Episode 11: How To Analyze A Deal with Technicals: Hurdles To Real Estate Investing Part – 3
Choosing the right deal for buying an investment property can be a major hurdle for new and experienced investors, but it doesn’t have to be.
How do you analyze a property by the numbers so you can feel confident to either move forward or toss the deal away and move on to the next one?
In today’s episode, we’ll continue our Hurdles to Real Estate Investing series by digging into Kyle’s favourite part of the rental property analysis process: the technicals!
What you’ll learn:
- How to determine if a deal is worth it when looking at the numbers including cash on cash return, return on investment (ROI), capitalization rate (Cap Rate) and more;
- Questions you should be asking selling agents of investment properties;
- What expenses that listing agents often leave out;
- Why you should look at the “3 Silver Bullets” when analyzing a deal; and,
- Why a deal isn’t dead just because the numbers don’t seem to be making sense.
- Invested Teacher Property Analyzer Spreadsheet
- Enter the Invested Teacher Giveaway
- Download our Wealth Building Blueprint
- The Invested Teacher Wealth Building Booklist
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For those interested in potential Joint Venture (JV) Partnerships, reach out to us here.
Jon Orr: Welcome to the Invested Teacher Podcast with Kyle Pearce, Matt Biggley, and myself, hey, I'm Jon Orr.
Kyle Pearce: Get ready to be taught my friends as we share our successes and failures encountered during our real life lessons, learning how to build generational wealth from the ground up.
Matt Biggley: Welcome invested students to another episode of The Invested Teacher Podcast.
Jon Orr: Well, guys, welcome everybody to another episode and we're eager to talk with you because this is a part two. This is a double header actually, it's a triple, it's a triple header. We're ready to talk to you some more about hurdles in getting started with real estate investing in finding that real estate investing property. Maybe it's your first one, maybe it's your second one, maybe it's your like 10th one, and you're listening in to see if the tips we're providing here today are some of the things you're already doing or may do. But that's what we want to talk to you today is some more hurdles and the one specifically we are going to get into, which is about how to find the right deal. That's the one we're going to do, but we do want to do a quick recap of the hurdles that we chatted with on the previous episode. Kyle, why don't fill us in? What are some of the hurdles we discussed last time?
Kyle Pearce: Yeah, for sure, and I'm happy that I'm getting to summarize some of these hurdles because this particular one I think is my biggest hurdle and that's why I feel so passionately about it because I think we've already talked about it before. I'm a little bit of a hoarder of money. Not saying that I have a ton of it, but when I have any of it, I don't like spending it. I really, really want to emphasize when you are going through this process to ensure that you get your financial situation in order, getting an understanding of what you can do and how you can do it being able to sleep at night. I guess for me, I'm happy that I lose sleep if I feel like my risk is getting too great. For other people though that might be listening, maybe you're different than me and maybe you don't have that sort of the automatic sleepless night when you're getting too risky.
What I'm saying is no matter who you are, you want to make sure that you've got a buffer if things go sideways. If this is your first investment, and in particular if it's in real estate, which is again our favorite asset class, you want to make sure that you prepare for things to go wrong because guess what? Anytime you try something new, things don't always go as smoothly as you had hoped. Of course, you want to prepare yourself, you want to get yourself ready, but then you also want to be thinking about, okay, what happens if, even if it's an unlikely situation. For me, just recapping before I got into my first investment property, I wanted to make sure that I knew that if, for example, there was no tenant, again, I've never had a scenario where we've had no tenant in all of our buildings or anything like that.
But I wanted to make sure when I got started that if let's say I didn't do something right or we had an issue with the unit or with the home, that I would be able to float all of the expenses on my own. Now, I'm not saying I'd be living a lavish lifestyle in doing so, but I just wanted to make sure that I had something there. For me, that was making sure that it might have meant, hey, if I had some sort of automatic investment happening on the side to an RSP, could I stop those and redirect them to this investment, right? Or is there something in my budget that I know is going to help me? Do I have maybe a line of credit, a home equity line of credit there that provides me with that buffer? Remembering that a home equity line of credit typically is an interest only minimum.
Again, not advocating that we want to set ourselves up for this, but in case of an emergency, I knew that I had a lot of access to capital to ensure that I could continue moving forward, and I didn't say default on a mortgage or not be able to pay the utilities or anything like that. Again, I didn't structure it in such a way that I had to maximize all of that capital, but I did want to make sure that that was available to me in the case, in the unlikely case, but possible case that things didn't go as I expected. Again, finally the other big piece here is mortgages, so how are you going to finance this thing? I think we had brought this up, this topic of maybe going and getting a pre-approval, talking to different banks or brokers.
I'm a huge fan of mortgage brokers. My old mortgage partner, Hussein Saad here in Windsor is amazing. Treats you like gold and always helps you to ensure that you are getting yourself set up for something that's going to be successful for you. But make sure that you're looking around and trying to figure out, you're probably going to have to put 20% down and then you're going to have to also be able to qualify and ensure that their stress tests that they use at different banks are slightly different, but oftentimes, they might not take all of the rent income as your personal income, so you need to weigh some of those factors. Those are some of the big hurdles for me that I had. Fellas, anything else that we missed from the last episode before we dig into sort of finding the right deal?
Jon Orr: I think you summarized pretty well, Kyle, and Matt, did you want to add anything there before we jump into this next hurdle?
Matt Biggley: I'm so excited to talk about today's hurdles.
Jon Orr: All right, let's do it. inaudible. Let's do it. Let's go, Kyle. Kyle, you summarized enough.
Matt Biggley: There you go. There you go.
Jon Orr: People are waiting around to find out what the next hurdle is, and we already said it. This hurdle is I think larger one. I guess, it's not saying larger because financing is a large hurdle to wrap your head around, but this one is usually one of the most asked hurdles that we get asked. As a new investor or a new person looking to get into real estate investing, I think the hurdle of finding the right property is one that keeps people in that analysis paralysis stage that is like I've looked at a property, I don't know if this is the right one, what happens if this is the wrong one? This is already making sure your financing situation is taken care of and some of those other hurdles we talked about.
We're kind of break this one down in its own episode. This whole episode is dedicated to finding the right deal and we've got up some tips and we got some suggestions from our experience on finding that right deal. These two experts here are pretty knowledgeable on this. Matt, let's dive in right away. I think when we first think about finding the right deal, we're going to talk about fundamentals, we're going to talk about technicals, but I think we also have to think about where do I look just to get started? If I haven't even started looking for the right deal, it's like what should I be aiming my eyes at? Matt, give us some tips on where a newbie could look to find the right deal.
Matt Biggley: Yeah, I think as a novice investor, we've talked about the power partnerships, about having people on your, some people call it a power team, and I really think it starts with having a good relationship with a knowledgeable realtor. Fundamental to this is really your perception of your realtor. Do you feel like when you're working with a realtor, you're being sold something or are you being helped? I believe I'm a big helper. I've been successful enough in real estate that I've been able to move beyond, they call it the commission breath or the salesy part of it. This has truly been a calling or a passion for me that I've felt with. I think when you're looking for a realtor partner to partner with, you want to make sure you're working with a realtor who has investments themselves. I became a realtor much later in life after 15 years of teaching, after years and years of investing myself learning some of those lessons.
I think if you choose a realtor who's experienced, who's an expert in this area and whose desire is to help you and not sell you, that's going to allow you to turbocharge your search. Now, when it comes to searching, I think that the biggest source of properties is the MLS is realtor.ca and something like 93% of properties are sold using a realtor. A lot of times people will say to me like, I only want off-market properties or I want the pocket properties. And I'm going to tell you right now that pocket listings are off-market properties aren't oftentimes the deal that people maybe are led to believe or maybe even some of the shows would lead you to believe. And oftentimes, I'm going to say the overwhelming number of people who are trying to sell a property themselves, we call these FSBOs, for sale by owners.
They are completely out of touch with the market and have expectations that are just way, way, way too high. I'm going to say that using a realtor, an experienced and knowledgeable one is going to help you then look at the MLS in a much more analytical way. There's a couple of great ways you can work with realtors and one of the best things to do and it's such a simple step, is to get on a realtor's email list for all new listings. These come out automated, so the realtor doesn't have to send them to you, you don't have to go looking for them, they come right to your inbox. They can come daily, even I can set it up so that any new listing can come out instantaneously. If you want to see what this looks like, certainly we want you to reach out to us and we'll be happy to set up a sample of this for you so your listing's coming right to your inbox.
Of course, I'm here in Windsor, Essex, and so this is the market we focus on and we can get right into the nitty-gritty with our search criteria and we can look at specific areas, we can look for specific types of properties. This already helps qualify some of the properties for you without you having to go and find them. Now, some of the other places I'm going to suggest you look are Facebook Marketplace. Of course, you could look for those FSBO owners who are trying to sell themselves. Kyle and I found our very first property, this was before I was a realtor, we found it on Kijiji. Certainly, those places are places where you'll see a lot of times for sale by owners, realtors are advertised there as well. But again, I just want to put that caveat out there that it's really not always a deal.
To be able to work with a realtor who can help frame the market conditions for you and help you with comparables, that's going to be able to tell you whether or not you're seeing a deal or not. I'm going to say as an aside, even if you're not actively looking to buy in the next 30, 60 days, I'm going to suggest getting in touch with a realtor and having some market updates is going to help you stay current with the market. Listen, we've had eight interest rate hikes in the last year from a realtor's perspective, from my perspective, that means we've had eight different markets. The market is so fluid. It is changing so fast just like the stock market or any market.
If you're listening to the water cooler talk at work or you're reading the headlines or you're talking maybe with your friends and family about real estate, that's not a very well-informed place for you to be getting actual, on the ground, current real estate market data and information. Any good realtor is going to be able to help you with current market conditions and they're going to update you on what that looks like. Even if you're not looking this month, this day, you still feel like you've got some fluency around what the market looks like and maybe where you should be looking for deals and where those deals are trending.
Kyle Pearce: I love that. I love that, Matt, and I'm going to tell everyone I know Matt is awesome and he's also very humble. He said reach out to us, but I want to be very specific. If you head to investedteacher.com/listings, you will be prompted to get connected with Matt so that you can be up-to-date on what's going on in Windsor, Essex, of course, we look and Matt and his team look outside of Windsor, Essex as well to get a sense of what's going on and then there's of course the macro view as well. So many great things that can be happening there. I know, Matt, I still get your listings, you send them on to me and that's what gets me sniffing down sort of the path of like, hey, does this financing thing work for us? Is this going to be a deal that we want to dig into? Which we'll talk a little bit more about.
Now, before we dig into some of those fundamentals, I also want to comment, you brought up something about those for sale by owner properties, Matt, and you mentioned our first property, the Reno Resort as we like to call it. It was in really rough shape. Okay. We're going to do some deep dive episodes where we actually take specific properties and analyze the numbers and where things were and then where things are now. Something you had mentioned was this idea of a deal. I think when you're starting, I think another hurdle I had was that I was looking for the best deal in the universe now, and that's not my mentality now. It's like, and we're not going to say just go out and pick anything, but the reality was it was almost like there was so many good properties along the way that were good, but they weren't the best. It was like if it wasn't the best, if it wasn't like what we call a home run, then we didn't do anything.
Now, maybe that's you because you have limited capital to start, so you want to search a little bit more. You want to be a little bit more selective on those pitches that the pitcher's throwing down. You want to make sure this is a ball I can hit, and of course, you want that, but a double is fantastic. Now, we really look for a lot of singles and of course when the home run comes, we just tee up and we go with it. That's how our mindset has shifted. I also want to mention back when we did the for sale by owner, this was before we've had all of this massive appreciation in all the markets, before COVID. This was back in 2016 when we picked up this particular property and real estate in this area was people would call it flat, but it actually wasn't.
It was appreciating a few percent each year. That's just healthy appreciation. Things were fine, but what you'll notice, and Matt, you said it best here where you said, some of these people who are selling privately, we just came out of a massive jump over these past couple of years so the mindsets of these private owners is very inflated. Whereas when we got it for sale by owner, this was before all of that where it's like the mindset I would argue was almost the opposite. Depending where you are in the cycle, that's going to change the mindset of someone who's selling privately. Matt's 100% correct, oftentimes for sale by owners are not connected to the actual reality of the market now, which is advantageous when we are not on a huge rip, but it's actually against you as the buyer when we're coming off a massive rip.
All these for sale by owners that we run into, right, Matt, lately have been almost like you're like, I can't believe I got on the phone with this person. There's not even worth a discussion because they're thinking in 12 month ago prices and let's be honest, they're human. How is it possible that 12 years ago my property could have possibly sold for this amount and now things just aren't moving like they were? We weren't buying 12 months ago, we're trying to start buying more now because we are now seeing this sort of dip, which is an opportunity for investors. I just wanted to riff on that a little bit before we dig in deeper here.
Because again, first sale by owner will be a really awesome strategy and we're going to keep digging there, but we're not expecting anything magical to happen, at least in the current time because people still have that recency bias going on where they're like, wow, isn't real estate just flying right now? It's like people who are in the trenches, realtors like Matt and his team know what's going on in the area and which properties are selling for what. Obviously, that puts us in a strategic position as investors to ensure that we're not just trying to fomo into something.
Jon Orr: Excellent tips there, Kyle, for sure. Then this goes back to a tip, I think, we also shared on the previous episode on not going alone. I think that you can split some of the work, you could split some of that risk up amongst you and a partner. For example, when you're saying looking for your property, you can split up talking about where to look, which one have you been seeing? Which one have I been seeing? That's going to be a common theme that we recommend here on this particular episode as well, especially when we get into analyzing the fundamentals is something that you want say two eyes to look at, can be very helpful in managing and choosing the right property.
Let's dive into that guys. The next two parts of this episode is about doing some analyzing and looking at. Once I've seen some properties and I think this might be the right property, we want to dive in and go, let's confirm that this is the right one for us, how are we going to choose that one? We're going to break this into two parts. One is we're going to look at the fundamentals and then we're going to look at the technicals much like we look at analyzing a stock, right, Matt?
Matt Biggley: Absolutely, absolutely. I love that we can separate these two and look at them differently and we've talked about this a number of times, what's so great about investment properties? They are totally and unequivocally about the fundamentals and then about the technicals. There's very little emotion involved in these decisions and that just helps to make better decisions. With analyzing investment properties, it can really be a volume activity. You can analyze properties without ever setting foot in them from the comfort of your La-Z-Boy or at your desk chair, that's what's really neat about this.
Kyle Pearce: Or on your spin bike, right, Matt?
Matt Biggley: Or on your spin bike, Kyle. Kyle's currently biking while we're recording this podcast, hilarious, check the YouTube channel, you can see those subtle shoulder moves. I didn't know if you were dancing.
Kyle Pearce: I just stepped off. I'm like, we're recording, it's too loud, but I'll hop right back on after.
Matt Biggley: When I see a property that a client is interested in or that I'm interested in for a client before I ever set foot in that property and listen, going and seeing properties is fun. Most clients want to just go see properties before they've done any analysis whatsoever, and I get it. That's the part we see on TV that's fun about real estate, but we want to build some efficiency into this. When we're going to see these properties, we've already vetted them so that you're not wasting your time chasing prop ... If you want to get educated and just go and see some properties, I take people on property tours all the time and we do that, but when it really comes time to property hunt, we want to make sure we've asked the right questions before we ever set foot on the property.
Before I take a client out to a property, these are the questions I ask, these are the questions that I research on that listing before we ever go. First of all, I want to look at the neighborhood. The neighborhood variance across Windsor, Essex is huge as it is across any municipality or region or area. What kind of a tenant profile are you going to attract to that particular neighborhood? I talked to an agent last night about a listing I currently have for a duplex that's in an A+ property. I said, could I find you a cheaper investment property? Yes. Could I find you one in a better neighborhood? Absolutely not.
The better the neighborhood, typically the better the tenant profile. Of course, dealing with tenants and the fears around that is one of the major hurdles that people have. If you can attract a better tenant profile, it means they're more likely to pay their rent on time, more likely to be working professionals who have to get up in the morning and go to work and maybe aren't causing trouble for neighbors or aren't the party type, and so neighborhood quality is definitely a huge fundamental.
Kyle Pearce: I love that. I love how you highlight that. It makes me again reflect and I love these conversations because it sort of makes me think back to who am I as an investor? Who was I? Who am I now and who am I becoming as an investor? Back in the day, if you showed me something in that A+ neighborhood, I would look at the number because I'm an analytical person. I look at a lot of the technicals first. That's sort of like where I gravitate towards and I look at that and I go, no way, absolutely not. But then when you zoom out and you think about who was I at the time, I was a person with limited capital, so I needed to essentially move out of an A+ neighborhood, take on. I didn't want to go to really, really rough areas of any municipality, but what I did want to do is I was like, hmm, I need those technicals to bump more for me.
But I'm thinking right now, and as you were saying that, Matt, I'm picturing there's probably some people out there listening to this podcast right now, and they might be someone who has, let's say maybe it's a doctor or there's someone out there, maybe there's an engineer or a CEO or something out there who are listening and going, actually capital's not really a challenge for me. I just don't know where to put my capital and I want as little problems as possible, and I also want to take advantage of real estate. What I'm hearing you say, Matt, is that property you just described might be for that sort of avatar. That person is thinking, they'll go like, listen, this isn't going to be my only investment I make. It's just one of many because I do have access to capital and I don't want to keep sending it to the big bank to sort of just invest into whatever.
I want to take advantage of the inflationary protection that you receive through real estate and also be able to generate some cash flow. If I have a lot of capital and I go to the technicals on that particular property, Matt, what I'm going to find is a guy like me who wants to put down as little possible because I want to maximize my leverage, I'm going to do that and my cash flow numbers aren't going to work out, but for this other avatar, that other avatar goes, you know what? I don't need to maximize my leverage. That's not my goal here. I just want to get my money working for me. Maybe I do a 50% LTV on this thing, which is a loan to value, meaning I'm going to pay half of that property in cash because I got it, it's right there.
Then the other half, I'm going to mortgage. When I do that, the adjustment by doing that, I feel comfortable that I own half this property already and I'm not paying interest on it, and therefore the technicals start to work in your favor and it starts to cash flow. I guess, what I'm trying to highlight for everyone is this is something that I'd never considered way back when I only saw myself, I saw my own situation and I couldn't see past that, whoa, this is not going to work and it's not going to work for anyone. But in reality, it can work for someone. It just might not be you or maybe it is you depending on who you are and what that avatar is that you fit into.
Matt Biggley: Yeah, Kyle, sometimes I liken this to a conversation about price versus cost. You and I have really evolved in the properties we look for now, like our most recent purchase, the nicest units we've had, the most turnkey.
Kyle Pearce: We've moved up in the world there, Matt.
Matt Biggley: I'm not sure we would purchase some of the properties we did at today's values in the shape that they were in, but at the time, price was the most important thing to us. However, what we didn't think about at the time, and you've just spoken to this, was the cost of ownership, the cost of renovations. We have dumped tens or hundreds of thousands of dollars into renovations after getting those cheap prices. When you meet a realtor you want to work with, that realtor and you should be having a conversation so that realtor can understand your goals, what type of investor you are. If you want to be hands off turnkey, well then yeah, we're going to find an A+ neighborhood with a turnkey recently renovated property. If you're someone who's swinging a hammer but doesn't have a lot of capital, then we're going to go and find you a fixer upper, something that's maybe a shell.
I want to continue talking about some of the other fundamentals we're looking for and trying to identify before we go and see property. We just talked about price versus cost. So many of the costs associated with owning any home, be it investment or otherwise, are some of the major capital items. When we look at HVAC, so what is the furnace and air conditioning age situation? Of course, this can all be identified with a home inspection, but a lot of times, we can ask the age and the condition of these things ahead of times. What's the type of plumbing? Do we have updated plumbing or are we likely to get some plumbing issues? I had a personal experience years ago of living in an old building in Walkerville and literally the drains all sealed up because they were galvanized. Over time, that happens, what kind of electrical are we dealing with?
If it's an older building, are we looking for knob and tube or aluminum was popular in the 70s, do we have an updated electrical service? What about a roof? That is a really unsexy thing to have to do and an incredibly expensive thing to have to do. You want to make sure that the roof has been updated and is good shape. Then windows and doors, again, another monster expense that if you have to put into an investment property, it's going to just absolutely crush your cash flow. We want to see what the condition is of some of these major capital items, at least to the extent possible before we go out and see a property.
Jon Orr: Those are good things to look at. Question I have Matt and also Kyle, Kyle might be able to answer this as well. I know both of you can is if I am looking at the fundamentals and what I've heard Matt already say is thinking about the neighborhood is the thing to look at, and the realtor can help you with the neighborhood. If you're not sure about your neighborhood, there's that person there to consult. You just mentioned a whole whack of things that is not in most people's wheelhouse to analyze like plumbing, electrical, roofs, the air conditioning and the heating, all of that stuff. It's like, okay, I'm starting to analyze, I'm starting to look and I want to make sure that this is the right property for me. When I'm seeing this with my realtor, I'm not going to run out to the property, I'm not jumping out there yet.
I'm going to talk with the realtor, or I might be able to learn about some of these things through the realtor, but also maybe looking at MLS on the website, you probably see sometimes they quote those things, but it's like, should I, at this point, guys, this brings up actually another question that I'm going to have about versus looking at technicals versus fundamentals first, I'm curious about that because Kyle mentioned the numbers. A moment ago, Kyle mentioned the numbers have to work in this situation. My question now, I'm morphing it as I'm asking it, should I consult and get someone to go look at the property with me or for me, like an inspector? I know that when we buy a home, we ask an inspector to go look up just to go over all of those things and get you a report. But if I'm looking at a property, do I need an inspector to go and do these things for me because I'm not that knowledgeable? And should I? Then should I do that before I start looking at technicals? Or should I be doing the technicals first?
Kyle Pearce: I love it. I don't think there's an either or, and I think that's what actually made Matt and my partnership so easy is that actually I tend to look at technicals first because I'm sort of like if these numbers aren't attractive to me, I don't even really care how old the furnace is, but Matt actually is more of, I think a fundamentals first sort of person so we compliment each other well, and I would argue it's not like a chicken or an egg and you can approach it however you choose. Again, it might just be based on your personality, but either way, one thing that I want to go back to as well is just this idea. Matt says it all the time, it has to be emotionless. Matt, you even referenced earlier about how initially people who are excited, they're excited, that's emotional, right?
They're excited, they want to go check out the property, they're like, woo, this might be woo. They get all amped up and the dopamine's flowing and you're running through the property and you're falling in love with how this or that and you're going, whoa, whoa, whoa, whoa, whoa. Let's take a step back here. This is not your forever home. This is a business, this is an investment. It's hard to control that, especially when you're new and you're excited at the opportunity, you're taking the plunge and all of those things. I want to reiterate that piece. But when it comes to all of these different major capital items, I think Matt said it before and will say it again, looking and figuring out what is the age, right? And that's by asking, you can ask the selling agent, they either know or they don't know, but they go to the seller and they actually ask them for as much information as they can, and realtors have to share material information with you.
They can't just make it up, if they know, they know. If they don't, they don't. They have to tell you what they know about the property. That's one thing you can do. But something recently that was shared with me by an old elementary school buddy, Dan Crosby, who actually has really cool stuff going on through Coachwood Capital, folks, might be worth checking out. But Dan is actually, he owns many, many, many properties and what he's found on average is that what he does to get a sense of how much capital you might expect to put into a building, now this is just general, but for him, he uses what he calls the 0.1% rule, not the 1% rule, the rent to price value percentage, we're talking about for capital costs. What he does is he generally will look at, hey, how old is the building?
Let's say it's a 10-year-old building, he'll take the purchase price, multiply it by 0.1% or a 10th of a percent, and then he'll multiply it by the number of years the building is old. That gives him sort of a pool of capital that he sort of budgets in. I really like that as a starting point. Again, there's nothing that's going to beat, that rule's not going to work if you buy one property and every item in that house has never been fixed or repaired since the property was built. Or on the other hand, that pool's going to be way bigger if you use this rule, if everything was just replaced last year. I think it goes back to Matt's point where Matt says, you know what? You just ask. Then honestly, whether it's you or someone trusted in that industry that you ask, you could Google and say like, listen, what's the average age of a furnace?
You start to build this, and this isn't something you have to go and do all this homework before you start. It's like you do this as you go and you learn as you go. It's like, oh, it's a seven-year-old furnace and here's the name brand of the furnace, punch it in and it's like you see, oh my gosh, this is the worst furnace that was ever made. They only last eight years and then boom, or the opposite, these things are tanks. We've got some at the rental resort there, Matt, that were like, they were tanks and they were so old, but they just kept going, and that was a pleasant surprise, but all it was was a quick little Google search.
Jon Orr: Got it. Got it.
Kyle Pearce: You can get way in the weeds or you can sort of do just a little bit of that background knowledge and you can work from there. But ultimately at the end of the day, you don't want to be scared because you're not familiar. It's like ask and again, lean on your realtor. If you do this alone without a realtor, the realtor's going to tell you exactly what Matt just told you, if it's a great realtor, right?
Jon Orr: Right.
Kyle Pearce: They're going to say, here's what we can do to help you feel comfortable about this decision you might be making.
Jon Orr: Thanks, Kyle. I think that gives a lot of insight on how we can look at a property and decide if it's the right fit for you. I know that we've got lots of tips and things to think about, but I think you guys are also would say that there's no hard and fast rule here. We have to take all of these things into account and help inform if this is the right property for you. But you do want to think about all of these things and look these things up. This brings us into maybe thinking more about the tenant side of things, and I have a couple questions about that.
For example, is it a deal breaker to have when it says on a listing that the tenants paying the utilities, you have to pay the utilities? Are you guys looking at that for something or is that even factor into your decisions? Does it even matter if that's the case? The other one is what about the tenants being vacant or already rented? Is it like if I see that in the listing or if I'm talking to the realtor about this particular property and is this already being rented, is that a good thing or is it a bad thing that it's actually vacant? Tell us your experiences on these two ideas.
Matt Biggley: I think an investor's nightmare is this, it's the middle of winter, you're paying your tenant's utilities because you have one meter for multiple units. It's the middle of winter, freezing cold, you drive by the house, you just happen to be in the neighborhood. They've got all the windows open, but you know that heat is cranked up...
Kyle Pearce: They're having a beach themed party.
Matt Biggley: ... to 80 degrees and you're just like, oh my god. This is something that I think most people wouldn't consider because of course most of us will live in a home with one utility meter, and an investment property, you don't want to be paying your tenant's rents, and this means you need to ask, are there separate meters?
You're going to have separate gas meters, separate electrical meters, and this one doesn't always happen, but separate water meters is a perfect world, although that doesn't necessarily happen, because paying for your tenants utilities is going to absolutely crush your cash flow, and it also becomes a variable that's really difficult to control. Now, I've seen landlords deal with this a few different ways. Some of them will institute price caps or utility sharing, but I think that can get messy. In a perfect world, we're going to look for separate utility meters, and this is really easy to ask and really easy to identify. I'm going to say Kyle and I own some properties that don't have separate meters, but it crushes my soul to know that.
Jon Orr: Matt, if this one comes across your desk and you're looking at it and you're like, if you see that it doesn't, is it just toss it out and don't even go there? Or does it have to be real, the technicals have to be real nice?
Matt Biggley: Yeah, the property's got to be pretty compelling otherwise for us to take a look at it. Now, of course you can add these meters after the fact, but it's just incredibly expensive to do that.
Jon Orr: Sure is. Yeah.
Matt Biggley: It's very expensive. In an ideal world, we've got separate meters, it's a purpose built or it has been a multifamily property for some time and somewhat before he was gone through that time and expense of separately metering that.
Kyle Pearce: I love it. Yeah, exactly what Matt's saying here and it's like, I want to reiterate, it sucks because as humans, I mentioned this on our Math podcast all the time, how we're sort of on or off we're digital creatures. People talk about the pendulum swinging in so many different areas of life, it's because we suck at balance. The reality here in investing is exactly that. There is no throwing it out completely. There's always, always, always a possibility for any property as long as the upside makes sense. When we bought those properties that don't have separate meters, there were other things going on there that made it make sense to us, even though Matt gets sick to his stomach when he thinks about it. We're like, Matt, is that okay? Are you okay to feel that way sometimes once a month when you pay for that bill and you go like, how's the water bill in a one bedroom place more than my five bedroom home with six people?
You start to think of those things, but the reality is if it's worth it, and again, only you can decide that because again, your duplex in that A+ neighborhood may not be worth it to me, but it might be worth it to a different investor. That's really, I think, the big piece here is you got to analyze these things and figure out what you're okay with. Of course, separate meters is a massive bonus and it's something we want, but it's definitely not a must have. But one thing that you have to be cautious of is, let's say when we get into the technicals, we'll talk more about this, but let's say there's multiple things working against the property.
You have to think of it almost like a strike system. It's not a three strike, you're out system, but it's like the property's in maybe not the best neighborhood, and then you look and you're like, the rents aren't that great, and then the cash flow is only this, and then you add in that variability of what the utilities could be and essentially for all time, unless you plan to budget in putting meters in. But again, there's like a big payback time for putting those things in.
Jon Orr: Right, for sure.
Kyle Pearce: Every time we do something to a property, you have to sort of think about it and go like, okay, how long's it going to take for us to make that money back off of the value it added? If let's say I add meters and I'm adding meters and that's going to maybe save me $300 a month or whatever the number is, I now have to go, okay, well, the cost is this, it's $300 per month. How many months is that going to take us to pay that back? Is that actually worth it? Oftentimes with meters in particular, it oftentimes to us hasn't made sense yet, but maybe in the future, it will. I want to answer the second question though, Jon, that you had, which was about the tentative or vacant units.
Now, again, I'll put on my beginner investor hat. Back in the day, I was looking for property specifically that had a tenant because I was so deathly scared of that worst case scenario that no one's going to pay me rent. That is a fear that the sooner you can get over that fear, the better, because in reality, it's actually something that actual experienced investors in real estate actually look at that as negative because you didn't get to pick the tenant. Here in Ontario anyway, and I know in different places there are different rules, but tends to be in Canada and most provinces are very tenant favored in terms of the rules. Here in Ontario, Matt and I will say this openly, we just had a tenant finally leave our property. You could call it an eviction, but ultimately, it took us a full year through the Ontario process where they did not pay a dime to us in one of our units.
That did happen. We didn't get rent for an entire year, but we have a buffer, so we're okay with it, and it took us that long to get that tenant out and you know what? Had we been the ones to pick that tenant, maybe it would've been different. We can put them through the different things and we can ask them the questions and we can make sure that their income can support it. You can't just take anyone to go in there. If the rent's going to be 55% of their income monthly, that's going to lead to problems, right?
Jon Orr: For sure.
Kyle Pearce: That's not sustainable. That is something that I would argue vacant is better, but I totally get for those newbie investors out there, that sounds scary because you're like, I'm taking this property and then now what? Where am I going to find these people? Well, guess what? Everybody needs a place to live and there are renters out there who want your property that safe, affordable, and a place that they can call home. That's something that I would say the sooner you can get over it, the better you will be.
Jon Orr: Awesome. Awesome. That brings up maybe I think one more question, then I know that we could probably dedicate a whole episode to you guys on you brought up the tenant in the choice of that tenant. That might be a hurdle for a lot of people. I'm going like, you know what? I'm going to look at this property. Let's say it's vacant and I have to choose my tenant. You guys have a quick tip for people to think about that before we move on into the next stage. Also, do a wrap up here and we will extend our technicals into another episode.
But what about this last question, is there any process that you're using? Is there some sort of tool that you have that helps select tenants or is it somebody on their own here where they're saying, okay, now I have to choose, well, how do I do that? Do I interview them? Do I put them through some sort of stringent credit application? What are your quick tips here on this? Like I said, we could probably dedicate and should dedicate an episode to this.
Matt Biggley: Yeah, Jon, we've had some great systems in place and again, we've taken on property management in the last couple of years, so we no longer actually do our own tenant selection, but one of the things we found worked really well was an open house style approach to selecting tenants. We would hold an open house on a weeknight evening and then again on the weekend for a couple of hours and just invite people to come through the house and be able to see it, which in turn tended to give us a larger pool of potential tenants to choose from. Some of this is just intuition. I think as educators, we're very intuitive about people and certainly that helped us to understand just simply by talking to people and asking them some fundamental questions. You get to know them pretty well and get an idea of them, but we always want to do that backup check as well.
There's so many great online tools that will not only pull credit. Now, quick note on credit, I just went through, I was helping some first time landlords this week with a lease application and the tenants had poor credit. That's almost to be expected. There's a reason why people are renting. Could be life circumstance, could be poor credit, could be that they haven't been able to save up enough for a down payment or they're in the process of repairing their credit. I don't necessarily put all the weight onto credit score, but these tools that we use, one of them is called SingleKey, used to be called Neighborly, another one's called FrontLobby. They'll actually do a credit check for you, they'll check employment, they'll check for criminal background for any kind of judgments or decisions against people. It's pretty comprehensive and pretty interesting.
All of this can be done online and the tenants simply fill out their information. There's a small cost for it and it actually gives you some scores and some analytics around how likely this tenant is to even damage your unit. Again, that sounds a little subjective, how likely they are to not pay you in rent, how likely they're to leave early. Again, it's not foolproof, but there's some terrific tools out there that allow you to have, as I said to these first time landlords this week, I said, it's impossible to give you 100% peace of mind, but we're doing as much as we can to give you as much peace of mind as possible.
We had to talk through all the anxieties around what are the worst case scenarios and if that was the scenario, what we could do to help them address those scenarios? To choose a great tenant, I think is about having a larger pool to choose from. So keeping that rent as market value and not pushing it too, too high so that you're excluding a lot of people and then really getting to know those people and doing some background searches. All very, very doable and all pretty quick to turn around.
Kyle Pearce: I love it. I love it. Something I think we gained from that open house style approach was, as you mentioned, you're meeting these people and you're sort of getting a sense like who, you know when you walk into a party or whatever and you sort of gravitate to certain people, it's just like something there, the conversation is easy and it just flows and then you tend to hang out in that group. It's like the same thing we noticed in the open house style. There was certain people that it just clicked. It felt like, hey, these people have a similar maybe thinking on these certain ideas or they just seemed like they're going to be easy to be working with and so forth. You got to figure out what makes sense for you. And by getting to know these people will really help you because you want to get a sense of if somebody comes in and they sound demanding or they feel like maybe a little aggressive in their approach to how they communicate with you, maybe that doesn't jive for you or maybe it does.
Maybe you are similar and you see some similar personality traits and maybe you think that'll be cut and dry and easy for you. I think that is key. The other piece too that I want to mention is so Matt as a realtor, but also before Matt was a realtor and we were managing our properties, we would figure out what is the market rents for something like this? Here's something that I think is worth doing is that you don't want to be at the top end of the market rents. You want to be a little bit lower. You don't want to sell yourself short as Chantel's uncle would always say, don't cheat yourself, but you want to be in a place where you're going to get a good selection of those tenants. Don't be greedy on the rents. You want to balance that out so that you get the tenant that's going to work.
Just back to the credit checks and the great systems, there's a lot of great systems out there. We know one we used to use was Neighborly, which got purchased by FrontLobby. All right, so it's now called FrontLobby. It's a great tool. They offer all kinds of things like insurance, rent insurance, there's all kinds of options that you can partake in. Definitely worth checking out. We have a link for you which will be an affiliate link. I have no idea what the details of that program will be, but it's an affiliate link. I just want to be clear that if you do decide and you think that's worthwhile for you, check it out over at investedteacher.com/frontlobby.
We used to have the Neighborly account. Now, our property management team leverages FrontLobby who took over Neighborly. It is a tool that we use and we support. Again, that link investedteacher.com/frontlobby will get you hooked up. Right after we stop this episode, we'll reach out to them and say, "Hey, what can you offer the Invested Teacher audience to motivate them to check out your tool and leverage it?" We'll do our best for you, and hopefully they'll put together something that's really cool.
Jon Orr: Thanks there, Kyle, and that's a great tool. I think that can be relieve a lot of anxiety around that hurdle. I'm glad that tool is out there because I think that would be a big barrier for me is like, I don't want to have to interview people or I don't want to have to go through this process. If this can do a lot of that part kind of take actually that emotion part out of this, that's going to be really helpful for someone to get into real estate investing. That is a great one. Just do a quick recap here because we're going to leave our technical side. Remember we talked about analyzing a property in two ways, one being fundamentals. We've been outlining that here in this episode. We're going to leave our technical analytics so that's the numbers. Do the numbers make sense for our property?
We're going to look at purchase price, we're going to look at some tips and some rules that we follow to exclude or include properties in our analysis. Kyle talked about sometimes doing that first or in parallel to looking at the fundamentals that we discussed here, but we'll go into that in the next episode. Just a quick recap here in the fundamentals talk in how to analyze a property and its fundamentals. We talked about the neighborhood, we talked about getting in with a realtor and asking the realtor questions and having that great realtor who is in the game in real estate investing. I think that would be a great asset to have because they know what questions also to ask. If you're not sure, partnering with the realtor is going to relieve a lot of that stress for you. We talked about looking around at some of the fundamentals themselves, like plumbing, electrical, roofs.
Kyle talked about Dan's 0.1% rule, which is about thinking about capital expenditure and how much you're going to maybe spend extra on that property, and you would include that in the technicals in your budgeting for that property. We talked about meters. Having separate meters is important. We also talked about the tenants and whether that's vacant, it's rented, and how we can analyze that. That's some of the fundamentals that we want to look at. There are no, I think guys, right, hard and fast rules on our fundamentals, but things we want to consider. My big takeaway from you gentlemen is going back to the... Actually, the very beginning is taking all of that into account, all of these ideas to think about. Kyle mentioned something really important about what your goal is in real estate investing because that can shape how you view these fundamentals.
Like that example of I've got a chunk of cash here that I want it to grow in value and I want to sink it into real estate investing. That might look differently for properties that are probably a less amount of stress or less amount of work versus some properties that might require a little bit more attention, but maybe give you some bigger cash flow. It goes back to are you looking for cash flow? Are you looking for the maximize your cash flow, or are you looking to maximize some of the appreciation growth that can happen over time? I think that goes back to deciding who you want to be as a real estate investor and then finding the right partners there to help you achieve those goals.
Matt Biggley: Kyle, Jon, thanks for another great episode. To our invested students, we'd love you to leave us a five star rating and review. It helps others find this podcast. We'd also love you to share this with your friends and your family. Make sure you hit the subscribe button on all of our social media platforms at Invested Teacher on YouTube, Twitter, Instagram, Facebook and TikTok.
Jon Orr: Awesome there, Matt. All links and resources from this episode so we mentioned a couple links throughout the episode. You can find all of those over at investedteacher.com/episode10. That is investedteacher.com/episode10. We can also find our full transcript of the episode over there as well.
Kyle Pearce: Awesome stuff. Along with that, on that episode page, you're going to see a link for our Invested Teacher share the podcast giveaway, share, subscribe, and rate over at investedteacher.com/giveaway, all kinds of great goodies and our JV link for those who are interested in joint venture opportunities. That list is growing and friends, we can't wait to see your name on it so we can connect and see what makes sense for you. That's over at investedteacher.com/jv. Once again, that's investedteacher.com/jv, and my friends, another awesome episode here. Class dismissed.
Jon Orr: Just as a reminder, the content of this episode is for informational purposes only. You should not construe any such information or other material as legal, tax or investment in financial advice. Just as a heads-up there, folks.
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