The Reality Check Every Real Estate Investor Needs: Today we chat about the unrealistic expectations many new real estate investors have, from chasing unrealistic returns to misunderstanding market dynamics. By shedding light on the genuine challenges and opportunities in the investment landscape, we aim to steer listeners towards sustainable success. Beyond the allure of quick profits, we explore strategies for long-term growth, emphasizing the importance of thorough market research, patience, and adaptability.
Brett
0:00:51 – Welcome to It’s 5 O’Clock Somewhere Real Estate podcast. Today we’re going to talk about investor expectations and why so many of them get disappointed when they talk to us. Because that’s not a bad thing, but we tell them about the real market and what they should be looking at and the realistic version of how they should be investing. And it usually doesn’t match up with what they just learned in a seminar. Takes a while for us to deprogram and get them back to reality. So listen in, we’ll talk about those unrealistic expectations and how you can maybe guide yourself around them and become a good investor.
Sponsorship
0:03:58 – We are sponsored by Title Assurance and Escrow, a title company here in Cordova that does all of our closings, title work, escrows, and we only use Title Assurance and Escrow. That relationship is very important because we can get things done for our investors quickly and easily. So to speak with Title Assurance and Escrow, call 901-737-3332 and ask for Chris or April.
Brett
0:01:55 – We do get investors that call us and they have unrealistic expectations about what they expect to find in Memphis. I don’t know where that’s coming from. They’re getting their information from a bad source or they’re reading the wrong book or they’re on the wrong website teaching themselves about real estate. I’m only talking about the Memphis market. Shelby Camp, what are you smiling about?
Richard
0:02:24 – I honestly thought you were going to mention seminars.
Brett
0:02:27 – Seminars now, I’ve been on them long enough. Seminars, yeah. Look, if you go to a seminar in Memphis, okay, someone’s going to teach you about the realistic world we live in. If you go to a seminar in California, let’s face it, everything in California is weird.
Jeff
0:02:44 – You had to get him started.
Brett
0:02:46 – You had to get me started. Every time I get a call from a young guy or young girl who says, I’m getting into real estate, I just finished up a seminar and I’m like, oh crap, here we go again. It’s such a deep programming that has to take place to get them into reality.
Richard
0:03:00 – That’s great, isn’t it? Well, isn’t it wonderful that when we wind Brett up just a little bit, he gets animated.
Brett
0:03:07 – Seminar is a four-letter word for me. Only because it makes our job a lot harder, it really does. As you guys, as both Jeff and Nick get into this little war and start dealing with investors, you’ll begin to realize there’s a good amount of deprogramming you have to do with a new investor to get them to realize and get them to a real place. You know my thing with seminars, they’re selling you an idea. They’re not selling you an idea, they don’t care if it works or not, they just sell it to you because you’re paying them to do. So let’s deal with unrealistic expectations. I’ve got a specific scenario I want to go over. Got a call from an investor. He or she, I will leave it open because I don’t want to, you know, just in case they listen, I don’t want to get in trouble. Immediately said, I want to be in a B neighborhood and I want to get X amount of cash flow per month out of that property. Clear. Well, I immediately told this person that that’s not going to happen. Why? Because in a B neighborhood, you want to be in a B neighborhood because you want low risk, right? You want a little bit better tenant, lower risk because you’re scared to take any kind of big risk, but yet you want the high cash flow that you get in the high risk area. It’s like going to a stockbroker and saying, listen, I’m going to give you a million dollars and I want you to invest it in every high risk company you can, but I don’t want to have any risk involved. It’s very simple. The higher risk you go into, the higher reward, same as anything in life. The lower risk, the lower reward. And how I put that is I can put you in a D neighborhood and we can go buy a house for $50,000 that’s going to rent for $950,000 all day long. But I can pretty much guarantee you that you’ll rent that house six times in two years and you’ll have to replace appliances and light fixtures and doors and everything else in that house because when you kick a tenant out, they’re going to take everything out of the house they can possibly take with them and you’re going to end up replacing it. And by the time you’re done, you will realize that your return on that investment is lower than if you were in a little bit upper side neighborhood. So flip that to a B neighborhood or B plus neighborhood, all right? Let’s go to Cordova. You’re going to spend 200 grand on just a basic home in Cordova that’s going to run for $1,500 a month. Well, you’re upside down on your cash flow. You’re not producing the 1% or better. You’re well under that. And after your expenses, your cash flow clear is very minimal compared to what your loan cost is going to be, what your carrying cost is, and your management, and your maintenance, and all those items. So I always tell every investor that the C, C plus markets are the sweet spots. That’s where you can get the 1% by a house for 100 grand that rents for a thousand bucks, 1100 bucks, or 1200 bucks a month. You get the best cash flow and you’ve got a mid-range type risk. You’re not on the high risk, you’re not on the low risk, you’re just kind of in the middle. It’s a blue chip, right? It’s never gonna make you a ton of money overnight, but it’s never gonna lose its ass in 24 hours It’s gonna stay steady and roll along. So a lot of investors come here with these expectations Because they’ve gone to a seminar That I’m gonna roll into Memphis with my hundred thousand dollars and buy my first three houses for 30 grand a pop, put three $3,000 in each one of them and run for a thousand bucks apiece and I’m gonna be making three grand a month with my $100,000 investment. That looks good on paper. I can write that down too and it looks fantastic. But it doesn’t work.
Jeff
0:06:36 – You have to collect the rent for that to work.
Brett
0:06:38 – Right. You’ve got to get the house finished without everything getting stolen out of it first. And you got to get a tenant in there that can actually pay the rent. So what looks good on paper and what looks good at a seminar doesn’t work in reality and that’s when I talk about unrealistic expectations. They come to Memphis and Jeff and I have argued with an investor and we think we probably lost her because she felt we weren’t qualified to be her agents because we’re being brutally honest with her about her philosophy and her formula.
Jeff
0:07:07 – I’m still a little disappointed you couldn’t get her $600 a month cash or $100,000 property. I thought you were the expert.
Brett
0:07:16 – You can do that if you’re paying cash for a property, but you can’t do that if you’re borrowing money and paying interest in principle on that property. A lot of people don’t get that if some clown in California at a seminar tells you, yeah, you can make 800 bucks a house. Sure, if you’ve got a million dollars to invest in 10 homes, but if you’re gonna go to the bank and borrow 80% of the money at an interest rate of 6.5%, you’re going to have a mortgage payment, you’re going to have interest payment. There goes a chunk of your cash flow. So that’s why I tell people, remove your PITI, your mortgage payment out of your cash flow calculation because that’s money borrowed. The interest you’re paying back to the bank is based on the money they gave you that they have invested in the property. You don’t have that money invested, so it shouldn’t be calculated in your rate of return or your cash flow, but people do it anyway because they’re looking at the income versus the asset wealth building.
Jeff
0:08:07 – Well, that’s going to put you out of just about any market if you’d figured out that way.
Brett
0:08:11 – No, according to some of these investors, oh, I can do it in Vegas all day long. I’m like, well, then why are you in Memphis? Why aren’t you in Vegas? Why aren’t you in San Diego? Why aren’t you in Dallas doing it? If you can do it there, why are you here? Why are you calling me? The truth is people get so convinced that what they’ve learned is the way to go that they have troubles Talking to an expert or someone who actually knows what they’re talking about and understanding that maybe they’re wrong about the calculation to me I would assume get rid of that investor because they’re gonna be way more problems than it’s worth down the road because they’re constantly Gonna be upside down. They’re constantly gonna be scrapping trying to survive And I’ll be the one holding the bag and running back and forth trying to, you know, figure everything out for him. So when you get an investor that just is so hard-headed that refuses to actually listen to your advice, you’re only asking for trouble. There are plenty of agents out there that’ll do you a one and done and help you buy that house and tell you everything you want to hear, tell you everything that you think is going to happen is the best and it’s going to work for you. Those are the agents you need. We’re not those agents. We’re going to be brutally honest with you and tell you, your system doesn’t work here and here’s why. Here’s a system that does work and here’s where you need to be. This investor I’m talking about this morning finally responded to me, appreciated my blunt observation of her property she sent me to look at, and then tailed it off by finally saying, but I trust your judgment and I’m going to stay away from that zip code. So I finally got this investor after months, crossed the finish line. She now realizes where she needs to be and what market she needs to be in. Dealing with unrealistic expectations is probably the biggest part of our job as investment agents and that is putting people’s feet on the ground and slapping them and getting them into a reality check to make them realize, look, you want to invest, here’s what it’s going to take.
Richard
0:09:54 – Do you find that there are unexpected expectations when it comes to financing?
Brett
0:09:59 – Yes. I guess people don’t correctly calculate the cost of money, but they just look at the loan as a cash on cash transaction instead of calculating the interest that you’re paying. There’s just a lot of factors that go into that. I’ve had people that just never even factored in the what if something goes wrong, what if I got to fix a window, what if I got to do this. But if you factor in your cost including your mortgage payment if that’s what you’re going to do, your management, your maintenance, your taxes, your insurance, and you still put $200 to $300 a month in your pocket and you’ve got an asset that is growing in value and you have a tenant covering your expenses with the rent money they’re paying, you’re doing fantastic. That’s a great rental scenario if you’re in a C plus neighborhood that’s stable and growing which is why I tell people get away from the I’m going to get 10 houses and quit my day job. Get away from that. That is never going to happen for you. I guarantee you if that’s the approach you take, you may do well for a year or two and then the market is going to shift and you’re going to go upside down. Just like we’ve got some investors that had houses sitting vacant for 30 days. Why? They’re asking me why. I’m like, well, number one, went through the holidays, went through a harsh snowstorm, ice storm in January, things got kind of rough. And on top of that, inflation. When you have a guy that makes 18 to 20 bucks an hour as your tenant, and it’s now costing him 20% more to put gas in his car, buy groceries, his insurance just went up, all these things have gone up for him. He no longer has that disposable income he had before. So what are they doing? They’re sitting tight. They’re going to wait. They’re not moving this year. They’re going to sit for another year, sign another year lease because they can afford this house and wait until next year to maybe consider moving. Well, then that brings the whole rental markets and slows it down for us. We are starting to see a little spark. Things are starting to move again, but tenants, they pay your note. They pay your expenses. So if you’re still making money and someone else is paying your expenses, I don’t understand how people don’t think that’s a phenomenal investment.
Jeff
0:12:00 – Well, it’s not about the cash flow for me. It’s about building the long-term equity and letting that tenant pay all the expenses for you. Mortgage, insurance, taxes, repairs, maintenance. If you had any money left over, buy the principal down.
Brett
0:12:18 – You put money in the stock market, right? You invest money in the stock market and your 401K, you don’t take cash out of that each month. What do you do? It all goes back in. Why? Because you’re building that portfolio, you’re building that investment up so later in life when you’re ready, you can use those funds and reinvest them, retire, whatever you want to do. You look at real estate the same way, it’s a hell of a lot safer than the stock market and it grows at a more steady pace, maybe slower, but steady growth over a long period of time.
Jeff
0:12:46 – Well, I just think that’s the biggest misconception out there is people, you and people that are thinking about investing in real estate just think it’s all about making money, cashflow, like you said earlier, quitting my job and that’s not what it is. This is just another avenue to invest your money in long term, no different than your 401k, the stock market, whatever you’ve got your money in.
Brett
0:13:08 – I guarantee you, it’s called the Donald Trump syndrome basically, that’s what I call it. Look, unless you’re born with a silver spoon in your mouth, your dad was a billionaire who set you up in life to be able to do this and quit your day job and be a real estate full-time investor, this is not a realistic way of going. There are so many factors. But at the end of the day, I’m getting more and more unrealistic investors contacting me today. I would say that out of the last six that have called me, we may have managed to pull one. The other four or five are probably dealing with some agent who’s burning their eyeballs out with a screw job right now and they’ll take them six months to realize they just got burned and then they’ll come back to us because they wanted me to tell them what they want to hear instead of what they need to hear.
Jeff
0:13:52 – Makes you feel any better. I’m 0 for 3.
Brett
0:13:54 – Well, three of those are, that’s what I’m trying to say, is like three of those were just based on unrealistic buyers, unrealistic investors who just took a piece of paper, wrote it down and said, wow, this looks fantastic. And now they’re stuck on that.
Jeff
0:14:09 – Well, let me ask you one more question. I don’t want to get you wound up again, but talk to me.
Brett
0:14:15 – Don’t say seminar. Please don’t say seminar.
Jeff
0:14:17 – Talk to me about overcoming some of the obstacles of some of these unrealistic agents, particularly sellers agents, listing agents. And I’ll say this first, I go through Paragon more and more every day and all I’m seeing are $125,000, $135,000, $145,000 turnkey rent-ready rehab properties. But you pull rent comps on them, $950, $1,150. Are they over-listed or is the market changing or is the 1% rule going away?
Brett
0:14:50 – No, those are just agents that don’t get the investment game, right? They want to, they want to get into the game, but they just don’t understand it. I just talked to a host seller yesterday who sent me a property, $150,000 market rents, 1200. He sent it to me and he says, what do you think? I’m like, it’s way over price. Well, no, it’s worth one 60. I get it. But it rents for 1200. Who’s going to pay? Who’s going to put $150,000 into a house they get $1,200 a month gross rent out of? He goes, I don’t understand. I’m like, 1% rules, pretty simple. $100,000 house, all in, $1,000 a month or more. $150,000 house, all in, $1,500 a month or more. Plain and simple.
Jeff
0:15:27 – I mean, I’m assuming these agents will figure it out and lower their sales price or will they just sit on the market for 460 days?
Brett
0:15:35 – It could be a scenario where the seller is just unrealistic, thinking that, yeah, I mean the house may be worth 125.
Jeff
0:15:41 – They should have never taken the list to begin with because that’s the sellers.
Brett
0:15:44 – No, they did a bad job as an agent not advising their clients properly on how to sell an investment property. Most investors are wanting the 1% rule or better. Then you have to tell your client there’s two types of value here. You got market value which based on appraisal and CMA, the house is worth X, but then you got rent value. And sometimes market values far exceeds rent value. So what I would tell a client at that point is that let’s go in, put five or six grand in market ready work into it, and let’s go to open market and find an unoccupied and make more money on the property.
Jeff
0:16:18 – That’s what I was going to say. I guess my question is if I’m looking at a tenant-occupied property for $135,000 that’s out of rehab in the past 18 months and there’s been a tenant in there paying $950.
Brett
0:16:30 – Well let’s say you look at the market rent, let’s say market rent is $1350.
Jeff
0:16:33 – Do you buy the house, cash flow it for a year, kick the tenant out?
Brett
0:16:38 – If it’s in the right market.
Jeff
0:16:39 – Put a first coat of paint on it and then set rent it for $1500?
Brett
0:16:42 – If it’s in Midtown, Sears Crosstown, Cordova, East Memphis or Berclair, sure. Because I tell some investors, look I may send you a property that’s going to be short for a year until or eight months to lease expires. But market rents going to exceed the 1% the day we renew that lease or move out and put a new tenant in place because it’s in a hot growing market. I wouldn’t do that in 38106.
Jeff
0:17:03 – But I mean if you have a seller that has a house that he think is worth 135 But he’s only got a tenant in it for 950. I guess you’re right. The sellers been a little…
Brett
0:17:10 – Well, no, but the agents not doing their job for their client by being brutally… They’re afraid of not getting the listing so afraid of not getting the business so that they don’t tell their client the truth But then what ends up doing is in a pertinent. I mean we’re dealing with one client now We spoke about earlier who is about to fire their agent why? The house is in sale unrealistic expectations. She let her client get unrealistic about what to expect. She told her, yeah, we can do this. This’ll work. And here’s, didn’t tell her why or why not. So she listed the house at those numbers. And now what now she looks bad and her clients about to fire her and come to us.
Jeff
0:17:50 – But you can buy them all day long, right? Rehab them, put a new tenant in for or go on owner occupant if it truly is a $165,000 house with the current tenant for $1,200 a month?
Brett
0:18:04 – You can, but you’re going to be hard-pressed to find somebody to buy. I mean, if I go and say, look, I’m going to sell you Google stock for $300 a share and it’s growing at 2% a year, why would you buy that? It makes no sense. There’s other places to put your money that do a lot better. So the 1% rule…
Jeff
0:18:21 – No, no, I’m going to go buy $75,000 house. It requires 25,000. I’m all in at 100, but the market, retail market on it, 140, 150.
Brett
0:18:32 – Yeah. And you rent it for $1,200 a month. That’s great, because it doesn’t really have to do anything to do with market value. You’re all in cost as a buyer, right? Period. The house could be worth a million dollars. But if you only have all in $150,000, and you’re getting $1,500 a month rent for it, it’s a good investment. Now when you go to resell that property, your only option then at that point is to vacate it, clean it up, get it market ready and go to an occupant or you’re going to end up selling that house for $120,000 because the rent comps dictate that’s all you can get. And it’s not hard to figure out, it’s just so many agents just why they don’t get that, I don’t know. And that’s why some of these houses are listed for, you know, 20 grand over what market rent is.
Jeff
0:19:15 – But do they, do other agents figure this out and say, Hey, you know, bringing them…
Brett
0:19:21 – those that don’t end up going back to their jobs, bring an offer for a hundred
Jeff
0:19:24 – …an offer for 110. I mean, but am I wasting my time now? If I’ve got $135,000 that I know is worth 110, if I make an offer for 110, am I just wasting my time? I make offers all day.
Brett
0:19:34 – No, I mean, you know, we’re, we’re dealing with a client right now that has everything listed at market value or rent value, right? So it was renting for $1,300 a month. We’re listing it for 121.25. Now we have one that appraisal came in at 115. So he was forced to realize that the market value far exceeded what the rent comps were or far went well under what the rent comps were.
Jeff
0:19:59 – Well, he gets it. He understands. He understands it, but he knows that part of the game.
Brett
0:20:03 – As long as you put everything out there at 1% or better, you’re going to sell property. Sometimes you’re going to deal with an appraisal not coming in where it needs to, and you’re going to have to deal with that. Now, these people, thankfully, gave us a $6,000 appraisal guarantee. They’d pay $6,000 or whatever the appraisal number was up to 131 grand. The other one that didn’t appraise, they agreed to put up, I think it was 7,000 under contract. They agreed to put up 5,000 toward it. So Tom just took a $2,000 hit on it and we sold it. I’ve been honest with Tom. Tom knows how I handle this. He knows I tell him up front, this is what the house is worth. This is what the rent value is. Here’s what you can expect to get based on rent. Here’s what you can expect to get if you decide to sell it open market. And then he can determine how he wants to handle that. But I’m being honest with him out front and I’m sure he appreciates that, I hope he does. If more agents did that, you wouldn’t see those homes for 135,000 renting for 950 a month.
Jeff
0:20:57 – Why does Tom put a tenant in as soon as he finishes rehab? Is that just to create cash flow, marketability?
Brett
0:21:05 – Because what we’re finding today…
Jeff
0:21:06 – Secure the property, all the above?
Brett
0:21:08 – Yeah, secure the property, increase the sellability of it, increase the rent market value, maybe not the market value, but the rent value for sure. We’re seeing a lot more investors coming to us that that’s what they want. They want, I wanna buy turnkey cashflow and 1% or better with a warranty. I mean, you don’t get any better than that, right? You don’t get to buy a 1% cashflow of the house already remodeled. Now, there are these guys that are still convinced, well, I wanna buy a 30 grand house, I wanna put 20 in it, and I wanna rent for $900 a month. God bless you, just don’t call us because I’m not going to that neighborhood every other week when the air conditioner gets stolen or the windows get taken out or they strip the electrical out of it. I want guys that are looking to build long-term portfolio wealth. That’s what I want. And you do that by buying the best property in a CC plus neighborhood with a 1% cash flow starting out because guess what? What grows every year? Rent and equity, rent and equity. So your asset grows. If you start at 1%, you’ve got a good base to start at, and every year you’re gonna slowly increase the value of that home through equity and increase the rent value through just natural economic rent increases. If you’re MHA, a lot of times they do 10% a year. Anyone that sells you, I wanna buy a $200,000 house that rents for $1,500 a month doesn’t quite understand the investment gain. And agents that list homes for 20 grand over what rent value says they’re worth doesn’t understand the investment game. And they’re not advising their clients properly, the sellers or the buyers.
Jeff
0:22:33 – So that’s just frustrating. That’s all.
Brett
0:22:36 – That’s part of our business. It gets more and more frustrating. Jeff always asks me because I’ve been pretty hard on some agents via the email lately. And just like, man, I’m kind of hard on him, man. He told one agent or what he said, one agent, Brett doesn’t mean to be an asshole, right? I’m not being that way. It’s just, once you do this long enough and you deal with agents long enough on the other side, you begin to realize that a lot of them don’t know what they’re doing. They’re lazy and they don’t really care. And when an agent makes my job harder or asked me to do something that they should do, like go to a house so their inspector can get in the house to inspect cause they didn’t bother to show up. It pisses me off to no end. Well, you’re not an asshole. Because she’s making as much, they’re making as much money as I am.
Jeff
0:23:19 – You’re a pretty blunt guy, tell it like it is, but that’s good, that doesn’t make you an asshole.
Brett
0:23:24 – Well, some agents wouldn’t say that. Some agents would call me an asshole.
Richard
0:23:28 – He’s just a rectal affliction.
Jeff
0:23:30 – Yeah, naturally.
Brett
0:23:31 – Is that the medical term?
Jeff
0:23:34 – Now at the lake.
Richard
0:23:35 – That’s just what came to mind.
Brett
0:23:36 – Now at the lake, you’re the nicest asshole I’ve ever met.
Richard
0:23:42 – Well, you know, because I’m drinking and hanging out with friends, I’m not dealing with agents.
Richard
0:24:04 – So I mean talking about expectation and rents, one of the things I’ve seen in the marketplace recently, obviously when someone rents a house they often rent more than they actually need. Some of those people now I’m seeing they’ve gone from tenting at $1,250 a month to $1,950 a month. Those people are downsizing to what they actually need rather than what they want. So driving around town, there is so much rental property on the market at the moment. How do you think that’s going to be affecting rent prices because it ought to drive it down a little bit.
Brett
0:24:21 – Yeah, rent prices have dropped slightly. I wouldn’t say that – well, they went up dramatically in the last three years. I mean 30, 40%.
Richard
0:24:30 – That 1250 to 1950 is a good example.
Brett
0:24:33 – So now what we’re seeing is we’re seeing a balancing of that where things are coming back down to normal rental levels. Now I don’t expect that to last. I think after this November election, regardless of what happens, opportunity and optimism from America and the economy, if it starts to improve and they get some things under control, we’re gonna see another surge upward. But rents, I always say it’s a rubber band effect. So if we see market values jump 20% in the next two years, then those rents aren’t gonna keep up. Now, a lot of your homes are gonna be worth more than what rent value says they’re worth. But it’s like a rubber band effect. All of a sudden, two years later, a rubber band snaps and rents catch up with the values. And then we go through that, almost like a slinky effect. You know, one part goes forward and then the back end kind of catches up to it and just keeps doing that. So, I think this balancing and leveling of the rents will help, but it will create a situation where we have a lot of investors that have homes that are worth 180, but they’re only getting $1400 a month rent, so therefore if you want to sell it, you got to go owner-occupant. But with owner-occupancy, we’ve watched that go down because interest rates are so high. When people used to afford $200,000, they can only afford $130,000 now because interest rates have made the principal payment and interest too high for them to afford. So people are having to come back to reality and realize, well, I can only buy a $150,000 house. I can’t buy my $250,000, $300,000 McMansion because I can’t afford the payment anymore. So there’s a lot of variables that are going to dictate that. Smart agents will know how to navigate that, will know how to advise their clients through that. I’ve got several homes that are owner-occupant listed simply because the values have far exceeded the rent comps and I know if I go to sell to an investor, I’m never going to get what my client should get for it. So I’ve advised them, go in there, clean it up, paint the walls, put some floors in the living room and let’s go to an owner-occupant and make an extra 20 grand on the house. Take you a little longer, but it does take longer. But you know, I mean, unless somebody is going bankrupt and desperate for cash, there’s no reason to fire sale a house to simply get rid of it. If your goal is to move that property, this gentleman is going to make about 50 grand on this house. He bought it in 2019 or 20 actually. So four years ago, he’s already got a $50,000 buildup in appreciation. So even if he puts 10 in it and then we lower the price and he puts an extra 20 grand in his pocket over, divide 20 grand into his investment of 75,000. That’s what he put into it.
Richard
0:27:01 – I think second to the rent balloon, my other concern as a buyer, because I’m going to get into the investment game this year, I’m concerned that the house that I buy at 1% rule today is going to recede somewhat. So I’ve got to have a contingency plan in the back of my mind that it might be a 0.9 or 0.85 six months down the road.
Brett
0:27:26 – Two years ago, investors were buying 10% gross. The 1% rule went out the window. They were actually doing 10% gross per year. They dropped below the 1% because it was so competitive you had to be aggressive on your purchase in order to get that property. We are going to go back to that I think it won’t be maybe this year but it will maybe next year but the 1% rule has been around it’s going to be around listen if you buy a car and you know that every year typically it’s going to go up in 5% of value which is the truth I’m just using that example but next year it just drops 10% it’s going to go back to where it needs to be. There’s no reason to panic. You don’t need a backup plan unless you’re, if you’re buying and holding for three years with the goal that you’re going to cash flow three years, liquidate, reinvest, cash flow three years, liquidate, reinvest, now you should be concerned with market rents and values. If you’re buying for five to ten year hold, building portfolio wealth, the little dips in the rents and the markets should not even concern you because the one thing I can guarantee someone is that unless a meteor hits the earth, market value is going to continue to rise over the long term of real estate.
Richard
0:28:35 – So you’re saying then with my property management fee, my loan amount fee that I pay each month versus the rent that I collect, the rent is always going to cover that?
Brett
0:28:48 – Yes. If you use a 1% rule, it will.
Richard
0:28:51 – That’s what I’m saying. If within a few months you step below the 1% rule, I’m then still going to have to put some of my own money in.
Brett
0:29:01 – A lot of smart investors do this. A lot of my long time smart investors that own multiple properties, Daniel will be one that you could ask about this. In his formula, if he makes 150 to 250 a month per house, he’s good because that means whatever variations happen in rent, he’s never going to lose 250 a month in rent. So his worst case, he’s going to break even until things swing back the other direction.
Jeff
0:29:26 – Well, you just keep building your reserves, right?
Brett
0:29:28 – His only goal is to make sure the property pays for itself. He doesn’t really care about the cash flow. His cash flow is his buffer for the what ifs, you know, up and down in the market because he’s not living off the cash flow. And that’s why if you go into a market and your whole goal is to live off the cash flow, then you’re very susceptible to that very scenario that you just talked about. Market swings, rent drops, all of a sudden now your $12.50 a month rent goes to $11.50 or $11.00 and now you’re barely making your mortgage payment or you’re coming out of pocket to make that additional expense.
Richard
0:30:02 – Well, I’m not even considering any money that this might make as a cash flow for me to live on, but at the end of the day, I don’t want to be in a position where at least my costs aren’t covered because in the market that I see now, we’ve got rents that I’ve ballooned to beyond true market value and as those correct over the next few months, that could put me in a position where the amount…
Brett
0:30:31 – I would say on a $1,500 a month property, you’ll see that rent may be reduced back to $1,400, $1,395. So if you’re cash flowing $250 a month, $200 a month, you’re still on the positive even if your rent adjusts. And then 12 months from now, the rent adjusts back the other direction or two years or whatever it’s going to be. So if you eliminate the cash flow idea and you just strictly want to create positive cash flow or a break-even scenario and let equity grow and asset wealth grow, then work your numbers to where you, but having a $30,000 crack house that rents for $900 a month.
Richard
0:31:20 – I think expecting to have an income is unrealistic.
Jeff
0:31:23 – I think what he’s saying is…
Brett
0:31:25 – Daniel makes $200 to $250 a property. He said on most days, but there are times where something’s empty and like he said, he takes all that money and jumps in on one mortgage, pays it down and when that one’s done he takes the rent from that one and pays the next one.
Jeff
0:31:39 – I think what Richard’s saying is he’s got an MHA tenant in his house for $1,800 a month. Now, he doesn’t want MHA to wake up January 1, 2025.
Brett
0:31:48 – Very possible.
Richard
0:31:49 – Drop the rent down to $850 a month.
Brett
0:31:51 – No, that’ll never happen because what had happened at that point is you’d see mass evictions. It’d be just a massive layoff layout of all the MHA tenants.
Jeff
0:31:59 – It’s got to stabilize somewhere, sometime.
Brett
0:32:02 – I think where we’re at currently, we’re going to see a freeze for about three years. Right? So if you’re getting 1850 for a new build construction, I think for the next two to three years, you’re going to kind of see MHA pause off a little bit and just kind of let things level off because let’s face it, they’re paying 10, 15% over what market rent should be, but they’re doing that to get good homes for their tenants. But as they’ll probably pause it until rent market, regular market rents catch up with theirs and then they’ll start increasing again to stay above. They’re always going to try to stay one step ahead of market rent because that’s what gets their tenants good homes.
Jeff
0:32:36 – Well, I mean, the rent has to, I mean, just rent in general can’t keep going up. People can hardly afford the rent now.
Brett
0:32:43 – Well, you think about it. When I first moved here and we rented a house 2006 after Katrina, we moved here and rented a house for the first year we were here. I paid $650 a month for a 3-2 house in Cordova. That same house rents for $1,700 a month today. So yeah, the economy…
Jeff
0:32:58 – I just don’t think it’s going to go down though. I mean… With all this inflation and everything’s over with, you know, hamburgers aren’t going to go back down to $2. Cars aren’t going to go back down.
Brett
0:33:10 – I wish they’d go back down to that 50 cent McDonald’s cheeseburger.
Jeff
0:33:14 – Automobiles aren’t going to go back down to $30,000.
Brett
0:33:15 – It’s the same old rule. When my dad bought our house, he bought our house for $7,500 brand new. When I was a kid, the house is probably $250,000 a day. Back then, people like 250 grand for a house. What are you a millionaire? Well, no, that’s an average house today. The economy and the people that live in our economy and the people that rent and buy just eventually grow with the market. So while you see dips in rent, you don’t see massive drops, nor, I mean, unless the economy completely collapses and the government runs out of money, you’re not gonna see that, especially not in Memphis, because every tenant here, most tenants, work. They work at FedEx, they work at the airport, they work at St. Jude’s, they work somewhere in distribution making 18 to 25 bucks an hour. So they’re always gonna have a job unless those companies close down. So there’s always going to be tenants that can make the money to pay rent. The problem with rents today, which is going to cause, I think, like I agree with Richard, a reset is inflation simply because people’s cost of living has gone up 20% groceries, gas, everything. So until that comes down, we’re not going to see a big bounce in rents again. I think we’ll see anything going to level off and stay there for at least a year or two until things start moving the right direction.
Richard
0:34:28 – I think to Jeff’s point MHA is definitely the direction I would go as of today. Don’t know what the program is gonna look like in two, three years but they seem…
Brett
0:34:50 – It could be a complete shit show in three years. I mean it’s happened before. But it has improved dramatically in the past recent years it It’s government, all right? I mean, let’s face it, government rarely works for people. It rarely works the way it’s supposed to. I will give credit to MHA and the new director here. She’s done a phenomenal job of turning that around and really making it a win-win for investors and tenants. When it used to be just a win-win for the government and the tenant, and the investor got burned over and over again. She’s done a phenomenal job at that, you know? But, you know, she may have aspirations to run for public office and leave. And then we get another dimwit in there right behind her and he trashes the whole program again. Who knows? I will say this during COVID as Andre said, when we had him on the show, the only investors getting paid rent were MHA tenant investors. MHA never skipped the beat, paid rent, continued paying rent. Self-paid landlords lost six, eight, nine months, 12 months worth of rent on their investment.
Richard
0:35:41 – Is there a different expectation today as to what makes a good rental property? Because back in the early 2000s, it was 3-2 everything. Everybody wanted 3/2s. As a result of COVID, we’ve seen people wanting 4/2s and beyond.
Brett
0:35:58 – Yeah, I mean, I would say the sweet spot for investors is 3/1, 3/2s, you know, brick home, little 1972 built Raleigh brick home. That’s the middle of the road sweet spot. I do have some investors who want 4/2s because they’re renting MHA and MHA pays so much more for a 4/2 over a 3/2. I have some investors that like 2/1s, but 2/1s are hard. They’re hard to rent, they’re hard to sell unless you are in Berclair, University of Memphis or somewhere where there is a ton of them and they are very common. But if you go buy a 2/1 in North Frasier where everything is 3/1 and up or 3/2 and up, you are going to have a tough time renting that when you are competing against 3/2’s and 4/2’s for $100 a month more in rent. So I try to push people away from 2/1’s if possible, unless it is University of Memphis, Orange Mound, Berclair, I’ll tell them to jump on. So check out our website, MyMemphisInvestmentProperties.com we have a brand new page, it’s got a little icon for sale up on the right corner. If you click on that, it’ll bring up an entire list of all of our properties we have available, the turnkey, the off-market, the brand new construction rentals, gives you all the details about it, the rent, so you can actually kind of run your numbers and see what works for you. It even gives you the location and the zip code. We don’t grade it based on the location because we’re not allowed to do that, but you can do that yourself by looking at it on the map or call us at 901-692-7401. Again, MyMemphisInvestmentProperties.com. Go to the little for sale icon and check out what we got. Go to the little for sale icon and check out what we got.