The Economics of Landlording

Dan Austin: [0:00] Hey there. Welcome back to another episode of the collecting keys Friday focus. Today, have me as your host, Dan Austin. If you're new here, these are the episodes where Mike or I like to take a deep dive into a topic. Or on every third Friday, you gotta come in because we do our deal case studies with real deals from our scale community members, their wins and losses, you know, we we don't hold anything back here, but we like to dive in with them, see what they're working on, how they found the deals, and what their extra strategies were, and profit margins, and all that sort of stuff. So those are every third Fridays, and then in between, you're gonna hear Mike and I talk about things or rant on stuff. And today, I'm happy to rant for you. It's a great Friday, I hope. But actually, you know, I won't say I'm ranting. I'm just going to highlight a few things, and I wanna talk about the economics of landlording, and it's sparked by a post I did on Instagram. Well, I I posted it on all platforms, we post on TikTok, all that sort of stuff. If you don't follow me, go and hit me at investor man dan, you should be able to find me on all the platforms with that handle. But most important, the one that was most vigorous in the comments was on Instagram, I got a couple 100 comments on there, and 70% of them were like, yeah, I totally get what you're saying, that's what I do, and then 30% were obviously not people that were landlords, they're probably tenants that called me things like, slumlord douchebag, or I would never rent from a cheap ass landlord like this, all those good comments. And just to be open here, I don't care, I love it, I like hate on it, whatever you want, I just love the engagement, I love having the conversations, and it gets me kind of a good chuckle anyways. So, let me give this set up here, and then I will talk about why I'm even talking about the economics of landlording.

Dan Austin: [1:42] So the post I made was video of me walking through one of our units. We have a six unit property in here in town where Mike and I live, all the same unit, two bed, one bath, kinda smaller units, eight, nine hundred square feet. So as I'm walking through the unit with one of our staff members, he's videoing me, we're making some content, he's asking questions, I go in the bathroom and I point out, hey, the laundry, the tenants took the laundry units with them, because they owned them. And we are trying to get away from owning in unit washer and dryers, and so in the video, I kinda asked the question like, do you provide laundry to your tenants or not? And I kinda went on the path, down the path of like, we don't do that. And generally speaking, we do in some of our units, just not all of them, and in this building in particular, we don't. And the reason why is because they break down, they're not an essential part of the unit, not all units in this country have in unit washing machines, right? And so it's not like a standard you have to provide. Will you rent it for less? Probably, maybe, I don't know, just depends on your market. But anyways, we don't because they cost money when they break down, and like not all tenants are like this, but you have to plan for the edge cases. Some of people just don't take very good care of things, they don't change out the lint traps, they throw greasy clothes, or who knows what they put in their washing machines, things that break down. And then, like, let's just be honest, appliances are not manufactured the way they used to be, so to get three to five years out of a washer and dryer from like a lower end unit, is pretty damn good. A good example of like washing machine headaches, I own some student rentals in my portfolio as well, and I have six, seven, sometimes eight young adults living in a single family home with residential washer and dryers. You can imagine if you have eight young ladies in a house, you know, the laundry gets pretty big, and they're probably doing a load every couple loads a day, so washing machines break.

Dan Austin: [3:30] And I'll go back to one story, so this is back when I was just a cheap landlord, I was just doing everything I could to to increase my cash flow, and I had time, because I didn't have a big portfolio or anything like that. The girls that were living in the house called and said, hey, our washer and dryer, it's not draining, it's like flooded. And so I go over there, I don't know what I'm doing, but I'm gonna save a couple 100 extra bucks in my mind, and I take out YouTube, I follow this YouTube video of like the troubleshooting, and I take off the side of the thing, and it's telling me, hey, there's this pump in the bottom, that might be bad, but take the hose off and see if it's clogged. I'm like, what's the chances of this thing being clogged, know? So I take the hose off to this random pump inside the washing machine, and I see this like red string in there. I'm like, what is that? So I like kinda grab my pliers and I start pulling on and I pull it out, and it's a very small women's thong underwear that was wrapped, it somehow, because it was tiny, wrapped its way through the washing machine and got into the drain pipe and then got wrapped up into the impeller on the drain pump motor. And the thing worked out great. I felt super proud of myself. The young ladies when I them the thong back were a little bit embarrassed, but they're happy to have a washing machine that worked again.

Dan Austin: [4:39] But nowadays, I I call a technician that can work on appliances when we have issues with them, right? Well, a lot of times he's like, hey man, sure, I'll come out, but just go buy a new one because it's gonna cost like close to that, and my fix might make it six months, might make it a year, might make it five years, but if you buy a new washer and dryer, you get a warranty, you'll probably get five years out of it. You know, it's like he's not wrong, know, if I can go to Home Depot for $450 to buy a new one, and he's going to charge me 300, I'll go buy new, and so that's the economics that are coming into this idea of landlording. And a lot of the people on my Instagram post, I don't think quite understand that. I don't think they quite understand the economics of landlording, and let's be clear, given the opportunity, those people that are having the negative comments, they would do exactly what I'm doing, right? It's like you're trying to defend your asset, and defend your investment, and make sure you're getting the most out of your investment possible, while still providing a really good service. You know, because like, let's be clear here, this building I bought, I bought it from a tired landlord that was treating it like dog shit, right? So we came in there, we've cleared out bed bugs that were going from unit to unit, every unit we've turned, we've upgraded with high end LVP, nice nice paint, doors, floors, trim, really turned this thing out to look good, exterior paint, better landscaping. It's not only made it better for the people that live there, but also for all the community around it too, it's just a better building. Safer, more secure, extra lighting, all that sort of stuff.

Dan Austin: [6:04] So it's not like we're just trying to take more profits, we're reinvesting in it to make the property better. As many of you all know, as operators, as good landlords, that's what we want to do. We're not just trying to look at the bottom line, but the economics do make it and are changing. Let's be honest, Mike and I just recorded a podcast that'll probably draw I think next week or maybe, yeah, next week, you know, we're talking about like the property taxes on some of our units, right? So we had one that was from $20,100 to 4,000, and then we had insurance that's doubling. So you have all these counties and these municipalities that have property taxes, they saw this large growth, they want their tax dollars, they wanna be able to invest in their, you know, local infrastructure, how do they usually do that? Through property taxes, so they're raising those as fast as they can. Insurance companies, they're dealing with inflation, and also, they don't wanna have to pay out any claims that they don't have to pay, and so they're trying to increase their profits for their shareholders too. So we literally have units that were $60 a month, now they're $120 a month, and I don't live, just to be clear, I don't own properties in like flood zones or weird places like you know, Florida or Texas, where you're having these massive hurricanes or anything like that. They're safe, they're up on a hill pretty much.

Dan Austin: [7:14] Anyways, all those costs that are costs that we actually have historically as landlords taking for granted, and don't talk a lot about, because it's like that's the baseline underwriting is taxes and insurance, That stuff's going up, it's being tighter, and it's going up at a time in the market right now. Last year, rents where I live, didn't go up. They actually went down probably 5%, and I would expect them to stay flat at best. And we're in a market that was one of the hottest markets in the country here, Eastern Washington, Northern Idaho, back in 2022. So it's not like we're just like a dead market that nothing ever happens. So we have costs going up, and we have rents going down. And then of course, we know that with inflation, labor's gone up, material cost, materials have gone up, and so it just costs more to run a property. And so you really need to focus on your underwriting nowadays, knowing that you're not going to get these big upswings in rents right away, and that your costs are you have to be a little more conservative, because you can't take for granted that taxes and insurance stay somewhat flat, because they very well might go up next year, and they probably will, given the opportunity to do that. Tax, you know, counties and insurance providers, they want money, so they're gonna get it from you because they can. There's not much you can do about it, What are you gonna do, sell the property?

Dan Austin: [8:29] Well guess what, the county's gonna go and get an excise tax if you have a transfer tax, and the insurance company's still gonna be insuring a property, so who wins, right? But back to the point I'm making here with the economics, when you're underwriting a deal, you really do have to win on the buy, and so underwrite those deals, so that you can really be honest about what that cash flow is like, but be okay with it not being this like big cash flow win. If you're here just for cash flow, I'm sorry to tell you, you're not gonna be getting these big wins that you see all these gurus talking about online using methods that worked the last five years, that aren't gonna work the next five years. They made some wealth, they did some good stuff, and now they're going on stage and telling you, this is how I do, this is how I do, well guess what, that didn't work anymore. You really need to focus on what's going to work in the next five years, and if you're traditionally buying, you wanna burr properties, cash flow is not necessarily gonna be where you win, but you do want cash flow to be your defensive metric, right? So I look at it as, the cash flow is there to help you sustain the appreciation of the property, and it doesn't get dilapidated. So you're taking a lot of that money, and you're reinvesting it into the property over the years, and then you are paying down debt, and you are getting tax benefits, and then you are gaining the appreciation of the property. So that's where your profit will be in the long run, and then over time, as your mortgage, if you have a fixed rate mortgage, stays flat, and your rents do go up, probably not this year, but over the next three to five years, that's when you'll really start picking up cash flow. But even then, don't really focus on that as much as what is the best way to build the wealth in real estate in this next five years outside of cash flow. Focus on that purchase, focus on that acquisition, and get creative with it.

Dan Austin: [10:17] I've made a post on Instagram not too long ago, maybe a month ago, was like, this is going to be the year of seller financing. It's going to blow up, because people know what it is, sellers still have twenty twenty two prices in their mind, and interest rates are not dropping nearly as fast as we would want them to be, and we expect them to be. They're saying they might actually stay high for another year basically, higher than we had hoped, and maybe even some rate increases this year. So basically, people that do wanna sell their properties that missed the boat, they still want to get that price, and if you can give them a higher price, and negotiate terms that allow you to take possession of this property, and have enough cash flow to own it, that's what's going to help you win. That's one method, but there's a lot of different things that can help you win in the next five years, but I will just leave it with this, of like, really dial in, and understand the economics of landlording, and what you're getting into, Because getting this metric that everybody looks at, the $10,000 a month in passive income, isn't going to be quite as easy, and it definitely might not be. Apparently Instagram, 70% agree with me, might not be as easy if you're leaving in unit laundry. Do what you will with that, I don't care, but man, I really love some of those comments. But I promise, I'm not a douchebag cheap landlord, I might be a douchebag, you just gotta meet me in person, and you can test that for yourself. But I'm not a cheap landlord, I do take care of my tenants, I take care of my properties very well, I just understand the economics of owning a property, and I'm not just becoming a rich, wealthy land baron, all of us are out there chipping away at it, you know, property by property, month by month, and slowly building wealth. And I'll close out with this, it's like, well Dan, you're talking about this like it's not as easy, and why don't I just go invest in the stock market?

Dan Austin: [11:58] Absolutely. But the reason why, is because there is still massive wealth to be built in real estate, we're just in a market cycle, where you need to readjust how you're doing that. You can go and continue to chip away and dump money in the stock market, go get an S and P 500 index, and it's going to be easy for you. You're not gonna do any additional work, and you can calculate exactly where your money's going to be at. And I can assure you, it's not going to be the same place as if you're buying real estate smartly, you understand the economics of landlording, and you get these assets under control, take care of them, and then strip the value out through tax benefits, debt pay down, and appreciation over the near term. And then go back and when after this one drops, go listen to our next episode, because Mike and I talk a lot about how often you should sell properties, because I have a certain belief that you should cycle properties and own them, know, for plan to own them for a full market cycle of seven years, but be okay with selling them at year three, or year nine, never really go into thinking you're going to own them for thirty years, unless you have some legacy properties that you want, or for me, my still Brandon Turner's little methodology, where I bought a house for my son, and house for my daughter, that they could have when they become adults, they're going to work on them, and maintain them while they're kids, and that's how they're going to earn either their college money, or seed money for a business, I'm gonna own those longer, till at least I turn them over to my kids. So there's some one off circumstances where you might do that, but look at it as a business, and the economics of landlording will maybe change through that lens. So with that, I'll stop rambling, but go and follow me on Instagram if you wanna see me get yelled at by other people.

Dan Austin: [13:32] If not, and you wanna learn more about what we're doing in the scale community, you're listening to some of our Friday focuses, you're hearing these case studies, and you haven't participated, go to collectingkeys.com/scale, book a quick fifteen minute meeting with Mike or I, and we'll see if you're good fit, see if it's a good fit for you. Also, I'm still doing this, five star reviews. If you go on iTunes, give a five star rating and a review, screenshot it, I will send you a free collecting keys t shirt, some swag, whichever shirt you want, you can go to our website and tell me which one, give me your size and I will mail that out to you. Other than that, have a great weekend.