When you open social media, it can be so easy to get sucked into the idea that long term rental is easy. You fix it, flip it, then either sell it or do what you want with it. However ideal this is, it does not paint the whole picture accurately. In this episode, Lauren Wells invites her sister, a property manager and real estate investor, to give us the good, the bad, and the ugly of investing in and rehabbing long term rentals. An expert in all things long term management, Nicole Garnes has seen it all in her career. She shares with us her experiences with properties, what went right and wrong, and tackles the processes involved—from buying parameters, contractors, and rehab, to self-managing properties and more. So tune in and dive deep into the world of long term renting, so you know what to expect and how to prepare for it when you finally start your journey in the space.
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Investing In & Rehabbing Long Term Rentals With Nicole Garnes
My name is Lauren Wells, and I am not here with Chris, as he is returning from moving his daughter into college this weekend. However, I do have another guest, Nicole Garnes, on the show with us. On this episode, we want to talk about long-term rentals, out-of-state, in-state, the rehab process, management, and everything in between. This question actually came from someone who is an audience, and was interested in learning more about what that process looks like because they’ve been thinking on pulling the trigger on a long-term rental, so I reached out to Nicole. Full disclaimer, she is my younger sister. Nicole is a real estate investor, property manager, mom of three awesome little girls, and active member of her PTSA board. With that, Nicole, welcome. I have introduced you, but do you have anything else that you want to add?
I’ll give you the background on this. We had someone reach out who was interested in us doing an episode on long-term rentals. When I think of long-term rentals, that’s the background you and I have experience with. I think that a lot of people who are watching social media see like, “You can easily get a long-term rental, fix it, flip it, or either sell it. You’re going to be cashflow positive immediately,” paint this ideal picture of what it looks like. The person who had reached out was saying, “I want to know what is it really like? What should I prepare for? Where do I look?” They have the funds, but they don’t know where to put them, but they know they want to put it in real estate. To kick it off, why don’t you tell me a little bit about how you started in this and where you’re at today portfolio-wise?
I grew up around real estate. Our dad was a realtor broker for our whole life. That’s what he did. I started asking questions at a young age. I always had an interest in real estate, so that benefits me because it’s also a passion, and a job for me. I actually went into insurance after college and realized that it was too corporate for me. Then I got pregnant with my first, then realized I want to do something where I could stay at home and grow a portfolio and/or get passive income so that I could raise my kids and I could be there taking them to and from school, and doing all their activities with them. I knew that I needed something that would give me flexibility. That’s where real estate came in.
I saw that my dad was able to do that. I just followed in his footsteps. I started off working in an office as a secretary for a realtor that was pretty big. He was a broker in my area. I was super pregnant, just working and doing all the paperwork and the background of it to see what a sales transaction looked like. I worked for very little pay and did a lot of the grunt work, but it was a good intro into the day-to-day of what a realtor does in the sales world.
I learned really quick that I was not into sales. It seemed like that was a lot of work. My husband’s father passed away, and we inherited a farm that was not producing a lot of income. We took that and we saw an opportunity to invest in real estate that would bring us some passive income. We sold that and we did that. That’s how we got into it. We went and purchased some properties and then rehabbed and rented them out. It slowly grew from there. I now manage over 100 properties, not on my own, but some are in California, then about half the portfolio is in Florida.
I have another question, but before we go there, you can see Nicole and I are sisters, but we took very different paths into real estate. Nicole isn’t lying when she says she has asked questions and been interested in real estate since like forever. For the audience who have read our previous episodes, it took me actually having kids to then realize I didn’t want to be in corporate. I went the full corporate sales, tech startup, and Nicole has always known, “No. Passive income, that’s what I want. I want to be there for everything for my kids.” She graduated college. We both went to the same college. She’s really committed to that. That’s something that a lot of people don’t see. As she said, she did work for very little. She just learned as much as she could before she took that step. You said you have properties in both California and Florida. Did you start in California? What did that look like?
I did. The first property I got was during the recession, and all the foreclosures were happening. I picked up the property in California at a tax deed sale for really cheap. It got priced out pretty much after that.
The recession we're going into now isn't fully based on the housing market. There are a lot of other factors taking place. Click To TweetDo you remember what year that was?
You’re like a decade into this?
Yeah, since I purchased my first property.
I feel like that’s important to highlight for people, to show that you’ve been at this for a while. It wasn’t this overnight success where you’re managing 100 units, your own and other people’s. Then you moved into Florida. That’s super interesting. When you’re looking at a state, I think thatscares a lot of people because either they don’t see the property beforehand or they’re not familiar with the area and they’re just hearing Florida’s a good area or Tennessee is a great area, whatever it might be. After you decide to look in Florida, how did you decide what properties, what your buy box was, your parameters for buying? I think it was 2015 when you guys started there?
What was your, “This is my requirement for a home when I’m looking to purchase?”
It’s going to be different for everyone and it’s going to be different based on the location you’re in. For Florida specifically, because there are hurricanes, there are different laws, so you need to get familiar with the area you’re working in so that you’re aware of the environmental factors, the political factors that are going to affect whatever you’re doing. Our general model has always been lower-end long-term rentals. Some people are in it for the appreciation game. I’m in it for the buy, hold, and rent for as long as possible. Obviously appreciation is a benefit. The appreciation has allowed me to refi and purchase more. My goal was to just buy a property, have the return on investment be good, and be able to rent it out long-term.
We focus on single-family detached homes. It’s lower-end but still gives you a better return on investment. For Florida specific, you want something that’s block. A frame doesn’t do well because of hurricanes. There are certain things you want to look at based on the location you’re in. I don’t want pools because that adds an extra liability as a renter. You’re looking at things that would increase your liability.
We do have something very specific. We want to single-family detached. We want it in a good area. We’re looking at the neighborhood. You have to learn the different neighborhoods of the counties you are in because there are going to be worse neighborhoods and better neighborhoods. We did a lot of research online. The internet is great now because you can get into Facebook networking groups, and pretty much pick anyone’s brain on a location, whether this is a good location or a bad area. That’s our general, single-family detached, lower-end.
Once you picked Florida, you looked at different counties. Within that, you already had your established. When you say lower-end, did you have a specific like, “We weren’t willing to buy homes above this range or above this price point?”
Long Term Rentals: You have to make sure you’re reading your bylaws before purchasing a property.
I just didn’t have a lot of capital, so I was priced if I wanted to pay cash for something lower. Also your return is so much better if you do stay in the lower end. For the right price, I would buy anything. I’m always looking at what my return would be. If I could only put $100,000 into it versus $400,000, and I can get the same return, I’d rather just put $100,000 into it.
Let’s say you were purchasing under $100,000, did the home have to be valued at a certain amount? What kind of comps?
Originally we were, I was getting them a lot cheaper.
That’s a good point.
In 2015, I was getting them probably like $0.25, $.050 on the dollar. Now, it’s closer to $0.75, $0.80 on the dollar. Prices have increased dramatically. Before, the recession was caused a lot by housing recession. The housing market took a huge hit, so we were able to take advantage of that. Now, there haven’t been recessions. I think the recession we’re going into now isn’t fully based on the housing market. There are a lot of other factors taking place. The housing hasn’t taken a great hit at this time.
That’s interesting that you mentioned too because I always tie it back to what people are hearing and seeing when they read those flashing news stories of overnight success. Their market conditions really impact how much success you’re going to have at a given time. You’ve been in this for a decade. In 2015, when you started in Florida, you’ve seen how much cheaper it was to purchase properties and how much more equity you had versus now. This will lead into the rehab, which I know is probably your favorite part. The construction costs have gone way up, and the delays and finding someone. When you first started in Florida, how did you figure out who to work with? If they were good, if they made sense cost-wise, if they were quick, how did you find them and how did you figure out how to manage all those contractors from basically across country?
I knew a little bit about the rehab process prior to going into it just from managing properties in California and seeing it firsthand and having that initial one. I bought the first one in 2011, 2012, and didn’t buy anymore until 2015. I had rehabbed that one at least once in that timeframe. I knew how to go about starting a rehab. Then it was just a matter of calling a lot of different contractors, talking to a lot of different people, and you start to get a feel for who’s BS-ing you and who’s not. Then you need to find someone that essentially you trust to be your eyes at the property.
There are definitely vendors that we trust a lot and have used them and relied on them to be our eyes and ears on the property. Like our AC, once we figured out we had a good AC company, now when they go to service something, I can be like, “Take a look at the property when you’re in there. How does it look? Is the tenant keeping it up?” That’s just a way I’ve been able to work without being physically there and doing an inspection myself, just relying on the vendors.
The internet has been a great tool in that. You can search. The internet has just has allowed this to happen. Many years ago, you wouldn’t be doing this because there are many internet tools you can use now and reviews online that you can find. If someone has done something bad to someone, they’re going to write a review online and you’re going to see it and know to stay away. The downside is you have to realize you’re going to take a hit every once in a while, and it’s not going to work out how you wanted it to, or someone’s going to screw you over. We’re hoping to buy at such a low price that we factor in some errors.
When you were speaking with people who you’d potentially want to hire as a vendor, do you have specific questions that you’re asking them that you go through as your top 3, 4 or 5 questions that are important to know other than obviously cost?Knowing what things cost is going to be your biggest advantage. Click To Tweet
It really depends. At this point, I know if someone says something is going to cost a certain amount and it’s way out of this league. I know that they’re not going to work for me. Knowing what things cost is going to be your biggest advantage of not being there. If you know what the hourly rate should be and how long it would take to install a toilet per se, then you can go, “Toilet is going to be X amount of materials. It should take them two hours to install it. My cost should be approximately X.” Then I start asking the handyman when I’m talking to them, “What do you charge to install a toilet? What do you charge to do this?” Then you can get an idea of, “Is this someone I could work with? Do they sound like they know what they’re doing? Are the prices on point?”
I like that example. Even finding one thing like changing a toilet, and using that as your benchmark. I would imagine if they’re going to overprice you on changing a toilet, they’re going to overprice you on everything. Can you give me an example or do you have a story where something went really wrong?
The first property I’ve purchased had an HOA that wouldn’t allow me to rent it for two years after purchasing it. I had a down property for two years. I bought it and it just sat for two years before I could rent it.
I’d imagine you always make sure there’s no HOA or rules with renting since then?
Yeah. There are pros and cons to HOAs, but that’s an added fee and they can change your regulations little bit. They can tell you, “HOAs are always changing so that rental isn’t allowed.” Things are changing rapidly right now with that. For HOAs, you have to make sure you’re reading the bylaws before you are purchasing a property.
That’s an interesting one. I didn’t think that’s the kind of the example you’d give. What about a rehab gone wrong?
I have plenty of those. We had someone in Florida that was just stringing us along for a long time. I don’t know if it went wrong like it eventually got done, but it could have been done a lot quicker. He was not being there. He had to get a permit and we weren’t sure. You never really know if they’re pulling the permit or not, so he was telling us it was taking all this time or he needed more money for a permit. We come to find out he never even pulled the permit. You have to be careful.
I will say that we do have people check. If I have this person doing the full rehab, I’m going to have another realtor in the area, which are a good resource to use, “Can you go and take pictures of this property and do a full inspection on this property for me?” Before I send payment to the handyman, I want to know that it was done well and correctly, and as they said they were going to do it.
That’s another good piece of advice. If you’re not there calling the realtors in the area, and I’ve done that with houses in the past, just go by and take pictures and make sure everything is moving along. Let’s move on to management of the properties. Do you self-manage all your properties?
You manage properties in Florida and California. Do you find that it is harder in a specific state? Do you find it’s harder being out of state? What are some pros and cons to each of those?
Long Term Rentals: The hardest part is relying on other people for move-ins, but again, it’s really just trial and error of finding the right person to do it for you.
I can’t visually see them. I am relying on someone else to tell me. Everyone’s standard of what is good is going to be different. Something that I might think needs more repair or the paint’s wearing or whatever, some other person might think this is totally fine. I am relying out-of-state on someone else’s eyes to tell me the condition of a property or for even things that need to be fixed, I’m relying on other people. If a vendor knows I’m out-of-state, he might think, “I can tell them that this needs way more work put into it than it really does,” because I can’t visually go in and check in on them. Here in California, when I rehab a property, before I send payment, I’m the one going out and checking and making sure the tile is installed correctly.
Even just simple things like a move-in. Move-ins have probably been the hardest part of not doing because that’s where the liability comes in with a tenant. Here, I am doing a full video of the property. I’m opening everything. I’m checking everything, taking hundreds of pictures of everything. No matter how many times I tell them I want 100 pictures, I still end up with 20 of them. You get stuck when you have to refund a security deposit if you don’t have good enough notes prior to a move-in. I would say the hardest part is relying on other people for that. Moving in is a trial and error, finding the right person to do it for you. You’ll know when you found the right person.
When you find the right person, they switch jobs, so it’s always ever evolving. I will say that there are apps now. I do have one called zInspector, where you pretty much have someone log in and walk through, check the front door, does the lock work? These little things you don’t think of, but if you have several doors where the locks are broken, it can add up. Little things can add up with a tenant moving in or out. You want to know who and where to place the blame.
For the ones that are out-of-state, you said you have an app that you use. You’ve created a checklist for whoever’s going through?
It’s made for property managers. It basically has a basic checklist for a move-in inspection that you would go through. It allows you to upload a photo and write a note, take videos, so they can go through. It says like, “Bedroom one,” and then it gives you all the things you need to check for that bedroom. How are the closet doors? How are the windows? How are the screens on those windows? Does the window lock? It gives you a checklist of items to check.
There are all these little things that you don’t think of, even as a tenant, you don’t really think of until it comes down to someone having to pay for it. Then it’s like, “Was that screen ripped prior to the tenant moving in? Did the tenant have a pet that ripped the screen?” These little things that when a tenant moves out and you’re trying to get it rent ready for the next person, you need to know who and what caused it.
You’ve been in this for a while. Were there times where you were discouraged like, “Does this even make sense? Is this the right direction?” or have you always been steadfast moving forward, “I know this is the right thing?”
Deep down, I know it’s the right thing. Tenants can be awful and people can be awful. I used to take things to heart at the beginning, and it has made me a little cold or cynical now. I don’t take everything to heart. You have to let things go. I’ve learned a lot of patience in letting things go. It has caused a lot of stress. Big risk, big reward, little risk, little reward. Putting my own money into it has helped me on the property management side because I know what investors have in it. When you put your own money into something, it becomes your little baby. I know deep down it’s the right call. The benefits outweighed the negatives.
You’ve never had a time where you were like, “I’m done, never again?”
No, not really. I’ve gone through a lot.
We don’t talk about the specifics very often. I know that you’ve dealt with literally about every type of scenario that you could. Dealing with tenants in California, it’s not always the greatest. I’m sure that hasn’t been great. Why Florida? I didn’t ask that in the beginning, but for people who are looking at different states, what attracted you to Florida?There are a lot of other smarter people that you can ask. Getting a mentor is a good idea. Click To Tweet
There’s no income tax. I don’t live there, so no income tax is beneficial to me. Also, you’ve got to do your research. If you go online, you’ll see that Florida is one of the top places to invest. I’m not reinventing the wheel here. There are a lot other smarter people. I will say getting a mentor is probably a good idea. Start asking them questions. Learning what your criteria is. Are you going for a single-family, detached? Are you going for a mobile home? Are you going for an Airbnb? What are you looking for long-term? Are you looking for short-term? Are you looking to rehab and sell it? For our model and our price range, this is what made the most sense for us based also on the market.
Another good point is you had your model in Florida. If people don’t have a specific model, then maybe looking at multiple states to figure out what fits their model would make sense. For you guys, you chose Florida because it hit all the boxes of your criteria that you were looking for. You invested there in 2015 and you’re investing there again now, is it harder to find property now? You said you read a ton of articles and everyone’s saying to go to Florida, you went to Florida. Do you feel like it’s like harder for you to acquire something that meets your criteria?
Yes, because we’re not in as much of a recession as we were before. There are still a lot of people out there purchasing property. Before, when we were purchasing, there were a lot less people purchasing. There was a lot more supply, thus it being a lot cheaper. Now, we’re going up against a lot of other people who are purchasing, so it’s a lot more competitive in that. It’s definitely been interesting wrapping my head around, buying something now for what I bought and put something in to have it fully rehabbed before. What I’m purchasing at now, I was all in for before. Now, I’m purchasing it at that price and having to then spend on rehab.
Do you budget a certain amount for rehab? If your property is worth $100,000,do you say, “I need a certain percentage for rehab,” or does it vary a little, obviously property to property depending on condition? Do you have a, “At bare minimum, I’m going to need this amount?”
I always try and give myself more than I’ll probably need, so I don’t want to run out of money. When we look at a property, there are some big ticket items you look at. “It doesn’t need a new roof,” that’s a big one. If it does, then you’re going to need a budget accordingly for the size of the home. It doesn’t need a new AC system. How’s the AC system? Those are the two big ones that you don’t want. Not that other big items can’t come up in the home, but the way we purchase them on auction sites, sometimes you can’t see inside the home.
You’re hoping, but then also budgeting per square foot, “If I need to put in new flooring for this home, I’m going to need X amount of money. I should save that.” I would say that we do save. There’s not a magic number because it depends. We look at the bigger items. If we need those, we mark those, then depending on the size of the home, an additional $10,000 for potential rehab inside home.
You have your budget set aside for what you might need in terms of rehab. You mentioned here that you buy these off auction site. You obviously have your criteria, but when you’re purchasing at auction, can you tell our audience essentially what that means?
We’re purchasing them at foreclosure auctions online, so properties that were closed so they could or could not have tenants in them, or previous owners as well. It is a gamble. That’s why we want to purchase them for not market value because there is some rehab and/or you might have to run into purchasing a property at an auction. We are reviewing the properties and getting a value for the properties and then seeing what the market value is and then trying to undercut that. There are a lot of people bidding on these properties.
Can you finance this or do they have to be cash?
Auction properties have to be cash.
When you’re doing that, that’s probably why there’s more rehab that could go into it than necessarily buying a property that you’re financing.
Long Term Rentals: The auction is a gamble. We can research and try to have people drive by, but there’s only so much you can do if you don’t have access to the property.
If you’re financing, it has to pass an inspection. For cash, it can be completely run down. We’ve run into both scenarios where it’s been absolutely run down, everything needs to be done, then we run into situations where it’s in pretty great condition and there’s very little work that needs to go into it to get it rented. The auction is a gamble.
We do research. We have people drive by, but there’s only so much you can do if you don’t have access to the property. We’re pulling permits and title and all that stuff on the back-end to see, was there a roof redone recently? In Florida, they’re very strict on permits, so usually people pull permits for everything because they’re required to. We can gauge based on that. We’re trying to get them cheap, hoping that if we have to, we can then put a little money into it and still be under market value.
If you were to meet with someone who was looking to get into long-term rentals in-state or out-of-state, what would your number one action tip for them be? What should they actually do to get started? Maybe it’s not like invest in a property, but we just try to give actionable tips that people can take away and go ahead and implement. What would your number one tip be for people who are looking to get into long-term rentals?
Find a mentor who does exactly what you want to be doing. Start asking questions. Find someone that has maybe just even one, but they’ve done it and start asking questions and research. Definitely find someone who knows what they’re talking about and is in the industry. I started off working for someone and learning the business before I actually got into it. I think if you learn the business before you get into it, it’s helpful. You’re always going to run into stuff, but it gives you a good base.
You mentioned earlier, and I think this ties into that and this is something that we’ve talked about on a previous episode, is the power of networking and getting in Facebook groups. If you’re interested in a specific state, go to those Facebook groups. There has to be someone in there who you can connect with.
I’m in Facebook groups for every county that we’ve invested in. You get resources. You have other investors, and I’ve used this for vendors. You have other investors who are doing the same thing I’m doing, who have a great AC person. I write in like, “Does anyone know a good handyman in this area?” I’ll get fifteen leads right there. Are they all good? No, because I have my own criteria, but it’s a start and it’s word of mouth. Usually, other investors are not looking to screw other investors over. It’s been helpful. For sure, the internet is a powerful tool.
Your tip would be find a mentor, network, and ask a ton of questions to learn from someone who has done it, and not someone who talks about doing it.
Also be patient.
Patience is key. You’ve been in this for a decade, and you have a ton of experience and are still probably learning new things every time you acquire a property or rehab it. I think that is the hardest thing is patience and taking that first step. Thank you, everyone, for joining us on this episode. If you enjoyed the show, please share it with a friend, subscribe or leave us review. Thank you, Nicole.
Nicole Garnes is a property manager, real estate investor and mom to three girls. Shortly after graduating from UC Santa Barbara in 2012, Nicole threw herself into learning everything about how to invest in real estate. Only a few years later, she acquired her first long term rental at tax sale and her passion only grew. Since then she has expanded her business to include property management while also investing in more in her own long term rental portfolio. Currently she manages a portfolio of over 100 long term rentals and has helped rehab several dozen properties both in CA and FL.