I've invited my friend Veronica Woods to join me in an ongoing conversation about building a real estate toolkit called The Rental Property Café™. Please send your ideas and suggestions for topics to firstname.lastname@example.org.
What you'll get from this video podcast:
“What I always tell folks is that cash flow is the cake and appreciation is the frosting.
You don't just eat frosting. You want cake with frosting.”
- Cynthia Meyer
About the Rental Property Café™
The Rental Property Café™ podcast offers a real estate tool kit for busy professionals who are building a real estate portfolio. In each episode, our co-hosts Cynthia Meyer & Veronica Woods explore ways to grow a successful real estate business while growing your career.
About Cynthia Meyer
Cynthia Meyer is a financial mentor, CERTIFIED FINANCIAL PLANNER™, CFA® Charterholder, real estate investor, blogger, and the founder of Real Life Planning. She offers unbiased financial planning and learning resources to real estate investors. Cynthia is a first-generation rental property owner, who built a rental property portfolio with her husband, Steve, while they were both building their careers. She lives in NJ, where she balances teenagers, her financial planning practice, and a rental property business.
About Veronica Woods
Veronica Woods of Daniel Woods Real Estate, real estate advisor and investor, is passionate about helping her clients create wealth, legacy and lifestyle through real estate. She works with people to buy, sell, rent, and develop residential and small commercial real estate in Delaware County and Philadelphia, PA. An MBA in finance from the Wharton School, Veronica also shares her real estate wisdom with new investors on her YouTube channel.
- Book: The Millionaire Real Estate Investor by Gary Keller
“The reason that I say it's important to know your investor personality is because some people like to make decisions collaboratively. Some people like to make decisions more by themselves. You have to know about yourself if you're going to work with other people.” – Cynthia Meyer
“In order to have a successful, profitable investment, you need somebody to be hands-on.” – Veronica Woods
“Be mindful that when you buy real property you don't want to have a net negative out the door every month before depreciation and taxes.” - Cynthia Meyer
“…even in this " do it yourself world" that we live in, teams make the most success.” -Veronica Woods
”Run numbers. Look at numbers. You don't make investment decisions off of pure gut. There are lots of numbers involved.” - Veronica Woods
“We all have to ask ourselves, "Where can we make the biggest impact on our own real estate businesses? Then you partner with other people who going to do that particular area better than we can do it ourselves. That is what's going to help you scale.” - Cynthia Meyer
Transcript: Rental Property Café™ Episode 4: Stick to Your Fundamentals
[00:00:11] Cynthia Meyer: Hello friends. I'm Cynthia Meyer with Real life Planning.
[00:00:14] Veronica Woods: Hi, I'm Veronica Woods with Daniel Woods Real Estate company and we're here on the Rental Property Cafe.
[00:00:22] Cynthia Meyer: Good morning, Veronica, what are you drinking this morning?
I've got some iced tea this morning. I was out for an early walk at six o'clock in the morning. So I've got some tea.
How about you?
[00:00:34] Veronica Woods: I am on my second cup of coffee, almost done.
[00:00:37] Cynthia Meyer: It's the season, right? You must be so busy this time of year as a realtor and property manager.
[00:00:42] Veronica Woods: As you know in the segue into the topic is around people really nervous about how hot the market is and what that means for how they should be investing.
[00:00:55] Cynthia Meyer: Our topic today that we want to talk with you and talk with each other is about, how do you stick to the fundamentals? How do you stick to your strategy when market conditions are really changing?
[00:01:08] Veronica Woods: It may sound cliche, just like location. What I've seen or my dad and the company has seen over 30 plus years is that the people who have stuck with the fundamentals over time were really successful. And so on this podcast, we're just going to go over six tips that are a part of the fundamentals when it comes to real estate investing.
[00:01:34] Cynthia Meyer: I'm so glad you wanted to have this conversation today, Veronica. Cause I know in my financial planning practice, and I work with folks in all different parts of the country, I'm getting the same kinds of questions.
Should I stick to what I've been doing or change my strategy? Common one. I bet you get this one too. Is there anything to buy? Should I even get into real estate investing right now? Or if I've got extra capital, should I even put it in real estate? Should I put it somewhere else? What are your thoughts about that?
[00:02:03] Veronica Woods: I think as we start going through our six tips, we can weigh into different parts of sticking to your guns, sticking to your goals and maximize your goals with the strategy.
Fundamental #1: You Have To Know Yourself and Your Goals
[00:02:15] Cynthia Meyer: That brings us to our first fundamental, which is you got to know yourself and your goals. And that's key to any kind of successful investing. Whether it's real estate or securities or investing in your own business. What are your financial goals ? Why do you want to create wealth? Are you trying to be financially independent or retire early or send your kids to great colleges?
What is your personal risk tolerance? Everybody knows what speed limit they are most comfortable driving at in terms of investing. And some people are more risk tolerant than others in terms of how much they're willing to put on the line in return for a potential gain. The other thing that I talked to folks about, particularly in the development of an investment policy statement is what's your financial capacity, right?
What is your personal balance sheet look like? You might have a really high risk tolerance, for example, but a not so great balance sheet. Not great financial capacity and that might put some guidelines on what folks are doing. As you mentioned that time horizon is so important. Know when you need the money. If you've got a shorter time horizon, that's going to limit your choices. If you have a really long time horizon, that might open them up a little bit. What else would you add to that?
Fundamental #2: Matching Your Financial Goal With The Right Real Estate Strategy
[00:03:33] Veronica Woods: I think that’s a good segue to what we have down as number two, which is matching your financial goal with the real estate strategy. I think too often people want to jump into talking about strategies and I always tell them pump the brakes and tell me about what your objectives are first and then I can help you figure out what's going to be best for you. I ran across this framework from this book, The Millionaire Real Estate Investor. Um, It's by Gary Keller. It's been out for a while. So it's not a new book. But he really breaks down real estate investing strategies into two big buckets. One is Buy and Hold. Buy and Hold, you own the asset, and you make money by appreciation as well as getting a regular stream of income associated with the assets.
So this will work great if you want an additional monthly income or maybe you're thinking about longer term savings for a child's college fund. So Buy and Hold in that capacity makes a lot of sense. I should mention there's a lot of things in Buy and Hold. There's probably like 10 different strategies. Essentially what you are doing is using the asset to create either appreciation or cashflow. The other side is Buy and Sell. You want to buy and sell when you want an injection of cash. Typically, you can get that injection between six and 18 months. You don't own the asset. You're just using the asset for that injection of cash.
Maybe some financial goals that would match with that is maybe you want to pay off student debts right away, or you just want to diversify some of your investments in other asset classes. In that case, buy and sell may be a good idea. The reason why I'm saying this is part of the fundamental is because if you're out of alignment, just because you hear something, it sounds sexy and hot, and it was not going to give you your financial goal that you're trying to achieve, it just doesn't make a lot of sense.
[00:05:45] Cynthia Meyer: Yeah, I think that's a really good point. I hear that a lot lately from folks who are looking to 10-31 exchange out of a particular property and trying to think about, "Am I going to reinvest in something similar or am I going to look to change my strategy for a little bit? There's so much information now about the types of things that you could do. People are coming to me and saying should I buy an apartment building? Should I do self-storage? Should I be the mortgage lender? Should I do a syndication which you can't do with the 1031 exchange? All of those questions are coming up and we have to bring them back to their original objective, what's your goal? What's your risk tolerance? When do you need the money?
Fundamental #3: Know Your Investor Personality
[00:06:28] Cynthia Meyer: So the thing that I would add to that is our third fundamental, which is to know your own investor personality.
What I like to ask folks is, are you hands-on or are you hands-off? What I mean by that is that a hands-on investor is looking to design and actively manage all aspects of their investment portfolio. A hand off investor wants to participate, in this case, in the real estate sector, with a simple and easy solution.
A hands-on investor is the person that's buying and managing their own rental properties or commercial properties and the hands off investor might be, into a turnkey property investment solution. They might be into real estate securities, crowdfunding, or if they're a high net worth accredited investor, they might be in syndications or something like a DST Delaware statutory.
You don't have to be all one or the other. It's a continuum between hands-on and hands-off. So you could be hybrid a little bit of both. For example in our situation, when we got started as real estate investors, we found the properties, and someone took them through the renovation stage.
We manage the finances, but we have a professional property manager on the ground who manages the day-to-day rental business and the maintenance of the property. What would you say your investor personality is?
[00:07:45] Veronica Woods: I guess it's probably hard for me to answer as I'm a professional real estate property, so it would be unfair.
[00:07:52] Cynthia Meyer: Yeah. You're hands on. But you have the knowledge right to do this yourself.
[00:07:56] Veronica Woods: You got to be practical. In order to have a successful profitable investment, you need somebody to be hands-on. There's your personality and what you can do practically, you can't do a good job, then you still have to manage the manager. People discount that as not really doing anything, but let's say if I wanted to invest in Georgia, I'm not going to try to manage it myself. I have the knowledge, but practically, I know I can't do a good job. I was telling somebody about that not too long ago, she has investment in California, and she was getting upset with her property manager. She had a flash of thinking," Should I do it myself?" I was like, how could you possibly do a good job, you're in New York? How can you do a good job of managing your property in California? Your job is to manage the manager. There's still a lot in managing systems. Especially, if you have investments in different markets, you still have to have a system to be able to track your success and make sure that the people you have on the ground are doing a good job in each market.
[00:09:05] Cynthia Meyer: The reason that I say it's important to know your investor personality is because some people like to make decisions collaboratively. Some people like to make decisions more by themselves. You got to know about yourself if you're going to work other people. Do you like to take advice or are you really DIY?
Fundamental #4: Know What Interests You And What Would Be Fun To Do
[00:09:22] Cynthia Meyer: What that leads to then is the fourth fundamental, which is, what interests you and what would be fun to do. So just because you can do something doesn't necessarily mean you should do something. And I think we all, have been watching a lot of cable television during the pandemic, right?
And there's this HGTV or DIY network effect where they only present the fun aspects of what the benefits of various real estate projects, whether it's flipping or renovating or decorating. They don't spend a lot of time on the hard stuff. And so some folks in particularly, new folks, have a rosy view of what the day to day work is like.
You have to ask yourself how much time do you have to work in your real estate business, and how much time do you have to work on your real estate business? As you mentioned, Veronica, you have to know what your strengths are. What would you add to that?
Fundamental #5: It Takes A Team
[00:10:15] Veronica Woods: I would add and segue to number five tip is it takes a team.
And so combination of looking at your strengths and weaknesses, you have to figure out where you need to fill in the gaps with other people. You're either hiring them or they're business partners. When you move from talking about it as a hobby versus this is a business. If you're watching but you're in the data business or technology businesses, people who do different things, it's important for everybody to be in their lane in order to make a successful result.
It's no difference in real estate and the most successful people have a team. If you want to scale, especially there, you're pulling some sort of team together. I've worked with a client who, and like some of our listeners, their strength may be capital.
So they have money to bring to the table, but they don't have a lot of time or the experience to work individual renovation projects. So they'll partner with somebody with the time and capability. You can make money together. There might be some legal things with that in doing joint ventures and the decisions about profit sharing. But for some, that's a really good kind of partnership between skills and money.
Some people could be a husband and wife; could be a group of friends. They're coming in with a trust. They decide to invest together as a team. Hopefully, that mix of people are bringing different skills to the table and they're somewhat dividing the work.
But even then, they may have to bring in outside professionals to round out the skillset in order to pull off a successful investment. I think one of the bottom line fundamentals from my perspective is that even in this " do it yourself world" that we live in, teams make the most success.
Figuring out who you want to partner with, is pretty critical for success.
[00:12:16] Cynthia Meyer: I agree with you. There is a strong DIY tendency in the real estate investor community. We all have to ask ourselves, "Where can we make the biggest impact on our own real estate businesses?
Then you partner with other people who going to do that particular area better than we can do it ourselves. That is what's going to help you scale.
Fundamental #6: You Have To Run The Numbers
[00:12:38] Cynthia Meyer: So that definitely leads to point number six, which is no matter what you’ve got to run the numbers.
[00:12:44] Veronica Woods: Run numbers. Look at numbers. You don't make investment decisions off of pure gut. There are lots of numbers involved. A big thing in real estate is back to the location. Real estate is very local. So it's hard to take a national headline and devise a real estate strategy for yourself in a particular city because each market is different even in Philadelphia.
My market where I work there's lots of different sub-markets. The advice that we give to invest in West Philly would not be the same in South Philly because they're different sub-markets. Price Waterhouse Coopers does this annual investor, real estate investments survey. They look at both commercial & residential properties. They ranked where the people felt most bullish about the opportunities. The highest ranking residential one was single family properties. When I said that, you had a reaction like, "Oh there's no shortage of single family properties."
I'm like, yes, because of other dynamics in the market, people are still very bullish about it. Even saying that is not enough to say, "Okay, I want to go out and buy a lot of single family properties." You have to look at the employment and housing trends in your local market.
Then you have to run the numbers of our particular deals. So you really have to get down to a really micro level investment decision. There are very little broad scopes of green light, buy that thing, that you can make without running the numbers. One number that I don't hear people talking about a lot is the cost of borrowing money today.
So because the interest rates are so low, people are discounting that has a significant position of why it's such a good idea to buy today because it's different of buying something at a 3% interest versus 7% interest. If you run the numbers, you're paying less for the same value property if you can borrow at 3% versus 7%. Just because the prices are higher today than they were a few years ago, the interest rates are also a lot lower, which means it's a lower cost to buy. If the deal makes sense with your cost to finance as well as the ongoing cashflow if we're talking about the rental properties, it makes sense. I know you probably have something to add on this topic too.
[00:15:17] Cynthia Meyer: What happens in my practice a lot with people that are actively expanding and scaling their real estate portfolios is that we'll look at the numbers. We'll look at a spreadsheet. It's easy as a real estate investor to see something that looks like it should have great potential for you as a property. Or maybe it's in a growing area with a property to buy and live in.
It's tempting to just look at down the road where there might be future appreciation. What I always tell folks that cashflow is like the cake and appreciation is the frosting. You don't just eat frosting. You want cake with frosting.
Be mindful that when you buy real property you don't want to have a net negative out the door every month before depreciation in taxes. Making sure that there isn't a negative cost to carry is going to help manage the risk of an investment as well as contribute to a long term potential return.
[00:16:16] Veronica Woods: I would also say that everybody has a different goal. If you're buying something and you knew you weren't going to touch the money to your kid graduating or went to college in 15 years, you may have a different perspective on the cash flow you want now. But if you're about to leave your corporate job and you need to have monthly check then that may not be the decision you make. From neighborhood to neighborhoods, I do advise people, I'll just say, the numbers in this neighborhood are all cash. I have instances where people have made a lot of money just on cash flow in certain, say a lower class C type neighborhood. Cashflow all day. Now, not a lot of appreciation. It's just clear that there's no frosting. There's pretty much just cake. That's not to say you can't make lot of money if you're holding it over time. But if you are looking at, I really want to make sure I get some appreciation, you have to pay a little bit more for that.
[00:17:17] Cynthia Meyer: Yes.
[00:17:18] Veronica Woods: And so for that, you probably use a lower monthly cash flow. These are all different tradeoffs. I agree, you don't want to go negative, but for some, you could break even, and it would still be a good investment depending on what your objectives are.
[00:17:34] Cynthia Meyer: That's why I get hearkening back to your point about there are there are local markets and then there are micro markets within those local markets. You can't know every market really well. You have to know the market that you're investing in. If you don't, you have to work with somebody who really knows the local market.
[00:17:51] Veronica Woods: So before we wrap up, we do want to go over our six tips that we covered today on the podcast.
Number one was know yourself.
Number two, make sure that your real estate strategy matches your financial goals.
Number three, know your investment personality. Are you hands-on or hands-off?
Number four, think about what interests you. What are your strengths in the real estate business?
Number five, remember it takes a team.
And our favorite number six, remember that you have to still run the numbers.
[00:18:27] Cynthia Meyer: Absolutely. And Veronica, as usual, you're one of my favorite people to talk to you over a cup of coffee or tea and I really look forward to talking to you again in the Rental property Cafe in our next episode.
So thank you everyone for watching. Please subscribe to the channel. If you'd like to get notification of new episodes and you can check out our other episodes there that we've recorded so far. If you have a question or a challenge that you'd like us to tackle. During one of our conversations, please email email@example.com and you can connect with Veronica and myself. And you can connect with us on social. We'll leave the details in the show notes. Thanks very much. See you next time.
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