HIGHLIGHTS FROM THE PODCAST:
1:47 – Introduction
2:52 – #1: Under Capitalized
5:29 – #2: If you don’t do your homework
8:09 – #3: If you’re too nice
10:49 – #4: If you have a short-term thinking
13:00 – #5: Commitment Issues
FULL TRANSCRIPT OF THE PODCAST AUDIO:
Matthew Whitaker:
There are times where you’d probably need to have the soft heart and give in, in certain instances, maybe do a resident’s demands or something. But then you also need to be able to disconnect yourself, and that’s kind of the thick skin, and think about this. Because as soon as you buy a rental property, you’re in business for yourself.
Spencer Sutton:
Right, right.
Matthew Whitaker:
And you need to be able to make objective decisions and investment decisions, and not let your heart always lead the way.
Spencer Sutton:
Everybody. Welcome back to another episode of The Birmingham Real Estate Investor. I am one of your hosts, Spencer Sutton, and I have with me, Matthew Whitaker. Matthew, welcome back to the show.
Matthew Whitaker:
Very glad to be here, glad to be back on the show.
Spencer Sutton:
And you guys can’t see Matthew, but he shaved his beard and he looks at least 15 years younger, which-
Matthew Whitaker:
Well, it’s funny, because that’s what my daughter said too. But she said she liked me better with a beard, so I don’t know if she likes me older looking, or what. But-
Spencer Sutton:
Yeah. Yeah. Well, that’s good.
Matthew Whitaker:
I think I like the younger look, I guess.
Spencer Sutton:
All right. So we’ve got a great episode for you today, and we’re just going to dive right in. We’re going to give you, the listener, our listeners, five reasons not to buy Birmingham rental property. Now this may sound strange coming from us. Obviously we’re a property management company. We love to help owners manage rental property. I mean the more rental property, the better for us, the better for our investors, but there are reasons why you shouldn’t invest in rental property. Matthew, do you agree with that?
Matthew Whitaker:
Well, I have to I’m on the show, right? I mean, you forced me to agree with you. I totally agree. I think one of the things I wish somebody had told me really early on was some of the things on this list. So I think having been there, having grown a rental portfolio, and still has a rental portfolio, I think it’s very important, kind of passed on these words of wisdom of ‘what would be a situation where this would not make sense for you?’.
Spencer Sutton:
Yeah, right, and I agree. I think back when I first started, some of these definitely would have… I should have headed some of these. I mean, I went in just guns blazing. We were already wholesaling houses. So I thought, “Hey man, I’ve got it all together.” So I just kind of threw caution to the wind. But we do talk to a lot of investors, right, from around the country who are interested in rental property. So I do end up having phone conversations where I talk about some of these issues, because I really want to find out if the people that I’m speaking with are really ready to buy rental property. And so let’s go through this list. I’m going to list them off, and we’ll just take one by one. And so I’ve got five reasons not to buy rental property. Number one is you’re under capitalized.
Matthew Whitaker:
Yeah. So not having enough money. I mean, this is kind of a no brainer, but I think a lot of people get in this business because the barrier to entry is so small. A lot of people get in this business and don’t leave themselves any margin. And one of the things I’ve learned over my career is that margin equals sleep, margin equals better decisions. And so, as you’re thinking about your rental portfolio, and growing your own portfolio, you want to make sure that you maintain some level of margin as you invest.
Matthew Whitaker:
Now, what is that? I mean, it’s different for everybody, but ultimately it’s about having enough cash or having enough capital, if at some point something bad happens, it doesn’t disrupt your day life. That way you can, again I get back to make better decisions, make more long-term decisions. I’ve seen some people get into trouble in this business when they basically are forced to make short-term decisions just based on cashflow. Kind of easy, tangible for instance would be, they really should replace the air conditioner, because it’s kind of outlived it’s useful life, but they choose to fix it. And then know it’s going to break again in a year. And Because they don’t have the money today they think, “Hey, maybe I’ll be in a better position in a year.”
Matthew Whitaker:
So maybe you invest $500, $600 in fixing it. Whereas it’s probably going to break again next year and you might as well have gone ahead and replaced it. And then you can start reaping the rewards of having a new air conditioner. But they don’t have the cash to do that. So just thinking about that, it’s pretty obvious that, when you’re in a capital crunch, you make different decisions than when you’re not.
Spencer Sutton:
Yeah. What are some other big ticket items that you would think, “Hey, rental property investors, you really need to be prepared for them.” And obviously HVAC, probably roof, I know that I have patched up a roof until it couldn’t be patched up anymore.
Matthew Whitaker:
I’ve left a tarp on a roof when I didn’t have enough money. I mean, it’s embarrassing to drop by your house. And I know the resident that lives in there is probably embarrassed that they’ve got a big blue tarp on there.
Spencer Sutton:
Sure.
Matthew Whitaker:
But if you don’t have the money, you don’t have the money. But I just don’t think that that’s fair to the resident. And honestly, it’s just not good investing.
Spencer Sutton:
Yup, that’s right. So under capitalized, number one. If you don’t have the money, and honestly I’ll just say this, having just more debt is probably not the best idea to just keep pouring, if you’ve financed the whole thing, and then you’re using debt for your cash. So under capitalized, number one.
Spencer Sutton:
Number two, if you don’t do your homework. Now this is something we talk about a lot, and there’re houses that I bought that I didn’t even know what I was getting into. I didn’t do my homework, and I am a local investor. So Matthew, talk a little bit about this one. Why do people need to do their homework?
Matthew Whitaker:
Yeah. If I go back to the first house that I bought, 1500 Cherry from you, Spencer, I didn’t do my homework.
Spencer Sutton:
That’s what I was counting on.
Matthew Whitaker:Â
I’m just kidding. I have made this the mistake. I think it’s pretty well documented on the show that we want people to come to Birmingham. And we really think that it’s important for you to come to the city where you’re investing and see it for yourself. And so some of our best investors come kind of pre-buying, and then once they start buying, they come on a fairly consistent basis to see what they’re buying. And I just feel like they made better decisions. They really understand the business much better. They really understand what they’re buying much better. You can kind of get the feel of the neighborhoods that you’re buying in. And so it just makes a lot of sense to do your homework by coming. Now, obviously do your homework also means this thing has to pencil out. It’s funny because I can make a spreadsheet look whatever I want it to. And almost fool myself into thinking, “Well, you know…”
Spencer Sutton:
If you torture the numbers enough, they’ll say what you want them to say.
Matthew Whitaker:
If I stay on the spreadsheet long enough, I can make it work. I can make the speil to work.
Spencer Sutton:
That’s right.
Matthew Whitaker:
And so you also don’t want to trick yourself. Jim Collins calls it, looking under the rocks at the squiggly things, like facing reality, and then being able to deal with it. That’s actually Ray Dalio. Squiggly things, Jim Collins, Ray Dalio is embrace reality and deal with it. But people get themselves into trouble when they try to kind of manifest reality into the rental property.
Spencer Sutton:
Yeah. And the point is, investors are eager, right? Especially in a hot market like we’re in, they want to find deals. And so you can trick yourself into straying outside of your buy box, or saying, “Well, that’s really not all that important.” But really I think understanding what your buy box is, coming into town, doing your homework, driving the streets. And doing your homework also means getting on the phone, talking with multiple sources about areas that you’re interested in. Don’t just take one person’s word for it. I think speak to several different people as part of it.
Matthew Whitaker:
Especially not the person selling you the property. Definitely don’t take what they’re saying at face value.
Spencer Sutton:
Yeah, yeah. A 100%.
Spencer Sutton:
All right, number three. Another reason why you shouldn’t buy rental property is if you’re too nice. And the truth is you need thick skin to be in this business if you’re going to manage your own property.
Matthew Whitaker:
I used to be a nice person and this business… I often liken it to if anybody’s ever seen Indiana Jones and the Temple of Doom, when the person reaches in and grab somebody’s heart out, I think-
Spencer Sutton:
That pulls it off.
Matthew Whitaker:
I think sometimes property management is actually done that to me a little bit.
Spencer Sutton:
It has.
Matthew Whitaker:
But I call this, using the term thick skin I think is very important. Because what you don’t want is, you want thick skin and a soft heart, which you don’t want is thin skin and hard-hearted. So some have some property managers, some real estate investors, are literally the meanest people I know. And sometimes, when I first got in this business, I would project out and think, “Golly, I don’t want to end up like that.” Kind of crusty, just mean. And I’m like, “Man, I don’t want to end up like that. That Just looks miserable. They live a miserable life.”
Matthew Whitaker:
But there is some element of this where you need to be able to make objective decisions. And I like to think of it as having thick skin and a soft heart to be able to invest. There are times where you probably need to have the soft heart and give in, in certain instances, maybe do a resident’s demands or something. But then you also need to be able to disconnect yourself, and that’s kind of the thick skin, and think about this. Because as soon as you buy a rental property, you’re in business for yourself.
Spencer Sutton:
Right, right.
Matthew Whitaker:
And you need to be able to make objective decisions and investment decisions, and not let your heart always lead the way. I’ve heard people call it, this is overused, but investing with your heart, not your head. And that’s where a lot of people get in trouble as being too nice and investing with their heart.
Spencer Sutton:
Yeah, and also just getting caught up in other people’s story or drama or whatever is going on in their life. I mean, it’s okay to be understanding and be empathetic. But again, like Matthew said, you’re running a business and you have to make business decisions. So being very objective is the best way to handle this. So if you have trouble saying no, if you get your feelings hurt very easily, probably owning rental property, especially in some of the class C class D areas of different cities, probably not going to be the best for you.
Spencer Sutton:
In that case, I would suggest you hire a property management company wherever you’re investing. So that’s number three. Number four is, if you have short-term thinking, right, this is… Owning rental property, the strategy for owning rental property, is get rich slow. It is not get rich quick. And so talk about just the problem with short-term thinking when you own rental property, Matthew.
Matthew Whitaker:
We had a guy on this show that basically said, “For five years I was buying rental property, and essentially I was like, am I making the right decision?” And it wasn’t for essentially five years of buying that things started to actually pay off. It started to get traction. If you think about it from good to great, the flywheel really started going, started to pay down a ton of debt. As rents rise it really starts to make this thing make sense. But if you are not bought in to long-term, if you’re thinking, “Oh, I’m going to replace my income next year, just off the cash flow of this business.” That’s a very hard thing to do.
Matthew Whitaker:
And so what a lot of people we see make mistake is they want to be a full-time real estate investor becuase it feels very sexy, but they give up their day job in conjunction with it. And now we’re very fortunate to have day job in the business, and be able to invest on the side, but they give up their day job. And now all of a sudden they’re having to eat out of the business. And then that essentially stifles the growth of the business. What I see the best investors do is have a day job, invest, invest, invest on the side, and grow that cashflow to the point where it’s almost like your business can’t afford to have you continuing to work at your day job. And that takes some long-term thinking because it’s not going to happen overnight.
Spencer Sutton:
And don’t get enamored with your initial spreadsheets that show you how much cashflow you’re going to be receiving every single month. Because then in your mind, you start going, “Well, I’m going to have this money so I can go and do this, or I can go purchase this, or we can take this vacation,” or whatever the case is. I mean, it’s never going to turn out the way you have on that spreadsheet. So you just need to be committed. This is a committed relationship. This is not a, hey, you’re just going to date short-term, it is committed.
Spencer Sutton:
All right, speaking of commitment. So that was number four. We’re going to get to our last one. Commitment is all about number five, which is you need to commit to owning 10 or more rental properties. Like if you’re not prepared to do that, then probably you shouldn’t buy rental property in the first place. So explain that, Matthew.
Matthew Whitaker:
There’s no magic number to 10, but the whole idea is that you own a bunch of them, so that it levels out the issues. It levels out the cashflow. Where we see people get in trouble is when they own one or two, and they have these seasons of feast. And then the seasons of famine when they’re having to send us money. And if you think about it, it kind of makes sense. It’s like an apartment, right? I’ve got, let’s say, 10 units in an apartment. And any one time one of them is vacant, and I’m turning it, and trying to lease it. But the other nine are making up for this one vacancy.
Matthew Whitaker:
And so it intuitively makes sense. Doesn’t mean you have to run out and buy 10 right off the bat. I would say it’s much more important to buy the right 10. And I think you can do that over the course of a couple of years. Because the first kind of season of owning a rental property, especially if you renovate it post-acquisition and prior to moving a new resident, there really is kind of the honeymoon phase where things shouldn’t break all that often. That’s not a blanket statement, because things do break, but you should be able to build this over time. And once you do that, the cashflow will basically grow because it’s feeding itself.
Spencer Sutton:
Yeah, agree with that. And anytime you have like two or three houses, and let’s say you have three, and two of them go vacant, it’s rough. Especially if you have a lot of work that needs to be done. But again, like Matthew said, when you’re owning 10 or more, it all evens out.
Matthew Whitaker:
So this has been a lot of fun, spencer. We got talk about the five reasons we wouldn’t buy rental property. And obviously these things are kind of area agnostic. So hopefully they can apply across your whole portfolio. Thinking through all these, I mean, I would definitely go through and just kind of make this as a checklist, and just make sure, “Hey, am I ready?” Especially if you’re just getting started, “Am I ready to do this?”
Matthew Whitaker:
Maybe use some of these things if you’ve already gotten started to kind of… Especially like buy 10, bots, now I have a goal, I know that I need to get to, to make this thing work. Just based on some people that have seen this over the course of… We’ve been doing this a long time, almost, we’re closing in on 20 years each.
Spencer Sutton:
Almost 20 years, that’s right.
Matthew Whitaker:
Yeah, so we have 40 years of experience sitting here. So what I would say is take a look at this list. We’ll be coming out with some new stuff in the future, but wanted to make sure that we were very transparent about reasons why people wouldn’t want to invest in rental property.
Spencer Sutton:
All right, that’s right. Well, thank you, Matthew. And listen, if you have not already subscribed, go ahead and do it. Share this one if you know other real estate investors who are just like you, who might need to see this list. And we will be back next week with a new episode, see you all then.
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