Real estate prices have dropped, and interest rates have climbed, is it a bad time to buy turnkey properties? Are the days of 12% cash on cash returns over?
We invite Heather Marchant from RP Capital back on our podcast to get an update about what is REALLY happening in the real estate market right now. And whether you should hold off buying any real estate until things improve.
Watch the episode here
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Is Turnkey Real Estate Doomed In This Market
I’m bringing on a repeat guest. We’ve had RP Capital on I don’t know how many times. We have Heather Marchant in this episode. We had Ron Phillips on a few times as well, but it never gets old. I want to bring them back on because the truth is, if you guys go a year back, it is 100 episodes. We want to make sure you guys feel to read the updates specifically because I know many of you are asking, “Is rental real estate good right now? Is it good timing? Is this something that we should be avoiding at the current time and waiting for it to get better?” I want to talk about that.
I also want to bring this up too, because Heather not only had a great experience as the Chief Operating Officer of RpCapital and is also intimately involved in doing these investments, also investing herself, but she also used infinite banking with it. I know many of you have asked, “What are the different ways? How do you use infinite banking? How do you do it in real estate?” I have Heather share her experiences. You can get another perspective on this besides mine. I know you love me, but you don’t love me that much to not want to hear more experiences and stories. I will bring on Heather to be able to talk about these things. Heather, good to hear you or see you again.
It is good to be here. Thanks for having me. We need to have you on our show again. It is funny. Time goes by fast. I feel like I was here chatting with you, but it has been probably been several months.
It is crazy how fast time flies. 2020 was awesome because it was the best two and a half years ever. You went for a couple of months and you thought you had a whole year under your belt. Now the time is coming right back to where it was before. Things are speeding back up. We are getting back to our norm. It is good to have you on because I know many people haven’t been introduced to you guys at RpCapital. Let’s talk about that right now. Tell them a little bit more about what you guys do.
We are a real estate brokerage. We specialize in rental properties. Our main focus is 1 to 4 units. It is a single-family up to a fourplex because those are conventional loans and the cheapest financing out there. It is a more digestible price. We have been doing a lot more apartment syndications in the last couple of years than we have ever done. We have more opportunities. We have helped clients grow to that point. They are ready to expand and get into bigger projects.
It is a blast because we help to educate clients. We don’t charge anything for our services because we want people to keep their cash so they can invest. We don’t charge for any coaching or mentorship that we do. We also have a podcast where we teach and try to help educate people, new investors, especially. They feel like they can be successful in owning rental properties.
That is one thing I noticed that this is unique about you guys. You have a few things that are unique there because there are several turnkey companies out there today. One thing I have noticed is that you are not geographic-specific. You are not in one location. If that location goes bust, it is not like you are out and stuck. You are scrambling, trying to find another location to do rentals out of. You are all over the United States. I will look at where your properties are to see where the new hot market is. The hot market that hasn’t become hot yet. You are coming ahead of the curve that way.
It is watching for solid economies that are growing with new jobs. That means tenants have jobs. They can pay rent with their income. We are always watching for that. We are watching for states or cities that have landlord-friendly legislation instead of tenant-friendly states. Everyone knows what that is without even thinking too hard about it, having an area where you are going to be able to evict a tenant if they are not paying you.
It opens up many great opportunities and great markets. We work with a lot of builders and help buy direct from builders. We get bulk pricing from them. I negotiated 120 townhomes last year. They weren’t going to sell. They wanted to sell to a hedge fund. They weren’t getting any traction because the builder had sold four units to someone else.
He didn’t have the whole development for a hedge fund. He didn’t even want to sell it until he found us and said, “You guys will handle the sale of all of them.” I said, “Yes, but to individuals.” They said, “I’m in.” We are getting great opportunities. That is everywhere, and we can take a break in a market if we feel the pricing is coming up and rents aren’t following that increase. We took a break. We did that in Boise. When Boise was going up around 2007, it has been a little while. I got to get my calendar right.
It was during the recession.
I don’t remember what year it was, but I remember we turned clients away and gave them our competitor’s information because we said, “No one likes to hear it. Sorry, you missed the opportunity. It is too late. You are now overpaying.” They went and bought from competitors a couple of people because they were mad that we wouldn’t sell them property, and we said, “Sorry.” What we are all about is helping people be successful long term and not about the hope they buy a property today.
It is no secret that interest rates have gone up over the last year especially. Rents haven’t necessarily caught up with it. They are going crazy in the beginning. When rates are going up, all of a sudden, it flat-lined almost. What are you seeing right now in the market? Cash and cash returns are not as healthy as they used to be. It almost seems like going to the days of expecting an easy 12% cash and cash return. What are you seeing right now with you within the markets that you are in?
They started going up quickly, and they slowed down a little bit. It has been picking up a little bit. It is possibly due to the season. We are entering prime leasing season. I got a text from one of our builders yesterday that he had a target of $2,700 for rent in Kansas City. He texted me, saying, “I’m getting $2,900 on this house.” I was mind blown because our estimate initially was $2,650.
It keeps inching up, and that is primely seeing season a lot. Some people think that means we are gouging on rent, but expenses are up. We have had a couple of people upset when I talk about rent increases and how important they are. It is pivotal. If your interest rates and your mortgage payments go up, you have to have rent increase with it. You have to, with inflation. It is not like we are breaking people over the coals for no good reason. That is bringing up our ROIs.
The other reason rents take a minute to keep up is their twelve-month leases. You can’t raise the rent because your expenses went up and your taxes increased. You got to wait nine months to raise your rent and renew a lease. That is going to take a minute. It will keep pace with historical data inflation, but it takes a minute to catch up.
The thing that is happening is you have builders who are hurting right now. That is something that people necessarily don’t think about. If you have a builder who has been taking nine months to build a project since 2020, that is your average construction timeline. What used to be four months is now 7 to 8 months. If you have pre-approved people who are ready to rock and build, and halfway through or at completion, interest rates went up, they all canceled.
We have big builders who weren’t spec buildings that now have 100 doors of standing inventory that they need to offload. They were raising their prices like everybody was across the country. They are going up, and now they are going hey about that. They were like, “Let’s reduce the price.” There is an awesome opportunity now in that new construction space.There is an awesome opportunity right now in the new construction space. Click To Tweet
If you look at new housing starts, there has been a lot of new housing start that is already in process. They already started them. They got their financing. They went through permitting. Those are going to be finished this year. If rates are still high, there is going to be another massive opportunity. Unless they are a small builder, they are not going to want to hold 100 extra doors that aren’t doing anything, and they won’t rent them out. There is a huge opportunity there.
With interest rates being high, a lot of people cooled off on buying, investors included. In prices, we can negotiate. We haven’t been able to negotiate effectively for two and a half years. Trying to get concessions out of our sellers has been awful and hard. We are getting concessions, and it is fantastic. When interest rates go back down, that opportunity is going to be gone.
We have pent-up demand. We have people that are waiting to move because they want rates to come down. Investors are waiting to buy because they want rates to come back down. We could have a run as we had before where prices go up again, you can’t find a property, and everybody is bidding against each other all over again. It is a cool window of opportunity.
That is the thing I have noticed. Whenever people start being scared, saying, “Real estate sounds like it is bad right now.” That is when it is best.
All of the great quotes in real estate are all surrounding, like, “When there is blood in the streets, I buy. When people are nervous, that is when I buy.” I’m a bit bullish right now. I closed on a property two weeks ago. I close on one next week. If I have equity in my properties, I’m doing a 1031 exchange and selling them for a profit. I finished 1031 in January. I’m enjoying that I have less competition right now. It is quite fun.
As far as ROI, I didn’t answer that. We are creative. This just happened. I will give you an example. I had a builder say, “If your clients use our lender, we will give them $5,000 off the purchase price.” I said, “That is great. However, if we can get that in closing costs, that is going to yield better returns for our clients. A $5,000 price reduction on your monthly payment is almost nothing. It is not even exciting.”
It is less out of pocket. That means you get a better return on your cash.
Buying down the rate, sometimes, the math works well. You are saving that $5,000. I pay toward some origination fee to buy down the interest rate, and it saves me $100. Probably not likely, but I’m using some round numbers. I would go, “I run the math. How many months will it take for me to make back that $5,000 investment?” That is how I choose if I’m going to pay extra points because I do feel like rates are going to come down in the latter part of 2023. I’m already planning on refinancing. Our lender is set up with no-cost refinance. You can slide right into a lower rate.
I heard from a mortgage broker. He said, “Getting a fixed rate costs like a 30-year fixed. Even if it seems high right now, you still end up winning either way. If rates keep going higher, at least you are locked in now instead of waiting for the real estate market to get better. What if rates keep going up? You are locking at a lower rate now.” What if it does the opposite? What if rates do come back down? I don’t know if they will this year. They might end the latter half of the year come down, but if they do come down, it is great. You are refinance. You lock in a lower rate. It is nice with real estate. You can have that option. You can do things in the meantime to help manipulate your ROI a little bit more.
We are in an inflationary market. Holding onto your cash and waiting for interest rates to come down, you are losing. The numbers that we are seeing are close to 15% inflation. Losing all that money every month versus making it work for you, even if it’s at a little lower ROI. Our average with new construction is probably close to 7% cash on cash. That is only because of the rate that it has come down. Everything else remains about the same. For our rehab properties, we are getting into 12% to 13% on those. We have a couple coming in this week in the teens, which we haven’t had in a hot minute.
You have that choice. You get a newer bill that has lower cash and cash, but there are possibly lower expenses in the short-term and even in the long-term. You got the older properties that can give you higher cash. You might have expenses depending on what is going on. Sometimes some things can happen there and mess with your numbers.
The thing that is nice about real estate is if you focus only on cash and cash return, you miss the bigger picture because the truth is if we are in an inflationary environment, that drives up the price of the home. Not that we should ever bank on appreciation, but it is nice if you put 20% down and appreciate 10%. That is not a 10% return on your money. That is a 50% return because you only put a fifth of a down payment. You get a five-time multiplier of that leverage using the mortgage company.
Now you get a 50% return. Even if there is no inflation or appreciation, they are still paying down your mortgage for you and building up equity, whether it appreciates or not. That is tax benefits. There are all those four returns you guys talk about all the time, even on your own show. The thing is that there are many other returns that happen, that it is hard to compete with real estate that way.
There are many ways to make money, and keeping pace with inflation is not hard. I had horrible maintenance on several of my properties, all at the same time in January. It was painful. I’m not going to lie, but I took that number and made a note. We have software that helps our investors track the performance of their properties. I put it in there and made a note, “Capital expenditure.” I can write it off on my taxes. You make money and write it off with depreciation and maintenance or any capital expenditure on the property, which is awesome.
Let’s say somebody is not a real estate professional, and you can’t get below zero to show a loss. We put that depreciation into a future year when you need it more. It is like tax-free income.
It is exciting to be able to help people that call us, especially the ones I get excited about. I love all of our clients. You are unlocking a whole possibility for them that they have never even considered what real estate could do in the power of real estate. They lose their minds their first year owning a property with those different rates of return. You file your taxes and say, “I didn’t have to pay any taxes on this income.”
You do 1031 if you have appreciation and principle reduction. You own all of it. You can finance it. You can have someone pay it off for you. They are trying to compare it to stocks. We had this conversation like, “Trying to make this apples to apples for stock.” I’m like, “There is no way. There are so many differences that it is hard to illustrate how it is similar to stock because it is much better if I say so myself.
I did a show. It was August or September of 2022. I did a whole bunch of shows making a case for real estate versus the stock market and why mutual funds don’t work. It is funny because I compared. I took one of the properties I bought from you. I bought a property in Memphis. Now it is going five years, but I did the numbers about four and a half years ago. I compared the cash on cash returns that I had coming in the cashflow from that, like the net profits. I gained that equity from both the paydown of the mortgage because it is lower now. The tenants are paying it down for me and the appreciation on that property, even with appreciation coming down a little bit by that point in time.
When you factor those things together, my return was about a 300% rate of return on my cash. It is about $32,000 to put down with the closing cost. If I did that same thing in the stock market, that $32,000 wouldn’t have been over $100,000 like it was the real estate. Instead, it was going to be $40,000 somewhat in the stock market. The stock market had a big boom, especially after 2020. Still, it wasn’t nearly even close to what I made on the real estate. Even if I took out the appreciation, I still made more from the cash and cash returns than I would have ever made in the stock market.
You would have to pay taxes on that income if it was on stocks. It is such a great vehicle. What Ron and I say on our show is it is something the government got right in giving you incentives to own real estate. That depreciation and writing off your capital expenditures is great.
The one thing that also is unique with you guys is that most of the time, you see turnkey companies will say, “Everything is in-house. We do the lending.” They will farm out the lending. They will also property manage because you are in different areas. You have property managers in these different areas, local and boots on the ground. How do you minimize risk there for yourselves to ensure you have a good property manager? For us as investors, that is a big risk. We don’t want to be hands-on and dealing with the tenants, but we have to make sure we trust somebody to do that. How do you vet these property managers to make sure you have good ones?
I should share my list of questions. We have a list of 30 questions that we ask them. A lot of ones are obvious, like they are maintenance, how they handle it, is it in-house? Do they have an upcharge for maintenance? We ask how they vet tenants and what their criteria are for tenants. We talk about if they do Section 8 or not.
Some of it is information. Some of it doesn’t mean that it is a make or break for the property management company, but we want to know how they handle things and how many units they manage. If they don’t manage enough units, we are like, “You are not a big enough player to handle a lot of volume of business at once.” What software do they use? Having software is important for owners as having a 1099 and the paperwork. Sometimes if they don’t have a good one or don’t manage enough units, they don’t qualify for a product like AppFolio, or the numbers don’t work for something like AppFolio. That is an important question that we have to ask.
We review their management agreement like so many things. However, I tell our clients that the trickiest part, Chris, is I can vet a property manager today. They can check all the boxes and be great. In six months, they lose one of their key people. Someone that makes it happen. You are doers in the company. They are no longer that great, and that happens. That is probably the hardest thing to keep an eye on, honestly.
I try to own property in every market. I do what I tell my clients not to do usually. I own one here and one there. I have a good sampling to gauge my experience, number one. Number two, we encourage clients to reach out to us if there is any rumbling of something not right. Even if it smells funny, you reach out.
I have had four clients reach out complaining that they can’t get ahold of their property manager. This was St. Louis. That is always the first red flag. Communication is the first red flag. It means that they are busy or they don’t have enough staff. I said, “I see a pattern.” I reached out to the property manager. I have had three reach outs, and I’m scheduling a call with owners to understand what is happening because it escalated in the last six weeks.
Normally, our process is to try to problem-solve first. Having all our clients pivot and move management is a lot of work for the owners, not as much for us but for the owners. I’m going to try to solve the problem and its root. In this one, what happened is the property management company sold to a nationwide management company. I knew but thought, “Let’s give them a minute. I got to get their legs under them.” That is a bunch of turbulence for a company. It is not improving. I’m meeting with them next week. I have sent them a list of the clients, their complaints, and what has been happening.
Staying involved is our biggest asset there. It is to understand what is happening and affect change because the property managers don’t want to lose all of our clients. We have a big share of how many clients they service overall. They are going to move heaven and earth to fix stuff. That is the game plan. If that doesn’t work, we already have a backup property manager. We have been referring clients. If they are feeling nervous, we refer clients to the new property manager. It is the stickiest part, but it is the most important part. For owning remotely, it is important to have a solid property manager.
I know that is a big worry for everybody. How do you make sure you can trust someone? What is important for people to realize is that you don’t drop them. You don’t say, “We sold the property to you. Have fun. The property manager’s point of contact. Deal with them.” You can still be accessible and say, “We are seeing a trend here.” You want to know that anyways. If you are still doing property in that area, you want to know if that property manager isn’t doing what they say they are going to do and when to replace them.
For the new business we have had for the last couple of months, we haven’t sent their way. If they are already struggling with the business they have, I’m not going to send them more. That would make no sense. Feedback from clients is helpful. A lot of us own properties in these areas. That helps.Feedback from clients and from your own portfolios is super helpful in the real estate business. Click To Tweet
If people want to be able to find your company, where would they go to be able to reach out to you?
Our website is RPCInvest.com. We have an email that they can reach out to. It is Invest@RPCInvest.com. That goes to me. I can help to answer questions, or if you want to schedule an appointment to go through your own portfolio and see how we can help.
We already spent a lot of time talking about this, but we still promise we talk about infinite banking and how you are using it. You are a client of ours. You got infinite banking policies for us. First and foremost, what was it about infinite banking that made you say, “I should do this?” Ron is also a client too. I know both of you guys are doing this strategy.
The opportunity to have another rate of return was my first excitement in it. The second thing I loved was that I could grow it tax-free. I use it like a savings account. I don’t keep a lot of cash in checking. When I qualify for a mortgage, that throws people off. They are like, “Where is all your money?” I’m like, “I don’t keep it there.” If I have money, I’m buying property or investing it.
Mostly, my emergency fund is in my whole life policy because I have access to it within a week. That has been solid and awesome. I use it to buy property. I did this yesterday, Chris. Not even trying for this recording today, but I reached out. I took a loan against my policy because I’m closing on that property next week and my 1031 is short all the funds to close. I will pull that in into my account and close on my property.
I have a bill pay from my bank account that goes back into my pen policy to pay back that debt or the loan. Every time I buy a property, that payment can increase because I’m getting more cashflow. I haven’t increased it from the last property yet that I closed on. I will be able to have it be close to $3,000 a month that my portfolio brings in and pay that toward that loan, pay that back, and I do it again. As soon as I have the money in there, I do it again.
You are recycling the money in and out. You are doing like what I do. I bulk my emergency fund there when people say, “Are you worried about bank failures?” I was like, “Nope.” I know insurance companies are more stable than banks. I keep it there because I know I’m more protected than even FDIC-insured bank deposits. I keep it there for my emergency fund. I do the same thing, even qualifying for a mortgage. I send them my statement for my life insurance. The only thing above and beyond that emergency fund is a free game to invest however I want. I use that money to recycle through the cashflow to write up that loan and pay it down.
What surprised me is that it is earning interest, and I’m paying back those loans. Every time I get in there to look at my balance, I’m always pleasantly surprised, which I maybe shouldn’t be. I should keep better track of my numbers, so I’m not pleasantly surprised. I try to update my personal financial statement every month. When I’m in there, I’m like, “This is like magic.” It feels like this awesome mailbox money that increases. Some of it was my cashflow for my properties, but a lot of it is that it is increasing in value.
You get to pay the annual dividend, but when you have the guaranteed portion of that, the 3% guarantee, this paying in monthly, you are like, “I got a 25% bump going into this account every month.” Some people are happy with 25% per year. You are like, oh, I saw a 25% bump. That doesn’t include the extra dividend they pay on top of it once per year.
Talking to you, I feel like I’m getting all warm over here with the excitement of getting what is possible and how many people don’t know, aren’t aware, or afraid to test and try it. When I first met with you about doing that policy, I remember we met for a while. I had you explain it to me several times. Once I got it, I was like, “Why have I not done this a few months ago? Why did I waste time?” Taking action today is more powerful than anything, real estate and policies. Taking action and moving forward.
For you, was it a different level of getting it and using it than it was trying to learn about it? A lot of people find us by going down that infinite banking rabbit hole. They were like, “I have been studying this for two years. I haven’t figured out what I should do and how I should pull the trigger.” “You are like, “Do it.”
It is such a great opportunity, especially if you are going to use it to invest in real estate. You can’t do any better than that. We used to include this infinite banking in our calculations when we would show people projections of what is possible with their money, and we took it out. The reason we took it out is because people thought we were selling snake oil. They said, “It is too good to be true. You can’t achieve those rates of return.” We had to carve back out using a whole life policy because they didn’t believe it.
Even when you show real estate, they are still like, “That still looks too good to be true.”
With it, it became over the top.
Heather, I appreciate your time today. For those who want to follow your podcast, go ahead and give them the name of your podcast too.
It is Get Real Estate Success. You can go to GetRealEstateSuccess.com. You can search our podcast there for content. If you want to look up using your retirement account by real estate, you can search and look at past episodes. We have a lot of fun. I thought it would be an obligation and something else I had to do every week. I felt nervous when I first did it, and now I look forward to it. It is fun and exciting to share what is working for you and other people. Thanks for having me on today.
Heather, it is always a pleasure. We are going to have you back again at some point when everybody gets buried in more episodes. I appreciate the perspective, especially with how the real estate market is going right now, and that rare opportunity, that the things that the masses are running away from are the things they should be running towards. We say that a lot on our show. It is good to hear another voice in the wilderness that is preaching the same. We have been telling you. Eventually, it is going to reveal itself. People will say, “I missed out on it.” We told you so.
Everybody, be sure to check out RpCapital. You can check out RPCInvest.com. You can even shoot her an email at Invest@RPCInvest.com. The one thing you can learn from Heather is to take action. It is to learn this stuff but have that faith enough to take action, even if it is not perfect. The thing is, move me a step forward. Even if you stumble a little bit, it is still a step forward.
Take that action. Make sure you are doing what is going to be best for you and your family and create a better future now. Live your dream life now. That is what it is about. You got to create that dream life by taking action and moving on it. Go and make it a wonderful and prosperous week, and we will see you later.
- Podcast – Get Real Estate Success Podcast
About Heather Marchant
Heather began her real estate career in 2007 and quickly became passionate about real estate investing. Heather has personally mentored over 1,000 clients to help them achieve an increase in cash flow of nearly $10 million since becoming an investment specialist in 2011. Heather loves helping her clients grow their portfolios while she actively increases her own impressive real estate portfolio.