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Tennessee Real Estate Insider is your go-to podcast for uncovering the latest trends, tips, and investment opportunities in Tennessee’s real estate market. Whether you’re a first-time homebuyer, seasoned investor, or just curious about the industry, we provide expert insights and local knowledge to help you navigate the ever-evolving real estate landscape with confidence.
Hey, and welcome to Tennessee Real Estate Insider. I'm your host, Allison Spencer, real estate investor, and property manager, top producer here in East Tennessee. And today, Kara Johnson is joining me. Thank you so much for coming. Thank you for having me. Kara is also a real estate investor and I have the pleasure of managing her rental investments, which has been really exciting.
Um, today we're going to talk about avoiding those real estate pitfalls. Um, and I get asked a lot from first time investors, what should I look for? How do I get started? We talked about how to get started in our last podcast. And today we're going to talk about making the right choice. So that you can succeed.
Yeah. So thank you so much for joining today. Yes. Um, I tell people I tell my clients You make your money when you buy a rental and you make your money when you place the tenants Yeah, placing the tenants is a whole episode on its own But 📍 today we're going to talk about making your money when you buy the property Yeah, it's so important to go into purchasing a rental property With a mindset of is this going to cashflow is this?
Um, if it doesn't cash flow, is this a resellable property? Yeah What are some of the important factors when you all were looking to purchase investment properties? That you considered a good strategy Yeah, I think the biggest The biggest thing for us that sometimes we did really well at and sometimes we did not is doing your due diligence to know the property.
Um, it's extremely important to, we, we touched on this a little bit last week, um, or the last podcast, but, um, you know, knowing your numbers, how much it's going to cost to, you know, fix up or to get this to be an established rental. Um, one of the things that. We have, you know, really, uh, looked at in all of our like rental portfolio is What has caused this to cash flow and what money did we have to put in to get here?
And for us, you know, one of the biggest things to avoid is not knowing the ins and outs. and not getting a, you know, report of the, an inspection is what it is of the property to be able to know what needs to be fixed, right? 📍 There are so many variables in determining and evaluating a property. You have location, the condition of the property, um, the current rental market.
There are so many different variables there. And I know my husband, he is a numbers guy. He is really big on the cash on cash return. So we evaluate, okay, is this property going to take three and a half percent to put down or now we don't move into our properties, but as a beginner you might be looking to move in and have less money to put down before you graduate to straight on investment loans.
Um, so the money that you're putting up front to get into the property, Also the money that's going into rehab the property. Um, is it going to be a small project, maybe five or 10, 000? Is it going to be a large project, maybe 50 to 100, 000? And evaluating those costs before you commit to the property so that you can then say, okay, The cash on cash return for this is a really good investment.
Yeah. Um, I know for us, we personally have certain numbers that we look for to, to reach that criteria. And I think that depends on everybody's bank account and reserves. I think having a budget going into the property is very important. And with that budget, I think that that's a really important thing for people to remember, and this is something we did not do well when we first started out, is making sure that you are aware that more than likely that budget is going to go over.
Absolutely. It always does. It always does. And so you don't want to be left blindsided and realize like, oh wow, now I have to I am not in a position or a financial position to be able to continue with this rental, because I did not think that this was going to cost as much as it does. Right. And as a property manager, I also have helped assist in, uh, Rehabs with other investors and I'm able to pull up the numbers and say here's the contingency You need 10 to 15 percent contingency because inflation happens Um tragedy happens just you know, you open up a floor and see termites.
I mean been there Foundation issues that you weren't expecting so you just you've got to have a contingency strategy in place so that you can stay on budget um You As far as properties and looking to hire out Are you all were, you know, having the right contractors is key to success. It is key. So you kind of learn by trial and error or, you know, you contact a professional like me so that I can have a whole list of people to use.
Yeah. Um, but do you have any stories to share with the listener today about Maybe something you've learned with working with contractors and the proper steps to take. Yeah. I think that's the, one of the biggest things if people can hear is that it's extremely important to know who you're working with.
Um, because that is really going to make or break a project. Um, for us, you know, we have found that nobody is great at everything. It's just, even if they claim to be, it's just the reality of it. And it is great to have a general contractor like in your back pocket that you know, does good work and can, is a really great maintenance man.
But when you are looking at totally. Um, redoing a space and you deal with plumbing and electrical or, you know, roofing or all of these different aspects of a renovation. We prefer to actually use, that specific professional for that specific job. Um, you know, we, uh. Unfortunately learned that the hard way and, you know, knowing who you're working with is pivotal to the success of the project because, you know, we found ourselves, this was early on, this was in, 2019.
I was pregnant. There may be some trauma from this experience, but, um, two small children at the time. But anyways, we had a very, um, big project, a house that needed to be pretty much completely gutted. And, um, we ended up hearing of this person that was a general contractor and we met him. He came, looked over, assured us he could get everything done, and we paid him up front.
And I know that this is not just our story. I since have heard many other people making this mistake or pitfall, um, when it comes to investing. And we ended up giving him 30, 000. And at that time, that was You know, and really even now that's a very large amount of money to hand over to someone. And we expected the house to be renovated.
Right. And what we found was is that he ended up taking the money and, you know, started the project probably got about a week's worth of work done and then ended up taking it. I think leaving the state. Um, so it was, it was very hard and made it very difficult to navigate. Um, but one thing it didn't stop us.
And one thing that we learned from that was, okay, we will never do that again. So, you know, making sure that you know who you're working with, because we did not know him. And since then, we have made sure that we are getting, you know, recommendations, we're testing them out, we're, you know, having people come and we're really doing our due diligence.
I think a part of that due diligence, I'm sure you all do. And I know you do because I work with your business, but, um, You know, it's getting contractors to sign agreements. Um, it's getting, it's not prepaying for services that haven't been done. Yeah. So setting those up if you're getting started and a contractor is approaching you to say, well, I need the full payment up front, or I even need half of the payment up front.
I would caution The listener to say, okay, I will pay a portion of it, but it's going to be in writing. It has a deadline. If this job isn't done by X date, then there's going to be a fee involved maybe for the contractor. I think it's important to set up timelines and timeframes and have contracts in place so that you aren't taken advantage of.
Um, and of course, always, always use, uh, licensed and insured contractors. Yes. Make sure they're pulling permits, that they're doing things the right way because your reputation in this industry is so important to be known as good. doing a good job, taking care of your property and following the rules. Um, for the safety of everyone that's going to be living in that home.
So I think a couple of the pitfalls we've mentioned and there's a few more, but having a budget, one of the pitfalls is overspending. It is, um, going in thinking your budget's going to be half of what it ends up being and you run out of money. I've purchased properties from people who have, um, you know, overspent or overbudgeted and they didn't have the funds to complete the job and the house falls into foreclosure.
So you don't want the property to go into foreclosure. You have to have some reserves on hand. When you go to purchase a property, I would say you need a minimum of six months of mortgage reserves so that you can go in and really have peace of mind because this property may not be producing income at that time.
Um, or maybe you're living in the house and you need some reserves so that you can afford to do the repairs or to hire those out. So you need to have Um, financial reserves to avoid financial pitfalls. Yeah. And then the contractors being able to do your research and be prepared. Another thing is the pitfall of purchasing just a terrible home, you know, being able to do your thorough inspection and Get that done so that you know, it's a safe place.
I know for us We are a little more conservative and have generally looked for a little more cosmetic repair properties Yeah, and they have turned out to be a good investment for us but also Remembering your contracts when you're signing the lease with a tenant which will be another podcast But when you're signing the lease really securing, um, terms that are going to keep you safe and keep your investment secure.
Yeah. So I think those are some really good, um, pitfalls to avoid. Um, is there any other pitfalls that you can think that would be helpful to someone getting started that could maybe, you know, hinder their progress in moving forward? I think that when, when I think of pitfalls, I also, you know, It's extremely important to have, um, the reserves in place.
But when you first get started, I think a pitfall that kind of is in a different category is thinking everything has to be perfect and then you never get started. Right. And so, you know, a pitfall there would be, you do have to make the jump sometimes. And so being knowledgeable about things to look for, being knowledgeable about what you can do to make it the best investment that you can.
But then also, Luke's favorite, favorite phrase is no risk it, no biscuit. And, and there's a lot of risk involved, but there's a lot of reward. And so, you know, looking at the pitfalls, if you, you know, if you can do it as best as you can, As long as you are actually taking the step forward, then it will hopefully benefit you because it for me and for you, it has been a great, you know, a source of a passive income for us.
Absolutely. And I know that there's opportunities out there where maybe you are looking to sell. 📍 Maybe it is useful to help grow your portfolio to actually sell a property because there is so much cashflow involved. Yeah. I know for us personally, we purchased a , foreclosure when we were living overseas, we had not seen the property and we did a virtual tour and we bought it for $141, 000.
a few years later, we did put some money into it, but a few years later we sold it for $400, 000. Yeah. We profited the cashflow, but we said, let's take this cashflow and invest it to grow our rental portfolio, reinvest the funds. And there are things in place. Like 1031 exchanges and other things to help avoid the tax pitfalls that come with that Yeah, but just being wise when you purchase you have a good exit strategy Maybe if you have a rental property and you say I want to sell it one day Is it going to profit me money
so just keeping in mind the opportunities With what you can to avoid the big pitfalls and I think we you know, we Very subtly touched on this but when you are looking at a property and you do see that Okay Wow, this property may need more than what I feel capable of doing. I know for me in different seasons of my life That would be very overwhelming to think about doing a whole project or getting it on the market.
And I really, you know, I really would encourage you that there are really great project managers. Allison has been a great, you have been a great project manager and um, you know, for those specific cases that you can look at a house and say, I want that house. I don't know where to start. I don't know the contacts that I need.
And finding, you know, someone to help you along, there are people that can do that and that have all of those tools. I mean, you have a whole list of, of contractors that you use and that can avoid a lot of the trouble that may come without that. Absolutely. And I think too, just to add one more little thing, when you are renovating a house, one of the pitfalls could be, um, overspending with high quality finishes.
So I think it's important to remember your audience. Who is going to be living in the house? How much are you going to get and that's going to dictate how to move forward with that rental? So it's it's so true even for us Something that we do for all of our rentals and it seems boring but like we have we put the same paint We put the same countertops.
We put the same LVP. It's like just very standard middle of the road, like that. We know, okay, this last, this may be boring, but this is a rental. The purpose of this is to generate income. Yes. So thank you so much for sharing your experience with us today. I think we really had some great takeaways of Things to avoid and things to pursue so that we can help encourage other people to move forward in their investment opportunities.