Episode 12: So You Thinking About Investment Properties?

Thinking about buying an investment property but not sure where to start? Whether you're considering a rental property, duplex, short-term rental, or your first real estate investment, this episode is packed with practical advice to help you make informed decisions.

Join Jannea Wood, Tiffany Tobias, Katie Kolakowski, and special guest Sherry McKee, as they break down the fundamentals of real estate investing and discuss what every new investor should know before purchasing an investment property in Madison, Wisconsin and beyond.

🎙️ About It's Like That Madison
Hosted by local Realtors Jannea Wood, Tiffany Tobias, and Katie Kolakowski, It's Like That Madison explores real estate, neighborhoods, local businesses, lifestyle topics, and everything that makes Madison, Wisconsin such a great place to live.

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Jannea Wood, Stark Company Realtors: https://jwood.starkhomes.com/ Instagram

Tiffany Tobias, Stark Company Realtors: https://ttobias.starkhomes.com/

Katie Kolakowski, City RE: https://www.cityremadison.com/

Transcript

SPEAKER_04 0:00

Do we need a countdown? No.

SPEAKER_01 0:02

Well, yes, sure.

SPEAKER_03 0:03

We do like Wayne's world.

SPEAKER_04 0:04

And one.

SPEAKER_01 0:13

Welcome to It's Like That Madison. We are at episode 12. Can't believe that. And I know, and I think you were just saying we started one year ago, right? Yep. Once a month, one year ago. So I thought that's a little celebration as well. Here.

SPEAKER_03 0:26

Well, five sherry. She listens. She's going.

SPEAKER_01 0:37

I'm Tiffany Tavis with Start Company Realtors.

SPEAKER_03 0:40

Janae Wood with Stark Company Realtors. I'm Katie Kolikowski with City RE.

SPEAKER_01 0:44

And today we are very excited to introduce you to Sherry McKee, also with Start Company Realtors. We um are here to talk about investment property. And uh the three of us are kind of novice in the investment department, right? Like we understand it, but Sherry has some more background, and so um great friend of ours, uh fellow realtor, so we figured she'd be the great person that invite on the show today. And you also having me on your own investment properties, right?

SPEAKER_04 1:12

So we do do it for business, do it for personal.

SPEAKER_02 1:15

Exactly. Yep.

SPEAKER_04 1:16

So thanks for coming.

SPEAKER_02 1:17

Yeah, thanks for having me.

SPEAKER_03 1:18

I think we should take a quick time out too and thank Tiffany for this lovely backyard setting. So it's just like a girls' chat in the backyard for all of you that can't see. It is uh we're outside enjoying the sun, the long-awaited sun from the winter.

SPEAKER_04 1:33

So thank you.

SPEAKER_03 1:34

Yeah, all right.

SPEAKER_04 1:35

Should we get into it? Yeah. Ready? Sure. All right. So I know very little. I think I've done just a couple of transactions with investment properties. One thing that scares me is those clients always want spreadsheets. I can't do spreadsheets, so I think I stay away from it because I don't want to have to learn spreadsheets. Yeah. But like for real, there's differences in lending practices, I believe, right? Between investment and if you're just buying a single family home.

SPEAKER_02 2:04

Exactly. So if you're not planning on owner occupying, you're gonna have to put a higher percentage down. And it's typically gonna be 20 to 25 percent down. So that's pretty substantial. Yeah. And you're also probably gonna be having a higher interest rate, it can be anywhere from half a point to a full percentage point higher for investors. Okay. So you gotta save your money a little bit longer.

SPEAKER_04 2:30

What if they're living in the home and renting out? Like if it's a two-flat and they're living in the bottom and renting out the top, is it the same for no?

SPEAKER_02 2:38

If you're owner occupying, you there's different programs and you know you really should talk to your lender about that because it's different if you're owner occupying a single family home and you're gonna just rent out rooms versus living in one side of a duplex and then renting out the other, you can definitely do it for a lower-down payment.

SPEAKER_04 2:56

Oh, okay.

SPEAKER_02 2:57

Yeah.

SPEAKER_04 2:57

How much lower? Any any ideas on that? Yeah, all right. Well that's that's a good answer. Right.

SPEAKER_01 3:06

What so we um so tell us a little bit just about like your investment, personal investments, like how you got into it and kind of what was Yeah, like what is what is a beginner investment look like, or like how do people get into it?

SPEAKER_02 3:18

Yeah, mine was a little bit different because we bought a home, fixed it up, thought we were gonna stay there, and then we ended up having to move out of the area, and we knew the market wasn't such that we would make out what we'd put in, so we ended up renting it out. And then when we that was in California, when we moved to Wisconsin, we sold that property, and then we ended up buying two more homes in Wisconsin for the price of the one we sold in California, but um especially in California. Exactly. Yeah, it's kind of a different market there, yeah. But I think a great way people can do it is by owner-occupying. It's really hard to get a deal in Dane County or the surrounding areas. It's gonna be really hard to make the numbers work. So I think the best thing that somebody can do is to consider, like you talked about, a duplex and living in one side and renting at the other, having them help you make your mortgage payment each month.

unknown 4:14

Yeah.

SPEAKER_01 4:15

So now you have two properties in Wisconsin now?

SPEAKER_02 4:18

Yeah, so right now we've had a couple over the years, but right now what we have is just a duplex um side by side with long-term renters, and then we have a short-term rental vacation property up in Door County.

SPEAKER_01 4:31

Yeah, that that market is so interesting. The short-term, because around here it's so specific whether you can do it or you can't do it. But like when you get outside of you know Ding County, um, you have a little bit more flexibility.

SPEAKER_02 4:43

You do, but even then you need to know that the rules can always change, and they can change the rules on you. So you can buy a home and think it's going to be one thing, and then the municipality, maybe the citizens, are like pushing back. So that's what actually happened to us in the town we're in and to our county. Luckily, we were grandfathered in, but now they've changed the regulations stating uh you can only have one person there for for each week. So if somebody only comes for two days, you have to leave it vacant for the next five until you rent it to someone else.

SPEAKER_04 5:15

Is that similar to here? Or is it are we more restrictive with just like 30 days a year if you're not living in at something?

SPEAKER_02 5:23

I mean, I know City of Madison is very strict with you know that. I think Monona. In Verona? Oh, did they switch that now? Okay, I think it used to be more flexible.

SPEAKER_01 5:34

Yeah, I because I've looked and I've seen, well, at least from what I could tell. Yeah. Like, because I looked at some friends that were coming for a party that we were throwing, and everything that I could find, it was a minimum 30 days in Monona. But and I was looking right around here, so um, I don't know what the Verona allows short-term rentals.

SPEAKER_03 5:52

Yeah.

SPEAKER_02 5:53

Do they still that makes sense with Epic? Mm-hmm. Yeah.

SPEAKER_03 5:56

Yeah, I have I know two people who do short-term rentals in Verona, but like you said, the rules can consistently change and right. And it's with all the burbs around here, each one is different. Everyone's different, yeah. Exactly. Yeah, so I think my question is too is like do you recommend that people primarily if they're looking for a short-term rental or just a rental property, do you have a preference over one another? And then because Deane County might be really tough, should they look at other states or other counties in Wisconsin? What do you kind of how do you guide people?

SPEAKER_02 6:33

Well, I mean, I don't know other states, so I yeah, I try and stay in my lane. Right. So the I will say the short-term rental market tends to be much more lucrative financially. You know, the the nightly rates you can get in some of these, you know, like destination areas is very high. Um but I for me locally with my long term, I manage my own property, and that's a big cost savings right there. Otherwise, you're gonna be paying eight to ten percent to a property manager, and that's a lot of your profit margin. Um, but up in Door County, that's three and a half hours away. I don't have any relationships with home cleaners, and you need to have those kinds of relationships. So there we just pay a property manager, and they take almost 30% of our profit. So that's a big difference.

SPEAKER_01 7:25

So do you use like an Airbnb or a or a VRBO to rent that out then?

SPEAKER_02 7:29

So we we have the property manager who um takes care of it through their site. We're on both of those plus booking.com. I think there's a few other sites as well.

SPEAKER_01 7:38

So they take they take the property manager takes an addition to what would be taken from.

SPEAKER_02 7:43

No, no, that's the total. That's total, okay. Exactly. And then in all fairness, they they set the price and they have software systems that can look at you know how much availability is there over this weekend and they might tweak the price. Exactly. And they also set a much higher rate than I would ever be like courageous enough to set. I would never think to price it as high as they do sometimes.

SPEAKER_01 8:07

But is that for like events or just the time of the year? Especially because it's George County, right? Like went up there in the winter and like there's still some stuff to do, but like the summer's obviously insane.

SPEAKER_02 8:18

Exactly. The the peak months there are really like July and August, and then you still we're starting to kind of go more into the fall. In the spring, it's really slow because it's cold up there still. People are in school, but it's become a destination for like bachelor and bachelorette parties. There's like other you know, high school reunions, there's a lot of events going on up there.

SPEAKER_03 8:40

I like the goat that eats grass off the roof up there. Yes. I think those are coming up this weekend.

SPEAKER_02 8:46

He's coming off or something. No, I think they're just going up. They're going up because it's finally warm up. Yeah, that's scary.

SPEAKER_03 8:52

I think my question too is for people who like don't really know, like what advice do you do you give people? They like save, save, save until you have a certain amount, or like start looking at X, or like what what is your kind of if you want to get into the to the game per se?

SPEAKER_02 9:04

I mean, in some ways, I think it's fairly similar to if you're buying a home to own or occupy, like location, location, location. You want to look in an area, and it's maybe not exactly the same, but you want a place that's going to attract people. Is it in like is it close to major employers, or is it in a neighborhood that's very walkable? Is it maybe um in a school district where like families want to be but they can't afford to buy and they could rent? Um, so I think looking at the location in the neighborhood is still very important. And I do think um that's a good point. I think you want to be prepared just like when buying, you know, a typical home that you're going to own or occupy. Save up except for in this case, you're gonna have to save a little bit more money. Right. But I think if you get all of your ducks in a row up front, because you don't know when the opportunity is going to come up, and when it does, you need to be ready to move quickly. Yeah, to go.

SPEAKER_04 9:59

There's a lot of competition, I understand.

SPEAKER_02 10:01

There can be quite a bit of competition. Exactly.

SPEAKER_04 10:04

Oh, quite. Oh, I was gonna ask how you even evaluate a property for your clients, whether it's a a good buy. Is it up to cash flow? Does that matter? What kinds of things are you looking at to help?

SPEAKER_02 10:17

I mean, it depends on the clients. I I had a client who was like just bound and determined to buy an investment property and was not as focused on the cash flow, which like I'm not gonna lie, I can't really understand that way of thinking.

SPEAKER_03 10:30

Because that's what you would think it would be about.

SPEAKER_02 10:31

Exactly. I mean, they were looking at like they had a set of money and they were looking at like long-term appreciation as well. Um, but yeah, I think the most important thing is yeah, it it does have to cash flow and you have to take into consideration things that you know are out of your control, like the tenant leaves and now you have a vacancy. You know, you have to make sure you have enough of a cushion that you're still in a good situation when you have a tenant leave. Or when you know, we had this happen, we had ice damming on our flat rubber roof in Wisconsin and the ceiling caved in on a rental we had downtown Madison. So we had to, you know, give some money back to the tenant and you know, do things to help make that right. You just have to be prepared and have money saved for a rainy day.

SPEAKER_03 11:20

I think that's the big thing that when I have conversations with people too is that there are multiple classes that you can take around the state. I I see a uh class that's a free class typically out of Milwaukee, but being a landlord or taking on a tenant or having people in your space for vacation, it is a large responsibility. It's not just that you're gonna get an instant paycheck. A lot of times the money comes back from when you sell, correct? Or like you're taking that rent in and you're holding it for an ice dam or a plumbing leak or in in in is that correct guidance as an agent?

SPEAKER_02 11:57

Like, yeah, I don't think you're gonna unless you have a very large amount of money to put down, the cash flow is gonna be pretty minimal like in Dane County and surrounding areas. Um God. You just said something and it it sparked something and now it's gone. We'll come back.

SPEAKER_03 12:14

And if not, we'll put notes at the body.

SPEAKER_01 12:17

Well, it was interesting because when we when we moved back here from South Carolina, we ended up having essentially three properties at one time. And I was I I was like, I can't take on this person. I mean, we had no, you know, that that was the whole process of like, hey, you know, let's rent this one out, let's or let's rent this one out. And uh we ended up selling just because you know I I mean I interviewed a few people to rent the con the one condo here, and I was like, I can't do this. Like I just can't, you know, I would in my head because I like stuff like that. Like, and of course I wasn't even thinking property management at the time because we just had the one, but I was just like, I I don't know what I would do if someone called and was like at 10 o'clock and was like, I need to come fix my toilet. I'd be like, Yeah, sorry.

SPEAKER_02 13:04

Yeah, it's gotta be a good fit. That that's exactly what I was thinking. It's like you have to really kind of look within and think, can I handle this? Can I have like a difficult, you know, conversation? What happens when the tenant says, Hey, I don't have the month the rent this month, like, is it okay if I pay two weeks later? Like, you need to be willing to have difficult conversations. And the other thing to your point of, you know, is are you holding the money now and then you're gonna make money when you sell? When you sell, unless you turn around and reinvest it, you're likely gonna be paying capital gains. Cap gains. So you know, I I really kind of think of my rental properties as long-term investments.

SPEAKER_01 13:45

So did you did you use like a 1031 when you moved from California then? A 1031? Okay. Yep.

SPEAKER_02 13:50

Tell people what a 1031 is. Yeah. So a 1031 exchange is basically like a tax deferral method. So you um you have a certain number of days once you when you're selling one investment property, you have a certain number of days to identify, like you can identify up to three properties, I believe, that you're going to choose from, and then you have a certain amount of time to close on that. So you have to use um an exchange company, so you don't get your proceeds from the first closing, they hold it, and then when you close on the next property that you're gonna buy, they facilitate that.

SPEAKER_03 14:26

Yeah, that was great.

SPEAKER_04 14:27

And what happens if you don't find a property within that time period? Or something falls through or it doesn't work out, there isn't a property out there.

SPEAKER_02 14:35

You just that's a great question that I haven't encountered.

SPEAKER_01 14:38

So I've got a few people that have used the 1031, and for whatever reason it seems as though it it it works out. But I wonder, you know, that's a great question, because I I I never I'm assuming it defers back to capital gains.

SPEAKER_04 14:57

There might not be much to identify. And you're assuming you might get one of those.

SPEAKER_02 15:02

We've got to ask accountants. Right. Yeah.

SPEAKER_04 15:03

Gotta ask our accounts.

unknown 15:05

Right.

SPEAKER_02 15:06

Because it is a pretty tight window. I believe it's like 90 days minus 90.

SPEAKER_04 15:11

Yeah. And there's like the big term house hacking that's out there now. And that's whether you're renting rooms or you, you know, overoccupied. Some people rent their couches. Yeah. You know, and it's new buyers they're guiding to do that. What do you think about someone who's never owned a home and like their first property that this is what they're thinking about?

SPEAKER_01 15:32

Okay, can someone tell me what I I don't know what house hacking is.

SPEAKER_04 15:35

It's just renting out parts of your home or you have an investment property at home.

SPEAKER_02 15:41

There's like a way to make them more affordable. Yeah. Everything is hacking.

SPEAKER_03 15:44

Yeah.

SPEAKER_02 15:45

Like, I mean, I suppose like I'm old. Like a lot of times when they say that I think they're like just you know, looking for a way to like game the system, like as if like they're the first person who has ever thought about this and they're gonna be the one. It's like the people who are like, I'm gonna buy when the market comes down. It's like, well, great, let me know when that is. Um exactly. But I do think like, you know, the dude the buying the um rental property like a duplex is a good house hack because you can um you know potentially look at a higher, a more expensive price point than you would be able to do on your own. Because a lender will likely consider at least a portion of the projected income, and it might be like 75% of the income that you get on the other side, but at least you can use that and maybe you can now qualify. I mean, if you're at a lower price point and you're not finding anything, that might be a way to level up.

SPEAKER_04 16:42

Okay, yeah, that's a good idea. Yeah, that is.

SPEAKER_03 16:45

Any other tips, tricks, hints for first timers or resources that they could go to?

SPEAKER_02 16:51

Um, you know what? It's a free website, at least for the first handful of times, is Rentometer. Oh, I love that website. That website's really good. So I do like that one. Um, and again, I would just say like meet with a realtor early on, get your finances in a row because it you know, the last couple of um times that we've bought, it was because we were there, we were ready, we had everything, and an opportunity came up and we were able to just jump on.

SPEAKER_03 17:20

Pull that trigger.

SPEAKER_02 17:21

Oh, that sounds good. Great advice. Yeah.

SPEAKER_03 17:23

Anything else?

SPEAKER_02 17:24

Being prepared.

SPEAKER_03 17:25

Yeah, yeah.

SPEAKER_02 17:26

Girl Scouts motto, right? It's a good one.

SPEAKER_04 17:29

I've been around for like a hundred years. I think we answered all the questions I had, actually. Yeah. Um that was those are mine. Yeah.

SPEAKER_01 17:41

Thank you.

SPEAKER_02 17:42

It's always fun.

SPEAKER_03 17:43

Kicking it in the backyard.

SPEAKER_02 17:44

Yeah, this is a rough place to spend a Monday afternoon. Teach me spreadsheets if we ever think this, but well, and it's like that.

SPEAKER_04 17:55

Yep. Yeah.

SPEAKER_00 17:56

It's like that, Madison. Thanks for coming. See you next time. It's like that is hosted by Janae Wood of Start Company Realtors. Tiffany Tobias of Start Company Realtors, and Katie Kolakowski of City R E. Engineered by Jerry Casper, produced by Katie Kolakowski, Tiffany Tobias and Janae Wood.