Cash Flow vs. Appreciation Markets: Which We’d Choose (Rookie Reply)

0:00Ashley Kehr:How do you pick the right market as a new investor? Today, we're answering questions just like this to help all of our rookie investors make sense of real estate investing.

0:09Tony J. Robinson:From making sure your contractors aren't overcharging to knowing how to price your property, this episode could be exactly what you need to help you make your next day.

0:23Ashley Kehr:This is the Real Estate Rookie Podcast. I'm Ashley Kehr.

0:26Tony J. Robinson:And I'm Tony J. Robinson. And with that, let's get into today's first question. So our first question today comes from Oscar. And Oscar says, is it unusual to ask your property management company to get multiple bids for repair work? I've always found that contractor pricing can vary significantly, and getting a few estimates helps me make a more informed decision. In this case, I'm getting some pushback from my management company after requesting a second bid on repairs. Just curious, how do others handle this? Is it standard to expect multiple bids? Or am I a crazy out-of-state investor who has no idea what he's doing, which also may be true?

1:01Tony J. Robinson:So fair question, Oscar. And I know what the experience is like for me, Ashley, being a long-distance investor, but you've actually got a lot more experience here. So what's your take? Is Oscar in the right for wanting his PM to get multiple bids, or is he a crazy out-of-state investor?

1:17Ashley Kehr:So I have two different takes. So when I was running a property management company, our rule was always three bids for like over five things that would be over five thousand dollars. If it was like a plumbing thing that would be, you know, two hundred dollars or whatever, like we would not go out and bid out different plumbers like we would for, you know, capital improvements mostly or, you know, apartment turnovers that needed a remodel. Things like that, we always bid out. But when I had a property management company, I also got pushback. They would do it. They would also take consideration as to my preferred vendors that I would want to use.

2:01Ashley Kehr:But it was a very difficult process. And there was like a lot of pushback and just kind of like groaning to have to go and do that. Because a lot of property managers have their preferred vendors. And actually what I came to realize was that there was some kind of with the, I think it was a plumbing company. They had the owner of the property management company had an ownership interest in the plumbing company also. So like there was, you know, huge benefit to using that contractor to the owner of both. So that could definitely be a part of it, which there's nothing wrong with that. I mean, you see lots of real estate investors build out multiple arms to their real estate business, but that could be a piece of it.

2:51Ashley Kehr:But I think stick to it. If you want multiple bids, go ahead and ask for the multiple bids, especially if it is a big project. I don't think if it's replacing a toilet or, you know, even anything under a thousand dollars, you replace a hot water tank that you should give much pushback because with it being at that lower price point, it's not going to be a huge difference. And the preferred vendors of the property management company most likely are going to make the properties of the property manager a priority. Like the plumbing company we work with, we can text them on a Saturday morning and say, we have this property with no heat.

3:31Ashley Kehr:They will be there because we give them so much business. So you also have to look at it that way too, that it actually can be a benefit that your property manager has these preferred vendors that do a lot of their properties that you might get better service. And that definitely is a huge benefit.

3:47Tony J. Robinson:My experience was pretty similar to what you shared, Ashley. The property management company that I worked with also owned a maintenance and home improvement company. And as part of the property management agreement, it was very clearly stipulated that their management or their maintenance arm would be responsible for all of the repairs. And if we wanted a bid outside of that, that was fine, but it was our responsibility to do that. So they would send us the issue and say, hey, here's our maintenance company's bid. Do you approve? Do you reject? Or do you want to get your own bid? So they put the onus on me as the owner to say, well, hey, it's fine if you don't want to use us, but then you've got to go out there and source the right person to do this job for you.

4:30Tony J. Robinson:So that is an approach. And I think to Ashley's point, it probably is a little bit different. But I think that's why it's important for rookie investors to just ask those questions up front of, hey, how do you handle maintenance? What is your process for bidding out jobs? Is there a threshold where if it's under X amount, then you're going to do Y? if it's above X amount, you're going to do Z. And just asking all of those questions and getting that clarity up front, I think is what's important. But obviously as a rookie investor, you don't know what you don't know. So I think that's the purpose of this episode is to start laying those seeds.

5:04Tony J. Robinson:But Oscar, the one who asked this question, I think if you're feeling this and there was never clarity from the PM about what their process is, I think it's totally fine to address it and say, I feel like I'm getting a lot of pushback every time I ask for multiple bids. is this going to be an issue? Or, Hey, what is a better process that we can agree on to make sure that when there is an issue, we all know what to expect. But I think, uh, not posing that question to them could just cause more pain and more turmoil down the road.

5:34Ashley Kehr:Yeah. And I think go over your property management agreement, um, and see, does it clearly state what this process is? And, you know, it just wasn't clear to you when you signed, but also like Tony said, reach out and And be completely honest instead of just continuously fighting it, just saying, you know, I want to understand why you don't get a second fit on repairs and, you know, ask them to enlighten you. And like maybe you can agree with the decision or not, but at least you're giving them the opportunity to explain, well, we get a 10 % discount for you, which also can be common because, you know, we have a good relationship with them.

6:14Ashley Kehr:We know it's not going to be better, whatever. But I think if you really want that multiple bid, go ahead and keep pushing for it. Don't give up unless it clearly does stay in the property management agreement that you signed that they'd actually don't do that.

6:30Tony J. Robinson:And, Asha, I think just one last thing to add here is that these sound like small things, but they really can add up over the course of a year. Let's say that you're netting maybe$300 a month on your rental. but every single month there's an expense from your PM's maintenance company for$100,$150. And every month it's just like small things, but they keep sending their company out there. That's half of your cashflow potentially being gone to these little maintenance things. And if you can reduce that by 25 % or 50 % or 75%, or maybe you realize it's not even needed, that adds money straight to your bottom line.

7:09Tony J. Robinson:So I think sometimes we think about saving money as an investor and like these big capital expenses. But oftentimes it comes down to these little leaky holes and how can we fill those little leaks and how can we make improvement around the margins, around the edges? And that's how you end up with more money at the end of the year.

7:25Ashley Kehr:Honestly, I was thinking about this the other day that I think one of the hardest parts of being a landlord is the, not the big maintenance expenses or repairs and handling that and finding someone to do it. It's the little odds and ends handyman stuff, like little things that, you know, a plumber isn't going out to do, or if they go do it, it is expensive because they're charging just $150 just to show up. Like, um, you know, the, the toilet handle to flush falls off. Like, Like, okay, that's not a huge thing to, that's an easy thing to fix. But like your tenant could, you know, be that one that's like, I'm putting in a maintenance request for this.

8:11Ashley Kehr:I'm not going to, you know, do it myself. And, you know, so I found like little things like that or like a drawer falls off or is breaking or whatever. Just think of all these little things. I feel like that is literally the hardest thing to do when you're self-managing is find a really good handyman that will take care of those little things for you and still not charge you an arm and a leg for it. And I think the big convenience of having a property management company is they usually have somebody in-house or have someone they work with that will go and take care of those repairs and take care of those little minuscule things.

8:52Ashley Kehr:but then those things start to you know add up and they can be expensive just to have them go out so I think that the way that I've gotten by in my portfolio is partnering with people that are actually good at that kind of stuff as in like okay I'm doing everything in the property management software you know I'm making sure rent is collected I'm handling that I coordinate things with the bookkeeper. I send our tech stuff. But your job is if there is something that is not worth paying one of our big contractors to come in and do, you're going to go and take care of it because it's something within your wheelhouse and you actually have experience and knowledge.

9:38Ashley Kehr:And yes, this isn't the most effective way to grow and scale because I'm highly dependent on them, but they're also highly dependent on me to do all the admin and the behind the scenes stuff. So I I've just really been thinking about that lately is how once you find a really good handyman, like hold on to them because that can be a really hard piece. So I guess the whole point of this is that you may be paying more, but if you were doing it on your own, it may actually be, you know, more expensive or more difficult to find people to do some of these smaller repairs and in a timely manner too, you know?

10:15Tony J. Robinson:Ash, I think it's so interesting because it's finding reliable people is such a big challenge for real estate investors. It's interesting to me that no one has found a way to really solve that challenge. I mean, we have Facebook groups, there's Yelp, there's Thumbtack, but those like the best handymen typically aren't even on those places, you know, and it's like, you're finding them through referrals, you're finding them through your agent or from your PM or wherever. So I don't know, for everyone that's out there listening, if you can solve that issue, you'd have a line of people banging down your door to find the right person.

10:49Ashley Kehr:And because it's not only about finding someone who's good at it or that they're cost effective, but also availability. Like somebody doesn't want to be sitting at home waiting for you to call them and say, hey, we need maintenance done at this property. Can you drop the TV remote and go and fix it? No, most people need other sources of income than waiting for your $100 service call that may happen once a month, five times a month. So like availability is also a really big thing where most contractors or handymen are like working on jobs that are actually paying them to live rather than waiting for a little maintenance request to come up.

11:32Ashley Kehr:That will take five minutes and, you know.

11:34Tony J. Robinson:Maybe it's like an Uber for the trades person. It's Like you open up your app, you punch in what you need. It gets shout out to all the different plumbers that are available and in your area. They can all electronically bid on that job. And then you can hire someone through the app. There's a billion dollar idea for someone right now. I just want my stake whenever you build it up.

11:55Ashley Kehr:Up next, how do you select the right market for your first investment, especially when funds are tight? But first, a word from our show sponsor.

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15:10Ashley Kehr:Okay, you guys, welcome back. We are here with our second question. So this question comes from Sean in the BP forums. I'm an aspiring investor from Los Angeles. Tony, again, is this your son? Priced out of local investing. So now I'm stuck at the stage of choosing a market. I've saved$60 ,000 expecting to reach 70 to 80K soon and will earn 10 to 35K monthly selling solar. My fiance qualifies as a real estate professional, which helps tax-wise. My goal is transitioning to full-time investing within five years. I'm considering BRRRS in Detroit for affordability and capital recycling or buying in Tampa for appreciation potential and short-term rental opportunities.

15:56Ashley Kehr:Tampa fits my budget but limits renovation options and cash flow. I'm open to market suggestions or alternative strategies to optimize this first investment as I finalize savings. Okay, well, first of all, we always have to applaud anybody who is diligent with saving their money and doesn't outlive their income and overspend. So congratulations, Sean, on being able to save some money. And the first thing that I think of here is Detroit, doing a burn Detroit. We actually just did an episode with an investor, a rookie investor, who invested in Detroit. He was an out-of-state investor. I can't remember where he lived, but he was investing long distance into Detroit.

16:44Tony J. Robinson:I think the biggest thing, though, is, you know, Sean, like, what is your goal in investing? Like, what are you trying to get out of it? Because you mentioned two different kind of ideas here. Burring in Detroit for cash flow, it seems like, or buying for appreciation. And those are two competing goals, cash flow versus appreciation. And it's very rare that you find a market that gives you an equal dose of both of those. So I think the first question is, what is more important to you right now? Are you just looking for a safe place to park the excess money that you're earning? If so, appreciation maybe is a better play.

17:23Tony J. Robinson:You said your goal is to transition to full-time investing in the next five years. So I'm assuming it's cash flow. And if that's the case, then who cares about the appreciation play in Tampa? I don't know if your properties will appreciate enough in five years where you can realistically use them to walk away from your day job. So in my mind, the Burr approach seems to be maybe the better strategy because to your point, you can recycle the capital that you have, start stacking multiple properties on top of each other. Maybe you're leveraging different strategies like midterm rentals or renting by the room to supercharge the cash flow.

17:55Tony J. Robinson:So I think just hearing where you're at and what your goal is, your time frame, I would probably lean more so towards the BRRRR than buying a turnkey property in Tampa. What's your take, Ash?

18:10Ashley Kehr:So I think one of the other things to really consider with this outside of what is your goal, what are the opportunities, is to analyze a deal in each of those markets. And what does the actual outcome look like? So if you're going to do a short-term rental, we have the short-term rental loophole where you can write off 100 % bonus depreciation of the property with a cost seg. So I think not just looking at the cash flow or doing a BRRRR or the equity in each property, but also other benefits that can come with it too, such as the tax benefits. Also, too, look at appreciation. So you did say Tampa has more appreciation play.

19:02Ashley Kehr:Look five years down the road for either property. So does one have a bigger potential down the line looking, comparing the cash flow that it would make plus appreciation in the property? So like I've had properties that have cash flowed very good, but they literally have had no appreciation. And I compare that to the properties that cash flowed somewhat decent and had great appreciation. I'm way better off playing the appreciation route. Like it's been nice having that little bit of cash flow. But looking back in the 10 years I've been investing, I would pick the appreciation play over more cash flow every day, especially since you're still working that you're not going to be fully reliant.

19:54Ashley Kehr:but you could take this property that you're buying for appreciation, have a little bit of cashflow and then plan to sell it three years, five years, do a 1031 exchange into something bigger that generates more cashflow and more appreciation. So just from my own experience, I like the option of the appreciation play more.

20:15Tony J. Robinson:And it's interesting, you know, Ashley and I are coming to this from kind of two different angles, but I think at the end of the day, Sean, like what's most important is what aligns best with what it is that you want. And I feel like a broken record sometimes because I go back to that so often, but I do that because I think it's a mistake that a lot of investors make is that they just jump in without really having a strategy. And it's like the ready fire aim strategy where you shoot first and ask questions later. And sometimes that works, but when we're talking about laying a good foundation, I think it really is important to understand what is it that you're trying to get out of this?

20:48Tony J. Robinson:What do you want? What are your resources? What are your skill sets? Put all of those things together. And oftentimes when you do that, it gives you more clarity on what makes the most sense. And honestly, the truth is both of those strategies could work. Maybe you do buy a bunch of properties that are appreciation heavy. And maybe instead of it being five years, it's out of your job. Maybe it's 15, right? Maybe it's 10, somewhere in that ballpark. And you've got enough equity built up over that 10-year timeframe where now you can start refinancing and you're getting money back to fund your lifestyle or buy more deals.