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David: Hi guys, welcome back to the discount property investor podcast. Mike, it's good to see you back brother. I haven't podcast with you in a couple weeks.

Mike: Yeah Dave, we said we were going to do it more and man I'll tell you what, we're just keeping busy doing the business of real estate and neither one of us, you know, makes the time to reach out and be like Dave, Mike, we gotta get in the freaking studio, we got to record. So we're doing it remote just because it's important to us and I'm glad we're doing it and we are going to- again, it's been on our mind, it's been our effort to get together and record so again, we're going to be doing more of them and I'm happy to do it because again, it's something I've done for a long time with you.

David: Oh yeah man.

Mike: And even prior to that and I really do, I just like talking and sharing my thoughts sometimes and yeah, it's good. So I'm very very happy to be recording and kind of sharing I guess our insights into what's going on in the current market. I know we've all just say, oh it's crazy and that is true, but there's still plenty to do in business and that's something that I really like. It's kind of like a perspective thing. A lot of people are like oh man, the market's so hot, like I would never want to be buying rentals right now. Oh man, the market's so hot, I don't want to flip anything cuz like what if it turns and I get stuck with it? Oh man, the market's so hot, I'll never find a good wholesale deal. Well okay, that's one way to look at it, right Dave?

David: That's right.

Mike: Here's another way of looking at it. Here's the other way: go ahead and do nothing, and you're exactly where you were right now. Go ahead and do nothing, that's fine too but again, that's not where I-

David: Man, that's powerful language right there.

Mike: Right, that's not where I want to be.

David: I don't want to be in the same place either man, I totally agree.

Mike: Right. Even if you go a hundred miles an hour and you learn a ton about real estate and the market corrects and you get stuck holding the bag on one or two properties, I mean that's all part of this real estate game. Like, no one can predict the stock market, no one knows what's going on with crypto. I mean you and I both know that. I mean it's up and down, it's crazy and I truly don't believe anyone can predict this real estate market or cycle or when it's going to turn with you know, laser pinpoint accuracy so, the only option is to again, in my opinion, just keep taking action towards your goals. Do what is working, do what other people know is working and again, just keep making progress on your goals. So that's kind of what we're doing, you know we in our business, I think we're pretty candid with everything we've done. We built a massive portfolio of rentals together and we sold off a bunch because again we we're buying out a partner, we had a little bit of debt, you know we cleared that out. Now we're doing it again in our rental business.

David: Now we're doing it again, that's right.

Mike: It's not something again that I'm super super excited about that the market's so hot right now but it really is only felt like that to me for the past- I mean this year, 2021 is the only time I've really felt like it's a hot market.

David: Yeah.

Mike: Like I don't know when you felt like things were getting heated. I mean, I think it was just this year though.

David: Yeah, I think so too but even through the winter though, usually in- so we don't really have much of a dip in the winter with the investing.

Mike: Right.

David: But I felt like even through the winter, the inventory was low you know. It's taken us more marketing dollars to find a deal over the last, you know, 12 months but I agree, we've really, really felt the impact the hardest over the last six so it hasn't really felt that bad, you know, in terms of getting deals but-

Mike: Yeah, and I guess that's true because we weren't-

David: It's hard to find a deal right now man.

Mike: Yeah. Up until the end of last year, we we're still kinda in the sell mode, now we're back in to buy mode so that makes sense.

David: Yeah.

Mike: Why I didn't really see it. I'm more- you know, Dave really focuses on leading our wholesale side, I focus more on leading our rental, our acquisition side so yeah. And then that's really when I really, really felt it and it really was a squeeze and that's the squeeze we're in, but we're still again, hundred miles an hour trying to build a rental or rebuild a rental portfolio you know.

David: Well hopefully by the end of the summer, I'd say by the end of August, that gives us about 5 and a half weeks, I would think we'd be back to 60, right?

Mike: Oh that's- yeah absolutely. I mean we're basically at a little over 50 doors you know, all together like when we count all of our rental properties.

David: Yeah, but under contract to be added's gotta be another 5 or 6, and then there's probably another 3 or 4 that are in-

Mike: Pipeline.

David: In the pipeline too.

Mike: Right, right. No, I think we'll be 60 by the end of this summer. It would be really cool if we could buy another big package and get to that hundred by the end of the year but dude that's 5 months away you know, and I just don't know that we're going to have the capacity unless we find a sweet package to pick up.

David: Yeah, no, you know what? I think what'd make for a good topic just for a few minutes here is buy box, and the reason that I want to talk about that is we have 23 units under contract right now on one parcel, right?

Mike: Oh, that's right.

David: That would be amazing to just add to the portfolio but it's not in our buy box, and the buy box for Mike and I is you know, typically somewhere within 20 to 30 minutes of our office and it really doesn't necessarily matter the price range but it has to have a good return on investment, either has to be at the 1% rule or we gotta be able to buy it at you know, 70 to 80% to be able to BRRRR it and this particular 23 unit building that we have under contract right now, it's an hour and a half south so you know, not that I don't want to buy it, I think it's actually a really, really good deal but we don't have a property manager that can cover it, right? So we'd have to get a new property manager and there's new you know, basically challenges that arise with having property spread out all over and then having to manage multiple property managers and whatnot so buy box guys. Figure out your buy box when you're going to be investing. If you're starting off wholesaling, then anything and everything will work and that's what we're doing with this particular deal is we contracted it because it was a good deal but then when it comes time to figure out what we're going to do with it on the dispo side or the other side of things you know, it doesn't fit the buy box so just resort to wholesaling.

Mike: Yeah, it's a great analogy or way to look at it is calling it the buy box. I like that. A lot of people it's like what's your buying criteria is the most common question that we get, you know, as buy-and-hold guys and yeah, it's kind of difficult to define because for Dave, it's really like he just said, he'll buy anything that's a good deal even if it's two hours away and it's outside of what he was referring to as our buy box, like he's not necessarily going to say no to a smoking deal, why would you? Again, so that that little apartment building, I wish we could keep it, I'm in the same mindset like that's a great one you know, it's underperforming because you know, the current owners are- they're very kind and they actually built this from the ground up and they just haven't done a lot of rehab to it. They've done a lot of maintenance to it so it's in good shape but man it would be sweet if we could go in there, rip out the kitchens and baths and then up the rents a 100, 150 a unit, charging tenants utilities and shoot we'd have a huge return on it, like I'm not disagreeing but like Dave said, since it's an hour and a half south, we don't have one, the property manager, but two, then to make our crew or to find a crew down there to actually do that work for us would be another undertaking. And when we're managing new crews, we got to keep a little bit closer eye on them so it just doesn't work for us unfortunately even though it is a great deal. So we're going to sell it and I think it's going to be a great one. So our buy box, what are our criteria-

David: It'll be a 6 figure wholesale so we're going to be doing good on it regardless Mike.

Mike: Yeah. No tears for us please, no tears for us.

David: That's right.

Mike: So the buy box, I mean let's talk a little bit more about what we buy Dave. We- again, it's really anything in a- that meets our criteria and like Dave said, it's either that 80% or something that hits that 1% rule and we're really looking-

David: The 1% rule is basically, you know, just a simple rule guys that basically states that you're going to collect 1% in rent. So whatever the number is to purchase and typically it's not just to purchase, we like to look at it as like what's our all in number? We can buy something for 90 grand and put 20 in it, that's a 110. 1% of 110 is 1100 so are you able to buy it and be all in at- and then collect 1% of the rent? So at 1100, if you have a loan at 110, that typically means that you're going to have you know, a decent amount of cash flow. So that means what's left over of that 1100 after you pay your taxes and your insurance and you factor in maintenance and you factor in capex and you factor in your management and then you also factor in your vacancy, it pretty much guarantees you what? What is it Mike? Maybe 200 bucks a month, 150 bucks a month?

Mike: Yeah, well and it depends on if you-

David: But-

Mike: It depends if you use what you're into it for versus the ARV or what the value of the property is, cuz we'll even use like the actual value of the property so if we're into it for 110, let's say it appraises at like 140, we really want to see that rent around 1400 a month as opposed the 1100. But again 1%, super quick simple thing to use, 1100 to 1400 on rent on something like that and you're going to make those cash flow numbers that you need to make. So yeah, and it is. It's not a ton especially on the higher, the higher priced the property, we found it gets even, you know, skinnier like at a 150 cuz your loan gets higher and your expenses just get higher. When something happens to a property, it needs little bit more work. Your vacancies take a bigger hit. If I've got a $800 mortgage on a property that's renting for you know, 1200 or 1400 vs a $500 mortgage, when I have that vacancy running, I am out a significantly higher percent or higher number of dollars than I am if it's only you know, a $500 mortgage and again that's an actual cost plus the time to turn it plus yada yada, so over a 3 month period, say it's vacant for you know, 2 to 3 months during a turnover, I mean you've got significant costs that can add up pretty quickly. So again the more expensive the property, it just costs more. The holding cost is more when it's not rented, the mortgage is more, so it does, it just gets thinner and thinner. But back to our buy box, a little bit more about that and what we're specifically looking for.

David: 1% rules in the buy box.

Mike: It is there baby. 1% rule, we hammered that one home, super important.

David: Yeah, what else though? You know I don't like one bedrooms, let's talk about what we exclude, that's probably easier, right?

Mike: Absolutely.

David: So we exclude one bedrooms guys. We exclude properties that need more work than the purchase. So if you buy a house for 40 but it needs 60, right? And that'd put you in at a hundred. Why not buy one at 90 that needs 10? It's just so much easier, right? So we typically exclude the one bedrooms, we typically exclude properties that need more work than the purchase price but also-

Mike: And Dave and I were just talking about that though cuz that is a super, super good one and I love that because I'm on the rental side and I do a little bit of the rehab and the management of it but we're buying properties now that need more work because we can't find those 90 thousand that only need 5 or 10.

David: Yeah, that's so true.

Mike: So again, you're getting squeezed-

David: They need more work than typical but we still try to find that line though, right?

Mike: Right.

David: Will we cross the line occasionally? Of course, depending on the area of town that we're in but you know, rule of thumb, don't buy $100,000 property that needs 150, look at it that way. When you get into bigger numbers, whew.

Mike: No, and you are absolutely right and that's a really good way to look at it. Even though you're doing a rehab, you don't want to do a full gut on a rental project necessarily.

David: Why would you if you can find something else that's easier that makes just as much money, you know?

Mike: Exactly. And if you're going to do that level of work, I mean quite frankly it might make a better flip than a rental because again, you're basically rebuilding a house, so why not execute on it and get that full retail and cash out and buy a different one for a rental? But again, everyone has different strategies. So back to you Dave.

David: Also like to exclude small properties.

Mike: This is the big one for me.

David: So like 600 square feet or less you know, it's like you can't convert a one bedroom into a two-bedroom at 600 square foot without the bedrooms being extremely small. Can you do it? Yeah of course, but you're going to have like closet size bedrooms. That's hard to keep rented. You might be able to rent it but you're typically not going to have somebody that's going to stay there for 4 to 6 years, you know? Like they can get a bigger place for equal money cuz when you have a 600 square-foot house, you're still dealing with roof maintenance and HVAC maintenance and all of the maintenance that you would have on a 1500 square foot house or a 2000 square foot house. Your maintenance isn't any cheaper necessarily because it's only 600 square feet, roof still leak and air conditioner still break and water heaters rust out and die.

Mike: So let's talk about the flip side.

David: A ton of maintenance on these small properties in relation to percentages so yeah.

Mike: What about a 25 or 3 thousand square foot house Dave?

David: So you know, that's a great point, like there's a range. So when you're dealing with a 3 thousand square foot house, hopefully you'll get 3 thousand a month in rent but if you don't, you're already breaking the 1% rule and then when it comes time to turn that property, that's a lot of square footage to cover with new flooring and/or new paint.

Mike: Exactly.

David: So turning that property's not gonna be 6, 8, 12 hundred bucks, it might be 4 or 5 or 6 thousand depending on how much work is needed.

Mike: Yeah, even just painting it is going to be several thousand.

David: Right.

Mike: So it's definitely, there's a sweet spot and I would say that we look for smaller end, I mean we're looking for around a thousand give or take a few hundred square foot would be our target or is in our buy box, our sweet spot. The number of bedrooms, we don't put as much weight on if the square footage is within the correct number because we'll convert old dining rooms if there's a second dining area into bedrooms to maybe make that two bed a three bed. If it was a two-bedroom, 1100 square foot house, well there's plenty of room in there to add a third bedroom and it's not going to be tiny, it's going to be just fine. So again-

David: And we've done that a bunch of times.

Mike: Yeah, so our buy box is probably between, I would say the sweet spot is really closer to 7, 8 hundred square foot to maybe 14, 15 hundred square foot, right? Target right around a thousand though is really what we're looking for. So that hits on what is our number of bed and bath requirements. We don't like one beds, I think you mentioned that. So really, two beds are okay, but a three-bed is our preferred, three plus and-

David: Three plus, right.

Mike: It's pretty hard to find anything more than four bedrooms. We do have that sweet one that you put under contract Dave, I'm looking forward to it if we can get that thing figured out up on Jerry's you know.

David: Yeah, that's a big one.

Mike: Yeah, it's a five bedroom, that's massive so that'll be pretty good. What else Dave?

David: You know I would say like area of town matters as well too, you know. We'll buy A, B and C. We try to avoid anything below a C. Now, are we buying a ton of A's? No, let's be honest, just because it's hard to get a great deal that can cash flow, that doesn't need you know, crazy amounts of work but we'll come across them from time to time. The majority of the rentals that we're buying are probably in the B and the C-Class areas, but even in the C-Class areas, you're typically not having crazy amounts of crime. You're also having school districts that are you know, on the okay to good side, they're not like terrible, right? So neighborhood, type of neighborhood I think definitely matters. There's some neighborhoods in St. Louis like for example Castlepoint, you know where I would never want to own a rental. Will we buy something to flip there? Well sure cuz we can pick it up for 2 or 3 grand in some cases and sell it for 8 or 10 or 15 and make a couple thousand bucks real quick but that area and that part of town just isn't ideal for a tenant. You're going to have a ton of issues with just it being dangerous, right? And that's a ton of liability so I think neighborhood definitely matters. Also, I think type of property will matter too you know, like are you buying a single-family home or are you looking at you know, a weird two- you know, two unit building that may have an off building, right? Like sometimes if it's too weird you know, we may avoid that type of thing, right? In terms of roofs, it doesn't really matter if it's a pitched roof or a flat roof. You know here in St. Louis, we have a lot of old buildings when you're in the city limits and we own a few of those as well so that's- you know, that's not necessarily a deal-breaker but personally I like a pitched roof because you can easily inspect it, you can see what's going on and often you can add square footage or have attic space when you have a pitched roof. I think distance is typically going to be you know, the main one obviously right behind type and square footage and cost, of course but that's the reason why this 23 units that we have is out of the buy box is just cuz it's too far away. If it was half the distance, we'd probably buy it and keep it but you know, it's just too far away too.

Mike: Here's the thing-

David: There's a lot of things that you have to factor in.

Mike: And here's another one that's we don't often deal with but they are out there, especially in the South County area more often than not is septic systems. So we prefer all of our rentals be on city sewer.

David: And water.

Mike: And water, exactly, and wells. That's a good point. For this reason: it's just easier to maintain, there's almost nothing you have to do besides getting that thing cabled out if it gets clogged out, clogged up or you know, replacing the pipe if it cracked. If you're on your own septic system, not only are you going to have to do that if it gets clogged, but if the septic system cracks or fails, you're gonna have to replace the septic system and last I checked it was I don't know, it was like $20,000 or something to dig out and replace the entire septic-

David: Yeah, what is a septic system? About 20k? Whew.

Mike: I don't know, it's been a long- it's been awhile since I've really looked into it but yeah they're not cheap. Again, you have to dig out the thing, you've got to fee- I don't really understand all of it, it's just yeah. We try to avoid them. So when we do get them, more often than not, we'll try to flip that property for that reason because it just is an unknown cost or kind of like a ticking time-bomb, could go bad at any point. Tenants aren't necessarily aware of it or they don't care, like again, if you tell them hey this is a septic system, make sure you do this. Well, tenants hardly even change the air filters in your HVAC's, let alone can you expect them to really maintain a septic system and use the- what is it? Like Rid-X or whatever you're supposed to put down there every so often. So again, it's just another thing that pushes it further out of our buy box.

David: Yeah, well's versus city water or county water, right? If you're on like the infrastructure water system, then you know, it's pumping a decent PSI 24/7/365 versus a well. Well's can go dry, well's can have issues as well. Typically, wells don't have the best water pressure, I mean I guess it depends on the system that you have. But Mike, that's a great point. City water and city sewer or city sanitation is a big thing, right?

Mike: Yeah.

David: Will we buy outside of you know, them having them? Yes, but ideally our buy box is having both of those. Great point, something I didn't even or wasn't even thinking about but it just goes to show you that there is a lot of little things to consider.

Mike: Yeah, so let's recap it real quick up and then maybe wrap up and I think this would be the buy box episode. So what is in our buy box for our rental portfolio? I think it was first and foremost was the 1% rule which encompasses the price and the rent, it kinda combines those things. So 1% of the value of the property, you should see that being collected as the rent each month. That's a really good way to look at that 1% rule. Dave, what's next?

David: I would say like distance, size.

Mike: Yeah, so location.

David: Location.

Mike: Location kinda- location includes that distance. It includes that there's some areas we don't like, some areas we do. So real estate location. location, location, right? You know you can't get around it even in our rental buy box. So we've got the 1% rule-

David: Size also matter cuz you don't want to go too small, you don't want to go too big, right? [inaudible] next.

Mike: Yup. So buy box, location, size and then, what was the last-

David: Area you know, like A, B, C or D. You know, stay out of the war zones, probably not going to find a ton of great 1% or even one and a half percent which we have as well in some of our portfolio you know, and the A zones right? It's just probably not going to happen. And then last but not least, more specifics on the property. Does the property need more work than the purchase price? Doesn't mean you might not want to do that deal but you can do a similar deal and make just as much typically you know, whenever you're encountering that kind of thing. And then last but not least you know, I would say just details about the property like it's systems. Are it's systems hooked up to the city and county infrastructure or are you out in the country and you're dealing on your own water from a well or your own sewer from a what's it called?

Mike: Sep- or uh.

David: Septic tank?

Mike: Yeah.

David: Which has a drainage field, and there's lots of things that could go wrong.

Mike: Dave, it's so funny we try to recap and we both do this all the time, where it's like- so you're talking about the systems and I'm just thinking oh well wait a minute, what about the electric system too? That's another one. So obviously that comes in the condition of the property but there's one kind of big red flag and that still is the knob and tube wiring.

David: Good point.

Mike: Or the older electric panels, the Federal Pacific's. So those two things, they're not gonna push it out of a buy box, but knob and tube wiring can be dangerous, can be a fire hazard so we really don't really necessarily want that. And the Federal Pacific is you know, you can replace the panel but it just factors in as well.

David: It factors into the cost though, right. If it's a property that needs you know, all new electric and it maybe needs all new plumbing, well that may push it over the line to be something that may cost more than the purchase depending on the neighborhood.

Mike: Exactly.

David: SO there's lots of things that kind of can reflect on that. Mike, great conversation. The buy box guys, know your own buy box, right? Know what you're looking for. Really, I think the whole point of having a buy box at the end of the day is to have a plan. You know don't just get out there and like just buy something, right? And then later just you know, figure out oh man I probably shouldn't have done this cuz of this or cuz of this. It's just smart to educate yourself you know, in buying places that are going to make you comfortable, but also in places that you know, are really more defined as investments versus just speculation.

Mike: Dave, let's do another episode guys. On the next episode, let's talk about how to get yourself ready to buy rentals. I know we have a lot of new investors. So Dave- thank you everyone for listening. The next episode, we're going to record it, we'll talk about getting yourself ready to buy rentals.

David: Awesome. Thanks for listening guys. Signing off.

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