Tailwind Talks
Tailwind Talks is a podcast for high-performing professionals who want to build serious real estate portfolios without leaving their careers. Hosted by an airline and military pilot turned investor, it dives into actionable strategies for scaling your real estate portfolio while balancing the demands of a full-time job.
Tailwind Talks
What I Look For Before Buying Rental Property (MILWAUKEE)
Wondering how successful real estate investors evaluate potential rental properties? In this transparent, no-nonsense breakdown, Cole—a part-time real estate investor balancing a career as both a commercial airline pilot and military instructor pilot—reveals his six-point property evaluation system built from years of hands-on experience.
Cash flow reigns supreme in Cole's investment approach. Forget complex appreciation models or speculative metrics—he focuses exclusively on cash-on-cash return, aiming for approximately 25% when possible. This straightforward calculation (annual pre-tax cash flow divided by total cash invested) immediately reveals how hard your money is working for you.
Unit configuration significantly impacts investment performance, with Cole strongly preferring two and three-bedroom units that attract stable, long-term tenants. Property condition assessment follows a practical hierarchy based on replacement costs, while property tax considerations—often overlooked by new investors—can dramatically affect long-term profitability. Cole shares a cautionary tale of selling a property primarily because its $6,000 annual tax burden consumed the majority of its cash flow potential.
Beyond the numbers, Cole dives into neighborhood dynamics and tenant profiles, drawing from his unique perspective gained while working as a mail carrier throughout Milwaukee. He explains how AppFolio property management software standardizes his tenant screening process, helping avoid costly mistakes like the tenant who stopped paying for 16 months during COVID and ultimately removed the kitchen cabinets when leaving.
Whether you're considering your first investment property or looking to refine your existing portfolio strategy, these practical criteria will help you evaluate opportunities through the eyes of an experienced investor. What's your most important criterion when evaluating rental properties?
What's up everybody. My name is Cole. I'm a part-time real estate investor, a full-time legacy airline pilot and a part-time military instructor pilot. Today I'm talking about the six things that I use to figure out whether or not a rental property is for me. And the first one's not going to surprise you, because I've talked about it a million times cash flow. That's the only thing I care about. I'm not using any fancy metrics to figure out how this property is going to do next couple years down the road as far as appreciation and things go. All I'm looking at is the cash on cash return. How much money does the property make after everything is taken out, versus how much money I have to put down on it. And those are the numbers I care about. If it has under market rents, maybe I'll consider that as a bonus or an add on to everything, but other than that I'm not really going to do anything special. I'm going to take what they report for, what each unit pays, or look at the leases. I'm going to add that up. Subtract the expenses, which is going to include everything from the mortgage, principal and interest taxes, insurance, water bills, you name it property management fees, things like that. I'm going to subtract all that out. Whatever is left over, I'm going to divide that by my down payment and it's going to tell me how much this property makes. That's the number I care about. If I can get into the 25-ish percent range, that's usually pretty good, generally speaking. If the nicer the building, the smaller the number is going to be. A lot of people use cap rates to figure out how a property is performing Kind of a similar idea. Cap rates generally are going to be compressed the higher up on the scale you go as far as the quality of the location goes. So that's the first thing I do.
Speaker 1:Second, unit layout and size. The layout I do care about some, but I really care about the size. How many bedrooms and bathrooms is it? I really do not like studios or one bedroom units. I've always had problems with the one bedroom units, more so than I've had with two and three bedroom units, and my holy grail is the three bedrooms or maybe a four bedroom single family house, something like that. That would be my holy grail as far as a quality of tenant and length of their tenure with you, and then it would just continue to cascade down from there, eventually make it to the studios, which I do not like at all.
Speaker 1:In my market I have the luxury of not having to focus on those units. I know in places like New York there's a high concentration of those kinds of units because of the cost to build, the cost to live out there, but in Milwaukee that's not really a concern. So when I'm looking at stuff right now I'm looking at two and three bedroom units almost exclusively. If I find something that has a mixture, maybe a couple one bedrooms mixed in with a bunch of other two or three bedroom units, I might consider it. But as a standard for me right now I'm pretty much just looking at two and three bedroom units exclusively and I'll throw in some one bedrooms maybe down the road, but right now I'm not even remotely concerned about it because one bedrooms they don't command as high of a price, obviously, and there's a higher turnover. I think two bedroom and three bedroom units in Milwaukee right now are commanding a pretty serious price for what they are offering because people need the space. People have families, people have loved ones that they need to live with and they need more space. So when I'm looking, that's what I'm looking at. It's one of my things I don't know. Somebody in the comments let me know if you think something else about that. I just am not a big fan of one bedroom units.
Speaker 1:Exterior and interior condition will be the next thing I'm looking at. Okay, when I talk about that, I'm talking about how old is the siding? Is the siding damaged? How old is the roof? Is the roof damaged? Are there gutters? Is there gutter damage? Is there foundation damage? Are the walls bowing in? Those are the things that I'd be looking at. Water heaters, furnaces, all the big ticket items are things I'm looking at and I'll weigh them at different values based on how much they cost to replace. So a roof, in my eyes, would be weighted a lot more than a water heater. I would take a house with a brand new roof and an old water heater. I don't really care. Water heater to me is about 400, 500 bucks. That's way cheaper than trying to replace a roof for $15,000 or whatever the case may be.
Speaker 1:So, looking at the exterior condition, usually I start any tours that I'm doing with a walk around of the exterior of the building. You get an idea of what I'm working with and what are the major things that are missing, and you don't need a scientist to figure that out. Some things are harder to access, like the roof and chimneys and things like that, but you can deduce some of that from inside the building. If a chimney is damaged or the flashing around a chimney is damaged, oftentimes you're going to see water damage on the drywall in the area of that chimney, in the upper unit if, let's say, it's a duplex. So you can do things to try to bridge the gap and save yourself the money of hiring a home inspector. That's just something that I've done personally. Usually I go with a friend of mine and we'll go tour the property together. So we have two people looking at everything and trying to catch any pitfalls that might be there. But hiring a home inspector and setting a $500, $600 inspection with somebody that potentially has a lot of knowledge and was a home builder in the past or something great, but oftentimes is somebody that passed an online course, I'll just take my chances with my own expertise and the people that I'm working with, because I've been through a lot of houses and so have they. So that's kind of my perspective on that.
Speaker 1:Look at a once over on the building and, honestly, even if it's in bad condition. Maybe that's your opportunity to use it as negotiating power. Just because the building's in rough shape doesn't mean that it's necessarily a dead deal. This could be. Hey, it needs $30,000 worth of work and it's going to take time and everything. So I really want $35,000 off the purchase price to make up for the time that's going to be lost and, obviously, the cost of fixing everything. And you can use things like that to help negotiate, because the problems that you're seeing somebody else is also going to see and there's people out there that will just buy anything sight unseen, but you're not competing with those people. Generally, those people are going to get washed out of the system eventually. You're competing with the people that are in your local area to stay, and those people are seeing the same things as you and they're probably going to be adjusting their purchase prices accordingly as well, unless the property is way underpriced. There's a lot of variables that come into these things, as you can see, but you want to get a good idea of what the property needs in the short and medium term. Long-term stuff you're always going to have to replace roofs and siding and things like that as times go on, but you want to try to limit your exposure from the get if you can. So that's what I do to do that.
Speaker 1:Property taxes something that not a lot of people will focus on. But property taxes can really influence a deal, both positively and negatively. Property taxes change year by year, obviously, and sometimes what was a good deal when you purchased it gets nailed with a 60% increase in their property taxes and now it's not such a great deal. And actually one of the duplexes I recently sold it was two duplexes on one lot we ended up selling it and part of it was because the property taxes were just insane for the property. I think it was $6,000 a year and it was really squeezing the majority of what would have been the cashflow in that property when we bought it and it just didn't make sense to hold on to it.
Speaker 1:So property taxes you want to not only know what they are now but also maybe look at the historical trends and try to predict into the future what they might be. Oftentimes if you sell a property or buy a property, it triggers an assessment change for the city. So they'll come out and look at the property or at least make some sort of BS assessment that they're going to send you in the mail and say, yeah, it's worth 50% more as far as taxes are concerned. But just keep that in mind. When you purchase a property, you're oftentimes triggering an event with the city that is going to cause them to potentially adjust your assessment, and usually they're not adjusting it down. If anybody knows anything about government here, you know that once you start giving them money, they never want to give. They never want less than what you gave them last time. They want more. They're like a drug addict.
Speaker 1:The next consideration I would have is the actual neighborhood itself. Where is this property located? It's not only okay, this property is in Milwaukee, but what sub-neighborhood of Milwaukee is it located in? And that's what I'm doing. I'm figuring out. Okay, what's the vibe out here? Are people homeowners out there? Are they primarily renters? Are the properties taken care of? Are they not? Is there a major police presence?
Speaker 1:There's a lot of things that you can deduce about a neighborhood just by being around and in it. I used to work at the post office delivering mail and that's a place that I really learned about that stuff, and anybody that's worked in a job like that understands it, because you're in the neighborhoods day in and day out for 8, 10, 12 hours a day. I learned a lot about the city of Milwaukee in that process of working that job for a couple of years, because I was in neighborhoods that I had never, I didn't grow up in and I wasn't familiar with, but I was able to learn the subcultures of those individual neighborhoods, and I think that's really important when you're buying a property. It's not the most important thing, but there's a reason that A neighborhoods are A neighborhoods and D neighborhoods are D neighborhoods, and so when you're looking at those, you want to consider the fact that, okay, this property is in an okay neighborhood, but it doesn't really look like maybe three blocks away, it's not super great, and what's the likelihood of that neighborhood eventually creeping its way into what you've got? You want to consider that stuff when you're buying a property, especially for the long term, because if you're going to buy this thing for five, 10 years, those things are going to change, and so if you can try to deduce what's going on in and around the property that you're looking at, it can help you make a more educated decision for the future.
Speaker 1:So it's a tough one, though, because it's subjective. What's off-putting to me may not be off-putting to somebody else. What's concerning to me may not be concerning to somebody else, and vice versa. There's a balance between something that cash flows and also the quality of the neighborhood and where the city is going as a whole, and that's something that you can extrapolate even into the regional outlook for the area. If you're on the west or east coast, things have changed a little bit compared to what you're seeing in the deep south right now, and the resurgences and states that historically haven't had a massive migration are now seeing that. So there's a lot of things that you want to look at, but I honestly don't get too wrapped up in the macro. I can't control the macroeconomics. Things change all the time. Governments change policies and outlooks on what they want to do all the time. I can't influence any of that. I'm just a nobody. I have 60 units. Nobody cares that I exist, so I'm just going to operate within my little bubble. So I'm focusing on just the micro of the neighborhoods that I'm dealing with and the prices and the cash flows accordingly. So that's what I look at with.
Speaker 1:That's a ramble, a kind of a rant there, but hopefully that makes some sense. I'll try to give some specific examples as I tour more properties, but that's the idea. The next thing would be tenant profile and what kind of tenants are you attracting? That kind of goes hand in hand with the neighborhood. Is the neighborhood rough, is it not? And generally speaking, you're going to see a similar tenant profile coming through according to the neighborhood that you're dealing with, something that you have to consider.
Speaker 1:But I will say there's properties I've had that are in rough neighborhoods that have had amazing tenants, and there's places I've had in nice neighborhoods that have horrible tenants. For example, I had a property in a pretty nice neighborhood, actually a really nice neighborhood now in a suburb of Milwaukee and it was a one bedroom units in this eight unit that I've talked about a couple of times and one of these guys during COVID stopped paying for about 16 months during the whole rent moratorium and everything Preston Pysh. When he moved out, he actually took the cabinets with him off the wall of the property. So I not only inherited a unit that was vacant, as far as the payment goes, for 16 months, but he also destroyed it on the way out. I think he took all the appliances too, and that was in a really nice neighborhood.
Speaker 1:So you really can't shout out, robert Davenport, you really can't predict your tenant profile, always based on where the property is located. So really a lot of that goes into vetting your tenants properly, giving them strict guidelines as to what they need to have as far as income, sticking to your guidelines as far as income and security deposit credit score history. All those things are going to come into play when you're picking your tenants for your units, and if you pick a good tenant it can work wonders for you. But if you pick a bad tenant, you're going to be feeling the pain and it just makes everything worse Because, let's say, that person moves in next month they stop paying. Have that. I've had that happen for sure. Now you have a unit that's not making any money. You're stuck with this person trying to get them out. It's going to take you at least probably 4560 days to get them out. Now you're inheriting a unit that's probably beat up. You're gonna have to reset it again, which you just did 90 days ago, let's say. So now you're paying to reset this unit again and you still haven't collected any rent. So now you start looking at that. You could be down thousands of dollars quickly in a blink of an eye from a situation like that.
Speaker 1:Picking good tenants is key. Appfolio is what I used when I was managing this with my buddy and really he was managing all of it. If he watches this he's going to laugh at that. He was managing most of it because I was working my normal jobs, like I still am, but even the property manager that I use now they also use AppFolio. I think they're really intuitive as far as vetting tenants and getting everything set up as autonomous as you can tracking work orders, things like that Pretty good tool. I'm not sponsored by them, they don't even know I exist but I thought it was really useful tool and it's probably one of the better softwares that I've used or looked at for the property management stuff. So good software can go a long way too.
Speaker 1:Those are the six things that I'm looking at when I'm picking a property, when I'm trying to figure out what exactly I want to buy, and my guidelines for what I'm looking for often change. A lot of this has to do with how much money do I have to put down. If I had unlimited money, of course, I would buy probably the nicest possible properties for the future, but money is a prohibiting factor and not everybody has unlimited money, and I certainly don't, so some of it. You have to bracket your expectations with some of these things on this list next to your actual money and what you can put down. If you only have $10,000 as a down payment, then you're going to be restricted to a smaller category of properties, and they're probably going to be in the C and D neighborhoods, and you're going to have to massage that as you go. You're going to have to accept the fact that you're not going to be able to afford these extremely expensive high-end properties right away, and you probably don't even want to. They're not going to cashflow very well, it's more of a long-term play, so just keep that in mind.
Speaker 1:A lot of these guidelines are great and things that I think about are great, but it has to be commensurate to the money that you have, and so that's something I would really consider when you're getting your foot in the door here and, honestly, sometimes that's why it's best to just hold on for another year or two and continue to save money, so that way you can upgrade from a duplex, maybe in a D neighborhood that's in rough shape, to a C-class duplex that's in pretty good shape, and that difference might be the difference of you making a career out of this and making something that's lasting for you and your family, versus getting stuck before you even started. So those are my thoughts. With all of that, I appreciate anybody that's watching this still, and let me know what else you guys like to see. This came from the comments. Hopefully I answered some questions effectively and we'll continue to roll with this from here, so appreciate it.