Richard

Does the insurance industry offer opportunities for “purpose-driven” entrepreneurs to drive social change. Sam white, CEO of Stella Insurance thinks so. She is seeking to build a brand that directly addresses the concerns of women across issues ranging from inappropriate levels of cover through industry practices that ignore the dangers of domestic abuse.

On the face of it, at least, motor insurance is a pretty-much gender neutral product. Yes, women tend to drive more safely than men so, in theory at least, they should pay less for their car insurance. But sadly, here in the UK and across the European Union, equality laws currently prevent insurers from pricing policies on the basis of gender alone. Despite a lower accident rate, women do not enjoy a discount on policies.

That fact has posed an interesting challenge for Sam White. Based in the U.K., is the founder and current chair of insurance company, Freedom Services but when she decided to launch a brand that would be avowedly female-centric in its approach, she initially chose Australia – a country where policies could be priced according to gender – as the launchpad. At the end of last year, she brought the Stella Insurance brand to the UK. When I spoke to her last week, I was keen to find out how she intends to build a business that speaks specifically to women when arguably the biggest potential selling point – reduced cost – is not something that can be brought into play.

Born in Cheadle in the North of England, White started her entrepreneurial career with a claims management business launched from her sister’s conservatory. Sticking with insurance, she went on to found the Freedom Services Group, which in 2020 launched Stella Insurance in Australia in partnership with Bauer Media Group, Viper Capital and VC, Envest.

As she explains, Stella is positioned not only as female-centric but also a business with a social mission. “Purpose-driven businesses have the power to change the world,” she says.

But what does that actually mean in the context of the insurance industry? Let’s face it, very few of us think of buying car insurance as anything than an uninspiring essential. We buy policies to protect ourselves, protect others and stay in compliance with the law and most us probably use comparison engines and try to pay as little as possible. So, where does purpose fit into that picture?

A Female Lens

White’s approach is to look at the market through a female lens. As she sees it, the needs of women haven’t been particularly well catered for. She cites car contents cover as an example.

“Traditionally, the cover for contents carried within cars hasn’t been high enough,” she says. “It doesn’t reflect the value of goods that women carry.”

Then there is the question of the kind of interactions that women like – or more to the point – don’t like. “Women don’t like being asked all sorts of questions that aren’t necessary to price the cover but are being asked because the information can be used in the future,” she says.

Loyalty penalties – the practice of charging long-standing policyholders more on renewal than those who sign up for the first time – are also disliked by women, although White concedes this is something that has already been addressed by the industry.

So there is scope to do more to align the offer with the expectations of women, even with price taken out of the equation. You could argue, of course, that this is simply good marketing – or to put it another way, tailoring a product to address the preferences of a target consumer. That probably falls well short of a “purpose definition.”

Deeper Problems

But White points to more fundamental issues with car insurance as it is sold to women. She points to policies that repudiate claims if the damage done to a vehicle is done by someone who is known to the claimant. On the face of it, this sounds like a fairly standard industry opt out. But what if the claimant is a woman suffering from domestic abuse? Then its a problem.

This is something that White has set out to address. At the same time, the company has developed a product – which can be embedded in car insurance – that will payout in the event of a domestic abuse situation. “If you are a victim, you can get funds,” she says. It’s a fixed sum of between £2,500 and £5,000, with the trigger being a domestic abuse order.

In addition, Stella in Australia has donated $5 (Australian) to the Women and Girls Emergency Centre. Here in the UK, the company has partnered with Flyaway Foundation to help women break the cycle of abuse. White sees this as an important part of the ethos of the company, even if it means slightly lower profit margins.

Raising Capital

So how does all this sound to financial backers? Until the launch of Stella in Australia, White has grown her business organically rather than seeking VC finance. Even so, she’s seen at first-hand the problems women have when they seek to raise capital. Back in the days of her first business, her father had to pose as a director in order to help her secure a loan.

But doesn’t positioning as a “purpose” business make things harder, if only because it confuses investors or lenders? White says a commitment to purpose needn’t be a deterrent. “A company without a purpose element might have an EBITDA of £130 million. An equivalent purpose-driven company might report £100 million. But that’s still £100 million.” In other words, you can embed purpose and still deliver good numbers. “I believe in Stella and my numbers are good,” adds White.

So can the “purpose-driven” concept find a foothold in the insurance industry? Well, as the industry itself evolves – embracing big data and AI to price policies and assess claims – at the very least there are opportunities to think creatively and take a customer-first approach. Big insurers may be set in their ways, but there is scope for entrepreneurs to find ways to better serve their target markets.

Ashley Kehr:
This is Real Estate Rookie, episode 288.

Tony Robinson:
Ash, outside of credit score, what other factors do you typically look at when screening for long-term tenants?

Ashley Kehr:
Yeah. Let me give this disclaimer first is that make sure you know what you can and cannot screen for with your state laws. I mean, every state has different rules on this as to what you can screen for. So screening also cost money, so you have to pay if you’re doing a background check to make sure no violent crimes have been committed. If you have a multi-family unit, your tenants are not going to be wanting to live next to someone who is convicted of murder and just out of jail. My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.

Tony Robinson:
Welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. We’re back with another Rookie Reply episode. We’ve got some great questions today. We’re going to talk about why Ashley’s first eviction had her in tears and what you can learn from that process to make sure you don’t end up the same way. We’re going to answer the questions, “Do evictions and bad credit scores always lead to bad tenants, or is there a silver lining in there somewhere?” Last, we’re going to talk about what a DSCR loan product is and how you can use to fuel your funding for your real estate business.

Ashley Kehr:
You forgot to add in the part where a tenant leaves a note as to why she’s leaving the unit that also leaves you in tears.

Tony Robinson:
Yeah, but those are good tears. Those are good tears.

Ashley Kehr:
I know, I know.

Tony Robinson:
Yeah.

Ashley Kehr:
Yeah. So, today’s episode, we go through these questions. As always, Rookie Reply is your chance as our listener to send in your questions for us to answer. You can send your questions to the Real Estate Rookie Facebook group. You can send a DM to Tony or I, or you can leave some questions onto our YouTube videos. Just search “Real Estate Rookie” and make sure you are subscribed. Okay. So our first question today is from Dan Rodriguez. I took a look at this question, and I said, “Oh, great. Another opportunity for me to talk about how I cried on the podcast.” So today’s question is, “For those of you that have gone through the eviction process, did you go to loan in small claims court, or did you hire a lawyer? Local court has advised me of the steps needed. I’m just wondering if I should spend the extra money despite already being at a loss with a problem tenant. The guy already has a bench warrant for repeated failure to show for driving with suspended license, so I’m pretty sure judgment is paper value, and I’ll never recover nothing from it.”

Tony Robinson:
I just want to ask before you answer that, Ashley, because I wonder if Dan’s question… It seems like he’s just more so worried about trying to recover maybe lost rental revenue and not necessarily evicting him because… I mean, he said, “Wondering if I should spend the extra money despite already being at a loss with a problem tenant.” But if that tenant is still in the house, then you should definitely spend the money. I don’t know. How are you reading that question?

Ashley Kehr:
So you could go… and this probably varies from state. So I’ve done New York evictions, so I’ll speak on terms of that, but it has been a while since I’ve actually done one myself. So I think right here are two different questions that he’s asking or two different scenarios. So the first one is the eviction process, and then the second one is filing a judgment against someone. So these can be done simultaneously, or they can be done separately. So let’s take the scenario that the person is still living in the house, and they want to do the eviction plus file a judgment against the person, or you could just file the eviction and not even go with the judgment. But with the eviction process, you can do it yourself, but you just have to be so diligent.
I did two evictions. My first ever that I did, the investor I was working for said, “We don’t need to hire an attorney. You learn everything. You can learn how to do this process.” So, at court, judge made me cry because I didn’t file at the timeline, said I messed up the… or like when you serve the person, it has to be a third-party. You have to have them sign an affidavit. Then, you have this much time before you can file the next one, but the next thing to them has to be filed within three days or whatever. It’s a very time-stricken process, and if you don’t know what those time periods are that you need to hit, the judge can throw the case out of court.
Luckily, it was in a very small town. There was nobody else in the courtroom, except for me and the tenant. For the next case, she excused the first tenant and was like, “Please go ahead and go. She’ll have redo the eviction or whatever.” So she tells the bailiff or whoever is the only other person in the room is like, “Don’t bring the next person in yet,” and she says to me, “I’m just going to dismiss this for you. I’m not going to say the reasons why so you don’t have to go through the embarrassment a second time.” Something along those lines. I don’t remember the exact words. Basically, that, but… Yeah. So, I was like, “Please let me hire an attorney to the investor.” So, since then, I haven’t done any evictions myself, and always hire an attorney to do it because they know the process, and they can do it so much faster than you can.
There’s also certain language that has to be appropriate in the documents that are filed. So, for example, in New York, you have to give a 10-day notice for them to pay rent or to vacate the premise that they do not do either of those. Then, that’s when you can file the petition for eviction. You send it to the court, they give you a court date, and then you have to serve it to the tenant by a third-party, get the affidavit of service, all these things. Then, once you actually go to court, it can vary vastly as to how your court experience is. So I’ve gone with my attorney to different evictions, and sometimes I just sit there. I don’t have to say anything. Other times, the judge wants to ask me a million questions. Sometimes the tenant doesn’t even show up, and they make you wait 45 minutes to see if they are going to show up. So I think having an attorney is definitely a huge advantage. Plus, they can file the judgment for you.
The judgment is a lot easier to take care of than it is the eviction. You can go to small claims court. Well, you go to the court clerk, go to their office, and you will ask for the small claims form. You can fill out the form right there, and then they’ll give you a court date, and then they’ll have the marshal serve the person, and then you have your court date to do the judgment against the person. I’ve only done one judgment myself personally against someone because in the same scenario, it’s not going to really recoup anything, but one of the first tenets of my own that I had to evict, I did a judgment. It’s probably been seven years now, and I think it was a 10-year judgment. So, in 10 years, that judgment will expire. I’ve never seen a penny from it, and maybe someday I’ll get a check in the mail. Yay. But until then, it’s just a waiting game.
I think if you’re going to do the judgment, it’s fairly easy process, at least in New York, to do the that through small claims court. But as far as the eviction process, if you don’t know what that process is, then I would definitely hire an attorney, and for an eviction that goes smoothly, I would say on average, I’ve paid $1,000 to have that eviction done. But if that means that tenant is out quicker and I’m not losing two more months of rent because I messed up or I did something wrong, that is $1,000 well spent. Then, another option is you can do cash for keys. Offer the tenant like, “Hey, I’m going to give you $400 if you’re out by next Friday. I will come here, you have everything out, I’ll give you $400. That’s enough to help you towards a new security deposit,” or whatever that amount may be that would be cheaper than going another month or two waiting for the eviction to process, hiring an attorney, things like that.

Tony Robinson:
Yeah. One of the benefits, obviously, of investing in a short-term rentals is that you don’t have to worry about evictions. I can’t speak to all states, and this is not legal advice. So if this information is incorrect, please don’t come back, and try, and hold me liable, but I’ve been told that in California, as long as the stay is less than seven days, they never obtain tenant rights. The majority of our properties in California, they turn about every two days or so, so we never have to really worry about someone potentially needing to be evicted.
Honestly, we had one situation where we had to call the local sheriffs, and they were more than happy to show up at the property to help escort that guest off of the property. So it’s super easy with the short-term rental to get a tenant out if you need to, but obviously, every state is going to vary, and make sure you understand the laws in your local state as well. I actually looked it up, and it says that not only is it seven nights, but if a guest stays 14 days within a six-month period, then they also get tenant rights. So if someone booked two or three six-day stays, or something, whatever, whatever the math adds up to in a six-month period, then they get tenant rights, and I actually didn’t know that, so that’s good to know as well. If we see the same name popping up, that could be a cause for concern as well.

Ashley Kehr:
Okay. Let’s move on to our next question. This is from Tam Vo. “When tenant screening, I know credit score isn’t the only thing that matters and pulling credit helps to see their payment history. What credit score range would you accept for B neighborhood, C neighborhood? What else do you look for?” So I think a big consideration on this, and I think you’re definitely on the right track, Tam, is knowing what kind of class neighborhood you are in. If you are renting an apartment in a C neighborhood and you’re requiring a 700 credit score, you’re most likely not going to get that.
Where if you’re doing high-end luxury units, you’re more able to get the tenant that has that high credit score that is choosing to rent instead of purchasing a property because a majority, and not all renters, of course, are renting because they can’t afford or don’t have the credit to actually purchase a property. So that is a part of your tenant pool that you don’t want to, I guess or say, leave out because you’re setting your standard so high as for the tenant that you’re going to let occupy the property. So as far as the range to accept for a B and C neighborhood, I really don’t have a good answer. I will say that a lot of the units I have are in B neighborhoods, and we accept a 600 or above credit score for those areas.

Tony Robinson:
Yeah. Ash, outside of credit score, what other factors do you typically look at when screening for long-term tenants?

Ashley Kehr:
Yeah. Let me give this disclaimer first is that make sure you know what you can and cannot screen for with your state laws. So, in New York state, I think it was June 2019, they passed a law that you cannot deny someone because of their eviction history. So you can find out if they were evicted, but you cannot deny them for that reason.

Tony Robinson:
I did not know that.

Ashley Kehr:
Ridiculous. Yeah. I mean, every state has different rules on this as to what you can screen for. So screening also cost money, so you have to pay if you’re doing a background check to make sure no violent crimes have been committed. If you have a multi-family unit, your tenants are not going to be wanting to live next to someone who is convicted of murder and just out of jail. So there are things that you can screen for. The biggest thing is make sure you are consistent with your screening. Build out what your criteria is. What do you require of every single tenant so you don’t get yourself in trouble with fair housing laws?
Another thing. So doing the credit check, the background check, that is a big thing. Some states, doing the eviction check. Having references. So with references, it’s very easy for somebody to put their friend on the application and say, “Yes, they were my previous landlord.” So that’s where, as real estate investors, it can come in handy that we have access to finding who owns certain properties. So if you really want to go the extra mile and screening your tenant, wherever they put their previous address, go on PropStream, the GIS mapping, and see who actually owns that property that they’re saying was their landlord, or if they have a… Ask for the property management company that managed it and get that number directly, or you can Google it to verify that is the number if they give you a property management company.

Tony Robinson:
I guess, Ashley, have you ever had an experience where on paper, a tenant was probably someone that you shouldn’t have rented to, but maybe they had… Not a sob story, but they had a story for you as to why they were deserving and how their past isn’t indicative of their future, and you end up renting to that person, and it ends up being a nightmare. Has that happened to you before?

Ashley Kehr:
I’ve actually had it go both ways. So I had one tenant. It was the first property I ever bought on my own without a partner, and this was the first… I had just closed on it. It was rent-ready, ready to go, and I didn’t have a ton of people that came to showings. Instead of waiting to find the right tenant, I became desperate, and I rented to a young girl and her boyfriend, and her boyfriend didn’t pass the screening requirements, so she had somebody else co-sign for her. It went great until COVID hit, and so since March 2020 until they were just evicted, October of 2022, they did not pay rent at all. They would get… It’s called ERAP. It’s a government assistance program that started during COVID where you could apply for rent payments.
Well, this would only… You would apply for it, but then it would take up to four months for it to get approved. So then, they would be behind again another four months. When they were finally evicted, the place was trashed. It looked like… They had had a child since they had first moved in. Definitely looked like signs of domestic dispute like whole punches in doors like somebody had went in and locked the door, and somebody punching trying to get through, and just trashed the place. I had to spend $10 grand to remodel it after they moved out. So that right there was… I still think back to showing them that unit even though that was in 2017. So they paid from 2017 to 2020, and then after that, it just went downhill.
I had another scenario where it was a mom, and then her two teenage kids, and she really didn’t have… She met the credit requirements, her income was just barely at the level, but she asked for her kids’ income to be included saying they would be pitching into rent. So that was how we got around approving her was that she was including her teenage kids who had jobs, that they would be pitching in for rent. So we did that, and she had told me that she was leaving her boyfriend that was not nice to her and things like that, and she really gave me a sob story.
That time, I learned that’s sometimes a red flag is when they immediately are telling you, “Here’s why I am moving in and reasons I might not pay rent because I’m starting all over. Blah, blah, blah.” She paid late a couple times. She lived there two years, and then she put in her notice. It was the nicest notice, “I’m leaving your apartment,” I’ve ever received. Just the biggest thank you for giving them a chance. She had saved enough money. She had started this first-time home buyer program, and she actually had put a down payment on her first house that she was going to own on her own. That right there was like… That was a success story. That was one time where giving someone a chance really did work out, and I’ll never forget that tenant because of that thank-you note that she wrote me when she was moving out.

Tony Robinson:
As real estate investors, we get so much heat on social for destroying communities and just being awful, terrible people, but we need to share more stories like that where you gave someone a second chance, and they were able to use that to pretty much restart their life. We do some good as real estate investors as well, so kudos to you, Ash, for that one. Cool. So, before we jump off of this question, I just want to read another review that came in. This is a five-star review on Apple Podcasts by someone by the username of McNeil2712, and McNeil says, “My brother and I have talked about getting into real estate for years. After struggling financially for years, I recently paid off all of my debt, credit cards, loans, everything, except my car loan. So now that I see that it’s soon possible to take this seriously and my brother told me about BiggerPockets last week, I’ve listened to two episodes a day every single day. You guys are awesome.” McNeil, we appreciate that. For all of our rookies that are listening, if you haven’t yet left us a five-star review or an honest review whatever platform it is you’re listening to, please do. The more reviews we get, the more folks we can reach. The more folks who can reach, the more folks we can help.

Ashley Kehr:
Okay. So let’s go on to our next question from Zane Clark. “Hello. Has anyone structured a deal with seller financing in which you take over the mortgage for the seller? How does the seller benefit or recoup any of the equity they’ve already put into the house? Thank you for your time.” Are they asking about seller financing or subject to?

Tony Robinson:
Yeah. I mean, he said seller finance, but maybe just trade financing in general is what Zane is referring to.

Ashley Kehr:
Okay. Yeah, because he says, “Take over the mortgage for the seller.” So, in the sense that you’re taking over the mortgage for the seller, it’s not really considered seller financing. Seller financing is when you are actually paying your monthly mortgage payment or however you’re paying to the seller. They’re actually holding the mortgage on it instead of the bank. But in this case, if you’re taking over the seller’s mortgage, then you are still paying a bank a mortgage, and it’s not technically seller financing. So, in this scenario, the second part of the question was, “How does the seller benefit or recoup any of the equity?” Tony, have you ever done a subject to deal before?

Tony Robinson:
I have not. We’ve had a couple under contract, but they didn’t quite work out. But if you are doing a seller finance deal or maybe more so a subject to, you can still have the… between you and the seller, negotiate a down payment. So if the seller says, “Hey, I want 20% down,” then that’s them tapping into some of that equity that they have. So, yeah. There are ways to structure it, but if you guys want a full breakdown, I actually still have the book right here, Wealth Without Cash, one of the newer BiggerPockets books by our buddy Pace Morby. He was on episode 280 recently of the Real Estate Rookie Show and talked about all things subject to and seller finance, and really just gave a world-class breakdown of what that looks like. Then, if you guys go to biggerpockets.com/bookstore, you can pick up a copy of Pace’s book, Wealth Without Cash, as well.

Ashley Kehr:
Yeah, and I guess to give a quick answer to Zane’s question is how do they… the equity, maybe they don’t have any equity, and that is also part of the advantage to them is the reason they can’t sell it is because nobody is willing to pay that price for it, that market price, or they just don’t think that it would sell for that or they… For whatever reason, they don’t have any equity in the property, and maybe they listed it with a real estate agent. Pace talks about how he really goes after expired listings. So people tried to sell it, it didn’t sell, and now you are the one coming in and solving their problem by retaking over their mortgage, you’re purchasing the property from them, they can get out of the house, and they can move on and do their next thing. So that’s the benefit is that maybe they got a new job somewhere else, and they have to move, so it’s better than them having to pay money to pay their mortgage off.
So if you went, and say, their property for easy math is… They have a mortgage for $100,000. They try to sell it on MLS for $120,000. They get offers at $80,000. So that would mean they would have to come up with $20,000 to pay their mortgage, and then the proceeds from the sale, the $80,000 would go to pay off the other $80,000. But what you can do with subject to is you can go and offer to pay that $100,000. You may be thinking, “But wait, why would I pay $20,000 more than someone else is paying?” Because right now, interest rates have increased. So somebody else who’s buying that same property, their mortgage might be 6%. But if that person bought the property, say, in 2020, 2021, and their interest rate is only 3.5%, your payment is going to be a lot lower and more affordable than that person who can pay the $80,000. So that’s one huge advantage that Pace talks about too in his episode. So that’s just a couple of the reasons why someone might sell it, why you might be able to purchase the property at that purchase price of what their mortgage is.

Tony Robinson:
Yeah. The levers you can pull are your down payment, right? A lot of people can get into subject to or create a finance with zero money out of pocket. It’s the term of the deal. Maybe it’s a shorter note where it’s like five years. Maybe it’s long-term debt where it’s 30 years. Right? It all depends on what that person wants. Interest rate, like Ashley talked about, is another lever you can pull. Then, the overall purchase price. For a lot of sellers, they’re going to have different motivations or not motivations per se, but each one of those is going to be important or more important to one person than the other. So it’s up to you to figure out what’s really driving that person, and then leveraging that to create the best deal. I mean, yeah, we know people that are crushing it with creative finance and subject to, so it’s about understanding that seller’s problems, and then presenting some solutions that make it a win-win for everybody.

Ashley Kehr:
Yeah. Another example I give is I’ve done one subject to deal, and it was to purchase a farm. They had back taxes that they couldn’t afford to pay, and they were also starting to fall behind on their mortgage payment. So the property was going to be foreclosed on if they didn’t come up with the cash to pay off the back taxes. So what we did was we worked out an arrangement with them where we took over their mortgage payments, we caught their mortgage payments up, so they were no longer in risk of foreclosure, but now they still had the back taxes where they’re at risk of the county coming in and taking the property. We paid off the back taxes. Paying off the back taxes, catching them up on their mortgage, that was less money than we would’ve needed as a down payment. Plus, this was this person’s primary residence. So their mortgage terms were a lot better. The payment was a lot lower than what we would’ve had to pay if we went and got our own financing.
The benefit to the seller was they weren’t going to lose the property to a foreclosure where that would be on their record. Also, we let them front the house. So they live in the house and pay rent to us, so we didn’t have to go find a tenant. They live there. They pay rent. So they got to stay in their house even, and we just use the farmland, and then there’s two other rental properties on there too that are rented out. So there’s always different ways that you can make it a win-win scenario for each buyer and seller. Okay. Next up, we have a question from Jared Sutherland. “What are the advantages/disadvantages of getting a buy-and-hold in a historic district? Thanks.”

Tony Robinson:
Have you ever bought in historic districts?

Ashley Kehr:
No, I haven’t. There is this church that bought the movie theater in a small town near me, and they bought two buildings adjacent to it. They were going to tear the one building down to make a larger parking lot for the movie… Actually, a parking lot. There is only street parking from the movie theater now, and they got stopped by the historic district and said, “No, you can’t tear this building down.” I had toured that building probably five years ago when it was first up for sale. There was a three-unit. In one of the units there, it was a two-bedroom unit, and there was eight people living in it. Mattresses on the floor in the living room. The other two units were vacant. One just needed a lot of repairs. The other unit had… In the bathroom above the bathtub were pieces of plywood with chains and hooks so that you could fold the plywood down like bunk beds. This was all through the house, graffiti, needles, and had been a drug house basically where people would go in, and do drugs, and stay over on one of the plywood bunk beds.
Yeah. So it was definitely in need of a ton of repair and just like… The building just sits there now. It hasn’t been demolished. It hasn’t been fixed up or anything. To me, it’s very controversial as to how do they decide what’s historic, how do they decide… So I honestly don’t know a lot about purchasing in a historic district or the board members, so my advice would be to look at if there are any tax advantages, if there are any grants or funds that the historic board will help you get because there are tons of funding out there and grants that you can get for all types of things, but you have to, most likely, to be really successful at getting them, and hire a grant writer, which can cost a lot of money. I used to be on the board for a Boys and Girls Club for about 10 years, and we would always go do these grants. Finally, we just got a grant writer to join our board because we weren’t having any luck. But once we had a grant writer, and we’re investing in that to come and make it, we are getting a lot more grants coming in. So that, I could see, is one advantage of doing up iron hold in a historic district.

Tony Robinson:
Yeah. It’s a great call-out, and I haven’t purchased anything in a historic district either, but a friend of mine, her name is Katie Neason, K-A-T-I-E Neason. You guys should follow her on Instagram. She’s @KatieDevelops. She lives in Bryan, Texas, and she’s basically on this mission to restore downtown Bryan, Texas. She’s buying old beat-up buildings and repurposing them into mixed-use commercial facilities, and she’s doing a really great job. So I know she knows a lot about buying in historic districts and what the benefits are. But like you said, Ashley, when I was investing in Shreveport, their local government was also encouraging people to buy homes in downtown and renovate them as well. Like you said, they were giving tax incentives to people who were buying and renovating properties in that downtown area, assuming that you were using it for whatever purposes that they had approved it for. So there’s a lot of potential benefits of doing that, and it’s cool.
I think my short-term rental hat, putting that on, if you’re able to buy whatever, like a historic bed and breakfast, or like you said, Ash, like an old movie theater, who would’ve thought that you could buy a movie theater? But being able to buy some of these properties in these historic parts of town, there’s a marketability to that. So if you bought that old thing and turned it into this really cool Airbnb, now you’ve got someone that’s going to stand out in that neighborhood. So I’ve talked about Katie Neason. If you guys want to hear more from Katie, she was on episode 538 of the BiggerPockets Real Estate Podcast. Like I said, she’s a really amazing person, funny as heck, and she does redevelopment in Bryan, Texas, all in the downtown historic area. So episode 538 if you want to hear more from Katie.

Ashley Kehr:
Okay, and our last question today is from Brandy Joe Krum, a BRRRR refinance question, “Have you recently refinanced based on the asset itself and the rental income, and what kind of rates and discount points are you paying? Is this a portfolio loan, or are you refinancing where they take into account all your personal income and debt, and qualify based on that?” So, Tony, I don’t know if we talked about this in this episode or the last episode, but you haven’t done any refinances lately. When was the last time that you did one?

Tony Robinson:
Yeah. It was a while ago, but I’m actually working on one right now. I think it plays in perfectly to this question because I’m working with two lenders, and one is called an investor loan. Even though it’s called an investor loan, it’s still in my personal name, and they are looking at DTI, and my tax returns and all these other stuff to make sure that I can qualify. Then, I’m working with a second lender that’s using a DSCR product. So it’s called the debt Service Coverage Ratio product. Obviously, I told both lenders that I’m working with both of them. Then, I’m just going to go with whoever gives me the best deal here, but you can go either route branding, which is the beauty of investing in real estate.
So your first question is, “Can you do it based on the asset itself and the rental income?” So, yes, you can totally do that. That’s what the DSCR loan product is, and a lot of lenders will underwrite that property and say, “How much rental income do we think this property will generate, and does the rental income meet or exceed the debt obligations or the mortgage payment of that property?” If it does, then the chances of you getting approved for that DSCR product, it’s better. Right? You have a better chance of getting approved.
Now, typically, their interest rates are higher. So on the DSCR product, right now, I’m getting quoted like a nine. On the investor product, I’m getting quoted like a seven. So you are going to pay more for the product. But again, if your ability to get approved for a traditional loan, just looking at your DTI, your income and all that stuff is limited, then going the DSCR route tends to be a little bit better. I’d say that the LCVs are about the same. I think both of them are around 75%, I want to say. So that doesn’t change too much, but you are paying more upfront with the DSCR products than you are with the traditional investor loans.

Ashley Kehr:
So I’m doing two refinances right now, or I just finished the one, and that was a short-term rental. We did that on the commercial side, but they did not take into account what our short-term rental income would be because we hadn’t had it active. At the time that we started the refinance, we were still finishing up the rehab. So, Tony, in your experience for doing them for short-term rentals, are you going to specific lenders that understand short-term rental income, or what should I do differently going forward? Because when they sent the appraiser out, the appraiser was just there to appraise the property and not do any kind of income approach.

Tony Robinson:
So there’s two options. So your first option is to hold onto the property for at least about six months and show that you have short-term rental income on that property. Most lenders I’ve talked to said that if they can see at least six months of documented income, then they can use that to project out what that property would do on a year. If you had it for a year and it shows up on your tax return, then that’s the easiest way because then they can just look at that tax return and say, “How much money did this property generate?” So even if the lender doesn’t really understand short-term rentals, if you have a long enough paper trail to show how that property is actually performing, lenders that I’ve talken to or spoken with have said that that’s a decent route to go down. The other option is to work with a lender that actually understands and offers DSCR products specific to the short-term rental industry and who have the ability to underwrite the property not just as a long-term rental, but as a short-term rental as well. That’s the kind of lender that I’m working with right now is someone who specializes in the short-term rental space for DSCR products.

Ashley Kehr:
Okay. Awesome. That’s why I love that we get to be co-hosts of the show because I always get to pick your brain on everything short-term rentals that I don’t know.

Tony Robinson:
So you got options out there.

Ashley Kehr:
Yeah. I’ll have another one that I’ll be doing this fall. So, yeah, I’ll have to consider which would be the best.

Tony Robinson:
Look at you turn into a little short-term Airbnb queen over here, huh?

Ashley Kehr:
You would be so proud of me. I just hired an operations manager, someone to handle the day-to-day.

Tony Robinson:
There you go. I love that.

Ashley Kehr:
Yeah. Her third day, I have the septic pumped at one of the properties, and it was so relaxing for me. I had to do nothing.

Tony Robinson:
Yeah. Yeah, and that’s so funny because we’re actually on the inverse where our operations manager, actually, her last day was last Friday, so she moved on to another role somewhere else. So, now, me and Sarah having to step back into the operations at least in the short-term while we try and source someone else, so it’s like… I actually have my ops calls right after this with our VAs to try and keep everything moving. So I’m glad you’re enjoying that process, and hopefully, I can get back there soon enough.

Ashley Kehr:
What a great way for you to come back to vacation, having to work more.

Tony Robinson:
Totally. Yeah, having more work to do. Yeah.

Ashley Kehr:
Okay. Well, thank you guys so much for joining us for this week’s Rookie Reply. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson on Instagram. Don’t forget to check out the Real Estate Rookie YouTube, and we will see you guys on Wednesday where we will have a guest.

The ‘Options Action’ traders discuss the home building sector and whether to hold out or sell in the current market.

Employee turnover can be a costly issue for any organization, and it often stems from a lack of adequate training, resources or support for new employees. When new hires feel unsupported or ill-equipped to handle their responsibilities, they may quickly become disengaged and seek employment elsewhere.

To prevent this situation, leaders must take steps to ensure their new employees receive the training, resources and support they need to succeed in their roles. Here, a panel of Young Entrepreneur Council members shared strategies that leaders can implement to improve the onboarding process and set up new hires for success.

1. Encourage Open Communication And Focus On Employee Wellness

Leaders should define objectives while prioritizing employee wellness, including training. It’s also essential to craft an environment of free-flowing communication where feedback is welcome with open arms. Establishing these principles and beliefs as a leader will motivate your crew to adopt them, culminating in a good workplace that cultivates expansion, enthusiasm and retention. – Anthony C Johnson, Stellium.co

2. Support Staff With Reoccuring Coaching Sessions

Regular coaching sessions from the founder to employees can help provide employees with what they need to both align with the company mission and get adequate training. This process is ongoing and requires situational leadership—meaning not all employees will be treated or approached with growth and development in the same manner. A leader needs to be agile and consistent to support staff. – Libby Rothschild, Dietitian Boss

3. Set Clear Expectations And Provide Feedback

Leaders can ensure employees don’t leave due to a lack of training or resources by providing clear expectations, offering thorough onboarding, assigning a mentor, providing ongoing feedback and recognition, making a positive work culture and offering opportunities for development. Effective communication, empathy and proactive problem-solving are key to providing what employees need to succeed. – Bryce Welker, Big 4 Accounting Firms

4. Build Employee Engagement By Showing Them That Their Voices Matter

Employees want to grow personally and professionally; therefore, allowing them to influence decisions that affect their work and the organization’s direction will create a collaborative environment and ensure mutual buy-in on the mission. Furthermore, a structured onboarding process will acclimate employees to their roles. – Julian Hamood, Trusted Tech Team

5. Hire A Great HR Team

Your human resources department is here to help with so much more than payroll. They’re a safe space for your employees to bring up issues, they encourage positive company culture and they probably have a happy hour or two up their sleeves when morale needs it most. Invest in an HR team that can steer the culture helm of your ship all year long! – Isabelle Shee, GROW

6. Personalize Training Sessions Based On Roles

The best way to offer proper training to your employees is to create personalized training sessions based on different roles. Identify and assess the skills of your new employees and help them upgrade those skills through your training sessions. You should continue to improve these sessions to ensure it’s the best resource your employees can get. Also, assign mentors to each employee for support. – Josh Kohlbach, Wholesale Suite

7. Offer Mentorship Opportunities

Create a mentorship program where experienced employees are paired with new hires. This can provide guidance, support and a sense of community for new employees. Provide on-the-job training, opportunities for professional development and regular check-ins to ensure employees feel supported. Open communication and feedback will help address any issues or concerns that new employees may have. – Andrew Saladino, Kitchen Cabinet Kings

8. Provide Flexibility

Leaders should be flexible when it comes to work arrangements. This includes offering flexible schedules, remote work options and other benefits that allow employees to better balance their work and personal lives. When employees have the freedom to work when and where they’re most productive, they’re more likely to stay engaged and motivated in their roles. – Sujay Pawar, CartFlows

9. Create A New Hire Assessment Process

Designing a well-thought-out assessment process can be of great help. Your assessment process should give you a clear overview of the strengths and weaknesses of the new members of your team, which in turn enables you to design seamless onboarding processes and tailored training programs that best serve diverse requirements. – Stephanie Wells, Formidable Forms

10. Periodically Check In With Employees

Conduct “Stay Interviews” after the new employee has been on the job for a few months and identify any challenges or concerns the employee may have. By addressing these issues early on, leaders can improve the new employee’s experience and increase their likelihood of staying while showcasing that the company values employee feedback and is committed to providing necessary resources and support for success. – Devesh Dwivedi, DeveshDwivedi.com

For decades, when investment advisors talked about “diversifying your portfolio to include real estate,” they typically meant adding REITs to your stock portfolio.

Don’t get me wrong, real estate investment trusts (REITs) have their advantages. They’re extremely liquid and easy to buy or sell with the click of a button in your existing brokerage account. And you can invest for the cost of a single share, which could mean investing $15 instead of $50,000. 

But do publicly-traded REITs offer true diversification from the stock market at large? Perhaps not as much as you’d like to think.

What are REITs?

Real estate investment trusts are companies that either own real estate investments or loans secured by real estate. In fact, to qualify as a REIT under IRS code, the company must earn at least 75% of its gross income from real estate in some way, and at least 75% of its assets must be real estate-related, among other more technical requirements.

As the names suggest, equity REITs own properties directly, and mortgage REITs own debts secured by real property. Hybrid REITs own both. 

REITs typically specialize in one real estate niche. For example, a REIT might focus exclusively on self-storage facilities, or on multifamily properties in gateway cities, or a hundred other niches. 

Some real estate crowdfunding companies offer private REITs sold directly to investors. But most REITs trade on public stock exchanges. 

That subjects them to the same volatility and violent mood swings as the stock market at large. Prices can crash in a single day, even if the underlying real estate assets haven’t budged in value. But we’re getting ahead of ourselves. 

REIT Rules

As outlined above, companies must earn the overwhelming majority of their income from real estate to qualify as a REIT. 

REITs must also pay out at least 90% of their taxable income in the form of dividends. In practical terms, that means they usually pay high dividend yields but sometimes see limited share price growth since they can’t reinvest profits into growing their portfolio. 

There are other rules that apply to REITs, such as being governed by a board of directors and having at least 100 shareholders after the first year, but I can feel the yawn starting now, so we don’t need to dwell on them. 

So why would a company jump through all these hoops to qualify as a REIT? Because they get special tax treatment: they pay no corporate taxes on money distributed to investors as dividends. As a result, many REITs payout 100% of their earnings to shareholders and pay no corporate taxes at all. 

REIT Returns

Real estate investment trusts have actually performed pretty well over the past half-century. 

From 1972-2022, U.S. REITs delivered an average annual return of 11.26%. That’s comparable to the S&P 500, with its average annual return of 11.98%. Both figures include dividends and price growth, and both are just a mathematical average of annual returns, not the more accurate compound annual growth rate (CAGR). 

So where’s my beef with publicly-traded REITs, if not their returns?

The Correlation Between REITs and Stocks

The trouble with REITs is that they offer little diversification from the stock market. They’re too closely correlated.

A Morningstar study over nearly two decades found a correlation of 0.59 between U.S. REITs and the broader U.S. stock market. If your middle-school math needs a little dusting off, a correlation of 1 is lockstep, while a correlation of 0 means no connection whatsoever. 

A correlation of 0.59 between real estate stocks and the larger stock market is similar to other sectors of the economy. For example, telecommunications stocks share a 0.62 correlation to the broader market. The correlation for consumer staples is 0.57, and energy stocks are 0.64. You could even think of REITs as one more sector within your broader stock portfolio. 

Just take one look at this chart and tell me the correlation isn’t clear:

Why does the correlation matter? Because it means a stock market crash also sends your REITs tumbling. Eggs and baskets and all that.

Consider that in 2022, the average return on U.S. REITs was -25.10%. Yes, you read the minus symbol correctly—they lost over a quarter of their value. Meanwhile, the average U.S. home price rose 10.49% in 2022. 

That’s quite a disconnect. This is precisely the point of diversifying into different asset classes: when one collapses, you can hopefully still collect strong returns on another. That particularly matters to retirees, who depend on their investment returns to pay their bills. 

In fact, that figure for residential property prices doesn’t include the income side of real estate returns. Good rental properties often earn a cash-on-cash return of 8% or higher, and short-term rental yields can be even higher in the right markets. When I’ve compared long-term and short-term rental returns on Mashvisor, I sometimes see yields as high as 12% on Airbnb rentals. 

Alternatives to Public REITs

If you want a lower correlation between your stock and real estate investments, you need to go further afield than publicly-traded REITs.

Consider the following alternatives to get the benefits of real estate along with true diversification. 

• Private REITs: You can invest in non-traded REITs through crowdfunding platforms like Fundrise and Streitwise. Do your own due diligence, but at least they share little correlation with stock markets. 
• Non-REIT Funds: Not all real estate funds meet the legal definition of a REIT. For example, Groundfloor offers a fund of property-secured short-term loans with full liquidity and no discernible correlation to the stock market, called Stairs.
• Fractional Ownership in Rentals: Platforms like Arrived and Ark7 let you buy fractional shares in single-family rental properties for $20-100 apiece. You collect rental income in the form of distributions, and get your share of the profits when the property sells. 
• Real Estate Syndications: Syndications offer fractional ownership in commercial properties, such as apartment complexes, mobile home parks, self-storage facilities, and more. As a downside, they typically require high minimum investments, usually $50-100K. But some real estate investment clubs like mine help investors pool their money to invest with less. 
• Direct Ownership: There’s always the old-fashioned way: buying properties yourself. But again, that often requires $50-100K in a down payment, closing costs, repair costs, cash reserves, and the like. It makes it hard to diversify your real estate portfolio. 

Should You Invest in REITs?

Far be it from me to tell you how to invest. If you prize liquidity above all else and want to get started with a few real estate-related investments for $100, buy a few REIT shares. 

I personally want my real estate investments to counterbalance my stock investments. I don’t need liquidity from my real estate holdings—I already have liquidity in my stocks. 

In fact, I invest in real estate as an alternative to bonds in my portfolio. It serves most of the same functions: diversification from stocks, passive income, and low risk of default. Real estate also provides better protection against inflation, and while it might dip 5-10% in value, it can’t drop 100% (like bond values can if the borrower defaults or declares bankruptcy). 

You invest the way that’s best for you. I’ve found my own happy place, a balance between passive real estate syndications and diversified stock funds from across the world. 

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Marc Andreessen has proved himself to be one of the foremost entrepreneurs and financiers of his generation and is said to see himself as another J. Pierpont Morgan. Andreessen jumpstarted the growth of the Internet as the technical expert and co-founder of Netscape that was sold to AOL for billions. He has since built his VC firm, named a16z, into one of Silicon Valley’s foremost funds and seeks to become a leader in other areas of finance with $55 billion in assets under management and with tentacles in other areas of finance. Here are 9 lessons from Marc Andreessen:

#1. Focus on emerging trends. Andreessen was a pioneer in the emerging Internet, and Netscape, his landmark venture, kickstarted the Internet. Nearly every entrepreneur from Sam Walton (Walmart) and Dick Schulze (Best Buy) to Joe Martin of Boxycharm and Brian Chesky (Airbnb) jumped on an emerging trend.

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#2. Finance after Strategy Aha, the third Aha! There are 4 Aha’s and the Top 20 VCs, who are in Silicon Valley, mainly finance after Strategy Aha. to get an edge on other VCs, to replace the entrepreneur with a seasoned CEO, and to promote and build the venture for an attractive exit. However, if you are an entrepreneur, wait for Leadership Aha!

#3. Respect your growth engines. Andreessen and Horowitz, his partner in a16z, have a policy to respect entrepreneurs and their time. Their firm’s VCs are fined if they keep entrepreneurs waiting. They recognize that entrepreneurs are crucial to bring ideas to Aha.

#4. Flip fast if valuations are through the roof. Timing is crucial in VC to get a high value exit through a strategic sale to gullible corporations that recognize the potential but not the risks. This might be one reason why nearly 70% – 90% of corporate acquisitions fail.

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#5. Expand in “easy” directions from a strong base. Corporations expand in “easy” directions with proven products into new markets or new products into established markets. While most VC firms have stuck to their VC knitting, a16z is diversifying to money management and investment banking – to combine home runs and base hits for higher returns and synergies.

#6. Keep partners on a smart leash. Not too tight. Not too loose. a16z allows its partners to seek new directions, but also monitors their ventures in order to cut losses. This means allowing the partners to test new ideas with limited capital, investing more if successful and cutting if not.

#7. Learn investing by proving assumptions. Gamblers rely on their instinct. Smart investors do their homework. a16z challenges its partners’ assumptions and requires them to test to minimize the risks. Except for senior partners, who have more leeway.

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#8. No boundaries. Others may shy away from entrepreneurs with a dodgy past, but 16z does not seem to have any such qualms, including financing Flow, the new venture by Adam Neumann of WeWork infamy.

#9. Promote constantly. a16z is no stranger to PR, which helps companies such as Coinbase. Airbnb, Affirm, Instacart, Netscape, and Skype to be relentlessly hyped and allows VCs to exit at sky-high valuations. After they exit, watch out below because the valuations often tank.

MY TAKE: Andreessen and his firm seem to have found the right mix of positioning on emerging trends, testing new directions, and relentlessly promoting for high valuations. But Andreessen is human – after being an early investor in Instagram, his company invested in a competitor and avoided a later round of Instagram funding. The competitor folded. Instagram became a unicorn.

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The above also suggests a piece of advice for the investing public: Be careful about investing when the venture is going through its hype cycle prior to, along with, or immediately after an IPO when the venture, the VCs and the investment bankers are in full promotional mode. Let the hype die down before considering an investment.

Bits BlogHow Andreessen Horowitz Bunted on an Instagram Investment

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MORE FROM FORBES20 VCs Capture 95% Of VC Profits: Implications For Entrepreneurs & Venture EcosystemsBy Dileep Rao
MORE FROM FORBESFrom $375 To The Newest Unicorn In Beauty: How Joe Martin Built Boxycharm.com Without VCBy Dileep Rao

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FortuneInside Andreessen Horowitz’s grand plans to scale its venture capital firm into a behemoth and conquer the globe

Andrew:
This is the BiggerPockets podcast show 767.

Angie:
The management company knows what they’re doing. They are the professionals, they’re the ones with the experience. When you have a client that’s overly involved, case study after case study, the property does not succeed. When you have clients that are hands off and you have a weekly call with them, you send your weekly report, your owner’s report. Those properties time and time again are hugely successful.

Andrew:
Andrew Cushman here with our buddy Matt Faircloth. David Greene has left the recording studio vacant once again, and we thought he might have learned his lesson from the last time, so we are taking over.

Matt:
Glad to be here with you, Andrew. I’m grateful that I get to do the takeover with you. You’ve got an exciting conversation coming up today and people are like, Why are you excited about property management? This is so boring. Let me tell you guys, shame on you for thinking property management’s boring. Property management is, it is what will make or break your profitability on a deal. A good property manager will take a mediocre deal and make it amazing and they’ll take an amazing deal and make it complete crap. And guys, one last thing. If you guys want to hear more about what makes deals profitable, property management and asset management, you guys have to listen to show number 739 where myself, Andrew, and David go deep dive into what asset management is, what it’s not, and how it correlates with property management. So after you listen to this one, check that episode out. Number 739.

Andrew:
Today we’ve got a multifamily market expert with us. We are going to first get into a bit of a market update because things are changing rapidly and we want to try to keep everyone up to date on what we are seeing in real time out there in the markets. Then we’re going to talk about property management and we’re going to talk about a lot of stuff. But a couple things that are real important to watch out for is the key traits that an investor should look for in a third party property management company. What are the top mistakes that new investors make when bringing on third party property management? And we’re also going to hear a story about a tenant who had a vertically integrated farm butcher shop and barbecue that they were running inside their unit. So stay tuned for all of that. Matt, do you got a quick tip for us? You ready?

Matt:
Quick tip. Okay, guys, here is your quick tip of the day. Andrew and I have assembled a phenomenal resource for you guys to use when you’re interviewing property management companies. These are 27, not one, not two, not three, 27 questions you need to be asking a property manager when you’re considering hiring them guys. And this is capital F free, something that Andrew and I put together as a nice gift, a nice thank you. Back to you guys. Go to biggerpockets.com/resources.

Andrew:
Yes, go grab that, make it your own. Add some additional questions and let us know in the comments on YouTube, what you think of it. All right, I’m excited. So let’s go ahead and jump into that market update.

Matt:
So guys, let’s talk about the market, man. Things are changing daily. What do you guys think? Where we at?

Andrew:
Well, it’s interesting as everyone listening knows it has been, I can definitely give some insight, we’ve been pretty active in this last quarter. Deal volume, we’re seeing a slight uptick in what’s available to look at. We’re underwriting more deals than we have been, not getting more offers accepted, but we at least have more properties to look at. There’s a lot of headlines out there. I’ve seen stuff like rent drops six time in the last six months and all that. We’re not seeing that. Our rents are up at all of our properties. Almost every one of our properties had record collections in March. I think it’s really important to differentiate what markets you’re talking about. Remember, real estate’s local, not national.
So yeah, rent’s probably down if you got A class property in San Francisco, but if you’ve got a B class property in a strong growing submarket, it’s probably still doing pretty well. Don’t let headlines scare you off. Lots of properties still doing fantastic. We also just closed an acquisition at the end of March. It was the largest equity raise we’ve ever done. It sold out in a week. So again, there’s lots of talk about, you can’t raise equity these days. And yes, it is harder, but if you have the right deal and the right investors and you put those two together, you still can get a deal done. And then finally, on the flip side of that, we just listed a property for sale and right out the gate we got actually a pretty strong offer with hard money. We’re not going to accept it just yet.
But what we’re finding is properties that require bank or bridge loans are pretty tough to sell right now because those lenders are tightening their sphincters and financing is really tough. But if you’ve got a property that’s stabilized in a good market that qualifies for agency financing, the agencies are still very active and they’re out there putting loans on stabilized properties. So because there’s so little inventory for sale, properties are actually doing quite well. That’s the four things that I would hit on and dispel some of the myths and doom and gloom that’s out there. But Angie, Matt, anything you guys would add or want to comment to flush that out a bit?

Matt:
Interesting stuff, Andrew.But first of all, I can’t help but say it, congrats on the purchase and listing a property for sale, can’t help but high five you on that. I’m also seeing a lot for sale. And unfortunately, if you look at the properties that are for sale that I’ve seen, a lot of them are things that people bought a year ago, two years ago. You’ve probably seen a lot of those where folks have bought something, the seller bought it two years ago and they’re selling it for double what they paid for it, or the brokers that has it on the market for double what they paid for it. It’s a pocket listing, right? Meaning the broker doesn’t even have a signed listing agreement. They’re just going around. The seller said, well, if you can get me this number, I’ll sell.
I’ve seen a bunch of those and I don’t know, I don’t want to go buying somebody else’s problem. And I get leery for buying anything that was owned for less than 18 months to two years. Because the problem with that, that I’ve seen it firsthand, you can’t address real capital improvements. You can’t address real deferred maintenance in that short of an ownership cycle. You need to own a property a little bit longer to deal with all the things that need to get dealt with. And so these are all just properties that have just been polished up a little teeny bit and her back on the market. So that’s what I’ve seen a lot of these days. But I don’t know if it’s really an indication of the market. I just think that a lot of folks are just hanging on waiting.

Andrew:
I’d agree. And those ones aren’t going to trade. Those are the sellers that will end up riding the market down. The market will drop five, 10%, then they’ll drop their price five, 10%. Well, guess what? They’re still behind the eight-ball and they’re going to be chasing it down and holding on forever. So yeah, the property that we bought was long-term ownership, like six years. And the one we’re selling we’ve owned for six years.

Matt:
There you go.

Andrew:
So that actually makes it work. So now Angie, you have a little bit of a different insight because you see the nitty-gritty on the other side of this, on close to what? 25, 26,000 units.

Angie:
Yes, 25,000 units. It’s a little bit different. Our clients or what we’re seeing is our clients are actually not buying anything right now. Number one, prices are still ridiculous. Interest rates are up. And we also have clients that have concerns because they have bridge loans out there and they’re worried that they’re going to lose their properties and they’re going to go into receivership. We’re seeing a whole mixed bag of things. And with regard to the rents, certain markets, you’re absolutely right, Andrew, there are markets, the secondary and tertiary markets that the rents are still going strong. But in the major cities, exactly what you said, you referenced San Francisco and all, because we’re a Georgia-based management company, I’m going to reference Atlanta.
We’re we are starting to see the ramps drop. We’re seeing concessions being offered. And so you are starting to see that weakness in the market on the A and the B. And historically A starts to fall, then the B gets the A residents, and then it’s a vicious cycle and it goes down to the B, the C. There’s some concerns out there, and I think it’s going to be tough. And I think we’re going to see a lot of properties in the latter part of the summer, early fall going to receivership and foreclosure.

Andrew:
And so for those who are listening who aren’t familiar with the receivership, could you just real quickly define that?

Angie:
Yes. If a property’s going into receivership, the finance lender takes it to what we call a special servicer. So there’s a lot of special servicers in the US and so the loan goes to what’s called a special servicer. And then the special servicer actually takes the property owner to court because they’re not paying the mortgage and they take the property owner to court and the court appoints a receiver. So your court appointed receiver, which means bringing in a management company to manage the asset. For the receiver, the receiver’s actually managing for the lender, we manage for the receiver, and it stays in receivership until such time the special servicer decides to sell the asset.

Andrew:
And the special servicer typically puts it up for sale relatively quickly from that? Or is there a lag or?

Angie:
It depends on the condition of the asset. So if it’s a very distressed asset, and so you think about a property where the mortgage isn’t being paid, generally other things aren’t being paid, there’s a lot of deferred maintenance and the water bill may not be being paid. And a lot of times you see these properties end up on the news. It’s like, wait, 200 unit apartment community, the water’s been shut off because there’s no money to pay anything. And so you end up with generally a very distressed asset. So being appointed a receiver, the manager comes in, the management company comes in and turns the property around. The special servicer actually gives you the money, which is phenomenal, to turn the property around, get it in a condition to which it can be sold.
So it depends on the condition of the asset when we get it. They’re not always bad, but generally they are because by the time it goes from default on the loan all the way through the courts to appoint a receiver can be up to a year of distress for the asset.

Andrew:
And it’s funny you mentioned them being on a news, in a decade and a half of being this business I don’t think I’ve ever seen a piece of real estate being in the news for a good reason. That’s almost universally not something that you want to happen to a property you own. And then no investor left behind. Let’s dive in. Just quick definition. What is a special servicer?

Angie:
A special servicer is a company, and I’ll give you a few examples. CWCapital, LNR Partners in Miami who we work a lot with. Rialto Capital, those are special servicers and they literally focus on distressed loans.

Andrew:
So they basically come in and take over regardless of whether or not the owner wants them to?

Angie:
Yes.

Andrew:
And then the final question for those who, there’s a lot of us out there and especially those who have been trying to get into the business the last few years, it has been so tough to get a deal the last few years. Prices are high. There’s tons of competition. You are seeing behind the curtain, right? Because you’re managing thousands and thousands of assets. Matt and I only have a couple thousand. You have a much broader view than we do. I’ve been hearing stories of properties where they can’t make the mortgage payment. And then like you said, they’re not paying vendors, they’re doing capital calls. There’s no more distributions. They’ve got a balloon loan due in six months. For somebody listening, when do you think some of these things are going to become opportunities for a new investor to get in at the bottom of the next cycle?
How much longer can some of these property owners kick the can down the road before they end up in special servicing and then for sale, before they become an opportunity for the next person?

Angie:
Well, our prediction is late summer, early fall, that we’re going to start seeing the process start and that we’ll build from there. Because as you know, Andrew, so many of these people have overpaid for these assets and it just can’t continue. So you get into the vicious cycle that happened in 2008 and nine where you’ve overpaid for this asset, you underwrote it to have these astronomical rents and you can’t obtain the rents because the market’s falling apart, concessions are being offered, and it’s just that vicious downhill cycle. Oops, now we can’t pay the mortgage. Oops, now we can’t pay this. I think we’re going to see the beginning of it, especially on these balloon loans, again, late summer, early fall is our prediction.

Andrew:
All right, so late summer, early fall. And then final question, and I’m really interested to hear your thoughts on this. Some folks that I talk to and that I listen to are saying, hey, this is just going to be a slice of the multifamily market. Others are like, this is going to take the whole market down like 2008. I have my thoughts, but I’d like to hear what you think in terms of, is this going to be more like select opportunities for those who are looking to buy or is this going to be just a widespread distress it was in the great financial crisis?

Angie:
No, in my opinion it’s not going to be, because I think there’s so many property owners out there that have good solid loans at a reasonable interest rate. They’re cash flowing now. So they can take a little bit of rent drop and some tough times and tighten the belt, let’s say. So in my opinion, I don’t think it’s going to be mass destruction. I think it’s going to be, again, the people that have overpaid for the real estate that were not smart purchasers, that had to get the money out there. And those are the ones that are going to suffer, in my opinion.

Andrew:
Okay. All right, good. Well, that’s hopefully some good relevant information for everybody who’s out there looking for deals and maybe even have some of your own properties. Matt, do you have anything to add before we transition on?

Matt:
I agree that a lot of properties are going to maybe have issues, but I’m not a doomsday foreseer either. I think a lot of folks are going to find a way out or find a way to make it work. I don’t think there’s going to be blood in the streets by any stretch. I do think there’ll be plenty of deals to be had, maybe more. And I think that those that are going to win in this game or those that got into this game to play the long game. Those that got in that wanted to flip an apartment building like a hot potato and get in, get out in a year, two years as they see people on social media doing, are going to maybe have to either change their plan or they might end up losing a property. Who knows?
But I think that those that are getting into the game or expanding in a multifamily, Andrew’s a case in point, Andrew just did a deal, just closed a property or just put a property under contract and closed it just recently. It can be done. Good deals still can be had in that. I think that those that are sitting on their hands and waiting for the sky to fall are going to be sitting on their hands for a while. You might as well just get out there and try and find opportunities. Just be scrutinous and bid on deals that with an understanding that you want to make cash flow and that appreciation, because appreciation might not be a thing for a while. I think cash flow is going to be the king for a very long time in multifamily.

Angie:
I keep telling clients too, be careful in your underwriting because the market literally with inflation and everything else, the breaks have to go on. You just cannot continue at this pace. And there’s going to be a time where people are going to say, I can’t afford this. And you can’t keep affording these massive price increases. So underwriting to me, even though there might be some good deals out there, you can’t underwrite and expect 30, 40% rent increases. The market cannot bear it. And that’s what we continually advise clients of, do not over project your rents because it’s not going to happen. And we’ve seen it. People are just like, I’ve had enough. No. So you have to be very, very careful and we continue to advise clients of the same. If you have to underwrite these massive rent increases, don’t buy the deal because it will fail.

Matt:
So before you move on from our market analysis, I want to just let everybody know that the crystal balls owned by Matt, Andrew, and Angie are in the shop. We cannot seem to get them out of the shop. So make your own market decisions based on your own market data. You make your own offers at your own risk. So that is our Matt, Andrew, and Angie disclaimer for the day. But I hope that you found this market conversation informative. Moving on, Angie, you are someone that Andrew and I both think a lot of them have interacted with in the industry, but for those that have not heard of you, don’t know you in that, could you give us a brief intro and tell us who Angie Smith is and we’ll jump into an awesome conversation about property management and multifamily.

Angie:
Okay. Yeah, great. My business partner, Cindy Batey and I started Strategic Management Partners, or SMP, as everyone knows us, in 2010. We literally started the company with zero assets. And we worked for companies that were going bankrupt or were distressed. And Cindy and I looked at each other and said, what are we going to do? And we either going to go to work for someone else or we’re going to start our own company. And so we started SMP in 2010, 0 units and literally we called it dialing for dollars. Cindy was calling attorneys and brokers that she knew from her past. I was actually calling special servicers. So it leads into this. And it was when the market was falling apart. And finally a gentleman in his name, and I have to say it because I think the world of this man, his name is Hector Gomez, and he said, “Angie, I give you a chance.”

Matt:
Nice.

Angie:
And I was like, yes. We finally got a deal from a special servicer and it worked out beautifully. And he gave us the most distressed asset you can even imagined giving someone. And he gave us his asset. We turned it around and we became known at in LNR as the Georgia girls. And the Georgia girls, we got to give them more, we got to give them more. And literally LNR gave us 18 properties in one day throughout the state of Georgia though we had to go take over. And so between brokers, attorneys believing in us and Hector Gomez at LNR, that’s really how SMP got their start. And we did such a good job on those distressed assets and it just built our reputation with the brokers because they saw these assets in distress, couldn’t believe that we had the ability to turn them around and they were able to sell them at great prices for the special servicer. And there you go. And that’s how SMP really started.

Andrew:
We’re going to take a slight diversion into the juicy stuff here. So what you’re telling everybody is you started off your company managing the most unmanageable assets out there, during one of the most unmanageable times in multifamily in recent history. So tell us, give us one of your most interesting property management stories that you’ve encountered over the life of SMP.

Angie:
Well, it’s a Hector Gomez LNR story. There you go. And it wasn’t the property that he gave us our chances on. It was another one. And it was a multicultural property. And when we took over, there would be, and I’m not exaggerating, I’m not kidding, there would be goats on patios or chickens. And then we started walking the units and there were holes in the carpet in the living rooms and we’re all going, what? And they were actually taking care of the animals.

Matt:
There we go.

Angie:
They were taking care of the animals.

Matt:
Well, they weren’t vegans is what you’re saying.

Angie:
They were not vegan at all. And then they would cook the said animals in the floor in the apartment because they did not know how to use appliances, American appliances, because you have to think a lot of these people came from places where they did not have modern equipment, electricity, anything. So we had to deal with that. And we actually had to post signs, this property had a retention pond that had ducks and geese, and we actually had to post a sign, habitat not for human consumption because they would take the creatures out of the retention pond and have them for dinner as well.

Matt:
Now Angie, were they paying pet rent for the goats and chickens?

Angie:
Do you know Matt, we actually kidded about that. It became a joke even with our asset manager, are you charging pet rent? We can make a lot of money here.

Matt:
That’s a revenue stream, man.

Angie:
Revenue stream. But no, we had to stop the practices. There you go.

Matt:
Oh man. Different strokes, right?

Angie:
It was a total educational situation too, that we had to help people truly learn how to cook and use modern appliances. It was a wild time, it was fun. That’s probably my wildest story.

Matt:
There you go. Every landlord’s got stories that at the cocktail party, they’re the one that you got to stop the music and everybody huddles around the landlord, you hear them tell some crazy landlord stories. So thank you for sharing that.

Angie:
Exactly.

Matt:
Here’s an interesting thing, right? Because some folks listen to this podcast that maybe are just getting into the real estate game or some folks that are listening that may be self-manage or whatever it is. Property management, believe it or not, Angie, some folks don’t find it to be that interesting. And some folks might even say, I don’t even need to talk about property management or even listen to that podcast episode because it’s not that important. Right? What would you say, to say that why is a third party management using a separate PM company, aside from managing in-house, why is it, I’m throwing you a softball here because I think Andrew and I both agree it’s imperative, but why is it important for a real estate investor, why can’t they just buy the property and let the winds of the market take the property where it’s going to go?

Angie:
Good question. And a lot of people, you’re right, Matt, do not understand it, but it’s the boots on the ground day in and day out that make it happen. You have to deal with the resident, you have to lease the apartment, you have to collect the rent, and you have to understand the market you’re in. So let’s just say someone from San Francisco, California buys a property in Savannah, Georgia. What does that person from San Francisco know about Savannah? 99% of the time little to nothing. You need to hire someone that is market knowledgeable, that knows what they’re doing, knows the laws of the city and state in which they’re operating, to be successful and is hard to manage a property from thousands of miles away. You need a professional management company on the ground, running your asset.

Andrew:
Let’s step back a little bit. How exactly do you define, what is third party property management?

Angie:
And there’s really, I’ll say three different types of management companies. There’s a third party management company, which is 100% fee managed. We SMP for example owns no real estate. And then there’s an owner manager where they may own some real estate, but also they’re a management company. Then you strictly have the owner that manages, and I know that just sounds crazy, but you can have an owner manage a real estate company that they own and manage third party and then the owner that has their own management company and manages. So for someone that’s out there looking for a management company, and my career prior to SMP was an owner manager management company, and a lot of the clients would say, hey Angie, how do I know Mr. Owner of the management company?
He’s getting all the attention, he’s getting all the best employees, he’s getting all of this. So it created a lot of friction, so not to say that they’re not good management companies or they won’t do a good job for you, but to have a third party 100% management company is appealing to a lot of people.

Matt:
I want to highlight something, because you don’t only work for individuals like myself and Andrew that are either syndicators or larger corporations that are hedge funds, whatever, that are owning multifamily. There’s also a concept called receivership. And you mentioned it when we were talking about the markets. You mentioned it here. I’m realizing that to some folks we might just be throwing around real estate slang, right? What is receivership? Let’s define that term and talk about how it’s different than working for a direct operator like myself or Andrew.

Angie:
Right. Well, as a special servicer or being a receiver, actually if you’re appointed receiver, you’re appointed by the courts in the county in which that property’s located. And the court literally appoints you receiver and you report to the court. So you work with the special servicer, they’re the ones that fund you money to operate the asset, but it’s the court you actually report to.

Matt:
Is this like a bank owned property? Because a lot of people in other lanes of real estate might call that a foreclosure where the property’s now owned by the bank. But a receivership arrangement could be, correct me if I’m wrong, Angie, where it’s still owned by the owner, but the bank has taken over the responsibility measures and turned in, you turned it over to your company to act in their best interest, if you will, even though they’re not the owner.

Angie:
Correct. And the foreclosure. So you have receiverships and foreclosures. So if a property goes into foreclosure, the lender has taken it back and then they hire a management company to operate it. And under the same really pretty much premise as you do a receivership. So they fund, you operate until such time the lender wants to sell the asset. So in a receivership, technically, yes, Matt, the owner still owns the property, but the lender goes in, gives it to a special servicer who takes it to court to appoint a receiver because they’re in default of the loan. And a lot of times a receivership property keen or generally does go into foreclosure. So it gets the owner out of it. So it will go into foreclosure. But there are times, and we had it during the years that we managed so many of these, that it stayed in receivership the entire time.

Matt:
Have you ever seen a situation where a property in receivership ended up getting out of receivership and going back to the owner?

Angie:
Never.

Matt:
Okay.

Angie:
Never.

Andrew:
I’ve heard stories of owners trying that, but they generally get found out, and that’s not allowed. One of the key things for investors, especially those who are looking to move to another market or get in for the first time, is picking a property management company. I live in California, I’m going to invest in Georgia. There’s all these property management companies. How do I figure out which one is the right one for me and my business and how I operate it? So could you, Angie, explain a little bit, how does someone go about picking a property management company? And then in that, actually tell us a little bit more about SMP, how many units do you guys have? Who’s a good fit for you? Who isn’t? And maybe use SMP as an example of how someone would go about that selection process when they are building their third party property management team?

Angie:
It’s a good thing for a property owner to interview more than one management company because a lot of times, and I’m going to start this and this will throughout our entire conversation today, this will be the key. It’s a people business. It’s all about the people, it’s about the property owners, it’s about the property management company, it’s about the vendors, it’s about the residents. So everything we do in property management is a people business. And so a lot of times it’s personalities. How is the personality between the owner and the property manager? Then, does the property management company have the expertise? So do they have the expertise in the asset class of what’s being purchased? Do they have the market ability? Do they understand the market and do they have the right accounting software?
Are they agreeable? Okay, I want my property on accrual. Oh no, I want my property on a cash. Is the management company accommodating to that? So really it’s a relationship. And that is why Cindy and I named our company’s Strategic Management Partners. We wanted to strategically manage with our clients. And that’s how we came up with the name, because we wanted it to be a partnership. Here’s another thing that’s interesting, and again, you asked me to use SMP, so I will. So when Cindy and I started the business and we started meeting with potential clients and doing our dog and pony show, we literally had to tell people we are not going to be a buy the policy 100% cookie cutter company. So property, like Andrew has two properties in the same city. I’ll use that for example. We don’t operate those two properties exactly the same. I don’t care if they’re a mile down the road from each other, they’re different assets with different residents, different everything.
I’m not going to run property A exactly the way I’m going to run property B. Of course you have generalities, you collect the rent the same, you try to get everybody to pay their rent online, et cetera, et cetera. But the marketing of the asset or what you do can be totally different. And I think that is also besides us getting started in the receivership business and proving to the world that we could manage stuff that nobody thought could be managed. It was our commitment to our client not to run everything exactly the same because no two assets are exactly the same.

Andrew:
One quick thing to ask before we move on to another topic. Where is SMP now? Because when we met, I think you guys were at about 3000 units. So where are you now and where does that put SMP on the scale or spectrum of management companies that investors have to choose from?

Angie:
Right. Dang Andrew, we’ve known each other way too long. If we started at 3000 units, we currently, we run between 24 and 26,000 units. Again, being a fee management company solely, clients buy, clients sell. So our numbers from month to month literally are up and down. But we generally run between the 24 and 26,000 unit range is where we’ve leveled out at. And there’s larger management companies, there’s smaller management companies. I just think we fit in a good, I’ll say a good niche. And we do not operate in every state. So if a client asks us to go to Kentucky, for example, the answer would be no. Number one, we would be doing a major disservice to that client because we don’t know flip about Kentucky besides the names of the city and they race horses there. So it is just not our forte. Or to go to Arkansas or Andrew, California.

Matt:
I wouldn’t go to California either.

Angie:
I wouldn’t go.

Matt:
Not for investments, no.

Angie:
So you don’t want to go where you’re going to do a disservice to your clients. And if a client is buying a bad deal and we don’t agree with it, we will also tell our clients, no, this is not for SMP. And we have probably lost more business. We could probably be at 50 or 60,000 units now. We’re not going to do it if it’s not the right fit. So it has to be, again, a mutual partnership and agreement because we don’t want to set our client up to fail and we don’t want fail for our client. Are we perfect and have we failed? Absolutely. Will we do it in the future? Absolutely. It’s part of life. Sometimes it works and sometimes it doesn’t and it’s okay. And that’s why we have a 30-day out in our management agreement.
If you’re not happy with us or we’re not happy with you, let’s part friends. Life’s too short. And again, this business is 100% about people and relationships.

Matt:
Absolutely. And going further on that, let’s talk about people, right? Because there’s two different people, there’s the owner and the property manager. And let’s discuss that relationship for a little bit in that. What is the most misunderstood part of the owner, PM relationship, that you see over and over and over again and you wish, you’re talking to lots and lots of real estate owners right now, so this is your chance to preach from the pulpit and tell all these owners, what is a big misunderstanding that owners have, either about something a PM should be doing, that they think owners should be doing that they’re not? Or just a common misconception that you think owners have between the PM and owner relationship?

Angie:
Well, that’s a tough question, Matt, but I’ll answer it this way. The management company knows what they’re doing. They are the professionals, they’re the ones with the experience. So when an owner, especially new ones are too involved in the day-to-day operations and want to say, oh my gosh, we just had a unit come vacant, raise the rent $250. Well Mr. Client, no, you’re going to price it out of the market and it’s unreasonable to expect that rent. Do it anyway. So when you have a client that’s overly involved, the chances of success of the management company, and this just is not SMP, it’s every management company in the United States, you’ve hired them for a reason, let them do their job.
And for those clients that are overly engaged, case study after case study, the property does not succeed. When you have clients that are hands off and you have a weekly call with them, you send your weekly report, your owner’s report, you’re engaged in good conversation with them. Those properties time and time again, are hugely successful.

Andrew:
I’m going to play devil advocate for a second here, Angie. I own the property, I care about it more than anybody else, therefore I’m going to do the best job managing it.

Matt:
It’s my money.

Andrew:
It’s my money, it’s my property. I’ve got my own thoughts on that. But what would you just say to an investor who says they want to self-manage because of that reason?

Angie:
And we’re going to keep this show PG, I was pre-warned about that. So we are going to keep it PG. Well, Mr. Client, you don’t flip and know everything and I’m sorry. We try to professionally tell our clients that, please, we have the market expertise. We understand. We do this day in, day out. We have done this for a living. You haven’t. Please let us do it. And sometimes they do, sometimes they don’t. But a good management company, and Cindy and I tell our clients this all the time, Cindy and I, we’re going to go to past lives. We had major ownership in real estate. We understand what it’s like to own a property and want that property to succeed. We instill that in our executive team.
When we tell them time and time again, you treat this asset like it’s your own. So Andrew and Matt, there you go. We instill in our people, pretend like this is your asset, that you own it. And that’s what we try to always give our people.

Matt:
Going off of that, right? There is a line though of things the owners should be doing and maybe they expect a PM company to do. So what are some common things that an owner really ought to be doing themselves and they maybe expect, an untrained owner would expect their PM company to do, but it’s really the owner’s task?

Angie:
I’ll just give a couple of examples, because there’s many. But like tax appeals, a management company is not a wizard in tax appeals. We don’t do that. That’s not our forte. So there’s tax appeal companies out there. Mr. Owner we’ll get you the tax appeal company, but your manager is not going to go file a tax bill for you. I need to get a refi done. Will you work on this? No, it’s not our job to do your refinance. It’s your job to do your refinance. It’s our job to manage the property. So those are just a couple quick examples of stuff that sometimes we get asked and they’re like, well, why can’t you just do the appeal? Tax appeal companies they get a fee for doing this. And the client says, oh no, you can just do it. No, we can’t.

Matt:
I can’t believe you’ve had owners ask you to handle your refinance. I’ve also heard of owners asking their PM company now to handle their investor distributions for us. Like, hey, can you just pay my investors direct and send them there quarterly, just send it to them direct from the company. Right?

Angie:
Happens all the time.

Matt:
The reason why you can’t do that, there’s a fiduciary duty there. That’s not an end of the stick that you want to pick up in dealing direct with investors. And that’s probably something that ought to get handled by this syndicator or by the operator themselves and investor relations and everything. Yeah. Great. Thank you. Well, what are some things that keep you up at night, about just things that go wrong on these properties and things like that where you’ve got, just what keeps you up at night as a PM, as a good property manager that really cares? And I can tell you do. So as a PM that really cares, what is something that just really concerns you on a day-to-day basis as a property manager?

Angie:
Number one. And it’s number one, number two, number three, crime and lawsuits. It’s very simple. That is the hardest thing that any management company will ever deal with, is crime and lawsuits. It’s no fun. You can have a drowning, you can have a shooting, you can have a kid fall out of a tree and you’re getting sued. Somebody falls off of a ladder. The legal aspect of this. And everybody is so litigious today, so we can go into insurance from here and I can talk to you for hours about the insurance and how hard it is to get insurance now. But the litigious society that we live in today makes it very hard to be a property manager. And it’s actually scary. And then yes, it can’t keep us up at night, especially if we have one of those situations happen.

Matt:
Well, let’s go there, because a lot of things you talked about, crime and lawsuits are driving up the cost of insurance for owners. It’s not just because we’re getting more hurricanes or whatever, because not every area is getting that. The cost of insurance is going up drastically on multifamily. Why is that? You already comment on why that is. What is something that you recommend owners can do? Are there ways that we can navigate insurance costs and that multifamily owners can just be prepared for with regards to cost of insurance?

Angie:
No. And there’s really no simple answer, Matt. I just can’t say, wave this magic wand or do this or do that. Because if you go to an insurance broker and they take it out to market and you don’t like those quotes and you go to another insurance broker, well, the next insurance broker’s going to be blocked out of the market. So they can’t go get those quotes because they’re already blocked out of the market for that piece of real estate. So you literally have to trust in your broker to shop every aspect to get the best insurance possible. But is there just a simple snap your finger solution to insurance these days? No. And again, we’re primarily based in Georgia, getting insurance in the state of Georgia, especially in Atlanta, I’ll leave it like that, Metro Atlanta.
It’s almost impossible because the laws in Georgia have changed and so many high awards have been awarded to people from juries that the insurance company’s just, life’s too short, we’re out of Georgia. And so owners are having a very difficult time in Georgia getting insurance.

Matt:
Trouble all around. Good insight. It is what it is. A lot of folks I talk to either talk about, they look at property management as believe it, and you can scream, don’t do it right now if you want, they talk about either self-managing or even gasp, starting their own property management company and managing on behalf of other people. Drinking the Kool-Aid that you drank many years ago and doing it themselves as a revenue stream, as a business to own. What would you say to folks that are considering getting into the business as you and Cindy did many years ago and starting their own PM company?

Angie:
The difference is, Cindy and I grew up in this industry. So I started out as the leasing consultant, worked my way up to owner of a management company. It didn’t happen overnight. We had the big hits and the fall down and hurt your knee along the way. So we had the experience of learning the industry versus an owner that they just bought their first property and they think they’re going to go in and manage it. They don’t have a clue. They don’t know, number one, you need a software program. Well, some people go in and try to use QuickBooks when they buy their first property. And how to hire people. What do you hire for? Where do you get the vendors from? And that is the experience that comes from a management company to know that.
Now, there are owners out there that have started their own management companies quite successfully, but it’s understanding the business and it didn’t happen overnight either. You don’t buy your first property and then start a management company. It generally just doesn’t work.

Andrew:
I would certainly agree with that. And then also, so there’s a lot of people listening who are like, okay, that’s great, but I still need to pick a management company. So what would you say are some of the most important, if you were to pick the top three most important questions that somebody interviewing property management companies should ask, what would those three questions be? And then for your bonus question, what is the question that everybody asks that really isn’t that important, even though they think it is?

Angie:
What’s my astrological sign, I guess? So important things to ask. Again, I have to go back. Do you understand, know the market and can you operate in that market? Because if you hire a management company that doesn’t know the market, they’re going to be starting behind the curveball. Can it be done? Yes, it can be done. But if they don’t know, again, let’s go to Lexington, Kentucky where SMP does not operate, you would be making a huge mistake. So they need to know, do you know the market in which we’re purchasing our asset? What kind of software do you use? Do you have the bandwidth to take on our property? Is another good question.

Matt:
That’s a great question. And I bet you nobody asks that.

Angie:
Very rarely. Every once in a while, but very rarely does that get asked. And what kind of billbacks or hidden fees are there? A lot of people don’t ask that. And Cindy and I, when we started SMP, again, we came from very large companies in our past lives that some of them had or they had billbacks. And when the client saw some of it, they’re like screaming. So Cindy and I are full disclosure, we tell you exactly what you pay for with SMP and you see every check that’s written, everything, there’s no hidden agenda. And when Cindy and I started, because I did come from the fee side with an owner portion, and she was totally from a company that was owner managed, so she didn’t understand what I was saying. But I was like, no, billbacks, full disclosure to our clients and we live with that integrity every day.

Matt:
Can you just real quick, what is a billback? Just to help educate here. What is a billback?

Angie:
A billback could be like if there’s a marketing department or a portion of the accounting fees would be billed back to the client, and that is not disclosed in the management agreement.

Matt:
Like charges up and above and beyond the PM fee.

Angie:
Yeah. Or portion of the regional manager or whatever that is being charged to the client, unbeknownst to them.

Andrew:
I want to highlight two of the things you said, Angie, that in my experience and observation are two of the biggest reasons that owner and third party management relationships fail. And that is, number one, you said make sure you hire a management company that knows the market. That right there is absolutely key, because unfortunately there’s two mistakes there. One, an owner hired a property management company that didn’t know the market. The second mistake was the property management company agreed to take the job. They shouldn’t have done that. And then that leads to failure because they don’t know the market and that owner is not really going to get better service than if they did it themselves because the property management company doesn’t know that market either. I think that that’s real important for everybody to make note of.
The second one is bandwidth. A lot of companies, not just in real estate, but across the board, are growth at any and all expense. And especially in property management that’s a huge mistake, because if you’ve got a regional that’s already managing 27 properties and yours is going to be the 28th, you’re probably not going to get that much good oversight and things just aren’t going to work well. So for those listening, those are two absolute key questions. Is does the property management company you’re talking to truly know the market, have experience in the market? And if they do, ask them if they can help you underwrite and look at deals, right? Because like Angie mentioned, she has said to the clients, no, we’re not going to take that deal. Well, if you’re talking to a property management company and they’re willing to take anything you’re throwing at them, that’s a red flag, right? That’s growth at all costs.

Angie:
Number one red flag probably.

Andrew:
You don’t want that. And then also, yeah, do they have the bandwidth? Do they have the people in place? Do they have the systems? Do they have the capability to hire and bring on and attract new staff? Does a property manager who’s going to come run your property want to work for that company? So again, Angie brought up two really, really good things. Make sure they know the market, make sure they have the bandwidth. And then also for those who missed the previous episode we did on property management, we did provide everybody a list of 27 questions to ask. So if you missed that last time around, there’ll be a link in the show notes, go get that, and that will definitely help you out. Matt.

Matt:
Great, great, great stuff. Andrew and Angie, this has been a phenomenal conversation. Angie, thank you for coming on, on behalf of everybody, for coming on and joining us.

Angie:
It’s been fun.

Matt:
Always fun. So real quick, for those that want to hear more about you or SMP or get connected in one way or another, how would folks do that?

Angie:
Go to our website at www.smpmgt and you can find us.

Matt:
Smpmgt. Angie, thank you. Thank you so much. And congrats on the growth and success of SMP. Looking forward to talking to you again soon.

Angie:
Yep. Sounds good. It’s been fun, guys. Thanks.

Andrew:
All right, take care. Well, that was our interview conversation with Angie Smith on property management. We only got to a fraction of the stuff we would’ve liked to talk about, but this isn’t a six-hour podcast. So for the stuff we did talk about, Matt, what would you pick out as one of your top highlights or most important things that we talked about?

Matt:
First of all, phenomenal interview. Angie is an industry expert. She’s been doing this for a very long time and manages thousands and thousands, thousands of units. So it’s such a great conversation to have with someone that’s got that much seasoning and industry experience. A few highlights for me is towards the end where you had talked about asking a property manager to underwrite deals for you. And I don’t think enough people realize that a property manager can give you, not just, this is the way we would run the property, but a really good or even great property manager is going to be able to look at your financials and validate them and say, well, rents in this market should be X. You have them as Y, or we think we can manage for a lighter expense load or probably more likely a heavier expense load.
They can give you guidance on payroll for folks you’re going to have to hire. A good way to know if a property manager really has their finger on the pulse or not is their ability to give you a good financial analysis for deals. And so I think that asking a PM for their underwriting, their performer is what they’re going to call it, for your property, is I think really, really paramount. And I’m glad you brought that up during the interviewing. That was a good reminder for me as well.

Andrew:
One of the things that she said that I thought was really important to highlight, is that one of the biggest new investor mistakes is picking out the perfect property management company saying, all right, hiring them, putting them on the property and then micromanaging them to death. Just diving into the little details of, well, this unit I want to rent for this, and this unit should be this. And is the lady in 6A, has she paid her pet rent? Step back a little bit and let the property management company handle the day-to-day details. That is what they are there for. And if you hired the right company, they’re going to be better at that than you are.
Now, that doesn’t mean you hand the property over to them and say, all right, I’ll talk to you in a month when you send me the report. You still want to be involved. You still want to be given the big picture vision and direction for the property, but let them do their job, don’t micromanage. And you know what? If you let them do their job and they don’t, well, that’s a different conversation and you can go find another property management company. But if you go third party, let them do the job. So that’s definitely one of the things I would highlight. Matt, for those who are maybe just new to BiggerPockets and somehow have missed you, how do people find you?

Matt:
Folks can get ahold of me real easy, Andrew, just by going to our company website, that is derosagroup.com. Derosagroup.com. They can hear all kinds of cool stuff we’re up to right there at that website.

Andrew:
I’m Andrew Cushman. You can just google my name or find me at Vantage Point Acquisitions, vpacq.com. And there’s a handful of ways to connect with me there. And of course, I’m a BiggerPockets pro member, so make sure you connect with me first on BiggerPockets. So this is Andrew Cushman for Matt, Captain America, Faircloth, signing off.