Afford Anything - Ask Paula - Should I Buy a Rental Property with an HOA?

Episode Date: July 16, 2018

#140: Should you buy a rental property that mandates HOA payments? How do you adjust for cap rate over the years, as the property's rent increases with inflation? Should you buy an $88,500 house that rents for $1,250 a month? And can you dive into detail about how you work with contractors and property managers? I answer these four questions in today's Ask Paula episode, themed around real estate investing. Daria asks: My husband and I live in Charlotte, North Carolina. I've been looking at local properties and I notice that a lot of these properties, Class C+ or higher, come with HOAs. For example, I've found properties that cost $80,000, rent for $1,000 per month, and have HOA fees of around $150. What do you think about HOA fees in general, and how do these affect factors like cap rate? I'd love to hear your thoughts. Sabrina asks: How does the cap rate on a property change over time, as the rent increases with inflation and other operating costs shift around? Jasmin asks: I'm looking at a rental property that costs $88,500 and needs $2,000 in initial repairs and other fees. My gross rent would be $1,250 per month, with estimated 8 percent vacancy. I estimate $555 monthly in expenses ($6,660 annually), including setting aside one percent of the purchase price for repairs and maintenance and another one percent of the purchase price for capital expenditures. What do you think of this deal? Rob asks: Can you please explain how you work with your contractors and property managers? On your blog, you describe texting with your contractor, but shouldn't the manager handle that? I'd appreciate any insight into how you handle these relationships. 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. And that's true, not just for your money, but also for how you spend your time, your focus, your energy, anything in your life that's a scarce or limited resource. And so the questions become twofold. Number one, what matters most to you? Number two, how do you align your daily behaviors to reflect this? How do you bridge that gap between intention and action and action and values? Answering these questions is a lifetime practice, and that is what this podcast is here to explore.

My name is Paula Pant. I am the host of the Afford Anything podcast and the founder of Afford Anything.com. Every other week we interview a guest and on the weeks in between, we answer questions from you, the community. Of these episodes in which we answer audience questions, half of them are about general personal finance and the other half are specifically about real estate investing. This is that one in four episode in which I answer audience questions about real estate investing. So if you're into that idea, keep listening. And if not, check through our archives because 75% of our episodes are about a wide variety of other topics, including stock investing, entrepreneurship, behavioral finance, the psychology of money, and lots of other interesting facets of managing a person's relationship with money. Here are the questions that we're going to be answering in today's episode. First, we're going to answer a question about HOAs.

What do I think about HOA fees in general and how should a person conceptualize HOA fees? Should you buy a rental property that has HOA fees? Why or why not? What are the pros and cons? We're going to talk about that. After that, we're going to talk about how the cap rate on a property changes over time. And then we are going to answer a question from a listener who is looking at a rental property that costs $88,000, needs $2,000 in a initial repairs and would rent for $12.50 per month with an estimated 8% vacancy. Let's talk about

this deal. Is it good? Is it bad? What do you think? And finally, we're going to close out with a question about how to work with contractors and property managers. So let's get started. Our first question comes from Darya. Hi, Paula. This is Darya. First, let me thank you for all the great information and inspiration you provide. I've been following you for a couple of years and it's been awesome. My husband and I live in Charlotte, North Carolina, and we've been thinking and saving for real estate investing for some time now. I was looking at the properties in the area and noticed that many of them have HOA. Single family homes, condo, town homes, any area C plus

and higher seems to have an HOA. To give you some numbers, I was looking at properties around 80K, could collect around 1,000 per month, and HOA is around 150, 175 per month. Do these numbers make sense to you? How do you think about HOA generally, and how does it play in calculations such as cap rate? We'd love to hear your thoughts. Thank you. Darya, that's a great question. Now, first of all, the offhand numbers that you've given, the cursory glance at those broad

overview of numbers, a property that costs $80,000. and rents for $1,000 a month, located in a class B or a class C plus neighborhood? Just at a cursory glance, I haven't taken a deep look at the numbers, but that sounds awesome. So I'm happy to hear that there are some great deals that you can find in Charlotte. And an HOA fee of $150 a month does not sound bad at all. But let me pull back a little bit and talk about a conceptual framework around how to think about HOA fees. First, and I'm saying this for the benefit of anyone who's listening, avoid the temptation to have a knee-jerk reaction to HOA fees.

HOA fees are not in and of themselves a bad thing. They're simply one of many expenses. They are one pixel in the overall picture. And so when you're looking at a rental property, when you're analyzing one in terms of deciding whether or not you want to buy it, what matters is not any individual pixel, but rather how good the overall picture looks. Now, HOA fees specifically are not just money down the drain.

You do get something in return for what you're paying in those fees. And often what you get are certain repair and maintenance items that are covered by the HOA. Now, what the HOA will cover depends on each specific association. But in many cases, the HOA will cover a majority, if not all, of your exterior maintenance and repairs. For example, your HOA, depending on the specific organization, of course, every HOA is different, but your HOA might cover stuff like roof repair, roof replacement, the siding and the garage door repair and repainting, whole house repainting, gutter cleaning, lawn mowing, hedge trimming, leaf blowing, pest control, termite treatment, snow removal.

And so when you are estimating the costs of your routine maintenance, you can predict these costs with greater precision if you have an HOA that covers that. Remember, this type of exterior maintenance, this is a standard operating cost and any investor is going to have to pay for it. So the difference is if you have an HOA that covers this stuff, then you know exactly what that monthly fee is going to be and what that's going to cover. You can solve for X because you know what those costs are going to be precisely. If you're an investor who owns properties that are not covered by an HOA, then you don't know what these costs are.

But if you don't have an HOA, then it's up to you to find the contractors and then pay piecemeal for each of those items. And yes, it's true that HOA fees can go up. I know that there are people who will take issue to me saying that you can predict exactly what these costs are going to be because you know what that HOA fee is going to be. It's absolutely true that HOA costs fluctuate, but it's also the case that if you were not covered by an HOA and you had to pay for these costs directly by hiring contractors or having your property manager hire contractors directly, then those costs would fluctuate too and they would fluctuate quite a bit more. So what I'm saying is there are certain expenses that you will need to pay one way or the other. and either you are covered by an HOA that pays for those expenses, or you are not covered by an HOA, and you yourself still have to pay for those expenses, but you need to find your own contractors or find a property manager who will find contractors. Now, one issue that a lot of people have with HOAs is that they feel as though they could get a better deal if they were hiring contractors directly. So in other words, they feel as though having an HOA gives them a worse deal on the cost of these services. And not having an HOA might result in a net cost savings.

That criticism, in many cases, is absolutely true. There are lots and lots of, I would probably guess, without having any data to back this up. I would guess that in the majority of cases, you could probably save money by hiring those contractors yourself rather than having an HOA do it for you. because you have the ability to compare prices and shop around. But on the other hand, by having an HOA, you have greater predictability and you won't have to make huge lump sum outlays. For example, if your HOA covers the cost of repairing and replacing a roof, you don't have to write an $8,000 check in one big lump sum when it's time to replace that roof. So yes, there may be net cost savings that are associated with not having an HOA, but that being said, there are still other benefits to the HOA's presence.

And if you are self-managing your properties in particular, then the absence of an HOA is going to create a lot of additional work because it's up to you to call those contractors and gather those quotes and make a hiring decision and then follow up and evaluate that contractor's work. So in essence, the HOA allows you to outsource. all of those tasks. You can think of it as mandatory outsourcing. So the broader picture of what I'm saying is that I don't see any problem inherently with buying an HOA governed property, assuming, of course, that the HOA allows you to rent that property out. And I think the biggest risk to having an HOA

governed property is not the expense associated. It's not that $150 a month or $250 a month, for which you will be receiving repair and maintenance services. The biggest risk is the possibility that the HOA might decide that you're not allowed to rent out that property. And if the HOA makes that decision, then your hands are tied. That is the risk. It's not the expense. It's the lack of autonomy in making rental decisions about your own property. So let's talk about how to handle that risk.

First of all, if you are looking for a property that is governed by an HOA, talk to the people on that HOA or talk to your agent and ask that agent to get documents from the HOA and find out, number one, if long-term rentals, I'm not talking about short-term like Airbnb, long-term rentals have ever been banned in the recent history of the HOA's guidelines or regulations. Also find out if that has ever been brought up at a meeting. Meetings are open to the public and there are meeting records. So with a little bit of digging, you can figure out whether or not this is a controversial issue, whether or not there are other homeowners who are arguing in front of the HOA that long-term rental should be banned. If there's any controversy around it, if they have a history of banning long-term rentals, then be cautious because that is the single biggest reason to avoid HOA governed. areas. Another question that I would ask is what percentage of homes, let's say that it's a subdivision

that's HOA governed or it's a condominium in which there are a lot of units that are all going to be HOA governed, what percentage of homes or units are owner occupied versus what percentage are being rented out as long-term leases? If there's a very high percentage of homes or units that are being rented out, then you know that there's going to be broad support from homeowners, existing homeowners to allow homes to be rented out, to not change the HOA regulations. Again, none of these are guarantees. The HOA can change its rules at any time, but it must put those rule changes to a vote. And so by asking questions about whether or not there's homeowner activism that is trying

to get the HOA to make those rule changes, you'll get a sense. about what the political sentiment is. And if there seems to be broad support for allowing units to be rented on a long-term basis, then great, that's good news. There's one other issue that you may run into with HOAs, and that is the risk that the HOA may go into arrears, which means that it does not have enough funds. And if the HOA goes into arrears, this could impact your ability to sell or refinance the property. So before you buy the property, you, will also want to find out the strength of the HOA's finances. How well-funded are there reserves? If you encounter a well-funded HOA and there is no activism from the existing homeowners or

unit owners around banning long-term rentals, then that's a pretty good situation. Thank you so much for asking that question, Darya. And again, I'm glad to hear that there are so many properties in Charlotte that have what seem to be awesome numbers associated with them. I mean, the numbers that you've quoted are properties that well exceed the 1% rule of thumb. So that makes me very happy to hear. Best of luck, please call back if you decide to go forward. I would love to hear what, if anything, you end up buying and where your rental property pursuits take you. So we're going to take a short break right now for a word from our sponsors.

And after that, we're going to hear from Sabrina, who has a very nuanced and interesting question. about how to calculate cap rate over time as the numbers change. So a few months ago, I became a Grove collaborative VIP member and started getting all of my household staples delivered right to my door, things I absolutely need like my dish soap and towels or my window cleaner. In the beginning, I was all about using Grove to replace the big items on my monthly shopping list, since they're all about the best prices right to your door. But then, Grove started introducing me to their own in-house line,

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Again, get $20 off your contacts at simplecontacts.com slash Paula 20 or intercode paula 20 at checkout. Our next call comes from Sabrina. Hi, Paula. First, I want to say I love your show. You are such a huge inspiration and I will be the first one beating down your door for that real estate course when it opens. My question is about cap rate and how it may or may not change over time. I'm clear on the fact that I need to evaluate a property for purchase based on the acquisition price and rent minus expenses in that first year. But what I'm unclear about is if does the cap rate change as inflation takes, rent up. For example, if I have a property that's bringing in, say, $1,000 a month today, and based on acquisition price and expenses, I'm getting, say, an 8% cap rate. If in 10 years or so, I'm getting $1,500 on the same property, am I still figuring cap rate based on acquisition price? And if so, I would assume that changes the cap rate, or am I looking at some other factors into that equation that are also changing over time.

Thanks so much and thanks for being you and for having this awesome podcast. Sabrina, that's an excellent question. Here's what I'm going to do. First, for the sake of anybody who is unfamiliar with Caprate, I am going to briefly define it and quickly go through the equation. And then I'm going to specifically answer your question because there are a lot of variables that go into Caprate and there are kind of a lot of different ways that you could look at this.

So here we go. First, as background for anyone who is unfamiliar with this concept, the cap rate on a property, conceptually, measures what would be analogous to the dividend or the income stream that a property kicks off. So the cap rate on a property is an expression of the income stream from that property expressed as a percentage of the acquisition price of that asset. And so what that means is that it allows you to answer the question. hey, if I pay X for this house, what percentage of that each year will this house kick off as its dividend? That's essentially what cap rate is answering. And by the way it's structured, cap rate only looks at your unleveraged returns.

So in essence, it looks at how good the deal would do if you paid all cash for it. And the reason for that is because financing is variable. If you paid 99% interest, a lot of things would look bad. If you paid 0% interest, a lot of things might look good. So you want to take interest out of the equation. You want to take financing out of the equation and look purely at the deal itself first. And that's what cap rate allows you to do. So here's how the equation works.

First, take all of the rent that this property would collect if it had full occupancy. So, for example, if a property collects a thousand, thousand dollars a month, then at full occupancy, it would collect $12,000 per year. That's its potential gross rent. Then you subtract out vacancy, so you subtract out maybe a 5% vacancy rate. And then what's left over is what's known as your effective gross rent. And then from that, you add in any additional income that you might make. So, for example, pet fees, storage fees, parking fees, anything like that. And then what you end up with is your gross operating income. Basically, this is the amount that reasonably you can expect to make from the property, right? So that is

the yardstick that you're using in terms of what you think that you'll be able to make after you adjust for vacancies in rent from this property. Now, after that, you want to subtract out all of the operating overhead. Now, this is any expense associated with running the property, like utilities, water, trash, repairs, maintenance, management. Now, it does not include the principal and interest portion of your mortgage, because remember, we're setting financing to the side. But it does include the homeowners insurance and the property taxes because those will be there indefinitely, regardless of whether you have financing on this property or if you own it free and clear, those will be there regardless. Right.

So you subtract out all of that operating overhead. And then what you are left with is a figure that's known as your net operating income. And so your net operating income is basically the rent that you really, reasonably can expect to collect after adjusting for vacancies, minus all of your operating expenses. What's left over is that operating income net. So now that you've got this net operating income, you take a look at it in proportion to what you paid for the property.

And the way that I define paid for the property is your purchase price plus the initial repairs that were required to get it rent ready for that first tenant. And so when you look at that net operating income, proportionately to what you paid for the property, that expressed as a percentage is your cap rate. In other words, net operating income divided by acquisition price and then multiplied by 100 to turn that into a percentage,

that is your cap rate on a property. And remember, it's not your total return. It's your dividend, so to speak. So that is the background for anyone who's not familiar with this. Now, Sabrina, to your question, what happens at year 10? Because if in year one, the property collects $1,000 per month in rent, and let's just assume that every year you increase the rent by 3% to keep pace with inflation,

then that property that rents for $1,000 per month in year one is going to rent for $130 in year two. And it's going to rent for $1,062 in year 3 and $1,093 in year 4 and so on. and so forth, right? So it can be tempting to project outward as to the way that that rent is going to increase and say, hey, my cap rate's going to get better in 10 years. But, and there's always a but, your operating expenses are probably also going to go up. Property taxes, I can almost assure you, will rise over the course of 10 years. Homeowner's insurance premiums, repairs, maintenance, utility costs, all of these things, these bills that you pay, they're also probably going to go up. Some may go up at the rate of inflation, some less, some perhaps significantly more.

So more or less, every variable in there is going to change. So how do you calculate your cap rate at year 10 when everything is different than what it was when you bought it? Well, before we address the how, let's talk about why. It's clear why. It's clear why. you would calculate your cap rate before you buy a property, because obviously you're comparing multiple deals and you want to know which one to buy, and cap rate will give you a lot of information about what deal you might want to purchase. So during the analysis phase, before you purchase a property, there's a very clear why as to why you would calculate cap rate. But why would you do it in year 10? Well, there are a couple of reasons. One might be sheer curiosity.

you want to know how well your property is doing. The other might be that you're weighing whether to hold the property or whether to sell it. And in the do I hold or do I sell question, course cap rate's going to play a role. So let's talk about both of these and how you can get a big picture understanding of what's going on. So we'll assume that you're in year 10 of owning a rental property. in year 10 there are two equations that you can run. Your first equation might look at the performance of your property relative to the price that you paid for at your acquisition price. So you can look at all of the year 10 numbers, the year 10 rent, the year 10 operating overhead, run that entire equation and then compare that net operating income in year 10 to the acquisition.

price that you paid for the property. That's one equation that you could run. Another equation that you could run is the net operating income of the property in year 10 relative to what that property is worth in year 10. This is the controversial question in real estate investor circles, where debates often can get heated between people who are like, no, you know, you should compare it to what you paid for it. You should compare it to its current value. What you paid, current value, what you paid, current value. Those debates in forums go on forever.

I say, why not do both? Running a spreadsheet is free, and you'll have the answer to both questions. You'll have both equations. You'll be able to look at that income stream relative to what you paid for that asset, but you'll also be able to look at that income stream relative to that asset's current fair market value. And by taking a look at both, you'll be able to have a wider picture, a broader understanding of how your property is doing. Now, let me make a big, big disclaimer here that I am assuming that we are discussing a residential property such as a single family home. And the reason that I'm making this disclaimer, and this is very important in terms of a conceptual understanding of real estate, is that if you are transacting a single family home, for example, a residential property,

the majority of buyers for that home will be owner occupants. And therefore, the fair market value is not going to be determined by the cap rate on the property because you're selling to an audience of primary residents who are making buying decisions based on emotional reasons, such as they think the tile fireplace is really cute and they like the school district. And so in the world of residential properties, particularly single family homes, the investment returns do not have an influence on the fair market value of a property. However, and this is a huge asterisk to everything that I have said in the past several minutes, if you are dealing with a commercial residence or even a triplex or a fourplex, that's where things change a little bit because you will be selling that. property most likely to investors. And investors are going to pay for a property based on its cap rate. And so the fair market value of a property that you sell to investors is going to be related to its cap rate. So in other words, with a single family home, you've got its fair market value. And there's not a whole lot that you can do to affect that market value. Sure, you can make it nicer, you can renovate it, you can spruce it up. But by and large, that market value is going to be determined by the market plus, you know, your reasonable renovation and forced

appreciation efforts. With a multi-unit dwelling, you yourself can actually directly influence the fair market value of that dwelling by virtue of improving the income stream. For example, if you owned an apartment, let's say you own an eight-unit apartment complex, and you run it in a very efficient manner so that the operating expenses, decrease, and you market it in a very effective manner, such that the vacancy rates decrease and the rents increase, well, you have improved the cap rate on that property. And by virtue of doing so, that improves the fair market value of that property because only other investors are going to be interested in buying that eight-unit apartment complex. So that adds a little bit of a twist

to the answer to your question. But let's just assume for the sake of simplicity that you're talking about a single-family home. The purpose of Capri is to figure out the potential return on a property in the first year of ownership so that you can make comparisons and choose whichever property you decide to buy. And then once you have that property, your focus then, really, as the owner becomes how to improve its performance. so your focus becomes, what can you do to increase the rent, to decrease the vacancies, to decrease the operating expenses? For me, once I buy a property, I really never calculate the cap rate on a property after I have bought it. Because once I've purchased it, my focus has changed.

Now, if I were considering possibly selling my properties, I would want to take a look at the net operating income as compared to its current acquisition price. Sure, I would want to know that. But I would only want to know that if I were deliberating between the questions of hold or sell. So I hope that answer was illuminating. I realize that what I've just told you is

there are actually a lot of ways that you can frame this question. And there is some controversy around how a person would answer that question. So I suspect that I'm going to get some angry letters from some real estate investors saying, oh, I have a different position than you do. And that's fine. That's the thing about real estate investing is there is no gospel

truth to how to do things. And even when it comes to the framework of how do you analyze a property, how do you look at a property, there are multiple perspectives. If you talk to 100 different rental property investors, you're going to hear 101 different points of view. And people get very angry and upset about it. I've gotten messages from people being like, well, you should look at it this way. You should analyze it this way. You know, that's the thing about why you need to be so careful about who you listen to for real estate investing advice. And I'm not saying listen to me. You don't have to. I'm, I guess, trying to communicate the point that even something that seems to be as straightforward as how you run an analysis is itself mired in nuance and debate.

And I believe that that is because an equation is not just an equation, an equation is a framework for thinking. And so when people debate real estate analysis, what they're really arguing about is thinking about how to think. Thank you, Sabrina, for asking that question. Now, speaking of property analysis, next up we have a question from a listener named Jasmine, who is looking at a property that costs $88,000. She needs to put $2,000 into initial repairs and other fees, and it will rent for about $1,250 per month. And she has a lot of other numbers as well that she's going to share with us. But first, we've got a word from our sponsors.

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And they don't just work with life insurance. They also compare disability insurance, renter's insurance, and health insurance. So if you care about something, they can cover it. So if you need life insurance, but you've been putting it off because it's too confusing or because you don't have the time, check out PolicyGenius. It's the easy way to compare top insurers and find the best value for you. There's no sales pressure and zero hassle. And it's free. PolicyGenius.com. When it's this easy to compare life insurance, why put it off? Next up, we have a question from Jasmine. Let's hear it. Hi, Paula. My name is Jasmine. I would like to start investing in real estate and wanted to get your opinion on a property. The money that I would be using a portion of it came from a sell of some company stock that I've gotten a couple of years ago. The property I'm looking at has a purchase price of $88,500. My lender would require me to pit down 20%. So $17,700 down payment. There would be $7,500,000. There would be $7,500,

roughly a closing costs. That's pretty high due to the property taxes and insurance that be rolled into the escrow cost. And I'm looking at just roughly thinking around $2,000 worth of initial repairs to cover costs for my permit, a license to be a landlord, lead paint, testing that I'd have to get done, and maybe some painting. Otherwise, the property is rent-ready. and the initial cash invested would be total $26,700. I'm thinking for the gross rent based on comparable rents in the area that I should be able to get a monthly rent of $1,250. The vacancy loss of 8% would reduce my operating income to $1,150.

For expenses, I have a total of $55, and that includes 1% of the purchase price for repairs and maintenance, $67 a month for insurance, $241 a month for property taxes, 1% of the purchase price set aside for capital expense savings, which would be $74, and then 8% for property management at $100. Even though I would probably manage it myself, I wanted to include that. The mortgage would be $359 a month, and I'm calculating a cash flow of $236 a month. My cash on cash return would be 11%. And the cap rate is 8%.

I wanted to get your opinion on where you thought this was a good deal. The house is in a nice neighborhood. It's a C-plus to be neighborhood. And it's not too far from golf course and just nice block, nice area. If you have any feedback, I would appreciate it. I love your show. And I look forward to any advice you have. Thank you.

Woo, Jasmine, this is a serious number cruncher. So a couple of things first, zooming out and thinking about how to think, I love the way that you are thinking about this. Specifically, I like that you are running the numbers in detail. You know your potential gross rent. You know your effective gross rent. You know to set aside 1% of the purchase price for repairs and maintenance and 1% for CAPEX. You've got the numbers down.

that is something that especially first-time real estate investors, a lot of people don't do. So I love the fact that you are looking at these numbers in comprehensive detail. Now, you mentioned cash-on-cash return. Personally, and again, this is a controversial personal opinion. I personally am not a very big fan of looking at cash-on-cash-return. So I noticed that you mentioned your total out-of-pocket expenses to enter the deal, which would be $26,700, and you mentioned what the cash on cash return would be. And I personally, and this is only my opinion, I don't like emphasizing that too much

because that, by its very nature, sets up a deal analysis in such a way that it penalizes buying properties free and clear. And I'm not talking about you. I'm just talking about a framework for deal analysis, right? If you are emphasizing cash on cash return or if you're scrutinizing a deal relative to the out-of-pocket expenses that you need in order to enter it, then you are inherently kind of setting up your deal analysis in a way that rewards high levels of leverage and penalizes buying properties free and clear. And as a matter of principle, I don't agree with setting up a deal

analysis in such a way. That's just my viewpoint on it, but I just think that that is not an ideal framework for rental property analysis. And that perspective makes me very different than the majority of real estate investors. The majority of investors are going to disagree with me on that topic. But setting that aside for a moment, because I noticed that within your question, you did both. You talked about the out-of-pocket, you talked about the cash on cash, but you also talked about the cap rate on the property. You talked about the rent that you would collect and the operating expenses that you would have. Now, it is not appropriate for me to tell you. you whether or not to buy any specific individual property. I can help give you the tools and the

framework around how to evaluate a property, how to make a decision for yourself, but it is not appropriate for me to tell you what decision to make. That is entirely up to you. So I cannot and will not say yes or no on any particular property. What I will say is that based on the message that you've left based on the variables that you are looking at, based on the depth and the rigor of your analysis, based on the fact that a lot of expenses that many first-time real estate investors tend to overlook you seem to have factored for. Based on all of that, it sounds to me as though you are approaching this question with a strong thought framework, a strong thinking framework. I can't give investing advice. And you wouldn't want me to give investing advice. This is,

and here's my big legal disclaimer, this is not investing advice. I'm not licensed to give investing advice and you don't want me to anyway. This podcast is purely for entertainment purposes only. Think of this as the least funny comedy show you've ever listened to. So I do not hold myself out to be an advisor or a professional or, heck, I don't even hold myself out to be a responsible adult. This podcast is here for your entertainment. That being said, Jasmine, I really like the way that you are approaching this question. So that is all I will say. Our next question comes from Rob. Hi, Paula. My name is Rob. I appreciate your real estate income reports and showing the good, bad and ugly with real estate investing. I have a question about the roles that your property

manager plays as it seems that you have a lot of text messages and or phone calls with your tenants and contractor. It seems that a property manager would handle all of those things. So I'm curious what roles you have the property manager playing and what roles that you have yourself. Thanks so much. Rob, that's a great question. Now, first of all, to be clear, we both self-manage some properties from a distance and also have property managers on other properties. We have seven units. Not all of them are covered by property managers. I've written this on the FAQHQ, which is available on my website Afford Anything.com. I'll link to it in the show notes. Affordanything.com are FAQHQ, where I have a detailed explanation about this. It's been on the site for years. What we decided to do when we

moved to Nevada was self-managed the Triplex and the Class A properties from a distance because I'm partially because we lived in the Triplex ourselves for five years. So we know that building very, very well, and we know a lot of the tenants who were our neighbors, or at least we did at the time that we moved to Vegas. We've had some turnover since. But, you know, that was our personal home. Also, with a Class A property, because property management is charged as a percentage of the overall rent, with a class A property, you pay the highest amount in terms of raw dollars, but

you have the easiest tenants. And I'm speaking in broad generalities, but let's say you've got a Class A property. We'll take the Triplex, for example. You've got a Class A property and the Triplex all three units combined rent for somewhere around $5,700 per month. So if we were to have a property manager on that, that would cost us about $570 a month, not counting placement fees. In exchange for that $570 per month, the property manager, would be dealing with highly qualified tenants who are, quite frankly, really easy to work with. They pay their rent on time. They take good care of the place. It's pretty lovely.

That to us, at least at this point in our lives, was not worth $570 per month. Now, by contrast, a Class C property where the total rent is $900 per month, to send that to a property manager only costs $90 a month. in exchange, that property manager then chases down the tenant for, you know, the tenant frequently makes late payments and the property manager has to go collect not just the rent but the late payment and deal with lots of other issues. That is, in my opinion, a better value. And again, I know people are going to disagree with me. I know this because I get emails and comments about this all the time. There are a lot of people who disagree with me on this. But in my personal opinion, I believe, and the way that we have chosen to run our business is that we have decided to manage our Class A residences and outsource the management of the Class C residences. And so far, it's been three years since we moved to Nevada and became out-of-state landlords. And in three years of out-of-state landlording, that has served us really well.

In fact, when we were in state landlords, we still outsource the Class Cee properties. So in seven years of total landlording, three of which have been out of state, that decision so far, so good, has served us well. That doesn't mean one necessarily do it forever, but it's working for now. And we spend on average between the two of us about one hour a week approximately on the properties. Now, some weeks are very intense and some weeks are nothing. But as a long term, you know, when you average it out over the course of a year, we spend about an hour a week combined between the two of us. us. Now that being said, there are other occasions in which we would be working frequently with contractors as well, and that would be renovations. And probably, I'm guessing, that the

posts that you read on Afford Anything.com probably dealt with renovations. And when those renovations take place, those happen during turnovers, obviously, because you can't do a big kitchen remodel when a tenant is in there, right? So during a turnover, when a property is very, that's when we will do a kitchen remodel, build a deck, do some type of planned upgrade or planned renovation for the purpose of either replacing stuff that's just worn out and needs to be replaced, or making something better so that we can charge higher rent for it, depending, of course, on the particular property and the particular renovation job. Now, if you are interested in being an out-of-state landlord and you do not want to interact with a contractor on a renovation yourself,

You can always pay a property manager, a willing property manager, to take charge of that renovation on your behalf. And a perfect example of this is Rich Carey, who we interviewed on a previous episode of this podcast. We'll link to that episode in the show notes. Rich Carey is in the military. So right now he's stationed at a base in South Korea and he owns rental properties in Alabama. And so what he does is he pays his property manager to manage a complete renovation. And so the property manager hires the contractor and then charges about 10 to 15% on top of whatever the contractor charges as the fee for managing that renovation. So if you want to, you can absolutely do something like that.

This cost structure is referred to as the cost plus model because what you are paying is the cost of that renovation, the cost that the contractor is charging you, plus an additional 10 to 15% fee to. the manager to manage it. So that's what Rich Carey does and it works for him. For us, again, we would be perfectly willing to do so. We just don't have to because we've got our systems in place. We've got a great relationship with our contractor. We know our houses very well. We just don't have to. So it's easy for us, even being out of state, traveling, being in California, being in, I managed one renovation from Brazil. And for us, because we have the right systems in place, because we have the right team in place, it's pretty easy to do that. So for us, there's no reason to pay an additional 10 to 15% if we didn't have to. But I do want you to know that that option is always there.

And there are plenty of investors like Rich Carey who choose that route. Oh, and finally, I know I've said this many times on the podcast. But so very quickly, I just want to emphasize this, regardless of, and I'm saying this for the sake of everyone who is thinking about purchasing a rental property, regardless of whether you manage it yourself or you hire a property manager. When you are in the analysis phase, when you're running the numbers on a property, run the numbers assuming that you will hire a property manager. That way, you can do so and the numbers stay the same. So in other words, even if you choose to do some of the work yourself, when you're in the analysis phase, run the numbers under the assumption that you won't. Because that way, you will analyze the deal from a perspective of somebody who is purely a detached passive investor and not a worker inside the business.

Your goal is to own an investment, not get a job, right? So run the numbers as though you're outsourcing everything. Well, that is our show for today. Thank you so much to everybody who called in. And if you have a question, head to Afford Anything.com slash questions. That's where you will be able to leave a voicemail that we can play on a future episode of Afford Anything. Now, don't forget to subscribe to this podcast in your favorite podcast player. So whether you listen to this using Apple, Google Play, Spotify, whatever it is that you prefer to use, hit the subscribe button so that you can make sure to get all of our upcoming episodes.

Coming up next week, we have an interview. view with Stephen Wendell, who is a behavioral economist and the head of behavioral research for Morningstar, which is an investing research firm. Stephen and I have a very interesting conversation about the gap between intention and action. He studies that gap, and he's going to come on the show to talk about why this gap happens and what we can do to bridge that gap, what we can do to bring our intentions closer to our actions, both in terms of our investing behavior and in anything in life. So next week we deep dive into questions like, hey, why do we make decisions that are against our own interests? Why do we so often get in our own way? We talk about cognitive biases like loss aversion. We talk about best practices when it comes to habit formation. This is an incredible episode. So please hit subscribe in your favorite podcast player so that you don't miss

this upcoming episode or any of the future ones that we have in store. Also, I want to say a huge thank you to everybody who left us a review or a rating on iTunes. Well, technically they call it Apple now, but the platform formerly known as iTunes. As of this recording, we have finally, we've broken to 600 mark. We have 602 ratings on Apple. So awesome. I'm super excited to break that mark. I've been looking forward to that for a long time. So thank you, thank you, thank you so much to everybody who left us a rating and left us a rating. review. And if you haven't done so yet, please go into your favorite podcast player, whether if you're using a Google Play app, awesome, leave a review there. If you're using Spotify, leave a review there.

I'm just going to read some of the most recent reviews that came through on Apple. O underscore Baski says the information Paula and her guests share are just too amazing. Her story and innovative approach to life is a huge blessing to me. Thank you so much. And Memphis Kate says, I found Paula's podcast and blog when she was interviewed on the Bigger Pockets podcast. Oh my goodness, that was a long time ago. I was interviewed on the Bigger Pockets podcast back in Bigger Pockets episode 35, which was forever ago. And oh, please don't listen to that because I'm sure it's embarrassing. You know how it is when you go back and you listen to old interviews that you've done and, yeah, you recorded it maybe, I don't even know how many years ago that was.

That must have been at least five years ago. I'd have to check, but I'm sure I was not as smooth in speaking as I am today. But you know what? Five years from now, I'm probably going to say things, say exactly the same thing looking back at my 2018 self. So I suppose that is the hallmark of improvement. If a version of ourselves from five years ago is embarrassing, that means that we've been improving. So anyway, so Memphis, you were pulled towards real estate investing as a way to make passive income through Paula's teachings and interviews, found a wide range of financial experts. Awesome. Excellent. I'm glad to hear that. I'm glad that I've brought that into the fold.

There's also a review from De Bears and Cubs that says a good mix of things to think about to get your finances in order. I'm happy to hear that because I put a lot of effort into making sure that this podcast has a really good mix. Like I say, 75% of our episodes are not about real estate. 75% of our episodes are about everything ranging from behavioral finance to productivity, to the psychology of money, to entrepreneurship, early retirement, financial independence, case studies on how people became millionaires. We talk about side hustles. We talk about all kinds of things because real estate is not the point. That's something that I want everybody to, or not want everybody to know what I think is right. But, you know, that's something,

that's an idea that I want to communicate to the world is real estate's not the point. The point is managing, having a good relationship with money and honoring your money in a way that aligns with your values and with what you want out of life. If that means that you are going to have a relationship with money in such a way that it brings you financial independence, then awesome. But to me, financial independence isn't even quote unquote the point. The point is that alignment. It's that integrity of money and life, money and values in life. So that, I think, is the purpose and everything else, financial independence, early retirement, whether or not you make it to the double comma club as a millionaire. Like, all of that is, um, juicy details around this bigger picture

of just are you living in integrity? Is your money, are your money and your life in integrity with one another. So that is to me why this podcast exists and that's what I hope to communicate every week. And I'm happy that you are part of this journey with me. So thank you so much for tuning in. My name is Paula Pant. You can find me on Instagram at Paula P-A-U-L-A, P-A-N-T. I appreciate you so much and I will catch you next week.