Jason Parker discusses investing in real estate with real estate expert, Brett Warner.
Brett Warner is the owner and Designated Broker of Strategy Real Estate, a real estate brokerage specializing in real estate in Kitsap County, Washington for over 13 years. Brett personally invests in real estate and also helps clients make real estate part of their investment strategy to achieve financial goals and grow their real estate investment portfolio. He manages a team of 15 real estate Brokers in Bremerton and Silverdale who sell residential, commercial, and multi-family real estate. He also has a team that works with investors on auction properties. Additionally, Brett has extensive experience in property management and has managed over 450 rental units for over 100 owners. Brett has served as President on the Board of the Puget Sound Rental Association, the Treasurer on the Board of the National Association of Property Managers and has been a board member of the Independent Brokers Association for over ten years.
Learn more about Brett & Strategy Real Estate at: www.strategyrealestate.net
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Below is the full transcript:
Speaker 1: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. Now, here is your host, Jason Parker.
Jason Parker: Seattle, Tacoma, Olympia, Gig Harbor, all the good people right here in Kitsap County, welcome back to another round of Sound Retirement Radio. If you’re joining us as a podcast from iTunes or from around the internet, thanks so much for being here and making sound retirement radio your place for expert retirement advice. My name is Jason Parker. I have been doing this program now for a little over 6 years and I sure appreciate all of our listeners, all the positive feedback we get. As you know I like to start Saturday mornings off with something kind of fun. I know this is really the only reason that most of you tune in. It’s just for the jokes Saturday morning. I was thinking about a good joke. You know a good joke is only worth something if you share it with somebody else, and a bad joke well, it’s (chuckles) … As you know that’s usually what we share on this program. Those are worth sharing as well so, here you go.
A teacher asked her students to use the word ‘beans’ in a sentence. “My father grows beans,” said one girl. “My mother cooks beans,” said a boy. A third student spoke up and he said, “we’re all human beans.” (chuckles) Beans, human beans, that’s pretty funny.
I’ll give you one more just in case that one kind of went over your head. (sound effect) Here it is. What do you call a pig that does karate? A pork chop. (chuckles)
All right, let’s take a moment and renew our mind. This verse that I’m going to share with you this morning comes from John, Chapter 4, 13 and 14. “Jesus replied, ‘Anyone who drinks this water will soon become thirsty again. But those who drink the water I give will never be thirsty again. It becomes a fresh bubbling spring within them, giving them eternal life.”
All right, now that we’ve renewed our mind, let’s get into it. I’ve got a very special episode, this is episode 049 so if you’re driving down the road and you can’t catch the entire thing, know that you can go to soundretirementradio.com and we archive all these programs for you. This episode is investing in real estate in retirement. One of the things that a lot of people are looking for as they transition into and through retirement is cash flow, and real estate can be a good source for cash flow in retirement. I’ve got a special guest that I brought onto the program. As you know if you’ve been listening to this program for any time, really what I like to do is bring experts into this community that we’re creating who I believe can add significant meaningful value to our listener’s lives.
Today I have Brett Warner on the program with me. Brett is the owner and designated broker of Strategy Real Estate, a real estate brokerage specializing in real estate in Kitsap County for over 13 year. Brett personally invests in real estate and also helps clients make real estate part of their investment strategy to achieve their financial goals and grow their real estate investment portfolio. He manages a team of 15 real estate brokers in Bremerton and Silverdale who sell residential, commercial, and multi-family real estate. He also has a team that works with investors on auction properties. Additionally, Brett has extensive experience in property management, and has managed over 450 rental units for over 100 owners. Brett has served as president on the board of the Puget Sound Rental Association, the treasurer on the National Association of Property Managers, and has been a board member of the Independent Brokers Association for over 10 years. Today he will be talking about real estate investing in and for retirement. Brett Warner, welcome to Sound Retirement Radio.
Brett Warner: Thank you, Jason. It’s great to be here today.
Jason Parker: I know that our listeners are really going to value what you’re going to share with them because as people are looking for retirement, and yields on treasury bonds have gotten so low, they’re looking for ways to diversify their portfolio. I know you’re a big real estate investor, this is something you personally do. My first question for you, Brett, is why do you invest in real estate?
Brett Warner: Well I love real estate, and invest in real estate because it’s probably where I’ve made the majorities of my gains in my younger life. I was able to go out and leverage myself in real estate, which as we get older, I wouldn’t always recommend. But when you’re younger, in your younger 30s, being able to go out and put down so much money and see a return, I would also say is dangerous because it would be the crystal ball effect, you would not want to invest, you would want to invest on cash flow, which in Kitsap County, it is a great place to invest on ROI. I also love real estate because I can touch it, I can go out and when we’re in a down market like we were in 2007 and 9, I was able to transform and go in and take a building that was a 50 unit apartment complex and make it much better, increase its value, even while other people were losing value in their residential homes. So what I see is it’s very versatile. Also a tax benefit you can get, depending on whether you’re looking for that.
Jason Parker: Okay. I want to get in to some of the nuts and bolts for our people out there because we have listeners that are considering adding real estate, not real estate investment trusts, but actually going out and buying property, whether it’s single family homes or commercial real estate, as a cash flow form. I want to get into some of those nuts and bolts. But one of the things I find, there are a lot of so-called ‘experts’ out there that have some kind of system they’re selling people, they’re selling books, they’re on late-night TV, and it’s all about get rich quick with real estate. I was hoping we could start out, do you have anybody out there that you see as a trusted source? Anybody that provides good information on investing in real estate that you could refer people to? Obviously, you’re an expert in this arena, but who are some of the people you’ve learned from over the years?
Brett Warner: Well when I was younger, I learned from some of the old late night shows, that’s kind of what opened that dream of real estate. Maybe Carleton Sheets, you go back way back in the 80s. And I knew a lot of that stuff wasn’t true, and for all markets. But I understood if I could think like some of these guys, that would really help. There’s also Robert Kiyosaki, there’s also some great Christian leaders out there.
The thing is, I think it really comes down to listening to them all, and then figuring out where you stand in there and having a personal team around you. Whether that’s investors, a tax accountant, a great real estate agent, just like a doctor or a mechanic, you want to have the best one in town. You don’t want them to do all of the thinking for you, I think. That’s why I read a lot of books and I’ve taken all of these different ideas and formulated them in to what I see best fits for my life and my family. One question I would ask all investors is, “what’s enough?” Some of these late night talk shows you look at, they don’t give you ‘what’s enough.’ So you’ll be chasing that forever. When I look at balancing that with Christian leaders, you have to see a lifestyle that you want to be free and not chase that. I would ask every investor that came into my office, what is success to you? What is that measure? Because if you don’t set that in the beginning of the race, it’s going to be a long race. I guess the answer to your question clearly, would be that you have to listen to everyone. They absolutely, ones that say to go leverage, which I don’t agree with completely …
Jason Parker: Mm-hmm (affirmative).
Brett Warner: … And there’s other ones that’ll tell you to pay everything off, which I don’t agree with completely. Now maybe when I’m 65 I’ll agree with one of those guys, but right now in my life, I like to pay things down, and put certain amounts down, and have myself own a percentage of it, that’s for certain.
Jason Parker: Before we get into the mechanics, you’ve had a lot of real estate investing experience, and you’ve been through one of the roughest, toughest real estate markets, with the bubble in the 2007 to 2009 financial crisis that we went through. As you’ve had this experience, what have been some of the lessons you’ve learned, both good and bad? What have been some of your biggest takeaways?
Brett Warner: All right. Probably that the market doesn’t continue to always go up.
Jason Parker: (chuckles)
Brett Warner: I read and talked about, there’s the 80s, and then there’s the great depression, and then you had the late 90s boom, I mean the fall, and you just think it’s not going to happen to me. I’m well diversified, I’ve got a 4, even a 5-legged table here. If you knock out 2 of them, I’ve still got 3. Well, what we just went through, they pretty much took out all the legs. That’s why is was very thankful that I had savings and I was able to, I had to dip into that. This was a very deep real estate market.
Jason Parker: So big take away, then, if you’re going to invest in real estate, make sure you have a safety to fall back on.
Brett Warner: Oh, absolutely.
Jason Parker: Yeah. Don’t assume that real estate is always going to go up. Just because Will Rogers said they’re not making any more land doesn’t necessarily mean that during your time period, it’s necessarily going to be always a positive experience. You could go through down markets, just like you do with the stock market.
Brett Warner: Absolutely. You can take that something, not even to a full market itself, and looking at the conditions. It is uncontrollable. There’s another thing, you can throw a tenant in your place, and you’d better have $5,000 in case they don’t leave it as nice as you gave it to them. Generally, that’s why I would tell people in their expenses they would want to put $50, $100 a door, every month, into their basis. That way every year they have 1200 bucks to take care of that. Hopefully they have …
Jason Parker: Is that the right formula, $100 a month for a rental property, just kind of as a reserve for repairs and that kind of thing?
Brett Warner: That’s one of those things that I would say, some people don’t put anything in. But I would say, I think it’s an easy rule of thumb. Somewhere along one of those books I was reading or something, I came out, I think they said 50 bucks a day. I’m a little more conservative, so I tell people 100 bucks. Because I’d look at a water heater, if that goes out, that’s 800 bucks, if you look at an oven, that’s $400. You’re going to lose one of these things every 2-3 years, so it’s nice to have that money and not have to go back home to the wife and say, “hey, we’re going to buy a new stove for the tenant.”
Jason Parker: You know, real estate is back. It seems like it’s making a pretty good recovery right now. I’m amazed at the prices that we’re seeing things locally here going for, but is it possible in today’s real estate environment to still find an investment property that will cash flow on day 1? What I mean from cash flow, is that you’re not just paying off the liability that you owe on it, but you actually have positive cash flow in your pocket, money that you could go spend as a result. Is it possible to find those today?
Brett Warner: Absolutely. In our county it is. If you go to Seattle, that’s going to be more difficult. If you find yourself in San Diego, that’s going to be more difficult. They do get 3 times the amount of the rent, but they don’t cover the debt. Help me again with that one more time.
Jason Parker: Just is it possible they find something that’s going to cash flow day 1?
Brett Warner: Yes, yes, I would say as long as you’re not buying the pretty home on the block.
Jason Parker: Mm-hmm (affirmative).
Brett Warner: Absolutely. I can find 10% to 20% returns. What happens is if you pay all cash for the house, your return is going to be less because you can borrow money so cheap today.
Jason Parker: Wow.
Brett Warner: In 2014, there were only 33% of the market was first time home buyers, so the rest of that, you see is cash buyers, and they’re making money. At the auction …
Jason Parker: So there’s people that do flips on properties.
Brett Warner: Which I don’t like because you don’t get the tax benefits.
Jason Parker: Mm-hmm (affirmative).
Brett Warner: … But you can make money on that. I would say absolutely 10-15% is not a problem around here. After mortgage debt and stuff. With that, you’d want to put some money down.
Jason Parker: For our listeners that are just joining us, you’re listening to Episode 049 Sound Retirement Radio. You can visit us online at soundretirementradio.com. We archive all of these programs for you. I’ve got Brett Warner on the program. He’s a professional real estate investor, designated broker with Strategy Real Estate here in Silverdale/Bremerton area. We’re talking about investing in real estate for retirement. Brett, I know that people are going to want to learn more about the work that you’re doing, so before time gets away from me, if people want to get in contact with you, maybe they just have some general questions about investing in real estate, what’ the best way for them to learn more about the work that you’re doing?
Brett Warner: You can go to our website at www.strategyrealestate.net, that’s .net.
Jason Parker: strategyrealestate.net.
Brett Warner: Yes. Or you can call my main office at 360-405-0077.
Jason Parker: Okay. When it comes to financing, so you’re a believer in financing it, not paying all cash for a property. How much money do you generally recommend somebody puts down as a down payment? What are banks looking for for down payments?
Brett Warner: Right now, if you’re buying, it’s always changing, and every bank you go to may be a little bit different, but if you’re going to look at something 5 units or less, they’re probably looking at about 15% down, is what the bank would require. If you’re looking at 6 units or more, some banks would say 5 units or more, you’d be looking at more like 20-25% down. I like to say, tell everyone, and I’ve always tried to do my buildings with 25 or 30% down.
Jason Parker: Is that right?
Brett Warner: Yeah, and the reason why that is is if you hit a correction in the market, I was never upside down in any of my properties and we went through this.
Jason Parker: Okay.
Brett Warner: Because I got in earlier, and I had a lot of appreciation. That gets you a nice start on the run. I always tell people if you put 0 in, when we talk about return, ROI, 0 times anything is 0.
Jason Parker: (chuckles)
Brett Warner: I look at a return basis, so the more money you put down, the better your return should be in real estate. Until you go to the point where you’re not borrowing anymore. Because then it’s all your own money, but you’ll never be upside down, that’s for sure. I hope not.
Jason Parker: (chuckles)
Brett Warner: (chuckles)
Jason Parker: What are some of the metrics that you use when evaluating investment property. This isn’t a primary, you know, let’s get emotionally attached to this thing, we’re going to spend the rest of our life here. This is something that we want as an investment. What re some of the metrics that you’re looking for?
Brett Warner: The metrics I’m looking for is I’ll look at rents in the local area. I think it’s very important to look at vacancy rates. I’ve gone to other people and say, hey look at this area, and I’m not going to name any towns. But I go look there, and it’s like, wow, really cheap. But then you find the vacancy rates somewhere around 20 or 30%, and they really didn’t put those into the per-forma or the numbers.
Jason Parker: We talked about the census bureau has kind of a gauge for …
Brett Warner: Oh yes, census, you can pull the information, and most real estate brokers or agents should be able to pull this for you. It just generally will give you the median income for the area. It’s something I like to do with my clients, when we’re looking at a different area. We want to see if they’re making, let’s say the average house there is making $80,000 a year, we can know that that area probably is not going to afford much more than 3x that income, and that might be on the high side. It depends on whether you’re conservative or …
Jason Parker: That’s if they have $80,000 a year of income, they’re probably not going to be able to afford more than $250,000 approximately out of a house. So you wouldn’t want a rent that’s going to be much higher than the average $250,000 house. Is that kind of …
Brett Warner: Yes, and that’s what would keep our rents down in this area. When you see, for example, our average area is houses that are around 250, so we know a mortgage on a 250 is about 1,200 bucks at a 5% interest rate. Maybe 4, and that would, with taxes and insurance. If you start charging people $1,700 for rent, they’re most likely going to want to go out and just buy, unless they’re just one of those people that are, you know, they move every 3 years, and then it makes sense to rent, you know if you’re moving a lot.
Jason Parker: Yeah. The bottom line there is if you’re going to be renting for more than what somebody could get a mortgage for, if your rent is going to be higher than what people could buy a house for, then you might consider that to maybe, you’re spending too much money or you’re not putting enough down.
Brett Warner: Absolutely. One question I would ask my local property manager, or maybe a few of them, what are you getting in that town. Remember, this only goes in 5 mile blocks. You can ask them, ‘what are you getting per square foot on your units?’ It’s an easy way to calculate, then what your return would be. So if they tell you it’s a 1,200 unit place, it’s a buck a square foot, you know you’re going to get about $1,200, maybe $1,295, maybe $1,150 depending on is it the bottom of the hill, the top of the hill, how many windows, those kind of things.
Jason Parker: Everybody in an upward trending real estate market, thinks that they’re a real estate investor. How do we make sure, somebody that’s never done this before, because I run into people like this all the time. They say, hey Jason, I’m getting ready to retire, and what we plan on doing is buying a house and flipping it every two years, kind of living in it, fixing it up, and turn around and selling it. But they don’t really have any experience in that. What’s some of the advice you would give somebody that’s getting into that for the first time?
Brett Warner: Be careful. Set up your team. There’s a lot of people out there, they just want to sell real estate, and their job is to sell real estate. You want to find a team that’s going to crunch numbers with you, that’s going to … You don’t want to go in and start doing the general contracting job on your own. I’ve seen people take 6 months to do a project that should have been a month and a half because they thought they could do it. It also wasn’t done to the same standards. I think it’s really, somebody just needs to be careful.
You want to come alongside somebody else that’s done it. There’s a lot in real estate, you know I look back at what I’ve learned the last 20 years, and about a house there’s so much from the foundation to the eves to the windows. Some people will come in, the contractor, you’ve got to be careful because they’re making a living for their family.
It’s really about setting up a team, even like our auction team, we make sure we have some contractors working behind. We always encourage people to make their own relationships. That’s always best. But at the same time, we want them to walk slowly. If somebody tells you to buy 3 of these in 2 weeks, like you see on TV, that’s dangerous. That can take you down quick. I would just say make sure that you have a good real estate agent that’s crunching numbers, and when you get in there, you want to see the finished price, and you want to see what the activity in the area is, because every month you hold on to it, if you made 30 grand on a flip, which I don’t really like, I like to hold longer, it saves you tax benefits, if you hold it longer than a year, it’s just, it’s all about setting up a team. Don’t just go out there and watch a video and think you can go do it. Hard money is expensive, and people will tell you, and then the agent’s not calculating that money in for you. If you’re paying …
Jason Parker: When you say ‘hard money’ some of our listeners may not know what you mean by that.
Brett Warner: Hard money might be used if you want to buy something and close quickly, like in a week, and you’d go to …
Jason Parker: Like a private lender.
Brett Warner: … Private lender, it’s basically like you agree …
Jason Parker: Guido comes breaking your legs when you don’t …
Brett Warner: (chuckles) Uh, just short of.
Jason Parker: (chuckles)
Brett Warner: He does have the rates of Guido, you know, so they do run 4 points right up front, and 10 or 11%. People don’t calculate that in there. If you end up holding something for 5 months that can be, if it’s a more expensive house, you know 250, that can really add up and take away from your profits. If you’re 30,000, 12 grand is 30%. So you …
Jason Parker: What about raw land? What are you thoughts on raw land?
Brett Warner: Well raw land, I think if you’re building, I think it’s great. I think it’s best for a husband and wife to go build. Raw land doesn’t have much of a return. There are commercial investors that will rent or lease out pads and things like that do work, but they’re very advanced, and these guys have been doing it for a lot of years.
Jason Parker: Mm-hmm (affirmative).
Brett Warner: So, what I see is in land, it’s very little ROI, and it really comes down, when you’re investing, it’s return on investment.
Jason Parker: One of the things I’ve learned from working with a lot of retirees, that have done really well in real estate over a long period of time, it usually seems like at some point in their life, usually around 80-85, they just don’t want the headache and the hassle of having to deal with renters anymore, and the responsibility. You’ve done a lot of property management. When does it make sense for people to consider hiring a property manager, and financially does it make sense on a rental, or is it going to take away any of the actual cash flow or income that they’re going to be receiving on that if they just don’t want the headaches of having to deal with the people anymore.
Brett Warner: I would say for property managers, you’re probably looking at anywhere, after fees, they’re going to tell you 10% upfront, but when you look at all of the fee structures and move-ins, you’re going to be probably closer to 13-14%. The question is, one thing to ask that property manager, do they own any rentals themselves. If they own rentals themselves, they understand where you’re coming from. I think there’s some times that we have property managers out there that have not really owned a lot of real estate, so they’re quick and they can spend your money faster than you like. But really, it comes down to just trusting your property manager. If you can’t trust them, you think you have to manage them, you need to get a new property manager.
Jason Parker: Mm-hmm (affirmative).
Brett Warner: Nothing was worse than when somebody would try to call and say this is how you need to manage it. Every property, we manage quite a few properties still right now, and every one of my owners trust me. I’m not arguing with them on the phone. I am a property manager, and I manage. That’s my title. If you want to manage, then you go ahead and manage.
Jason Parker: Mm-hmm (affirmative).
Brett Warner: That’s why that trust is so important, and that they know how to save you money. Not doing emergency calls on Sunday that could wait to Monday.
Jason Parker: I want to remind our listeners if you’re tuning in, we have a special promotion going right now, where you know if you’re getting ready for retirement, what you really want is a good retirement plan more than anything. I’ve learned retirement is all about cash flow. You can get a free copy of my book right now for a limited time by going to soundretirementplanning.com/radio. Again that’s soundretirementplanning.com/radio to request a free copy of the book.
Brett, we’re almost out of time. You’re with Strategy Real Estate here in Silverdale for our listeners that want to find you, but are you concerned about real estate prices stagnating as interest rates begin to rise?
Brett Warner: I would say yes, absolutely. I think anybody who reads, watches the market would say that we do have to watch that. If we’re at a 4% interest rate, we’re at 3.9 right on owner occupied, maybe 4 1/2 for non-owner occupied, if that goes up 1 point, we will see principle payments go up 20-25%, and then that becomes about affordability.
Jason Parker: Okay. All right. Brett Warner, thanks so much for being a guest on Sound Retirement Radio today.
Brett Warner: Thank you for having me. It was great.
Speaker 1: Information and opinions expressed here are believed to be accurate and complete, for general information only, and should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance projects. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions, or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm, located at 9057 Washington Avenue NW, Silverdale, WA. For additional information, call 1-800-514-5046 or visit us online at soundretirementplanning.com.