The Landlord Lens - Ultimate Real Estate Investment Tips with Erin Spradlin

Episode Date: April 16, 2024

In this episode of Be A Better Landlord, real estate agent, and consultant Erin Spradlin sits down with Krista to share the ultimate tips for real estate investors, from how to decide which property is best for you to settle the debate on cap rate vs. cash flow.Erin's YouTube channel  @erinspradlin_rentalconsulting Colorado Real Estate Podcast: https://open.spotify.com/show/4zYO417j6ZlqGy0MRKkfnc Erin's books on Amazon:https://www.amazon.com/stores/author/B0BLTDT2HT For more about Erin's consulting services & business inquiries: https://stan.store/erin_spradlin

I'm Krista and this is Erin and we're here to help you be a better landlord. I am here today with a very special guest. This is Aaron Spradlin. Did I say your name right? You did. Thank you for checking. Setting it off on a good note. Could you tell the audience a little bit about your experience in real estate?

Yeah. So I bought my first property in 2014. What's crazy about that is that it's, you know, only 10 years ago, but Airbnb was not as widely known. So at the time, my boyfriend, now husband and I were together and I was like, we're paying double rent, but we're not really ready to live together. So I put it up on Airbnb. And then that just changed the trajectory of everything. I had a renter within 30 minutes that was paying 100 bucks that night. And then my boyfriend at the time and I, we ended up actually doing a lot of rental arbitrage. And then in 2017, within a month of each other, we quit our full W-2s and went into real estate because we thought there was probably. a market for investors that wanted to invest off of Airbnb. But again, not a lot of people were talking about it at the time. So we started to do a really like a huge deep dive on the different city laws because the laws around Airbnb are on a city level.

So we did that for a long time. And then and so we're both real estate agents. And then in 2017, Denver changed their laws to ban short-term rentals unless it was your primary residence. So at that time, I switched into mid-term rentals because we had all these furnished places. So I started 30-plus-day rentals. And then since then in 2020, I wrote my first book about them. I'm now written three, and I'm a consultant primarily now for investors in the midterm, long-term, and short-term space. And I will stop soon. But part of the reason for that is just as a real estate

agent that worked with investors a lot, I saw a gap for people feeling nervous about, like, how do I run my numbers? And I want sort of a neutral but informed third-party opinion that is not a family number or my real estate agent, you know, like someone that can just look at the number. So anyways, that's what I've been doing. So you have a wealth of experience in all sorts of lease lengths that you've been in the game for a while. So I'm super excited to talk to you about some of the prevailing myths that are out there that maybe make people nervous to invest or otherwise seem to overcomplicate the situation. Yeah, a myth or, you know, an issue where I see investors working against themselves, a prominent one is that they have trouble believing

in good data. They have no problem leaving in bad data all day long so if you tell them, hey, the numbers won't work, people are very much willing to walk away, but sometimes when you have nothing but good data points where we're saying, actually these are the numbers, it will run, it kind of meets your objectives,

then people sometimes will come back to me and say, but tell me the bad stuff, tell me the bad stuff, and I say, well, just like I can't make up good data, I can't make up bad data, and that's why I think it's always smart as an investor to pull from third-party data sources, so that way you're not doing it just based off of your gut or a feel.

Because that's also something we see, like, people will say, I just don't know why anyone would come and rent here. And it's like, well, the data says that plenty of people do, you know, even if it's not necessarily an area that you might be interested in, the numbers are saying that people are there. So I think a lot of times people have trouble believing good data, and I think that's something people should become more comfortable with. And one way to do that is to run your numbers on an area,

a couple of places before you start to look, because then you'll have an idea of what's an outlier versus what's normal. I love that. So really getting informed and taking into context what's going on in that area and being willing to believe in something good. Yeah. And not just cherry picking to make something good, but really seeing the scope of numbers and saying,

okay, this could be something I could do. Yeah. Do you have any recommendations for sites that you might use or have your clients use? Because I know you do a lot of consulting and handholding to get people through these deals. But if someone wasn't local could not tap into your wonderful services, What would you see? Yeah. I mean, first off, I'm in total Excel, Google Sheets, spreadsheet, nerd.

Nothing makes me happier than like three hours with a Google Doc or Google spreadsheet. But the sites that I use for that are, you know, I look at Zillow and Rentometer.com to pull my long-term numbers and then use Zillow or Redfin to pull the cost of the house and then, you know, input them and then run the numbers. But really what I'm looking for a lot of times when I'm analyzing data is the cost of the property, the layouts, always two bedrooms or more, how much you would have to put down, which is typically 25% for an investor. Sometimes it's 10% if you've gotten a second home loan, and then the cost per square foot and then what your rental numbers are going to be. Those are kind of the high level things that I care about, and all of that information can be sourced from public sites. So whether that's Zillow or rentometer, that's where you even find it. I love that. Okay. So jumping into the data, looking at those key metrics, and that should give you a pretty complete picture on whether or not this deal is a good fit. At least we'll give you a framework. Sure. So I always recommend people, and we talk about this, we've talked about this before, about analysis, paralysis, and investors, you know, data is good to an extent. But then it becomes bad when it's working against you because you can't make a decision. And so I was just in a CPR class and we were kind of surprised by the cursory review that this.

the guy gave on CPR, we're like, we did this like 20 years ago. It was much more detailed. And he was saying part of the reason for that is because people won't act in a situation if they feel like I only retained 40%. So they're trying to really strip it down. Like these are the three things that you need when you're on the scene. And I think real estate investors could benefit from that too. You don't need to know it 100%.

You don't need, like, let's have three or four takeaways and three or four things that we're comparing and then make decisions off of that. because you could endlessly run your numbers. And we want to avoid that time as your enemy in real estate. Yeah, right? Some of these deals, it gets snapped up really fast and you have to be ready to commit. Yeah. In terms of mitigating analysis paralysis in real estate investing,

are there any particular metrics you would point to or things that you would say, hey, this is really something to look out for when you're dealing with clients or when you're looking for a deal yourself? Yep. And so I just did a video on this. And what I was doing in the video was first identifying what area you want to be. And so you're just going to ask yourself a couple questions up front, like do I want to locally invest, which I definitely recommend for first-time investors, try and make it as easy as possible, like a nice turnkey down the street, beautiful, right? But if you don't necessarily have the money to invest locally, then identifying areas that you want.

And some factors for that might be, where do you like to vacation? Where is your family? Where do you notice industry is going and that you think that that's a good investment? So once you identify a few areas, then pulling. the same property types. So that can be a single family home or condo, but having consistency across that. So a three-two for single-family homes or condos, and then pulling three properties out of the same zip code for, you know, each particular area that you're looking for. And then when you see one area beating another, then doing another three-by-three-by-three, three different zip

codes in that particular city. So for instance, I was just looking at Dearborn, Michigan, and I narrowed it down from Akron, Milwaukee, Dearborn to Dearborn. And then I pulled three different subcodes in Dearborn to see, okay, how far will my money go? And then what you're looking at is the total cost of the house, cost per square foot, and then also what your rental numbers are going to be. So, you know, what I found there is that there were some markets in Dearborn that were significantly more expensive than others, but the rents weren't much higher. So kind of went for the middle market there. Wow. The way you broke that down and really, you know, you start broader at this area and you are honing in with at least three properties to get to the root of where you want

your money to go and how far it can go. Genius. Thank you. I love being called a genius. Say it again. No, anytime. Any time. I think it's just so worthwhile to remind people that you can do all this work and really hone

in on what is a good deal for you. I think sometimes people get caught up in this idea of cookie cutter or I need to have like 10 plus properties. is how do you address that in your work? Yeah, well, first off, I think that, you know, so in the United States, 50% of real estate investors have 10 or fewer properties. And then the people that have 10 or more, I think, you know, there's a couple of probably very ambitious, successful individuals that are pursuing that. But for the most part, I think that's probably big money in corporations. I think most mom and pops are probably 10 or fewer.

And 10 is an arbitrary number except for the fact that your loan is, you know, once you hit 10, then it becomes, much harder. But I think in general, we just got that number because it ended with a five or a zero. So I think people need to start to question more what they want their investments to do and what that looks like. So I talk to investors all the time, some of my consultant clients that will still dad, like, I only have three properties. And I'm like, there is, there's zero shame in that, like, you know, 95% of the U.S. does not have a second property. So if you have more than a second property, you are ahead of your peers very much. So I think that, you know, just reevaluating how you want your investments to work for you. And for most people, and for myself included,

it's not some arbitrary number like 10. It's that when I retire, I want asset diversification and those homes are part of that. And so I only work as hard as I need to have asset diversification, but that's not 10, you know, that's whatever I feel like my income needs to be in retirement or even like for myself and I think for a lot of people in our generation, I'm not, you know, what I don't want to do is I want to have autonomy and freedom. And so the investments support that. Yes, really want to underscore that. Your investments should support that lifestyle.

You don't have to get wrapped up and just growing your portfolio because someone on Bigger Pockets told you to you. Yes. I'm just going to say it out loud. There's a lot of, and again, this is why I like TurboTenna a lot and why I like a lot of alternatives to bigger pockets. I think bigger pockets really service people when they're trying to get educated on real estate, but it can also work against them in this notion of 10xing things and even the Burr strategy. I'm not really a huge fan of for your first investment because general contractors get paid

a lot of money and the reason why they get paid a lot of money is because it is hard to organize people to show up on time, pull permits to do all these things, right? And when you're doing a birth strategy, you're talking about pulling equity out of a property that you're flipping, right? And so it's like now all of a sudden you're a general contractor. You've never even bought a property before. I mean, this is taking, this is biting off a lot, right, for your first investment. And so when it's my clients, I'm just like, let's make this as easy as possible because we want you to enjoy this and then you can graduate into harder projects. But if you have a property that you hate, that you lose a ton of money on that you fight with your spouse or your partner about constantly,

you're not going to be inclined to do this again, and ultimately that really works against you. Such a good notion. Like, again, just keep it simple. I liked your example of a turnkey unit down the street. How do you help investors evaluate different neighborhoods and different risk levels? Yeah. So it's interesting because I work a lot in the midterm space, right? So since 2017, that's really become a major focus of mine. And then obviously since 2020, I think, it's grown a lot because a lot of the urban centers needed more traveling nurses and also because of remote work, we saw a lot more with people looking for long-term furnished, which is what a mid-term rental is. It's 30-plus days furnished. And so people will come in and they'll say, I'm not,

you know, I'm near a hospital, but I'm not near a trauma one hospital. Will anyone rent my place? And you see this, you know, this is the latest trend as far as what people are focused on, but in the past it was some other metric for myself. I think that there will always be a, ton of people that are coming in as couples or singles. And basically, the number one metric I care about is the walk score. So you can pull this for free off of Zillow. And the walk score will tell you if you're close to a lot of industries. And those industries are not only a reason for people to want to rent your place because they have access to retail, restaurants, jobs, but also there's a lot of industries that are going to be employing that will also feed your

property. So I don't, when people are like, people always want the magic bullet or they want to know, you know, what area would you invest in? It's like, well, I think there's different reasons to invest in different places. But if I'm comparing properties in that particular market, I am looking at the best walk score. Yeah, higher walk score, better chance that people are going to come by. Yeah. I want to be there. Okay. So much good information delivered so far. Here's something that our audience asks about a lot. There's this idea that cash flow should be everything. That should be your go-to, number one metric. How do you feel about that? Is that true?

I feel bad about that. Yeah. I'm glad Warren Buffett has said it because obviously people will listen to him more than me, as they should. But he always, well, he has a quote that is my favorite position as buy and hold. And I think in real estate this should be true too. And I think people should consider the fact, I think people have gotten very understandably interested in the short term and midterm rental models where you're going to have higher cash flow, right?

And so there's an idea of like, I'm not ever going to buy a property unless I have cash flow. But also, we need to keep in mind that short-term showed up and, like, started to get popular around 2014. But up until that point, a lot of people made a lot of funny with long-term unfurnished real estate investments. And they did that on appreciation. So appreciation, this is like such an unpopular thing to say. But I think a lot of people, as they get further into their investing career come to believe this, is that appreciation accounts for 80%. of your real estate returns. When you're focused on cash flow, that's only 20%, and it's really a defensive measure you're fighting for that last 20%. So the reason why I don't like it is not that

cash flow isn't important, but that a lot of people stay out of the game because they're not hitting their cash on cash or they're not hitting their cap rate or they have this arbitrary idea in their mind that they have to make 500 a month or a thousand a month on cash flow. And it's like, yeah, but in the meantime, you could have made a lot of money. And an example of this is in Denver. So let's say that to be successful on your rental, you think that you have to make $100K on that rental. So if you have $500 a month in cash flow and you stayed rented every month, which is not going to happen, it would take you 16.5 years to get to $100,000. Whereas the Denver market, people were seeing it in two years, you know, and seeing it on condos, too. That's another thing. People talk about not investing in HOAs, and it's like, I think that's terrible advice.

Like, single family homes do appreciate faster, but there are a lot of people, including. including myself, I got their starts with condos. And I just think to advise against it or to talk about HOA boards, like, you know, they're just going to ruin your investment. That just hasn't been my experience. And I think more and more as we have families shrinking, there'll be demand for smaller properties with great amenities. And that usually parallels condos and townhomes. That makes a lot of sense to me. We do have an episode about HOAs. If you'd like to check it out, we'll link it. Because something that I found really fascinating when I was researching the topic is that more and more properties are being built in A2A communities. Yeah. It's really taking off. So

it's going to be harder and harder to find, as you said, places with nice amenities that are not in HAA. Not that they won't be out there. But again, when you're looking at different deals and you're trying to figure out where to put your money, you want to make sure you're getting the most bank for your buck. Yep. And I just think we should question some of these assumptions because they can, they can work against you versus serving you. So avoiding an H2A for a long time maybe worked against you, depending on how much money you had to spend in a market and also being overly fixated on certain metrics like cap rate, cash flow. In Denver, for instance, we've always been an appreciation market. If you were really like, I have to get this cap rate, then the Midwest always would have been a better investment for you than Colorado metro areas.

But there's a lot of people here that are very happy with their appreciation. And, you know, there's reason for that. And I think actually just to jump into one other myth that you'll allow me. I'm with investors and with real estate buyers in general. When we have had really low interest rates, we have a very competitive market. And so that means you're going to pay, you know, a certain amount over. You might give up your inspection rights. You know, you're in a bidding war.

Some people find that to be a major turnoff. And I totally understand that. They're like, I'm going to set this one out because I'm very turned off by the idea of a bidding war. But now that we have less of a bidding more because the interest rates have gone up. up, then it becomes a, well, look what I could have bought, look at what my mortgage could have been. So my advice to people on that is just pick whichever scenario you're more comfortable with and then move once you're in those scenarios. That way you're not always talking yourself out of it or going in a circle.

Identify, because I think it's fair to not be comfortable to make the most expensive, you know, the most consequential financial decision of your life in like four hours. Like, you have to do this and you just met me as your real estate agent. ran more than you thought and like, no big deal. I could see why some people don't love that, right? But just pick your lane and then make a plan to move forward on that because otherwise it's very easy to get in a pattern of putting it off. I think making a plan and understanding your options, that's what gives investors confidence to have the kind of storied experience that you've built for yourself and with your husband. Like I think that is so critical. People often lack it.

Could you explain your strategy when it comes to high interest versus low interest markets? Do you have a preference one way or the other for your own portfolio? We don't, right? And again, I think people, because I think there's been some education that has set people up to believe differently. But my experience and my belief, my husband's belief and a lot of the more seasoned investors we work with, they're not looking at the short-term numbers. They're looking at the long-term numbers. So it is different if you're planning on selling in two years.

if you're doing a flip. But if you're planning on buying and holding, it's not that big of a deal. There's also something called date the rate, marry the price. It's a little, have you heard this? I have. Yeah. So date the rate and marry the price means that when you buy a property, you can't ever change the price of the property, right?

But you can change the rate. So if rates continue to go up, if you're uncomfortable with the rate right now and you're afraid it's going to continue, or you're uncomfortable with the rate right now and you're thinking about how it used to be lower, right? If it never goes back down, then this is the cheapest the rate is ever going to be for you. And if it goes down, then in two years you can refinance and get into that. So when they say date the rate, that's what they mean is that you can refinance and get that deal in the future, but that price is locked in. So I think, you know, there's different strategies and I understand why people are uncomfortable with that.

But I think for ourselves or whatever, it's just like it's a long-term play. We are not overly fixed it on that. It's like a buy and a hold. And again, this is why I think stripping it down to the basics a lot of times helps people more than, like, analyzing to the last number because you're never going to get the perfect property. Someone will always have a better property than you. That's something that needs like just come to terms with that. Accept it. That is my philosophy.

Thank you so much for sharing that. If you'd like to find more of Aaron and why wouldn't you? She has a wonderful YouTube channel. She also has a podcast with her husband. if you'd like to dive deeper into any of the things we've talked about today. If people wanted to use your services, who qualifies and what do they do? Yeah. So I have worked primarily with investors, a lot of new investors, people across the long-term, unfurnished, midterm, and then short-term. And I would say with a focus on mid-term,

so furnished investments for 30 days or more. And I usually help people that are nervous about they're going to do their own self-property management. So they're either new to investing or they're letting go of a property management company and want to figure out how to do it. For a lot of my clients, I help them set up on the platforms and then vet and set their first tenant and hang out with them through the first week or two so that they have confidence. They have had their handheld. They have worked with someone that's done up before, and then they can feel confidence moving on. And so that's the majority of who I work with.

And then sometimes also I just take calls where we run the numbers. And sometimes I call it real estate therapy because it's a big decision and it's hard. and so sometimes you just need a second opinion on it. Love that. And do you work primarily with people in Colorado or are there other states you work with? Yes, thank you for asking that. So I would say 70% of my clients are outside of Colorado. So a lot of people outside of Colorado and then 30% in Colorado.

And I love them all. Beautiful. Well, check out Aaron's YouTube channel and her podcast. Reach out if you'd like some real estate therapy. And comment down below if you have any real estate therapy tips. TurboTenant is the all-in-one platform for landlords to manage their rental properties. From vacancy to tenancy, we have you covered with industry-leading tools and expert advice. Landlord better from anywhere for free at turbotenant.com.