Today’s REI Classroom Lesson

Find out why bad markets aren’t necessarily a bad thing for landlords from our host today, Steve Rozenberg.

REI Classroom Summary

Learn the benefits of a good and bad market for landlords, including the vast amount of millennials who are renting for longer periods of time.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Announcer: Welcome back to the REI classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now let’s meet today’s expert host.

Steve: Hi, everybody, this is Steve Rosenberg. I am the co-founder of Empire Industries property management company. We’re located down in Houston, Texas, so we currently manage about 500 single-family properties. Today what we’re going to talk about is how to handle good and bad markets when you’re a landlord.

Announcer: This REI classroom real estate lesson is sponsored by

Steve: A lot of people always come up and ask me or they email me and they want to know, “Is this a good time to be a landlord or a bad time to be a landlord?” Again, I always think they base that on their perception of what they’re hearing in the news and what they’re hearing in the media, not a logical opinion, but more of what they think the perception is. Obviously, as you know, your perception is your reality.
So, a lot of times, what people don’t understand is that a bad market, when things are considered a bad market and if people consider the economy to be slowing, that is actually a better time to be an investor, in my opinion, because when you are what’s called a contrarian investor, meaning you’re opposite of what the flow is going, you actually can find better deals because, even down here in Houston Texas, we’re seeing people not easily able to sell their property as quickly as they could, which means that is no longer a seller’s market. It’s becoming a buyer’s market.
When it is a buyer’s market, you can obviously get better pricing. When you think about it, when the economy is bad and unfortunately when people do lose their jobs, they don’t melt away and turn into sugar. They still have to live and have a roof over their head. That means that they normally are downsizing and they’re going from bigger houses that they own to maybe smaller houses that they’re going to rent. So in a down economy, actually the rentals go up and the rent-range rent prices go up.
Our worst time as landlords was when the economy was doing great back in ’04, ’05, ’06, when everybody could get a loan. When everybody could get a loan, they were punching out of our houses and they were going and buying a house and we don’t have any renters. So now in ’08, ’09, 2010, they all kind of came back as renters because they lost the houses. So, again, it sounds a little sad or morbid, but the truth of the matter is when you’re a landlord, a bad economy is actually better for you.
One thing that I think that people have to realize when you’re looking at a property and you’re thinking of becoming a landlord, you really have to look at all the ways that you make money in real estate. A lot of people only look at one thing and that one thing is cash flow. What I have learned, in my opinion, is that there’s five ways that you make money in real estate. Whenever I do a mentorship or help an investor, they always say, “I don’t want to buy that deal because it makes no cash flow.” As soon as they say that, that tells me that they’re really not as educated as they could be and they’re not looking at the big picture. They almost have tunnel vision. They’re just thinking cash flow.
So cash flow is one and it is important, but the other thing is when you actually buy that property, you are going to capture some equity. It’s called equity capture. When you sign the contract and you close on that property, it may be worth $200,000 and you bought it for $150,000. So you’ve gained $50,000 in unrealized capital. It doesn’t go in your pocket, but you actually got that money.
Okay, the next thing is, I think we’d all agree, that if you had a house, in 30 years from now that house would be worth a lot more money than it would be today. So with that being said, that’s called appreciation. Thirty years from now, you will have a house that will appreciate over time. Now, on year 30, when that house is paid off, a tenant will have paid that house for you. They will be making that mortgage payment for you while you’re making cash flow. So that’s called debt pay-down. Debt pay-down is basically someone else is paying that mortgage.
Now, obviously you’re going to have some maintenance costs and you’re going to have some vacancies, but all in all you will get a house that is basically essentially paid off and paid for by a tenant. So that’s the other kind of equity capture.
Then you want to think of depreciation. Depending on your tax basis, you are going to be able to depreciate that property over time and you will be able to do it with your taxes and be able to help you out.
So you want to think of all the things as a whole. My opinion is when you’re looking at investing and you’re looking at these three options, I look at it as a three-legged stool. If you can make sense with three of those avenues, it may make sense to at least move forward on the deal based on, “You know what? This is going to go up in value. I’m going to be able to depreciate on the taxes and it’s got a little bit of cash flow.” So don’t just look at one side and don’t think of just one thing that you’re looking at to have it make a deal.
The other thing I will say lastly is when it comes to renting, the largest sector right now are the Millennials, people that are between 18 and 34. There’s 92 million Millennials right now and things like Uber and other things, cell phones and renting cell phones – this is a disposable type economy when it comes to Millennials. That means that they are not buying houses. They are renting. They’re renting houses. They are renting apartments and they’re going to stay renting for a lot longer than most other people in other generations did.
So as a landlord, you have a very large sector that is going to be flushed into the rental market that most people have never experienced before because these Millennials are not going through the standard progression that a lot of the older generations did. They are renting and staying renters.
So for me as a landlord, I’m looking at that and I’m making my properties Millennial-happy. I’m making sure it has Wi-Fi ability. I’m making sure it has things that can help Millennials because I know that they are looking for rent and they’re looking for the amenities.
So, again, that’s my opinion. This is Steve Rosenberg with Empire Industries property management company. Thank you very much.

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