Bruce Norris is joined this week by Rick Solis. Rick is a real estate investor, property manager, note buyer, options investor, real estate appraiser, and a good teacher.
Bruce and Rick began by discussing his favorite subject: rentals. Bruce asked why he decided to manage them himself. Rick said at one point in his appraisal career he had 4-5 employees working for him. He had payroll taxes and a desk, chair, computer, and phone for each one. If any of those things broke, he had to take care of getting it solved. At this point he realized working with employees was not for him. He managed most of the properties himself simply because he did not want to hire a property manager or employees.
In hindsight, he thinks he would have done a lot better and had more houses if they had at least one employee. Rick did put some of his rentals with property managers, about 10-20% of it, and that is not so bad. They do not do as good of a job and things cost more, but you do not have to deal with the property. Where he can get it repaired for $150, they might be paying $300. However, he does not have to deal with it.
Bruce asked about the selection of tenants and if they were on par. Rick noticed the tenants he got with the property managers worked better than the ones he had. This is surprising because they would advertise everywhere, get 30 calls, show it to 10 people, get 5-6 applications, and take the very best of the applications. Still, it was a 50/50 shot whether they would be evicting the person or it would come to a successful conclusion. There were all kinds of scenarios. Some were not evicted, they just took off without paying the previous month’s rent. Others destroyed the property. Half the time, it was a crapshoot for any of the tenants after 2012.
Before 2012, they were getting people who used to be homeowners. This included those who had done a short sale or lost their house in a foreclosure. This was a much better tenant for them, and this was in 2010-2011. It seemed in the High Desert once you got to 2012, people who were good tenants left and those who stayed were bad tenants. It was a 505/50 shot of being a problem.
Bruce asked Rick what he would do to determine who was a great tenant or not. Rick said if they had been on their same job for a while, did not live in the High Desert, and were moving in from some other area, that usually worked out really well. The great tenants were the ones who came in from other states. However, if they lived up in the High Desert or had switched jobs or moved a lot, those were not good tenants. Bruce asked if credit was something he had looked at, which Rick said he did not focus a lot on this. He made sure they did not have any prior evictions, then they would contact the current or previous landlord. It was better to call the latter since the current one will tell you anything possible to get rid of the tenant, while the previous will tell you everything. Rick discovered that both landlords actually own those rental properties. They wanted to make sure they were not talking to their cousin or their boyfriend.
Bruce asked what the common reason was for people renting and not owning. Since the first segment lost their property, Bruce wondered what happened to the next group of people and if there was no way they could afford to buy at even a discounted price. Rick said he noticed the High Desert has a high shift in demand and many people are not interested in owning. Down in this area it might be different, but the age group that aggressively pursued houses, 25-35, a decade ago is not interested in owning anymore. Bruce wondered if it is because the reward for aggressive price increases is not there anymore and the incentive is bland. Rick said it could be this or it could be they saw people lose previously or they just do not have confidence in their ability to maintain and fix up the property. It could be they do not see an exit payday. You are going to buy it for $200 grand and it will still be worth this ten years from now, so why bother?
Bruce asked if most of the people who rented from Rick work within 20 miles of the rental. Rick said most of them did. They were either truck drivers or worked in the High Desert. He would not rent to them if they worked too far away. He remembered receiving one application from a guy who worked in El Segundo. They turned him down since it would have been an hour and a half drive just one way.
Bruce remembered a buyer for Victorville who was the Riverside occupant as a renter. He could not afford to buy in Riverside, and they were willing to drive an hour just to get the price tag. They would not do this now, but rather they would stay in Riverside and rent. They are not as motivated as they were; but it is interesting that the local people were probably never what pushed up the market. This is how it works now. When they sell a house and list up there, then there are two MLS boards. One is up there and the other is down the hill. Rick said most of his buyers come from down the hill where they receive much higher offers. If you run the comps in the two MLS systems, about 1/3 of the sales only show up on the down-the-hill MLS and not up the hill. These are always the highest comps. The appraisers who live up there do not use the MLS down here. If you have an appraiser up there, you will come in low.
Bruce asked what the typical family unit would be that was renting from him. Rick said it was either a married couple or a man and woman with 2-3 kids. However, by the time a lot of these people moved out the tenants they rented to changed. One of the spouses either moved out, or they switched up and there was a different person living there. Rick said things changed for about 1/3 of them.
Bruce asked what the typical inventory was he targeted to buy. Rick said he went after all the same things, which included property built after 1978. This was because they did not want to deal with lead-based paint issues. These also included 2 bedroom, 2 bathroom homes with a 2-car garage and 1300-1500 square feet. Bruce asked if he had a lot of competition in that pocket for rent. Rick said the rents for those went from $995 to $1195, and this seemed to be what everyone could afford. At $995, you attract more applicants and can have more of a selection. It comes down to you receiving the 30 calls, 10 people seeing it, and 6 applications on a house in above average condition.
Bruce asked Rick what factors dictate the type of tenants he will have, whether it is area or inventory. Rick said it is more area and most people they rented to did not want to live up there, but it was all they could afford. They would have done much better and made a lot more money buying half as many houses in Rialto, Fontana, or Ontario versus being up there. This was an error in judgement putting all their eggs in one basket.
Bruce asked what percentage they had to evict. Rick said it was about 10-20%. There was some very large cash offers to move out before an eviction took place, and nobody took them up on the offer. He has one going now that is a duplex in Apple Valley and runs for $695 a month. Rick sold it and thought the one living there was the good tenant, so they got rid of the one in the back. This guy never called for anything, always paid on time, and they finally got in for inspection. They found out he had five cats in there, and he did not own a litter box or clean up anything. Everything in the house was destroyed. Everyone flipped out, including agents and inspectors.
He offered him a month’s free rent and $2500 cash on top of his deposit to be out by the end of July. He did not respond because he had been on the internet and knew he could probably squeeze six months of free rent out of it. He thought he could fight the process, which got longer and longer. It gets easier for tenants to squeeze out six months if they fight a good fight, which is not hard for them to fight. Anything out of pocket for him would be less than $500. The multiple trips to court alone would probably run them $2500. He had even offered a mover for the guy while he looked for a new place, and he still got no response. This situation seems to be the norm today.
Bruce asked Rick how often he was called by the new landlord in a situation where he had to evict someone. Rick said this never happened. If he did, he was not sure how he would handle the call. He would not want to be sued, but he would find some way to let them know he would not rent to that person again. Rick had rented properties prior to this era, so Bruce wondered how different the tenant was this time. Rick said it was actually very successful, especially renting in the High Desert from 2000-2006. Grants and quality of tenants were much higher, and he never had to do an eviction. It was completely different because people wanted to live there.
In additions, things were much more stable. Incomes were more stable, people kept their jobs longer, and this was what really enticed Rick to go back in 2010. He was renting these things for $1300, they were selling for $350, and he wanted to load up since they were now offering them for $65 grand now. He did not anticipate the quality of the tenant had declined that much. You hear about the magic term “positive cash flow,” so Bruce wondered what is required to end up with one. Rick was not sure; but he said what doesn’t work is if you rent a house for $1,000 and your PITI payment is $700, that last $300 a month is not positive cash flow. That will easily be gobbled up to vacancy, maintenance, evictions, water heaters, massive rain storms, and septic tanks. That extra 30% a month just goes toward ongoing maintenance, repairs, and vacancy.
Very few rentals have this spread if you are buying them new. If you are buying them free and clear, that is a different story. After having 60 properties he was dealing with, Rick was able to say that on a huge pool he found out the percentage numbers. Sometimes he would only have 5 and things were going great, and he was keeping the whole 300. He thought when he got the other batch it would be the same story. He had them all fixed up and the tenants moved into them. He thought everything would turn out great, and it just did not play out that way. You will lose about 1/3 of your rent just towards those if you are in a low-income, blue-collar area. This is not even talking about taxes and insurance, but miscellaneous.
If you are talking about taxes and insurance for a property manager, half goes away. If you receive $1,000 a month and have a property manager, $500 just goes to covering expenses, insurance, taxes, and the property manager himself. Because of this, your mortgage payment better not be more than $500 a month long-term. You may have a year or two where it is winning; but if your air conditioner goes out then there goes $3 grand. This takes out a lot of positive cash flow, and this is with getting a deal. This could be somebody without a permit and hoping he doesn’t need a crane to get onto the roof. If you are getting the contractor from Glendora to put it in, then there goes four years of positive cash flow.
Because of things like this, Rick is not excited about having a rental property at all. However, he does have a couple rentals in good areas, and that is completely different. Those tenants never call, pay early, either move or stay for a long time, and if you do not bump the rents they will stay forever. Rick finds it hard to make the numbers work on this. When you are renting a house worth $600 grand at $2,500 a month, you will have to put $200,000 down just to make it even. This is a lot of money to tie up just to break even.
Now that Rick has done a lot of liquidity, he knows what trust deeds are and prefers these. He can buy a rental in Hesperia for $200 grand cash, and he may get $1,200 a month from that. When all is said and done, if he has a property manager he could end up with $600 a month profit, which is about $7,200 a year. This is less than 4% of his money; or he can lend that $200 grand out and easily get 7-8% on a 60% loan-to-value type deal. He can even lend it to the person buying the $200,000 house up in Hesperia. He could lend him 60% on $120, and at 8% he would be getting $9,600 a year. He is not worrying about anything, not the house or the tenant or eviction. He does not have to worry about the city wanting to inspect his house or changing the smoke detector laws and having to spend more. With 60 houses, $150 a house is $9 grand just for smoke detectors where they were already installed.
None of these are things he has to worry. He can have the guy automatically send the check to his retirement account, be anywhere in the world, and the money is there. If he does not make the payments, he can send in a check for $1,000, start a foreclosure, and that house he paid $200 for is now owned by Rick. He picked $120 plus the foreclosure fees. A lot of people get locked into a certain percentage of their assets into real estate because they have a lot of profit and do not want to pay tax. Therefore, they 1031 exchange and stay in something.
This was something Rick did a lot of in 2006, and this did not work out well for him. Bruce noticed areas like Dallas, Fort Worth never went up when he was there. It was not a case of, “Let’s go there so it goes up” because he was hiding. It just probably wouldn’t go down. Rick took 2 or 3 rentals in Barstow and walked out with $150,000 in profit, which he rolled into one house in Victorville and one in Apple Valley. He picked $175 for each house in 2006. He got rid of the one in Apple Valley, for which he received $90,000. There is also one in Victorville he is selling right now for which he is getting $146 when he had paid $175 for it a decade ago. He spent $20 grand on getting the tenant out, rehabbing it, and fixing everything. He had about $8 grand in closing costs, so he was losing about $50-$60 grand on that one. He did not want to pay the tax on that $150. The tax would have been $40,000, which means he would have walked out with $110,000 after tax that he did not want to pay.
Bruce asked if he does a fair amount of things other than real estate investing. Rick said he is in with a few other investors that buy apartment buildings who will each pony up, all sophisticated guys. They are usually apartment buildings that have some value added feature where they can add extra units or the rents are below market. They will each put up some money and take a small sliver of ownership in that. Through this they control the outcome. He also likes a lot of mutual type investments called ETFs in the Stock Market where he can get 3-4% dividends. He would rather have 4% dividends on 50 different stocks than have that rental house and get 3-4% with a tenant.
For Rick, having a tenant in a rental house is not for him if the house is not going up in value. There could be several things wrong with the place, or the tenant may move soon. He would never buy things like this out of state in areas like the Midwest where a house worth $100 grand now may be worth the same a decade from now. Most of the people Bruce and Rick know with phenomenal net worth have that pile of real estate. Bruce is not in love with rental real estate, but he does find tax-wise he has a certain portion stuck. Without rentals, you can shield half of your income with a nice rental portfolio. He has not figured out how he is going to deal with this yet. He may have to pile up on rental houses at some point, but hopefully not.
Bruce asked Rick who he calls if he has a real estate problem. Rick said he will either call Bruce, Mike Cantu, or Tony Alvarez. He may also be in a group of other investors who will ask questions about this and come up with an answer really quick. Usually you will get 5-10 answers. It is good to have a little network of people who have been through it. Rick is trying to structure his life so that he does not have to ask that kind of question.
Bruce next asked Rick what his favorite newsletter was, which he said is a Stock Market newsletter. Rick does not even look at real estate newsletters because he is so tapped out, although he likes writings by Mauldin. He has a few other people who work underneath him now. Another person whose blog he just started reading was Jim Collins. He is also really obsessed with the people who have an amazing lifestyle who sold everything and live in RVs, traveling around the country. This is a lifestyle Rick wants to have, at least for a little while.
Bruce also asked Rich about his favorite motivational trainer, who he said is Zig Ziglar. This was the guy who got him going when he was having a hard time as a teenager. He began listening to and reading things by him, and he even had his cassette tapes. Bruce spoke to him one day after listening to him, and he actually has a legitimate unique accent. One of the Bruce’s favorite stories was when he got kicked out of the private club he was not a part of, and he was also kicked out of a pool because he was not a member. In his residence, he built a pool that was one foot longer than the pool at the club. He put an arrow in it, and the tip of the arrow was the extra foot.
Bruce next asked him about real estate training, which he said all he really reads now is Bruce’s information, especially on market timing. Otherwise, he does not pay attention to real estate at all, doesn’t even attend the club meetings. He had known that a couple good books and Bruce’s market timing reports are really all you need. The books he likes are by John Schaub as well as Jimmy Napier and Jack Miller, all who are out in Florida.
Bruce went through a period of being fired five times in a row, and after the fifth firing the confidence level about work was so low that at every lunch he read the Want ads. He would always look for the next job until he realized what really motivated him. If you can get to what you love to do, then you are not working a day in your life.
Tune in next week as Bruce continues his discussion with Rick Solis, talking about his experiences as a property manager and what he does for investing with non-rental real estate.