BiggerPockets Real Estate Podcast - 929: Spring Cleaning: Why We’re Selling Off Parts of Our Rental Portfolios

Episode Date: April 4, 2024

Why are David and Rob selling off parts of their rental portfolios? It’s a new season, and you know what that means—spring cleaning! And if you’ve got underperforming properties, a real estate business that’s just treading water, or employees who aren’t moving the needle, this is the episode for you. David and Rob are talking about “trimming the fat” of their portfolios and businesses, weeding out the bad expenses, and selling off their problem rental properties. And with spring being the best time to sell, you may want to consider doing the same. First, we’re going through David and Rob’s real estate businesses—they’re talking about hiring, firing, starting new businesses, and when it’s time to slow INSTEAD of grow. Next, the investing duo takes a hard look at their portfolios, triaging the properties into winners, losers, and the ones that need a little love. If you’ve got a rental property that isn’t pulling in the numbers you want, now may be the time to sell! But, if you’re going to sell some of your rentals, how do you use that money to keep building wealth? We’ll get into exactly what David and Rob are doing with the money from their problem rental properties and how they’re using it to multiply their cash flow even more. Don’t leave your portfolio collecting dust—you’ve got some spring cleaning to do! In This Episode We Cover When it’s time to sell your rental properties (and how to know they’re underperforming) Why you should NOT start a new business until you evaluate THIS  Hiring, firing, and how to know it’s time to cut back your business expenses  The real reason you need to visit your properties more often (Rob’s BIG mistake) Return on equity (ROE) and why you need to keep track of this crucial metric David’s potential move and why he may be leaving the Golden State behind  And So Much More! Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-929 Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 9-2-9. What's going on, everyone? This is David Green, your host of the Bigger Pockets Real Estate podcast here today with Rob Abas Solo. Spring is in the air. Love is in the air. And do you know what that means, Rob? I do. Flowers blooming, bears coming out of hibernation, which honestly makes me feel like a missed

opportunity here because I don't wear any of my floral shirts. What was I thinking? Yeah, you have floral shirts. You have raggedy T-shirts that actually make me look like I dress nice. and then you got your H-Town sweater that I see you wear pretty frequently. But no, we're going to be doing some spring cleaning. So Rob, after today's show, you could go do spring cleaning at your house and find some new clothes. But in this episode, we're going to be talking about how Rob and I are spring cleaning in our real estate businesses.

You're going to hear about how I'm optimizing my team, restructuring pieces out with the old, and with the new. And that goes for business and property so I can get more deals. Yeah, today's episode is very needed because we are currently looking at our own portfolios today. So I think this is going to be mega valuable for anyone who might be thinking, should I sell this property? Is the juice worth the squeeze? Should I re-optimize this property and try to make more money? I think you and I are sending a lot of properties to the chopping block. So I'm excited to get into it. That's right. Algorithms are changing. Demand is changing. Business laws are

changing. Commissions are changing. There's a ton of change just like changing with the seasons. So we are going to be making adjustments in our portfolios and businesses that reflect that change and sharing it with everyone today. All right. Well, let's make like a spring bunny. and hop into the episode. All right. So let's start with business operations. Rob, I'm going to ask you, how often do you evaluate your business operations?

Well, I'll give my answer. I'm excited to give my answer because every single time I answer before you, I realize how incorrectly I do things. So I'm excited to learn what not to do. But for me, there's really two key moments when I evaluate these things. Number one is when I make a new hire

because not only am I hiring a new person and I'm having to train them, but I'm always looking under the hood and seeing exactly what I'm training them on and realizing that a lot of the systems and processes in my own company aren't necessarily as concrete as I would like. So I feel like, you know, I make several hires a year. I would say at a minimum, I'm looking at things every quarter. And then the other kind of dual aspect of this is every single time I'm thinking about starting a new business. Before I start that new business, I always take a step back and say, hey, is it fair to my other three or four businesses to start a new

business? And I kind of evaluate from that standpoint. What about you? Yeah, that's a fair question to be asking. Is this fair to my other businesses? Now, sometimes you make a move that takes attention away from your businesses. Sometimes you add a business that actually creates synergy with the other businesses you have. For me, I'm always thinking about a client. Okay, so I've got a client that wants to buy a house. They come to the David Green team. Well, can we do their mortgage for them also so they don't have to use a stranger? Yep. Now the agent and the loan officer are on the same page. working for the same goal. Well, can we also help manage their properties? Like, I'm always asking, what can I do to make this process more streamlined and better for the clients? And then I'm also saying

what of my employees that are working in one company could also help in one of the other ones, because they sort of know what's going on with everything. So in my world, the more integrated that we make everything, the better the experiences for the client. But starting a business that's outside of that little circle of trust, you might say, that now takes energy away from the current businesses, which would be the current clients. Yeah, and we'll talk about this a little later, too, but I have the same thought process with buying property as well, because a lot of really good deals have been served up to me. Spoiler alert, there are still good deals out there, and it's really hard to turn them down, but I'm looking at my own portfolio, and I'm like, it just doesn't make

sense to launch something when there's so much disrepair across the entire portfolio. So, yeah, I'm always just like, I have shiny object syndrome. I recognize this, and so I really, these days, Try to be very good about taking a step back and just examining what I have. So it does reveal a lot of issues. And I'm curious in your specific business, where do you think you need some help to operate a little better these days? Well, for me, the challenge is usually the same. And it's going to be people, specifically leaders. So I always have great ideas.

And if I jump in there, I can do it. But you can't do everything. You only have so much energy and so much attention to spread over your businesses just like with your kids. If you try to have nine kids at one time, I can guarantee you one of those kids is going to feel like they're not getting enough attention, probably all of them. Well, when that same phenomenon happens with properties, what you find is their productivity goes down. Like you said, they fall into disrepair. They need attention, just like children need attention, just like your fitness needs attention. Everything always needs attention to make it work. And when you get too many of them, even if you have the skills or the knowledge of what to do,

you don't have the energy or the time to go do it. So when it comes to my specific situation, the National Association Realtors was just involved in a lawsuit where they settled, where they agreed to change commission structures. The market in general has shifted dramatically when interest rates went up. What we saw was that even the home prices didn't necessarily come down, the velocity of which transactions take place went down. So less houses were selling. So now I've got all these employees that work for me that I don't want to have to lay off, but I got to find something else for them to do to keep them busy. So I'll be starting a property management company. We'll be managing properties for other people because that is still a need that has to happen. When it comes to what I need to do that,

it's always going to be people. How do you hire a person that if you're not giving them energy or attention all day long, you can still trust that things will get done? Is it similar for you? You know what? I just put, I just made a couple of hires that have actually made life a lot easier for me. It hasn't always been that case. Sometimes you make a hire and it doesn't turn out to be, it ends up being a lot more training than you're anticipating. I actually feel pretty good from the people in my organization standpoint. The biggest flaw or the biggest fault in the crack, the biggest crack in the foundation, if you will, right now is follow-up. I think follow-up is something that all businesses probably lack on overall, but for me, follow-up really,

no matter what the business is, whether it's following up with the lead or following up with, really the biggest one is in my portfolio, a lot of people get to this point where they buy the property, they do the inspections, they get the appraisal, they get the funding on it, they put the furniture in it, and then they're like, who, I'm done. And the follow-up is actually just not there. I find that most people set up their properties at like 90 or 95 percent. And they say, okay, well, once it starts cash flowing, I'll go back and I'll do the other five to 10 percent. Or I'll add this. I'll invest this way and I'll make more money this way. And it never happens. And I've just realized this over the past year visiting my own properties. I'm just like,

wow, there's so much that I said I would do that I didn't because I focused on buying more properties. So I think follow up overall is the death of all businesses. And that's really for me the biggest downfall. that I feel right now, though it is being worked on. It is something that I recognize and I'm specifically working on right now, but it's just not something I ever, you know, I think people getting to the finish line is really more common than people actually getting across the finish line, if that makes sense. I'd say here's one of the ways that a lot of short-term rental owners, I mean, I'm sure this will apply to long-term rentals as well, but we get a review from our OTAs, online travel agencies, where people will leave you a review. And then there's a little private section

that's privately emailed out to you. And it typically has amazing feedback. Like, hey, we really liked it. But by the way, all of your Teflon pots are scratched up. And you say to yourself, oh, yeah, let me, let me, I'll fix that eventually. And you never do. And then you go and you visit your property, like, dang, I forgot about all this feedback. So I think there's so many ways that you can implement systems.

But I would place more importance on follow up in the real estate journey than the actual setup. Because, you know, the setup is the exciting part. The follow up is the annoying part. Yeah, and to be fair, we don't talk about it on podcast very often. We typically talk about the acquisition, the getting the property. And then it's like, oh, happily ever after. Well, you're in a marriage, Rob. You know, that's not happily ever after.

It's work and follow up and paying attention to giving an energy. And then it's happily ever after, though. As long as you keep paying attention to it. That's the idea, right? The story doesn't, in a book, the story ends when the couple gets together. And on a podcast, the story ends when you buy the property. But in practice, the story doesn't end. You are always giving attention to that thing.

All right, now that we've taken a fresh, honest look at our business fundamentals, we'll move on to how we prune our portfolios right after the break. There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties. These gaps surface only when filing claims. That's why investors work with NREG.

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Yeah, a lot, a lot. Well, I'll say one, I'll follow up here with one thing that was talked about on the show a couple weeks ago. I think it was me, you and Dave Meyer, or maybe it was me, you and Henry Washington, but I was talking about this property that was supposed to be a wholesale. I bought it for $75,000. I was supposed to put in 25K and I was going to make like a $10,000 or a $15,000 spread.

A wholesale is like a wholesale meets a retail. You know, that's the idea there. And it didn't happen. A lot of people came in and they're like, yeah, we need to offer you less. And basically, all the offers I got, I was going to lose $5,000. And I was like, oh, man, you know, I've never lost money on a deal like that. So my pride just wouldn't let me do it. So I was going to invest $65,000 back into that property and just finish the renovation. And if I did that, I would make between 20, $25,000 and you and Henry, or you and David, whoever it was, you all were like, yeah, just take the $5,000 loss. And I was like, yeah, so I'm moving forward with that. The next time, an offer like that comes in, I will, I will take the $5,000 loss and just consider it a victory to get $100,000 back, which I know first world problems as I say that, but I still don't like to lose money, you know? Who does? Well, that's what made you not want to sell it because you felt it's a loss, right? I took a $5,000 loss. When I'm looking at your problem objectively, I'm saying you have $75,000 out

into the ether doing nothing. You could get $70,000 back to do something with. That looks like a much more simple way of processing it, right? Yeah. It's, yeah. So that's, I'm moving forward with that. Thank you for the clarity. I'm still a little like, I still want to find what the victory is in this. But my realtor, I told them like, hey, just if you get the offer, take it.

So that's one big thing. Sometimes, guys, our time is just worth a lot more. And I think ultimately what you're trying to get at with your tip here to me was, hey, don't spend six months of your life to make $20,000. You can make $20,000 easier in other methods. And I was like, okay, so duly noted there. The second thing, I am selling one of my Airbnbs. That property is in West Virginia, and it's been breaking even.

Sometimes we make a little bit of money. Sometimes we lose a little bit of money. But overall, I would say it's a break-even. Obviously, the ROI is pretty good when you factor in cost segregation reports and all that good stuff. But, you know, I'm really into this whole thing where I want all of my properties to be like my crown jewel and I want them all to be beautiful and I want them all to be inspiring. And truthfully, there is nothing inspiring about that property at all. There's nothing I can do

about it. There's, I can sure, look, I could add a pickleball court. I could do something, right? Obviously, there are things I could do, but it just doesn't bring me joy. I don't care about it. And you should never own something you don't care about. That's kind of my opinion, especially in the short-term rental space or medium-term rental space. You should be like, they should be your babies. And at scale, I kind of lost side of that. So I'm cutting that one out. A little bit of a happy story there. I'll make $125,000 on that sale. So, you know, it could be worse. All right. And you've got a third one, right? I do have a third one. Yeah. So I just recently visited one of my Airbnbs in College Station and found that it needed a lot of TLC. When we bought that

property was a bad flip and the contractor made it seem like he fixed the foundation but he didn't. And so it has settled dramatically and all the drywall cracked. And so we had a handyman come and patch it up. And when I went and visited it, I noticed that the patches hadn't been sanded or painted. And it's been like that for many months. And I was just really mad. And this kind of got me to this whole like, I love this episode because it makes me understand really my biggest problem, which I talked about with follow-up, and I wanted to kind of illustrate this in an analogy for you. So if you're in a ship, a battleship, as you said, David, if you're on, if you're at sea and you move one degree, you can probably, you know, like continue on and get to that same destination.

But if you keep moving one degree, eventually you're completely turned around. And I kind of found this at that property because I walked into every single room. And every single room, the rug under the bed had scooted away from the bed and started curling up against the wall. And all it would take, every single time that my cleaner came in was just to pull the rug one inch back to its spot. But what the cleaner did was they never did that and they just let it shift over an inch over the course of a year to where like there's like so much rug just up. Oh my gosh, dude, I hate even talking about this. And so for me, I'm just like, this is the problem with business. When you let your business deviate one degree at a time, at a certain point, you're going the

opposite direction. And that's how I felt with this property. So we've since we're revitalizing it. I've put $26,000 into the backyard. We've added a pickleball court. We've added like a game day shed with like a big screen TV. We've added murals. And this property will go from being like a so-so moneymaker to, I think, a pretty profitable machine. And I'm really excited about it. That's one where, you know, wasn't excited about it until I went there. And I was like, you know what, I'm just going to own that we really didn't love this one as much as we should have. I'm going to fix it. And now I'm excited and I'm like, all right, we're back. All right. I mean, there's some trends that I'm seeing here. When you out of these properties,

the economy was charging along. You wanted to expand your portfolio. You needed to invest some money. You probably had some depreciation that you wanted to take advantage of. Well, now the economy's contracted a little bit. It's a little bit tougher. It's harder to find people that can oversee your cleaners and your handymen and stuff, which means you got to do it yourself, which means you can't do it all. So you have to make some selective choices of if I have to be the person to oversee this and I can't do all of it, let's trim out the least productive or least fruitful things. Yeah, let me just say one thing because a lot of people might hear this and say, well, how are you going to stop the rug from coming up against the wall?

We do this with some of our properties, not with all, and now I see the value of doing it. But there are certain apps out there that you can basically empower your cleaner to take photos of the property of every single room, every single bathroom, every single toilet, bathtub to basically keep them accountable on every aspect of the property so that whenever they send you photos and you see the rug up against the wall, you would say, hey, can you go fix that rug? And we didn't have that process in place for this property. Lesson learned. So that is basically how we're going to be turning around the accountability and the communication between me and my cleaner. I'm curious. When you hear people say this and someone DMs you that goes, Rob, all you got to do is have somebody

you take a picture of the property and sit it to you. And you're like, I know, but that means somebody on my team has to look at the pictures. And then they may just be ignoring the one inch rug that's moving along. How do you typically address that criticism or those concerns from people that can see how the problem should be solved? But they don't understand the complexity of why it never gets solved. Yeah, I don't know if there's a lot you can do other than explaining that most cleaners are like, you know, really, they're wonderful people, but they really do the thing that you hire them to do. And that's clean and they're not necessarily proactive about, hey, this side table is loose. They're not going to really tell you that. And so I don't know, like, it's one of those things that you fix in hiring.

It's really difficult to fix this retroactively. This is not something you can just tell your cleaner, hey, can you now start spending 10 to 15 minutes extra at every job? It's really hard to do that. And so actually, this could be the third fire that I make ever. I actually have let go of some cleaners. So if that counts, then I might be letting go those cleaners as well. Sometimes you've got to start fresh. Good deal. And that's okay. That's how business goes, right? Like a human body is always having new cells form and dead cells die and come off. Well, your business will work the same way. There'll be new hires. There'll be new properties. There'll be new clients. There'll be new opportunities. And then there will be old ones that have to make their way out. Okay, we're going to take a quick

break, but stick around because we've got more for you right after the break. There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties. These gaps surface only when filing claims. That's why investors work with NREG. They specialize exclusively in real estate investors, understanding portfolios, risk at scale, and cash flow protection. One claim can erase years of returns. If you own a rental property, don't assume you're covered. Have NREG review your insurance with someone who gets investing at NREG.com slash BPPod. That's N-R-E-I-G.com

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That's bill.com slash bigger pockets. Welcome back to the show. Let's get right back into it. So tell us about your side of the portfolio. Are you making any big changes? I know you've, I mean, it seems like this whole year has been, you know, spring cleaning for you, but is there anything of notoriety that you want to talk about? This is the biggest, deepest spring clean that I've ever experienced in my life. It's a deep clean. That's what it is. Deep clean. Before this, I've sold maybe like one or maybe two properties my whole life. I hardly ever sell them. But I, my portfolio grew very rapidly a couple of years ago, maybe like a year and a half ago when I was

forced into a 1031 because of some title fraud issues where properties were stole from me. And I had to go buy a whole bunch more. And that happened at the same time that the David Green team was crushing it. And the one brokerage was crushing it. And I was just super busy trying to do all this. So now that the dust is settled and the economy has contracted a little bit, I'm just looking at some of the properties and like, yeah, there's some winners. There's some okay ones. And then there's some losers. So like you said, you're just trimming the fat. So I have two cabins and the smokies that I bought at the very beginning of a 1031. I did it at the advice of a property manager that was less than ethical that I'm trying to get rid of now. And they're just

not performing well. The property manager is managing them themselves. And they were like, hey, I got an opportunity to get some off market deals. I was just learning the Smoky Mountain. So I said, hey, those, the numbers sound good. Well, the numbers did not perform like they said. And there's some challenges with like steep driveways and stuff that make it tougher to rent them out. Like, it's just not something I'm going to be able to fix. So I'm getting those spruced up and I'm going to sell those two cabins in 1031 into like one cabin. instead of having two, that will be better and more expensive. But now that I know the area better, I'll make a better decision.

I've just got more knowledge to be able to reinvest that money. I've got a commercial property that I'm going to be selling. I have a big burr that I was doing where I took this property, an amazing community on the top of the hill. And I added to it and I made it nicer. And the city has been giving me a very difficult time getting short-term rental permits for the thing. So it forces me to go medium-term and it's been working okay, but I'm not really getting enough going to justify this $3 million property.

So that's a property that I'm going to be selling instead of keeping as a burr, which is the wonderful part of the bur method. When you add equity to a property, you have options in case things don't work out like they happen to not work out here. And then I've got five single family rentals that I've had for years. They're fine. The rents haven't really kept pace with how much the equity has grown. So I've got a spreadsheet that I used to track all my properties and it tracks the return

on equity and the return on investment of future properties. and I can tell the return of equity is really low on these things. I could get a much better ROI if I reinvested into better assets that I now have knowledge of. So I'll probably at some point this year be selling five of my single family rentals that are just like, they're just not that sexy anymore. There's nothing wrong with them. Well, they rarely are. Yeah. But I think that I can put the equity to use somewhere else. Yeah, I mean, and that's fine. I think that's, that's okay. I did a video this week that was like, you know, short-term rentals versus long-term rentals, which should you choose? And I made the case for long-term rentals. They're not sexy.

They just consistently and you'll have like really great wealth when you retire. Let me ask you this. For someone in your position where you're at today, you've seen it all. You've really tried a little bit of everything. When you get rid of those five single family residences at your level, are you replacing them with more single family residences? Or are you like replacing them with one property that's worth the same as those five properties? Yeah, it's the second. I basically, this is a strategy I teach other people.

There's nothing wrong with it. it's actually a healthy part of the cycle. And I just call it houses to hotels. I'm trading four small greenhouses for one big red hotel. And it could be a commercial property or it could be a short-term rental or it could be something else. But yeah, I'm not going to go buy four more properties. I'm probably going to buy one property that's four times more expensive that will bring in more revenue and have more opportunities to force equity. Got it. Okay. Yeah, it makes sense. I mean, that's that's the natural progression, right? Scale or fail. And I think scaling is scaling accordingly into consolidating and having to,

like one thing versus 20 things that make up the same thing. I think that's really, that's where I'm moving too. I sold that property in West Virginia thinking like, wow, I've never sold property. I hate doing that. But, you know, what I didn't talk about was that I'm actually building three new, brand new homes in Joshua Tree, California, because that fulfills my creative spirit. They're more expensive. They're 500,000 plus dollar homes. And I'll just get a lot more out of those properties and that equity. So yeah, I think caveat, I'm glad you said that. I'm selling these to move into bigger properties too. Sweet. And that is how it works. And you know what? Hopefully these new properties we buy will cash flow, we'll save the cash flow. We'll then reinvest that money into maybe single family

rentals in the next up and coming area. Buy ourselves a fixer upro that needs some love for some equity, buy some equity, getting in at a good price. When that property appreciates to a point that there's a bunch of equity, then you do the same thing. So you trade houses to hotels, you take the cash flow from hotels, you buy more houses. When those grow, you trade those into hotels and you put yourself a nice, steady, consistent method of acquiring real estate until retirement. Hey, before we close out, why don't we just end on this? Do you have any spring cleaning or anything in your own personal life that's not necessarily so businessy or real estate related? Yeah, I think I'm going to be moving. I think I'm probably going to be leaving California at some point here. So I'm figuring out what it would look

like to put some of my stuff in storage, rent out my primary residence. I haven't needed it. It's like a 2,600 square foot house. I bought it as a foreclosure in 2013. And it's just been me living in it for most of the time. Occasionally, I'll have employees that come will rent rooms for me when they come learn the business and then they'll fly back to wherever they live. But I'll probably make that a rental and then take a room or a unit in one of my other California properties that I do medium-sharm rentals with. I'll just like set aside one of them and say I'll keep all my stuff there for when I

come back to California and I'm going to be moving. I'm going to go check out the south and the Midwest and see what's cracking over there. Wow. Dang. Talk about a casual thing to drop at the end of the episode. I can't wait to read these YouTube comments. good get out of California Okay well that's much cool

And what I was gonna say I was gonna say I've got a couple I've got a vehicle that I'm getting rid of And my wife and I are thinking about Going to a one car household Because I drive 3,000 miles a year And it's not I walk most places So I think we're gonna be a one car household

Just the reason that you walk so much Because of this obsession you have with getting steps in Well that is part of it But it's more so my dream has always been To live in a place where it's walkable to everything so I can walk to the bodega to get a haircut. Yes, I do get haircuts for all the YouTube haters out there. So yeah, I walk anyway, so I don't need a car. I'm to try it. I'm going to try it for six months and walk in Uber everywhere. All right, folks,

there you have at spring cleaning in our businesses, in our portfolios, and in our personal lives. We're sharing it with you. Let us know in the comments on YouTube. Are you going to be doing any spring cleaning? Has this show inspired you to take action? Were you sitting on a property that's losing money, but your pride and ego just won't let you let it go. And Rob, as the trailblazer of real estate that he is, has finally given you the confidence to let go of that problem child and replace it with something better. If so, let us know because Rob's ego really needs to find some gleaming hope or positive thing in this terrible deal that he's losing $5,000 on.

That's funny. If this was recording like the 1800s, that might sound like a terrible thing, but like five Grant is. He's going to go bankrupt. While someone's playing harpsichord in the background. And if you appreciated Rob pulling back the curtain and showing you some of the warts in our own portfolios and lives, please do us a favor and leave us a good review wherever you listen to podcast and subscribe to this podcast so that the algorithm knows that this is what you want to see. I'll let you guys get out of here. This is David Green for Rob the

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