an investment property. If you're interested in a website in which you can check your credit score, for free. Plus, get personalized credit tips to better manage your credit. Check out creditcesami.com.

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But here's what you need. a URL, which means like a domain name that's like afford anything.com or the thing that you type in. And you'll also need hosting. Hosting is where your blog lives on the internet. It's kind of like renting a space, renting an apartment for your blog. You can get both of those at Bluehost, which is super affordable and easy to use. And if you want a step-by-step tutorial in exactly how to set up a blog on Bluehost, check out Affordanithing.com slash start a blog. Again, that URL is afford anything.com slash start a blog where you'll find step-by-step instructions, including tons of photos and a video that show you exactly how to start blogging through Bluehost in only

five minutes. Affordanithing.com slash start a blog. Our next question comes from Anonymous in Orlando. Hi, Paula. This is Anonymous again from Orlando, Florida. Thank you for having my question on the air. Really appreciate the insight. We are going to be moving forward with purchasing a home.

And in thinking about how to finance it, I was wondering if you think it's a good idea to do a cash-out refinance or a home equity loan on my current property that's already all paid off versus taking out a traditional mortgage. I was trying to research and find out the difference between the two or really the three. But it's not entirely clear for me, and I feel like this would be a great question to have some insight on.

Thank you so much. You know what's funny is I actually, Joe and I, so when Joe Saul Seahy from Stacking Benjamins was on the show in episode 84, we actually recorded an answer for this, and the audio track for that got super effed up. So if you go back and you look at the show notes for episode 84, this question is featured. in it. And it totally confused me because Aaron, so Aaron is the chief sanity officer of Afford Anything. She's the organized, a grown-up in the room. And so she pinged me the other day. She was like, you never answered that question. And I was like, well, yes, I did. And she was like, no, no, you were supposed to answer it in episode 84, but you didn't. And so I went back, I looked at the show notes, and then I re-listen to episode 84. And I was like, holy moly, what happened? So anyway,

Because whoever asked this question submitted it about six months ago. By the way, for those of you who are submitting questions, we now have such a backlog. We've got about a three-month lead time on some of the questions that we're dealing with. So just be aware of that. For anybody who submits a question, it's going to be at least about three months before we're able to get to yours approximately. We organize these questions based on the ones that are more relevant to a broader segment of the audience, get priority. Of course, we alternate real estate episodes with general money questions. So that factors into it. So, you know, we might be able to tackle your question in as soon as one to two months. But for some people, it is going to take a lot longer. So just be aware of that. And then also audio quality makes a difference. Sorry, sorry about this tangent. Audio quality does make a difference as well. So we have received some questions where the audio quality just isn't really good enough and we have to throw those out. So that all plays a factor in it. Anyway, Anononon in Orlando to get to your question. So your question is, you own your home free and clear,

and you are buying a second home. So the question fundamentally is, how should you finance this second home? And the options that you're looking at are, A, do a cash out refinance on your primary residence, B, get a conventional loan from the bank, or C, a home equity line of credit, or some other alternative. The answer is, what's going to get you the best interest rate? I mean, go to a mortgage broker and just find out what the interest rate on all of those options are and then make a decision based on that interest rate as well as on the down payment required if that is a if that is also a consideration. If you are buying, if this second home is an investment property, then it could be the case. And I'm just speaking in broad hypotheticals, broad generalities here. So if it's an investment

property, a lot of banks will ask for between a 25 to 30 percent down payment on that, which is steep for a lot of people. So if that is the case, then a cash out refi on your primary residence, for many people in your same situation, it might be the most viable option because you won't have to come up with a large down payment. And typically the interest rates on cash out refis are fairly reasonable, particularly if you're cash out refying a primary. No matter which loan you choose, your loan will be secured by a property. If you take a conventional loan from the bank, your loan will be secured by that second property that you buy. And if you do a cash out refi, then that loan is secured by your primary residence. So, I mean, that would be the other consideration is if you

have a strong preference on which particular property acts as the security for that loan. But I can't imagine that you would have a strong preference for that unless the house that you own free and clear is one that has significant sentimental value. If that were the case, then you may as well protect that house by virtue of not borrowing against it. But if a few that you it's all the same to you. If it's all just assets on a balance sheet, then just go for whichever numbers make the most sense. So cool. Thank you so much for asking that. And sorry I didn't get to that one in episode 84, as I'd intended. Our final question is about the concept of turnkey investments. And this particular caller asks about a specific company. I'm going to bleep out the name of the

company just because I don't want their PR goons gunning me down. Her question may be about a particular company, but really the broader question that she's asking is about turnkey. Well, here, you have a listen. Hello, Paula. I would like to invest in real estate. I just found out that there is a way to invest in real estate through .com. I would like to know what do you about it where I don't have to deal with the tenant. It's just I'm investing in real estate, but I don't have to go through all the tensions. So please let me know. Okay, so at the high level here, this is what I'm hearing from your question, is you're interested in investing in real estate, but you don't want to go through the work of starting up as a

real estate property investor. And so your hope is that by going through this particular turnkey company, you will be able to have the benefits of real estate investing without going through the efforts that other investors go through. That is at the high level, at the 30,000 foot level, that's the question that I'm hearing you ask. And so essentially you're asking, is that the case? And if so, what should I watch out for? So here are a couple of thoughts about turnkey investing broadly. A lot of people are drawn to turnkey investing because of the perception that it offers a shortcut, that it is easy money. However, you as the investor are responsible for all of the due diligence, and that means that it isn't necessarily less work. It's different work, but it is not less work,

if that makes sense. So rather than doing the work of, say, interfacing directly with contractors, your job is sussing out the company to make sure that the two of you are in alignment, that your vision is in alignment. If you do make the decision to go turnkey, here are some of the ways in which I would urge you to do that. Number one, when the company finds you a property, fly to that destination, assuming it's in a different city. Fly there and check out the property yourself.

Now, don't bother doing this before you're under contract. But when you are under contract, make sure that your contract has the buyer's general right to terminate. in other words, make sure that you have a very large get out of jail free period. And during that inspection period, go there, personally walk through the property, and then invite two professionals to walk through the property with you. One, an inspector, and two, a general contractor. Now, this is very important.

Do not use the inspector or the general contractor that are recommended by the turnkey company. independently hire your own inspector that you find through referrals or even just through a Google search and also hire an independent general contractor, make sure that neither of these people have any affiliation with the Turnkey company. Pay both of them to walk through the property with you separately on two separate days or at least one in the morning and one in the afternoon on the same day and have each of them separately and independently give you their. report on the property. That way, you have two independent professional opinions about the property. Yes, this might be redundant and yes, this will cost several hundred dollars, but that is the cost of mitigating some of the risk, mitigating some of the uncertainty that comes with buying a property that the turnkey company claims is in a particular type of condition. Because the thing is, when a turnkey company says that they have renovated a property, like, what do they really mean? You know,

What is the definition of the word renovation? That is a very broad and ambiguous term, and it could have any number of meanings. It might mean to some people that the property is in excellent condition, and to others, it might mean that the property is in merely good or decent condition, and to others, it might mean that the property merely qualifies for a certificate of occupancy. In other words, it meets the minimum criteria of being habitable, but nothing better. So you don't know what they mean when they say that it's been renovated, and it is up to you to find out you cannot take their word.

for it. You can outsource action. You can outsource somebody installing the toilet for sure. Absolutely. But you can never outsource the decision making by leaving those decisions in the hands of others. So, TLDR, fly out there and have two separate opinions done of the property as well as walk through the property yourself. That's critical anytime that you're buying a turnkey residence. Number two, don't take the turnkey company's word at face value for the type of rent that you can expect to get. Figure that out yourself. Go on websites such as Craigslist, Zillow, Trulia, anywhere that, you know, any website that posts places for lease, look at those places from the point of view of a tenant. So, for example, if the property is a three-bed, two-bath, single-family home in the 1, 2, 3, 4-5 zip code, then what you should do is put yourself in the

mindset of a tenant who wants to rent a three-bed, two-bath in that particular zip code. and then search the internet for all available properties that meet that criteria. And by doing so, you'll be able to see what those types of properties are renting for. And that will give you a much better sense of both the price and the condition and the availability of comparable properties. It will give you a much better sense of that than just taking the turnkey company's word for it. The other thing that you can do is call up other local property management companies and get their opinion about it. you know, call a local property management company and say, hey, I'm thinking about buying a three-bed, two bath in this particular school district or this particular zip code,

let them know the condition of the property, new paint, new carpet, and then ask them what they think, both the rent and the demand would be. Because remember, rent and occupancy exist in this comfortable tension with one another. The expression is, if your rent is one dollar, then your occupancy is going to be 100%. And if your rent is a million dollars, your occupancy is going to be zero, right? So rent doesn't exist in a vacuum. Rent and occupancy have a relationship with one another. So what you want to do as you're like sussing out this neighborhood and this area is figure out what type of rent you can get at a reasonable occupancy level, say 90 to 95 depending on the demand for that particular area. So all that being said, your job if you go

through a turnkey company is to do a significant amount of duty. diligence. And that means that you're not going to be doing less work than you would if you were to buy the property directly. You're going to be doing a different kind of work. Rather than evaluating contractors, you're going to be evaluating the company that hires contractors. You know, a turnkey company is just essentially another level of management. And your job as the owner is to assess and manage that management. So I hope that helps. And you know what? The The other comment that I would say is, the question that I would ask you is, why are you interested in rental property investing? Because if your goal is purely to invest, you could always go into index funds.

You don't need to have rental properties in your portfolio. This is purely optional. The benefit to rental properties are, in my opinion, they're twofold. Number one is that rental properties are a little bit of a hybrid between having a business versus. is having an investment, meaning that you have, as a rental property owner, you have judgment and discretion over how that is managed. And therefore, your decisions can directly affect the bottom line in a way that they can't if you're investing in a broad market index fund. And so when your judgment is able to positively or negatively affect the bottom line,

that's, I think, great for you because you have a greater degree of control. A rental property is more within your locus of control. And that is, to me, one of the two benefits of rental investing over index fund investing. And I love index funds also, but that's one of the reasons that I am so drawn to rentals. The other reason, quite frankly, is because the value of an asset comes in two forms. One is capital gains or capital appreciation. And the other is a dividend or an income stream that comes from that asset. Now, in an index fund, the gain that you will receive is primarily capital appreciation. And the dividend will be maybe one or two or three percent. That dividend will be typically in an index fund much smaller than the capital appreciation that you would expect.

In a rental property, the situation is reversed. In a rental property, you're really buying for the dividend. You're buying for the income stream. And capital appreciation, if it exists, is icing on the cake and nothing more. That's why I always tell people to assume that the value of your rental property will merely keep pace with inflation, nothing else. And if it happens to do better, that's awesome, that's icing on the cake, but it's not why you bought the property. Because in my view, appreciation is speculation, particularly when it comes to housing. So, zooming out a little bit, the question in terms of should I invest in rental properties or not really boils down to, number one, are you more interested in assets that produce an income stream? Or are you more interested in assets that have a greater probability of capital appreciation?

That's question one. And if your answer is income stream, then awesome. Rental properties might be good for you. But if you are more into capital appreciation or if you just generally want returns and you don't care which of the two forms that they come in, well, index funds are easier. Question number two is do you want a greater degree of control over your end investment or not? If you do, rental properties are awesome. But if you don't and you don't want to deal with it, again, index funds are great. So my question to you, I guess, is why?

are you interested in rental properties? Yeah, I want to make sure that you're going into this for the right reasons. And that's something that only you can answer. So hopefully that gives you some food for thought. And thanks for asking that question. Well, that is today's show. Thank you so much for tuning in. Coming up on future episodes, we have, all right. So I'm not supposed to tell you the name. I promised myself that I would not give you the names of people who I'm interviewing before I actually record the interview because that has bit me in the butt before when like, you know, scheduling problems happen. And then I, end up not interviewing them, but I'm going to break my own rule and do it anyway. So interviews that I have actually already recorded include Pete McKitis talking about how to be awesome at your job and Joshua Dorkin from Bigger Pockets and he and I will not be discussing real estate. We will be talking about something else. So tune in for that. I will, oh, I have actually recorded this one, Robin Dreek, the lead instructor at the FBI's counterintelligence training center, will come on the show to discuss the Code of Trust, his new book, and we'll also be discussing, you know,

interpersonal communications, things that you can apply in business and life. AJ Jacobs, those of you who are longtime listeners, remember that I mentioned him this past spring. He will be coming on the show. I still haven't recorded the interview, but it is on the schedule. He'll be coming on the show to discuss how we are all cousins twice removed. and Will Bowen, who started a movement around the art of not complaining. We'll be coming on the show. I think I'm going to air that one on Christmas Day, probably. But that is an awesome interview about how to create a complaint-free world and why you should,

how that positively impacts your work and business and life and your relationship with money. So that is all coming up future episodes of the Afford Anything podcast. Hey, huge congratulations to everyone who entered and who won our Instagram contest. for a free copy of the book, The Secret Lives of Introverts. A couple of weeks ago, we aired an interview with the author of that book. And at the end of the show, I announced that I'm giving away 10 free copies of that book to anyone who goes on Instagram and leaves a comment about the show. Loads of you left comments.

There were almost 200 comments on that Instagram post. So thank you so much. It was so much fun reading through that and learning about how you reacted to the show, how it connected with you, what your habits are, whether or not you identify as an introvert. fascinating, fascinating stuff for everyone. I encourage you to head over to that post and read the comments because it's such a great way of getting to know the community. That's what I love about this. So anyway, I just wanted to say congratulations to the 10 people. We randomly chose 10 respondents to win a free copy of that book. If you've won, we have contacted you on Instagram through Instagram's messaging feature. So please check your messages. And I'm going to read your names out loud right now too. So I apologize in advance if I mispronounce anything. Sonia Potter, A. Fishter, Shop, Shanny Steve, Father with Sense, It's Me, J.B., Christy Grow, Reeks-like, Daria K. Tabaka, Little Golden Nuggets, and Awesomeness. So, congrats to the 10 of you who have won. We've messaged you on Instagram. If you haven't responded yet, please do so. And for everybody else listening, thank you for those of you who entered. And also, we've got more interviews with authors coming up on future. shows. We're doing a free

book giveaway for Robin's book and hopefully for other authors as well. So keep tuning into these interview episodes for your chance to learn about cool ideas, cool concepts, to learn about books that are on the market and have a chance to win some free copies.

We have a YouTube channel. Head to YouTube.com slash afford anything where you can check out the audio-only version of this podcast and you can also check out videos that I've created. And we're going to have a special video up celebrating episode 100. And we also have a very, very special guest coming on to the show for the episode 100 celebration. I will keep that guest's identity a secret,

but I'm really excited about it. Thank you so much for tuning in. My name is Paula Pan, host of the Afford Anything podcast. I'll catch you next week.