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Many investors get upset when they buy their first property and realize the expenses that are bound to come up in the maintenance of a home and how that can eat into cash flow. In this episode we cover how to calibrate expectations about your returns, setting aside sufficient reserves and what you can do to glean the most out of an inspection report. --- Transcript   Emil: Hey everyone. Welcome back for a weekend wisdom episode of The Remote Real Estate Investor. My name is Emil Shour and my co host today are   Tom: Tom Schneider   Michael: And Michael album.   Emil: And today's topic we're going to be getting into is setting the right expectations for owning remote real estate. So we've talked about expectations and cashflow, specifically for the financials and cash flow side. But now we want to talk about a little bit more about the ownership side of things and things you should expect as an owner, especially in the beginning. Alright, let's get into this one.   Alright, guys, so this is um, we were just chatting about before we hit record, and I think it it hits a nerve with all of us. And it's something you will particularly see with people who I think our new a new to real estate investing and be just haven't had the right exposure to the education or the expectations that can come with rental properties.   Michael: That was great alliteration. I mean, expectations and education. Love it.   Emil: Thank you. I try. I try hope it's it's stickier with alliteration, you know. So this is stuff we hear about through our community channels, maybe somebody just purchased a property of they or they've owned it for a couple months, and an issue comes up. And it's often met with expectations of Oh, I you know,   Michael: I didn't expect it to be this much, or I didn't expect it to happen to me, or I didn't know that this was an issue that even could arise.   Emil: Yeah, exactly.   Michael: You know, we were talking about before we hit record here, me Oh, you brought up such a good point. It's like, Yeah, but it's a house. Like if you've ever lived in a house or lived anywhere, there have been issues, if you live there long enough issues with the water heater issues with the pain issues with the mechanicals of the property. So just because you're now an owner, as opposed to a renter or a tenant or even an owner in your own primary. These things happen, their mechanical systems, just like you take your car to the maintenance shop to get fixed and worked on. Same thing happens with any piece of rental, that's how the world works,   Emil: Right. Especially when you only been renting and you know, you call up management company or the owner and they come and fix things. You don't see the bills, you're not really exposed to the costs for these things. You just, you know, you just call it in when something breaks. So that could be one thing. I think it's especially hard when you just buy a property and something happens, right? It's your first property and something breaks, and you get hit with a $500 bill or a $1,000 bill and you're like, oh man, there goes my cash flow for the first couple months. And maybe you you kind of just like think, well, is this gonna happen forever? Do I have really bad luck? Did I buy a lemon, whatever it is, but I think the message we want to tell people is that's common. It's this is this is part of owning real estate, there's going to be expenses, we call it a lumpy business, you'll have times where nothing happens. And then other times where it seems like everything is happening all at once.   Michael: The sky is falling!   Emil: Yeah, yeah. So I mean, has that been your experience as well, guys?   Tom: Yeah. And I'd say, you know, a term that I've used a couple times is peanut butter spread, like the risk and to unpacked that peanut butter spread the risk is like over enough volume. And over enough period of time and volume of units, things tend to average out but it's not unreasonable. It can seem extremely frustrating where you know, you buy properties and maybe pretty early on like some things come up over time that peanut butter spread analogy is the lumpiness evens out over time?   So you know, we had this conversation of this idea for weekend wisdom came up and just looking at like YouTube, looking at like comments on forums and all kinds of stuff and people get frustrated but important like kind of perspective to have in mind is things come up as an investor but over time things tend to even out with myself you know have roughly like a dozen properties or so and it's like some of them have never had anything happen has just performed like a champ.   Michael: Knock on wood dude!   Tom: And then some of them it's like you know, I'll have a run where a year where it's like, oh man, there's a leak in the bathtub or something that didn't get seen and then you know, the sub flooring and real estate is a not a get rich quick game like it is a very much long term wealth building game. So to kind of lose it you know, with one kind of thing coming up early on in your career it can make you want to like point fingers or you know, I you know, I got tricked blah blah, but it's a little bit of, you know, the dices are stacked in the investors favor just because there's so many wealth building levers in it, but you know, with any type of investment, there's a little bit of risk that comes into it. But going back to my original point is that peanut butter spread year over year and getting, you know enough units that you know, you do the process right and evaluating it, that risk is going to be peanut butter spread cross over time long rant   Michael: No, that's so good. And just to kind of piggyback on that, Tom, one is not a sample size, right. Nobody goes and buys one stock and says, Oh, you know, the loss value, right, it went to zero. So the stock market sucks, I shouldn't invest, like one, it's just not a reasonable sample size. So to your point, exactly, given a long enough, big enough volume and a long enough time horizon, that's when you can start to really build out a reasonable sample size and come to a determination. And like, my first property was about as turnkey as you could get it was in a five star, what would be a five star neighborhood. And the first month I got hit with a $1500 tree cutting bill, because there was a big storm, and we had to cut these palm trees down, that was not in my pro forma.   Now I know if I'm buying houses that have palm trees account for cutting down trees or trimming the trees every couple of years. That's an expense they all incur. I couldn't put my finger at anybody other than myself and go up. Well, I should have asked that question. But I didn't know enough to ask that question. So I think, again, education is so key and talking to other people about Okay, what do I really need to be aware of what I need to look out for is so hyper critical, because if you've never ran before, you're probably going to trip. And so I think it's really, really important to have those open and honest conversations with other fellow investors and learn about what really goes into owning and operating rental real estate, especially remotely, because that adds a whole nother layer of complications.   Emil: Yeah, great points. You guys already touched on it a bunch. And it's easy for us to say this after years of investing, right? Like, Oh, don't worry about the expenses that come up on your like, first property. second property, take it from us, we had the headaches too, when these things happen, we got really frustrated, it's impossible to just not get frustrated when these things come up, especially when you have one property, right.   But as things grow, as your portfolio grows, it won't feel as bad because you have it multiple properties. So one bad thing happens to one, you know, the other three or four or however many you have, they're doing okay that month, so it doesn't feel like as big of a hit. Whereas when you just have this one thing you're focused on, it just feels much bigger than it is.   The other thing, one quick mindset shift that I've tried to have is in the beginning, I'd look at any repairs and be like, you know, damn, it costs. This sucks. There's one silver lining, I like to look at. Now, let's say you have a furnace that just breaks I'm using this as an example from myself, we had a furnace that just went out in the middle of a storm. And you know, that's a 2000 $2500 bill. And obviously, that sucks. But one way I try to think about it is okay, cool. Now I don't have to worry about a furnace for another 10 to 15 years, right. So it's like the silver lining is that you don't have to potentially replace that thing for a while. So that's another way to look at it.   Michael: I would just say kind of a counterpoint to that a meal to your fryer point about getting frustrated. And it's impossible not to get frustrated. I think that if you truly go into this eyes wide open and have realistic expectations for the performance of that property and a reasonable reserve, I think that you could not be frustrated by some of those nuisance expenses that pop up, I think not setting the expectation on the front end, or not having folks set the expectation for themselves in the front end sets them up for failure in that they do get frustrated with those expenses that they pop up. So again, I think they should be going into this eyes wide open, knowing kind of what the worst case scenario could look like. And be prepared for that. Because if you can't stomach the worst case scenario, you might not have any business as an investor, right.   And as tough as That is to say, we don't want people going in dealing frustrated or tricked or deceived or anything like that they need to understand this is a business and it needs to be treated and run as such. And in business, sometimes businesses fail.   Tom: Yeah, the last point that I'll, I'll make on this topic is we're not saying you know, throw a dart randomly at an investment property, go buy it and don't be mad when something goes wrong. It's you know, have a process have a process for your acquisition, in understanding the property condition, kind of the occupancy situation, all of those details come in and just like Michael said, Be eyes wide open.   And when something happens that maybe like wasn't to plan, that stuff happens sometimes as a real estate investor, you know, still have a solid acquisition process, but have the foresight, the long view kind of in in knowing that this kind of stuff comes up and it's part of being an a real estate investor in general is managing these kind of costs that come up and yeah, I think I got it in there. I think I got it in, my point was trying to say…   Michael: It's totally in there.   Tom: Yeah, okay, good.   Emil: Good. points, guys. Okay, any final thoughts here?   Tom: Like I say the last thing is like don't put in money that you like absolutely can't afford to lose so like if like whatever worst case scenario you know, don't have next month's whatever food to feed your family you know, yeah. putting into buying a rental house. So that'll be my last last point. Yes. Done.   Emil: And that's a good point for just reserves right. Like don't think everything you have in this like you got to maintain reserves for this exact moment. Right. things go bad. That's why we say maintain reserves. So if you have reserves, you're expecting these things to happen. So yeah, Michael, anything else?   Michael: No, I would just say to echo Tom's point, if you're going to go put $1,000 in the stock market. That should not be $1,000 you need to grow for next month's something your rent, like you mentioned Tom or food budget, whatever Same thing with real estate don't make this investment with it teetering on the fact that it has to work out exactly as you planned in the immediate short term future. Long term. Absolutely. We can count on that. But again, short term, no, that's not how that's not how real estate works.   So maybe another thing to keep in mind, before we let folks go is with regard to inspections. And I think that there's this really big misconception out there around inspections, and that if I go get an inspection report done, the inspector is going to highlight and find everything that's wrong with the house. And I can go get a budget and bid to repair those things. And there's not going to be a penny Moreover, that well, that's not always the case. There's there's a couple things keep in mind.   One is inspectors are human. And humans make mistakes. So while they are professionally trained and licensed to be inspectors, sometimes things get missed, they shouldn't be missing the big things. But sometimes things get missed. The second thing to keep in mind is that these inspectors are looking at safety issues. And so the best example I can think of is I've heard people complain, so I got my inspection back there was $2,000 worth of needed repairs. And then the property manager came in and said, oh, there's additional $3,000 for paint because we got to repaint this whole house, because if the rooms are green, pink and yellow, well, an inspector is not looking at the paint color of that property because that's not a safety issue. That's a property management type issue that guards to habitability.   So a tip that I always like to give folks that I speak with is Hey, have your property manager go walk with the inspector on the day the inspectors doing their inspection, if that's an option, if it's not send the property inspection report to your property manager and get their two cents on it. They're going to be catching those things like those off colored walls are things that need to be repaired before you can get a tenant in place. And now you have a collective picture of Okay, here's the safety issues. Here's the habitability issues Let's marry the two and go get a bid to have that work done. That's going to be likely my make rent ready costs. Soap box dismount.   Emil: Great one because that is one that comes up so often is well this wasn't in the inspection report. Why is it coming up? So I think you nailed it. Those are fantastic tips. Cool.   All right, guys. Let's end it here. Thanks, everyone for tuning in. We will catch you all on the next episode. Happy investing.   Tom: Happy investing. Michael: Happy investing.