Afford Anything - Ask Paula - Should I Sell My House and Invest the Equity?

Episode Date: September 3, 2018

#148: Welcome to a special episode of Ask Paula! Today I’m answering questions about real estate investing, and I’ve brought a special guest on the show to join me. His name is Lucas Hall, and he’s a landlord with 5 properties in three locations (D.C., Virginia and Colorado). He’s also the founder of Landlordology and head of investor relations with Cozy. We met about five or six years ago through blogging about rental properties, and I invited him on the show today to answer questions alongside me. Anonymous asks: If you have significant equity in a home due to market appreciation, what’s the best way to leverage the value of this equity? Should you sell? Refinance? Something else? Here’s a quick snapshot of the answer: You have three options: sell, cash-out refinance, or take out a HELOC. If you’re unhappy with the property, sell it. There’s no reason to hang onto an undesirable or underperforming property. If you choose to sell, use a 1031 exchange to defer taxes on the capital gains and use the proceeds to purchase another property. Be aware, however, that the rules regarding a 1031 exchange are onerous, and there’s a chance that you might either miss the cutoff or you may be forced into trading one mediocre property for another. That said, wanting to tap equity is not a sufficient reason to sell. If you’re happy with the property, keep it and either use a cash-out refi or HELOC to tap the equity. On today’s episode, Lucas and I discuss the pro’s and con’s of both of these strategies, and explain which one is our favorite. (Lucas prefers the HELOC and I prefer the cash-out refi; on the episode you’ll hear each of us explain why.) Richard from Massachusetts asks: I’ve been listening to this podcast regularly, and thanks to this podcast I’ve opened a Roth IRA. I’ve saved $54,000 and I’m interested in investing in a Class B or Class C neighborhood in an out-of-state location. How can I find out if a neighborhood is Class B/C without visiting it? Catherine asks: I’m 27 and need investing advice. I make $75,000 per year and I have $60,000 in retirement savings. I max out an HSA. I have $12,000 in an emergency fund. I live in Los Angeles and I’d like to invest in real estate, but I don’t want to travel to another state. I’ve been thinking about Roofstock; what are your thoughts? Anonymous in Atlanta asks: My wife and I have $500,000 in savings, in addition to our 401k. We keep $130,000 of this in the market. We had an advisor that was charging a 1.6% fee, and we recently fired him. What should we do with the remainder of the cash in our savings accounts? Should we put this in Vanguard funds? I’d also like to get into real estate, but many homes in Atlanta don’t meet the one percent rule. Should we look at foreclosure auctions? Should we look further outside the city? We’re in our early 30’s and would like to retire in around 15 years. We answer these questions in today’s episode. Enjoy! Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a tradeoff against something else. And that's true, not just of your money, but also your time, your focus, your energy, your attention, anything in your life that's a scarce or limited resource. And so the questions become twofold. Number one, what's most important to you? And number two, how do you make day-to-day decisions that reflect those priorities? Answering these two questions is a lifetime practice. And that's what this podcast is here to explore.

My name's Paula Pant. I'm the host of the Afford Anything podcast and the founder of Afford Anything.com. Every other episode, we answer questions that come in from you, the audience. And of these episodes, we alternate between episodes in which we answer general personal finance questions and episodes in which we answer specifically questions about real estate investing. This is the one in four episode in which we answer specifically real estate related questions. So if you're into the topic of real estate investing, keep listening. And if you're not, don't worry, 75% of our episodes are about totally different topics.

So check out our archives where you can listen to any of those. I have a special guest with me. Normally I do these episodes solo. But today, my friend Lucas Hall, the founder of Landlordology and the head of industry relations at Cozy, is on the line to help me answer questions. Hey, Lucas. Hey, Paula. Thanks for having me on the show. Of course.

Thanks for joining. My pleasure. I've been a longtime fan, so it's exciting to be here. So Lucas, a brief background. You and I met, did we meet in Portland or did we meet in Denver? We've met a few times. We have. We've met in Portland when you helped us shoot some video for Cozy.

And then we met at FinCon again recently, which is a great conference. But I think we actually met maybe upwards of five or six years ago just through email. We were two bloggers on the market doing stuff that was in line with each other. And so we just became friends. Has it been that long? It sure has. Wow. Tell me about how you got started in rental properties.

So I actually bought my very first rental property, not to be a real estate investor, but I wanted to impress this girl that I liked. And she was smart and she was pretty. And I talked to her one day and I asked her how her week was going. And she said, you know, it's going great. I just bought a house. And I thought, what in the world? Like, who does that? She was 23 at the time.

And I thought, man, how do I get to know her better? So I got to know her sister, and her sister is or was a real estate agent, and I said, help me go find a house just like hers in her neighborhood. And sure enough, we did. A few weeks later, I had a house and I was house hacking in it where I was living in the house and filling the other rooms with roommates. And they paid for my mortgage and then some. So I was living for free.

And my little romantic evil plan worked because that girl, her name's Julie, we've been married for over 10 years and I have a six-year-old daughter. So I like to say that if diamonds are a girl's best friend, maybe real estate's a close second. I much prefer real estate. So that's how I got started. And then from there, I just leveraged the equity in my homes and continue to buy more. So it was a great platform for me to launch off on. How many are you up to right now? Five in three different states. Nice. So D.C. Oregon and Colorado? D.C. Virginia and Colorado. Ah, okay, cool. D.C. Virginia and Colorado.

Nice. We'll chat more or later at the end of this show. But for now, let's get started. Our first question comes from Anonymous. Paula, if the value of a property you own has risen significantly in value due to overall market appreciation, what is the best strategy to leverage that value to invest additional funds, sell or refinance? Anonymous, great question. you have named two out of the three options. Your three options, if you want to tap the equity within the property that you own, are to sell the property, to do a cash out refinance of the property,

or to take out a helock. Let's talk about the pros and cons of all of those options. First, your option to sell the property is a good one, but not every option is right for every situation. So I have a tough time actually telling you to do just one option, but I can tell you what I would do and why I would pick one option over the other. So first, selling the property can be a good idea. If you have a lot of equity in there and you want to reinvest that somewhere else, and maybe the property might not be an actual gold mine for you, or maybe it's not a cash cow, as I like to say.

So it might be in a bad neighborhood or downward spiraling neighborhood or it might not be something that you're really happy about because of pending maintenance or deferred maintenance. So in that case, sure, sell the property, get rid of it. It's going to be rough in the coming year. So offload it now and take that money that you build from it. And then I would actually say put that into a 1031 exchange where you can defer the taxes. And so you eventually have to pay taxes on that money, but you can take that money and reinvest it in a like kind property or real estate.

So it doesn't actually have to be residential rental properties. It could be commercial property or land. And all of that is something that you could buy with the equity that you get from this property if you do a 1031 exchange. So that way you take all the money. You don't have to pay any taxes and then you go put it into something else and let it grow. And so if you do sell the property and you want to reinvest, that's exactly what I would do. I'm just going to jump in here on the topic of selling the property. I think selling a property is great if the current property that you hold is one that you are unhappy with.

So if the property is, as you said, Lucas, if it's performing poorly, if you don't like the characteristics of the neighborhood, if for any reason you're unhappy with that particular property, then sell it. and defer the taxes on it through the 1031. But if you like the property, then there's no reason to sell it. In other words, wanting to tap the equity within that property in and of itself is not sufficient reason to sell, given that you could also cash out refi or take out a heat lock, which are the two options we'll discuss next. The other thing that I want to say about 1031 exchanges, because I feel like in the world of real estate investing, everybody very flippantly is like 1031, 1031 it, 1031 is

complicated and messy and even if you have every intention of 1031ing a transaction, you might not be able to dot the eyes and cross the T's in time to be able to actually execute that. So it's entirely possible that you may sell a property with the intention of 1031ing it, but if you don't close on another property within six months, your window is closed and that's that. So kind of the flip side of the 1031 is it might, I've seen this happen where it might force you to buy another property that you otherwise wouldn't have bought or to make a hasty decision on a property purchase because you have a limited window. And to add to that, I mean, not only do you have six months to close, but you only have 45 days to identify the property that you're going to buy. So if you don't act quickly in that 45 days and pick out a property, then you're dead in the water. I mean, so then you have six months and that six months, as you know, if you're buying

distressed properties or properties that might have a lot of baggage to them, you know, six months might not be enough time. So I have friends who got stuck with huge tax bill because they didn't prepare for the 1031 properly. Yeah, I have a friend who bought a marginal property. He basically bought a property that he wasn't that excited about because he was coming up on that deadline. And so he found a house that was good enough.

and if he hadn't been under 1031 pressure, he would have waited and he would have bought something different. But because of that 1031 pressure, he justified the purchase by saying, well, if I buy this, then at least I get the 1031 qualification. It's better to not put yourself in a position in which you have to start making those calls. Exactly. Yep. And your friend sounded like he traded one marginal property for another. And that's not what you want to do. Basically, yeah. Yeah, you hit the nail on the head right. That's exactly what he did. So tell me about the cash out refi. Ah, cash out refi. Now, this is my, I'm giving away the ending here, but this is my personal favorite option. So with a cash out refinance, you go to a lender, typically a bank or a credit

union, typically a proper financial institution, and you refinance the property and you pull out that equity, then you reinvest that somewhere. Now, what's super cool about this is because you have taken cash out, you then have a big heap. of cash in your bank account, which means that when you make an offer on another property, depending on the price of that property, you could make an all-cash offer. And when you make an all-cash offer on a property, all else being equal, you are in a more powerful position. If you imagine from the point of view of a seller who has multiple offers coming in and one of those offers is contingent on financing, but the other offer is all-cash, the seller might prefer the all-cash

offer. And so if you are a cash buyer, it's possible that you might be able to buy a property to acquire a property for maybe a slight discount, maybe a 5% discount over what somebody with financing might offer. Again, huge asterisk here. It depends on the market. It depends on how many offers the seller is getting. It depends on all of those other factors. But what's cool about a cash out refi is the triple bonus, the triple win of you're making use of the equity that you have in a property. You are getting a relatively low interest rate. all things considered, like relatively favorable financing terms, and you're able to make offers on properties in cash. Those are really good points. I've been beat out by all cash offers, so I'm a little

bitter at that before. But I will say that I too have done cash out refis and they're amazing tools and they do get you a lump sum. But I've also been in situations where the refi, the cash out that I pulled from the refi wasn't enough to do an all cash offer. And I was using it. It really is a down payment. So I still had to go get a mortgage on the new rental property that I wanted to buy or reinvest in. What happened was because I borrowed that huge lump sum out of the refi, now my debt-to-income ratio is a lot worse because I'm holding on to that cash, but it's showing up as debt. Now, the interest rates can be great, but I do find that the interest rates on a cash-out refi are a little bit worse than just a regular refi because they know what you're doing. They didn't know you're taking money out.

Exactly. But I love how you can amortize that over the 20 or 30 years that you refi into, and therefore, you do have an incredibly low payment typically. So that's an awesome option. The last one, which is actually the one I prefer, so I differ from Paula a little bit here, is that I actually do like the HELOCs more than the cash out refis. And a HELOC is simply a home equity line of credit. And that is essentially a credit card.

It's not an actual credit card. but virtual credit card where your house is the bank or the lender. And you get to use that virtual credit card to borrow on the equity that you have in the home and you only pay for what you use. So let's just say you have an American Express card with $10,000 on it. You go and you buy a TV that's $2,000. You're only going to pay interest on that $2,000 because you haven't borrowed the other eight. And it's the same thing with the HELOC.

So if you get $100,000 on a home equity line of credit and you only use $20,000, to put a down payment on a new house, you're only going to pay interest on that $20,000 instead of the full $100 that you might have to take out for a cash out refi. So the interest on that is going to be smaller. And I find that because you sometimes only have to pay interest only on those, that's the only real requirement, that your actual monthly payment, if you're kind of short for cash because you're renovating this new property and you've used all your money to buy it, It's kind of nice to have a really, really, really low payment on the money that you're borrowing.

That one helps kind of bridge the gap for me. I feel like it helps me buy properties a little easier than a cash-out refi, and I'm paying less to do so. But the downside is you could pay interest on that forever, and you would never pay down principle at all if you'd just pay the minimum, just like a credit card. And so you could get yourself in trouble if you're not careful. When you use a helock, do you typically refinance the property after you've purchased? it into an installment mortgage, or do you keep the HELOC forever? Great question. So I typically like to have the debt for each property on the property that it's lent towards. So if I use a HELOC to buy a property, eventually I will refinance that

property and try to pay off the HELOC because, I mean, the HELOCs, while they're cheap, they are an adjustable rate mortgage or form of it. And, you know, that scares me a little bit because I don't want that rate to go up a lot and then I'm kind of stuck with it. So yeah, I like to move the money around and I like to have it on each of the respective properties. And so the debt for that property is on that property. That's just one way I kind of keep everything nice and tidy and helps me keep everything organized. We should probably at this point talk about the difference between an installment loan versus revolving loans or revolving debt. Because conceptually, that's part of the difference between a cash-out refi versus a he-lock. A cash-out refinance is, or really any

typical mortgage, is an example of an installment loan or installment debt. And what that means is that you have a particular payment schedule, such as 180 months or 360 months, in which you pay in regular installments over the course of that scheduled time period. And so conceptually, what that is known as is an installment loan. Now, a revolving loan or revolving debt is something like a HELOC or a credit card where you have an open line of credit and you can, like a revolving door, you can have various amounts of money pulled out of it or not without any type of fixed repayment schedule other than the minimums. So at its most conceptual level, the difference between a cash out refi versus a helock is do you want an installment loan or do you want revolving debt? Yeah, and the biggest

danger of that helock is the adjustable rate. You're never going to find a fixed rate helock ever. It depends on your risk level that you're comfortable with and then what your end goals are, for sure. Lucas, have you found that qualifying for a helot gets harder as you own more and more properties? Because I've seen that with refis. You know, it depends. It depends on the lender I go to. So if my debt to income ratio is just out of control, which depending on the year, sometimes it is. But if it's out of control or just too high, then even getting a HELOC is hard. But I do find that helix are a little easier to get because sometimes the loan of value on the property, it can be a little higher with a HELOC.

And so sometimes they'll let you borrow up to like 80% or even 85 or 90%, depending on the lender for the rental property. But with a cash out refis, if it's a rental property or investment, sometimes they won't let you go above 60% on a loan-to-value ratio. So whereas you might not qualify for the cash-out refi, you might qualify for the HELOC just because the loan-of-value ratios are different. With cash-out refis, I found even when my debt-to-income ratio is beautiful, cash-out refis, in my experience, have been harder the more properties that we've accumulated, in part just because they have to go through the underwriting process, the more assets you own, the more open

mortgages you have and the more complicated your finances are, the longer the underwriting process takes, the more paperwork it requires, and just the more probability that something gets hung up on a missing sheet of paper. Absolutely. For me, what's attractive about the HELOC is simply that it's easier. I've been able to get, it's been a couple of years since this has happened, but I've been able to get HELOCs simply with a simple desk appraisal and my tax returns. Isn't that crazy?

That's 2006 stories. Yeah. Awesome. Well, thank you, Anonymous, for asking that question. Speaking of learning and growing and expanding, there's a lot more that we're going to talk about and more questions that we're going to answer in just a moment. But first, I want to give a shout out to our sponsor, Blinkist, because if you're like me, the list of books that you want to read keeps expanding and you don't have time to read them all. Blinkist is the only app that takes thousands of the best-selling nonfiction books and distills them down to their core elements. So you can read or listen in under 15 minutes on your phone. So with Blinkist, you can expand your non-fiction. knowledge and learn more in just 15 minutes than you can in almost any other way.

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That's Blinkist, spelled B-L-I-N-K-I-S-T, Blinkist.com slash Paula to start your free trial or get three months off your yearly plan. Blinkist.com slash Paula. Hey, let me make a guess about you. Now, based on the fact that you listen to a finance podcast, I'm guessing that you're the type of person who thinks about your long-term future. I mean, after all, why else would you be listening to a financial podcast? So let's talk about creating a will or creating a revocable living trust. Now, both of these options can seem expensive and daunting and scary and time-consuming, but don't worry. There's an app for that.

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That's tomorrow.m.m.m. slash Paula. Our next question is from Richard. Hi, Paula. Greetings from Massachusetts. Thank you for all your hard. We're creating this wonderful podcast. I have learned a lot. I have been listening on a daily basis for months now. And thanks to you, I have recently opened up a ROT IRA which I plan on maxing out by the end of this year. I was really inspired by your guest, Rich Carey, who owns 20 properties in the Alabama area, free and clear. My question is toward real estate investing. I currently have $50,000 in one account

and $4,000 in another savings account, just sitting there doing nothing. And I would like to put that money to work. I figured I could use that money is at the down payment for duplex or triplex, and I've heard that Class B and Class C areas are the ideal place to buy and invest. Now, my question is, is there a way of finding out if an out-of-state neighborhood falls under Class B or Class C without going there first. Richard, first of all, thank you for being a follower. And congratulations on opening a Roth IRA. That's fantastic. And for maxing it out by the end of this year. I'm really happy that you're doing that. Roth IRAs are, as you know, one of my favorite retirement vehicles. So congratulations on all of that, on all of that success. Now, first of all, before we get started,

you mentioned that you have a total of $54,000 in savings. I'm going to assume that what you mean is that you have $54,000 in addition to a personal emergency fund. If that's not what you meant, If you have 54,000 in total, then what I would encourage you to do first and foremost is to decide what portion of that you want to hold as a personal emergency fund and what remaining portion of that you want to use as the down payment on your first rental property. Personal emergency fund can be depending on who you talk to anywhere between three to nine or 12 months of expenses. Personally, I kind of think that nine to 12 months is a little, it's a little bit extreme. But at a minimum, I think almost every personal finance voice out there tends to say between three to six months of your basic cost of living should be what you have in an emergency fund. So if your cost of living is $3,000 a month, make sure that you have at least between $9 to $18,000 set aside in that emergency fund. Now, that being said, Lucas, let's chat about class A, B, and C properties.

And I realize a lot of the people who are listening might not know what those are. So let's first start for the sake of everyone listening with an overview on what these are. Okay, great. The class system is actually kind of an arbitrary system, and it does have some standards behind it. So there is an association called BOMA or the Building Managers and Owners Association International. and essentially they have a list that works really well for apartments and some commercial buildings and then some residential. But I find that it does vary from city to city and even within the cities and the various levels of where the well sits. So let's talk about that. So class A, B, and C. So we'll start with the bottom.

So class C properties typically are buildings that are 15 years older and sometimes in some parts of the country, you know, 40 years older. if it's a really old part. And then they typically are, they're kind of the worst. You know, I even go down to D and F properties, but C is typically where people, you see some sales of people trying to flip buildings or flip properties. And so with the C property, you'll typically get anywhere from 30 to 50% of the units in that building being vacant

at any given time. And most of the people who live there turn over. And so they don't stay from year to year. They often have very little curb appeal. And they often need lots and lots of maintenance. And so that maintenance has been deferred. And then to top it off, they were built inexpensively in the first place. So they're built with cheap materials.

And this is just kind of a round number. But I typically find that C class properties, generally speaking, and most of the people that live there make anywhere from $30,000 to $40, maybe $45,000 a year in their total household income. So that's kind of the picture for a C class property. And then a B class property are typically newer. So anywhere from 8 to 14 years old. They have some deferred maintenance, but they don't really need anything right away.

You can defer that a little bit longer, generally. Meaning, if it has a roof and it might have another five years left on the roof, but it's starting to look kind of bad, but it's not necessary to replace it right now. They'll often have a lot less vacancy, so anywhere from 10 to 20 percent. And then the rents are decent, but they're not super great, but they're also not super bad. And then they're built with average materials. They have a decent curb appeal. And then generally speaking, I find that the average income on apartment,

complexes or buildings that our B class is around $60,000 a year for their annual household income. And then you get up to class A, and that's like the tip of the tip. And each one of these has a plus and a minus attached. So each class, you can even say like, hey, it's a B plus category, or it's a C minus, which would be really bad. And oftentimes investors are looking for kind of like C plus and B minus and then they want to improve it. But getting back to class A is, generally a newer building, oftentimes less than four or five years old. It has no deferred maintenance. It's been kept up really well. It has the highest occupancy rates, and most the units are occupied. There are sometimes even a waiting list. They command the highest rents in the

area, and they have lots of amenities. And so these are the places where you'll see nice siding. It has a pool that's maintained. It even has maybe a fitness center built in. And if it's a simple residential single family home, you know, they have detached garages or or, or, you know, in-law suites and, you know, they have archways and rounded corners on the walls and just really nice little features. So those typical units or homes typically attract households that make anywhere from $80,000 to $200,000 a year. So those are the best, but oftentimes there's not a lot of room for improvement in there. So if you buy a Class A property, that's as good as it's going to get, and you're not going to be able to raise the rents much. You're not going to be able to change the paint

color and then get more money. So there's very little room for improvement. But we're a Class C property is something that you can really work with. And I should mention that the vacancy rates that you are naming are for specifically for commercial properties, which is a totally different vacancy ballpark than what we see in residential. That's right. Yeah. Mostly apartment complexes, which is where this typically kind of finds its sweet spot when

you're talking about class properties. You can find small residential properties, single family properties that fit in the class system, but that can vary tremendously from street to street. Yeah. Yeah, kind of as background, the whole concept of, Lucas, as you said, the concept of class A, B, C, D properties came from the world of commercial real estate. And residential real estate investors have taken that notion and applied it to residential real estate in our own way. Really, a lot of the concepts in residential real estate analysis, even cap rate, a lot of them have been borrowed from the world of commercial real estate investing and then taken that framework. and then adjusted it for the residential market. And Paula, I know you've done some research here in Birmingham, and you were able to find a property based on the system.

Yeah, absolutely. I guess so briefly, I just wanted to say on the Class A, B, CD thing, the quick way to think about it for anybody who's new to this concept is that a Class A property is a place that you would love to live in. A Class B property is acceptable. And if you wanted to make the frugal choice, then sure, this is where you would live. Class C property is like, well, if I fall on hard times or if I need a like really frugal down because I'm starting a business or I'm going back to school, then I would be willing to live here. And a class D property is like I'd rather sleep in my car.

Just think of it like that. So in terms of looking out of state and in terms of determining what neighborhoods are like, what? A couple of things that you can do. First of all, I'll go through the example of when Emma and I, my friend Emma, who was a guest on some previous episodes of this podcast, she and I started looking at properties in Birmingham. And neither of us had any previous knowledge of Birmingham. We've never lived there. We don't really know anybody there. So we were starting from scratch. And so a few of the things that we did, number one, this is very simple. Go on Google Maps, run a search for where Starbucks, Panera bread, Lulu Lemon, run a search for where they are.

Because those are going to be located in Class A neighborhoods. You don't build a Panera next to Class C properties. That right away will give you a sense of, like if you look at the businesses in the area, and you can do that just with a Google Maps search when you look at various chains, you can get a sense of what the different neighborhoods are like. you can think of the concept, the Class A, B, C, D framework. You can apply that to both neighborhoods and properties. So investors sometimes talk about finding a Class B property in a Class A neighborhood or a Class C property in a Class B neighborhood. And when they say that, what they mean is, hey, I found this property that is in worse shape than the rest of the neighborhood would justify. Or conversely, you could say, oh, yeah, I found a, Class A property in a Class B neighborhood, meaning I found a property that's much nicer than what the rest of the neighborhood would justify. So I'll give the disclaimer here that you can think of Class A, B, C, in terms of both the property itself and the neighborhood at large. But this Google Maps look for the businesses tactic, which was the first thing that Emma and I did. That was our way of identifying neighborhoods. That was our way of knowing this is going to be a Class A neighborhood. We should avoid it because we're probably not going to find the returns that we're looking. for here. The next thing is if you go on, again, with Google Maps or Google Earth, look at the

types of cars in the area and look at the businesses in the area in terms of are all of the storefronts occupied or are there shuttered storefronts? In a Class B neighborhood, you'll have cars that are operable. In a Class C neighborhood, you might have cars that are up on cinder blocks. This is stuff that you can see from a Google Earth. search. So basically, use Google to do a virtual walkthrough of the neighborhoods, even when you're far away. And then also talk to other investors there. Go on meetup.com or go on a mailing list for the real estate investors association of the local area. So just run a Google search for the name of the city plus R-E-I-A, Real Estate Investors Association. Connect with local investors there.

and then ask them, hey, what are the Class B neighborhoods or what are the Class C neighborhoods? Or call a couple of property managers and ask them about it. That was what Emma and I did. We did a bunch of Googling, basically, did a bunch of Google mapping and Google Earthing. And we chatted with a handful of investors there and we chatted with a couple of locals there. And that gave us a pretty good idea of what the characteristics of the different neighborhoods were like. In our case, we flew out there just for a weekend to take a look at it. So we were there for a total of three days. So essentially it was a long weekend. It was three days start to finish. And during those three days, we actually went to two different cities. By the end of that, we had a very solid understanding of exactly what neighborhoods we wanted to invest in.

You know, Paula, I hadn't heard about the restaurant search. That's a really, really smart idea. You're so right, they won't put a panera somewhere in a classy neighborhood. When I have looked, I've actually taken a slightly different approach. I will pull up redfin or zillo, and I will just search first by single family homes, and I will divide it into three tiers. And so, you know, every city is different. So pricing is going to be different. But I will start at $600,000 and I will put the marker up to, you know, a million or a million to. and I will just search for those houses. And if you're looking at the entire metro area, you'll start to see pockets. And so you'll see that there, you know, maybe in the northwest region of that city is where you find most of the $800,000 houses. There are things that fit into that bracket. And then if you change it and you swing that bracket down to 300 to 600, then you'll see a different pocket of houses show up. And then likewise, if you go down from zero to 300, you'll see even a different, more different. And that's kind of the ABC area.

And you'll see that at least it'll give you a region to focus on. So let's say you wanted to go for B class properties and you're looking between three and six. And you find that, okay, that's in the southern part of Denver, let's say, or wherever. Then you can actually change the search filter and then show you where the multifamily properties are, which even if you're not looking for multifamily properties, the large apartment complexes, I find typically tend to exist in the B, you know, B, plus. plus to C-minus range neighborhoods because those residents who want, who have a tremendous amount of money and maybe can buy a $600 or a million house, they're not going to rent. They're not going to rent in a multi-unit complex typically.

So just finding out where the densities of those larger apartment complexes are also will tell you maybe this is a B class. And so then you can look at the single family homes in that area too. So that's kind of a one way to say, okay, well, now when I fly in, I'm going to focus on these two square miles. Yeah, the one exception to that being luxury high rises. Right. The Florida ceiling window, two million dollar condo type of a deal. Right. The downtown, yeah, high rises, sure. Yeah. But I think, Lucas, what you and I share in common is that both of us, both of us would want to, at a minimum, physically see the property before closing. Even if you don't fly out there to

take a look at the neighborhoods, you can use a combination of internet map searches and conversational. with local investors to narrow down to a particular neighborhood that you're interested in. And then you can even take that to that next step of making an offer and getting a property under contract. But once that property is under contract, when you're in your due diligence period, I would strongly advocate seeing it in person then. There are investors who buy property sight unseen, but I get that you can't be there all the time. Fly out there for one day. board an airplane in the morning, spend lunchtime there, and fly back at night. Absolutely.

Yeah, walk the property. Absolutely walk the property. I mean, you don't want to trespass, but if you can get on the premise and walk around and look at it, you know, even if you haven't set up a time with an inspector, you certainly want to get an inspector over there. But, yeah, walk the property, talk to the neighbors, do whatever you can to do that due diligence so that you don't buy a lemon. Yeah, exactly.

And you don't have to do that before you're under contract. I mean, go ahead. In fact, I would not do that before you're under contract because that would be a big waste of time and money. But once you are under contract for a property, once you've made an offer and that offer has been accepted and you've got a 10-day window of where you've got that get-out-of-jail-free card, during that time, even I get that you won't be able to be there for a long time. But seriously, fly there at breakfast, fly back home by dinner. Do you want to cook at home more, but you're busy? I get it. Check out Blue Apron.

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ask, how did you hear about us? Enter afford anything. Again, that's a 30-day free trial, no credit card required, freshbooks.com slash Paula. Our next question comes from Catherine. Hi, Paula. I'm 27 years old and need some advice on how I can better invest my money. I make 75K year and I have about 60K in retirement savings split between a 401k and a Roth IRA. I also max out an HSA. I have $12,000 in an emergency fund slash general savings. My monthly expenses are about $2,500. I wanted to get your thoughts on some possible options for hands-off rental property investments like roof sock. I live in L.A., and property around here is way too expensive, so I wanted to possibly invest in another state without me having to make back and forth trips and having to deal with tenants.

Are hands-off rental investments a good idea, or should I just continue to build my general savings? Any input would be greatly appreciated. Thank you. Catherine, thank you so much for that question. First of all, congratulations on having 60,000 saved up for retirement and having a solid emergency fund, and also your monthly expense. are $2,500 a month and you live in L.A. So you're living in L.A. on $30,000 on expenses of $30,000 a year. Bravo. Yeah. That is amazing. If you are interested at all, please call back and tell us to share the story of how you're doing that because I invite people to share success stories on here all the time. And the fact that you're living in L.A. on expenses of $30,000 a year, that is fantastic. please share with us how you're doing that because that's a testament to how well you are managing your money. Congratulations. So to answer your question, the first thing that I would want to say, it sounds as though you don't have interest in owning out-of-state rental properties.

The first question that I would ask is, are you sure that you want to invest in real estate? And if so, why? What's the purpose behind it? remember that you don't have to invest in real estate. You can absolutely build a strong retirement portfolio and have a secure financial future without any real estate exposure. I don't ever want somebody to feel as though they're missing out. Like, FOMO is not a sufficient reason to invest in real estate. There are plenty of good reasons to do so. But don't feel as though you're obligated to. Think carefully about the why behind your choice of this investment. The second thing that I want to say, you mentioned back and forth trips if you are an out-of-state investor.

I just want to kind of make a note here that I don't know what you would be envisioning, but you wouldn't really have to make many back-and-forth trips. I would advocate making at least one, which is after you get a property under contract, but before the due diligence period of that contract is over. I would absolutely advocate making one trip for that time period. And if you had to do major renovations on the property, you can have a property manager oversee that. And you wouldn't really even have to fly back to take a look at that. Rich Carey, who was a previous guest on this podcast, is a perfect example of that. If you wanted to make a total of two trips, I think that would be more than adequate. That would be more than what a lot of other investors do.

So if you wanted to make a total of two trips over the entire lifetime of owning that property, I think that would be sufficient. And those two trips would be, one, when you're under contract, and two, after a major renovation, just to do a final check of the work. Those would be the two times that I would look at it. Other than that, your team can handle it. Your property managers and your contractors can handle everything. I live in Las Vegas. I own properties in Atlanta. I've been back there once in the last three years. And the reason that I went back there is just I've got a whole bunch of friends in Atlanta, so I wanted to go there anyway. If it wasn't a place that I wanted to go to, I wouldn't have gone. Yeah, so I just wanted to make that note about investing in out-of-state rental properties because I find that some people, I'm not saying you, but some people often have the misconception that it requires a lot more travel than it actually does.

And I can reiterate, too, what Paul is saying simply because I have a bunch of properties in D.C. And I live in Denver. And I travel there, you know, at most, maybe twice a year. And I typically time it with when there's turnover. And so I'm able to kind of oversee any massive renovation that I need to do, whether that's floors or roofs or carpet or whatever. So I certainly don't need to go. I have family in the area, but I typically like to at least go check on my properties once, at least once a year. And I think that's just good, good property management. But. Well, actually, and that kind of highlights a difference between investor philosophies, because you've got, so Lucas, you self-manage the properties in D.C. or do you have a property

manager on those? I do. I do self-manage. And so I, I do self-manage. And so I, I I'm able to self-manage from 2,000 miles away because of the software I use. And I only visit once or twice a year. But if I truly wanted to be passive, I would just hire a property manager to be around and I wouldn't have to go at all. So I do have one short-term vacation rental in mountains that I do have a property management for. And he does a great job. And I just don't ever think about it. It just runs itself.

Exactly. And so that's the other. So, Catherine, to your note about traveling back and forth, if you have heard that from other investors, you might want to ask them, are they self-managing from a distance or do they have a property manager on there? Because when I went back to Atlanta for the first time in three years, the properties that I went back to see are the ones that I am self-managing from a distance. So I live in Vegas and some of my properties are handled by property managers and other properties I self-manage from a distance from Las Vegas. And so when I went to Atlanta, the properties that I saw were the ones that I self-manage. But if I didn't want to do that, I would just have a property manager oversee 100% of them. And then I would never, ever have to go back. And my property manager could do that once a year, annual walk through, as she does with the other properties that she currently oversees. And you mentioned roofstock in that, too.

I can say that if you truly want a passive investment system, I mean, you could look into the various crowdsourcing or online. real estate investing platforms like roofstock. I think a couple others might be realty shares, patch of land, and even Pier Street. And I've kind of looked into those over the years. I can honestly say I've not ever pulled the trigger on them. But I do know that they all have different types of minimums that you need to invest. Sometimes you can get in with as little as $5,000. And other times you have to put an entire 20% down on a property. And then you have you know, maybe a majority share of that, or you have more control than you would if you put less money down. So, you know, they can be great, but you are essentially turning over all control

of that property to someone else and you just reap their rewards. But I do think that, you know, if you are truly just interested in investing in real estate simply because you've heard it's a good investment platform, but you don't want to deal with all the headaches that might come with self-management or even having to deal and work with a property manager, then that's worth considering that maybe you shouldn't buy real estate by yourself. And maybe you should use one of these crowd funding platforms or potentially even just invest in what we call REIT, which is a real estate investment trust. So you mentioned that you're already investing in the stock market or in funds. And I would strongly suggest that maybe you go look at some real estate investment trusts and

you can get those through the different brokerages. Put your money in there instead of maybe investing in stocks, to put it into a REIT or a mutual fund that invests in real estate. state. I was looking up some stats earlier today, and I found that of all the U.S. real estate investment trust, the average return is about 9.72%, which is decent. So I think that you could certainly do that, and then you're kind of investing in the general real estate market, and you're getting a decent return without all the headaches. Our next question comes from Anonymous in Atlanta. Hi, Paula. This is Anonymous in Atlanta. I have a question regarding investing savings. My wife

I have roughly 500,000 in savings apart from our 401k, 130 of which is in the market. We recently fired our financial advisor that was charging a 1.6% fee on top of, you know, whatever the fees that J.P. Morgan was charging in the funds they had us. I've been listening to Tony Robbins, so really attacking that part and trying to lower our fees with our savings. I wanted to know with the remainder of our cash that is sitting in savings accounts, would you deploy that into low-cost bank card funds? I would also like to get into real estate, but a lot of the homes in Atlanta don't seem to meet the 1% rule. So would you go the auction route? Would you go further outside of Atlanta?

We are both in our early 30s, fairly high earners. so we plan to add to this nestag but would like to earn some sort of passive income through real estate or dividends that would retire either my wife and hopefully both of us in the next say 15 years. Thanks so much. We love to hear your thoughts on both. Love the podcast. First of all, congratulations on firing the manager who is charging you a 1.6% fee. Wow. Congratulations on cutting that out of your life. Good job. So I'm super happy that you've done that. Congratulations on having $500,000 in savings.

You're in a great position. Now, to the first part of your question, I absolutely would advocate low-fee index funds. And I'd like you to understand the reason why, because it's important not just to know what the answer is, but the reasoning behind the answer so that you can think critically through these questions in the future as this and other questions like it come up.

The reason that I am such a proponent of low-fee index funds which can be found at institutions like Vanguard Schwab or Fidelity is because over a long-term aggregate average, over 20, 30, 40 years, there is almost no statistical likelihood, at least based on historic data, that actively managed funds, which are funds in which you pay a higher fee, would outperform a passively managed index fund. So in other words, there's no evidence to support that that higher fee that you would pay for an actively managed mutual fund is worth it. When you buy a mutual fund, you're going to pay that higher fee regardless of whether or not it outperforms the underlying index. And we know, based on historic data, that the majority of funds do not outperform the underlying index.

So given that you have the highest likelihood of not beating the index, why would you pay an additional fee for something that is unlikely to happen? So that's the reason why I realize that on these shows, I often can talk about how much I like passively managed index funds without explaining the rationale behind it. That is the reason why I am an index fund proponent. And as I mentioned, you can get index funds from any low-fee brokerage. The reason that I like Vanguard is because Vanguard is organized as a co-op, meaning that every member is also a part owner. If you're familiar with the outdoor clothing store, REI, Vanguard is the REI. of investment brokerages. And as a result, there is no conflict of interest between the shareholders and the members or the clients because the members are the shareholders. Vanguard is member owned.

And so certainly you can get low fee index funds from a lot of other brokerages. I also do have an account with Charles Schwab and I like them too. I like them a lot. But I often use Vanguard as a shorthand for a fund that is a co-op, it's member-owned, and it's going to offer ultra-low-fe index funds. So that's my answer to the first part of your question. I want to talk for a moment about your comment that homes in Atlanta, many of the homes that you found in Atlanta, don't meet the 1% rule. Atlanta is where I have all of my holdings, and I know that area, better than I know any other area in the world. There are countless, endless homes in Atlanta that meet the 1% rule. There are literally millions of people who live in Atlanta

and who do not live in Dunwoody or Buckhead or Midtown or Virginia Highlands or Inman Park or any of these super expensive neighborhoods. There are so many people in the Metro Atlanta area who live in Ellenwood, Panthersville, the 303-4 zip code. That's where you find homes that meet the 1% rule, Mosley Park. If you really wanted to get out there, bankhead, I mean, Bankhead has its own particular mess of problems. We can talk about that particular neighborhood later. But all of those are places where you will find homes that way exceed the 1% rule. And I can tell you in Atlanta, there are a ridiculous number of homes on the market.

Even now, even in 2018, that cost less than $50,000. So why don't you buy one of those – why don't you buy 10 of those less than $50,000 homes in Atlanta? Okay. rant over. He sure picked the wrong city. For the entire time that I've been blogging about this, I've received messages from people saying, like, well, there's nothing in this city that's less than 600,000. And I'm like, huh, fascinating. Where do your janitors live?

Because you do have janitors who live in that city. Where do they live? Indeed. You know, and I think a lot of times people look, they're looking in the downtown regions. And you just, you aren't going to find it there. You're just not going to find it. But the argument is, well, that's where I'd want to live or that's where I think the best highest paid tenants live.

And it's like, well, maybe. But that doesn't mean it's a good real estate investment. That doesn't mean you're going to make any money. And it doesn't mean it's going to drive you nuts or not driving nuts. Absolutely. The 1% rule is a great thing to look for. And there are certainly, as you said, millions and millions of houses in most metro areas that meet this 1% rule, you just have to look for them.

And one of the things that I've done, in the past to try to find that house that meets that 1% rule when I feel frustrated is that I try to reach out and find, and this is usually through networking through meetups and whatnot, and trying to find a real estate agent that understands the investor mind. And so I will go to them. I will talk to them. I will even sign them if they're going to work a decent number of hours for it. And then I'll ask them, hey, go find me a house with a 1% rule. You know the area better than I do. This is what I'm looking for. And you understand the mind of an investor and you understand why that 1% rule is good. So let's see what you can come up with. And I kind of make them work for their

meal. And that's kind of the nature of being a real estate agent. So not every agent can just get a client who picks out a house and then they sell it, you know, or buy it. And so this way, they're doing a little bit of the legwork for me. And even if they don't come up with an exact house or something that would be a good fit, at least they kind of give me the areas that I'll watch And so that's one way that I narrow it down. And usually there are areas that I never would have considered before, the areas that I'm not familiar with. And that's how I kind of learn the neighborhood or learn the turf. I just have to say I'm on Zillow right now and I just did a search.

I just did a search for homes in Atlanta, Georgia. Zillow won't let you set a maximum parameter of 50K. So I set the maximum parameter at 100K. And I'm just scrolling through. And there are so many homes here that are, all right. Boom, single family home for sale, $45,000. Single family home for sale, $90,000. Oh, on People's Street.

Ooh, maybe I should buy that. Single family home for sale, three-bed, two bath, $50,000. Here's another one. It is $83,000. Here's another one, $43,500. Now, granted, I'm just stating the listing price of the home. There's always a question of, all right, well, how much repair does this home need? And then what's this home going to rent for?

But if you're buying a house for $40,000 and then you put another $20,000 into it and it's a three-bedroom two-bath house, the chances that you'll be able to rent it out for at least $600 a month, which would put it at the 1% rule, are pretty decent. Very decent. Yeah. And, you know, on that note, with the three-bedroom, so that's a really interesting segue. So I have a couple properties in the DC area that don't meet the 1% rule, or at least on paper they don't meet the 1% rule. When I bought them, I knew that. But they were in amazing locations that I knew I would never have a problem of finding renters.

And because of the type of house and they are single family homes with lots of bedrooms, I was able to say, okay, well, this is a trendy neighborhood and it's safe. And I think a bunch of young professionals will want to live here in community. Like people will want to be roommates and they'll go find their friends and they'll say, hey, move in to this house with me. There's six bedrooms. And so what I was able to do was say, okay, it doesn't meet the 1% rule, but I really like it. And I think it's a good investment from an equity standpoint.

I can get a decent amount of money for each bedroom. And I will still sign the whole group as a single lease, but then they kind of look at it like, oh, I'm only paying, you know, $700 or $800 for my bedroom. And then I've got all this common area. That way, together, all those people will net me way more money, way more rent than I would if I were renting. to a single family. So sometimes if you really like a house and it's in a really good neighborhood that maybe doesn't meet the 1% rule, but like you just said, that three bedroom, maybe you could price it at the price you need it and you'll be able to get three roommates who will each pay as a whole, you know, together they'll pay more than what a individual family will pay. Now,

with that said, you certainly can't discriminate against families. But what I do, what I do is I price it at what I need it to be. And just by chance, the people that want it will, be roommates because that's what they can afford. Now, if you don't get any interest or any inquiries, then you priced it way too high and nobody wants it and then you need to revisit it. But that's one way to consider maybe if you truly have trouble finding it in the 1% rule or you want to stick to a certain area that doesn't fit that 1% rule, look at roommate situations and look at maybe being creative on how you fill that house. There's this recently renovated house on Adair Street, which I know exactly where that is. It's a four-bedroom two bath. It's for sale for $75,000. I know

I could rent that thing out for $9.50 a month. Do it. You shouldn't have said where it was. Save it for yourself. Oh, Anonymous, you did ask about what are some of the other tactics for finding properties and you asked about auctions. Auctions are fantastic. Auctions generally looking at foreclosures, looking at short sales, those are all great ways of getting additional discounts on the property that you buy. In addition to all of the properties that are publicly listed on the MLS. There are also lots of properties that are unlisted that you can find through wholesalers or if you wanted to launch your own campaign, you could do your own driving for dollars, you could do your own in-depth property search. Or if you didn't want to take the time to do that, then just go find a wholesaler and just go buy directly from a wholesaler. And that's how you get oftentimes distressed properties that are being sold for less than slash for better deal. than what you will find on the MLS. Absolutely. Yeah. And auctions are an interesting beast because

by the time they typically hit Zillow or the foreclosures hit Zillow, it's way too late. It's way too late. Yeah. Yeah. Yeah, exactly. So basically, Zillow, Redfin, Trulia, all of these websites pull their data from the NLS, which is the multiple listing service. If you're looking for a traditional sale, a seller who is not particularly in a distressed or motivated seller position who was listing their home for sale, that's where you'll find those deals. The MLS is really well geared for retail buyers. Like you said, Lucas, in terms of foreclosures and auctions, by the time they hit the MLS, it's kind of too late. You might find a diamond in the rough, but you're much better off, in my opinion, if you wanted to go that route. Just talk to a wholesaler. They've got their finger on the pulse of the unlisted properties.

So that is our show for today. Thank you. Thank you so much. Lucas, introduce yourself a little bit in more detail. Okay, thanks. Yeah. So I, as you mentioned, I founded a website called Landlordology.com, which is one of the most highest trafficking websites out there to teach you how to be a landlord. And so that's where I started. As you know, I'm an independent landlord. But I also work at Cozy, which is the leading property management software out there for independent landlords. So between Landlordology and Cozy, It's kind of like we'll teach you how to be a landlord and then we'll also give you the tools to do it. And those tools are completely free. So with Cozy, you can collect rent, screen tenants, get background checks, credit reports, track expenses, track maintenance requests. You can do all of that and do it remotely even. So I use it myself. So I eat my own dog food.

That's a phrase for using the tool that you make. And I manage my properties from 2,000 miles away using Cozy. So it's completely free and it's used all over the country in every city, every major neighborhood, everywhere. I've got to say cozy.com slash Paula to support the show. That's right. I use Cozy too for the properties that we manage from a distance. And I actually have it written into my lease that the tenant needs to sign up on Cozy in order to pay. Because that way it's just easier.

It's easier than having the mail you checks. Yeah, and I'll have to say I haven't had a mailed check in over five years. Yeah, exactly. I'm not even sure I would know what to do with it, right? But I can also say that when I started collecting rent online, I've been using online software for almost 10 years now for rent collection, and I've been using COSI for four and a half years now. I haven't had a single late rent payment in over two and a half years

because I forced them, you know, I put it in my lease and I say, you must use COSI and must send it up to be automatic recurring rent payments. So between that and choosing qualified great applicants, I just don't even have a problem with rent. I mean, my realistic picture of what rent collection looks like is Sunday mornings. I'm in my pajamas and, you know, my phone dings. And it's like, congratulations, your rent's depositing. And that's it.

That's as much thought as I put into it. Yeah. Yeah, exactly. And I use, on Cozy, you can set up automatic late fees. Right. So one thing that I used to never do because I tend to be conflict diverse is if a tenant was late, I didn't want to charge them late fees because I just felt kind of uncomfortable about that. even though I know I should, it just still was kind of awkward, but now with COSI, I can assess

automatically fees. And so that takes, it takes the stress out of it. It does. And you know what we've heard too? I mean, you're not the first person that's come to us and said exactly that. And we've heard that people say, I didn't charge automatically, or didn't charge late fees, but now that they're automatic, it actually makes the software or the system the bad guy. And I actually get to be the good guy as the landlord. So when they get the email that's like, hey, you're late. And here's the late fee and it got assigned to your lease, you can go back to them and say, hey, listen, you know what, I know the charge got put on there, but it's your first offense, so I'm just going to waive it. And then the landlord just deletes the charge.

voila, now you're the good guy and they learned a lesson. So it's the best of both worlds. Lucas, thank you for joining us. Thank you, Paula. This was so much fun. So thank you for having me. Thank you. Thank you to everybody who called in with a question. If anybody else has a question that they would like answered on an upcoming episode of the Afford Anything podcast, you can leave your question at Affordanything.com slash voicemail. Again, that's affordanything.com slash voicemail. Thank you so much for tuning in. If you enjoyed today's episode, please subscribe in your favorite podcast players

so that you don't miss any upcoming shows. Thanks again for tuning in. My name is Paula Pant. I will catch you next week.