Episode 8: Investing in Single Family Rental Properties in the USA with Matt Bowles

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the Alt asset allocation podcast. Today’s interview is with mr. Matthew Bowles. Matt is a single family rental investing guru. His company, Maverick investors group is a fully remote turnkey rental investment company.

It helped people buy a cash flowing rental properties in the best us real estate markets. We go into great detail on single family rental investing in general, including more information on these investor advantage markets in the U S cap rates as well as the five profit centers of rental home investing.

I’ve known Matt for quite some time now. And we could talk about this topic for hours. It’s something I’m endlessly fascinated in, in this interview, we really try to drill in on why an investor might be interested in single family rental investing and what that process looks like to pick a market and then pick it property to invest in.

Enjoy this long conversation with Matt Bowles.

Good morning, everyone. I’m here with Matthew Bowles.

He co-founded Maverick investor group in 2007, which is a fully remote company to help people buy cash, flowing rental properties in the best us real estate markets. He’s the GoTo man for turnkey real estate investing.

I asked them tons of stupid questions all the time. So I’m excited to have you on welcome Matt

Matt: [00:01:35] Ben. So good to be here, brother.

Ben: [00:01:37] It’s good to see you as well. It’s, it’s weird. Yeah. That we’re in different places, but, you know, it’s just that it’s the new time.

So the last interview that we did was me interviewing you for my show.

And we did that interview on a boat in the middle of. Was the Mediterranean sea where that was

well, yeah, basically. Yeah. So that was a, that would have been an April, 2019. Right. So I didn’t give your full intro, but Matt is actually also the host of the Maverick show, which interviews, well, you know what, let’s just start with your bio.

I know you. Well, let’s let my listeners get to know you a little bit better.

Matt: [00:02:14] Let’s start with your background. Yeah, man. So, I mean, depending on how far back you want me to go, birth, listen,

Ben: [00:02:21] keep it relevant for the podcast,

Matt: [00:02:23] willing for the guests. Okay. So founded an African investor group in 2007 as a fully remote.

Company. So all of our staff are fully remote my business partners and I are fully remote. and that actually really benefits the buyer clients that we have as well. And the reason and the way that we founded our business model and why we did it like that. Wasn’t it just so that we, the partners could go and interview people like you on a boat then.

but it was also because we wanted to create a real estate brokerage model. It was fundamentally different from a traditional real estate brokerage. We wanted to number one, serve individual real estate investors exclusively. So we are a licensed real estate brokerage. I’ve been licensed since 2007, and we have never listed a property on the MLS.

We have never helped the primary homeowner find a house to live in. We don’t do any of that traditional stuff. All we do all day long has helped real estate investors buy residential investment property and. The reason why our location independence is important for our clients is because what happens traditionally in a traditional real estate.

A company, whether it’s a real estate brokerage, whether you’re a real estate developer, whatever you’re doing, typically it’s geographically specific operation, right? So if you’re real estate licensed in city, that’s the only place you can. So real estate, the only place, you know, where the real estate is, you don’t have access to any other real estate.

So even if you were to have an out of state and best, or be like, Hey, is your market a good place to buy real estate in? You have to say yes, because it’s the only market you have the sell. And so then what you ended up doing, and this is the same for real estate developers or home builders or anything.

Right. Put the client first and to say, listen, real estate markets. That’s not a big one big national thing. Real estate markets or local real estate markets go through cycles. The most investor advantage do U S real estate markets change over time. Right. So what we want to be able to do is first of all, help help our clients buy in the most investor advantage real estate markets at the time that they’re buying.

So if you were to come to us today, that’d be a very different answer than if you came to us, you know, nine or 10 years ago, right. In terms of where to buy. The other thing is that we want to work with all of our clients over the longterm. Right? So anybody that comes into the door be like, listen, We are here to help you build your wealth through real estate.

The ability to portfolio of cash flowing rental properties over time, and to be able to diversify that into buy them across markets, to own them in different markets. And to give you that diversification option, which is typically not available with real estate. Right. So that was our model. That was our knees.

That’s how we came onto the scene. And we’ve been doing that for 30.

Ben: [00:05:01] Yeah, that’s awesome. And it actually, I mean, with COVID, we’re recording this mid August, but lots of companies are going virtual, this big push. So it’s really like, you were a trailblazer in this, you know, fully remote. We’re going to take something like real estate that typically is your network in this.

This market and you know what, we’re going to spread it out across. So we can jump into these investor advantaged markets as you call them.

Matt: [00:05:26] so I’m curious,

Ben: [00:05:28] what is the process? Where

Matt: [00:05:29] are.

Ben: [00:05:30] Walk me through the process of entering a new market. How do you identify these new markets? You have a number of them right now on your website, but what does this process look like when you’re looking at the entire us and saying, we want to look for investor deals.

This is a potential market. Let’s let’s start sourcing deals

Matt: [00:05:51] there. Yeah. So there’s really two components of that. One is the supplier. In that market. So we are not like finding a random deal on the MLS and you know, how they go, yeah. Just come into this market and buy this deal off DMLS and then fix it and renovate it and do this and have all this scattered stuff.

What we’ve done is we’ve created a business operation where we build relationships with separate professional. Well, capitalized real estate companies on the ground in these investor advantage markets. Okay. So they are multimillion dollar independently, capitalized. Enterprises. And what they do is that they are the ones that are buying properties at scale, they are buying distressed properties, right in volume.

They are using their own construction crews to renovate those properties and a full scale professional operation. They’re buying all of their materials in bulk when the property is acquired. And it’s renovated and they lease it out to a qualified tenant who is an in place. And they’re either, usually they have either a vertically integrated property management solution or a professional third party, local property management company.

Once it is performing at that point, they will offer it. Through Maverick investor group as an off market, get private buying opportunity clients. So this is stuff that you’re not going to see on the MLS, like a regular real estate agent in that market. Isn’t going to be able to find you these properties or that kind of stuff.

So we, so, so one piece of selection is making sure there’s a supplier that can perform that operation for our clients and provide that inventory flow. The other part of it is the market analysis, right? In terms of what goes into. An investor advantage real estate market. Right? And as I mentioned to you, the markets have changed over time.

So we’ve helped clients buy real estate and over a dozen us real estate markets, right. And real estate crash and right at the great recession, I was in nine, 2010 coming out of that at that moment in time, you know, advantageous, real estate to purchase was in markets like Phoenix, Arizona. Right. They have all this new construction, right?

I mean, they’re going up. And then you just had this catastrophic crash with all this drama. And so what happened was you could go in there at that time and buy these. Almost new properties. I mean, literally built within the last five years, right. At a cost that was below the builder replacement cost.

Like builders couldn’t even build it at cost for what you could go in and buy it for. Right. And the rents had not plummeted. Just the housing market. Plummeted. People still need a place at the rent. Right. So you’re still getting good rents and you’re just buying at crazy prices. Right. So 10 years ago it made a lot of sense to buy in a market like Phoenix.

What has happened since then, is that markets like that. Okay. These kinds of cyclicals sort of rollercoaster kind of markets, Phoenix has skyrocketed in price. Right? So our clients that bought their decade ago, like big crushed it, right? Like they locked in a fantastic price to rent ratio. So they were cash flowing gangbusters from day one.

And now they have all this equity. Right. So they can, I mean, the house literally doubled in value. I mean, like, it was crazy. Right. So now you can either. you know, sell it right. 10 31 exchange, which we can talk about in a minute, when we get to the tax benefits and buy, you know, one or two or three additional properties in another market, or you can do a cash out refinance, take out the equity and keep the property, right.

Or you can just sit there and just, you know, keep the same mortgage, just keep collecting your stuff and let it, let it go. So you have a lot of options and you crush it. But right now it does not make sense for us clients to continue to buy in that market. Because what’s happened is the home prices have gone up so much faster than the rents.

That way you have as a process of yield compression, right? If you’re paying a lot more for the property, but you’re not getting proportionately more rent, all that does is squeeze your capitalization rate. Okay. So your, your yield has just been compressed and it’s been compressed to such a point in Phoenix that it’s no longer advantageous to buy there.

And so, you know, we are helping clients buy in, in markets that are advantageous to buy in right now. Okay. and what we always do like to encourage our clients to do is to make your money when you buy, do not speculate, you’re not buying property. That is going to be. Unprofitable now, right? Or barely profitable.

Now in the home hopes that in the future, you will make a profit by, yeah, no appreciation I’ll do this or that. And you’re all, you’re all gambling and speculating. We don’t like to gamble. We don’t like to speculate. we like our clients to make their money when they buy. So a cash flowing asset in a market that is based on real estate fundamentals.

A lot of them are Midwestern markets. So are markets in Ohio and Pennsylvania and Indiana. And places like that, where the cashflow margins are optimal, right? But pre home prices are disproportionately, low rents are disproportionately high and you have population moving into those markets. Right? You have a lower than average unemployment in those markets.

You have lower than average cost of living in those markets. A lot of which makes these markets more recession resilient as well. Right. So right now, during the COVID period, You know, a lot of people are like, Whoa, like what’s happening with the real estate market. What’s going to happen with the real estate market?

Well, these places are more recession, resilient, real estate markets, right. that have weathered all of like the last year while some of these markets like Phoenix were declining, like 30%, 40%, you know, they were just crashing through the floor markets like Indianapolis or Harrisburg, Pennsylvania. They went down, you know, single digits.

You know, and then it went to that’s

Ben: [00:11:49] less far to fall, right?

Matt: [00:11:51] Yeah. Well, that’s true. Yeah. That’s true. Right. So these are more, but they’ve been going up in value, right? I mean the big going up, you know, 5% a year. I mean, they’ve been, they have been cranking up lately. Right. But they’re much more resilient when it comes time for market adjustments and stuff like that.

So, you know, so we’re getting folks into those types of markets so they can make their money when they buy and then not have to speculate on appreciation if it happens. Great. You are buying. You know, in the path of growth and in front of a lot of these demand trends, but if it doesn’t happen, you’ve got a minute number of additional profit centers that are already functioning in your favor.

Yeah,

Ben: [00:12:28] you’ve got, more of a buffer, right? If, if the numbers don’t work out perfectly in your favor. So I definitely want to go into more detail on these buyer markets, but I realize I want to take a step back the process, these homes that you’re putting people into as an investment, it’s a single family rental.

You’re buying it as a rental property as a rental investment. So just back me up. Or let’s back up a second. And what is the value proposition for an investor? What is the pitch to invest in these single family rentals? Whether it be through you or, or, you know, boots on the ground myself.

Matt: [00:13:05] Yeah. As an asset class in general, residential investment property is fundamentally unique for a number of reasons.

The first thing that stands out, especially if, if I know the listeners of your show are comparing different asset classes and different types of assets. And so when you talk about residential investment property, the first thing is that this is a multi-dimensional asset class. Okay. Are five simultaneous profit centers.

Then they come with this asset. Okay. So what I mean by that is normally, if you were just to buy a traditional say, stock or mutual fund, it doesn’t pay dividends, right? One possibility of making money. And that is if it goes up and down, right? So it’s purely speculative. And at the end of the dimensional, if it goes up, you make money.

If it goes down, you lose money. Very simple. And for that matter, though, if it goes up, number one, it has to go up at a higher rate than inflation. And number two in order for you to make, make money in real dollars. And number two, it has to go up beyond the rate of inflation enough so that you’re it’ll gain after you pay your taxes on it.

And then adjust for inflation is still going to be profitable. So it’s not just that your stock has to go up. It has to beat the rate of inflation. It has to be the tax rate and then you’ll make money in real dollars. And that’s only if it goes up. I mean, a lot of times it goes down right. As a lot of people just saw it with the volatility that we have seen.

So, so that is a unit dimensional asset and you have a very little control over it. You buy something and y’all hope and pray. It goes up, you know, and you just watch the rollercoaster right. With residential investment property. There’s a lot of fundamental differences. First of all, you’re talking about a hard asset, not a paper asset.

That’s very, very, very different. Okay. You are buying a physical asset with real actual, tangible value. There is lumber and brick and glass and granite and concrete and land. Right. You were buying a hard physical asset. So the first thing is that, you know, you’re not going to have a crook runaway with your asset overnight.

You’re not going to lose it in a stock market scandal. You know, it’s not gonna be confiscated like that kind of thing. It’s an actual physical house, right? You’re, you’re buying the actual deeded freehold real estate. So the other thing with that is that you had then have control over it. Okay. So that’s very different from buying into a real estate syndication or buying into a REIT or buying into some real estate back security.

So, you know, some of these very high profile real estate syndications, just to give you an example, I’m not going to name any specific ones, but there were some people who have bought into it with some kind of, you know, return arrangement or whatever. And then in April, some of these reasons syndication’s just said, yeah, we’re not paying out any money for the next 90 days.

Too bad, you know, like good luck. So you’re, you’re not in control. Someone else is in control of that. And there’s all sorts of things that can happen when you do that. Now, beyond that, beyond being in control of this asset and having a tangible assets, which by the way, you can always rent out because someone is always going to need a roof over their head, which you cannot do with your.

Gold or your, you know, whatever or other hard assets there may be, this is unique. Cause you can, I actually rent it, right? I mean, that’s, that’s your second profit center, right? Regardless of what the housing market does. And if it goes up and down real estate, it’s different from gold or an asset, a hard asset like that.

Even if you have your, you know, you have your gold, a bully on stacked in your closet with everybody and I can do it or rent it, you’re not gonna be able to generate income from it. Right. You’re just, you just have the potential that it is going to go up in value or I do against inflation or whatever.

Right. So. First of all, you have the hard asset, you have control, you have the real, tangible value, then you then, and you control it. So then you have your profit centers are the housing market appreciation, potential, right? Which things have continued to keep going. You know, COVID is not seeming to impact a buyer demand whatsoever.

Buyer demand is outpacing supply at this point and home prices are continuing to go up. So, you know, if that continues, you have that. But as I mentioned, whenever that drops off. Or plateaus or goes down. The thing about owning a rental property is that you have four other profit centers that are still going.

Okay. So first of all, you have your stream of rental income. Okay. So you’re going to remember, you’re going to buy in a market where you can get a positive net cashflow. Really important. Okay. So none of this stuff that we’re doing is in Manhattan or San Francisco or Los Angeles, right? I know, I know Ben, listen, I know you’re in Venice in LA right now.

It’s one of my favorite places in the world. And I love to live on Venice beach. I would rent a property from someone on Venice beach because it’s a great deal for me. It’s a great deal for a renter to rent on Venice beach. It is not a great deal. Or a rental property owner to be collecting income from a renter on Venice beach, because the price to rent ratio

Ben: [00:18:04] buying something at $2,000 per square foot, out here is perhaps not a renter investor advantage market.

Matt: [00:18:13] That’s exactly what I’m saying is people do it, but they do it purely speculatively. Right?

Ben: [00:18:18] I think that the appreciation of

Matt: [00:18:20] the, I hope it goes up if it does. I wouldn’t, if it doesn’t, I lose in the meantime, I’m gonna take a negative cash flow. Right. So, so the price to rent ratio is really, really, really nice favorable in that it’s California.

But if you go to some of these other markets, we’re talking about the price to rent ratio becomes very favorable. The gross rent that your tenant pays you every month that’s coming in. And that’s going to cover your property taxes. It’s going to cover your insurance. It’s going to cover your mortgage payment.

It’s going to cover it, right. A fee that you pay to a professional property management company so that you are not the one with the tenant, collecting rent, taking tenant calls, organizing maintenance, or dealing with that at all, because that is the job of a landlord. And you are an investor, not a landlord, right?

Investors make decisions and cash checks. Landlords deal with tenants, toilets, and trash, and you want to be the former, right? So you’re going to pay a professional property management company and your tenants rent is going to cover that then after do you itemize all of that stuff out what’s left over your, you got to factor in a vacancy and a maintenance assumption because these are the two.

Non-fixed variables. These are the variable expenses that you don’t know what they’re going to be. Right. So you can, you can itemize out quote from your mortgage company. You know what those are going to be every month. What you don’t know is how much vacancy and how much maintenance are you going to have, right.

So, I mean, you’re obviously going to buy at a high rental demand area and you’re going to get that from the property manager, that this is the approximate amount of vacancy and the tenants usually stay for this long and such and such. But you know, eventually when you own rental property, you will, and I have those two expenses, right.

Maintenance and make it. So you’re going to factor them in. And you’re going to put those an estimate for maintenance and an estimate for vacancy and advertise that monthly. So your tenants gross rent is going to cover taxes, insurance. If there’s an HOA fee, it’ll cover that your mortgage payment, principal and interest fixed rate mortgage payment, your vacancy and your maintenance assumption.

And then whatever’s left over there. That is your positive cash flow. Okay, so that’s your second profit center. Your third profit center is the fact that remember I told you that, or tenants rent is covering your mortgage payment. So yeah, even if the property that you bought, let’s just say did not go up and back value.

They singled dollar beyond inflation for 30 years. It’s never happened in the history of real estate, but let’s say it happens with your real estate on that property free and clear anyways, cause your tenant paid off your entire mortgage. Can you build all that equity without market appreciation? Right.

So you have that cranking for you then your fourth profit center is the fact that residential investment property is the most tax advantaged asset class in the United States by far. Like, they’re not, I don’t even think there’s really any close contenders to that. And the way that the tax benefits work, I’ll just share a couple of them and I’ll share them sort of high level, obviously.

no individualized tax advice here consult your CPA about your individual situation. Applicable law. My lawyers would be proud of me.

Ben: [00:21:24] Nice, nice disclosure.

Matt: [00:21:25] you know, like that, just like, yeah, but basically the way it works is this, the government provide housing for other human beings in the country, so they don’t have to do it.

Right. And they are going to heavily incentivize you to do that through extraordinary tax benefits. So the first one is that you are allowed to depreciate the. Structural value of your property, even if, even if it’s going up in value. So you can’t depreciate land, you have to break out the value of land, but let’s just say then for easy numbers that your property was $325,000, and you determined the land was worth $50,000.

You broke that out and you determined your structural value of your property was $275,000. Okay. That’s called you depreciable basis. So. The government says you can depreciate that basis over 27 and a half years, even if your property is going up in value. Okay. So that is a $10,000 loss. We call it a Phantom loss because you didn’t actually lose anything.

It might’ve gone up in value. Okay. But you’re allowed to take a $10,000 loss there and use that as a write off against. Other forms of income from real estate. Okay. So for example, all of the cash flow that you would collect from your rental property, let’s say, which would be normally taxable. Okay. You could write all of that off.

Against this depreciation loss and pay zero tax on the cash that you were collecting. So if you had $10,000 in cashflow on that property, let’s just say you had a $10,000 loss you’re writing off against it and you paid no tax. Well, if you’re in the 33% tax bracket, let’s say right. That’s $3,300 a year.

That you would save in taxes. So here again is where you do your before tax versus after tax right assessment, which you need to be doing when you’re comparing assets. Right.

Ben: [00:23:21] So I get more and more important as these yields are squeezed, right? Then your, your after tax versus your pretax is going to get.

Oh, so important. So sorry. Continue.

Matt: [00:23:31] That’s a hundred percent correct. So, you know, I say that for people that are looking at these different alternative assets, right. When you’re looking at what is my return, and you’re asking about what is my return, make sure you’re looking at that after tax return.

Right? Cause that’s, that’s where real estate really has this kicker. Is the tax benefits there. Okay. So, and then, I mean, you could even go, I’ll just give you a sort of a, an example about, you know, some of the really next level tax benefits of real estate that you can get. If you can qualify for the real estate professional status, which I’m not going to go into all the details about that now, but it’s basically, you know, you have to spend at least 750 hours.

basically about 15 hours a week, or so on the active trader business of real estate, without spending more time on another job, you know, this kind of stuff, there’s various qualifications, but you can think you can just be an investor and there’s ways to qualify for this. but if you can qualify as a real estate professional, the government allows you to write all of your depreciation losses against them.

All other forms of income, even ones that have nothing to do with real estate. And if you’re married and filing a joint tax return, only one of the spouses needs to qualify and they can write all of the real estate losses against all of the other spouses income. So I’ve got a buddy who is a physician, he’s a partner in medical practice, right.

He’s not trying to quit his job. He loves what he does. Right. He’s crushing the game. His wife right now is. You know, stay at home mom, taking care of kids, real estate. They’re going to get, they’re going to get her to qualify as a real estate professional, right? Because she’s going to be looking after them, the properties that they’re buying through Maverick, right?

Cause they’re going to buy a whole bunch of properties through Maverick. She’s going to be dealing with them. Dealing with the property managers was doing all this kind of stuff, whatever to hit those check boxes for the real estate professional qualification. I mean, that’s just like massively enormous.

And by the way, if anybody makes less than a hundred thousand dollars adjusted gross income, you can actually take up to 25 grand in real estate losses against your salary as well. and then that phases out from 100, 250,000 and then above 150,000. And you don’t qualify for it, unless you get this real estate professional status and then.

Unlimited. It doesn’t matter how much money you make. So there’s some crazy stuff like that. But the other piece of it, the other huge tax incentive for real estate is what’s called the 10 31 exchange. 10 31 is the number in the tax code where this provision is it’s called a like kind exchange. And basically what that means is when you let’s say you hold it property.

So let’s say my clients that bought back in Phoenix in 2010, right. I actually have a, a client right now that bought in Phoenix 10 years ago. And right now he is buying two properties in Indianapolis, actually. and. What he is doing and what a, what a lot of our clients are, are doing right, is that they are, when they’re diversifying, sometimes they’re just increasing their portfolio buying more.

But when you bought in the market like Phoenix, 10 years ago, and your property literally doubled in value, some of those clients are selling their property. Through this 10 31 exchange provision. And basically what it means is, you know, there’s a, there’s some compliance requirements that you need to do.

but when you set the proceeds go to a qualified intermediary, so they don’t go into your pocket, you don’t touch them. And then you reinvest them into other properties. So you can like sell one and buy three, right. Something like that, or sell one to buy one, or like there’s all, all, however you want to do it.

But as long as you go through these compliance requirements, When you sell that property, it literally doubled in value. You do not have any capital gains tax or do you appreciation recapture that you have to pay at the point of sale? It becomes indefinitely deferred. Okay. And you can continue to 10 30.

You want to exchange your properties and do this and indefinitely defer both capital gains and depreciation recapture all the way until death, which point when your heirs inherit the property is a brand new basis and nobody ever has to pay the capital gains tax of the depreciation recapture. From any of those properties.

Ben: [00:27:34] That’s amazing. And that’s, that’s one of the things that’s always attracted me to real estate, right? Like all of these tactics loopholes, and it’s not, you’re not doing anything illegal. You’re not doing anything fishy. You’re playing within the guidelines and the rules that exist. And like you said, it’s the most tax advantaged asset class in the U S and these, these rules just exist to let you keep.

More of your money, like in the real estate market, right?

Matt: [00:28:00] Yeah. They, I mean, that’s really important to be clear about that. When we talk about and use words like tax loopholes, right? We’re not talking about like some bizarre esoteric provision that some dudes stayed up late at night reading. It’s like, ah, ha they forgot this one.

I’m going to utilize it. Right. We’re talking about, if you do this for us, meaning you create housing for Americans to live in. You know, you’re going to put your money in the house. You’re going to offer it for rent. You’re going to create housing for people in the United States, so that we, the government don’t have, I have to do that.

We are going to heavily incentivize you to do it, and this is how we’re going to do it. We want you to buy more real estate. We want you to offer more housing. We want you to do this, and this is what we’re offering you. So that’s a very clear, heavily promoted incentive. so there’s that now the fifth.

Profit center then that is one of the most interesting and compelling ones and the least understood about real estate, which I want to go into here because I think your listeners are gonna appreciate it is the, not just inflation hedging benefit of real estate, but you can actually truly profit from inflation.

Ben: [00:29:15] Explain why locking in that, that rate of inflation, right?

Matt: [00:29:19] Yeah.

Ben: [00:29:19] So, so,

Matt: [00:29:21] so here’s the deal? I mean, yeah, I mean with inflation, I mean, it’s, it’s basically, it’s important to understand that place and I’m sure listeners are at different places with their understanding of this. And this may be very elementary for a lot of people, but, you know, just as a basic primer for inflation, it basically means that.

The amount of money that you have today is going to buy you less stuff than the exact same amount of money would have bought you 10 years ago. Okay. The value of the dollar is going down. All right. So over the last decade, The official rate of inflation has been like 19.2% or something like

Ben: [00:29:59] skewed.

Right?

Matt: [00:30:01] Yeah. I’m just talking about the official rate. There’s a lot of people that think it’s significantly higher than that. Yeah.

Ben: [00:30:07] Bring that out. Right. It’s like healthcare and education and everything else is done. Sorry.

Matt: [00:30:12] Continue. Yeah. So without getting into that discussion, let’s just take the very conservative position that let’s just say inflation was 20% over the last 10 years.

Average is 2% a year, right? That means that if you stuck a hundred thousand dollars under your mattress 10 years ago, and you pulled it out today, you’d have the same number of dollar bills there. Right. You’d be like, Oh, it’s all here. Nobody stole it. But it’s only going to buy 80% of what it would have bought you if you’d spent it 10 years ago.

Right. So w w what’s happening when you stick money under your mattress is you’re losing. Real value, right? You’re losing money in what and what are called real dollars. Right? So you have the same number of nominal dollars. You counted them, you made sure, but you have less money in real dollars. Right? So, same thing as you put your money in a savings account and you had a 1% interest rate and it’s like, Oh, look at that.

You know, the power of compounding interest. Now I have $111,000. You know, look at that. I put a hundred thousand and I got a hundred left. Right. You still lost money in real dollars, even though you had your money in an interest bearing compounded savings account. Right. So. With real estate. Okay. When you buy a rental property, you have two things going for you that are indexed to inflation.

One is home prices because home prices rise with the rate of inflation. Right? And number two is rents because rents also rise with the rate of inflation and you’re able to renew your lease with your tenant. Every year. And you’re usually able to raise that lease amount about 2%, keep pace with inflation every single year.

Okay. So while other people, you know, inflation is eating away at their savings, it’s eating away at their nest egg or their, whatever their investment was, is just. Stripping away at it. You are having your home price go up with inflation and you’re having your rents go up to inflation to keep pace with it.

So that’s what I would call sort of an inflation hedging benefit, where you’re keeping pace with inflation and you’re not losing money, but if you take out a 30 year fixed rate mortgage, you can actually profit from. Inflation, if you lock that in now for 30 years, and this is really the most amazing thing.

So, you know, the most part about it. And it’s important to understand also that real estate in the United States is not only the most tax advantaged asset. It’s also the most debt favored asset. Okay. A bank, someone else, right. Is willing if you’re a qualified, you know, US-based buyer. Okay. And you qualify for a regular conventional mortgage, right.

Then somebody else is saying, I will give you 80% of what it costs to purchase that property. You just put up 20%. But even though you only put up 20% and I put up 80%, you get to keep a hundred percent. Of the appreciation, right? So if you buy a property for a hundred thousand dollars, let’s say, right, and you put 20% down, you put 20 grand down.

And the bank puts 80% down and that property goes up 5%, let’s say, right? So, and this is what kind of this crazy discussion about, Oh, the stock market goes up more than the real estate market. Look at that. The S and P 500 went up 8% and real estate only went up 5%. You have, but you only put $20,000 down.

So if you only put down 20 grand and it went up from a hundred thousand to 5,000, You don’t just get 20% of the appreciation. You get a hundred percent of it. So now you have thousand dollars return on your 20 grand. 20% because the bank takes none of the appreciation and you take all of it. So now with the power of financial leverage, you are able to get returns that are just gonna start going up significantly.

So that’s the power of financial leverage in general. So how does it work with inflation right now? You have some of the lowest mortgage rates in history. Okay. Our clients are getting. Around 4% now a rental property mortgage is of course a higher interest rate than a primary home. Okay. So if you see these primary home rates in the newspaper, that’s not what we’re talking about, but let’s just say a 4% interest rate right now.

What you’re doing though, is you’re locking in that rate for 30 years. Okay. And again, the same, the same principle applies here. So if the property goes up 2% with inflation, Right. You are getting all of that, right? So if you’re, if your cashflow on this hundred thousand dollar property, you know, was like, You know, whatever, you know, net, net, after all the stuff we talked about it, this and that let’s say it was like $250 a month was left over after your mortgage payment, after your, all this kind of stuff, you had $250 a month coming in for this thing.

Well, if you keep raising that rent present 2%, 2%, 2%, right? Over 10 years, you eventually raised the rent. Let’s just say it goes up, you know, 10% from, it was a thousand dollars a month, let’s say right. A hundred thousand dollars property rent for a thousand bucks a month. And now. You’re renting it for 1100 bucks a month.

You’re like, Oh, well, you know, is that, is that really like a huge increase in, you know, from a thousand bucks to 1100 bucks over a number of years? Well, if you were only getting 250 bucks a month cash flow, and now you’re getting 350 bucks a month cashflow, that is a 40. Whatever that is right. 40 something percent increase in your net cashflow, right over that 10 year period.

So of interest rate was if inflation was going up 2%, your cashflow went up 40%, right? Your net cashflow. So, and the same is true with it. With the house price, your return is going up significantly more than that. And the other thing to remember is that when you take out a mortgage, you are borrowing money.

In today’s real dollars. You are borrowing money in 20, 20 real dollars. That’s what the bank gives you. All of the money comes in real dollars, but they don’t ask to be paid back in inflation, adjusted dollars. They only asked to be paid back in nominal dollars. Right? So as you’re paying the bank back over the next 30 years, you’re paying them back in future diminished, nominal dollars that are worth less than what you borrowed.

So you are profiting and the bank is losing. So if you can lock in a 30 year fixed rate mortgage right now. As inflation goes up, right? I mean, the fed can double the money supply, triple the money supply. And the whole world was like, Oh my gosh, what’s going to happen with inflation. And if you’re sitting there with 30 year fixed rate mortgages on your rent, right.

You’re like, bring it on. Cause that’s all profit for you. Yeah.

Ben: [00:37:12] I mean, this is, this is the power and some of the reasons why we’re in the situation we are, because it’s so incentivizing to over leverage yourself, you know, lever up to the eyeballs because it’s basically a sure thing. So, those five, five profit centers, this makes a lot of sense to me.

So we have housing appreciation, rental income, net, positive cash flow tenant covering the, mortgage. Tax advantages and then the inflation hedge, right? So these are the five profit centers of single family rental investing.

Matt: [00:37:46] Yes.

Ben: [00:37:48] That was very helpful. Thank you for going through that. so, a lot of with single family rental investing is choosing the right market and we’ll go into that, but I’m curious with assuming you.

Choose the right market. What are the disadvantages of single family rentals?

Matt: [00:38:08] What are the, what

Ben: [00:38:09] are the kinds of the landmines lurking? So some things that come to mind, obviously, you know, vacancies, you do it on the spreadsheet. You assume one month per month, per year, 8%, and you end up having massive vacancies.

So this is a product of choosing the right spot, having good property manager, having a desirable location, all of these things, some other ones that come to mind or. If you’re going to sell this property in less than 10 years, most of what you’re paying is interest only, and you’re not paying down a lot of principle.

You have liquidity, you have high transaction costs. Additional costs convince me that real estate is, is, is not a good investment.

Matt: [00:38:49] Th th there’s a lot of different sort of. Nuances here, you know, in terms of how to think about this. Right. And also there’s the question compared to what are we comparing it to real estate backed securities?

Are we comparing it to, you know, cryptocurrency and bars of gold bullion and like, you know, I mean, like what are we comparing things. Got me.

No,

Ben: [00:39:12] that’s a, that’s a fair question. And anytime you’re investing in one thing, you have an opportunity cost of not investing in other things. So

Matt: [00:39:19] I, I traditionally have always leaned

Ben: [00:39:21] towards,

Matt: [00:39:22] stock

Ben: [00:39:22] equities bonds because they’re highly liquid. You know,

Matt: [00:39:26] the reason why

Ben: [00:39:27] I. Live in an

Matt: [00:39:28] Airbnb it’s pretty easily.

Right. So let me, so let me speak to that. I think the, the, the illiquidity thing is, there’s two sides to that, right? The one side is, yeah. if you wanted to sell your rental property tomorrow and cash out tomorrow, you wouldn’t be able to do that. It would take you, you know, 30 days, maybe more kind of thing.

So it is less liquid than the stock market where you could call tomorrow on the phone at 9:30 AM and be like, sell it all, man. Like give me my cash. you know, whatever. so you could say, Oh, that’s an advantage. I like the liquidity that I have in the stock market and being able to access my capital on an hour’s notice.

Okay. Well, let’s look at the other side. What is the downside of that liquidity? The downside of that liquidity, Ben, that’s something crazy in the world can happen. And all of a sudden, everybody sells and your stock just dropped 20%. Your entire portfolio is worth 20% less than it was yesterday because it’s so liquid.

That doesn’t happen in the real estate. You don’t have a one day 24 hour drop in price that goes 20% down because it’s less liquid. Right? So one of the advantages of illiquidity is that the market moves slow, or it holographs exactly where it’s going. And it goes there very slowly and you can watch it and see it moving.

And then you can decide if you want to get into. None of this or get out of that and you can sort of do that at a much more relaxed pace, and you’re not going to get that crazy stock market. Like you wake up like, Oh my gosh, I lost 40% of my 401k today. Like that doesn’t happen in real estate. Right. The downsides, as you mentioned, Which you need to, so, okay.

It also depends. I mean, this one also, I want to clarify too, when we’re talking about risk, because there is a giant, giant, in terms of, I mean, let’s break, let’s break real estate out a little bit into some of its component parts, right? So one, there’s a distinction between commercial and residential.

Okay. Commercial real estate right now. I gotta be honest, man. It is probably going to be in pretty big trouble, right? Yeah. I don’t know. I don’t know if you’ve seen this, but a billionaire investor, Carl Icahn is shorting the U S commercial real estate market. And he said it is his biggest position by far.

Ben: [00:41:51] I mean, I get it right. Like these, whose these offices massive fixed costs. They’ve been working remotely for months. I mean, you and I we’ve, we’ve known that these models work for years now, but like the rest of the world’s kind of catching

Matt: [00:42:04] up.

Ben: [00:42:05] Now I understand within real estate, there’s a number of suburbs

Matt: [00:42:08] there’s but there’s, but there’s that right?

There’s the declining demand for office. It’s the declining demand for in-person retail apartment buildings right now. COVID-19 then if there’s one defining trend of the COVID-19 era that is sort of coming to the surface, that may be like the defining trend of this era. It is the deed densification trend where people are moving out of crowded apartment buildings with shared living spaces and into.

Single family rental homes, right?

Ben: [00:42:39] They’re moving exoduses right.

Matt: [00:42:41] High cost. They’re moving out of crowded, urban kind of centers into suburban. Again, those, those detached single family homes, very, very high demand trend in the affordable price point. Let me address the risk question that you, that you asked because you didn’t ask.

Or more positive demands. but, but let’s talk about, let’s talk about that. So let me break this down further now, because there are different people that go about. This in different ways. And there’s some people that want to do it themselves and they want to buy, find a distressed property, renovate at least it, all this kind of stuff.

And there’s a lot of very high risks with that, that we help people leave and, and not have to deal with. Right. But I think it’s important to understand what they are in order to understand, you know, how to. Navigate them or circumvent them. Right. So if you’re trying to do that, there is a giant demands of upfront risk and buying distressed properties.

A lot of times you can’t even get in them. If you’re buying a foreclosure before you close on them, then you know, you’ve got to do all this construction. Well, first of all, you mean even acquiring them, right? You got to understand that if you’re trying to acquire a distressed property that has profitability potential.

You have to understand that you’re competing with multimillion dollar companies that do this professionally at scale every single day, and have systems and processes designed to take all of those properties. So, if you think you’re getting one property, it’s likely one that was passed over by those companies and you’re getting what’s left that they didn’t take.

So the potential to make that profitable is lower to begin with. Right. Then, you know, you’ve got the whole country production process. And if you’re not a professional, that’s doing this at scale with crews on a daily basis. And you’re just trying to like hire a general contractor to go in and do it for you.

good luck with that. but you know, yeah. Usually, you know, I can go over budget. It goes long, longer. You’ve got holding costs. You’ve tying up your capital or burning through your hard money that you borrowed to do this Costco over and all of this kind of stuff. So it’s actually something that, unless you’re professional doing this.

It’s actually quite difficult to do it profitably, but then once you get it renovated, then your initial vacancy rate to lease it to a tenant, maybe that takes longer than you expect it. More holding costs more, no cashflow coming in right. Then maybe you can’t lease it for as much as you thought you could.

Maybe you have on a bad rental projection to start with. And now your tenants paying a lot less than you thought they were going to. And now all of a sudden your projection, it looks totally different. From when you started out, all of that is very high risk for any person that is not a professional.

Even the people that are professionals, they factor in a certain number of their properties that are not going to hit those targets. I mean like, so this is all very high risk stuff. What we do is we help all of our buyers jump over overall. Okay. So in a turnkey real estate situation, the types of buying opportunities that we are introducing to our clients are already performing.

Okay, someone else has already acquired the distress property. They have taken all of the risks of doing the full renovation. If it went over budget, they ate that. If it went longer than expected, they absorbed those holding costs. If it took longer to rent it out, they absorbed that vacancy rate as the buyer is you’re to be able to come in and evaluate the deal.

And conduct your due diligence on the deal. Right? So in terms of risk mitigation, you’re going to be able to come in and say, okay, is the tenant in place? Actually, we’ll be paying this amount. It’s not a projected amount. It’s the real rental amount. Yes, they are. Here’s the lease. And they were qualified, right?

Yes. Here’s the qualifications that they went through. Is this the fair market rent? Does the property manager managing this believe that they could reliably lease it out to another tenant at the same rate, if this person were to leave within 30 days, right? Yes, it is the market rent. Okay, great. Okay. So now you’ve done that.

Now you’re going to send in your home inspector. Right. Was this property renovate in properly or all the big ticket, crap, all expense items, you know, re you know, reasonably new, if not brand new, and you know, all this kind of stuff. So you’re going to do that. Right. And you can do all of this from wherever you live.

Right? I mean, tons of our clients live in California and they buy in. You know, Indianapolis or Ohio or Pennsylvania or something like that. they don’t come out to see these properties. They’re welcome to sometimes they do. And that’s, you know, the sellers always like that, it’s fun. But, usually they don’t, you know, they just do all of this from afar.

They hire a third party home inspector. They, you know, and then of course, if you’re getting a loan, you’re going to have an appraisal done on the property because the lender ain’t Lyndon your money, unless they’ve done their own appraisal to make sure it’s worth what they’re lending on. Right. So that’s.

An ironclad sort of a fail safe there in terms of the market value. So, so all of these things you do and then only passes that rigorous due diligence regimen, where you have verified everything, then you close and you’re closing on a performing cash flowing asset and you cash flow from day one.

That’s the entry point with the types of properties that we’re dealing with. So your question now becomes what are the risks moving forward? Okay. What are the risks moving forward? And that’s an important distinction because a lot of people were talking about, Oh, real estate investing. They’re talking about all of that other risks that I just jumped you over the top of.

Okay. Right. So you’re, you’re avoiding all of that. You’re closing on a performing asset. You’re making your money when you buy it’s cash flowing from day one. now what are the risks moving forward? The risks are the, you know, the two non-fixed variable expenses that you’re, that, that all rental property owners are going to incur, which is vacancy and maintenance.

Okay. if you want to talk about, you know, what is a worst case scenario in terms of vacancy, if you have, if you have a tenant that let’s say defaults on the lease. Right. And then after defaulting on the lease, refuses to leave, refuses, to pay, refuses, to work with you amicably to come up with a payment plan, you have to evict the tenant.

if a tenant were to default on their rent, usually they’ll work with you in good faith. Like, geez, man, this happened, you know, whatever the work on a payment plan, If they need to get out of the property, usually there’s a cash for keys situation where they can get the tenant out. Like, so that’s, I’m just giving you a worst case scenario, right?

Tenant defaults, a tenant is, you know, not working with you in good faith to, to resolve the situation. it tends to work in, in bad faith. You need to evict a tenant. You need to go through that process. That’s a, that’s a worst case scenario, right? But your property manager is a professional at handling all of that.

Right? If your tenant doesn’t pay the rent, they send the, you know, usually it’s a five day kind of pay or quit notice. Then, then if the tenant isn’t responsive and doesn’t work out something right away, then boom, they start the eviction process. The markets where we are in our premise, rarely what are considered a landlord friendly markets.

So that even if you have to go through an entire eviction cycle, I mean, you’re talking like, you know, 30 days, you know, 45

Ben: [00:49:30] days now it’s a little, there’s an asterix with COVID obviously, but yes. Yeah.

Matt: [00:49:34] We can speak about that. Actually. We can speak about the COVID. We could speak about the cover of asterisk if you want.

I’m just talking to you about the asset class in general. Right? Right. and then you have that process and your property manager handles the whole thing. Late notices, evictions, legal, filing, you know, the eviction process, really new tenant in there and all that. Okay. But that’s obviously an expense to you.

It’s a, it’s a cashflow disruption. It’s an extra expense to go through and process, and then you have a releasing. A fee to get the new tenant in there. Okay. So that’s obviously a setback in terms of your yeah. Your cashflow, that’s it that’s a worst case scenario, right. Or, it takes longer to get someone in there and then you expect it it’s like the holiday season and people aren’t moving, like, you know, something like that.

Okay. but again, these are smaller things. So that’s why as with our clients, when they build their portfolios, you have an extended period with them. And by extended period, I mean like a couple of months, I mean, we’re not talking about like, Oh, it’s gonna be vacant for a year. You know? Like I’ve never heard of anything.

Like, you know what I mean? Like that’s, that’s not what we’re talking about. We’re in high rental demand areas and these are professional property managers and these are, you know, what are called landlord friendly markets. Right? So this is not something that’s dire and longterm. I’m just giving you kind of the worst case.

And then. repairs and maintenance is the other factor. The other expense that comes in there, right? again, it’s, it’s something where you’re going to do your home inspection before you buy. So the, what you really want. Yeah. Focus on is the big capital expense items, a roof, the roof, the hot water heater, the HVAC system, like that stuff.

That’s what your inspector is going to go in there. And he, and he, or she is going to tell you yep. You know, you got. Yeah, plenty of life on this and that. And the other thing, or, you know, because most of these are all going to be fixed and repaired. You know, there’s anything that comes up on the inspection report.

Then you can have that discussion. Of course you have an inspection contingency not to close. If you’re not satisfied with all this kind of stuff. So that’s all your protection, but you know, you’re not going to close on anything if you’re inspected it, doesn’t tell you that. Yeah, this is all, all the big items are good to go and all that.

Right. And then you’re just going to have repairs and maintenance, you know, which will happen periodically. which is what you’re going to factor into your expenses. And then, you know, but let’s say again, worst case scenario, one of the big items does break the inspector, whatever missed it or this or that.

And two years into it, like you’ve got to shell out more money than you expected for one of the big items or something. Right. And that’s going to set you back in terms of your cashflow. Right? All of these are, are what are called cash disruptions. Right. And, and sort of like your, your, your expenses. not being greater than your, you know, your, your income.

Right. But remember, that’s only one of the profits. Right. So that’s why we say, like, if you had a cashflow disruption, right? Like even if you had a really bad year where there was an eviction and it was this, and it was all that kinda stuff. That’s only a disruption to one of your five profits, probably a pack.

So a couple

Ben: [00:52:33] of other ones, right? If nobody’s paying rent, they’re not really paying down your mortgage.

Matt: [00:52:38] Well, that’s well, that’s, that’s true. The tenant isn’t paying your mortgage, you would, you would still be paying it. So that’s true. But you still have like, you know, the home price depreciation, you still have,

Ben: [00:52:47] the appreciation is a big one, right?

And I’m assuming you’re getting in the right market. You should have this. So that’s, that’s what I like about your services. That’s just an additional. Cherry on top, right? Like, and I like the analogy of jumping over the, these big risks. So

Matt: [00:53:06] the

Ben: [00:53:07] risks that you know is, well, is this a good place? And am I going to get some capital appreciation because that’s upside.

And then can I manage the vacancies and homeroom repairs and home repairs? It sounds like good inspection upfront, knowing that

Matt: [00:53:23] they’ve done a good job.

Ben: [00:53:25] And then the, the vacancies it’s. Being in a desirable place, making sure that you have these professional property managers, which it sounds like that’s one of the key services that you provide.

Matt: [00:53:35] That’s it? I mean, and just so people are really clear, you know, you’re talking about a tenant, that’s going to be qualified by a professional management company. Okay. So they’re going to verify the person’s employment, right? They’re usually gonna make at least three times what the rent is. They’re going to say, yeah, this person has this, you know, this is, you know, everything is good then.

So all that’s going to be verified. The person’s going to put up first month, last month, security deposit, this kind of stuff. So if the tenant defaults, you’ve got that security deposit, that one month that’s going to get dropped out to you. Right. So you’ve got ways to cover this. There’s also a tenant default insurance.

Product a, now that a lot of our clients are using where, you know, you can pay a fairly low fee for that per month. And then if you tend to just default and you’ll just make that. So you’ll, you can factor in that premium payment for the time kind of default insurance policy into your cash flows. Hey, I’m just going to pay for this.

Let’s just add that on as another monthly expense, you know, factor into the cash flow. And then if that worst case scenario hits. Instead of being vacant for a couple of months, if I had to go through an eviction and I was in that kind of less than 5% group where that happens, you know, if you’re that type of person that’s concerned about that, then yeah.

Just throw it in, add it to your expense and say, okay, cool. And now if this happens, I’m covered for four months of gross rent. If the tenant doesn’t pay, like no problem.

Ben: [00:54:52] Yeah. Yeah. That makes a lot of sense. And you just factor it in upfront. Right. And it’s it’s insurance. So it prevents that catastrophic loss of cash flow each month.

Matt: [00:55:03] Exactly.

Ben: [00:55:04] So I want to get into the buyer, vantage markets, kind of the due diligence checklist. But before we go there, just to kind of round off this single family rental as an asset class. What fundamental risks do you see to housing? So things that come to mind are like containerize prefabs tech, lowering the production of houses, lower population growth.

So, you know, less demand for housing is something I was thinking about with a friend the other day is baby boomers dying off and. Not as many young kids being born. So like, is there going to be a massive supply come online in 20 years? what fundamental risks do you see to investing in single family rentals as an asset class,

Matt: [00:55:53] man?

You know, on that question, I have to say, I feel like it’s one of the lowest risk things in terms of demand because everyone is always going to need a place to live. You know, when I look at the demand trends right now, even yeah, during this COVID-19 period, right. We see by, you know, rental demand and housing demands, prices of rents up.

Like, I mean, you know, all of this stuff is, is in a high demand sort of place right now. you know, it’s been interesting because we’ve been sort of asking this question. About the COVID thing particularly, is what we’ve been looking at and talking to different management companies about and, and, you know, looking into, and to be honest, there, there actually seems to be, yeah, increased household formation.

We’ll likely be coming out of COVID because first of all, as you know, people to get a quarantine together, you know, even if they’re normally roommates or whatever, they’re like, alright, we’re going separate ways that we’re getting separate houses. And for that matter, Ben, even people in relationships.

They’re doing one or two things. That’s what I was thinking of doing. They’re doing one of two things either. They’re making babies and, expanding the household and going to need to, you know, expand the household or they’re getting divorced from breaking up. Unfortunately, either way it’s more housing.

I mean, not to be, you know, but, but yeah, man, so like to be honest, every person will always need a place to live. They will always need a roof over their head. You know, no matter what, if there’s a, you know, there’s a global pandemic, okay. People don’t need to go to, they don’t need to go into the office.

They don’t need to go into a school. They don’t need to go. And like there’s things that you can actually, you know, perform in different ways. But you’ll always need a place to live. So what’s happened is the houses become like the center of the universe and the utility value of the single family home is actually increased because now in addition to sleeping there and relaxing there and, you know, eating there.

You are also working from there, you’re teaching from there or learning from there, you know, your, your, you know, your shopping from there, you’re doing all of this other stuff. So the utility value of the home has actually increased. It’s really become the center of the universe. And I think, you know, to your.

Larger sort of trend question. Like when you look at demand and population kind of they’re, they’re moving in and out of different markets, right? So you saw like population in a city like Detroit, you know, declining and people moving out, and then there’s more houses that, you know, that kind of a situation, right.

It’s not necessarily related to something will happen 20 years. I mean, it happens all the time when you have those kinds of population shifts. And so. Well, we are, are doing is we’re getting people into markets that have stable, high demand, you know, employment centers, population increase, lower cost of living that are attracting to have these magnets, you know, that are pulling population into them and developing sort of these healthy markets.

So,

Ben: [00:58:49] yeah, and I mean, I get that fundamentally. I get that, but I’m just, how has housing not been okay. Massively disrupted. And it still is a bunch of humans walking around with hammers and nails building this thing. And it’s not just, you know, three D print my house and the total cost to like, Erect this structure that is a roof over my head.

That is so important, goes from $300,000

Matt: [00:59:16] to $12,000.

Ben: [00:59:17] And this is, this is where my head,

Matt: [00:59:19] the tiny house movement.

Ben: [00:59:21] Then technologically disrupting the industry of home building. And suddenly it’s no longer a crew of 20 guys working for three months. It’s a dude with a computer and some injectable mold that just comes in and.

Prints out a house in 10 minutes.

Matt: [00:59:39] Well, listen. I mean, if that happens, then we’ll, we’ll pivot to that. I mean, the answer is that, you know, that’s one of the things where, what we’re talking about here is that people are not investing in a home building company. Right. People are investing in a finished asset and that’s important, right?

Because like, you know, when we go back to like where we started talking about like the situation in Phoenix 10 years ago. Okay. What happened when the home market crashed down so low that you could buy near new properties for lower than building replacement costs. What happened is that all the builders were sidelined, you know, and there was an, you know, and so, and so if you were investing in a, in a building company, a construction company to try to get this and that, like, those are all different things here.

What we’re talking about. Is an asset that has intrinsic value based on supply and demand though, based on supply and demand, it

Ben: [01:00:31] disrupted the supply side and suddenly it’s super affordable to bring more of these houses online in, you know, or suddenly

Matt: [01:00:43] unlivable places

Ben: [01:00:44] like. Phoenix Arizona in the summer suddenly becomes more

Matt: [01:00:48] livable,

Ben: [01:00:49] you know, and the build out a ton of houses.

I mean that disrupts the whole supply side of single family rentals

Matt: [01:00:57] overall. Well, listen, I mean, this is one of the, the agility pieces of our business model, right? If there becomes. An opportunity to acquire properties at more advantageous and more advantageous ways or more advantageous places or whatever, we can help our clients to do that.

Right? Like that’s the thing, we’re not a home builder. We’re not, you know, wedded to one particular style, one particular thing. We are a real estate brokerage. Then it puts the real estate investor first. So if there is something that comes on a new market, you know, it gets hot, a new housing style, you know, becomes, as you said, more desirable or more affordable or more this or more, whatever it may be.

We’ll be the first ones to check that out and help our clients buy into it.

Ben: [01:01:42] Nice. Yeah. Yeah. Well, I’m going to do some personal research on it. I lived in a shipping container for it eight months and it wasn’t so bad, you know, so you can modify those things pretty nicely.

last thing, and we’ve talked on that quite a bit, here and there,

Matt: [01:01:57] but,

Ben: [01:01:58] these investor advantage markets, you know, you talked about price to rent

Matt: [01:02:03] ratio,

Ben: [01:02:04] demographics, population growth.

Job growth, a number of these things. What are kind of the big ticket items that you guys are looking at before deeming a market investor advantage and putting houses online?

Matt: [01:02:18] Yeah, well, I think the first one is that the property has to make sense with the cashflow to cashflow at the number that you can buy it for and you can rent it for and.

You know, price to rent ratio is a, is a very high level metric, right? So the gross rent multiplier is sort of the real estate term for that particular metric, that evaluates price to rent ratio. But one of the reasons it’s important to go deeper than that is because all that factor then is the price.

And the rent. Okay. The gross rent and the price. Yeah. So, so what happens is, is that in different real estate markets, there are expenses that you will incur that can vary greatly. Okay. So the property taxes in a state like Texas compared with the property taxes or in like New Jersey, right. Compared with the property taxes in a state that is a fraction of that.

Is going to impact your cashflow. Okay. Just because you bought in this state, that means your property taxes are four times a day as much or three times as much or whatever it is, right. It’s twice as much. so you have to know what your expenses are. Similarly. there are certain places where you might have a very high insurance amount.

If you’re in a hurricane. Path or you’re in a particular place. All of a sudden your insurance can double and triple in price. Like if you want to buy a rental property here, dude, your insurance is going to be three times as much as it would have been if you’d bought over there. So what you need to do is understand that, what all of those expenses are going to be.

If you’re buying. A community that has a very expensive homeowner association. That’s all of a sudden now brand new, expensive, the property over here does not have at all, but now you have it cause you bought in this thing and now you have to factor that in, right? So when, if you buy in a place that could have the same exact price to rent ratio, But you bought in a place that has double the property taxes, you know, double the insurance amount and a HOA fee.

Now your cashflow is gone. Now you’re in a negative cashflow position, right? So those itemized expenses are very important to understand as well. And once you add in the itemized expenses, you get to what’s called net operating income. Right. And the net operating income should be after you factor in a vacancy and a maintenance assumption.

Now you have net operating income and when you take your annual net operating income, you divide that by your purchase price. You have, what’s called a capitalization rate. Assuming you have, I have the same. You know, reliable numbers in those. Okay. Don’t just take somebody else, be like, Oh yeah, the cap rate is this, you know, and then you look how they calculated it and it’s like, they forgot like the maintenance of the vacancy conveniently.

Right. so don’t just assume that when someone says cap rate that they have calculated it remotely, similarly to how you calculate it, put everything in your own spreadsheet, use your own numbers, make sure you verify the taxes, insurance and everything, and then you can sort of compare. So first of all, there has to be.

That situation where you have a net positive cash flow that is real and meaningful and sustainable. because again, when you close. That’s what you’re doing. You’re making your money when you buy, because you’re closing on a cash flowing asset and you have a stream of reliable income. Okay. So that is the first thing, because if that’s not there, nothing else matters

Ben: [01:05:33] just before we move on there.

The cap rate, I see you, you have it calculated on your website and people use different numbers. Like you said, vacancy and maintenance. You use five and 7% respectively.

Matt: [01:05:44] Yeah. And we tell everyone that those are just placeholders. Like those are not specific projections. Like we’re not saying you’re definitely going to have it.

Cause again, fixed variables. Right, right. If you want to put 3% and 3% and there you can put 10% and 10% do that, like just, just make sure you have a consistent. On each thing that you do, so go as conservative or liberal or whatever as you want on those as the minutes, just make sure they’re the same across what you’re comparing.

Right. But yes, on our website, just as the default, it has 7% vacancy and 5% maintenance. Okay.

Ben: [01:06:18] And then cap rate very important price to rent. A lot of people throw around like 1%, right? Like a hundred thousand dollar house. You want to it to rent gross rent to be a thousand.

Matt: [01:06:30] Thousand bucks. Well, that’s, let’s, let’s actually disrupt a little bit, that I think is not a very relevant metric.

yeah, because precisely because of what we just talked about. Okay. You can have a 1% price to rent ratio, have a hundred thousand dollar houses generating a thousand dollars in gross rent. And in one market have that before quite profitable. And then another market under the circumstances that we just described to have new cash flow.

I mean, so, so that alone is not going to tell you very much, right. Also, that’s going to vary depending on what type of price point your. Buying it, right. So let’s say you could hit that in a hundred thousand dollar property. And again, for people that are in Venice, California, there’ll be like do to hundred thousand dollar properties.

Like the shed in my backyard is like a hundred thousand dollars, you know, but in fact, right. But in fact, but in fact, in, in some of these markets that we’re talking about, you’re talking about. A detached single family home with a yard and majority owner occupied community that you can get for, you know, between a hundred, $150,000.

Right. So that’s what we’re talking about, but then that price to rent ratio is going to vary. So, you know, would say that the properties that we deal with probably start around. At the very entry level that sort of 70 to $75,000 range, and then go up to probably 175, $1,000. So you are not anywhere. And the country going to get $175,000 property that rents for 1% of that.

If you’re talking about single family homes not going to happen, but if you buy a $75,000 property, you can usually rent it for more than 1% of the price to rent of the price. Right. You can rent it for, let’s say. You know, 900 bucks or whatever kinda thing. Oh my gosh. It’s the higher pressure rate issue.

I should always buy this one and I should never buy the $175,000 one. Cause somebody told me that I should get a 1% price to rent ratio. Right? No, there there’s all sorts of things. Benefits from kind of going, to one or the other end of that spectrum, right? Like if you’re buying the $175,000 property, That does not rent for 1750, but still gives you a good, you know, cashflow and cap rate and all that kind of stuff.

But it’s lower than 1%. Well, there may be a lot of benefits for doing that, right. I mean, you may be in a really sort of premier, you know, you know, 85% owner occupied, you know, community, that’s going to have better appreciation potential. Versus that $75,000 property, which might be, have the better price to rent ratio, better cap rate, better kind of cashflow on paper, but that may not appreciate quite as well over time.

And also the tenants is going to rent that, you know, might be a little more transient, right? A little more, little more cashflow disruption due to the frequency of tenant turnover versus the other property. Maybe the personal stay for six years. Right. So, so, you know, there’s different. Factors like that to, consider.

And we have clients that prefer, all the different places on that spectrum. And, we offer them whatever they prefer.

Ben: [01:09:37] Yeah, well, I mean, the other thing is, I, I, a 10% cap rate on a seven $70,000 house. It’s less money in your pocket, even though it’s a higher cap rate. So, you know, if I want to buy a portfolio of these things and I want to live off them, then suddenly I have to have three or four houses instead of one or two, you know, which means three or four different.

Property managers, perhaps in different headaches and this, these sorts of things, which I don’t want to get into, but, you know, I think that’s, that’s important to think of as well for these investors, but just really quickly on the buyer market. So

Matt: [01:10:14] price or rent

Ben: [01:10:14] ratio. Owner occupied areas, demographics, rental demand.

Matt: [01:10:19] What, what other factors

Ben: [01:10:21] do you use to determine these investment advantage markets?

Matt: [01:10:25] Yeah, I mean, in terms of, and by the way, all of the markets are not going to have exactly the same amount of each thing. Right. So we could go through a whole list of factors that we could say these are. Factors that bode well for a, for a real estate market, but no real estate market is going to have all of them.

Some of them may have some but not others and always been on some. But, so, so, but basically that’s it, right? So the, the actual numbers of the investment have to make sense itself. If you can’t get a positive cashflow in a market, you don’t need to look at anything else. Cause it’s not going to make sense to buy, right.

If you’re in Venice, California, it doesn’t matter what any of the other economic indicators are. You cannot. Meaningfully cashflow a property there. So it doesn’t matter about anything else. Once you determine it, you can right. Get good cashflow numbers there. Then you want to make sure that you want to set looking at these economic indicators, population influx is the population growing?

Are people coming? There are their jobs being created is the unemployment rate lower than average. you know, those types of things. And then, you know, this is the other point also, Ben, that I want to. I want to also share with folks, which is that all of this stuff that we’ve discussed so far really has to do with sort of the macro market, right?

So this metropolitan statistical area has this much population growth and they have this unemployment rate and they have, you know, all of these kinds of desirable things that are going on at the macro level. That does not mean. That any property you buy in that market is going to be a good investment.

And in fact, good markets,

Ben: [01:11:57] good little neighborhoods and bad neighborhoods, right?

Matt: [01:12:00] The reality is, man, I’m going to, I’m going to this. I will give two very straight. Cause I say this all the time, most rental properties, even in those investor, advantaged macro markets, most rental properties are not going to be a good investment.

And the reason why is because most properties in any. Market are going to either be too expensive. They’re going to be those high end luxury properties that are not going to be able to rent for enough money to cover your expenses and cash flow. Or they’re going to be in undesirable areas that are not going to be able to attract qualified tenants that are going to treat your property well, stay for a long time, pay the rent reliably and all that kind of stuff.

They’re not desirable areas. So what we do is we hone in and focus on those real estate investor sweet spots. So you’re talking about the primary rental demand price points for that market, right? For people that are, you know, making the median income in that market, how much do they want to rent for?

Where are the areas that they want to live? This kind of stuff. And ideally, what we want to do is come up with those areas where both. Owner occupants and renters would love to live right. Rented. It would love to live in an owner occupied area. So if you can get rental properties that are in a high demand owner, occupied area, one, you’re gonna be able to attract the best tenants, especially because you’re in that affordable high demand rent range.

Okay. And then also you’re setting yourself up for a retail exit strategy. Meaning you own this house in an owner, occupied area. So, you know, primary, right. I just want to live there. So when you go to sell this property, this is also very different from commercial. Okay. If you buy an apartment building, even if it’s like a small apartment building, you’re like, Oh, should I buy like a 10 unit apartment building or 10 single family homes, you know, back to kind of what you were saying before.

That’s the thought process that. Industrials go through. Right. Well, if I bought a one, a 10 unit apartment building, wouldn’t that consolidate my property management and all my expenses and make my life easier. It’d be all this stuff. After all the game of monopoly told me that when I had four houses, I should trade it up for a hotel.

Right. Isn’t that how it’s supposed to go?

Ben: [01:14:07] Obviously every time.

Matt: [01:14:08] Yeah. So, so, but what’s important there to talk about is, is some of the distinctions for that. Okay. By definition, you’re going to sell it to an investor. By definition and that investor’s going to want a really good deal on it because they’re an investor and they’re not buying 10 unit apartment building for retail price.

Right. They’re trying to get a deal on it. Whereas if you own a single family rental property in a high demand owner, occupied area, You can list that and retail price with a real estate brokerage and sell it to an owner occupant with their family. They want to come and live in that property and pay you the retail price for it.

Right. So you’re setting yourself up

Ben: [01:14:47] social decision. They love the yard. They love the school. Yes. All of these, they’re not looking at cap rates, right?

Matt: [01:14:53] Yeah. And the other thing that it allows you to do by the way, I mean, just in this example of 10 single family homes versus the 10 unit apartment building, the other thing that allows you to do is what’s called a segmented liquidation strategy.

So if you own a 10 unit apartment building, You’ve only got two choices. Whereas if you own 10 single family homes, you now have a portfolio. And what you got you can do is you can say, Oh, like these two, two of my 10 homes really appreciated. They went through the roof, they went crazy. I think I’m going to sell those in 10 31 into some other ones and take some of that profit.

Or you could say like, Oh, this one out of my 10 units, this man, this one is just not performing up to par. It’s always fricking having, you know, these issues, whatever. I think I’m going to prune my portfolio, sell that one off, you know, and, you know, buy a different one and keep these other nine. Right. So you have a lot more agility in terms of controlling your portfolio and optimizing your portfolio.

When you have those multiple single family homes versus the one unit apartment building. Yeah,

Ben: [01:16:00] that makes a lot of sense. I mean, it’s diversification geographically as well. What mistakes do you see most often with investors in single family rentals? A lot of the things that I read is, you know, it’s a lot more, it’s a lot more, it’s a lot less passive than people think, you know, it’s just, they think here’s a hundred K I’ve got this rental and now I’m just getting 700 bucks in my bank account every month.

And then. There’s some things they have to do. So what would be the number one misunderstanding of, for an investor getting into single family rentals that you see?

Matt: [01:16:36] So in terms of passivity, It’s definitely not the same type of passivity as, you know, buying a paper asset and a stock. Right. It’s not like that.

Like you actually own the hard asset and you control it. And, part of the benefits of that, also go hand in hand with that control goes hand in hand with you being a decision maker. Okay. So, however, you are not a landlord, at least you shouldn’t be, or at least our clients aren’t right. so that’s very different.

I mean, and I want to make that distinction very clear. Some people think of owning single family rental properties as I’m going to be the landlord and the tenants going to call me when there’s a problem. And I’m going to have to deal with maintenance or I’m going to have to whatever. That is not the case here, but to your point, Ben, that doesn’t mean it’s a hundred percent passive, like a paper asset either, right?

So you are going to conduct all of your due diligence upfront and we support you in doing this, right. I mean, we kind of hold your hand and do it. We don’t do it for you, but we support you in doing it with using third party sources. And one of the things that you’re going to do is you’re going to interview your property management company.

Right. And we always have preferred professional property management company there, but we also have a couple others you can choose from, right. It’s up to you. but what you’re going to do is you’re going to interview that company and you’re going to read through their, their agreement and you’re going to talk to them and you’re going to understand what the relationship is going to be like and how they’re going to communicate with you.

Okay. So in many cases it will be the case, men that, you know, you will close. Their portal and, see in real time, the, the rent came in such and such. The property manager took their fee. They put the rest of the money in my account. Oh, this month there was a maintenance expense. Cause the tenant needed the toilet fix and it costs this much money and they took it out and sent the rest of my account and you can just see it on.

And, and in some cases that may be your first year of owning the property. You may not need to communicate with them at all, but there may be some situations, In which you do need to get involved or you do need to do something, you know, there’s a, the tenant defaults on the rent, the property measures.

Okay. Listen, I talked to the tenant, here’s the situation. This is what they propose. Are you cool with this kind of thing? Right. And you’re going to have to. Get involved as a decision maker. You’re not going to be the one that’s dealing with filing evictions or sending late notices or speaking directly with the tenant.

They’re a professional management company. That’s what they do. But you may need to be there as the decision maker. You also need to just, as you would with any kind of, you know, business situation, the property manager works for you. So you need to make sure that they’re performing right. And if you don’t like the performance of the property management company, you have the right to.

Are that property management company hired everyone. Right. And so you do need to be on top of just monitoring and making sure that things are going. Functionally really, this is someone that works for you. You are hiring them, they need to perform, and you can evaluate that and change if they don’t. So

Ben: [01:19:27] yeah, I totally get it.

Matt really appreciate you taking the time, spending all this time, going through all of these. I think this is, this is really, really helpful stuff. the service that Maverick. Group is providing is, is really great. So I’ll make sure and link all of those in the show notes. But what do you want to leave my listeners with?

Where can they find out more about you, Maverick?

Matt: [01:19:48] Where do you wanna send? Well, I’d like to give your listeners a special opportunity to connect with us. So we’re going to create a special link. So it’s going to be Maverick investor, group.com/invest in. Alts. And that link is going to be in the show notes for this episode, or you can just go and type it in.

And when you get there, you’re going to see two things. one is a free report that you can, just grab and that’s on how to avoid the seven biggest mistakes that real estate investors are making in today’s market. It’s going to go a little bit deeper into some of the stuff that we talked about. me a little bit more about us, and what we do, Or if you want to jump onto a phone consult with us, that will also be an option on this page.

Okay. So, yeah. Yeah. And maybe read the report first and then jump on the phone with us if you want. But this is an opportunity for us to speak with you. What questions do you have? What are your aspirations? What are your fears and concerns and risk tolerance and all of these types of things. We’re going to listen to you and get to know you personally, and then support you, right.

In making the best decision for you, which market is best for you to, you know, buying what types of properties as we talked about in that kind of price range continuum, what’s going to be the best fit for you based on, you know, your needs and preferences and all of that kind of stuff. So that phone consultation is about you and us getting to know you.

And then of course answering your question so you can get to know us and we can see if it’s a good fit to work together. But anybody that comes through you, Ben, starts off with a VIP status in Maverick investor group. We’re going to know who they are. We’re going to know where they came from, or we’re going to be very excited to talk to them.

Cause you roll with some very cool people.

Ben: [01:21:26] Love it, man. I’ll definitely link that up and thank you so much. Thanks for the designated landing page. And of course for

Matt: [01:21:34] coming on today. Absolutely. Awesome.

Ben: [01:21:37] Thanks, Matt.

Matt: [01:21:38] My pleasure

Ben: [01:21:40] there, you have it. Thank you for listening. I really appreciate your support.

Show notes, transcript links, and more can be found on our website at all. Asset allocation.com. If you’d be so kind, please share this with anyone you think might be interested or get some value from this conversation. If you have any questions or comments, please reach out. I’m always happy to hear them.

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Happy investing.