REAL ESTATE

Rookie Investor? Never Make This $40,000 Mistake

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This episode could make you $40,000. Seriously, one property management mistake cost our own expert investor, Dave Meyer, anywhere from $30,000 to $40,000, BUT it’s easier to avoid than you think. If you’re a rookie real estate investor, this single mistake could sink your portfolio and put you back years on your journey to financial freedom. So, what’s the mistake you must avoid, and how do you circumvent it to make more money while having less stress? It’s Real Estate Rookie episode 400, so let’s save you $40,000!

Dave has been investing for over a decade, and he’s made his fair share of mistakes, but this one takes the cake. One simple property management judgment error sent his short-term rental trajectory off a cliff, with a filthy house, no bookings during the peak season, safety problems that left his property in jeopardy, and guests leaving less-than-flattering reviews. But this is a mistake anyone can make, so how do you avoid it?

In today’s episode, we’ll get into the nitty-gritty of what cost Dave $30,000 – $40,000, the exact way he’d prevent this from ever happening again, what you should look for in a property manager BEFORE you hire them, and the contract clause that could kill your cash flow!

Ashley:

This is Real Estate rookie episode 400, but could you stomach losing 40 K? How long should you go before you fire your property manager? My name is Ashley Care and I’m here with Tony j Robinson,

Tony :

And welcome to the Real Estate Rookie Podcast, where every week, three times a week, we’re bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, before we talk about today’s guest, I think Ashley, we just got to reflect and appreciate the fact that we’ve gone through 400 fricking episodes.

Ashley:

I know that’s a lot of weight.

Tony :

We’ve made

Ashley:

It,

Tony :

We did it 400,

Ashley:

Right? A big stack, 400 episodes.

Tony :

Now Ash, we’ve been so fortunate because the Rookie podcast has touched so many lives and we’ve been able to talk to a lot of rookies at BP Con or meetups, whatever we’re doing where they’re like, thank you guys so much for everything that you’ve done. But I think we always try to remind people that obviously we try and do our best to provide value, but the true value of the show comes from our guests and them sharing their stories and sharing their experiences, and from our rookie audience continuing to support the show. So I think from Ash and I both just want to give a big heartfelt thank you to all of our rookies for support in the show,

Ashley:

100% and not only our guests in the rookie community, but being the rookie community members that are engaged, asking your questions for a rookie reply. We just did an episode where we learned about lean prohibition, where Tony and I had no idea what that was and we had to go down this rabbit hole researching. So thank you guys for always taking the time to ask your questions and may not always be the easiest to be vulnerable and put yourself out there asking these questions, but it’s helping so many other people learn, just like Tony and I learn every single day, something new on this episode. So we love the rookie community. Thank you guys so much for listening and for being so engaged in such a great community supporting each other.

Tony :

And last, we got to give a big shout out to the team behind the scenes for the Ricky Podcast. So our producers, Danny Eric, obviously we couldn’t have gotten to 400 episodes without all the hard work that you guys do. You guys make it so easy for me and Ashley just to show up and hit record. And so if you guys ever meet Danny and Eric, make sure you give them a big round of applause as well because they make the show possible. So today going back to our guests, we are here with Dave Meyer, who is the host of the BiggerPockets on the Market podcast, and he’s here to share some lessons. He learned going through a 10 31 exchange, how he landed in a vacation market, and even though it was kind of some rough roads, so had some pretty good returns, and he’ll detail what happens when a property management company owns your short-term rental listing and what the offboarding of that property management company looks like and some of those details that can pop up to maybe make it a little bit more difficult for you. Now guys, we aren’t here to scare you, but to share with our rookie community just how to manage these bat situations. So if you have a story you want to share about a tenant, a deal, a contractor, or anything real estate related, submit your personal horror story for a chance to talk with me [email protected] slash reply. Now let’s welcome Dave into the podcast.

Ashley:

Dave, welcome to the show. I mean, this is exciting. A lot has happened between you and I. In the last month we partnered on our first joint venture deal together, and now here you are on the Rookie podcast to get emotional and deep with us on a horror story. So Tony and I are here for therapy, so lay down on the couch and tell all

Dave :

Well, thank you. Hopefully our deal that we’re partnering on goes better than the horror story I’m about to tell you.

Ashley:

So give us a little background into this property.

Dave :

So I sold the property in Denver. I was doing a 10 31 exchange, and for those of you who’ve never done a 10 31 before, there’s a very tight timeline where you have to reuse your money. And I had this deal lined up in Denver that was supposed to be really good. And then literally I think two or three days before the deadline, my agent called me and told me that the permits for the A DU that they put in were not legal and there was going to be this whole big problem. And so I’m like two or three days out, I had to cancel that contract and I wound up just telling him, you know what? Let’s forget about Denver. Where to that point was the only place I had ever bought real estate. And we went and looked at every single property that was on the market in this small ski town in Colorado, wound up finding a place, and it actually, I’ll tell you the horror story part, but it was a great buy. That part I actually did well.

Ashley:

Well, it also sounds like finding out two days before a 10 31 exchange, you’ve lost your deal and the timeline real quick, can you explain what a 10 31 exchange is?

Dave :

Sure. So yeah, 10 31 is basically when you sell a property that you have owned for, I think it’s at least a year, you can reallocate the proceeds or the profit from that deal into a kind investment without paying capital gains, which is hugely helpful for investors. So if you sold the property made a hundred grand, you could take that a hundred grand rather than paying 20 grand in capital gains tax, you could take the whole a hundred grand, put it as a down payment into another property, and that allows you to invest more. You can afford more expensive properties and you can compound more of your money.

Tony :

But Dave, there’s also, like you said, a little bit of a time pressure with the 10 31 exchange. So what kind of had you under the gun to find a deal so quickly?

Dave :

So the way it works is you actually have 180 days to close on a 10 31 exchange, but you have, I think it’s five days to identify. It’s this weird process where you basically have to file with the government that you’re, I think you could do three or either four depending on the price points of the property properties that you are considering. And then you can close on them. You have another four and a half months to do that. And so I had this deal locked up, I had it under contract I think for 30 of the 43 days, and then something just came up and I was left scrambling. And worst comes to worst, you pay the tax. But obviously that wasn’t the intention of selling this deal and I really didn’t want to. And so I was fortunate to be able to find another deal in just a couple of days. But I always used the story to recommend to people. That’s why you should always be analyzing deals and knowing what’s going on in the markets that you invest in because you never really know what’s going to happen. And having a pulse on today what’s going on can really benefit you. So

Tony :

Dave, you waste like 90% of your 45 days and you have this mad scramble to try and find the next property. So I definitely want to get into how you identified the property and then what happened after you actually closed. And we’ll get into that after a quick word from today’s show sponsors.

Ashley:

Thank you everyone for taking the time to listen to our show sponsors and to check them out. We really appreciate it. They make the show happen along with the rookie community. So thank you guys so much. Now we’re back here with Dave who has two days left to find a property. He’s about to move out of the country. So Dave, at this point in my life, I have already have my closing check ready. I’m like, if I need to have something done, I cannot sleep. If I’m having this tight of a timeline, what is going on with you emotionally at this point?

Dave :

I was honestly a little panicked but a little excited because I had been eyeing the ski town in Colorado for three or four years and just never had the nerve to go buy something. And I had been doing analysis of the market for a long time. I knew exactly what I wanted to buy and sort of even had a buy box. And so it’s not a big area, it’s like a county with I think the full-time population is under 5,000 people. And I called my agent and he was like, okay, there’s 11 properties on the market. I was like, we’re going to go see all of them. And one of those 11 I am buying. And luckily it worked out, so I got a little bit lucky.

Ashley:

Real quick, can you tell us the numbers on that

Dave :

Deal? Yeah, so I wound up buying it for 742,000. So it’s a pretty expensive single family home, but ski towns in Colorado are quite expensive. And the reason I like this area is because a similar house in Keystone, Breckenridge Vale, some of the more well-known ski towns in Colorado would probably literally be four to five times more expensive. And there’s just always demand for skiing. It’s very close to Denver. And so I felt like it was going to pop and was willing to pay up for it.

Tony :

So Dave, you saw 11 properties that kind of fit your word buy box. What specifically about this one made you say, alright, this is the one I’m going to move forward with?

Dave :

It was actually the first one we saw. I walked out onto the porch and it had this amazing view and I was like, this one’s it. We actually went to go see the other 10, but I don’t know, Tony, you probably know from short-term rentals. There’s just something like having a property that’s just really special and it just felt super special and there would be demand. But part of it actually went back to my data analysis. So I bought all this data from Air DNA and it showed that if you had a four bedroom or bigger, it was going to be much better revenue. People go up with their whole families. And this was actually a three bedroom, but there was a 2000 square foot basement that was just a big open space. And so I knew I could add bedrooms and add value, and they actually already had egress windows. And so I knew that for relatively cheap I could actually really do value add from a cashflow perspective and I could use a property that was priced like a three bedroom to bring in the cashflow of something that was more like a five bedroom.

Ashley:

So this was an on market deal or did you deal with the owner directly?

Dave :

It was an on market deal and although there was an agent there, we actually had a very funny experience meeting the owner. They were there during the showing and we pulled up to this driveway and there’s a detached garage and we’re just milling about looking around. And a man walks out of the detached garage covered neck to knees in blood, just covered in blood and holding a knife in each hand. And I’m looking at my agent, who’s also one of my good friends, and I was like, should we run? Do we get in the car, just drive away? What do we do? And he just walks over us completely silently and I was just too stunned to do anything. And he was like, Hey, I’m Rob. Sorry I’m butchering an elk in the garage right now. I was like, okay, this makes a little more sense.

Ashley:

I was thinking, is this going to turn into a true crime podcast episode right now? It’s like,

Dave :

Man, you could be butchering an elk, but could you put down the knives? At least that part you have control over, you can at least just walk out only covered in blood, not also holding a weapon.

Ashley:

And I’m assuming he probably knew you were coming to the property too. That was the precise time you had to butcher

Dave :

It? Yeah, I actually got to know him pretty well over the course of the next few years and he is a super nice guy, but it tracks with his personality now that I know him

Tony :

A little bit better. So the blood covered knife wielding owner didn’t turn you away from this property, Dave. So what happens after you do this first initial walkthrough?

Dave :

So it went great, and actually one of the other reasons I love this house is the guy who I bought it from was a builder. He built it himself and it was just a rock solid place. I think you could see the pride of ownership and pride of construction and it just, everything was done extremely well. And so I bought it and began turning into a short-term rental. This was my first and still is my only short-term rental. And so I went about furnishing it, designing it, and because I was moving out of the country, I started interviewing property managers, which is where the horror story part actually begins.

Tony :

You don’t say,

Dave :

Does that sound familiar, Tony,

Ashley:

Before we actually get into what happened, thinking back now, are there things that you would’ve done different during this time period when you’re seeking out a property manager before you even actually hired them? Are there different things you would’ve done during that process of soliciting a property manager?

Dave :

I think one of the things I learned is I should have inquired about property managers before I even bought this property. It didn’t even cross my mind to be honest. That’s great advice. I was just like, oh, it’s a great deal. But in small towns in particular, there aren’t always good property managers and there aren’t always good contractors and you need to make sure that you can build the appropriate team and operations when you enter a new market. And I did not do that.

Ashley:

I think that’s great advice right there. And Tony, you’ve pretty consistently invested in two different markets until your commercial property that you already had your team built, you knew where it was. But for anyone just starting out, and that’s great advice, especially in small rural towns, you really don’t have a huge pool of selection for property managers. So Dave, you’re riding this high, you just bought this house, it’s sturdy, well built, you got it all furnished and you’re ready to bring in some guests. So tell us about the property manager.

Dave :

So I interviewed quite a few and wound up selecting a large sort of national brand and they were on the cheaper side and I was having a really hard time differentiating between the cheaper side and the really expensive side and what the difference was going to be. And I was like, oh, just take the cheaper one, all things being equal. And it actually went pretty well at first. I think these large companies have some really good processes for onboarding. Their listings were really good. They put in some really interesting technology. The reporting, the homeowner portals were all really good. And so I was pretty happy at first until guests actually started showing up and things just went really poorly.

Tony :

So Dave, I guess looking back just quickly on the analysis or I guess your decision between the more expensive and the less expensive, do you recall what some of those differences were and why they were able to charge? It’s a low percentage.

Dave :

The price, I think it was 18 or 20% is what I was paying for this other one. And the other comps, I had found one that was at 30, but the rate was about 35 in this town, 35% of revenue. And the services they offered on paper if you just line them up, looked very similar. I can talk about now knowing what I know, why they were not similar, but just sort of looking at their marketing material, it sort of looked the same. And what they were saying to me was like, Hey, we’re this big national company, we can reach a level of scale that we can lower prices, which sort of makes sense. And they said, we’re really tech enabled, so we’re able to be extremely efficient. And I am a real estate investor, but I’ve also been in tech my entire career. And that kind of just resonated with me and I was like, oh, I like tech, I’ll go with the tech company.

Tony :

So wait, now everyone who wants to be a property manager knows what to put in their pitch, just use words like tech confused, artificial intelligence, ai. Exactly.

Dave :

But no. Now after listening to this episode, hopefully everyone will know not to get swayed like I did.

Ashley:

Okay, so what was the first thing that went

Dave :

Wrong? For the first few months that I was working with this company, I was still living in Colorado. I would go up there periodically, the house would be just absolutely filthy between guests. And as my wife would tell you, my tolerance for dirt is pretty high. I’m okay with it. And I was disgusted by these types of places. And so as a landlord, you’re allowed to go up there and use it like 14 days a year. And so I’d go up and want to enjoy it and I would just be literally cleaning and fixing things the entire time. And then just things just started to break, not just furniture, but systems that should be working, like HVAC systems and plumbing systems, and the guest reviews would just go up and down. So some people would be doing really well, and then a couple of weeks later we’d get three in a row that were two stars saying that it was really filthy.

Dave :

And so there just seemed to be this really big lack of consistency and I was pretty on it in the beginning and was having hard conversations with them and they’d say, we will switch out your cleaner, we’ll do this and that and it would get better for a little while. And then two or three months later it would just sort of revert back to the way it was. And this is sort of the pattern that went on for quite a while. That was probably a year. And then I moved abroad and then there was the pandemic and I wasn’t able to visit the property for a couple years I think, and it just got worse and worse.

Ashley:

So how long did you have them as the manager?

Dave :

Oh, in total it was like four years. So that’s where I think that the real horror story here is I knew one year into it to fire them and then I didn’t for three more years, which was really the big mistake.

Ashley:

Well, it’s the convenience. The convenience of sticking with it. I did that too with my property management company. I stayed for three years when we probably should have left after one, but it’s the convenience of like, oh my God, having to switch to a whole new company, do a whole new onboarding, having to look for a new property manager instead of trying to make it work. It’s a lot easier and convenient to just stay and to try to figure it out.

Dave :

Exactly. And I had never done this from abroad and I just didn’t know how to do it effectively and not have someone there personally. It’s not like I have friends in town who could go help me out with something. It’s in a town, I don’t really know anyone. And somehow because of the pandemic demand, I was making money, so I was still getting a good return somehow. So I kept being like, it’s not worth breaking up with them because I could just do literally nothing and make money. And that just seemed like a better option until it wasn’t.

Ashley:

So what was the final straw? What was the thing that you were I am out of here.

Dave :

So the reviews were getting just worse and worse and worse, and I was getting really frustrated with it. And I wound up going to Colorado. I was like, I got to go see this place. And so I went up there and all the doors were unlocked. One of them was actually open and I was just like, okay, dirty bothers me. But now it’s a safety issue and it’s like an asset value issue. And there was literally, I just wrote a blog post about this, we’ll put it on biggerpockets.com. There’s just literally mountains of garbage in the garage, just like piles and piles of garbage. And they knew I was coming. I don’t understand how inept they have to be. And so I finally just sort of lost it this time. My wife was with me and she was like, what is wrong with you? You need to fire these people immediately. And so I finally did that and the breakup was pretty rough, but it was well over two.

Tony :

Let’s talk a little bit about the breakup, Dave. Were you under contract with them for a predetermined period of time? What did exiting that relationship look like for you?

Dave :

The unfortunate part was I had to give them 90 day notice and they would service the bookings I had within those 90 days. But after that I would lose all my bookings after that. And that was another mistake I had made was I didn’t time this very well. And so I think I broke up with them in February, which is the tail end of ski season. So I got a few more bookings, but April, may is what is known as mud season in Colorado where no one really goes to the mountains. And then I lost all my bookings for June, July, August, which is actually the best three months. And so I timed it almost comically poorly so that I lost all of my revenue for the whole year. And then the other part of it was that they owned the listing on Airbnb. And so that was part of why the timing was so poor is that they wouldn’t take down the listing until the 90 days. I had thought when I broke up with them, they take down the listing, they would service my existing bookings and that my new property manager would put up one so I could start getting bookings for the summer. But legally that is not what happened. And so I couldn’t really start marketing it until May. And so I got a few bookings, but it was really rough and that, I mean, normally like 60 ish percent of my revenue would come in June, July, August, and I basically missed the whole season last year.

Ashley:

Tony, as a Airbnb expert, what can you do to protect yourself from that happening?

Tony :

So if they wanted to keep the listing up, Dave, unless your contract explicitly stated that you couldn’t also have a listing live, you should have been able to create a listing of your own and just block out the calendar for the dates that was booked under their listing. So there’d be two instances of the same property, one that you control, one that they can control, but people just wouldn’t be able to book the dates that were already booked out by this vacation rental property manager. That way you could still get that revenue coming in for yourself. Lessons learned.

Dave :

Well, that’s another mistake. Should have asked Tony what to do last

Tony :

Year.

Ashley:

Now you see the value I get of the being on the rookie podcast that Tony, I self-serving Tony, my shirt’s a rental.

Dave :

Yeah, man. Another mistake not using resources, your network and friends, it’s too bad.

Ashley:

So Dave, as we wrap up here, what are some of the other lessons learned? You talked about maybe how you should have found a property manager while you were analyzing the market before you bought a property. What else would you add on to those lessons?

Dave :

Yeah, I think a lot of times instinctually what you’re supposed to do in an uncomfortable situation. That’s true in real estate and pretty much everything in life and you just need to sort of rip the bandaid off. And I think that’s what made this more painful is if I had done it a year or two earlier, I could have timed it better and then would’ve just been able to miss the mud season. But I left it till I got so frustrated, I just was like, oh, I got to do it right now. And it sort of put me in a really bad situation where I reacted more just emotionally or just knee jerk reaction after I had known I should have done this for literally years and it was a poorly thought out move by me. And so I think I would recommend just people just having, even though it can be difficult and it can be harder, the breakup and the convenience factor you were talking about earlier, Ashley, it would’ve been way more convenient to just have done it two years ago. There’s been so many more headaches now because I waited.

Ashley:

It’s like that quote like fire fast, hire slow. I don’t know if that’s exactly what it is, but

Dave :

Something like that. Yeah, that is. Oh, and then the other thing that is just not always true but is usually true in real estate, especially when we’re working with service providers is you usually get what you pay for. If people are offering a cut rate service, it’s probably because they’re going to cut rate service on you. They’re not just lowering their price on the goodness of their heart. So there is one more thing where it was just sort of getting kicked when you were down. I was just having this terrible year and then I have a friend of mine who is doing a lot of maintenance on the property and during the transition we had no bookings. I took the time to just do some paintings spruce up the place and a friend of mine was sort of taking care of it. And then he wound up moving out of state for his wife’s job sort of abruptly, and he had been taking care of filling the propane, which all the heat in the house runs on and it just fell through the cracks.

Dave :

And I didn’t tell the new property manager that it had to be done immediately. Long story short, there was this cold snap over a three day weekend in Colorado and the house ran out of propane and so it lost all heat and guests were checking in that day, but it was a long weekend, so the propane company was closed, and so we had to relocate the guests, which cost like four grand. It’s like a Colorado ski town like Christmas week. It’s pretty much the most expensive week possible, my God. And then I had to, thankfully they agreed to this, but I paid the cleaner to stay at the house and there’s a Woodburn stove and they basically just fed the Woodburn stove for three days until the propane company could come out and fix it. Luckily the pipes did not freeze and the house is on the up and up. Everything is going well now, but sometimes when you just think you’re on the upswing, something just kicks you one more time to remind you, you did this very poorly and so it was a very expensive reminder.

Tony :

So you talk about expensive reminders. Dave, I guess if you in totality look at this whole experience with this pm, how much revenue do you think you potentially lost in working with them if you had to ballpark it?

Dave :

I think in the transition a year, I probably lost 30 or 40 grand in revenue, which is crazy. But now that I think about it, I’m like, man, I was making money during the pandemic, but now I see how competent and great my new property manager is. It probably is more, I can never say that, but I feel like there is also this opportunity cost that I can’t really quantify.

Ashley:

And it’s some kind of time commitment too to having to deal with these issues and just the stress overall of having to look at a bad review. We only have three short-term rentals and we really haven’t gotten a lot of bad reviews. But when there has been one that’s like a four star, it’s an immediate turmoil. What happened? What went wrong? Why didn’t they like it?

Dave :

I know it’s hard because I want to make a great experience. I’m sure you guys are the same. It makes me mad obviously on a financial element, but people are going on vacation, they want to enjoy themselves. I put a lot of time and effort into making it a nice house. And even in the bad reviews, they’re like, great design, beautiful house. It would be nice if they mopped. It’s like we did all the hard stuff. Can we just please do the easy part to make this thing work?

Ashley:

The stuff that can easily be controlled and taken care of? Yeah, for

Dave :

Sure. And I do feel lucky. I bought this thing before the pandemic. It has still been a great deal, so that’s why I’m able to laugh about this. Otherwise it would be very painful. It still is painful, the opportunity, but thankfully the deal actually has still done pretty well. We bought a really solid thing, just the operations really failed. And I know everyone says you make money on the buy and there’s a lot of truth to that, but you really optimize your deal and a lot of how well your deal performs is in operations and it shouldn’t be overlooked.

Ashley:

So what has happened now with the deal? Did you find a new property manager when you hired yourself?

Dave :

No, I actually hired a full service property manager, one that actually had rejected me in the beginning because my property was a little outside their service area, but they grew a lot during the pandemic and they’re fantastic. I mean, I have other property managers for long-term rentals and they are really top notch. But I think the main thing they do differently is they employ their cleaners and a lot of their service providers and technicians full-time, which makes a huge difference in these small towns where there’s a lot of transients and it’s hard to hire people. And so they’re a very good employer in the area, and so they have really great people working for them. And I actually have heard great reviews of the first company I worked with in other locations. I think it just shows, tech only goes so far. It’s really about the people who are physically going to be at your property and in the small town, if you’re not the good property manager to work for, which they weren’t get good people to manage my property. And now I’m working with the people who are seen as the good employer to work for and now they have the best employees who are looking after my property.

Ashley:

What an interesting way to look at it as to where would the great cleaners, the great handymen go to work instead of looking at it, oh, who’s the great pm You want to find the great people that are working for it. Well Dave, thank you so much for joining us today. And if anyone listening also wants to find a great property manager and not go through the hassle that Dave went through for four long grueling years, you can go to biggerpockets.com and soon coming very, very soon is going to be your own property management tool to be matched with a property manager in your market. And that is very investor friendly because as we found out today with Dave, not all property managers are great and wonderful to work with. So make sure you watch for that new feature with BiggerPockets coming out soon and make sure you check out Dave at his podcast on the market and definitely to see the results of the flip off as James, along with myself and Dave who are doing nothing for this deal win, but are very excited to be a part of it, are going to beat Henry.

Ashley:

So make sure to check out more episodes about the flip off to see the end result of Henry and James deal. Thank you guys so much for joining us. I’m Ashley. And he’s Tony, and we’ll see you guys next time.

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