Epic Real Estate Investing - EREI 059: The Most Underrated Aspect to Real Estate Investing that No One Ever Talks About

Episode Date: August 6, 2013

There is one aspect to real estate investing that is so important that if you choose to ignore it, it will cost you hundreds of thousands, and perhaps even millions, of dollars over your real estate investing career. And NO, I'm not talking taxes (although taxes are a close runner-up). It's dumbfounding that this specific aspect is so underrated and so rarely discussed.  This could quite possibly be the most important episode of the Epic Real Estate Investing podcast that you'll ever listen to. Let me clarify, though... If it's your intention to build a real estate portfolio so that you can live the good life while you're still young and energetic, and if it's your intention to build a portfolio big enough to support generations to come, to create your legacy... this will then be the most important episode of ANY real estate podcast you ever listen to. That's a bold statement, I know. Try me ;-) Note: Matt Theriault will show you how to invest in real estate via FreeRealEstateInvestingCourse.com, or he'll do it for you at CashflowSavvy.com Learn more about your ad choices. Visit megaphone.fm/adchoices

Broadcasting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. Mmm. Yeah. Hello. Hello, and welcome to another episode of Epic Real Estate Investing where I show people how to get out of the rat race using real estate. And it all begins with just a small, simple little shift in mindset, a shift in focus, if you will. You know, the very first thing that you must do to get on the right track, to get on that road of financial independence, to get on the track of exiting the rat race is to, one, stop focusing on making and saving money. Stop doing that.

Stop trying to make money. Two, I want you to start focusing on creating a residual income. There are two entirely different mindsets that are going to lead you in two entirely different directions. And one of those destinations you are going to enjoy and one of those destinations you are not going to enjoy. You know, that traditional way of making money, of getting wealthy and getting rich, it's not working anymore. It hasn't worked for a really, really long time. So stop trying to make money and save money and live below your means and max out your 401k and all that stuff that you've heard in your entire life. Stop it.

Start focusing on creating a residual income. what we like to call in the real estate world cash flow. See, by doing that very thing, by just taking that one little tweak in my mindset, I escaped the rat race in less than four years. What literally 99% of our population was unable to do in 40 years. That's not to say, ooh, look at me, look how good I was. No, that's not what it is.

I'm not special. I say that to say with the right mindset and some specific intentional actions, anyone can do this, anyone. If only someone will only just show them how. Well, someone was gracious enough to let me in on this particular life secret. And now I'm letting you in on it. I'm paying it forward. And if you think that's good news, if you think that's cool, wait.

It gets better. Because, you know, it took me just under four years to escape the rat race. But that was with making all of the stupid mistakes and all the newbie mistakes and having to learn a bunch of lessons on my own. I mean, someone pointed me in the right direction. They gave me a little shove, but then I was out there on my own. And I made all those mistakes. And the great news about that is that you don't have to make all of those mistakes.

Meaning if you hang out here for a while, you're like you and me, we just sit here, we chill, we meet here every week. You should be able to travel that road much quicker than I. And to help you get started, I mean, to help you get started today, I created a free step-by-step course to show you exactly how to do. it to show you exactly how I would do it if I had to start all over again right now. And you can download that free course at free real estate investing course.com. Free real estate investing course.com. No strings attached. There's no catch.

There's no pitch. It's a whole incomplete course. It's hard to believe I know, but it's there for you and I created it just for you. So take advantage of it. If you don't, hey, that's your fault. All right. Today, just curious, you ever heard this before? Do not invest in property that is further than driving distance from your home.

Have you ever heard that before? I mean, do not do it. If you can't drive to that property, you do not invest in it. You've heard that before, haven't you? Of course. I mean, we've all heard variations of this statement at some real estate investor club in the RIA meetings or from some even seasoned typically, or quote on quote seemingly seasoned investors.

I mean, the sentiment is typically expressed with the conviction of wisdom and experience and logic and it makes sense. What do you do if there aren't any good investments within driving distance of where you live? Or what if there are good investments, but they lie beyond your financial reach, beyond your resources. What can you do then? I mean, do you just, do you pick up your family and move closer to better investments? Do you postpone your investing and just wait for the market to shift?

Or do you just not invest at all? Just say, okay, I can't drive there, I'm not going to invest. Of course not. No. Rental real estate is the most manageable, predictable, reliable, and highest yielding investment vehicle. Not to mention that the fastest path to financial independence. The fastest path to that residual income. I mean, it would be insane to opt.

for lesser and riskier opportunities just because you don't live within driving distance of good investment property. Be insane. So my little mantra, my little life saying, I guess, is live where you love, but invest where it makes sense. Live where you love, but invest where it makes sense. I mean, that belief has made me more passive income in out-of-state markets than I could have ever earned in my astrobi.

astronomically priced Los Angeles backyard. I mean, certainly there's money to be made here. But it's just kind of out of my financial reach, or it has been for a really long time. And now I'm so used to it in other places I don't want to work that hard, or I don't want to put that much at risk. You know, if you're one of the lucky few who can live and invest in the same place, hey, God bless you. But for the majority of people where that's just not the case, here's what you need to know. The two places where real estate investors lose significant amounts of money, and I've said this before, and I'm going to continue to say it because it is 100% fact.

The two places where real estate investors lose significant amounts of money are, one, bad contractors, a bad rehab team, bad, just bad workers, bad team members, but contractors specifically. And two, bad property managers. That's it. If you can eliminate those two, those two mishaps from your real estate investing, there's not a whole lot that can go wrong. I mean, I guess number three would be bad, what you call it, bad property analysis or bad evaluation.

Okay, so you buy the property, you paid too much for the property. Okay, there's a third place. But you can manage that really easily. Just got to learn how to do it. And it's not difficult. We've talked about that on several of these episodes. But really, if you can find a good contractor and good property managers, you know, there's not a whole lot that can go wrong with real estate.

You can manage the rest. I mean, the property's distance from your primary residence does not even make it into the top 10 of this list. I mean, distance isn't even a reason for a property to fail. It's not even on the list, actually. Not in the top 10, but it's not on the list at all. Now, there's no doubt in my mind, no doubt in my mind that the people who have advised you against investing in long-distance property have had bad experiences with long-distance investing. I'm sure that they are giving you honest to goodness truth and facts about their experience. But I assure you that the distance had nothing to do with their bad experience.

I'm willing to wage on my own portfolio of now, as of this week, 138, not in my state income properties, that 90% of the investors who lost money on long-distance deals went under because of bad property management. I'm willing to wage that entire portfolio, that 90% of the people who have lost money on long-distance deals, it happened because of bad property management. So is good property management the secret to long distance investing? Probably think I'm going to say yes, but I'm going to say no. It's not. Good property management is the secret to all real estate investing, regardless of location.

Income property acquired intelligently is an irreplaceable asset that no portfolio should be without, but your work doesn't end once the deed transfers. You know, as glorious as mailbox money is, your rental properties are assets, and assets must be managed for them to produce income, for them to continue producing income. Real estate, it's not as set it and forget it investment. That's where a lot of people think, oh, it's just passive income and cash is going to come to my, is going to just come flowing to my mailbox each and every month. Real estate, like any investment, must be managed. So this fact, it leaves you with a choice. You can actively manage your properties yourself

or you can hire someone to manage them for you. There's your choice. You can actively manage your properties yourself or you can hire someone else to do it. And, you know, many investors, they choose to take on the management responsibilities themselves. And there's nothing wrong with that. But, you know, when I meet these particular investors,

I'm always wondering, you know, did you become an investor to own property or so that your property could own you? And there is a distinction there. I mean, you can be an investor so that your money and your properties work for you or you can be an investor that works for your money and works for your properties. It's the difference between the left side and the right side of the cash flow quadrant by Robert Kiyosaki. On the left side, hey, you work for money. On the right side, your money works for you.

And on the right side is where your financial independence is going to come from. So that's your choice. You can actively manage your properties yourself. That would be on the left side of the quadrant. Or you can hire someone to manage them for you. That would be on the right hand side of the quadrant. Hey, you know, if you love managing properties, I mean, who am I to judge? Knock yourself out.

If that's what you love doing, then do it. Personally, I choose to hire professionals to do the job for me. I mean, even if my properties were within driving distance of my primary residence, I would still hire professional property management. I mean, my time and my sleep are just, they're too valuable to be spent showing property and collecting rent and playing social worker and fielding the middle of the night my toilet has backed up type phone calls just to avoid a 10% management fee. Instead, I choose to devote my time to enjoying my family, to traveling, hammock napping,

and looking for more property. Looking for more property. That's where my time is best spent. For everything else, you go out and you get people for that. You know, if spending the most active years of your life have left you, you know, let me put it this way. You know, if you want to go out and you want to spend the younger years of your life, at least right now, doing what you're going to. want, when you want, and with whom you want, while your income properties foot the bill.

I mean, if that's important to you, then you need to not just hire good, but you need to hire great property managers. I mean, that's why we all are into real estate in the first place. I mean, some of us love it. Some of us love to embrace it and go up and kiss it and then hug it and visit it all the time. Sure. I get it. But why are we really in real estate?

it's because we want what real estate can give us, what that investment can give us. And it can give us the life of being able to do what we want, when we want, and with whom we want, regardless of price, while our properties, while our investments pay the bills for us so we can go out and have fun. And if you want that,

then managing the property yourself is probably not going to be the best path. So you need to hire, great property managers. And I, hey, I'll be the first to admit that, I'll be the first, second and third to admit, actually, that I have made some very novice, expensive, and painful mistakes in selecting property managers. However, I have also absorbed numerous, invaluable, and profitable lessons along the way.

As with anything, I mean, you'll never know at all, but based on the cash now flowing into my mailbox every month, I am confident in my system for finding great property managers. You know, and in the interest of saving you from writing unnecessary checks and many a face-pal moment, I'd like to share some tips for selecting great property managers with you. I mean, with sweetly acquired assets and magnificent management on your side, you two can do what you want, when you want, and with whom you want, while your properties pay the bills. Shoot, maybe someday, you know, you and I will be hammock swinging together on some,

tropical beach. How's that sound? I like it. So when it comes to the basics of hiring property managers, just Google how to hire a property manager. That's very simple. I mean, it seems everyone out there has the exact same 10 steps or so. I guess there's a template out there. So those 10 steps, they're readily available. And what you're also going to find is that mostly this advice comes from property managers themselves trying to get your business. So the recommended procedures and questions and steps you got to take, they're a bit slanted in the property managers favor. They're not entirely useless.

I mean, there's some sound advice in there, but typically it's in favor of the property manager that's giving out the advice. Now, having learned the hard way and the expensive way, I want you to know that I've already traveled the road and finding good property managers, great property managers. So I've done that so that you don't have to experience

the same pains that I have. Well, actually, I did it because I was looking in the interest of my own investments, but I'm going to share it with you so you don't have to experience the same pains. Not unless you want to, of course. I mean, I know there are many people out there that will seek out advice from people more experience than they and end up doing it their way anyway. Don't do that.

I mean, go ahead and do it your way if you want, but don't ask for help from someone who's been there and done that and then ignore their help and do it your way anyway. I mean, if you want to learn the tough lessons on your own, just get out there and get to work. Don't bother people that are busy asking. them for help, they take time out of their day to help you and then you go do it your way. Just get out there, get to work, and you'll get the experience, you'll get the lessons, and you can learn it on your own. I mean, you'll find in this business you are either making money or you're learning lessons.

One or the other. I prefer making money. But, you know, you know your situation better than I do. I'd rather make money. So, after setting up now six markets for my cash flow savvy business, this is where we build passive income portfolios for people that are just too busy to do it themselves. And then, so we build that for them. So they don't have to work so hard.

So then they could have time to do it themselves if they ever want to. But after building up those six markets, I've really got it dialed in on how to find great property managers. And because I have found great property managers, that business is thriving. And I've got a bunch of satisfied customers. So I'm going to pass this on to you in case you want to go out there and do it yourself. and you want to build your own teams. Hey, this is totally what this show is all about.

You know, I'm going to show you and teach you how to invest. And if you don't want to do the work, hey, you can, you know, you can hire me or someone else to do it for you. But it's nice to know what's going on. Even if you don't do the work, it's nice to know, you know what's going on. It's your money. It's your investments. You have to understand that and you have to manage your own assets, okay?

Whether you're doing the hard, grimy, sweaty work yourself or you're hiring someone else to do it. You've got to understand how this thing works. So here are my 10 best tips for selecting great property managers. Straight from the school of Hard Knocks, by the way. And I think that school is a private school, isn't it? I mean, if you judge the price of the tuition, it's certainly competing with all private schools that I know of. Anyway, here they are.

In no particular order, though, too, by the way. Number one, seek multiple referrals from other successful real estate investors. Okay. Don't jump to Google. Don't jump to the yellow pages or the white pages. pages or, you know, don't go to the, what do they call those things, the little kiosks or message boards. Don't do that. Seek multiple referrals from other successful real estate investors first. I mean, you very well may have to result to Googling or looking in the yellow

pages, but go seek referrals first from other successful real estate investors. Success, it leaves clues and a referral from a trusted and prosperous source is more than a clue. It's more than a referral. It's evidence that whatever's going on over there is working and you want that to work for you. So seek referrals first. Okay, that's number one. Two, adopt the mindset of, you've probably heard this before, another business training, but this absolutely applies when it comes to hiring great property managers. Adopt the mindset of slow to hire, quick to fire. Slow to hire, quick to fire. Regardless of how many positive answers you get from a property manager during the interview process.

Sometimes the only way to find a good one is you got to give them a trial run. I mean, they're all going to tell you what you want to hear up front. So it's a little bit difficult sometimes. And some of them are really good and they're charming and they seem great. They seem competent. And cool. But hey, they're going to, they know they're being interviewed. They're going to give you the answer that you want to hear.

So sometimes the only way to find a good one is to give them a trial run. And if you notice a pattern of actions that conflict with their problem, promises during that interview process, cut them loose. Cut them loose. This is your livelihood. This is your money. This is your properties. These are your properties.

You're not obligated to someone who doesn't fit your needs. And I'm telling you, if you start noticing some actions that are conflicting with their words up front and early, it's not going to get better. Okay? So keep your eye open for that. Give everyone a fair shake. I'm all about that. but you got to watch them.

You've got to be slow to hire, quick to fire. Now, number three, interview more than one property manager. I mean, and I mean interview more than one, regardless of how much you like the first property manager that you meet. Keep interviewing. Not only do multiple interviews increase the likelihood of finding a great property manager. You're going to learn a ton about the projected performance of your properties and the market. You're going to learn some local insider information

that you wouldn't learn any other way. So even if you just fall in love with your first property manager, at least interview one more. I'd say two or three or four total, at least. Okay, so interview more than one. Number four, I want you to test their customer service. This is going to be such a big deal because one of the bigger complaints from real estate investors

with their property managers is that they can never get them on the phone or they don't call them back. So test their customer service. I mean intentionally end your interviews with a few unanswered questions. Don't ask everything in the interview. Then call back after hours and leave a message. And note, I want you to take a note on how and when your call is returned.

When they, if they return your call, use the unanswered interview questions as a basis for your conversation. So it's very natural. Ideally, you want your call returned within 24 hours in a professional and courteous way. Placing a call also during business hours can give you an indication of the company's professionalism and accessibility as well. Okay, so call after hours, leave a message and see how and when your call is actually returned. That's number four. Test their customer service. Number five.

Now, this one, sometimes it's a little difficult to do, but I want this to be your intent. I want you to hire investors. and really this tip, it applies to your entire team as well as your property manager. You know, although it's not essential that your property manager must be an investor themselves, I have found the communication and understanding of each other is much better when they are an investor also. Night and day, the experience. They feel your pain. They know what you're going to ask before you ask it.

They know what you're going to feel before you feel it. They know what to do before you even know what to do. Okay. So find out not just from your property manager, but your entire team. It's nice to, it creates a much better experience in a relationship if they are real estate investors in that area also. Okay. So that's number five, hire investors.

Six, read the management agreement. It's amazing. I had to put that on there, isn't it? Seems obvious enough. But it is so important that I must make mention of it. Yeah. This is the one place where I have found. contracts.

There's nothing standard about them. They're different everywhere. And, you know, as you read the agreement, as you read the contract, remember that everything is negotiable, everything. And as you're negotiating that contract, ask for more concessions, ask for more modifications than you need in order to get what you really want. So ask for more than you actually need. And then having said that, I don't want you to.

overnegotiate either. I don't want you to overnegotiate and remove the property's ability to support his business and earn a living. Don't take away all of his income streams, but you want to be fair. Because, you know, if you overnegotiate, you may win. But just understand that that builds resentment if you do. And resentment is the last thing that you want in that particular relationship. Okay. So you got to, you want to negotiate everything to make sure that, you know, you're increasing the return on your investment as much as possible, but you don't want to steal their ability to earn a living as well, because I'm telling you, resentment is no good, especially in a long-term or long-distance relationship. You don't want that guy halfway across

the country resenting you. Okay, so make sure you pay your people well, especially when you find good ones. Number seven, drive by, drive by the properties that they are already managing. Ask for a list of properties. As many as possible that that property manager, currently manages. And, you know, unkept properties and loitering when you're driving by. That tells a lot about how much attention those properties are receiving and what type of activities are going on in that specific neighborhood. I mean, dirt and debris and rough characters, those are red flags as they make finding quality tenants much more difficult. And when you've got, when you're talking about buying and holding, it's all about the quality

tenants. It's all about the quality tenants. If they're not paying the rent, that asset isn't performing. And those property managers are the ones that are responsible for finding your quality tenants. So drive by and take a look and notice the condition, notice the cleanliness, and notice, you know, the activity going on around the properties. Right? It's number seven. Drive by. Hey, trust your gut. This is a biggie. You know so much more than you think you do. I mean, if something doesn't feel right, investigate. If you expect something, inspect it. You'll find that your hunches are not only correct most of the time.

This is what's really crazy. Not only are your hunches correct most of the time, but they're often rather conservative, if that makes any sense. You know, as lucrative as rental real estate can be, it has its dark side as well. So frequently refer to tip number two. If you don't remember, that was adopting the mindset of slow to hire, quick to fire. Okay.

Trust your gut. Trust your gut. And if a lot of times you notice a little molehill, there's actually a mountain. Or you notice that tip of the iceberg is a giant chunk of ice underneath the surface. So trust your gut. Okay. I'm not saying that to scare you. There's great property managers out there that will never be an issue.

I'm talking about the ones that you don't want. Number nine, be direct in your communication and document everything. You got that? I want you to be very direct in your communication. Pull no punches. Don't sugarcoat anything. And I want you to document everything. And set that example and maintain a standard of clear and honest communication with

your property managers right from the beginning. Leave absolutely nothing open to interpretation. Leave absolutely nothing open to debate. And you do that by being clear, straight, and honest. with your communication with your property managers, even if it's painful sometimes. Got to be truthful and honest. And you want to document everything.

You want to leave nothing open for debate. Got it? Cool. Number 10, I want you to divide up your portfolio. I want you to divide that up. I want you to diversify your risk a bit. You know, once you've acquired more than two or three properties in a specific region or a specific area,

and you intend to continue purchasing there, like this is going to be part of your, wealth creation process, just like I've been doing. I'm at 138 properties now this week. And they're not all with one property manager. I want you to go look for a second property manager, at least for your future acquisitions. Once you hit that two or three property mark, you want to eliminate any single points of failure in your business, that one property manager.

If they're managing your entire portfolio and something happens with that property manager, guess what happens your portfolio? It's not good. I've experienced that already this year with 60 properties under one property manager. That's where I got the lesson for you. It's very expensive. It's very painful. It almost put us out of business.

But it gave us an invaluable lesson. You know, either you're making money or you're learning lessons. Because now through all six of our markets, we have no less than two property managers in every single market. We no longer have that single point of failure. It was a very expensive lesson. It definitely would have sent my son to at least two years at USC. That's how expensive it was.

But you know what? It's for the greater good because we took it as a lesson and we applied it. We learned from that lesson and now our business is that much stronger and that much better all for it. I'll tell you the whole story someday once the story is over. It's ongoing. But you don't want that single point of failure. you want to eliminate that. And by maintaining a balance of your portfolio between at least two property managers,

and three, if you can, if it makes sense for you, if you can find three good ones that you like, at least two, you really help cover your assets. And then also, here's something I've learned that I love this. And this kind of goes back up to number nine, being direct and honest with your communication, is keep no secrets about working with a second or third property manager. let your property managers know that, hey, you've divided up your portfolio and you're working with other property managers. You see, when your property managers are aware that they have competition, here's what you're

going to find. It's almost like magic. You're going to find that your expenses have a tendency to drop and the performance has a tendency to improve. It's like magic how that works. But you're just being honest and straight with your property managers, okay? this is your asset. This is your portfolio.

This is probably your legacy to your family. You need to protect it. And you need to manage it with fairness, but shrewdness as well. Okay? So I want you to diversify your portfolio amongst your property managers. Once you get to a point where you got two or three and your intention is to keep on acquiring, you want to eliminate that single point of failure in your business. and then, you know, once you get to, so maybe 10 or so, hey, it's time to start looking for a third one.

And then maybe it's actually start to, I have time to start looking in another market and diversifying that way as well. Okay? I want you to eliminate all single points of failure in your business. So if you notice something like, gosh, if this person drops out or if this system breaks, I'm going to be really hurting. You need to find a solution for that right now. Okay? That's what you, trust me. It's very expensive when that one little, that one little link in the chain snaps a lot.

a lot it's it can be devastating and I don't want that to happen for you okay so the real reason that I'm sharing these very expensive tips with you for free is because watching investors place limitations on their investing due to a few bad long distance experiences or long distance stories that they've heard about it really saddens me because it's unnecessary it could have been avoided and and it has nothing to do with the distance You know, we're here to learn a new way, actually the only way that's working today of creating financial independence. That's through a residual income. And the best shot you have at creating a nice, stable, and strong residual income is through rental real estate.

That's how 74% of our wealthiest 1% of our people do it. So if that's, if 74% of our wealthiest 1% is doing it that way, then it's probably the easiest way to do it or else 74% wouldn't have been doing it. That's like almost three quarters. And in the secret, it lies in selecting great property management. And now you have some of my best, my very best, real world tips to help you do it successfully. So there are no limitations on your investing. keep going and you can build something really awesome for yourself that you can enjoy while

you're still young enough to enjoy it and you can build something large enough that you can pass on for generations. It's your legacy. Got it? It's that important. A podcast about property management sounds so boring, doesn't it? But it's actually, it is the most important part of your real estate business. Okay, that's it for today.

Next episode, I'll be answering some of... your questions. And if you want me to answer your question, if you happen to have a question, a comment or concern that you'd like me to answer here on the show, please share them with me on the Epic Real Estate Investing Hotline

at 1-888-891-7203. 888-891-7203. All righty. Until next time, as a very wise person once said, Wall Street is the only place that people travel to in a Rolls-Royce to get advice from those who take the subway.

To your success, I'm Matt Terrio, living the dream. You've been listening to Epic Real Estate Investing, the world's foremost authority on separating the facts from the BS in real estate investing education. If you enjoyed this show, please take a minute to visit iTunes and share your thoughts. Thanks for listening. We'll see you next time here at Epic Real Estate Investing with Matt Terrio.

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