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David: Hey guys, welcome back. This is your host David Dodge of the discount property investor podcast. Today I am joined by a good friend and a St. Louis local, Edward O'Daniel. Hey Edward, how are you, sir?

Edward: Awesome, awesome here. Great to be with you this morning Dave.

David: Awesome and thanks for coming onto the podcast today Edward. I've been meaning to connect with you, it's been a couple weeks since we spoke last anyway, and you know, I get people reaching out all the time that are outside of the Midwest and they're wanting to buy properties here locally in St. Louis because we have a good market for cash flow.

Edward: Absolutely.

David: I've been given out your information left and right to individuals and I just wanted to bring you on today and just kind of touch base with you. Let's talk a little bit about the St. Louis market, let's talk a little bit about you and your business St. Louis property management and maybe we can just expand and have a little fun while we're doing it man.

Edward: No I appreciate it here, as a matter fact one of the things I was looking at here is that was I haven't quite finished your BRRRR book yet. I've been going through that, I've been having fun, a lot of great information in there but one of the topics that really stuck out to me well several subjects that sort of have to do with the investors that want to invest locally, you get contacted by a lot of people that want to buy properties and then I get contacted by a lot of people who once they buy them from you, they want us to manage it for them. But the problem that I see is they get themselves into trouble and this is where I try to tell people that get me involved, you know, get the property manager involved, you know sort of in acquisition time so we can kinda help you understand your total cost with buying that property. So,  just one of the biggest problems that I see people do is I see people- sorry, in chapter 4 of your book you cover about why rentals? You say, you know why rentals and one of the main topics that people invest is cash flow, which is one of the primary reasons people do. Now cashflow, unfortunately, the problem with cash flow is that you have to be able to get all of your deferred maintenance and you're high maintenance cost items done initially on the purchase.

David: That's right.

Edward: If you don't- if you have an old 20-year-old or 25-year-old furnace or air conditioning unit, that's going to hurt you because typically people once they buy it, they somehow refinance it or they buy it. However, they buy it, they typically finance it using the leverage that you talked about in that same chapter but the problem with that is once you leverage it, you sort of upfront capital expenses are all encompassed inside of that loan. Now everything that you pay outside of there has to be done through using your cash flow. Now, here's where the problem is you have a lot of this- you know you can have five, ten thousand or even more dollars worth of deferred maintenance on that property that you need to do and that needs to be included in the purchase and fix up cost. I know you had another chapter in your book for that but those are- that's great information.

David: You're taking me back to the book and actually going to the glossary here like chapter 4, what did I write? I love it man. You know what? Speaking of that, it's funny that you bring that up Edward because we have a rental right now that's turning over and we didn't rehab it when we bought it, we borrowed the money to do so. We still have it however, we refi-ed it in a package of three other rentals and when we did that, they didn't- you know, they didn't go in all of the properties so we know we got a really good appraisal on the property but now it's kind of come back to bite us because it's being vacated and we know we have to put about 15 grand into it, so luckily we saved that money and we put it aside and didn't spend it foolishly but yes now we have to go back and do that so if we didn't have that already and we bought it and we refi-ed it, we would be stuck. We would really be stuck with the property that needs, you know, $15,000 essentially worth of work. Man, that is a great point that you bring up about the capbacks.

Edward: If you would have to stop back before- I mean if you would have just again had the foresight of whatever but if that fifteen grand would have been- like if you would have been able to buy the property vacant and do all those repairs up front, I mean, what's 15 grand? Maybe like another 100 - 150 dollars at the interest rate, like another payment on your principal interest, taxes and insurance.

David: Right.

Edward: And it would've been maybe another $150 of total overall cost but you would have zero maintenance on it, you know zero upfront maintenance cost for probably years.

David: That's right.

Edward: And then that's when you- that's when those cash flow calculations really come in handy, and that's where I see a lot of the out-of-state investors starts failing in St. Louis market because they buy them as-is and they don't anticipate that 5 thousand or 8 thousand dollar cost and then they look at us like the bad guys when we go through and when it goes vacant and says you need to paint it, the carpet you know, we don't put carpet back in, we put hardwood floors in cuz you know, that's just another expense you don't want.

David: Right.

Edward: And by the time we do all these numbers, it's you know 8, 10 grand and they don't like it.

David: And they don't like it at that point. That's right. Let's talk a little bit about what people can do that aren't outside or that are outside the St. Louis market or they're not in the Midwest and they're coming from the coast and they're wanting to buy cuz I personally get inquiries all the time on little houses that you know, I may pick up for less than thirty or forty grand, like I literally just wholesaled one that I bought for 5 and sold it for 10, right? Not a home run deal by any means but I still left 10 or 15,000 on the bone for the investor who's going to fix it up and rent it out, right? So it's not necessarily all bad but let's just maybe start from the beginning, right? So if your outside of the St. Louis market, some of the things to kind of keep in mind, right? Buying really really cheap isn't always a great thing, okay?

Edward: No.

David: Typically when you buy a property that's 5, 10, 20 maybe even as low as 30 grand in some cases, you're gonna most likely be in really bad areas, right? or the property is in such distress that it's going to require you a ton of money to fix up. I kind of have a rule of thumb Edward, I don't know about you but I don't like buying properties that the rehab cost is more than the purchase price. You know, I've done it many times but my rule of thumb is if that's the case, let's avoid it at all costs because you are pretty much taking on a lot of risk at that point, right? If the value of the property is literally lower than the repairs, something is wrong with the situation, either the street's terrible, the ZIP code terrible or the property is just not even worth fixing up, right? So that's one thing to keep in mind guys. Another thing is don't chase returns, right? Whenever you see investors or wholesalers marketing their deal and they say you can get a 25% return, well maybe for a year or two until that tenant moves out and they leave the house destroyed, then you gotta calculate in your vacancy and you gotta calculate in all these other issues, right? So I think the best approach if you aren't in the St. Louis market and you are wanting to invest here, number one, learn the market right? Learn the market, figure out what's- what are the good areas and what are the bad areas and figure out what the rates of rent are, right? That's probably where I would start. Next, I would try to find a deal in an area that has a low cost of a home for a high rent rate but again, not too low. Don't chase these crazy 20-plus percent returns because at the end of the day, yeah you might get a 20% return for a one year or two or even three but then what's going to happen is you're gonna have a negative return. You're going to have to come out of pocket probably all the money you made over the last two or three years to get the house in the right condition.

Edward: Correct.

David: So again, be wary on you know, where you invest right? What am I missing here?

Edward: No, I mean you're exactly it and right now it's not- it wouldn't be uncommon for people, our clients that I have, to invest in those areas that you're talking about David, but they don't put all of their eggs in one basket.

David: Yes.

Edward: So I mean it's good to diversify if you want to have the lower-income rentals with higher returns to offset maybe your higher, you know, your class A or maybe high B properties where you know, you've got less return but less risk. People do that a lot but again you go back to you need to make sure that your deferred maintenance, that 25% return you talked about, it's great while the persons living in there but it has a 20 year old furnace, the water heater is rusted and leaking and you got $8,000 worth of work that should have been factored into the total purchase price and done when you bought the property and you should have factored those costs in your calculations. Now, that 25 might drop to a 14, but the 14 is going to be consistent now. It's going to be a solid consistent cuz you all the deferred maintenance has been taken care of. So, my advice to people would be get your property manager involved during the acquisition so they can be-

David: Ooh, you know I have not heard this being talked about a lot. We do this occasionally, but this is a gold nugget so please I don't want to interrupt. I just want to emphasize how important this point is. Go ahead.

Edward: We try to tell our clients: if you're buying properties here, please get us involved. Let us verify and this is no offense to you or any of the other wholesalers, but my client's I say let me verify that the rent price is what they're talking about cuz there've been prices where the tenants that are in there are paying higher than market rates to make that 25% look good, but then when they vacate and we can only rent it for $200 less a month cuz that's what the market rate is, did you follow me on that?

David: Yep.

Edward: So the market rate is less than what they had in there, now they're 25% return isn't so great and they blame us for that, like why can't you re rent it for what it was- for what it was already rented for? Well its above-market rent and the property doesn't you know, it's not fixed up or doesn't have the amenities to demand that rent. So, get us involved so we could check the rent price to make sure that's good and your rental calculations is accurate, as well as let us go through it and find out all the problems that we know you're going to have whenever you pick this property up here. We could tell you: you need to fix this, you need to fix this, just get it taken care of, put the you know, let's just say you buy it for 40, you know, put the additional 10 grand in it now finance it or wrap it like you did with multiple loans, you know, together, that's fine because the cost is only going to be a few hundred dollars more and you're going to have years, years of little to no maintenance and your cash flow is truly going to be your cash flow at that point.

David: That's right. Guys, the reason I brought Edward on today is because Edward is the owner of St. Louis property management, and he is literally one of my favorite property managers here in town because he actually cares about his customers, right? He's not just saying hey bring me a property, I'll manage and take the fee and good luck, like no, he cares. He's literally telling you to get him involved in the process of the acquisitions guys and again, just an amazing individual here. So, Edward is St. Louis Property Management again, this can be found at StLouisPM, or St. Louis spelled out, PM for property management.com guys. Go check out Edward, connect with Edward. Edward can be reached directly as well at 314-757-0025, all right? And I'm not trying to just you know, promote promote promote Edward, however, I am trying to bring light to the value that he provides to the market here in St. Louis and to his customers guys. So again, check out StLouisPM.com to learn more about Edward and Edwards property management company. So Edward, you are willing to help people on the acquisitions because you care and you want to retain long relationships with your customers. Man, I love it, so much value there, right? You personally are buying properties and flipping properties and hold rentals as well, so you're dealing with an investor that's also a property manager, not just a proper manager guys. There's a big difference there, I've worked with the companies in the past that were just property management and you know, they're just all about fees. That's how they make their money but as Edwards- he knows, he is an investor that, you know, you want to be as fair as you possibly can on both sides of these transactions here. I love it. Edward, what- go ahead.

Edward: Nah, I would say there's something else involved with that too. Not only are we sort of investor friendly, a lot of the property management companies that of course, they want their fees, that's how they continue to stay in business, as long as their fees are fair. The biggest thing I didn't hear you're say is that the way of being able to control cost.

David: And that's the thing, you're right.

Edward: If every time something is done, you just can't simply just keep throwing contractors and having people go out there and you just keep getting bill after bill after bill every month, you know at some point you're going to have to go onsite and do a sort of site survey to say hey mister client, you need to fix all of these items together, otherwise you're going to be getting killed in maintenance fees.

David: Yeah, and it's gonna be cheaper to tackle a lot of things at once as well because your guys are there and they're making less trips to the hardware store and you know so many things like that. So, let's take a step back just for a second Edward and let's just talk a little bit about you know, some of the things people need to be aware of if they are looking to invest here in the Midwest or specifically here in the St. Louis area, right? Cash flow, that's what we all like when it comes to real estate.

Edward: Absolutely.

David: And cash flow is what's left after everything has been paid, right? So when we are buying a property, you know, Edward and I have mentioned a few times now handling all the big issues upfront. You know we highly recommend you do that, that's called Capex and we like to fix all that stuff when we buy the property or when we have the ability to, but the sooner the better right? because if not, it's going to bleed you dry, you know, as we mentioned. Another thing that you want to be aware of is your vacancy, this needs to be calculated in when your- whenever you are determining your return investment or how much cash flow. You need to know what your vacancy rate is going to be, right?

Edward: Correct.

David: You also need to calculate in a maintenance expense, right? Every single month, no matter what. Even if you had just rehabbed the house and spent 30 or 40 thousand dollars updating it, you're still going to have maintenance guys, it happens. Things break, it just happens, you know temperatures and humidity can affect things in the house and wear and tear, it just happens, things break. So other than vacancy and Capex and maintenance, what am I missing here?

Edward: Property management cost.

David: Property management, boom.

Edward: So I mean, you also need to factor that in to your total overall expense and as long as you can calculate, you know, even a fair number of just like 10-10-10 on all of that kind of thing and then your deal still cash flows after all of that, that's when you're really looking to be in good shape.

David: That's right, so those are the expenses guys. So how do we calculate our cash flow? Well, we pay all those expenses, with what? With rent cuz we're buying these properties as investments and we're renting them out, so the rent comes in and let's say the rent's a thousand and you know, our mortgage plus our property management plus our maintenance plus a vacancy which isn't really an expense, it's a phantom expense, but it's a cost regardless of how you look at it. Then what's left over is our cash flow. Now the coolest part about the St. Louis market is we have a good- a good market for cash flowing, right? A lot of markets, it's very difficult to cash flow if not impossible, especially if you were on the coasts, but here in St. Louis my rule of thumb is 1% right? I'm typically looking for a property that I can buy and be all into that property and collect 1% of that all in cost in the monthly rent and the cool thing about the 1% rule is it almost guarantees cash flow, right?

Edward: Yes.

David: Somewhere around 200, maybe even as high as 300 depending on the property, but you can almost guarantee cash flow when you buy properties using the 1% rule. Now, the cool thing is I have some properties at the 2% rule.

Edward: Absolutely.

David: Which literally means I'm bringing in 2% now, but here's the thing, we talked about this in the very beginning, the properties in the 2& category versus the 1% category, the maintenance always seems to be higher on those properties.

Edward: Correct.

David: Vacancy always seems to be a little higher on those properties and for whatever reason the capex on those properties doesn't come every 7 to 10 years, it's every 3-5, right?

Edward: Well keep in mind guys we're in St. Louis, we have all four seasons here so we get the hot summer and we get the cold winters, the ice storms, you know, the trees falling, we get tornadoes, we get all kinds of stuff here so yes, there are unexpected expenses, you know, that are going to pop up.

David: Absolutely, absolutely, but if you are able to find yourself a good property and you get yourself a good property manager, hint hint hint, right?

Edward: Absolutely.

David: And you bring the property manager in on the acquisition of the property so they can tell you if this is going to be a good deal or not, cuz I'm sure that there's situations probably Edward where you turn away business like no, I don't want to manage the house that's in this much disrepair or that's in this particular area of town, it's probably not worth our time but that's really good information to have as an outsider, you know thinking well everyone else told me this is a great deal, well that's because they're trying to sell you the deal, right?

Edward: Right.

David: Big difference there.

Edward: I've actually had to let clients go unfortunately. I mean people come into our area-

David: It's not unfortunate at all Edward, it's fortunate for you, right?

Edward: That's what happens, yeah. I mean, they buy 10, 15, 20 unit packages altogether, but they do just what we talked about earlier, they buy them and then expect them to move forward generating cash flow and they've already gone through them so they know that dis- you know, the maintenance it needs to be done on them, but then they don't want to get them fixed and they want to squeeze these properties for every bit of money and we just kind of have to let clients go like that cuz I mean-

David: You know there's one thing I do want to mention on this topic and that's, you know, real estate isn't very- it's not- it's not as passive as we all think, right? Even when you have a property manager, right? It's still not completely passive because the property's going to need work at some point and the property managers there to just facilitate that. The owner still has to make the decisions and pay those bills.

Edward: Correct.

David: You know what I'm saying? So yeah, I just want to reiterate what you're saying. I think it's very important to have, you know, a property manager that's really on top of it.

Edward: Well, and one of the biggest things we saw is you talked about vacancy, the one of the biggest, you know, the ways that investors really make money are renewals. Renewals keep the tenants in there year after year after year. That's when you start making all your money, that year 2, year 3 and even year 5 and beyond. Well, how do you keep somebody in there? How do you keep somebody in that property?

David: That's right.

Edward: You keep them in there because they have a good property manager, they take care of the maintenance, they feel safe in it, they feel like if there's a problem, somebody is going to take care of them in their particular place and of course one of the things I try to tell our clients is you should look at refreshing the property, you know, at least every five to seven years. Even going through and touching up some of the paint and making the rooms look fresher cuz that gives people a sense of hey, I'm living in a new house and it kind of refreshes everything rather than having to move out cuz I guarantee you a painting cost of maybe, you know, 5 to 8 hundred dollars to do several rooms-

David: Sometimes less man, sometimes it's like 400, right, right.

Edward: Exactly, it's going to be a lot less than thousands of what it's going to take to renovate that property and get it back on the market  and [inaudible] cost.

David: And you gotta take one vacant month sometimes maybe $1,000.

Edward: Correct.

David: Right? and even if the property- here's the thing a lot of people don't really understand, or I shouldn't say that, that people discount, right? Is a property goes vacant, you're like okay, and then you get your guys in there to get it ready again, you do your turn over and it may or may not need updates, but even if it doesn't, you're still typically looking at, you know, anywhere from 3 to 10 days to turn the property over, tip, right? And then you have to start leasing it again, so even if you get a leasing person in there, that's awesome and they get at least within you know, let's say another week or less, it doesn't mean that that individual is going to be moved in right away. They may want to sign the lease for the first of the month and it could be the 18th.

Edward: Correct.

David: So it just- there's just time that you always have to be factoring in when it comes to this, so I think that might be one of the best tips that we've heard all day here is, you know, going in and doing a light refresh when you have a tenant that's renewing is  an amazing option because you know, I've had tenants that have stayed for 4 or 5 years and it's only because of that. At year 2, I'll bring in a carpet cleaning company and we'll go in and we'll touch up all the paint and you know, and clean the windows and just do a little extra. Maybe spend 7 or 8, 9 hundred dollars, you know, but what ends up happening is I reduce having a vacancy for 24 to 36 more months.

Edward: Correct.

David: Cuz they stay, and when you have a tenant that stays for you know, 4, 5, 6 years guys or longer, I've had some- not that I've owned the whole time, but I bought, the tenants have been there for 20 years.

Edward: Well, and we even have a- the even biggest thing we go is we even0- if the tenants have been staying there and yeah, we kind of try to schedule this along lease renewals so that way we can even try to squeeze in and add a one-year renewal but even at 2 year renewal with the rent increase by just saying hey, we're going to come get this stuff fixed up and we even let the tenant do in a sense some form of color picking, like we have certain colors that will go in there that are neutral and letting the tenant pick those colors or which one they would like gives them the option like they're decorating their own house which means they're more invested in it.

David: Man, that is- that's good piece of advice right there, I didn't even think of that. You know you could do that with paint.

Edward: We don't do blue's or orange's or purple's, obviously none of those, no.

David: No, no, but give them 3 or 4 different types of gray's or beige's or whatever, so what? It's simple you know, you don't- yeah, I love that. That is an amazing tool. Well Edward, hey thanks for coming on today. Let's give the audience, you know, a little parting tip or trick, something along those lines. Again, you know, we have a lot of people that are looking to invest here in the Midwest, they reach out all the time and I recommend them use you as a property manager just because you are a friend, you've been in the game for a minute. You're not just a property manager, but you are also an investor and the fact that you literally say hey bring me in into the process of acquiring so we can at least help you and tell you, you know, you should do this or not do this or run in some cases. I love it, so yeah, what'chu got man? One last tip or trick for us.

Edward: Well, I would like for the investors out there listening to this to sit back in and understand that David, discount property investors, St. Louis Property Management, we're all a part of the same team, we're on your team. That's the biggest thing that I want you to think about is that when you- when you're buying a property from discount property investors and you're like, okay great, you know, we know it needs work, whatever, let's get Edward involved and his company. They're going to tell us what we need, we'll figure out and kind of create this nice little balance. We can in turn bring our contractors on board to do some of the work, you know, to get that stuff fixed up and get it up to that particular speed for your appraisal, but just think of us as your team, we're not individual players. David and I and his- and our companies can communicate directly with each other to benefit you because I'm getting a client, hopefully a long-term client, and David's getting a sell with his property so everybody wins in this factor so if you look at us as a team, you know, we're going to work out much better.

David: Yeah, we're getting a great deal on a property that's cash flowing and they have been set up for success. You nailed it.

Edward: That's it.

David: Edward, thank you so much for coming on. Guys, check Edward out, StLouisPM.com, that's St. Louis property management, and again Edward is a personal friend of mine, and he and I would love to take care of you guys. Thanks for listening, until next time.

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