Episode #08 : Landlording Simplified with Brian Davis
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In this episode of The Richer Geek podcast, I’m talking with Brian Davis – landlord, real estate investor, and co-founder of SparkRental. Brian is a nationally recognized rental industry expert whose passion is helping everyday people build and automate their passive income from rental properties.
If you’re curious about creating passive income through rental properties, you do not want to miss this episode!
In this episode, we’re chatting about…
Why rental properties are a great long-term income producer, even in an uncertain economy
What processes you can automate to streamline your screening, rental, and management tasks… and which processes you should be doing yourself
Why Brian considers appreciation to be a bonus return when evaluating potential rental properties
How to forecast what your returns will be from a rental property
Brian’s Top Tips
· Find ways to maximize your savings as you look toward buying your first rental property – it does require some cash to invest in real estate.
Be conservative in calculating your estimated cash flow – plan for expenses like property management fees (even if you plan to self-manage at first).
Resources:
Brian has put together several amazing FREE resources for listeners of our podcast! Visit https://sparkrental.com/geek to check them all out:
Passive Income & FIRE Calculator
Rental Cashflow Calculator
Cheat Sheet: 5 Ways to Buy Rental Properties with (Almost) No Money Down
Ebook: The SparkRental Guide to Higher ROI
Free Tenant Background Check
+ Read the transcript
Welcome back to the Richard geek podcast. today. I have Brian Davis from Spark Rental. And I became aware of Brian really, I'd say during the past year because one I've read his blog post on bigger pockets. And two I provided a couple of quotes for Brian. Then I realized more about what Brian does and how he provides amazing resources for people looking to invest in real estate and I I thought he would be an excellent guest for our show. So welcome. Brian.
Nichole, thank you so much for having me. I'm excited to be here
We are, we're going to just jump right in here. I'd love to hear a little bit about your background. And then how spark rental your company came about?
Sure. So I actually started my career working for a lender specializing and doing loans for real estate investors. This is back in the real estate bubble. By the way. It was boom time for real estate, I was watching all these guys make money hand over fist with real estate and I was sitting there thinking, well, I can do this, you know what's to stop me from doing this too. So I went out and bought a bunch of properties. And then of course, the bubble burst, and I lost a bunch of money and you know, is a total train wreck. But throughout that whole process, I've learned a lot about real estate investing about real estate finance, I ended up working for a company for many years, that specialized in offering services for landlords and real estate investors. And then the woman that I worked with at that company, she and I split off and decided to start our own company, offering somewhat similar services, helping landlords manage their properties with more automation, and also helping to educate people on how to start creating passive income through rental properties through real estate investments, and eventually to replace their full time job income with rental income.
A couple of things that you said that I think would really appeal to anyone in technology who's listening to this, you said automation, right? And so you know, we talked about that all the time in tech, but at the same time, it's important because we're talking about folks that are working full time and don't have a lot of cycles to spend but but want to maybe have real estate and investment property. So tell us a little bit about what at spark rental what resources you provide specifically and and what do you do to help people around automation?
Sure. So on the automation side, on the software side, we offer everything from rental listing syndication, so you can enter your you know, advertising your rental listing information once it will syndicate out to websites like Trulia and Zillow and hot pads, we also offer tenant screening and rental applications. And you can charge the cost of the tenant screening reports to the tenants directly if you like or not, you know, either way, but the whole idea behind our software is to anticipate the next step in the tenancy cycle, and have it ready for you. So for example, when you run your 10 screening reports, and you find an applicant that you like, and you click Approve, we already have a state specific release ready for you that you can then click a button and access that and then of course, you can modify it from there, but the fundamentals are in place for you. And then when you have your release complete, we will show you how to set up our automatic rent collection payments online. So that the rent just flows into your checking account every month and you don't have to chase tenants and and deal with envelopes who have cash and cash checks. I've had tenants show up at my house in my front door at 10 o'clock at night before with, you know several thousand dollars in an envelope and cash which is not what you want as a landlord, right.
No, okay, couple things you definitely don't want anyone knowing where you live like none of your residents. In the multifamily space, we found that a lot of times we were dealing with money orders, and definitely cash as well. And sometimes people would be ridiculous, they would give it to their neighbor to give like their next door apartment neighbor to give to us. And then of course you know that that doesn't work out. Okay, so you kind of are handling that full lifecycle. I love the idea of the listing syndication. We don't have that many residential homes. But when we do it, that is a pain going to Zillow and Trulia. And Craigslist, heaven forbid, dealing with all of those sites. So that is awesome. Just automating one time, and also all the different formats that they require. So you take care of all that the tenant screening, I assume that the owner of the rental property could kind of specify their rules and what they're looking for. And that's part of your process, too.
Yeah. So when you go into our system, you can select exactly which reports you want. Because some landlords have different criteria than others, like you said, we offer four different types of reports plus the rental application itself. So we offer credit reports, criminal background checks, eviction history reports, and housing history reports. And you can just pick and choose which reports you want, and run all of them, or just one of them, or none of them and just collect the rental application, which is free. And you know, so it's up to you, what you want to run, there are parts of the process that can't be automated, like, for example, verifying the applicants income, you know, you should really get on the phone, with their employer, and you'll get top of their pay stubs, make sure that they've been honest about how long they've worked there, and ideally get a sense of where the likelihood of their continued employment, you should pick up the phone and talk to current and prior landlords. So certain parts of the process can't really be automated. But to the extent that it can be automated, we try to make it seamless and anticipate your needs as you go.
Got it, that payment process, then they just set that up and it goes into your bank account, or is it like a PayPal? Like what's the back end?
Sure. So there's a one time process where you have to verify your identity and that you own the bank account, to comply with us know your customer laws, banking laws. Once you verify that it's your account, it's really just a matter of the tenant logging in every month. And making a payment either by ACH which is bank account transfer, or by credit or debit card is an option as well. And they can set up automated recurring payments as well so that they don't have to log in every month and make the payment it just happens automatically.
Credit card payments. That might be the first time I've heard of that. I mean, Wow, that's pretty cool. Okay.
So there is a, there is a fee for credit card payments to the tenant if they want to pay that way. But you know, the fee is often mitigated by the rewards that they get by using their credit card. So you know, if they get 2% cashback on their credit card or 2% rewards, it depends on the landlord's account level what the percentages for the tenant, but at one level, it's 4%. Say so if they get 2% cashback and they pay a 4% convenience fee for paying their rent with their credit card, then it's a net of only 2%. For them to have the convenience of paying with a credit card and, you know, not necessarily having all the money in their account on the first of the month.
Yeah, it's like a stop me sometimes we absolutely do. That's why we have late charges. But I'm thinking that credit card that could be interesting,
that fee is usually less than a late charge fee.
Yeah, this is true, because ours is 10%. That's, and then a bunch of other things that tack on. Interesting. Now you are a real estate investor yourself? And do you do a lot of education around investing in real estate? I'd love to hear just kind of, first of all, for someone just looking to get started, what kind of overall advice would you give them?
Well, you know, the first thing that I would say is start by maximizing your savings rate, it does require some cash to invest in real estate. You know, it's not like buying stocks where you can take $100 and gotten invested in an index fund, right? You do need to buy even one property, you do need thousands of dollars for a down payment, and potentially for closing costs. So you know, there are tricks you can do to, you know, like seller concessions, for example, to lower your cash requirement for closing costs. And in general to buy real estate, but you still need some cash, and it's a heftier chunk of cash than you're probably used to investing in one go maximize your savings rate would be the first thing that I would tell people because without cash, it's really hard to invest in real estate. And on that note, one way that's an easy lower cash way to get started with both buying your first investment property in with maximizing your savings rate is house hacking where you buy a property to move into it yourself. So you qualify for owner occupied financing with a much lower down payment and lower interest rates. But you then rent out part of the property. So you can do this, you know, for example, multifamily property where you move into one unit and then rent out the unit or a couple units next door. Or you can either buy a single family home and rent out rooms in it, to roommates or rooms on Airbnb. And you can even get creative and do things like my partner and co founder at spark rental, Denny she and her husband and when this this big suburban house on their kids moved out. And they realized that they you know, they don't want to have this huge big suburban mortgage payment anymore, but they weren't quite ready to downsize. So they brought in a foreign exchange student. And the company the placement company actually pays them a pretty hefty monthly stipend, which covers the majority of their mortgage payment every month, they've brought a little bit more life back into this big empty suburban home, and they get a huge help covering the mortgage payment. So there's a lot of ways that you can house hack from roommates to buying a multifamily to Airbnb, you can build a casita, you know, like a guest house to put on the property with you. Or you can trick out your basement as its own separate unit that you can rent out or building a above garage, apartment, I mean, there's a million things you can do to how sack and have someone else pay for part or all of your housing payment. So it makes it way easier to boost your savings rate, because housing is the most expensive expense that most of us have. Right? And, and it also and hope you buy that first investment property, especially a multifamily property with very little money down, that'll be my first set of recommendations, but also told me what to get very comfortable with calculating cash flow for rental properties. Because this is something that a lot of people get wrong with their first few properties, they get very optimistic with the expenses. In my experience, usually your monthly expenses will average out to be 40 to 50% of the rent, non mortgage expenses, by the way, so not including the mortgage, you're going to end up with expenses in that 40 to 50% range. That includes things like vacancy rate, which people always forget about when they first get into buying rental properties, things like property management fees, which a lot of people say oh, well, you know, I don't need to worry about property management fees, because I'm going to manage the property myself, which is great until you decide that you hate managing the property yourself. Or you have triplets right and you can't run the time to manage the property yourself. Or you move out of state any there is so many reasons why you need to include property management fees, and it's a labor expense, whether you're doing labor, or someone else is doing the labor, you know, expenses like vacancy rate, property management, fees, repairs, maintenance, all of these are expenses that new rental investors tend to underestimate. And it gets them into trouble. So it's a long way of long winded answer for you. But those are the first few things that I would tell people if they're interested in buying their first property or two.
So I'm laughing as you talked about the expenses. And then also, as you talked about you, you may say, Well, I'm going to self manage, and then you decide that you hate self managing. And now you're stuck. Because Mike and I, we have, you know, multifamily, you know, apartment complexes that we enjoy, but single family homes, were like, Oh, you know, we're going to self manage. And we just, we we don't care for that as much. So I think that, yeah, I think it's it's such a good point. And the other thing is, is it's so good to be really conservative, right? Especially for investors, like investors that have been around since that bubble went through that came back out of that you're nodding your head, because yes, it's okay, just go ahead and be really conservative and plan for and then if you only have 20% expenses is going to be awesome for you. So
Yeah, no question. And people almost never overestimate their expenses, especially when they're first starting out. They almost always underestimate them. So yeah, to be on the conservative side plan on half of the rent payment, going towards non mortgage expenses. And then of course, you have to actually set that money aside as it comes in every month. So that so that you're not taken unaware, when you have a $5,000 New Roof bill, or, you know, or you have a vacancy for several months, and you've got to float the mortgage payment on your own.
right. Now so it's been purposeful, and conservative yet, once you do those things, you know, obviously real estate investing has a tremendous amount of benefits, or else people wouldn't do it. So I'd love to hear, you know, kind of what have been some of the positive outcomes for you after following these conservative advice?
Sure, well, you know, one of the advantages to real estate, especially rental properties over other types of investments is that they're very predictable with the returns, not on a month to month basis, because like we just said, you know, one month, you might have a $5,000 repair bill. But over the long term, you can predict those expenses quite accurately. And it usually is in that 40 to 50% range. And you can get much more specific, of course with individual properties. But you know, what the purchase price of the property is you know, what your mortgage is going to be, you know, what the vacancy rate is for that area, and you know what property management will cost you in that area and all of these other expenses, you can actually forecast with great accuracy, what your returns are going to be from that rental property. That's not including appreciation, which I consider a bonus return, real estate doesn't always appreciate, it usually does. So I actually don't even look at appreciation. When I buy rental properties, I consider it just a bonus. And even so even if you just look at rental yields, you can still earn outstanding returns on rental properties. Another thing I love about rentals is that rents rise automatically with inflation. So you don't have to adjust your returns on rentals for inflation, unlike, say, stocks or bonds, where you do have to subtract out for inflation, basically, if you don't get real returns over time, but with rentals, your mortgage payment stays fixed stays the same every month, assuming you have a fixed interest rate mortgage. But your rents will rise alongside inflation often faster than inflation, because rents are one of the primary drivers of inflation. So your spread actually grows at a much faster rate than just the rent itself, since your mortgage payment stays the same. So especially as someone who's into financial independence and early retirement rentals make a great long term income producer from that perspective without having to adjust for inflation. And there's also there's tax benefits to which are great to real estate, you can deduct virtually every expense under the sun, every real expense, and some paper expenses like depreciation. So yeah, there's a lot of reasons to invest in real estate and some drawbacks as well. But those drawbacks are manageable. Things like liquidity, you know, real estate is not so easy to liquidate, and things like diversification, because as we talked about earlier, it does take a certain amount of money to buy each individual property. But again, there are ways of managing those risks, especially if you spread your investments, not just in real estate, but also to investments like equities, for example, which counterbalance real estate quite well, in that regard.
It's a great list and overview that you've provided there. And I like sort of the reoccurring theme, as you've listed out these different points, which is the ability to analyze, and predict right and to and to forecast on a you know, kind of a consistent, so I know people listening may say, Oh my gosh, the bubble and everything that happened in like 2005, 2007, depending on your market. That was a perfect example of not doing strong cash flow analysis, not taking into account. You know, it was a lot of hype. And the reality is that people that were doing the thorough analysis, not letting emotion get into it, like oh, my gosh, fear of missing out, I need to buy properties that had strong fundamentals came out way ahead. Right.
Well, So to your point, actually, even if you look back at the Great Recession, and people even today tend to freak out when they look back at the Great Recession and think well, you know, gosh, if I invest in real estate, you know, what if something like the Great Recession happens again. So they look at things like housing values and how they dropoed in the housing crisis and in the Great Recession. And they did a nationwide housing values job or something like 25 to 30%. But rents actually didn't drop by very much nationwide rents only dropped by I think it was something like 6%. And that was over the course of several years. So even when home values drop, rents are incredibly stable, because when you do have a housing crisis, like we saw in the Great Recession, a lot of people went from being homeowners to being renters, which drove up the demand for rental properties. Again, rentals are much more predictable in their returns than other types of investments. Even if you account for home values, your rental property value can drop by 25 or 30%. And as long as you weren't forced to sell that property, you're okay as long as rents stay the same or dropped by a negligible amount like 5%, you're still going to be okay, as an investor, you can ride that out, and then keep earning that return or that cash flow until you are ready to sell and when the property value has recovered and gone back up. So just to your point there about the Great Recession and not freaking out too much about home values.
Right, so much different as an investment versus the home that you live in way, way different. So as you've talked through some of those points to you have resources on your website in all of those areas. And I know you put together you created a specific page for our listeners, I'd love for you to kind of tell us about that and and some of the resources that are on that page.
Sure. So put together a page at Sparkrental.com/geek for the Richer Geek listeners. So there's a handful of free not products because they're all free, but free resources and tools on that page. First time we have on there is something that we normally reserve for our paid students in our courses where we talk about how to reach financial independence and early retirement with real estate. And that is a passive income and fire calculator. So fire by the way, for anyone who's not familiar with a term stands for financial independence and early retirement. That's where your income from rentals and other investments is enough to cover your living expenses. So your job becomes optional. So we have this calculator on there to track things like your passive income, your net worth, your fire ratio, also good phi ratio, and that's the percentage of your expenses you can cover with your investment income. So it's just a very simple and easy way to reduce all of your personal finances into one calculator and tracking sheet, you can just update every single month and see how you're doing as a yardstick for your wealth and for your passive income. So we have a rental cash flow calculator on there as a resource, you can go in there and calculate your cap rates and cash on cash returns. For any rental property, whether you use it for long term rentals or Airbnb, it also includes a mortgage calculator. So you can run those numbers as well. But it's a great way to get comfortable with forecasting cash flow, as we've talked about throughout this episode. So a cheat sheet in there for some ideas for buying rental properties with very little money down is an ebook for how to increase your returns on rental properties. And then finally, we do include a free tenant background check for all people who sign up for our landlord app, our software. And you can run that to win a scary number, trace and verify and applicants identity verify their recent housing history. And it's just a welcome gift when you sign up for our software, the software does have a free option for the account. So there's no obligations, you know, it's not a free trial, it is a forever free account, on our landlord software. And you know, there's there's paid options in there as well. But those offer things like reduced pricing on Tenant Screening reports and that sort of thing. So yeah, free background check to get you started with with screening tenants.
So you've really run the full gamut is like, Hey, you know, how much income do I really want to achieve from rental properties? Okay, now I want to analyze some properties. And then from there, how could I buy them? Right? If I was either you talked about maximizing savings. And then there are some good strategies in there as well. I think some that people probably aren't that aware of like self directed IRAs and that type of thing. So thank you for putting those resources together. Very valuable, encourage anyone looking to invest in real estate to go to spark rental and check that out. And and this may be somewhat redundant, but how can listeners get in touch with you? We talked about your website, but you know, any other way?
Sure. So on our website, you know, if you do go to that page, sparkrental.com/geek you will see in the bottom right hand corner, a contact button to reach out to us, my partner, Denny and I do we get those emails, as you know, it's not just our team members, and we do respond personally to people who contact us can also reach us through our Facebook page at spark rental on Facebook. And we also one of the things that we've done on Facebook that has turned out to be great is we started a Facebook group a couple years ago for landlords and property managers. And it has grown to be the largest Facebook group of its kind. We've got about 20,000, landlords and property managers in there. And it's very active, very high engagement. So you can basically ask any question in there at any time and get 20 answers from expert landlords and property managers within minutes. It's a great way to crowdsource those questions. And of course, Danny and I are in there every day. And we'd run we do live videos in there every week as well, where people can ask us questions in real time and get it about their memory issues.
Oh, that is fantastic. I did not know you had that group. And what I like to is it's like minded people that are on the in that specific real estate niche as opposed to some of the other sites that are across the board. So you're really focused and you can ask those questions about like you said Tenant Screening or, you know, analysis of a particular property. That's fantastic. Wow. Well, thank you, Brian. I knew that you were going to bring a lot of great resources and information for this episode and really appreciate you coming on and sharing with our listeners
Nichole, thank you so much for having me. This has been a blast.
The information, statements, comments, views, and opinions (collectively, “Information”) provided in this podcast are not intended to be and should not be construed as financial, economic, legal, accounting, tax or other advice. For our full disclosure, click here.
ABOUT BRIAN DAVIS
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental, whose mission is to help everyday people build and automate their passive income from rental properties.
You can reach Brian and his partner Deni through the Contact button at https://sparkrental.com/geek/or on Facebook at https://www.facebook.com/sparkrental, where you can catch their weekly Facebook Live videos where they answer questions from their community about real estate investing, landlording, and early retirement.