Many people see rental properties as a path to freedom, but financial and time-wise…but almost nobody wants to actively manage properties or be a landlord. Unfortunately, they go hand in hand! In this Flipnerd.com Flip Show, we talk about the importance of Effective and Efficient property management with veteran real estate investor, Michael Jake. Don’t miss this one!
Mike: Welcome to the FlipNerd.com podcast. This is your host, Mike Hambright, and on this show, I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes store or by visiting FlipNerd.com. So without further adieu, let’s get started.
Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting VIP interview where I interview some of the most successful real estate investing experts and entrepreneurs in our industry to help you learn and grow.
Today I’m joined by Michael Jake. Michael is a veteran real estate investor with a large portfolio of rental properties that has seen it all. Many people want to own rental properties, but very few of those people actually want to be landlords. However, as we’re going to talk about today, efficiently and effectively managing your rental properties is critical to your financial success. There’s really no reason to own rental properties unless you can do that effectively.
So that’s it. Today we’re going to talk about effective and efficient property management with Michael Jake. 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.
Mike: Hey, Michael. Welcome to the show.
Michael: Hey. Thanks, Mike.
Michael: Good to be here.
Mike: Glad you’re here. So yeah, it’s funny. We were talking a little bit about, before we started recording here, that there’s a ton of people that, because of HGTV or because of a friend or an uncle or somebody that apparently made a bunch of money with rental properties, everybody wants to own rental properties, but nobody wants to manage them, very few people, including me. I hate it, which is why I’ve outsourced it which causes some other problems that we’ll talk about today.
Mike: But I know you know that well, and I’m excited we’re going to cover this topic today.
Michael: Cool. Well, hopefully we can shed some light on some of this for other people.
Mike: Yeah, yeah.
Michael: And especially for those that understand and want to enjoy the benefits short and long-term, but again, don’t want to get their hands dirty and all, I’ll sort of show you how we evolved from me doing everything to me outsourcing it within my own company to now outsourcing it completely, and still being on a growth curve . . .
Michael: . . . but not having to be involved.
Mike: Yeah, that’s great. That’s great.
Michael: Thank you.
Mike: Hey, before we get started though, Michael, why don’t you tell us about yourself? I know you’re a fellow corporate refugee that left corporate America to go out on your own and become a real estate investor. Why don’t you tell us more about your background?
Michael: Sure. Well, I grew up in Ohio, in the Midwest, and I was living in Columbus, Ohio. I have a business degree and throughout a long and arduous college career, I got into technology, more or less, information technology. I was working for sort of a consulting company while I put myself through college, and consulting was the buzz word and that sort of, in the late ’90s, ended up as IT consulting.
Michael: So 11 weeks later at a boot camp up in Farmington Hills, Michigan, I was now, more or less, a programming/consultant. We would go in and do date change stuff. I didn’t do a lot of the date change stuff, but that’s where a lot of that stuff came forward, for the Y2K changes.
Michael: I did very well. The money was great, but that was sort of a huge salary wave that crashed right after the millennium. I had since moved to Colorado in ’99, moved out here to be in the mountains and live the outdoor lifestyle.
Michael: And I loved doing that. I, unfortunately, had escalated my lifestyle to match my salary, and that salary was being threatened. A lot of those IT jobs were getting outsourced to exciting places like India and Mexico and who knows where else.
Michael: So I was basically living life, having fun, and then got called into the big auditorium one day with everybody else and told that 30% of us won’t have jobs in the next 90 days. So that was a big shock to me. Right around that time, I was talking to a friend of mine who I’ve known since third grade, really good friend. He was sort of the C student, and I was the Honor Society guy. I’m supposed to be the smart one.
Michael: And here I am facing a layoff and touting my woes to Shawn over the phone and Shawn’s telling me about this huge apartment building he’s buying. He’s writing a check, the size of which I could not even conceive at that time in my life. The one thing that Shawn did right was he started buying properties at, I think he was either 18 or 19 when he bought his first rental property and slowly fixed it up himself.
He bought big problems. He fixed them, rented them out, and hung onto them, and nothing more exciting than the typical Warren Buffet holding timeframe – forever.
Mike: Right, right.
Michael: And I got that, but when I was facing a layoff, not only was I looking for long-term security, I was also looking for how do I pay for the lifestyle I’ve grown myself into and handle the credit card debt, the house payments, and all that kind of stuff. So I sort of stumbled into real estate that way. I learned flipping and wholesaled, bought a few rental properties along the way and I just sort of built a business that kind of fits with, I guess, the market that I live in now, which is Colorado Springs, Colorado.
Mike: Yeah, yeah. And since that time, you’re being modest about it, but you’ve done a lot of deals.
Michael: Yeah, I quit counting honestly, but just kind of basic math, we’ve done over a 1,000 transactions and we’ll do probably 40 fix and flips this year. We’ll do probably an additional maybe 20 or so wholesales.
Michael: And then we’ll buy about 20 to 30 rentals creative finance, so I’m not the biggest flipper. I’m not the biggest wholesaler. I’m not the biggest anything, but it’s slow and steady wins the race and stuff.
Mike: Yeah, and that’s all that matters. Some people . . .
Michael: [inaudible 00:07:35]
Mike: . . . use unit volume and try to compare one another, but you and I both know that ultimately units don’t mean a damn thing.
Michael: No, I sort of structure the business on Mike being happy.
Michael: My wife and I have a pretty nice lifestyle and we got into this to retire early, and we both built a family business that we love and it doesn’t take a ton of time, and the rewards are very nice. We just got back from Breckenridge. We went for a long weekend. We do a lot of travel and stuff that . . .
Mike: Yeah, that’s awesome.
Michael: . . . real estate affords us, the same reasons you’re doing it too.
Mike: Yeah, absolutely, absolutely. Well, so the topic of the day we’re going to talk about is effective and efficient property management. One of the challenges is I think that a lot of people see real estate as a vehicle to achieve a lot of the same things you just talked about, which is a lifestyle, whether it’s financial freedom, time freedom, some passive income, all of those things, which you and I both know it’s really not all that passive, or it certainly has the ability to not be passive. But I think a lot of people use academic assumptions that, “Well, I’ll hire a property manager for 8%, and vacancy is going to be 10% per year,” and they start to make these assumptions to make a deal look good on paper.
Mike: But the reality is there are things that come up.
Michael: It costs what it costs…
Michael: . . . to manage a property.
Mike: That’s right.
Michael: I’ll give you this analogy. Here in Colorado Springs, I run the Colorado Springs Real Estate Investing Club.
Michael: Once a year, I try to get in one of my property management mentors, David Tilney. He lives here in Colorado Springs about four months of the year. I don’t know how many properties he has now, but he, at one point, managed over 100 rental properties and lived only four months of the year here and lived the other months of the year in Naples, Florida. This is a guy that’s got it dialed in.
Michael: I try to have him come speak. Usually when I introduce him, every year I say, “Everybody raise your hand if you’ve read a book, been to a seminar on how to buy a house.” Obviously, pretty much everybody raises their hand.
Michael: Then I say, “Everybody raise your hand who has read a book, been to a seminar, or gone through a course on property management.” Usually out of 50 people, I may get two, maybe three hands raised up.
Michael: Everybody thinks that, “Oh, I need to go get educated in this part of the business, but that property management thing, that just sort of falls into place.”
Michael: And it doesn’t.
Mike: It’s kind of like being a parent. You don’t realize until you have a baby that you have no idea how to be a parent.
Michael: Right, and clearly there’s some good parents, and there’s some bad parents.
Michael: It’s a skill set like any other and usually there’s enough negative information on the tenants, toilets, and trash. Tenants are evil people, or they’re going to tear up your house, and, oh, they’re going to make your life miserable, and that is a personal philosophy that people create for themselves.
Michael: Another philosophy might be that here is somebody who their family or the working adults will go to work for half of a month. They will give up half of their month’s take-home pay to pay off your asset. There is an on-site property management that you can hire to live in your home to take care of the property, to maintain the property, and pay you rent every month.
Okay, wait a minute. One sounds like a horror story, and the other sounds too good to be true and reality is somewhere in the middle there.
Michael: But you have to have the right philosophy if you ever expect to have the better side of that equation and if you hire the right tenant for the property, you’re going to get a whole lot better results. If you look at it as hiring somebody, you’re going to qualify that person a whole lot more. You run a business.
Michael: I run a business. If you’re going to hire somebody, you don’t want C students. You don’t want D students. You don’t want people that are going to fail out. You want the rock star. Assuming you have a good asset that you can offer them, you can be selective on who you put into your property.
Mike: Yeah, and how does that differ, Michael, with different classes of property? So let’s say you have more of a working class, C class, type rental versus obviously an A or a B class. You’re going to get people that are probably not people that you would, using your analogy, that you would hire in your office or your business.
Michael: I don’t want an asset that’s going to attract a tenant who a flat tire is a financial catastrophe.
Michael: Because they’re going to fix the car; they’re not going to pay the rent.
Michael: Because if they don’t have the car, they can’t go to work. If they can’t go to work, they don’t have any other money.
Michael: I started out with lower dollar properties. It always seems to make sense. Well, there’s more tenants that can afford a lower price point but the reality is, in anyone’s market, the median priced house is the median priced house. That’s typically where the most amount of people are looking for housing, whether it’s to buy it or to rent it. So I like upper blue collar, lower white collar price points. In Colorado Springs, our median existing home sale is let’s just say roughly $200,000. So the bulk of our rentals are $250,000 down to about $160,000.
Michael: That’s sort of the sweet spot that I like. I find it’s sort of scary when you’re getting started. I did a lot of creative finance. I still continue to do a ton of creative finance. We buy a lot of properties subject to.
When I got started, I was effectively the chef, cook, and bottle washer all-in-one. I did the marketing. I did the buy appointments. I did the property management. I did the accounting. I created a big mess for myself, and ultimately what I realized was I was a crappy property manager. It didn’t change the fact that that task still needed done.
Michael: And it didn’t change the fact that if I bought a less desirable property, guess what? I got a less desirable tenant that came with it, and when I got a less desirable tenant, the property was less desirable condition when I got it back. Which ultimately, the lower caliber properties, yes, the numbers look better on paper, but the turnover costs, the maintenance costs always go up and the gray hair factor, what I would say, goes up drastically.
You get into that sort of sweet spot right around the median price point for the area, and things get a whole lot easier. You get a much better tenant. If they get a flat tire, you’re still going to get paid your rent because they’re just a different income demographic. Usually, if they’re responsible for a certain percentage of the repairs, you don’t have to fight them for it. And if you do have to fight them, at least they have the capacity to pay you back.
Michael: So things just get easier.
Michael: A little Mastermind I go to every February in Aspen, Snow Mass, and a lot of the guys there are very, very, very veteran investors and there’s obviously much younger guys that go there too. But we had a discussion last year of what do you think it costs to, factoring the management, maintenance, vacancy, what does it cost to own that property? I think the lowest number was about 25%, and the highest number was about 40% that people touted off, and this was from a lot of years of a lot of veteran investors managing properties and often for themselves.
Mike: So clarify that, that’s 25% to 40% of gross rent?
Michael: Of gross rents. So if I’m managing my property . . .
Mike: Not including any financing, not including any financing.
Michael: . . . not including any financing, any costs. It’s basically you’re going to take 25% to 40% right off the top. Now obviously, if you live in Florida and your insurance costs have skyrocketed because of hurricanes and things like that it might be different than in Colorado Springs. We have one of the lowest property taxes and fairly low insurance rates here of anywhere. So it might cost me a little less than someplace else, but ultimately, even if I’m doing an A+ job at managing the property, I can scrape 25% of that off the top.
So if I’ve got property that rents for $1,000, I’m only netting $750 on any given month. So let’s say I don’t have that spread. Let’s say I’ve got $800 worth of PITI debt service on a property, and I’m getting $1,000 rent. Well, in any given month, I may have $200 extra.
Michael: But eventually, you know what we talked about before we started recording was there’s that occasional, “Oops. Here’s a $7,000 tax for putting the wrong person in the property,” and we’ve got to paint and carpet, and that $7,000 comes out of the profitability of that property.
Michael: So you don’t know when you’re going to get that bill, but you’re going to get that bill.
Michael: One way we do that is we offer lease-to-own so we get a little bit of option consideration upfront. We get a little bit of a premium in rent. So even if the numbers don’t quite make sense, we can create that spread by offering, more or less, instead of just renting the property, we’ll do a rent-to-own. We’ll offer them to buy the property, and then you can create additional value to create that 25% spread to break even.
Mike: Right, right. I want to talk about something you said a second ago which was you realized that you weren’t good at it, but it still needed to get done. So I want you to share your thoughts on . . . I think there’s a lot of people that maybe they’re not good at it. They probably don’t like it, but they’re trying to save money by not paying a property manager.
Mike: Which means that they don’t value their own personal opportunity costs very much, generally speaking, right?
Michael: Yeah, sure.
Mike: So talk a little bit about how folks that are maybe listening today can make the decision whether it’s something that they should do themselves or kind of do in-house versus outsource and maybe even some a la carte outsourcing, like maybe there’s a way to handle the certain parts that they like the least.
Michael: I would say first, be realistic at what the cost is if you do it yourself.
Michael: When I was doing it myself, when I was wearing all the hats in the business effectively, it was costing me whatever deals I could have done had I been focusing on those tasks.
Michael: When my wife quit her full-time job to join me in the business, that freed me up to do that, and I would say our business literally doubled overnight as a result.
Michael: As a result of taking away a good chunk of my tasks, obviously our business was able to thrive at a whole different level.
Michael: Then she was able to have time to treat that like a business and to systematize it. My wife has managed over 100 properties at a very part-time level and makes it look easy to the point where other people are baffled by how can you do that. Because she also runs rehab crews on all our fix and flips . . .
Michael: . . . and makes that look easy and still is at every single school function. My son goes to every after school curricular activity. So she has it so dialed in that it looks easy.
Michael: It’s nothing more than a learned system, and if you have to learn the system, you figure out how to make it work.
Michael: Now, that said, once we broke 100, my wife was not real thrilled about needing any more property, and I have a pretty good ability to keep throwing them in.
Michael: So I, more or less, found another person. Again, I don’t want to manage them, but I’m still good at bringing them in through the funnel. I sort of did a trial with a few potential property managers, and I picked one. Instead of paying a person a property management fee, I give him half the house. So we created another entity.
In the first, let’s just say, 100 houses, I have a partnership with my wife and we get commutatively all those benefits. With my new business plan, we basically do that through an LLC. His main company owns half. My company owns half. I dump the properties in, and he manages them from there. So ultimately, I’m giving up half the property. But the way I look at it is I’m hiring a property management that treats that property differently than a fee manager.
Mike: Yeah, for sure.
Michael: I’ve had this conversation with other property managers, and they say, “Well, we do the same job.” Well, no, you don’t do the same job. A fee manager does what? Manage for fees.
Michael: And they manage based on what’s the most profitable way for them to make a profit on any given property.
Michael: When they get paid to rent up a property, turnover is better than non-turnover. Okay, that’s a big chunk that they don’t get in the 10% management fees. So there’s a lot more incentive in turnover, whereas if you’re an owner, there’s a lot more incentive to get the asset to perform at its highest level.
Mike: Yeah, absolutely.
Michael: So even though property management is the same job, one is designed for performance and the other is designed for fee extraction.
Michael: That doesn’t mean you can’t get an excellent for-fee manager. I’m not saying that, but I want somebody who treats it like their own because it is their own more or less.
Mike: Yeah, absolutely. Oh, that’s really interesting. So talk a little bit about for smaller property managers or those that maybe don’t even have properties yet but they want to own them, what are some of the things they need to consider in their decision for the management piece, like to do that well internally, or maybe some reasons as to why they would want to outsource it because they can’t do those things well?
Mike: But in terms of kind of the topic of effective and efficient property management, what are some of the effective and efficient tips and advice you can give?
Michael: I think everybody, whether they’re going to do it themselves, do it, again, like I did with my wife, or partner with somebody, you still need to understand the business. And I think the only way to do that is to treat it like a business and study it like you would anything you want to be good at.
Michael: You can’t outsource management without understanding it. You can’t instill a philosophy of management on a partner, on a hired employee, or a spouse, without having the right set of philosophies and the right . . . So again, invest in seminars, education, books. Learn the process.
Michael: So even though you’re not going to do it, you can at least manage it and oversee it, and understand whether it’s being done correctly or not.
Michael: There’s a number of good books. I think if you’re going to manage single family houses, I think David Tilney is the guy. I think everybody ought to go to his seminar. He really has, I think, the best single family training out there, and obviously I don’t get compensated for referring. I just think he’s the right guy.
I’ve had the pleasure of getting to know him personally and professionally. I’ve seen his management system. I’ve been to his seminar. My wife and I went to the seminar. Inherently, we had our own. Even though we already had properties and were managing things, we had what we discovered inside ourselves, our own negative opinions on our tenants, and we shouldn’t. The tenants are the greatest thing in the world if you treat them properly and run your business properly because they will pay off your assets and make you very, very wealthy as a result.
Mike: Sure. Yeah, that is a funny thing that a lot of people tend to treat a tenant like a necessary evil.
Michael: And they can be a huge blessing.
Michael: They can be a huge blessing. And it’s just like anything. If we’re both in a Mastermind and you get the right people in a room, amazing things happen.
Michael: But you put the wrong people in a room, it sucks the life out of you.
Michael: It’s no different. If you get the right people in your properties, they can make this a beautiful business. If you put wrong people in your property, and ultimately, I would coincide that with if you have the wrong kind of property that attracts the wrong kind of people, you’re never going to be able to put the right person in there.
Michael: Because they’re going to look for a better property to live in and call it home.
Michael: One, understand where you want them, why you want them there. Ultimately, what I found is a lot of the properties that you really want for rentals, they’re not in the same neighborhoods we do fix and flips.
Michael: You know what I mean? I’m not saying there’s not rentals there, but those aren’t the rentals I want that are the least stress.
I would sort of equate houses with sort of like a stock allocation in the sense that you have stocks that produce cash flow, you have stocks that are for equity, and some that are in the middle. You kind of want to figure out what is the least amount I can have to meet my long-term goals.
Michael: And sort of coming full circle, how many does anybody want? I don’t know. It depends on, one, on their goals, two, how many they feel they can manage, and, three, what’s required to get you to the long-term passive income goals that you want.
Michael: And my opinion is that it should be the least number possible.
Michael: Right now, we’re both fairly young guys, right?
Mike: Real young, we’re real young.
Michael: Yeah, real young. It’s amazing how young we are. The point is if we were talking with a financial planner, they would put us in more growth. We would be in a more aggressive portfolio that is ideally suited to more growth. Then when we get close to retirement age, we want to convert that to something fairly stable, more recession-proof, that type of thing. At that point, we’d probably want to convert that portfolio to more cash flow driven.
Houses, I think, are the same thing. I don’t want a house that’s just going to sit there. It may chug out some cash flow, but, you and I, once you’re in a big tax bracket, you don’t want realized cash flow. You want growth without having to be taxed to death on it. And if you have a house that is geared more toward covering its costs, that’s going to go up in value, in equity, as opposed to create more cash flow, that one you have the growth without paying tax on cash flow, if that made sense.
Mike: Sure, sure. Yeah, the interesting thing about real estate is it kind of changes its dynamic over time. Based on what you just said, as you age anyway it should start to cash flow better because rents go up and there’s some appreciation there. Maybe you refi and you have the ability to ring the register at that point, or you pay it off. Then it’s a lot more cash flow.
Mike: So that’s kind of an interesting analogy of where you are in your kind of life cycle or towards your retirement goals because real estate has the ability to kind of adapt over time with you anyway.
Michael: Well, let’s look at an amortization curve on any given property, whether you’re taking over payments on existing financing, whether you’re going to go get a new loan. Basically, it’s not until about year 17 and a half where you’re paying more principal than interest on a property. What happens is a lot of people will ride that curve just long enough to get a profit, but they really don’t even hit the sweet spot.
Michael: As rents sort of trickle upward, if you apply additional cash flow to definance your properties, typically a little bit upfront makes a lot of impact on the back end. If you can basically make the equivalent of an additional principal payment each month on every property, you’re going to have that property paid off in 10 to 17 years as opposed to 30.
Michael: It’s going to save you, depending on how many properties you have, hundreds of thousands of dollars in interest costs.
Michael: And ultimately move the scale a whole lot quicker so you can basically pay off those properties. Again, I don’t spend a nickel of our portfolio on rentals. That’s not what it’s for. What are we all working toward, and that is true passive income and freedom, and that comes from free and clear properties. It doesn’t come from having a whole boatload of debt that you carry out 30 years into the future.
Mike: Right, right.
Michael: So ultimately, we treat our rental portfolio just like a retirement account, just like a 401(k) or a Roth or whatever. We build it up. We want it to grow, grow, grow, and the only way it grows is putting it back to work for itself.
Michael: So you may have a couple extra hundred bucks a month on a property here. What are you going to do with a couple hundred bucks a month?
Michael: Maybe I’ll buy a few more postcards. You can get a return on investment there, or I’m going to definance that property. So in maybe in, again, 10 to 17 years, I’m going to have a free and clear asset as opposed to 30 years.
Mike: Yep, yeah.
Michael: You just accelerate the process as much as you . . .
Mike: Yep, yep, great. Well, Michael, any kind of final comments on advice or tips or just kind of a summarization of what people should think about to handle property management?
Michael: Well, and we were sort of talking about this upfront. I’ve done a lot of creative real estate and a lot of the what you would say “no money down investing”, buying subject to. I’ve done lease options, all that stuff. And that sounds very attractive when you’re young and you’re broke, and you’re looking for any and all ways to make money getting started. I would highly encourage somebody to really understand what they’re getting into.
A lot of the seminars I went to, there was like this huge chunk of, “Here’s how you buy it creatively, and here’s how you do that nothing down deal.” And, then, “Oh, we’re just going to slap intent to buy on there, and that’s going to take care of the management thing. Next.” Nobody wants to learn about that.
Michael: It’s not a sexy topic, but ultimately, that’s going to make or break it for the average investor.
Michael: Buying property subject to gets a real bad rap because people don’t know what they’re getting into.
Michael: And they don’t want to learn that extra little piece that really makes the whole puzzle work. I would encourage you, if you don’t know how to flip, don’t do this business. Don’t do it if you’re on a shoestring budget because you may get to buy properties nothing down, but if you don’t know how to manage them effectively and you really don’t understand how to evaluate them realistically from a cash flow perspective, one, you’re going to put yourself in harm’s way, two, you’re going to put the person whose loan you’re taking over in harm’s way and ultimately nobody’s going to win.
Michael: Not underestimating the amount of effort that goes into management, whether you’re going to do it yourself, run it like a business. Understand it thoroughly. I continually go to seminars, read books on how to run my business in all aspects, and that’s the same thing. There’s always continuing education and don’t think, “Oh, I’ve been to one seminar, I know it all.” You don’t.
Michael: You keep evolving. You’re either moving forward or you’re moving out of business.
Mike: Yeah, yeah, awesome. Well, hey, Michael, thanks for sharing your insights today. It’s great information and something that just doesn’t get talked about enough, for sure.
Michael: Cool. Well, thanks. Always happy to be here.
Mike: Yeah, yeah, glad you’re here, and I’ll be seeing you soon, actually.
Mike: All right, man, take care. Have a great day.
Michael: You too.
Mike: All right, bye.
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