Jorge and Rafi explain 5 very important tips for real estate investors to survive the next real estate crash, during this Facebook Live broadcast.
Real estate investing is cyclical, and markets go down from time to time. One of the best things about investing in real estate is that you can protect yourself from down markets, and even crashes, if you follow these very sensible guidelines.
00:01 Rafi: Okay, good morning everyone. Welcome to Graystone Brown Bag Sessions. Guess what, this time I actually need the glasses. I’m sick, I have one of my eyes, that one… There you go. You saw it. I’m a little bit under the weather. Also, before I continue, big hugs to my wife that is at home recuperating from illness.
00:30 Rafi: You see, some Valentines, I gain like 1,000 points. So, once again, thank you very much for being here. Today’s topic is a great topic: Five tips to survive the next real estate crash. Basically, we all know it’s cyclical. If you look at the history; it’s every three years, so we’re gonna be talking about that. But remember, it’s not just me. I am Rafi.
00:58 Jorge: And this is Jorge. Hello.
01:00 Rafi: There you go. How you doing, man?
01:01 Jorge: Sure you guys missed me, but I’m here.
01:03 Rafi: There you go.
01:04 Jorge: I didn’t go anywhere.
01:04 Rafi: Again, everyone’s under the weather, so we will try as best as possible to keep it up, but thank you very much for joining today. Again, I think it’s a great topic, because a lot of people don’t get into real estate because they remember that last time that the market crashed. What they don’t know, when they do research, is that it’s almost cyclical; every 20 to 30 years, there’s a bubble, then that bubble bursts, and then guess what? We come up. And what a lot of people tend to miss is that during those times of bubble, stuff like that, there’re great opportunities. There are great opportunities for savvy investors. That’s the key. For savvy investors, there’s great opportunities. So, again, we’re gonna discuss today five tips. Before I continue, please make sure that you like our page, Graystone Investment Group, so just go to Facebook and like our page, Graystone Investment Group. Okay? And make sure that you share this in your timeline. So if you’re watching us now, we have 10 of you watching us right now, please make sure that you share this on your timeline to your friends and your network.
02:16 Jorge: To say “Hi”, because with the new Facebook setup, we can’t tell who’s online.
02:21 Rafi: Yeah. There’s nine of you there, but we don’t know who you are. Please…
02:24 Jorge: So I challenge you to say “Hi” right now. Come on, guys.
02:28 Rafi: I’m gonna pay a Diet Coke to the first one to put a comment right there saying “I’m here.” Let’s see. Five, four, c’mon, someone say “I’m here.” There you go. Erick Verdejo. [laughter] Erick. Great company that Eric, runs over there, so make sure that you support him. Jason also said “Hi”. Jason Fix, from Graystone Real Estate, our new venture into real estate and property management. I’m still waiting for the Mexican food from Jason for this Graystone meeting. Jason, I expect some nice Mexican food for our next Graystone Brown Bag Session, so c’mon let’s do it. Say hi to Diana. So everyone, we have those five tips. But before, Jorge, where can they find those outside Facebook?
03:15 Jorge: They could always find us at homes4income.com. That is homes, the number four, income.com.
03:21 Rafi: Excellent, excellent. So, again, Jocelyn Rivera, she’s there. Hi, Josie. Hope she gets something nice for some Valentines. Anyways, so…
03:38 Rafi: Let’s go to the first tip. So, what would be the first tip in terms of how to survive that real estate crash that… It’s happening, we don’t know when, but it will happen. What will be that first tip?
03:50 Jorge: So anyways, I want to mention to the audience out there that I went through it. In 2000, I started based in real estate in early 2000, and I pretty much lost half of my inventory in 2007.
04:04 Rafi: Wow!
04:07 Jorge: Even though it was very tough, it was a good learning experience that has prepared me now. I always say that that was like going to college; learning what we learned back then. So the first thing, when you’re talking about buying cash flow properties, is you wanna buy a property where the rents are lower than the average rent in that particular area.
04:31 Rafi: Wait, but that doesn’t make sense. You want me to get a property that rents below the median? Why?
04:41 Jorge: Well, the strategy behind it is, that if, as the market turns down, if the market comes down, if your rents tend to be cheaper, you’re gonna be able to grab those potential tenants that were in higher-end property, maybe they lost their job or they got demoted. So if you’re at the bottom, you’re not gonna get hurt as much as if you’re here. For example, the average rental property price in Tampa, Florida is $1,500 bucks a month; that’s the average. Most of our properties rent for $900. So if the market was to turn, let’s say in 2018, a lot of those people are either gonna lose their jobs, get demoted, they’re gonna seek for cheaper properties. So since you’re at the bottom, people need housing, you’re at the bottom, you are gonna get the bottom anyways, and all the other potential tenants that were at the other level, higher up.
05:51 Rafi: So basically your point is… By the way, that doesn’t mean that you’re gonna get a lower cap rate. No, no. Actually you may probably be getting a higher cap rate, but you’re just saying “Hey, target those rents that are lower, that way when people struggle and have to go through a situation where they have to come down on rent, you already have that rent ready for them versus you struggling to rent it at $2,000,” all that kind of stuff.
06:18 Jorge: Absolutely.
06:19 Rafi: Okay. That makes sense. So the number two tip to survive a real estate crash, what would it be?
06:27 Jorge: Number two, very important, is to have research. A lot of investors, they see the market taking off, they get excited, they wanna spend every dollar they have in their pockets, but that’s a big mistake. And trust me, I’ve learned that lesson myself. Right now what I do is, if you’re dealing with cash flow properties, you still have your job, and you’re dealing with cash flow properties, then you gotta just think of covering those rental properties for a year or two in case that the market turns down.
07:03 Rafi: Okay.
07:03 Jorge: If you’re into the real estate business, this is your business, you gotta make sure that you cover your expenses as a business for at least a year.
07:11 Rafi: Okay.
07:14 Jorge: ‘Cause you can maneuver six months, seven months, but you gotta make sure that you have at least a year.
07:19 Rafi: Okay. So it’s very important, and when we calculate cap rates for our investors, we always have there some very high maintenance reserves. Because again, we always want to prepare for the worst and hope for the best. So that’s definitely one area where we wanna do it. Now tip number three. And this one, if you have seen our previous videos, which you can check our Graystone Investment Group page and see the other videos, this one’s gonna resonate. You cannot be surprised about the next one. What is the next tip to survive a real estate crash?
08:01 Jorge: Be a good landlord. Be a good landlord.
08:05 Rafi: It’s easy, be a good landlord. Be a good guy. Don’t be that guy that, da, da, da, da. No. Be a good landlord. But there’s ways that you can be a great landlord. So when you say be a great landlord, what are you talking about?
08:18 Jorge: The way I put it, Rafi, is like, landlords are like your child, like your kids. So you love ’em, you love your tenants, I’m sorry, tenants, ’cause they’re paying you rent. You wannna take care of ’em, you definitely wanna take care of ’em. But you also gotta show them, make sure that they understand their responsibilities as well, and that they commit to those responsibilities. So it’s having that balanced approach, where like, “Okay, I’m gonna take care of you, tenant, these are my responsibilities.” Having that in writing, “Okay this is from one to five, this is what I’m gonna cover for you, and items six to 10, these other stuff that you need to cover.” And be able to, if there’s a repair that’s valid that is something that is on you, move quick and get it fixed.
09:12 Rafi: But you know what? That’s to be a good landlord. Let me tell you how you can be a great one.
09:19 Jorge: Tell me, Rafi, how do you do that?
09:20 Rafi: Hire a great property manager.
09:23 Jorge: Yes.
09:23 Rafi: Go back, go back to the video. When we finish today, go back to that one video, the second video, the third video, every single time we said it; get a good property manager. If you have a property manager, all those things that you’re talking about, now you hold them accountable because you’re paying them a fee, a small fee, 8%, 10%, but they are the experts at that. And it eliminates all the hand-holding, all the calls at 2:00 AM in the morning, all that kind of stuff; a great property manager will take care of that. So from my perspective, you can be a good landlord, but you can be a great investor by hiring a property manager. I think that’s the one area that I truly believe a lot of people try to cut corners there, and “Hey, I live in Tampa, so I can do it.” Guys, let the experts be the experts.
10:17 Rafi: I’m one of those that, hey, if at home, [10:20] ____, if a little switch, it sparks and stuff like that, I don’t go trying to be little Timmy Jimmy trying to be an electrician, uh-uh, I pay that guy. Same with the property management people, don’t skimp on that. Do your research, make sure you get references, make sure that they are for the right property. Remember, we’re talking about in Section Eight properties, you need to have a Section Eight property manager. But that’s how you go from good to great; be a great investor by hiring a property manager. So I [10:51] ____ believe it’s that one. What would be the next tip to survive a real estate crash?
10:56 Jorge: Number four: Manage your cash flow.
11:00 Rafi: But just manage it or…
11:04 Jorge: Aggressively manage it.
11:05 Rafi: Ah, there’s a difference, you will find out.
11:08 Jorge: And mainly what you wanna do is, you wanna make sure that you really count your pennies. When it comes to rentals, one thing could go wrong and really kill the deal, kill your rent, your income comin’ in, so you want to count the pennies. You need to assess how much the insurance are, how much the taxes are, confirm and double confirm and triple confirm with a few property managers to make sure, “Okay, is this the rent?” And even then, I will take a lower number to be conservative. So start with that, making sure that you don’t get excited because the property looks nice.
11:48 Rafi: Yeah, never get excited. Internal joke.
11:50 Jorge: And you buy something that at the end is gonna hurt you. So do your numbers the right way; that would be the number one.
11:57 Rafi: And let me tell you, when he says counting pennies, we really mean counting pennies. You need to have a very good record keeping of expenses, record keeping of repairs, taxes, all that kind of stuff. I’m gonna go back, and that’s answering Erick’s question, I’m gonna go back to a good property manager. A very good property manager will take care of most of that stuff. They will document for you repairs, they will document you rents; they’re late, they’re not late, that kind of stuff. So a good property manager will take care of most of that stuff. And again, from Erick’s point of view, in terms of property management cost, it ranges between 8% to, we’ve seen as high as 12%. Some of them at 12% include everything. Some of them at 8%, then they attack on fees for other stuff, like eviction programs and stuff like that. But I would budget between 8% to 12% in terms of property manager in that regard.
13:00 Rafi: And then Ian’s saying, “Reward your loyal tenants.” You know what? I’m gonna like that comment from Ian, because that’s something that he shared with us. He rewards his good-paying tenants with a holiday bonus. Can you imagine? Especially if you go with tenants that are a little bit on the lower end, if you send them $100 gift cards to Amazon, Wal-Mart, or something like that, at the beginning of the holiday season saying, “Hey, thank you for being such a great tenant,” man, that goes a long, long long way to make sure that you get tenants that stay, and that they take care of your property. So that’s a great idea by Ian there, that we implemented and has worked tremendously. You can do different stuff, but yeah.
13:47 Jorge: So when it comes to managing the cash flow, you wanna make sure that you’re good to the tenant, but they also understand the expenses too. They have to, because a lot of times, landlords are not clear on their leases. This is anything you do up to this much is your responsibility. Wear and tear, I got it, but this and this and that. You gotta be very specific, because a lot of landlords don’t do that, and that’s a big part of the total expenses, the net operating income that you’re gonna get at the end of the year…
14:27 Rafi: And I’m gonna sound like a broken record, but a good property manager will take care of that.
14:31 Jorge: You need a good property manager, absolutely.
14:34 Rafi: I’m sorry. And by the way, I’m not a property manager, but I’ve seen the value. I’ve seen the value. I’m sold on it. Then number five, the last tip in terms of suggestions to better survival in real estate crash. What would be the last one?
14:51 Jorge: The last one is to make conservative choices when you’re buying properties. And the best way to describe that is to rip your heart, take the feeling out of the transactional weight 100%. And this is something that I just talked about earlier. People get excited to see their neighbors doing good in a good real estate economy.
15:14 Rafi: They get pumped up.
15:15 Jorge: They get pumped up. They see their family members doing well, and they see a property, they looked at curb appeal and they say “I want that investment most,” without doing the numbers. So be conservative, do your numbers, and make sure you understand what you’re doing.
15:30 Rafi: I think the one thing that I learned pretty quickly in this business is, there’s a big difference between an investment home and a home that you’re gonna live in.
15:40 Jorge: Absolutely.
15:40 Rafi: And where most of the mistakes are made, are where people buy homes that they say, “Oh, my God, I wanna live there,” or “You know what, I’m gonna change this and create a double vanity master bathroom with a spa on Seminole Heights or Sulphur Springs.” It’s an investment home, so treat it the same way you treat your investment somewhere else. You look at how much you put into, you look at your cap rate, and then you say, “Is the risk… From my perspective, does that match the reward that I’m gonna get on that property?”, and go from there. One tip that I like to always give people when they’re doing flips is, if you’re doing flips, and you buy an investment home, how do you know it’s a conservative choice? Very simple. Run the numbers as if you were going to rent it, not flip it. And if those numbers are not at rental levels, but at least close, so for example, right now we’re getting in Tampa 9% to 10% of cap rate on rentals. If that flip gives you a six to eight, so it’s not there but it’s close, guess what? You got that flip, you put your investment there, the market goes down, you didn’t expect it; you can rent a house for a couple of years. It’s giving you at least a good 6%, 8%, you’re paying the expenses, to your point, for a couple of years, and then guess what? You ride the appreciation and you do it.
17:08 Rafi: But the key is that you have to make that calculation before you buy that investment property; that way you can get… We have a lot of people that ask us, “Hey, why you don’t have 50 flips at a time?” Because we run them that way, and we’re very conservative with our choices. And by doing it that way, we just had a situation similar to that where, guess what, we could have rented that flip at a point that we said, “You know what? It would pay the expenses. We can ride it for a year, wait for it to go up, and then sell it.” We have a couple of questions which is great. And these glasses don’t have my prescription so I have to do this. “Do repairs usually… ” This is Erick. “Do repairs usually stay on budget, or should you budget an additional amount? And if so, what is a good number?” You wanna tackle that one?
18:08 Jorge: Anytime that… You gotta see real estate as an investment, and you gotta come up with a budget from day one. And within that budget, things are gonna happen, so you’re gonna have some wiggle room within the budget. But if you have the right team and you’re working with the right people, you should not go over budget. You should not go over budget. Because inside of that budget, there’s the room for any…
18:35 Rafi: That would be the last question I’m gonna ask today because it’s already 18 minutes, almost 19. Here’s the way I would look at it, Erick, always: At least 10% buffer, over the already extended quote. Always at least 10%.
18:55 Jorge: That’s something we add to the budget.
18:57 Rafi: We always add that. So even if we added, “Hey, what if the AC,” okay, let’s put the AC there, and even after we come up with that final, then we go, “Okay, he said 28, we’re gonna budget for 30.” So, that would be my, definitely, initial one. Now, watch out for a key couple items. There’s four things that can really bust your repairs: AC, electrical, plumbing, and roof. So, those are the four things that, as soon as you get to a house, you need to make sure that there’s as much a good assessment on them as possible, and those are the buster budget, the budget busters. Those are the ones that, if you have to do the roof, it’s $6,000 to $8,000. If you have to rewire a house, depending on the size, it can be $10,000, $12,000. Those are the big ones.
19:48 Rafi: So, make sure that when you do that initial quote, the contractor tries as much as possible; sometimes it’s very difficult because you have to tear down a wall. But those are the really ones that you have to take a look at, and make sure that you have them as close to what you want as possible. If they’re not part of that quote, then guess what, you need to make sure that you have it. Excellent. Wow, 20 minutes, man. This was the longest. Everyone’s asking questions. We’re very passionate about it, because again, like you said, you went through it, and not only that, we want to make sure that… Again, it’s a cycle. It will happen again. We wanna make sure that our investors are prepared for that. Please make sure that you share this video in your timeline, so your networks and friends can see it. Where can you find us?
20:35 Jorge: They can always find us at homes4income.com, Rafi. That’s homes, the number four…
20:40 Rafi: Number four.
20:40 Jorge: Income.com.
20:40 Rafi: Excellent. Don’t forget to like our page here on Facebook, Graystone Investment Group, and we’ll see you next Friday in Graystone Brown Bag Sessions.
20:51 Jorge: Thank you.
20:52 Rafi: Bye.
Graystone Investment Group
Graystone Investment Group is an experienced real estate wholesaler in Tampa Bay. We serve clients who flip homes in as little as 30 days, as well as clients who hold high cash flowing rental properties.
Unlike other wholesaling groups, we provide clients with a turnkey process at no extra charge. We find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years.