How to effectively to turn a remote rental property

The Remote Investor

A turn is the most active period for a real estate investor, apart from the acquisition itself. This is a critical time to rehab the property and make modifications that could increase the rent you can charge. But doing this on a property that is on the other side of the country adds a whole new layer complexity. Between the two, Tom and Michael have seen hundreds of turns and in this episode they discuss Tom's current turn down in Georgia.

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Transcript

I think that makes a ton of sense, although slight counterpoint, I would say, is I think that the number that you've gotten reserves should be independent of your rent amount, because if someone owns a house, single family home that runs for 800 bucks a month, if I've got four months rent sitting in my bank account, that's $3,200 and I get hit with this turn because it's a similar sized property, I could be up a creek kind of a thing. What's going on? Everyone? Welcome to another episode of the remote investa. I'm Michael albaum, and joining me today is my co host, Tom Schneider, and today we're going to be talking to Tom about what it's like to do a turn, since you're in the middle of one, right? That's right. That is right. And for anybody who's new to real estate investing or who might not know what that is, can you just give us a quick rundown of, like, what is a turn and why? Like, why are we dedicating a whole show to this? Why is it important enough?

Yeah, so I'd say a turn is probably one of the most like, I guess, active or kind of busy decision making time after you've done the acquisition. So to kind of give specific kind of bookends of this, it's you have a resident who's lease sending and they've decided to give notice all the way to the point at which the home is occupied again. So lots of important kind of decisions to make with with me and my property manager, and excited to talk about it today.

Awesome, or or if you're like in Pierre's case, where your tenant doesn't give notice and just pieces out and you're left with an empty unit, you might have to do a turn then too. Yeah,

I guess not all turns are created equally. Evictions, there's Yeah, kind believed, yeah, yeah.

All right, cool. So let's, let's jump into this and dissect it a little bit. So first question, Tom, did you decide to do this turn, or did the tenant kind of make that decision, quote, unquote, for you, by leaving the unit in disrepair?

Yeah, I wouldn't say that they left the unit in disrepair. But so anyways, so I have a property management company that I use in Georgia. I'm over in California, and they're, they're on it like so their their process is, as we approach the end of a lease, they talk to I'm already getting away from the question you asked. I'm not exactly sure what it was.

I love your non answer.

I know what. So it was the resident decided to leave. So I got a little little winded there, but at high level, you know, we start the release process a couple months before the end, they decided now they wanted to move whatever. You know, we presented them an offer, and they decided to leave. So I think I got the got back on the rails of your actual question you were asking. You're

just doing a pitch for your property management partner for the episode.

I guess I am. I don't know. Yeah, yeah. All right. So

so your tenant left, yep, the property manager talked to them as the lease and approached its end, found out they were going to be leaving. And then, so then so then they gave you some heads up. Or, what did that look like? That? Hey, the tenant is leaving. We might have to do some work. Or how did you know that you were gonna have to do like, a quote, unquote turn, as opposed to just getting a new tenant in the door? Yeah, so

this is communication from my property manager and that, oh yeah, we've presented, you know, the updated rent they, you know, we're gonna leave nothing really to be done there. The first thing that they ask is like, oh, you know, do you want to lease it again, or do you want to, like, sell it? You know, they're probably excited about any and all situations, so long as they they keep, keep the business, perhaps make money. But yeah, I think I answered your question. All

right, yeah, no, I think that totally answers it. And so I'm curious, Tom like, with you and your property manager having this conversation, there's always the balancing act of occupancy and vacancy versus rent growth. And so did you try to get a rental increase for this at the end of this lease. And do you think that could, and if so, do you think that could have contributed to your tenant deciding

to leave? Excellent question. Michael, I, you know, I try to, usually, when my property manager comes to me at the end of lease, they'll say, Yeah, you know, the rents a little bit under they're a good resident. Oh, let's, you know, maybe increase it a little bit or not, and more often than not, my response is a, you know, what do you think is the right course of action, you know, and why? And, you know, good property management will kind of a thoughtful response to that. So I believe, for this particular case, that's happening right now, they did, they did. Thought it was, you know, a 25 or a $50 a month increase, you know, was, was the right, like, market length, but, you know, I would have been very willing, you know, let them know, like, hey, you know, if there's something we could do to save it, just because turns typically are just, you know, in vacancy and that kind of cost is just like, you know, a killer to the. Be underlined. So I believe the recommendation was going up a little higher, but like, leaving it open, if there was any kind of pushback around kind of keeping it, you know, keeping it the same. But I mean, as a really, like, really salient point, like, in going into a turn is like, hey, is there a way to avoid it? And you know, me as an investor, like, and especially having, like, a good tenant, like, great, you know, if they're good tenants, like, we don't necessarily need to change it. You know, while, like, some rent growth, growth is is always like, helpful to another line, you know, vacancy is like, much, much worse. So long winded story is, I think they were pushing for a little bit of rent growth, but even with the opportunity to keep it the same, they just they were moving anyways,

yeah, and that's exactly kind of what that tells me was, in the tenant's mind, like 25 bucks a month is whatever, $250 a year, if my math is right, in terms of additional rent that they're paying, like to go rent a U haul is like 200 bucks, let alone the hassle of moving. So I think you'd hit the nail on the head when you can keep things in place with a good tenant, it's a win win for everybody. And so even if you aren't getting that rent growth as the owner, you're not having to deal with vacancy, you're not having to deal with a release fee from your property manager, you're not having to deal with a turn cost. It can be a slam dunk even if you're not getting that rent growth. So I just encourage anybody who's who's kind of in a similar situation to run the numbers and not blindly run towards these rental increases, thinking that they're that they're doing so much better now, of course, now the obvious, the obvious downside to that is if you allow the tenant to stay at the same rent for multiple years at a time, and now there's a significant delta between market rent and your current rent that can get sticky at times, especially because our expenses do tend to increase on the property over time. All right, so shifting gears here. How did you figure out and what did that process look like in terms of what the scope of this turn was going to be? Did that come from you? Was that from your property manager? Was that from somebody else? Give us, give us some insights

there. Uh, this is from the property manager. And they, they manage a, you know, a little over a handful of properties for me. So, you know, a good

big hands. We talk in big hands, little hands,

medium sized hands. So perfect. Been through, been through like this process with them before. So the way that, you know, works with these guys is they will create a scope internally, and, you know, document it, have an inspection, and then they will go out and get multiple bids against that scope, okay? And that's so that's kind of with in house staff not doing it within in house. I think if the scope was really limited, like it was pretty much just, you know, mow and blow and whatever, you know, clean the carpets. But there's one, is a little bit more going on, you know, I think there's some some paint issues that you know gotta, gotta get into. So I think if the scope is very small, they'll like take it. But for this particular case, they they have some external folks jumping in, submitting bids. Okay,

all right. Man, I hope no one takes that rhyme out of context. They just sniff at the end of it, mow and blow and man, that is a funny rhyme. I never heard that one before. Oh,

that's a good one. Landscaping.

That's a real good one. Yeah. So, okay, so they, they develop this scope, they run it by you. They go get quotes for you, and then they just present them to you, and then you get to decide which what makes the most sense. Yep, I've got, actually have,

you know, very timely. I have that email in my inbox right now where they have presented the two bids against the scope. And, you know, something that, like never ceases to surprise me is, like, the differences in costs, like how kind of, like dramatic they could be, you know, between the two holders. And this isn't like an extreme case, but like a little bit, it kind of is a big, big swing.

Give us, give us the rundown of this, of the scope. And then I want to guess what the two the two bids are, okay, yeah, all

right, open it up right now. I just type the name of the property manager, and it has like the whole email, like history. It's like, you know, renewal suggestion, tenants notice to vacate. Utility connection. Okay? Turnkey estimates received all right. Drywall repair holes from nails and stuff like that. Paint they recommended, a full house, interior and exterior. There's drywall patches. Includes the walls trim and doors clean. They accept something called the rent ready package like door stoppers, light bulbs, smoke detector batteries, HVAC filters, landscaping, flooring. It says routine flooring clean. Why wouldn't that be just part of regular clean? Window blinds, lights are clean. It looks like. Not, and they're adding so this is net new window blinds, weather stripping, door power for the microwave is missing. I don't know what that means. What says the overhead microwave does not have power cord. Install a new card to replace the missing cord. There's, there's a few. This is like, I'm gonna, I'm gonna, I'm gonna speed this up a little bit. There is a little bit of water intrusion from the garage, from the back deck, so replace some water, refresh old water entry. Pressure washing. That's always fun videos. You guys watch pressure washing videos. So far, this is seeming pretty vanilla. I mean, except the full a full paint, full paint, see,

let's fire extend anything else major, or the rest of kind of miscellaneous outs and closet rack they like, list

the same thing twice. This is something that I'm gonna go back. I'm good. I usually don't go through this much of a but I might save myself 250 bucks by like, going in this a little bit deeper gutter cleaning.

Yeah, that's a mow and blow type of job, yeah, um. All right, so, so that's it, that's it. All right, I'm going 80, 8500

I'm feeling a little bit better. I could have imagined this being lower. So the bid that I'm looking at right now is 60, 885 okay, and this one, this particular bid, is the lower of the two that I received. And they're actually, like, kind of tight on each other. The other one was 7100 so here's the where I'm like, kind of like, I think I know what the right thing to do is. Well, just as a matter, matter of fun flow. So they manage a few properties, so they have, like, you know, they'll take run meant rent in and then, you know, pay, send it to me at the end of the month, and I kind of just tell them, like, Hey, don't send me money this month. Just like, use that towards this versus, like, sending, I mean, I guess it's like, indifferent, whatever. But oftentimes on these turns, you know, they'll request to, like, send money in, but just from like, a cash flow perspective, like, kind of what I'm just, yeah,

sending money out of your bank account feels worse than just not receiving it to begin with, totally All right. Well, that's that's helpful, and that's a good exercise, too, just for everybody listening, to get a kind of understanding of what could be involved in a turn like someone's moving out of the house, and you got to paint the whole house. That's a very different experience than someone moves out of the house, and now you've got to redo a bathroom, or put in new flooring, or simply just clean the unit and get somebody else in. So this is kind of middle of the road, one that's good to talk about. Yeah, so is there anything else above and beyond the scope that you're thinking about doing, like potential upgrades to either make the property more tenant proof, more resilient, or potential upgrades that would get higher rents,

you know, typically, like, typically not like, I would defer to the property manager, you know, I'm, I don't see this property very often, so it's, you know, fun looking at, like, the video of the inspection, just to kind of, you know, check in on everything that's there. And I see some potential spots to upgrade, you know, the granite counterplace, and, you know, whatever. But I think I don't want to add incur any more time on the rehab. And I just, you know, I want to get it like, occupied. I'm less less inclined, of, like, adding some additional scope, you know, to do that. And unless the property manager, like, explicitly mentioned something, you know, as such, and you know, perhaps it's something I can shoot to them to ask if they have any recommendations around that, but I might be like, pushing them to, like, say yes, if that's a way. I don't know, I feel like I wouldn't want them to try to think of something to do more, you know, when it's not necessary. But long winded, I'm not, yeah, I'm not, not planning

on it, yeah. Well, Tom, as you mentioning that just a couple things come to mind. One is the property manager might not be thinking about the increased revenue like you as an investor might be. So I, personally, I love just reaching out and asking, Hey, are there any upgrades that you'd recommend that you think would would command a higher rent? And just leave it kind of open ended and see what they say, because a lot of times it can be really little stuff. It's funny. It's like two sides to a coin, right? One is we as people, as individuals, have biases and have wants and needs and desires, and so we might think, Oh, I would never rent an apartment that didn't have x, or would never rent a house that didn't have x. So therefore I've got to go do exit on my rentals. And the reality is, real estate investing is so hyper market specific that might not do anything for that particular market. So like, if you're someone that loves marble countertops and you want to go put marble countertops in this particular property west of Atlanta, that might not be a big deal there. Like people might just not care. And now you now you've gotten spend this money for no reason. On the flip side of that, though there are so many things that are just a lot of property managers are very focused on getting the job done, and can be a little bit single track minded. And so if there's carpet down, they're just going to go figure out how to replace the carpet or clean the carpet if it needs attention, as opposed to thinking, Oh, hey, if you replace it with LVP. Be it might cost more upfront, but you're never gonna have to touch the stuff again. You're not gonna have to clean the LVP like you would a carpet. So there are things that that we want to just be mindful of as investors, some questions to be asking, thoughts, responses, feedback.

I like it. I'm processing all this bye, bye, and I actually have the email to respond to the the property manager, and I'm gonna put, put in a little, uh, little questions there about, you know, recommendations. I like it nice.

The other big one that I love, that I think is easy, is like carpet. Replacing carpet with LVP is a great one. My other favorite is replacing appliances with stainless steel. If the empty appliance has to be replaced, don't go swapping out a perfectly good appliance for a stainless steel one, but if you're doing it anyhow, you can start to slowly transition them to stainless steel. That can be a nice perk as well, and typically doesn't cost much more if you're buying a new appliance. Anyhow. So just something to think about that I enjoy doing. All right. Tom so you've got this big scope or medium sized scope, I'm curious, is the property manager charging you for this service to kind of manage this process, or are you managing the process? What does this look like? As a remote investor,

they're managing the like payment, and I think they have a little bit of an up charge on on this process. I've worked with one property manager that I don't work with anymore, who is, like, really, like, nickel and diming every activity and like, every day, like, it's just like perverse incentives. But for this particular property manager, they have, like, a little bit of an upcharge on the bills. They send me the invoices, like, direct from the vendors that they use. So, like, you know, a lot of transparency, and they'll even add, I recommend going with this one XYZ. We've used them before, so I built up enough trusts with this particular vendor that, you know, 99% of the time say, great. Let's go with what you recommend, you know, and then I'll add in a little bit of special questions that we went through on like other things within the market that could be help with occupancy and potentially rent. Okay, yeah,

that's great. One other thing I just thought of is, I know we were talking before about having your property manager pay those invoices from you the rent that they collected, as opposed to sending you the invoices. And if, if the vendor is able to collect payment via credit card, and there's no like, up charge on it, I've seen that before, that can be great, too. So that way you get credit card points or cash back, and, you know, maybe you get a 2% discount on the whole job, which for a $6,800 job or $7,000 job is not going to be life changing. But if you 5x that, you know, it's, yeah, and it's something like, it's free, it's free money at that point. So may as well try to take advantage of it again. If the if they can do that, I like it. My last question for you, Tom, is, how do you know whether to replace or repair something when it comes to a turn? Why don't you reach out to your to your property manager on some of this stuff, and go, Yeah, you know what? I don't think we need to paint the whole house. Maybe we can get by with painting these rooms. Yeah.

I mean, that's a very fair question. I mean, I'd say, like, on the spectrum, I'm probably less proactive in drilling into the specific, like line items, where they make those suggestions of repair and replace. So, you know, kind of where I am in my investing, I don't know how I would frame it. My investing, sort of like management style is, you know, I have enough, kind of, like, built up trust with this particular property manager. And when they provide a suggestion, they typically, you know, show their homework on, like, what they would recommend, you know, I would be fine, kind of drilling into them. But you know, for the most part, it's, it's a path of, although a path of least resistance, of like, Okay, let's move forward. Let's get you know, you know, I trust you as a local product manager, okay, repair. Okay, replace

that. And that makes total sense. And I function the exact same way. How long are you able to say, did it take you to get to get to this point. So if somebody's listening, has a new property manager, or is just getting started with their with their real estate investing. I mean, like you said, it takes time to develop that trust. How do How should they be thinking about that? Takes

time to develop that trust. I think a property manager that like, does their homework. You know, in that, if they have a recommendation, maybe I could, like, in first developing that relationship with them kind of noodle in a little bit deeper on stuff, versus being a little bit more passive. And I don't say like, you know, grill them on everything. But where are there are some like items where there could be, like, meaningful differences and costs or time, like, you know, ask them. Say, Hey, you know, I was curious, you know, you said, repair the paint or whatever. Like, replace the garage door opener or whatever. You know, what are our different options? Like, do you have similar situations with other customers? Like, how have you gone about it? What's the downside of doing this versus x? You know? Just just have, like, open a dialog.

I dig it. And I love that point you made about them doing their homework. If they come to you with with the solution, like the answer to the question, as well as all of the background and supporting evidence, you know, then, right? As opposed to saying, Okay, well, how did you come to this conclusion? Walk me through this a little bit more, and that's kind of what we always hearken back to, is communication when it comes to property managers is so crucial, yeah, so that's great. I think it makes a lot of

sense. And I think if you were like a, really the right word, as I know type A is the right type, but like, wanted to grind them on every single item, like, maybe, like, like real estate investing, like, could can be really stressful. So, yeah, you know, giving, like, the benefit out, like, I saw this, there's like, you know, there's a line for pressure washing in one place, and there's another and another spot. And it's like, why is there two lines for pressure washing? You know? Like, I think you can get really, like, sucked in and, like, frustrated on, like, what you're looking at, you know. But I think if you have, like, a good kind of guidelines on where those, like, turn costs, like, come in at and like, this is a good kind of middle of the road, you know, not, like a super duper cheap one, but it's not one where I'm gonna, like, throw like, a major stink, you know, on seeing, you know, some of this stuff. But

all right, Tom I gotta ask a question that I think might be burning in all of our listeners minds, what kind of rent are you getting on this house? Because you're paying you're going to pay about seven grand at the end of the day, more or less in a single turn. So what kind of rents you collecting on this property? Yes,

so market rent, their suggestion is 1550 so uh, 1550 is what they recommend for the monthly

All right, so that's $18,600 a year. Yep. And so we're, we're pushing seven out the door before we've collected any on that new market rent. So what is that 35% 40% is going out the door to this turn. And so people listening might be thinking, real estate investing sucks. Why would I ever, why would I ever purchase a property that I'm going to collect 18 grand on and have all my expenses and pay seven in a turn cost? So Tom, why? Why are you doing this?

Wait, wait a minute, maybe I shouldn't be investing. No, I mean, I think about it beyond the like, rent that it's collecting, it is appreciating a value. It has a loan on it that's getting paid off. So, you know that full value at the point in which I want to realize that home, you know, should I want to sell it? You know, thinking about the yield, which is like the rent relative to all of my expenses, is just one angle of the aspect of the kind of dual play of real estate investing. So, I mean, for me, like, I don't necessarily need the cash flow in my pocket right now. And if that was the case, I probably would consider, I don't know, moving my money somewhere else, possibly, but much more of a longer view investor, where, if you put together that cash flow yield, along with depreciation, along with the loan pay down, like, it's just a really exceptional like return and sort of like wealth building, especially with like, a couple of these properties humming, you know, along that it's the real kind of dual nature of the of the return. Yeah,

make a ton of sense. And also, to give like, some perspective, when was the last time you did a turn of this magnitude on this property? I

mean, two, three years, three years ago, four years ago. I'm not totally sure. I it's been, you know, yeah, big, good gaps. It's not every year, definitely not. No. I think that's the nature of the single family versus multifamily or, you know, apartments where you just, you get a little bit of higher turn with these single family homes, they the vacancy is a little bit further in between, probably more expensive turn costs, like, if this home is in a condo or an apartment, you know, maybe I'm paying half of that much, there's just Yeah, but there's less space, yeah, yeah,

1. I think that's great. I think that's great. And then my last question Tom, before we get out of here, in your pro forma, in your in your performance projections when you bought this property, did you have money set aside, in theory, and then also in practice, to tackle these types of turn costs. When they did a rise, did you earmark dollars? Or did you have everything going to one account? Walk us through what that was like,

yeah, so on, you know, setting up, I try to think about a couple of months rent. So cumulatively within the portfolio, you know, a few months rents for all of the properties, and they can act as like a backstop. So I set up a bank account, set up auto pay, both collecting from the property manager and going out to pay whatever mortgage. And as that money is flowing in, you know, typically, I'll just kind of keep it there and separate it from my personal bank account, but making. Sure that I have a good kind of balance there, maybe a few 1000 bucks, like anywhere, I don't know, five to 10,000 bucks just kind of sitting there for these type of turns. It's not common that turns happen on the same time on properties. But you know, if that was to happen, you know, pull some money in from other places. But it's, again, like, not super common, that that happens. But, you know, the worst thing that can happen in real estate is you, just as you run out, run out of money, and kind of get yourself in trouble that way. So being pretty conservative of having a few months rent, you know, on the back end for whatever size your portfolio is, I

think that makes a ton of sense. Although slight counterpoint, I would say, is I think that the number that you've gotten reserves should be independent of your rent amount. Because if someone owns a house, single family home that runs for 800 bucks a month, if I've got four months rent sitting in my bank account, that's $3,200 and I get hit with this turn because it's a similar sized property, I could be up a creek kind of a thing. And so I think that there is a mentally, we should be disconnecting the amount that we're having in reserve from the amount that we're collecting

in rent. Yeah, how would you think about the amount to have in reserve? For me, it's

just it's a flat number like five to 10 grand feels really great on a kind of per property basis. And that's kind of base level for your run of the mill property. If there are properties that have unique functions or features, like there's a property that has a hot tub that type of property, or that property specifically may require a larger turn expense, or there could be more things that go wrong with that property. And so I want to have additional dollars earmarked for that as opposed to one without. And so we just it's not a one size fits all approach. And so you want to be a little bit strategic around how you how you allocate funds in reserve based on on the property itself. Because I can't tell you how many times I see people talk about like, Oh, you just reserved 5% of the income for repair and maintenance, and you'll be good. And it's like, yeah, but to replace a water heater on a house that rents for $500 costs the same as it does for house that rents for two grand. But the person who reserving 5% on the $500 a month house is totally out of luck. So I think that there's a it's common practice in the industry to think about it that way, but personally, I like to be a little bit more conservative, unlike you, I prefer to think about it in a flat dollar amount term,

yeah, and, man, there's so many, like, high interest savings accounts out there right now that are doing like, 5% or something. So, you know, I manage all the, yeah, a bunch of checking accounts through Schwab, and they don't have as great so, like, maybe in my this particular, you know, real estate checking account, like, have, like, a thinner amount to make sure that I'm covering my, you know, mortgage payments, but the reserves for, you know, these properties, you know, make sense to have them in one of those higher interest savings account, but you still have the same liquidity that you could just slide it over into that account to wire over. So I think there's, you know, a thoughtful way to kind of get the best of all worlds where, you know, you have this automated machine pushing money in, pushing money out for kind of daily mortgage rent collection, and then you have the bigger reserve pool of reserves in a, you know, kind of strategic spot that's earning like 5% so it's not just sitting there doing totally nothing, but you still have that same

that's exactly what I do. Yeah, that's exactly what I do, yeah, yeah. Don't give away my secrets. Tom, give away my secrets. Awesome. Well, I think that just about wraps us up. Tom, any final thoughts to share with folks as you're in the midst of this turn? Yeah, you know, there's,

there's so many different components, and I think we can, honestly, like, have another section, you know, going into the marketing and and leasing of the property. You know, within a turn, it's, you know, it's one of the most active times, you know, as an investor, where you're actually kind of making some decisions. But the, I guess the kind of theme that I got, I kept speaking to is, you know, within your property manager, like, as you kind of develop that trust, trust, but verify. Also make them do their homework. Show them answer the why? Yeah,

try to verify that. That's great, man. Great advice. Well, thanks for opening up the vest a little bit on this. Really appreciate it and hope. Hope everyone enjoyed hearing about it. If you going through return, we would love to hear about it. Some of your struggles, some of your wins. Leave us a note in the comment section. We'd love to hear about it. If you got a question you're going through return or an upcoming term, we would also love to hear from you. We can try to answer those in our next episode. So thanks for hanging out with us. Everybody. Really appreciate it, and we will see you on the next one. Happy investing