S1 E23 - The Beginner’s Guide to Buying a Rental Property

Ben Bailey: Coming up on today's episode of Real Talk Rentals, we're going to walk you through buying an investment property from the very beginning, all the way to signing the contract at the end. Welcome back to Real Talk Rentals, a podcast brought to you by Oncue Property Management. We're here to give you all the tips and tricks that go into owning a rental property. Today, we're going to do a very special episode because my co-host, Mr. Eric Dixon, specializes in this. I think I would say you are the expert on this more than anybody else in Arizona. Oh, that's right.

 

Eric Dixon: That's a tall order. You got.

 

Ben Bailey: This. Um, so we're going to jump right into this today. The episode is about purchasing investment properties. We've talked, we've talked about, you know, like touched on this, danced around it in other episodes. But we're really going to go into the process. It's a question that we kind of take for granted because, you know, when it happens, it just goes right into the pipeline. We get it done. So today, let's start right at the beginning. Eric I'm an investor. I got a home. I'm interested in purchasing a rental property. What do I need to know before I even pick up the phone and or do an Internet search and find a real estate agent?

 

Eric Dixon: All right. So, yeah, let's start there. As as Ben alluded to, I'm super passionate about, uh, about investing in real estate, whether it's for your own home, for a rental, for whatever, Airbnb, vacation rental, whatever you want to do. Like buying real estate is my favorite type of investing. I fail at other types like cryptocurrency and stocks, and we all fail. We all fail at that. Yeah, dude, I, uh. Every time I lose money, I'm like, Dude, why didn't I just buy more real estate? Yeah, I believe in it. And I have seen it happen not only in my own life, but our clients and so forth. So if you are sitting there considering or you already own properties and you want to buy more or you want to just kind of feel feel out what we suggest to do. The biggest thing is you need to determine your why. You know. Ben, why do you want to invest? Is it because I call it? I asked a lot of people if they just have FOMO, if they have the fear of missing out. Yeah, because real estate is a hot topic on the news. Cnn, Fox, whatever you're listening to, there's always real estate is doing really good or really bad. It's never both.

 

Ben Bailey: Feel like times you should buy. Yeah.

 

Eric Dixon: And you're like, Well, I feel like I need to buy. Everyone's buying and then it crashes. It's like I need to buy. Yeah.

 

Ben Bailey: So buy the.

 

Eric Dixon: Dip. And it's one of the frequent questions we get is now a good time to buy and I am a believer in it is always a good time to buy if it makes sense. Like, yeah, well, don't buy just to buy, but buy and use an expert that knows how to buy investment properties like our like our brokerage to help you do it. So determine your why are you doing it for cashflow? Are you doing it for retirement? Are you doing it as a tax state tax haven, you know, to help you on your personal or your business taxes, determine your why and help, you know, help your agent or your broker realize, you know, that's why I want to invest. Another thing. You want to determine whether it's before or after you talk to your broker is if you'll be self managing or if you have a property manager for two reasons. One is location wise, right? It's like, hey, if you live in Gilbert, Arizona, you probably don't want to self manage a property that's an hour and a half away, right? If you're self managing it, maybe you put a ten, 15, 20 mile radius, you know, or something. Yeah. So that'll help. And then the other is when we determine return on investment and, and crunch the numbers and everything else. If you're hiring a management company, you need to factor in the management fees.

 

Eric Dixon: It's just one of the hard costs that you have to expense for. If you're self managing. Sure, there's less fees, but you're going to spend a lot of time and we've talked about that a hundred times. So, um, another thing you want to determine going into it is ask yourself how much cash or liquid reserves I have access to. It doesn't mean you need to drain every penny you have, but let's say you have $50,000 or 100 or 200,000, $300,000, whatever it is, is that going to be a down payment and you're going to get a mortgage or is that going to be, hey, I just want to buy something outright cash? Or do you want to do you want to look into, uh, different things like co-op or partner up with other investors we have and so forth. Um, and so if you know those things and then you call your broker, I can tell you the people that call that say, Hey, this is what I'm looking for, this is how much cash I got. I can tell if they're hot or if they're like, Oh, dude, they're actually going to buy. And we we can do that. Or if you don't know the answers to any of those questions, call us or call your broker anyway. You know, get get the ball rolling right on.

 

Ben Bailey: Yeah. When you mentioned the liquid cash reserves, it makes me think of, you know, we get sometimes people like, I just bought this property, I got to rent it in a week because after that I'm, you know, like in the negative, I'm going to start losing money. And it's like, man, maybe you should not have bought a property. Like you should have thought this through a little more.

 

Eric Dixon: Yeah, no, that's a lot of what, you know, we'll get we'll get to it a little bit later here. But it's like we run those scenarios. It's just a different type of buying a property. If you bought a house for you and your wife or kids or whatever, that's one way to buy. It's emotional. It's, you know, looking at the colors and different things. But buying a rental is just a totally different experience. Yeah.

 

Ben Bailey: So to that point, is it important? I mean, obviously we're a little biased here, but is it important to find an agent that specializes in investment and rental type properties? Or does any real estate agent, you know, will do the trick? Yeah.

 

Eric Dixon: So it's yes, yes and no. It doesn't mean that they need to only specialize in investments only like even our real estate, myself, our real estate team members and agents here, they help investors, but they also help friends, family referrals. They're their warm circle, you know, that sort of thing. But they need to at least know and have done it before. Like it is a different ball game. I took a few notes just so I wouldn't I wouldn't miss it. But if you're buying a home for, let's say, Ben, you and your wife and kids, you're looking at school districts and yes, you're looking at school district as an investment, too. But it's different. It's like, no, these are my my kids and they specialize in the needs of my kids and so forth. When it's an investment. Yes, you want a good school district in general, but it matters less. You know, it's more about the financials and like in a normal, um, let's call it normal, but like in an owner occupied transaction where you're going to it.

 

Ben Bailey: Traditional real estate, traditional transaction.

 

Eric Dixon: Yeah, you'll make the offer, you'll have inspections, you'll do the due diligence period, the financing, you'll close in 30 days or less. That's awesome. All of that applies to your investment property. But in addition to that, and this is where I took some bulleted points here, you'll determine we will determine the rental range for you. Like, hey, if you do nothing to the property, you'll get this. If you do X to the property, you'll get you'll get this result as far as your rental rate. We'll get estimates and bids during the for rent ready work that needs done. After closing, we'll do your ROI calculations. So what's your return on investment? Your cash on cash return year one, two, three, five, ten, 20 years down the road, what does it look like? We budget for the major repairs so the Hvac replacements, roof replacement, water heater replacements, You know, you factor those in when you're just buying for your family, sometimes you'll factor that stuff, but you're kind of like, oh, the roof. The roof has 5 or 10 years left. It's fine, Sure. And you just move in and then when the roof goes out, you just kind of figure it out. When you're an investor, you're like, no, this is this needs to make sense. Like, I don't want this to be a money pit. Um, the, the other stuff will do as far as in the while you're still in escrow, we can pre market it for rent and then we'll just be that one stop shop, whatever you need. It's the if you want it. Um, you know, carpets replaced right after closing. If you need us to go there, you know, before, after, whatever it is, we kind of just make it a smooth transition to get at least versus if you have an agent that just sells houses, they could be an awesome agent. But as soon as it closes, they just say, Hey, give these keys to your property manager. Good luck. Yeah. And it's like we run into nightmare situations sometimes when that's the case.

 

Ben Bailey: Um, you know, it's funny you talk about. We, you know, do the buy to the property management because that's what we do is property management. But I have a friend who just purchased a home and the realtor who purchased the home told him, I'll manage it for you, I'll property management and said, Oh, who does he work for? He said, Oh, he just does it himself. Does he manage any properties? He said, No, this is his first one, man. You don't you don't want to be number one. Like, that's a that's a big step, you know, from buying a house to managing it as a rental. It's like you might want to get another opinion there. But, you know, no, it's interesting.

 

Eric Dixon: One of the frequent issues that comes up and this is not a negative or a slight on real estate agents, I am one of them. Look, I did it for many, many years, even before I got in property management. But they're really good at selling homes and finding good quality homes. They're not garbage homes, but then they tell them that it's going to rent for whatever Zillow says or whatever Redfin says or, you know, whatever this algorithm says online. And they're not running true rental comps. So, you know, the buyer buys it. They hire us to manage it and they say, hey, I want to rent this house for 3000. And then we're like, oh, market rate is like 2500. And they're like, No, my agent told me 3000. Like, Well, let me tell you, your agent doesn't know what they're talking about. Yeah. Without, you know, being too rude or whatever. And they're, they're just like, No, dude, my mortgage is more than that. I would have never bought this had I known it. Yeah. You know, and we run it. Unfortunately, we run into that more often than not. And it's not the agent's fault. They just don't know.

 

Ben Bailey: Yeah, exactly. They're not. They're not in the day to day. They don't have the same comps we have where we say we got ten rentals in this neighborhood. We know what things are renting for.

 

Eric Dixon: And we have Yeah, it's just the market changes week to week with rentals. The inventory could be super high, super low, whatever. So it is to get back to your question, is it important that they specialize in investments? Yes. It doesn't mean that's all they have to do. Right. But have they sold rentals before? Show me your track record. You know, if you're not getting things like rental rates with actual comps that you can click through the pictures and see side by side and feel a confidence that your house will rent for that. Right? Then maybe look at look at other options or say, Hey, I'm going to have to do some of this myself and not depend on my agent, you know, to do that.

 

Ben Bailey: Okay. So. I've answered all my questions in my head. I've found the perfect agent, Eric Dixon at Property Management. I'm going to call you and say, Hey, I want to buy an investment property. What are the first questions you're going to ask me? What should I be prepared to answer? Obviously, those first questions we went over that I have in my head, but what else should I expect?

 

Eric Dixon: Yeah, so and I'm looking back at most of the calls. They're either existing clients buying more or maybe it's a new investor. So I want to determine have they been a landlord before? Right? Because that kind of tells me, do I need to start at step one or can we jump ahead to step ten? Because they already understand how property management or being a landlord works. And so kind of determine that where we're going to start. Explain, you know, the the even though there are people that we sell homes to that decide to self-manage, most of them come crawling back. Sure. But it's more just they're like, oh, man, I don't I don't want to give up that small fee every month to to my bottom line. And then they realize my time is worth more than that. Yeah, they come back. But those are the types of conversations I will absolutely figure out if they're pre-qualified, if they talk to a lender. We have tons of lender relationships, whether it's your conventional financing portfolio financing, some seller financing and creative financing that that's becoming more prevalent now. The interest rates are changing. Um, and want to find out how much cash they have liquid. So yeah, if you are getting a loan and you have a few hundred thousand dollars available, then your purchase price can be a huge range, right? If you're, if you have $50,000 total and you're getting financing, okay, you're, you're going to have a very small pool of houses that are that that could work.

 

Eric Dixon: So I try and get those answered real quick and either nips it and said, Hey, man, it might not be time for you to buy. Here's why. Or it's like, no, you're ready. And we we go down the go down the path of getting set up on our portal to see houses that are on the market. One thing that we specialize in because we manage so many homes for other owners is we have off market what we call pocket listings. You know, it's kind of a sure kind of an in house term, but they're listings that aren't listed to the public and the owner doesn't necessarily want to sign a listing agreement and put their sign in the yard and sell it. But they have told us, Hey, if you can give me this range, I'll sell it. Yeah, it's tenant occupied, We manage it. The tenants are usually, you know, good and vetted and paying on time and so forth. And then we can package together the buyer and the seller. The buyer gets a good deal. The seller saves on commissions, the tenant stays in the home. And those are that's what we could that's the ideal situation. Yeah, we retain the management, we represent the buyer and seller and help them, you know, get this good deal on both sides. And it's a win win, win win.

 

Ben Bailey: So yeah, that's something that I never even would have thought was available. But it makes perfect sense. You know, when I start working here, it's like, well, of course if you're already in management and you're like, Hey, you know, I want to sell this. Does anybody want to buy this turnkey investment property that has a tenant living in it? Yeah. And of course there's going to be people out there and.

 

Eric Dixon: There's there are. And it's really it's hard because they don't they're like, I don't want to put the house up for sale If the lease ends in six months and it's a burden on the tenant and you know, it's a it is a hard thing. So we try and do our best to say, hey, look, let us make this kind of back door list and say, hey, if we have a buyer that matches, I'll call you and say, Hey, I've got a buyer, I've got a seller. We try and match them together. If it works, boom, we'll get a contract going and and get that get that problem solved. We really just look at opportunities to for the seller to win the buyer to win and the tenants to win at least you know cost and frustration to the tenant like the tenant deserves to have quiet enjoyment in the home. Their lease is honored and it should be a smooth transaction.

 

Ben Bailey: So yeah, and a lot of people aren't, you know, I think I know in my mind I'm sure other people, when they're thinking of an investment property, they're thinking of a house that they're going to be turning into a rental. It wasn't before. And it's like there's tons of houses, you know, not just managed by a property management company, but that are rentals that are passing from owner to owner. And it's sometimes it's just I want to get out of the landlord game. Yeah. You know, so like, hey, this is fine. It's doing great for me. I'm getting the money, but I'm happy to sell this if you got another investor who wants it.

 

Eric Dixon: So and everybody has a number. I mean, you have to think some of these investors bought in 2008, nine, ten, 11, 12. Yeah. Bottom, bottom, bottom of the market. And they've reaped the rewards of great rent for ten, 15 years. And they're like, do you know what? I'm ready to cash out. You know, I'm done for the buyer. They're like, Well, I wasn't able to buy in 2010, so I can't even think about what you paid for it. But now the numbers make sense. Rates, rental rates have doubled. Yeah, purchase prices have doubled too. But who cares? The the rent, the rents just as high as well. One thing that you just mentioned that I hadn't thought about that we do do is let's say I own a home and I want to upgrade my personal family's home and turn my existing house into a rental. So we do that all the time, too. Sure. Where they're like, hey, I want we need another bedroom, I want a pool, whatever I want to. Be in this school district. So we'll help you with the with your primary residence by and then convert your existing home into a rental. Right. So there there are some different financing things that we can be creative about. There's different strategies with that. But it also there's even small tricks of making sure we close in a month, that the month you close, then you skip a mortgage payment and we make sure we get the house rented before the new mortgage payment starts and. Right. You know, try and just time it to make sure that there's not double payments and that we get at least with a qualified tenant before your new mortgage payment. So you're not double dipping and and so forth.

 

Ben Bailey: So that's the advantage, I think, to of using a property management company that's in the market you're going into. You know, there are obviously there's a million great property management companies throughout the country that are in states that are in the market. They know those things. And there are bigger ones too, that service a market. But, you know, most of their team members live in a different state or live, you know, in a different country. Even. And there's no shame in that. But they, you know, they're not in the day to day the way we are, where we're like, no, this is the neighborhood you want to live in. This, you know, is the the market.

 

Eric Dixon: No, there's a certain just you'll be more comfortable, too. And there's your boots on the ground in person. You know, agent actually lives there and. Yeah. And like I said, there are models to, like you said, nationwide models where the property manager lives in another state and manages your house just fine. Sure. But it's probably not the right firm to help you buy the next one. Exactly. They're not boots on the ground. So yeah, I feel like we're a great expert for the Phoenix, Phoenix and Tucson markets here. Even in in Texas, in that market, we have a local agent that they handle it. Don't handle it. Yeah I don't know the Texas market you know and so yeah you know the no.

 

Ben Bailey: Barbecue that's it like good barbecue.

 

Eric Dixon: That's right. After the offer is accepted, we'll take you out for barbecue. Yeah. So, yeah, I mean, I. I love that, um, we are not. I am not personally the expert outside of Phoenix, even like, we have an agent down in Tucson, two hours south that I'm the broker over, but I am not the expert to represent you personally on that purchase. Right. You know, we want to use a local agent that. No, that's down the street from the office. That's down the street from the house. Hey, we manage the place across the street or, you know, and they know that. They know that stuff much better.

 

Ben Bailey: Okay, So then last question. We find the right property. You know, you and I agree. All right, This is perfect. I'm ready to buy it. In the nitty gritty of it. How is it different from what you said that, you know, purchasing a family from your home? This is more of a transactional. I'm buying a rental. How is that different? Where does it fall on the spectrum there?

 

Eric Dixon: So the two words that come to mind is it's an emotional purchase versus a financial purchase, right? Emotionally, you think about just go with your spouse and kids to go look at houses. It's emotional. It's how you react to things. It's how you like the cabinets and the layout and the view on the deck and whatever it is, right? As a rental, you don't want to buy a house, but some of that stuff just doesn't matter. It's like, no, it has four bedrooms, it's got three functional bathrooms, has a pool or not. Yeah. You don't want it. You don't want it to be like, Man, there's no yard and all the other houses have yards. But you know, you just want something that meets the needs of, of the general area. And it has to make sense on paper when you're investing, right? As a family, you justify things way too much. You know, you're just like, Yeah, it's in the school district, it's in the church boundaries I attend, it's in the you know, hey, Ben's barber is down the street like, Dude, this is just awesome, you know? And yeah, like.

 

Ben Bailey: We'll fix up the stuff that's busted later, fix.

 

Eric Dixon: That later. When you're buying it as an investor, you're like, Well, I have to fix that stuff just to rent it out, right? You know? And so it's an emotional roller coaster versus a financial roller coaster. Um, when it's financial, everything can be solved with money. It's just how much is it going to cost me? I could remodel the whole house. I could do just countertops. I could do just appliances. We could do paint, do the whole nine. Doesn't matter. What's my all in cash and what's my return? Yeah. And what does this look like? And one, three, five, ten years from now. And so that's what we try and, you know, help people do. You know it's it's a totally different even ballgame even showing houses with investors oftentimes they're not even present during a lot of the showings because they're out of state or they're just working. Right. So we go in all the houses, we take pictures, video, all this stuff, we narrow it down. And then once we have it narrowed down, maybe they'll come out and see it. But when it's a family, the agent doesn't go by themselves to show it.

 

Ben Bailey: No, you want to see it first thing.

 

Eric Dixon: Usually the wife or the I won't even say the wife. The decision maker is the primary contact. Sometimes it's the wife, sometimes it's the husband.

 

Ben Bailey: Sometimes it's the kids.

 

Eric Dixon: Sometimes it's the kids that are like, no, my bedroom, bathroom, you know, they're driving the deals.

 

Ben Bailey: This is too far from my friends or whatever.

 

Eric Dixon: Right? So I would just say it's emotional versus financial. So if you've had a if you've had a hard transaction and you're like, Dude, I just don't want to do that again, look back and it's probably because you were sucked into this emotional thing and understand similar to investing on TD Ameritrade app or Robinhood transferring money and you just care about the return that is similar to investment. Yeah. You know, you're going to wire up the money, you're going to get the you're going to get the loan, you're going to hire a management company and they're just going to handle it. You're going to get monthly statements. You're going to get, you know, 24 hour service. And it's more of a financial decision for sure.

 

Ben Bailey: But paperwork wise and everything, once you lay that contract down and they're just initialling, it's pretty much the same, right? Yeah.

 

Eric Dixon: And that's what's funny is it's the exact same contract. Yeah. It's whether it's your family or not, it's just it's different and it's different because you're not living there, you know, it's not you. It's. It's a family is going to live there.

 

Ben Bailey: It'll be right for somebody else, even if it's not right for you. Yeah, totally. All right. Well, I think we covered it then from the very beginning, all the way to signing on the dotted line. So that's it for us this time. Be sure to leave us a review wherever you get your podcast. Five stars really helps out, and we appreciate it.