Successful Rental Property Investing

Mike: Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting Expert Interview, where I interview successful real estate investing experts and entrepreneurs in our industry. Before we get started with today’s guest, which is a very special guest for me, a good friend of mine, I want to make just a couple of quick notes, real fast here.

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For today’s show, I’m joined by Scott Belsley. He’s a man that I’ve known for a long time. We were just trying to figure that out. I think it’s been 10 years or more, actually, well before I was in the real estate investing industry. He was our tax advisor and CPA when my wife and I were corporate folk. Then we got into real estate investing. It was a natural fit to just stick with Scott.

Very few of you listening to today’s show have probably ever even heard of Scott, but he has achieved what almost everyone listening to this show will find enviable for sure. Scott’s, really his trade, as I mentioned, is a CPA and a tax advisor. He owned a firm for that for many years.

But since the late ’70s, he’s built a rental portfolio that consists of over 600 single family houses, and over 1500 apartments, over 2000 doors, mostly in the Dallas and the surrounding area. Scott has quietly built a business that to say the least, is very impressive. He’s been a mentor to me and my wife for many years and we’re excited to have him on the show today finally. We’ve been talking about it for a long time.

Today we’re going to talk about Scott’s investing philosophy. He has a unique approach to a lot of the things that he does and he’s going to share it with us from buying properties to managing in different markets, rental property operations, financing a number of things really around the rental property space. Again, very excited to have Scott with us today. Before we get started though, let’s take a moment to recognize our featured sponsors.

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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

Hey Scott, welcome to the show.

Scott: Good to be here.

Mike: Yeah, so glad to have you. It is interesting if your… Like I said, I had nearly 250 guests on the show and very few of them I know as well as I know you. A lot of people have become friends of mine or maybe we knew each other, run in some of the same circles. But you’re the first person that I’ve had on that I’ve known for quite as long as I have and it’s been so influential to my life and my business. Thanks for being here, my friend.

Scott: You’re welcome.

Mike: So Scott, before we get started, why don’t you tell us a little bit about your background and how you got into real estate investing.

Scott: When I went to college, I was very interested I had an opportunity to take a course under Henry S. Miller, who was a large local real estate investor at the time. This is the late ’60s, early ’70s. I was fascinated with what he did. It took a little while, five years later, I was able to use some of the items that he suggested I should do and bought my first property. It was a six unit apartment building on Cole Avenue. It is now where West Village is, anybody that’s familiar with the Dallas area.

Mike: Pretty hot area.

Scott: Yes it is and I bought up the place, fixed it up, sold it a year later, made 10,000 bucks. This is back in ’76 and ’77. I said, “This is the business to be in.” So I started buying and selling and then I, late ’80s, the market changed to a down market, and a very heavy down market. I had to turn to become an operator. Since then I have, that’s been my specialty, is management.

I buy properties whether it’s houses or small apartment buildings. I fix them up and I operate them for a long period of time. I generally will buy C-class properties. I don’t like D’s, I definitely don’t like A’s, maybe a low B because that level, in my opinion, has the greatest return on investment for the management effort.

Mike: Sure. Let’s go back to that, Scott. We’ll talk about the different classes. It’s interesting because you were very influential with us changing gears at one point. I don’t know if you even realize that. Well, of course, you do because now you manage our rentals. So you were a CPA and you were in the tax business? That was before you started real estate investing? Which one caused the other?

Scott: It was interesting. I also, when I got out of college, I worked for one of the big national CPA firms and then shortly after that, I went to work for a division of Lincoln Properties. I had exposure on real estate from a different attribute. I saw how those people did so well and I said, if they can do it, I can do it. I bought my first property while I still worked for a division of Lincoln Properties.

Mike: Lincoln Properties, for those that don’t know, is a huge multi-family developer.

Scott: Three years later, I started my own practice. Yes, I started in real estate a little bit before I started my accounting practice.

Mike: My guess is, of course, from seeing them and then from your accounting practice, and your tax knowledge, you saw that as a huge way too shelter you from the taxman and build long-term wealth. I assume that was the appeal.

Scott: Yes.

Mike: So this was in the ’70s. You bought your first property, say that year again.

Scott: 1976.

Mike: 1976. Scott, I was two, I was two years old then.

Scott: The rents for two bedrooms were $175 to $200 a month.

Mike: Wow.

Scott: Bills paid.

Mike: That’s awesome. So let’s talk about one of the things that I want to get into at some point here because we were talking for awhile before the show today about different market cycles. There are a lot of people that are in this business, me included. I’ve been through… we started in the down cycle in 2008.

We have never hit a market like what we’re seeing right now until this time. This is my first time in this kind of up-cycle. You feel the pinch of that. You kind of see what’s going on. But I know in talks with you many times, that you start to just develop a strategy of when this happens this is what I’m going to do because it tends to cycle back and forth. So you’ve you seen this market before, right?

Scott: Yes, I have.

Mike: Talk about that generally, just what with real estate investors and maybe get a little guidance about how… For a lot of real estate investors, they tend to get in for a short period of time and maybe they get hurt or maybe they don’t, but they’re not around long enough to see lots of different cycles and start to behave differently and anticipate things. Talk about the importance of that if you’re going to be in this business for a long time.

Scott: I was a different type of businessman before the first really bad cycle. I was not aware of the depth, of a recession in the need for liquidity and to really watch your operations. In the late ’80s, we had probably the biggest crash locally that I’ve seen in my lifetime. I saw values and some parts of town drop by more than 50% and it wiped out a lot of people.

The thing about a good market is enjoy it, but it’s not going to be there forever. There is going to be a day when the market changes. My advice to people is don’t overpay because I saw, on three different occasions, people overpaying and then the market changes and they can’t even sell the property for what they owe on.

Mike: Right.

Scott: As a result, we have foreclosures, we have bankruptcies, and in bad times, it’s a good time to buy. You need to have liquidity and money available. Generally speaking, at bad times, there’s a lot of money that’s not available. The big money is made when you buy, and in bad times, that’s when the opportunities are so much greater than they are today.

Mike: Sure. I know when I came in, in 2008, aside from a bunch of people thinking that we were crazy. Some of those same people now say, “Well yeah, you got in at the right time,” and we didn’t know that, it’s not like we planned it. It was just coincidence that happened. We didn’t have a lot of the bad habits that people had at that point. I won’t say we haven’t picked up some bad habits along the way. We didn’t know what we didn’t know, so we stayed really conservative.

I know a lot of folks during that time, echoing exactly what you just said, had access to capital but it was usually one or two sources and it was easy for them to lose access to that.

I know we were talking, previously, about how you’re spending a lot of time now developing those financing relationships, wide and broad, so that in the events or when the time comes when some of those start to go away, you have some relationships that will inevitably stay in place. Can you talk a little bit about the importance of building those relationships and doing it in anticipation of what you might need in the future.

Scott: Well, you’ve always got to look ahead, especially to a different market. While you’re in a good market like you are today, it is important that you establish multiple financial relationships. Get to know the banker, get to know the mortgage company. Do some deals with these people. Build up the credibility because in bad times, you’re going to need them, and you’re not going to be able to keep them all.

I generally have about 10 to 12 financing sources I use today. It’s gone up over the years and in the next bust probably half of them will not be available. This is the time to build your financing sources, get your credibility with people and get your financing straight.

Mike: Yeah. I know, again, even when we came in, there were plenty of banks that they would say, “Well real estate? No that’s evil. We don’t finance that anymore.” Or they would say, “Well that person is not here anymore,” whoever the primary person that dealt with investors is not here anymore and just meeting with you fairly regularly. I know you open up a number of doors for us and there were people that, they may be cut way back on what they were doing, but for guys like you, you still had relationships with them because you’d spent all that time building that previously.

Scott: And that helped a lot. Some of my relationships are 20 years old. Unfortunately, when you have a relationship with the banks, sometimes they merge, they have a different philosophy. In a few cases, the banks went under, so you lost that relationship. That’s why it’s good to keep multiple relationships. You can only finance a certain amount with a non-bank. Local banks are the key for what most investors are going to need.

Mike: Maybe you can take a minute and just share some advice, because I know that you shared that with me previously, and the banks that I work with now, our local banks that are here in my market. Just share how to get those inroads because I think a lot of folks have a hard time getting their foot in the door.

Scott: Well, first thing I do when I meet a new banker, is I tell him what I’m interested in, see if they’re interested in real estate loans. About half of them really like real estate. About half of them don’t. If you got one that doesn’t, go on and go to the next bank. They all like deposits. Be sure to let them know that you would like to make a nice deposit. The bigger the deposit, the mores attractive that is for them.

Then I also tell them, over time, I’ve been able, as I’ve gotten stronger financially, I’ve been able to ask for better terms and better rates. But my philosophy is, I like to do a 15 year fully amortized note. Thirty year amortization never pays off, banks don’t like it. They’ll do 15 years. If you get a 5 or 10 years, it’s too fast, it’s too big of payment compared to your total income.

I’ve found quite a few financial institutions that would do a 15 year note. Most of them, would only go five years fixed but then they will adjust it. Every five years, every three years afterwards the key is to have that fully amortized note because if you’re in bad times and you have a balloon payment coming up, and that bank doesn’t want to renew your note, you’re in trouble.

Mike: Right.

Scott: That’s been something I saw back in the ’80s, the late ’80s. Good investors that had good property, they had a balloon payment come due, the banks weren’t in a financial position to renew the note, they lost the property. So that’s one reason I do a fully amortized note. Fifteen years seems to be a good balance between a cash flow and… I’m kind of old fashioned. I like to have my properties paid off at some period of time.

Mike: Yeah.

Scott: If there is an adjustment in the rate a few years down the road, it doesn’t hurt you near as much when you’re on a 15 year amortization versus a 30.

Mike: Sure, sure.

Scott: Remember, on a 30 year amortization, five years into it, you’ve only paid about 4% or 5% down on it. But with a 15 year amortization, you pay 25% to 30%

Mike: I want to kind of echo something that you just said. It’s from advice that you gave to me that I pass on to some other folks that I mentor and coach. It was with a bank that you helped me get my foot in the door, which helps some other people get in the door. I don’t know if you’re even aware of that. But to help some other folks get their foot into the door, when the market started to get better again, it was harder to get in the door because they had taken on so many new clients. I literally just gave them the same advice that you just shared with us and you gave me before was to, if you can’t get their attention, just go put some money in the bank there.

Scott: That’s right.

Mike: Now, instead of just somebody walking in saying, “Would you like me,” or “Can I talk to somebody?” “Well they’re not available right now.” When you’re an actual customer, they’ll find a way to become available to talk to you. Even if it doesn’t go anywhere and you have to take that money back out and go put it into another bank, at least you get their attention for a period of time.

Scott: It gets their attention in a large way. The bigger the deposits, the more attention you get out of them.

Mike: So let’s talk about the importance of the operation side in a bad market versus a good market. Maybe you kind of share some differences there.

Scott: Well, you can usually get better deals in a bad market. A lot better deals than in the market you can today. The thing is, as an operation, you’ve got to watch the numbers. You’ve got to fix your property up as inexpensively as possible but don’t go so inexpensive that you’re skipping important things.

Mike: Right.

Scott: I’ve learned over the years, I do all my property in one color paint. I’m a C-class, low B guy, those tenants are fine. That saves me a lot of money by just doing one color paint. Learning to adjust your operations to the type of tenants you have, using a good off-white semi-gloss paint on everything, that means when somebody moves out I can touch it up. Saves a lot of money.

Mike: Right.

Scott: I do the same thing with carpet and flooring. They all have one color. I can buy them in quantity. I started doing that, buying things in quantity, in bad times and I can get some decent prices. Today it’s paid off even more because there’s more competition out there and good times and I’ve got somebody new that comes in, says I can beat the price of who I was dealing with.

Mike: Right.

Scott: There’s nothing better than competition. I love competition.

Mike: Especially if it’s bidding for your business.

Scott: That’s right.

Mike: Yeah.

Scott: One thing I think that’s very important with any people I do business with, you got to pay them on time.

Mike: Yeah.

Scott: Yes, I want a good price, I want good service. I want them to have their check on the tenth of month without fail. That’s my person philosophy and I think that helps me get better prices. You do a certain amount of volume like Home Depot and Lowe’s, you can go to the Pro Desk and you can get significant discounts off of what you’re buying.

Mike: Sure.

Scott: Much less [inaudible 00:20:34] I get even additional discounts.

Mike: In your business, you even buy direct on a lot of stuff. You’re buying stuff by the pallet load or the truck load in some instances.

Scott: We buy things like, Florine by the pallet, we even buy freon by the skid. It’s amazing how much I can save by doing that. I’m large enough, I can do that now.

Mike: Right.

Scott: And watch your expenses, whether it’s paint, whether it’s door knobs, whether it’s P-traps, whether it’s carpet. Do enough to get that quality tenant in there but don’t do too much. I saw some people putting granite counter-tops in class D properties. You don’t gain more rent for granite counter-tops in a class D. In an A, yes. You’ve got to adjust to your tenant in the way you handle your property.

Mike: Sure. Why don’t take a couple minutes to talk about different classes of property and your philosophy. Why you focus on the area you focus on.

Scott: Well, class C to me, I have the greatest returns on investment compared to the management headache. To me, a class A tenant is a tenant that can go to a bank and probably get an unsecured loan. A class B tenant can’t touch the unsecured loan but they’ve got good enough credit, they could probably buy a house. A class C cannot buy a house, their credit is bad. They may have a good job. They’ve been at the same job for a number of years, they need a place to live. I would say a class C tenant would probably be somewhere between $10 to $15 an hour approximate.

Then a class D tenant to me, are people that are on government subsidy. People that have no credit, no income, or very little income, or maybe they make minimum wage. Generally speaking, a class D tenant will have problems other than credit.

Mike: Right. And the house [inaudible 00:22:46] to give folks some indication of the house. An A-class property is well above the median price point in the market. Very nice house that, aside from their credit worthiness, is probably a harder property to cash flow, probably somebody that’s going to call for a maintenance request when a light bulb is out versus other folks. B is around the median price point, and C is more of a working class neighborhood. Am I saying that about right, Scott?

Scott: Yep, I would agree with all that.

Mike: Now the interesting thing about… So we’re here in the Dallas market where this kind of applies to lots of markets across the country, is in a C-class type property, they’re generally not building any more of those properties which is what helps them maintain their value as a rental property. Can you talk a little about what’s going on from a building standpoint?

Scott: Oh yeah. All of them. There’s a tremendous amount of apartments being built in the Dallas Metropolitan area but I don’t know a single complex that will be below a letter A. I’m talking about a lot of A pluses. Because the cost of construction is so high and there are so many government rules, they can only build the very top end.

Well, you look at my level, which is probably, the tenants pay less than half the rent that class A tenant would pay, they can’t afford this. Well, people can’t afford to build a class C property. Class C properties are older properties and these are in the middle. In some cases, in disrepair, although we fix them up. The class C properties, the class C tenant is the preponderance of the people available that want to rent.

Mike: Right.

Scott: That level is actually growing. There’s demand. The demand is greater and greater, and the supply is finite and declining because some of these older properties are being torn down. There’s less and less property for these people to live in and there’s more demand for it. So what happens? Prices go up. They’re going up exponentially greater than a class A in my opinion. Right now, I think we are having somewhat of a housing shortage coming. I’m putting my money where I think I want to be on the right side of the equation.

Mike: Especially at that level, I mean, even a lot of the houses that we invest in, we’re buying them for well, well below the build price. There are entire cities that are just rental grade houses now that you could never… nobody will ever build there again because they can’t afford to build at that level, right?

Scott: That’s true. Big chunks of town are that way.

Mike: Even the builders, most of the builders, there’s a lot of, in the market where we’re at and markets across the country, there’s a tremendous amount of new home building going on but they don’t build at the entry level point anymore. They’re building at well above that because they can afford to spend some money and of course, materials prices have gone way up as well, so they’re kind of forced to go up stream.

Scott: And they also have to qualify for a loan and that knocks the [inaudible 00:26:04] of society out. The upper end has no trouble. Even the class B’s can qualify.

Mike: Well Scott, we talked about different properties and different markets and things like that. Maybe talk, for a couple of minutes, about the importance of people being able to adapt as markets change.

Scott: Well, I’ve been through four recessions and if I didn’t adapt I wouldn’t be here. In a down-market, you’ve got to watch your expenses a lot closer than in an up-market. In an up-market, the problem is, it’s so much harder to find a property, and you may have to change your parameters of what you would in a down-market versus an up-market. I’ve had to pay more for properties. Fortunately, the rents are higher. The ratios are slim and a little bit. I’m not buying… I’m probably buying a fourth of what I bought three years ago because it’s so hard to find the numbers.

Then what’s happened in this market, is there’s a lot more people that are looking for a place to live than there was in a bad market. You have to cater to those people and the quality of the tenant has actually been improving. I’ve found I’ve had to do a little better quality make ready than I would have three or four years ago. You’ve got to change with the market. If it goes down, you’ve got to go down with it. If it goes up, you’ve got to go up with it. I just think that if you can’t… and you don’t want to overpay either because if you overpay in an up-market or down-market, you’re going to get creamed. Four cycles I’ve seen it.

Mike: My guess is, I know you’ve been raising rents pretty much across the board whenever somebody turns over, we were talking about that beforehand. My guess is, you always meet people that have different philosophies. You know plenty of people that their philosophy is, “Well I’m going to keep the rents low so that I have less turn over,” which doesn’t necessarily prevent less turn over. But if you start to figure out what that’s costing you, people who have that philosophy are leaving a lot of money on the table right now.

Scott: That’s right. And eventually your expenses, property taxes and insurance are going up with values increasing, there’s a substantial increase in property tax here in Texas which is a big expense here. If you’re not raising that rent and those property taxes are going up, you’re going to get squeezed. Yes, you’ve got to increase your rents with the market. If you’ve got to a good tenant and they’ve been there a long time, you’re raising, but keep them a little bit below the current market. It’s a balance to where, keep them below the current market but don’t lose them.

Mike: So Scott, did you from the beginning, you obviously have a huge operation that allows you to manage your own properties. You actually manage my properties, so my wife and I don’t have to deal with that. We have other problems that we have to deal with it. So that’s one of the things that we don’t have to deal with and we’re very thankful for. There’s always this discussion about managing your own rentals or not. Did you manage your own rentals from day one? From the beginning, did you always manage those or no?

Scott: With one short exception, yes.

Mike: Okay.

Scott: I did have a management company for a short period of time and when they painted the house for four times what I could have painted it for, I decided to take my property back.

Mike: I think most people that decide to switch, at some point, it’s something like that happens, or the turn over takes longer, or whatever it might be. We’ve got just a couple minutes left here. Maybe you can take a minute or two and just talk about the importance of good property management. For those that are out there that are managing their own or have a property manager, maybe just share some words of wisdom on the importance of that piece in this whole puzzle.

Scott: You’ve got to know your tenant, be able to deal with the tenants at the tenant’s level. Those that are managing your own property, there’s only so many you can handle before you need somebody to help you. Be sure that you change, that if you get to a certain size, you bring somebody in to help you. But don’t lose the ability to understand what the tenant wants.

If they need maintenance, get the maintenance done. You’ve got to be on top of the rent coming in. You’ve got to be on top of the changes in the area. Some of the areas in town are having a tremendous renaissance. Now you have to deal with a class B or class A neighbor to your class C. Always be able to adapt and watch what’s going on in your neighborhood and keep in touch.

Mike: Yep.

Scott: If you hire a management company, be sure they keep in touch. There’s a lot of them. You’re just a number. Be sure… one advantage I have when I manage property is it’s in neighborhoods that I own property so I know those neighborhoods. I know what’s going on and I can easily adjust my management property the same way I would the properties I own.

Mike: Right.

Scott: Understand what’s going on is the key.

Mike: I think it’s difficult because so many people that own rental properties, they truly want it to be passive. Whoever throws that word around, “I want a passive investment,” you and I both know it’s not passive. I use this line all the time, if I say passive around my wife, Lindsey, I get a sharp elbow. Even though somebody else is managing, we still deal with tax issues and insurance issues, and all those things. It’s not passive but it could definitely be a great vehicle for building wealth.

Scott: It’s a tremendous vehicle for building wealth.

Mike: Well Scott, thanks for joining us today, so glad to see you here in this interview my friend.

Scott: Thank you for having me.

Mike: Awesome, I look forward to talking to you again soon.

Scott: You have a good day.

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