Subscribe to our podcast anywhere you listen to podcasts:
HIGHLIGHTS FROM THE PODCAST: 1:31 – Introduction 2:37 – #1: Under Capitalized 5:14 – #2: If you don’t do your homework 7:52 – #3: If you’re too nice 10:33 – #4: If you have a short-term thinking 12:41 – #5: Commitment Issues FULL TRANSCRIPT OF THE PODCAST AUDIO: Spencer Sutton: Another reason why you shouldn't buy rental property is if you're too nice. And the truth is you need thick skin to be in this business if you're going to manage your own property. Spencer Sutton: All right, everybody, welcome back to another episode of the Atlanta Real Estate Investor. I am one of your hosts, Spencer Sutton. And I have, as always with me, Matthew Whitaker. Welcome, Matthew. Matthew Whitaker: Very glad to be here. Glad to be back on the show. Spencer Sutton: And you guys can't see Matthew, but he shaved his beard and he looks like at least 15 years younger, which- Matthew Whitaker: Well, that's funny because that's what my daughter said too. But she said she liked me better with a beard. So I don't know if she likes me older looking or what. Spencer Sutton: Yeah, yeah. Well, let's go. Matthew Whitaker: I think I like the younger look, I guess. Spencer Sutton: All right. So we've got a great episode for you today and we're just going to dive right in. We're going to give you, our listeners, five reasons not to buy Atlanta rental property. Now, this may sound strange coming from us. Spencer Sutton: Yeah, right. And I agree. I think back when I first started, some of these definitely would have, I should have heeded some of these, I mean, I went in just guns blazing. Matthew Whitaker: Well, I have to I'm on the show, right? I mean, you forced me to agree with you. I totally agree. I think one of the things I wish somebody had told me really early on was some of the things on this list. So I think, having been there, having grown a rental portfolio, and still has a rental portfolio, I think it's very important to kind of pass on these words of wisdom of what would be a situation where this would not make sense for you. Spencer Sutton: Yeah, right. And I agree. I think back when I first started, some of these definitely would have, I should have heeded some of these, I mean, I went in just guns blazing. Spencer Sutton: We were already wholesaling houses. So I thought, "Hey man, I've got all this, I've got it all together." So I just kind of threw caution to the wind. But we do talk to a lot of investors, right? From around the country who are interested in rental property and so I do end up having phone conversations where I talk about some of these issues. And because I really want to find out if the people that I'm speaking with are really ready to buy rental property. And so let's go through this list. I'm going to list them off. We'll just take one by one. And so I've got five reasons not to buy rental property. Spencer Sutton: Number one is you're under-capitalized. Matthew Whitaker: Yeah, so not having enough money. I mean, this is kind of a no-brainer, but I think a lot of people get in this business because the barrier to entry is so small. A lot of people will get in this business and don't leave themselves any margin. And one of the things I've learned over my career is that margin equals sleep, margin equals better decisions. And so, as you're thinking about your rental portfolio and growing around your portfolio, you want to make sure that you maintain some level of margin as you invest. Matthew Whitaker: Now, what does that mean? It's different for everybody, but ultimately it's about having enough cash or having enough capital. If at some point something bad happens, it doesn't disrupt your day life. That way you can, again, I get back to make better decisions, make more long-term decisions. Matthew Whitaker: I've seen some people get into trouble in this business when they basically are forced to make short-term decisions just based on cash flow. Kind of easy, tangible for instance would be, they really should replace the air conditioner because it's kind of outlived its useful life, but they choose to fix it. And then know it's going to break again in a year because they don't have the money today. They think, Hey, maybe I'll be in a better position in a year. So maybe you invest five, $600 in fixing it. Whereas it's probably going to break again next year and you might as well have gone ahead and replaced it. And then you can start reaping the rewards of having a new air conditioner, but they don't have the cash to do that. So just thinking about that, it's pretty obvious that when you're in a capital crunch, you make different decisions than when you're not. Spencer Sutton: Yeah, what are some other big-ticket items that you would think, "Hey, rental property investors, you really need to be prepared for?" I mean, obviously HVAC, probably roof. I know that I have patched up a roof until it couldn't be patched up anymore. Matthew Whitaker: I've left a tarp on a roof when I didn't have enough money. I mean, it's embarrassing to drop by your house and I know the resident that lives in there is probably embarrassed that they've got a big blue tarp on there, but if you don't have the money, you don't have the money. But I just don't think that that's fair to the resident. And honestly, it's just not good investing. Spencer Sutton: Yep, yep, that's right. So under capitalized, number one, if you don't have the money and honestly I'll just say this, having just more debt is probably not the best idea to just keep pouring, if you've financed the whole thing and then you're using debt for your cash. So under-capitalized number one. Spencer Sutton: Number two, if you don't do your homework. Now, this is something we talk about a lot and there are houses that I bought that I didn't even know what I was getting into. I didn't do my homework and I, a local investor. So Matthew, talk a little bit about this one. Why do people need to do their homework? Matthew Whitaker: Yeah. If I go back to the first house that I bought 1500 Cherry from you, Spencer, I didn't do my homework. Spencer Sutton: And that's what I was counting on. I'm just kidding. I have made this mistake. I think it's pretty well documented on the show that we want people to come and we really think that it's important for you to come to the city where you're investing and see it for yourself. And so some, our best investors come kind of pre-buying, and then once they start buying, they come on a fairly consistent basis to see what they're buying. Spencer Sutton: And I just felt like they made better decisions. They really understand the business much better. They really understand what they're buying much better. You can kind of get the feel of the neighborhoods that you're buying in. And so it just makes a lot of sense to do your homework by coming. Now, obviously do your homework also means this thing has to pencil out. It's funny because I can make a spreadsheet, look whatever I want it to. And almost fool myself into thinking, well- Matthew Whitaker: If you torture the numbers enough, they'll say what you want them to. Spencer Sutton: If I stay on the spreadsheet long enough, I can make it work. I can make this deal work. And so you also don't want to trick yourself. Jim Collins calls it, Looking Under The Rocks at the Squiggly Things like facing reality and then being able to deal with it. That's actually Ray Dalio, Squiggly Things, Jim Collins, Ray Dalio is Embrace Reality and Deal With It. But when people get themselves into trouble, when they try to kind of manifest reality into the rental property. Matthew Whitaker: Yeah, and the point is investors are eager, right? Especially in a hot market like we're in, they want to find deals. And so you can trick yourself into straying outside of your buy box or saying, "Well, that's really not all that important," but really I think understanding what your buy box is coming into town, doing your homework. Driving the streets and doing your homework also means getting on the phone, talking with multiple sources, about areas that you're interested in. Don't just take one person's word for it. I think speak to several different people as part of it. Spencer Sutton: Especially not the person selling you the property. Definitely don't take what they're saying at face value. Matthew Whitaker: Yeah, yeah. A hundred percent. Spencer Sutton: All right. Number three. Another reason why you shouldn't buy rental property is if you're too nice, and the truth is you need thick skin to be in this business if you're going to manage your own property. Matthew Whitaker: I used to be a nice person and this business, I often liken it to if anybody's ever seen Indiana Jones and the Temple of Doom when the person like reaches in and grabs some guys heart out, I think- Spencer Sutton: He pulls it. Matthew Whitaker: I think sometimes property management has actually done that to me a little bit. Spencer Sutton: It has. Matthew Whitaker: But I call this, using the term thick skin I think is very important because what you don't want is, you want thick skin and a soft heart, what you don't want is thin skin and hard-hearted. So some property managers, some real estate investors are literally the meanest people I know. And sometimes when I first got into this business, I would project out and think, golly, I don't want to end up like that. Kind of crusty, just mean. And I'm like, "Man, I don't want to end up like that." That just looks miserable. They live a miserable life. Matthew Whitaker: But there is some element of this where you need to be able to make objective decisions. And I like to think of it as having thick skin and a soft heart to be able to invest. There are times where you probably need to have the soft heart and give in, in certain instances, maybe to a resident to demands or something, but then you also need to be able to disconnect yourself. And that's kind of the thick skin and think about this because as soon as you buy a rental property, you're in business for yourself. Spencer Sutton: Right, right. Matthew Whitaker: And you need to be able to make objective decisions and investment decisions and not let your heart always lead the way. I've heard people call it, this is so overused, but investing with your heart, not your head. And that's where a lot of people get in trouble is being too nice and investing with their heart. Spencer Sutton: Yeah, and also just getting caught up in other people's story or drama or whatever is going on in their life. I mean, it's okay to, to be understanding and be empathetic. But again, like Matthew said, "You're running a business and you have to make business decisions." So being very objective is the best way to handle this. Spencer Sutton: So if you have trouble saying no, if you get your feelings hurt very easily, probably owning rental property, especially in some of the class C class D areas, different cities, probably not going to be the best for you. In that case, I would suggest you hire a property management company wherever you're investing. So that's number three. Spencer Sutton: Number four is, if you have short-term thinking, right, this is like owning rental property. The strategy for owning rental property is get rich slow. It is not get rich quick. And so talk about just the problem with short-term thinking when you own rental property, Matthew. Matthew Whitaker: We had a guy on this show that basically said, "For five years, I was buying rental property and essentially I was like, am I making the right decision?" And it wasn't for essentially five years of buying that things started to actually pay off, started to get traction. If you think about it from good to great. The flywheel really started going, started to pay down a ton of debt. As rents rise it really starts to make this thing make sense. But if you are not bought into long-term, if you're thinking, "Oh, I'm going to replace my income next year, just on the cash flow of this business," that's a very hard thing to do. And so what a lot of people we see make mistake is they want to be a full-time real estate investor because it feels very sexy, but they give up their day job in conjunction with it. Matthew Whitaker: And now we're very fortunate to have a day job in the business and be able to invest on the side, but they give up their day job. And now all of a sudden they're having to eat out of the business. And then that essentially stifles the growth of the business. Matthew Whitaker: What I see the best investors do is have a day job, invest, invest, invest, on the side and grow that cash flow to the point where it's almost like your business can't afford to have you continue to work at your day job. And that takes some long-term thinking because it's not going to happen overnight. Spencer Sutton: And don't get enamored with your initial spreadsheets that show you how much cash flow you're going to be receiving every single month, because then you start, in your mind, you start going, "Oh, well, I'm going to have this money so I can go and do this, or I can go purchase this or we can take this vacation," or whatever the case is. I mean, don't ever, it's never going to turn out the way you have on that spreadsheet. So you just need to be committed. Like this is a committed relationship. This is not a, "Hey, you're just going to date short-term," it is committed. Spencer Sutton: All right. Speaking of commitment. So that was number four. We're going to get to our last one. Commitment is all about number five, which is you need to commit to owning 10 or more rental properties. If you're not prepared to do that, then probably you shouldn't buy rental property in the first place. So explain that Matthew. Matthew Whitaker: There's no magic number to 10, but the whole idea is that you own a bunch of them so that it levels out the issues. It levels out the cash flow. Where we see people get in trouble is when they own one or two and they have these seasons of feast. And then the seasons of famine when they're having to send us money. And if you think about it, it kind of makes sense. It's like an apartment, right? I've got, let's say 10 units in an apartment. And any one time, one of them is vacant and I'm turning it and trying to lease it. But the other nine are making up for this one vacancy. Matthew Whitaker: And so it intuitively makes sense. It doesn't mean you have to run out and buy 10 right off the bat. I would say it's much more important to buy the right 10. And I think you can do that over the course of a couple of years. Because the first kind of season of owning a rental property, especially if you renovate it prior to post-acquisition and prior to moving a new resident, there really is kind of the honeymoon phase where things shouldn't break all that often. That's not a blanket statement because things do break, but you should be able to build this over time. And once you do that, the cash flow will basically grow because it's feeding itself. Spencer Sutton: Yeah, I agree with that. And anytime you have two or three houses and let's say you have three and two of them go vacant, it's rough. Especially if you have a lot of work that needs to be done. But again, as Matthew said, when you're owning 10 or more, it all evens out. Matthew Whitaker: So this has been a lot of fun, Spencer, we got to talk about the five reasons we wouldn't buy rental property. And obviously, these things are kind of area agnostic. So, hopefully, they can apply across your whole portfolio. Matthew Whitaker: In thinking through all these, I mean, I would definitely go through and just kind of make this as a checklist and just make sure, "Hey, am I ready?" Especially if you're just getting started, "Am I ready to do this?" Maybe use some of these things. If you've already gotten started to kind of, especially like buy 10. Now I have a goal. I know where I need to get to, to make this thing work. Just based on some people that have seen this over the course of we've been doing this a long time, almost- Spencer Sutton: Yeah. Matthew Whitaker: We're closing in on 20 years. Spencer Sutton: Almost 20 years. That's right. Matthew Whitaker: So we have 40 years of experience sitting here. So what I would say is take a look at this list. We'll be coming out with some new stuff in the future, but wanted to make sure that we were very transparent about reasons why people wouldn't want to invest in rental property. Spencer Sutton: All right. That's right. Well, thank you, Matthew. And listen, if you have not already subscribed, go ahead and do it, share this one if you know other real estate investors who are just like you, who might need to see this list and we will be back next week with a new episode, see you all then.
