Guided Real Estate Investing Podcast #28: Your Investment Formula – Separating Yourself from the HERD

Guided Real Estate Investing Podcast #28: Your Investment Formula – Separating Yourself from the HERD

Announcer: You’re listening to Real Estate Investing Talks, a SimplyDoIt podcast. Your journey to success in real estate investment starts right here, right now. Here’s Dani Beit-Or.

Dani Beit-Or: Good morning/good evening/good afternoon, depending on where you are. Dani Beit-Or here. I’m going to talk about real estate investment. I know this is on my main page, my personal Facebook page, and we are recording this audio, the screen. Facebook records it anyway. I like the fact that you are joining me.

If you are here because real estate investments is what interests you, by all means, please stay. If you are just a random visitor and you’re just kind of checking and seeing what’s going on this Facebook page, you’re welcome to stay.

But I’m telling you, I’m going to talk about real estate investment, so if that’s of any interest to you, you’re most welcome to join. This session is actually for you guys. My favorite thing is that if you have questions, you can post them about rentals, about flips, other types of investments of course. I’ll do my best to answer if I can. By all means, use this time for your own sake to learn, to ask questions.

Also, after doing so many of those sessions, people that I meet in person come up to me and say, “Oh, I saw your session and the recording. I saw you here. I saw you there.” For you guys who are actually—I learned that a lot of people are watching the recording and not the live session.

For you guys who are watching the recording, by all means, if you have some comment or something you want to ask about, you can post it. I’ll try to respond to it even if you are posting post-live event. No problem.

Also, I want to mention that every session that we are doing here is being recorded and uploaded to YouTube and uploaded as an audio to our podcast channel as well. We are on iTunes with SimplyDoIt, another podcast channel. You are most welcomed to subscribe and use that information or benefit from that information on the go.

Two other things that I wanted to say before I start talking about today’s topic is that we have our next month/month-and-a-half speaking schedule set, so I’ll be speaking, giving live sessions, actually in the room, in person in LA. We’re going to be in LA on Tuesday the 20th of February, in Orange County on Thursday, Orange County, Irvine on the 22nd February, in the city of San Francisco Tuesday the 6th of March and in Sunnyvale on the 7th of March. It’s a Wednesday.

If you are watching this and you’re not in our database and you want to get informed about those events because we mostly inform about them through email, please send us an email here or some other mechanism, and we’ll be able to add you to our database so you can get the information in.

Good. Remember, questions on the live, questions if you watch the recording, no problem. Feel free to post them. I’m going to get started.

What I wanted to talk about today is something I see every once in a while when I speak to investors, and they are telling me the reason they actually invested in a certain area or considered investing in a certain area is the fact that someone, their friend, went and invested there.

For me, it always strikes me as an odd thing to do. Why would you go and invest in, let’s say, Austin, Texas. I’m just going to pick on Austin. I have nothing against Austin, but why would you go to Austin, Texas because your friend may have invested there a year ago, maybe even three years ago? What’s the point?

Why are you doing this in the first place if you’re just going to follow someone else and go to Austin or any other market just because someone you know went there? Why? They know the agent and that saves you the trouble, and for that reason you might as well go and use their agent?

For me, it always strikes me as a very strange thing that someone would go and follow, not really think through what they need to accomplish, what’s their position, what’s their concerns, what’s their fears and just going, “Everybody’s going to Austin. I’m going to go to Austin.”

One of the markets I’m hearing about a lot recently—I don’t know what happened. Maybe it has to do with the Amazon HQ2 that they’re talking about. It’s Atlanta. I don’t know if it has to do with it or not.

By the way, everybody that says Atlanta or any other market is a winner, that’s completely wrong. Amazon did announce the 20 finalist shortlist. They haven’t decided which one just yet. A lot of people think Atlanta is a really good fit. I agree. I think there’s a very good fit there, but I don’t know if that’s the case.

But I will tell you this. Please forgive me all my Atlanta friends, my Atlanta colleagues, my Atlanta investors. I’m just going to tell you this, guys. For example, there is a buzz going on about Atlanta, which is fine.

Most of my investors who are active in Atlanta and myself already are doing the following when it comes to Atlanta: we are pulling out. I am done with Atlanta for rentals. Never say never, but I’m done with Atlanta. You know what? My investors that bought there in recent years are doing exactly the same thing without me telling them.

The reasons we are done with Atlanta is because, in all my years of operating and investing individually with investors, many years, Atlanta has been the most challenging market for tenants, altogether issues that we don’t see anywhere else.

In Atlanta, it’s not a bad market, but we see many more problems with evictions, not paying on time by tenants many more than other markets. We see theft much more than any other market, vandalism much more than any other market.

I as an investor don’t like this pattern of an area that has so much noise in the system. I’d rather buy a low-income house in Oklahoma City than an upper middle class in Atlanta, as an example.

This exactly brings me back to the herd mentality. Why would I want to follow the herd when the herd—By the way, the herd doesn’t necessarily always know what they’re doing. They may be following someone else and following someone else.

We’ve been investing in Phoenix right after the recession in probably 2010/2011/2012, maybe 2013 as well, and in the metro Phoenix, we started pulling out when the numbers just didn’t make sense anymore.

I know people still ran into Phoenix. Some of them are saying, “Hey. Listen, I live in the Bay Area. The San Francisco Bay area is so expensive, when I go to Phoenix, compared to the Bay Area, the numbers are amazing.”

They’re right, but compared to Phoenix in 2013, which is not a bad number and bad market, going to Dallas at the time or Nashville at the time or Tampa, the numbers were even better, much better numbers being returned in those markets versus Phoenix in the same period of time.

My question for you, and I think everybody who’s listening to this, you owe it to yourself to really explore which market is the right market or metro to invest in now, not in a year, not a year ago, right now.

If you don’t have a clear formula, and I’ll show you my formula, you should put one together. You should put one together and follow that. Otherwise, you’re just shooting in the dark. You’re just doing it because, again, you’re following the herd.

Let me give you a few things. I put them in the notes here or in the topic, but a couple of things you want to consider when investing, when choosing an area.

Number one. First of all, drop all preset ideas or concepts or thoughts. Again, you come from the Bay Area—if you’re coming. A lot of the investors we work with live in the San Francisco Bay Area. I’m going to use that as an example.

If you come with your San Francisco Bay Area mentality to another market, let’s say Dallas, practically in the San Francisco Bay Area, you’re not going to have vacancy. There’s very little.

Silicon Valley or maybe parts of the Bay Area, you’re going to have practically zero vacancy. There’s a lot of demand and relatively low supply, so there’s no vacancy in rentals. Someone moves out, and in the following day, someone moves in.

When you go out to the rest of the country which the Bay Area is not representing, you will have vacancy. Don’t come with your, “Oh, we don’t have vacancy here.” When you see there’s vacancy in another market, you’re like, “Oh my God. This is scary.”

Well, for me, a $1,500,000 house in Silicon Valley, which is not an expensive house in Silicon Valley, that rents for 5,000, that’s scary. A month of vacancy is not scary. That cash flow is scary. That dollar amount, that’s scary, at least for me.

What you want to see is not following your friends and don’t come with your preset concepts or ideas. Come with an open mind, an open slate. Then, choose areas around the country that the metro size population-wise are big. There are plenty of them.

I like to go to areas with at least 1,500,000 people population or just about and above. Anything below that, I consider a smaller market. I would probably be very cautious. The reason I’m looking at that size is because I’m making the assumption that in the near future, five/seven/10/15 years, all this period of time that I’m planning to own my rental property—

In this period of time, we’re going to have one or two slow economical periods. Hopefully, not as big as a crash as the last one, but slower economical period. If that’s going to happen, I want to go to areas that have better chances of going through the next recession, the next slow down, pass through more successfully or be more resilient to it.

Places like Dallas and Houston and Nashville. All of these areas, they have stronger chances because of the local economy than others. Those are not the only ones to sustain or be resilient to a situation like that.

By the way, just as an example, during the last downturn, Dallas as an example didn’t really suffer locally. They only suffered because the lending was tight. A lot of the banks were kind of blocking or limiting credit to buy real estate, but the area itself, the market, didn’t crash. Actually, employment continued to grow during that time. That’s something you want to look into.

For me, I rather skip or miss a few ROI percentages for the sake of safety. Safety in the investment, in the area, in the economical base, it’s very important. Going to big markets, big metros is very important.

Second or next, you want to go through areas that are showing growth patterns. What do I mean by growth patterns? There is a demographic shift and changes in the US happening as we speak. We have it on our website. You can go to different websites and research that.

What you can primarily see, on a state level, a lot of the Midwest and parts of the northeast are shrinking. Not all of them, not every city, not everywhere, but in general. The south and west are either growing or staying stabilized.

This is not just this year. This is not just last year or the year before or about 2017/2018. You can actually go back probably 20 years, and it’s projected to continue.

You want to stay on the growth pattern where the population is growing because if we’re going to hold this property or properties for many years, we want to make sure jobs are created, people are moving in, buyers are moving here, renters are moving in, our clientele for the house is coming in.

We want to be there. We want to have that. We want to be on the growth pattern, not on the declining pattern. Many states are declining. That’s something to think about. People don’t always take that into consideration. I don’t know why, but they don’t.

Next thing is when you go to a big metro, you want to choose metros that have multiple big employers. They are the anchors of the metro and multiple industries present. For example, as a negative one, Las Vegas, for me, was never very appealing because it didn’t really qualify that aspect of my formula.

Population-wise, it passes, but multiple industries and multiple employers present? Well, they’re all multiple employers. There’s no doubt, but there’s one industry. That’s a little bit scary for me as an investor. For me, Vegas is unattractive only for that reason.

I don’t have any other problem with Vegas except I’m not much of a Vegas guy, but I don’t care about that. That’s not what I feel about an area. As an investor, I care about the numbers and the safety, the returns and the safety.

Next thing I want to say is states that have eviction laws that are good for the owner and not good for the tenant. This is actually two things that are resulting from this point.

Number one, when you’re in that area and you have to go through an eviction, that means you’re probably going to be able to do it rather quickly- I’m talking as quickly as 10 days/two weeks, maybe even a month if the courts are a little bit more busy- and cheaply.

I have had evictions as little as $240 and one that was probably 675, and the 675 included all the fees including the sheriff going to the property, including the locksmith replacing the lock. That was really the whole package: $675, maybe even not that, just close to that, to get everything. That’s not terrible.

By the way, I didn’t pay for it. I had the deposit to cover it. That took not even three weeks to get the tenant out. I did have a lot of evictions, but I’ve had evictions.

By the way, if you’re in states that the laws are favoring the landlord, not only does it help you if you get to eviction, but it actually helps you before that because the tenants know the state is landlord-friendly and not tenant-friendly. That creates a setting where the tenants typically want to avoid problems altogether.

The setting helps you without even having to get to the eviction. If you’re in a state that the tenant knows it’s easier for him or her to give you a hard time and maybe fight with you, and you are in a disadvantage because the laws are not favoring you, then guess what, you’re already at a disadvantage before you even had to go to eviction. Just something to think about.

Eviction laws, and of course, do the numbers work? I’ll get to your question in just one second. Do the numbers work? What do I mean by that? Purchase price, rent ratio is a good start. How much can I buy a house, and how much can I rent it.

If I know that, in the Bay Area, that percentage is maybe 1.3% from the purchase price is the rent per month, I’m looking for more like three times that. I want to be in the 1% ballpark.

That means, an example, $150,000 home, I want to rent it about $1,500 a month just as the rule of thumb. Now, I will check it more in details per market because not all the markets will deliver the 1%, but I want to be able to look at it not just percent-wise, but also what will be the actual cash flow.

I will go through an exercise when I’m entering a new market. I will probably check anywhere from six to 15 different properties, different price ranges, different areas to come up with the numbers.

By the way, to see not just what the range ratio is but actually how much cash flow you’re getting from the property. If I’m not hitting this, say, $150/$200 at least, I have a problem with that. If I’m not at a positive cash flow, even a small one, I have a really serious problem with that.

By the way, about a month-and-a-half/two months ago, I did an exercise analyzing Portland, Oregon. Portland, Oregon is great. I love this area. It has everything I’m talking about, and the formula fits the bill, except one.

It’s a little bit expensive relative to the San Francisco Bay Area. Maybe Seattle is not, but a $300,000 to $400,000 home with even 25% down, based on my analysis, delivers a negative cash flow, and not 50 bucks.

For me, Portland works on everything except one. The numbers don’t work. Maybe once in a while you are able to make it work, but can you consistently continue buying properties in Portland that will provide positive cash flow?

My analysis, which was multiple properties, 25% down, 30 years in mortgages, trying to make it happen, multiple areas, not just all in one area. I took samples, and they all were negative cash flow. Not a bad market at all, just not very good for cash flow.

Sorry, maybe two years ago. Again, going back to the herd. Maybe your friends that bought in Portland and were very happy they bought it for $250 and it’s cash flowing—It’s now worth $350 or $395, whatever, and it’s cash flowing, yes, absolutely, but they bought it two years ago. Big, big difference. Don’t follow the herd. It’s too late maybe to go there right now.

I’ll give you another example in a second. Maybe I’ll talk about Boise, Idaho, but I see a question coming in. I have one question so far from Guy. St Louis, Missouri, is this market growing? I don’t know to tell you for sure. I haven’t checked. I’ve checked. I’ve looked into that, but it has been a while. St Louis, Missouri, I would say it’s kind of on my watch list but lower. I have other markets I want to get to before.

Again, you want to take my formula. Check those things. It takes some leg work, but you can do that if you want to. It just requires a little bit of time. See if the market is growing.

By the way, state-wise, it’s not in a growing state. It could be that St Louis is growing within the state, but the state of Missouri is not in a growing state. I think, as much as I recall, it’s either in a stabilized or declining in population state.

You want to check into that. I don’t know. It’s been a while. I don’t want to give you an answer without knowing all the details. I would research those things before making a decision. Thank you for the question.

The other market that I wanted to tell you as an example is Boise, Idaho. I have flipped a few houses, not too many, maybe three/four/five houses in Boise, Idaho. The agent that I have in Boise, Idaho is one of my favorite agents I’ve ever worked with.

She’s amazing. She’s a real superstar. She’s been flipping houses in Boise for 15 plus years. She’s always been doing it probably on her own financial ability. One or two properties a year but constantly and been very successful for maybe 15 plus years.

She focuses on three neighborhoods in Boise. They have funny names. It doesn’t matter right now. When you drive with her through Boise, this is how the drive looks like. In those neighborhoods, she knows them so well.

She lives in one of them. She knows them. Three neighborhoods. They’re not tiny, but she knows them super well. She doesn’t need GPS. She doesn’t need a map, anything.

In every other street, she has a story, “I sold one here. I bought one here. I flipped one here. I lived here. My cousin lives here.” Every other street, literally, she has something that she was involved with. “I purchased this lot. I helped my builder—” It’s amazing. She knows.

Then, we drive through, and she says, “I just want to show you. You see this duplex here? That’s mine. I bought it a year ago.” How much you paid at the time? “At the time, I paid $250.” What is your rent? “It’s actually renting well.” This is probably three years back. “It’s rented for 1750 combined, not each side. Together.” I said, “Really? You’re happy with it?” She said, “Yes, I am.”

I said, “Listen, I don’t want to really discourage you, but, in my world, a $250,000 house would be much newer than this one. This is an older house. Good area, no doubt about it, but I would probably rent it for $2,500 a month or so, quite a bit more.”

She’s like, “Really?” But she would never go and do the leap of faith of going to another area because she feels she’s a real estate professional. She knows the area. She gets cross opportunities. It makes sense for her to do it, but she was really amazed how much better we’re getting rent in another market.

For me, the numbers didn’t work. Now, Boise is about 850,000 people population metro. I’m thinking of maybe giving Boise a little bit more credit. Population doesn’t work. Rent doesn’t work. Prices have got to be very expensive in those areas. Not even a lot of big employers.

For me, for example, Boise is a cute area. It’s nice to come maybe to live, maybe to vacation, absolutely. But just because I like it, it doesn’t really fit the bill for probably most of the things on my formula.

I would not go and buy rental properties there. I would flip there, gladly. I have. I wish I could continue. The numbers are just not there, but I don’t flip there anymore because of that. I’m just giving you an example.

You want to use my formula? Go ahead and use my formula. If you’re not using it, create your own. If you’re not sure about your formula, create something. Call it version A/version B and refine it.

You buy your first one. You stop for a second, maybe a few months after you purchase it. You say, “Okay. What works? What didn’t work? What do I need to refine?” And you move on, and you get.

It took me some time to refine my own formula. That’s fine. It’s not something that comes overnight, but you know what? My request for you guys: don’t follow the herd. The herd being your friends.

Just because even if your friend bought a month ago in Austin, that doesn’t mean you need to buy there too even if it’s only been recent because maybe, budget-wise, you’re not at the same place.

Maybe the concern he has is different than yours and you want to mitigate them differently. Maybe he has another secondary reason such as, “I’m travelling to Austin on business every month or so, so it makes sense to me.”

Maybe you have other reasoning, but just because my friend or my family or something like—Really? Really? Is that good enough of a reason for you to make a decision? Don’t you owe it to yourself to give it a little bit more thinking and thoughts? At least, I would think so.

Don’t be the herd. I hope you won’t be. I hope you come up with a formula one way or another. Most of all, I want you to be successful. That’s really my message here. If I come harsh, it’s only because I think you want to open your mind to think about things and become successful in your journey.

If we’re going to be able to be there for you and help you choose a market and where to go and what to do, by all means, I will be very glad to do it. That’s our business. That’s what I do for a living, but the reason I’m doing this is to engage with you, is to share with you, is to help you avoid doing mistakes and just going and following others because—I don’t know. Because.

Let me know if you have any questions. By all means, please post them. I’m going to say again that, while we’re posting this, if you’re waiting for the questions, we have a short and simple and quick and nice eBook that’s available for free. It’s an easy read. We’ve put a lot of common sense and information there.

I just put the link here. [simplydoit.net/ebook] You can download it. It doesn’t cost you anything. That’s the one thing I wanted to mention.

The other thing that I wanted to mention is that I’m going to be speaking live in the room in San Francisco, Silicon Valley at the beginning of March and in Orange County and LA towards the end of February.

If you are not on our mailing list and want to be informed about the details, please send me a comment. Send me a private message. Somehow, get in touch with us so we can add you to our email list and you can participate.

When I go out and speak,  I don’t do it as much as I used to do in the past. We’re talking about easily an hour/hour-and-a-half plus questions off-session, and I teach. This is my style. I don’t go out there with a sales pitch. I really teach, explain. I go into much more detail about everything that I just explained now and much more.

I’ll wait another 20-30 seconds and see if there are any questions coming on. If they’re not, I want to thank Guy who asked a question. Guy, thank you very much. I know I owe you an answer on a personal level, so I will get to that. I just haven’t had a chance. Thank you for taking the time.

I know it’s late where you are, so I really appreciate all of you guys who are—I see some of the names that are based in Israel. Thank you guys. Friday night. Taking your time from your maybe family or your own Friday night relaxing and spending it here.

By the way, along those lines, if you think a different time of the week is better than Friday morning, and you want me to take a note of that, by all means, just say so, “Dani. We would love to do it Saturday.” Remember, I’m Pacific time, so we would love to do it Saturday morning/Sunday morning/Sunday evening, whatever. Feedback is appreciated.

If there is a topic you want me to talk about in the future that I feel comfortable talking about, leave the comments. I’ll be happy to consider it for sure.

Excellent. No additional questions are coming. I’ll use this opportunity. 30 minutes. I think that’s plenty. I hope you benefited from today. We talked about the formula to decide where to invest, not what to buy, but which market, how to choose an area to invest in, the formula that I’m using, the formula that most people do not have. That’s what we talked about.

I want to thank you very much for taking the time from your evening, your afternoon, your morning. I really appreciate it. Have a terrific weekend. I hope to see you at either one of our events or get in touch with us for a one on one session, whatever works for you. That’s fine. The most important thing, be safe with your investment and be successful.

Have a terrific weekend, everyone. Bye-Bye.

Announcer: Congratulations. You are one step closer to success in real estate investment. You’ve been listening to Real Estate Investing Talks with Dani Beit-Or. To learn how SimplyDoIt can guide you through the real estate investment process and achieve nationwide success, visit us on the web at simplydoit.net. Thanks for listening.