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Episode #17: Investing in Foreclosures with Lisa Phillips

Lisa Phillips, founder of AffordableRealEstateInvestments.com helps Black Professionals build profitable rental property portfolios. Her clients are generally first-generation college, first-generation white collar, and she guides them toward real estate wealth by investing in minority neighborhoods. She has a background as an electrical engineer but turned to real estate after a layoff and invests in working-class neighborhoods in cities across the country. Lisa also runs a wildly successful Facebook group: the Sub30k Mastermind Group. 

In this episode, Millionacres Editor, Deidre Woollard, interviews Lisa Phillips of AffordableRealEstateInvestments.com. They discuss Lisa’s personal story, investing in foreclosures as well as ways to ensure real estate investments are serving the local community. 

Transcript

Lisa Phillips: When you mix business, profit, and income, and you also mix that with the spiritual's essence of service to the community, service to others, not at the expense of yourself, together, and helping them get stability and bringing affordable housing and investments to these neighborhoods, you're really tapping into something that's just more of a higher perspective. You're giving back more, you know that you're making a difference, and you know that you're being of service to humanity. I do find that when you cannot only be profitable but also do so much more for people than anyone else has done, create a different narrative that really helps people other than yourself, have long-term secure housing that's in decent shape because you're not a slumlord, you're really giving out good karma, good dharma, and that does pay for itself not only in the people you're impacting but the impact you're leaving on a neighborhood or location. If you are this faceless machine, that's what you get back. If you are someone who is a landlord and like, my tenants haven't even met me, but they do know if they put in a request for something to get fixed, it gets fixed, they know the energy, they know when they walked into the place, it might be in a modest neighborhood, but I took the time to put contact paper on the countertops, which is a very low cost way of upgrading the look. They see these little signs of the luxury vinyl tile instead of like that office boring, which is really cheap, they see these little signs and energy, and so you really do get back what you put into it. Sometimes, it is these small little touches which shows you how important connection is for everyone to be fruitful. [MUSIC]

Deidre Woollard: You are listening to The Millionacres Podcast. Our mission at Millionacres is to educate and empower investors to make great decisions and achieve real estate investing success. We provide regular content and perspective for everyone from those just starting out to seasoned pros with decades of experience. At Millionacres, we work every day to help you demystify real estate investing and build real wealth.

Hello, I'm Deidre Woollard, an editor at Millionacres, and thank you so much for tuning in to The Millionacres Podcast. I had a couple of episodes recently about foreclosures, and I want to wrap up that series by talking to Lisa Phillips who is an investor who helps others build profitable rental property portfolios by investing in foreclosures and other properties. Through her website, affordablerealestateinvestments.com, Lisa Phillips helps black professionals build profitable rental property portfolios. Her clients are generally first-generation college, first-generation white collar, and she guides them toward real estate wealth by investing in minority neighborhoods. She has a background as an electrical engineer but turned to real estate after a layoff. She invests in working class neighborhoods in cities all around the country. I was drawn to her story because she shows how you can improve a neighborhood without gentrifying it, and how people can build wealth. Lisa, thank you so much for joining us today. I love your story because you had that "aha" moment about real estate investing, I always love stories like that. Can you share a bit of your story and how you discovered real estate?

Lisa Phillips: Yeah. Thank you so much for having me on. I have always loved The Motley Fool and I read all of your articles, so I am very honored to be on today and very excited. Thank you for that. My story starts with a layoff. [laughs] Just purchased a condo, and what am I going to do now? But the condo I purchased was about $35,000. What really guided that story was the fact that I grew up on the West Coast in Las Vegas. In the West Coast, you're just not used to very inexpensive homes. It's always more and more pricier and more expensive. You really don't see a downward slump. So when I moved to the Midwest for a job to work, I found out that there's this whole world out there where the prices at home can range from 30,000 to a million. But you definitely had a range and those neighborhoods were actually very decent, very nice, and to be honest, from my own background, the kind of neighborhood I grew up in, because I grew up in a low income working class neighborhood. When I went out there and discovered this reality, it was just such a beautiful thing to have. I was just laid off, but I'd purchased a $35,000 condo. I had to fix it up, but the thing is it just taught me viscerally in my 20s that if you own property, even if it doesn't cost much, you're protected from a lot of what the economy has to offer. If it doesn't cost a lot, you're doubly protected because it's easy to afford the mortgage. This was during 2009 where we saw a huge number of foreclosures. Even to this day, we're still affected by it. So having that piece of mind and clarity, and the understanding that the neighborhoods that I grew up with aren't necessarily desirable to a lot of white-collar workers out there who want to have a certain standard of living, but they are affordable for people who are in that income bracket, and tight price range, and we can provide a service. As you do know, I'm very much not into gentrifying. [laughs] I do make a note to mention we're not going into these neighborhoods to push people out. We've had enough of that. Today, in this [inaudible 00:05:25] day and age, the people who follow my system are very much concerned and think about not pushing out lower-income or working class families in order to make a profit. I find that because not only are we looking at the income data sheet but we're also thinking about community, that we just build a richer business and we each individually build a richer portfolio.

Deidre Woollard: I love that. I think that's really important. The other thing that we're seeing right now too is there's a rise in median home prices. A lot of neighborhoods all over the country are becoming unaffordable for renters, but also for investors. How are you still finding good deals?

Lisa Phillips: It is a process. You want to look where no one else is looking. I do have a whole system I developed that goes into this in depth. But you really want to find the major transportation routes strategically from major city hubs. From that, you could in a systematic way just go through and start finding these places that are outside the main cities but do offer decent enough rents but low enough properties. It is a system going from high populated area and moving out, but in a strategic manner.

Deidre Woollard: That makes sense. The other thing I wanted to talk to you about too was the foreclosure crisis, the potential for foreclosures. I don't think that this cycle that we're in is going to be like that last cycle. But as you mentioned, there are still foreclosures out there. How do you work with your clients in walking them through what buying a foreclosure is like?

Lisa Phillips: I love foreclosures. I do not like short sales. So we really need to separate those two. Because I've been doing this for 10 years, I've been working with people all over the country for 10 years successfully, I have not seen one short sale go through for an investor. I have not, [laughs] not once. I do exclude those from what we look for just because they can get caught up at the last minute, and the bank just automatically refusing, it's taking nine months to close. They are just very tricky to get through. When you exclude those from the conversation and just stick with real estate owned, I love them, because foreclosed property once it's gone through the entire process, that means the bank has cleared any and all liens so that you don't have to be responsible any second mortgages, any mechanics lien, financing lien, all of that has been cleared. They're usually empty and they're ready to be sold for under the market. I actually love when I see R-E-O, which is real estate owned, or foreclosed, but we want to make sure it does not say pre-foreclosure or short sale. Once you get through that understanding, it really just opens you up to prime houses sitting there under market, undervalued for a quick sell.

Deidre Woollard: Yeah, I think that's a really good point about short sales. I always think it's so funny that they're called short sales because they are always so long [laughs] and so complicated. They are very hard, especially for beginning investors. When you have a neighborhood that's got a lot of foreclosures in it, you do get that concern about gentrification. You get people wanting to come in and buy up a lot of properties and really change the neighborhood. Why is it important do you think to develop a neighborhood respectfully and not change it? How do you stop improvement from becoming gentrification?

Lisa Phillips: There's a component on why it's a good thing to do and then there's a how. But "why" is a bigger conversation that sometimes people in the financial community aren't so comfortable talking about. When you can mix business, profit, and income, and you also mix that with the spiritual essence of service to the community, service to others, not at the expense of yourself, together, and helping them get stability and bringing affordable housing and investments to these neighborhoods, you're really tapping into something that's just more of a higher perspective. You're giving back more, you know that you're making a difference, and you know that you're being in service to humanity. I do find that when you can not only be profitable but also do so much more for people than anyone else has done, create a different narrative that really helps people other than yourself have long-term secure housing that's in decent shape because you're not a slum lord, you're really giving out good karma, good dharma, and that does pay for itself not only in the people you're impacting but the impact you're leaving on a neighborhood or location. I have 11,000 people in my Facebook group. We have seen such positive changes and reformations in those neighborhoods that we invested in because we do care and think about that, not at the expense of profit but in conjunction with. I do find if anyone out there, if you want to make money but also find a way to make money and be of service to the communities that need someone to be of service, not only do you feel good, they feel good, and the whole planet's vibration may lift. Now, that might be too spiritual for you, but it is a real thing that I think sometimes gets overlooked in business where it's just money. Well, no, it's also the energy you put into it is the energy that you get out, and it can proliferate. We're proliferating a really good energy of community and thinking a little bit more thoughtfully about what we're doing in these neighborhoods. Now, the "how", and this is actually a very economic discussion, many times we talk in our group about how we do not raise the rents on our clients, and that helps slow down gentrification, at least for that one family or individual property or multifamily that you might have. There are a lot of benefits actually. Instead of raising your rents with the market every year, if you keep them below, you tend to keep long-term clients. I call tenants clients because they are my clients. I want to service them, they pay me money. But you tend to keep long-term clients, and when I say long-term, and especially in this demographic, you can talk about 10, 20, 30 years of the same tenant. If you [inaudible 00:11:26] get a tenant who keeps your place up and immaculate and tells you everything that's going on in the neighborhood, that is also a benefit, because in the long run, if you get people in and out, not only do you have turnover costs which will eat into your profits that year, guaranteed, but you also bring in the possibility of getting a not-so-good tenant versus a known quantity that keeps your place up and pays on time. Even during this economic and this pandemic, we have seen that. We still have our great tenants that know that they're getting a great deal, know that if they leave, that it will rise. So we get good tenants who take care of the place and we are not doing turnover costs every year to two years. It just stays profitable and it gives them stability as well. You might notice when I talk about it, I do talk about what we get, but it's also good if you can talk about what they benefit as well. Because to me, a good business, and this is my culture that I spread, is all about win-win for both.

Deidre Woollard: I really love that and I think that really shows why it's important to have individual investors. I know one of the things that happens sometimes is when you get institutional investors, you don't get that level of care, you don't get that level of connection. That connection really is important when you're talking about having someone care for the property like it's their own even though they're a renter.

Lisa Phillips: Yeah. If you are this faceless machine, that's what you get back. My tenants haven't even met me, but they do know if they put in a request for something to gets fixed, it gets fixed. They know the energy. They know when they walked into the place, it might be in a modest neighborhood, but I took the time to put contact paper on the countertops, which is a very low cost way of upgrading the look. they see these little signs of the luxury vinyl tile instead of that office boring, which is really cheap, they see these little signs and energy, and so you really do get back what you put into it. Sometimes, it is these small little touches which shows you how important connection is for everyone to be fruitful.

Deidre Woollard: Definitely. I know you work a lot with black investors and the black rate of home ownership has been below other groups. Do you think that it's possible to change that? What needs to happen in order to raise that rate?

Lisa Phillips: That is a big question. [laughs]

Deidre Woollard: It is.

Lisa Phillips: I will say there are institutional reasons on why it is at a lower rate. In my Facebook group, we're sharing stories of how appraisers will appraise a house that has pictures of black people in the wall, and it's very obvious that a black family lives there, can consistently be undervalued and underappraised appraisal versus if they take those pictures down. So a lot of what we have to do is be in the know and know any pictures that show that you're black, you're supposed to take down. We have to be in this network of getting around a system that is set up to keep us at a certain economic level and not to prosper. What does help is being around other investors. I will tell you in my group, out of all the banks out there, it's like five percent of the base get all of our money. In my group, it's like the same 5-10 banks across the country that we all use. Now, on one hand, those banks are making a lot of money because that's a lot of economic power that they're getting. But on the other hand, it shows you what's going on if we could only really work with five percent that are consistent with giving us loan if we have the right credit, versus others, you can be a black mortgager, have good credit, and still get denied. We have those numbers, those are out there, it is very obvious that it's in their nature. Even the companies themselves that are doing this, like Banco Santander, I was reading up that 90 percent of the people they give [inaudible 00:15:26] and loans to are white or Asian, [laughs] not black or Hispanic. You can look at those numbers and even that bank will deny to this day that there's anything wrong with how they're doing it. But you already know that we have the studies that show two people, one couple is white, one couple is black, and they have the same credit profile; one will get the mortgage and one will not. Will it ever change? It will change with us. It will change with people, like in my group, educating that, "Hey, not every bank is for us, but these five percent are." You know what? Those five percent benefit from that concentrated amounts of money coming from the black community, because as you know, we do have very large economic power. They benefit because the other 85, 90 percent are not good at being diverse and understanding where they may have institutionalized systemic racism. That is how we have been doing it in modifying ourselves around the situation, around this country that we're in. It's very much an "in the know" network. It's very much us educating each other and pointing to the few that will treat us very fairly. But I always go back to, you treat us fairly, you get all the business. There's something to doing something better than yourself in business that really pays for itself and keeps you in abundance. Will it ever change? Yes, and it will start from within. Because the system is so large, I'm not changing Bank of Santander. Bank of America has how many fines and millions they paid for racial discrimination suits? Have they settled? They haven't changed yet. What we try to do is find the ones we can work with, and those few ones, we try to proliferate and word of mouth spread.

Deidre Woollard: I think that's really important. On a previous broadcast, we talked a little bit about minority-owned lending institutions and why it's so important to support them and to help them grow. You mentioned the economic power. It's to everybody's benefit. There's a lot of economic power that these bigger banks are missing out on. It's their loss.

Lisa Phillips: It's ridiculous sometimes when you think about it. On my platform, on my book, I'm very open. I do have everybody in my group of all races, but I do say I target black Americans because the neighborhoods we tend to go into in our history, it's just like a nice little symbiotic relationship. I look around like, "If you guys are sleeping on the economic power of the black community, that's on you. I guess you don't like being in abundance, because it's there, it's known, it's been talked about." Even with my own platform, I had been very well taken care of just specifically focusing on this one group even though I do have an umbrella where I allow all in. It's there. I'm not saying they're for the taking because we've had enough of that but it's definitely there and it's overlooked. But the person who can see a little bit more and be a little bit bigger gets all of the revenue. That's how it should be.

Deidre Woollard: I like that. You've work in cities all around the country. I know some people are worried about investing remotely or investing in a place they don't really know. How do you help people feel comfortable with that?

Lisa Phillips: That is such a good question, because once you get past this roadblock or obstacle or fear, it really opens it out. Because honestly, most of the people I work with, they live in New York, DC, Florida, Atlanta, Texas, and California, places where they earn a nice living because the salary differential is so much higher, but they cannot afford to purchase properties there, especially not rental properties, at what would be comfortable for someone first-time investing. Once you get past the roadblock of investing remotely, you are good to go. How we do this is we really start being strategic. So with my California clients, I have them focus on the Midwest. If you are in the Northeast, you can focus on the Northeast. In the South, you can focus on the South. It's really my Californians that as soon as I talk to, you're from California, I'm like, "Hey, are you okay with travel? What's your travel schedule? Do you have 2-3 days off?" What I want everyone to know out there, there are ways to do this where it's very systematic, so you don't have to necessarily visit every week. This isn't, "I bought a cabin in Idaho. We have to go out there to fix it up." No. What we do, we're very strategic. We look at the closest places you can fly into. We look at markets that have houses and the price range that you were looking for that don't need much work. We're also looking at multi-families. So there's different things that we do to eliminate our risk. One of the things is, listen, you fly out of Jacksonville, Florida Airport. Where are the first direct flights on the low-cost carriers? Because the low-cost carriers tend to go to low-cost markets. It could be something that makes sense, but if you put a whole bunch of those little things together, it really is a lot easier, then you would think to find a market affordable to fly to, that has the houses you want, and create a nice little system between the contractors and property managers, and you are being informed where you don't have to be there every week. I just had a client go out to Wisconsin and purchase two multi-families, and I think she's visited two times [laughs] every month, but if you set this up properly, you don't need to visit because you've been very diligent about making sure the market can sustain that, that it has good contractors already, that it has good property managers, and it has more than one property manager. Because if you're an investor, you know the first one might not be that hot. [laughs] So you need to make sure it has a two, three, or four. If you work with me, I say it needs to have at least four because I'm on my third property manager in my Ohio property in nine years and that can happen. If you go to a place that's, oh, look at this cute little house, it's $40,000 in a rural area, but there is no one to manage it, I have to tell them we have to keep going unless you want to manage it yourself. So when you get really firm and disciplined on those little details, it can make it a lot easier and a lot smoother than people think. That is the biggest part of what I teach people so they can get started in real estate investing at a more affordable price point for their first investment.

Deidre Woollard: Fantastic. That note about low-cost carriers and low-class markets is such a great thing that most people wouldn't think of but makes so much sense. [MUSIC] Well, let's take a break here, and then when we come back, we're going to talk about some of the specifics of how you find tenants and working with property managers. [MUSIC] During our break today, we're excited to have Millionacres lead investment analyst, Matt Argersinger, here to speak briefly about one of our newest services, Real Estate Winners. Thank you for joining us, Matt.

Matt Argersinger: Thanks for having me.

Deidre Woollard: What is Real Estate Winners and who is it for?

Matt Argersinger: Well, I like to think of Real Estate Winners as our answer to Stock Advisor in the real estate market. It is a service that provides recommendations on publicly traded real estate investment trusts and real estate companies. It's a pretty big universe out there. There's over 200 REITs to choose from and probably dozens if not hundreds of real estate companies that are in our universe. We provide regular investment recommendations as well as commentary on the market, education material. It's really designed to get anyone who's interested in investing and learning about real estate started.

Deidre Woollard: Is it geared toward new investors or is it more for seasoned pros?

Matt Argersinger: I think Real Estate Winners can serve both. I think if you're a new investor, maybe you're just getting started with stocks and you want to learn more about how to add real estate to your portfolio, great place to start. If you're a seasoned investor and just thinking, how can I diverse my portfolio, maybe reduce the volatility in my portfolio, maybe add some income to my portfolio, then I think Real Estate Winners is a great solution for that cohort as well.

Deidre Woollard: Fantastic. What are the benefits of being a member of Real Estate Winners?

Matt Argersinger: I think the number 1 benefit is, from day 1 when you join, you get our top 10 investment ideas at the moment. Really, right from the beginning, you know what our 10 best ideas in the publicly traded real estate market are. Then going forward on a monthly basis, you'll get a new recommendation, sometimes more than one new recommendation, as well as regular content covering our past recommendations, providing updates, and talking about the real estate market. It's really the full package if you're interested in real estate investing.

Deidre Woollard: Perfect. What do you need to get started?

Matt Argersinger: Really, all you need is a discount brokerage account. If you're used to buying stocks, you probably already have that. If you haven't bought stocks in the past, of course, just open a discount brokerage account. These days, you don't even have to pay commissions. It's fantastic. So it really couldn't be easier to get started investing with Real Estate Winners.

Deidre Woollard: Sounds fantastic. How can people sign up?

Matt Argersinger: Sure. They can head over to real.fool.com that's R-E-A-L.fool.com.

Deidre Woollard: Great. Thank you so much, Matt. [MUSIC] We're here with Lisa Phillips who runs affordablerealestateinvestments.com and she works with empowering first-time investors to own rental properties. Lisa, you are a great mentor and you've worked with thousands of people, but how did you find your first mentor?

Lisa Phillips: All of my stories, I was laid off. [laughs] All my stories start like I got laid off, and then it was time to get to work. [laughs] I like money and I like being in a house. I was actually laid off and my first mentor was actually a coaching mentor. At that point, I had been helping people individually with their houses who maybe reached out to me through BiggerPockets, or maybe saw a blog post, and he was amazing. God sent him to me, I swear, because he just helped me reformat every thing and I was able to get to more people in a more polished manner. The more polished the manner was, the more they can believe in it and appreciate it and have a structure that worked for them. That was my first and not my last. I consistently have a mentor either for business or for spiritual purpose, someone who's better at their craft than I am. I'm trying to constantly evolve and do better. That is how it happened. I was laid off and I was like, let me see if I can build this online platform of helping people with their first real properties. That was 2015 and everything else has been history since then. He was a Godsend.

Deidre Woollard: Yeah, mentors are so important. I wanted to talk a little bit more about your strategy, because I think it's really important that what you do is that you don't ladder people up into buying more and more expensive properties, which I've seen a lot of other real estate investors do. Sometimes, that ends up putting you in a position where you actually have properties that can be a little too big for your portfolio. Why do you think it's important for investors to have basically workforce housing, more reasonably priced properties?

Lisa Phillips: You're going to have to get some dose of reality. [laughs] I'm going to be very real with you guys right now. Honestly, in order to understand this, you got to understand that the people who are traditionally in giving real estate investing advice were in a different socioeconomic class. They're in a socioeconomic class where putting $50,000 down on a $100,000 property and waiting 30 years for it to be paid off and then get the rents was something they can do because of the amount of money they have, they weren't necessarily looking to live off the income, and for a lot of people in that social class, they were not comfortable going to lower income or working class neighborhoods. They just didn't have the mindset, the familiarity. When you understand that context, you see why that was the proliferating thought. You buy this expensive property, hold out, it'll be more expensive. But that's 20 percent of any audience. The other 80 percent are working class moes like me. [laughs] Why would I do this? Why would I put that much money down to have a $1,400 mortgage to wait 30 years in order to have a house that might be worth $400,000 or $500,000? Yes, we obviously understand that there's a lot of equity, but unless you're really flush with cash, like a lot of the investors tended to be, it just really doesn't make economic sense to hold onto something like that for 30 years. When I came on the scene, I was like, look, I'm from these neighborhoods, I'm comfortable, the people I target are very comfortable, so why not? It's just so funny to us. 2013 is when I started out on YouTube. Till this day, there are people who are like, I will not step foot in the neighborhoods that Lisa promote. You know what? That's okay, because if you're not comfortable in it, they'll know you're not comfortable, and they'll think it's because of this "ism", or that "ism", [laughs] classism or racism. It's okay for you to stay in your expensive property if that's what you're comfortable with and if that's what you can afford. I just like to be the contrasters, those of us out there who do not have generational wealth. Whatever wealth we have, I literally created over the last 10 years just working very hard. There's no loans from mom. There's no loans from dad. I'm not going to the local church and someone's going to give me 50,000. That does happen in certain communities. It's not necessarily happening in mine. It just makes sense for who and what we are, so I think the biggest part is just acknowledging what social economic class are you in, and follow the advice that works for what you're trying to do and what you're comfortable with. I'm comfortable with these neighborhoods. You can start with $10,000, $20,000, $30,000, which is a lot more doable for college first-generation white collar. Personally, I'm all about "buy low, sell high". They can keep their strategy, which I understand comes from a place of their comfortability and access to capital. But I just want people to be educated on why that would happen, versus this other one which works for I think the majority of people who are more modest of what capital that they might have access to. That is where we stay, in our lane, and they stay in their lane.

Deidre Woollard: Yeah, it's all about finding out what works for you. There's also a benefit to just having steady, consistent wealth over time. That's how you grow a business. You don't necessarily have to swing for the fences every time. There's a lot to be said for a small amount of consistent income that comes in.

Lisa Phillips: It's been amazing. With these portfolios, I did fine. All of a sudden, I sold one, I was like, oh, look at that. For the first time, I'm one of those people who have X amount of money in the bank. So if there was a bigger deal, I can put down the 50k to buy a bigger deal. But it was these small little things that added up over years. Then you look back, you sell one that may be appreciated, and all of a sudden, you're a bigger player through those small little diligent plays that you've been making.

Deidre Woollard: When you're looking at these homes, you're looking at lower-priced homes, is there ever anything that for you is a deal breaker? Are you looking at things like plumbing or electrical? Are you mostly looking for homes that need only a small amount of improvement?

Lisa Phillips: That's a bit of a bigger question. For the most part, my non-negotiables are any foundation issues. We're not doing that, it's just too expensive. There's too much unknown and too many variables with that. Also in these locations, crime is something you have to consider. I know there are some really cute houses in these price ranges, but if they are shooting in front of the house, it's not worth it. [laughs] It's not worth it, or maybe it is to you if you're like G.I. Joe. But we really have to be discerning that we don't just chase a low-cost property and we're very mindful. As you said, the gut rehab, there are times where a gut rehab is worth it. Say it's a neighborhood where across the street, they're building like a $40 million megaplex. Then taking that shell and putting 50 or 60k into it is worth it because across the street, you have this huge development that's going to bring the value of your home up. But if it's not that particular upshot or situation where you're going to get that extreme appreciation, I would not recommend the full gut rehab. It can work in certain situations, but since we're not flipping and we're really trying to make sure that whatever we put into it, the rents match it, plus give us cashflow, that's something we have to be very discerning about.

Deidre Woollard: You also mentioned before having multiple property managers. How do you find a great property manager? What do you look for? Do you want to work with an individual? Do you like to work with a team? What works for you in finding a property manager?

Lisa Phillips: This is the best question, because what I tell my clients when we start out, let me tell you something, every property manager says they're the best property manager.

Deidre Woollard: [laughs] True.

Lisa Phillips: Everyone says they're good. Everyone says they're going to treat your property like the best. The reality is when you get into investing, you really start realizing it's mom and pop, it's character-based, it's individual. That individual who said they're going to do everything right may in fact do everything right, but they may in fact be terrible communicators, not really good at scaling their business. Or I've had people where they started out great, but then I recommended them on my platform, [laughs] then all of a sudden, they weren't so great because they had too much business and they couldn't scale with it properly. What I say that for is because everyone's going to say they're the best. Just like when you're interviewing someone for a job, every candidate that comes in says they're the best candidate. But what I tell them, we just have to be discerning to know that we're not going to know how they function until we get in bed with them. Until they start working with us, we're not going to know. Everyone says they're great. When I tell them that, I go, you just need backup and resources. You might find out six months in that they're not the best, but if you already chose a market and you knew that there were four, five, or six other property managers you can go with, it hurts less because you're not stuck in a position. If in three or six months, you find out they're not collecting rent, they're not getting any phone calls, they're not doing the work they need to do, or they charge too much, because I had to get rid of one because they charged too much for everything, it's like it does not cost that much for this. There's all these reasons that might go into why you're not quite satisfied, but each time I closed out whatever contract, if any, I had with them and I had the second property manager go pick the keys up from the previous manager that I just let go and continue on in the business. Part of it is making sure that there's enough in understanding that we don't know if they're going to be good or not until we start working. I know we want certainty, I know we want to know that they're going to be good, you're going to have it your way, but that's just not how real estate investing works. That's why you go to a contractor. Are they going to be good? Are they not going to be good? You want the certainty but it's not there. But what we try to do is mitigate our risk and give ourselves options and minimize how much overhead or over-leveraged we are. So if we do find out early in the game, either with a contractor or with a property manager, that they're not the best, we have exit strategies to switch over. That's how we try to mitigate the risk that goes into that.

Deidre Woollard: Interesting. When you're trying to get tenants, and I know you call them clients, but when you're looking for someone to be inside the house, do you have the property manager do the screening or do you do it yourself? Is there anything that you've learned is a red flag that probably people may not be aware of.

Lisa Phillips: It will depend on the property manager. I have one property manager who's amazing and she's like, "I'm deciding because I have to deal with them." [laughs] She's told me that, and she's amazing, so I'm like, okay, girl. She was like, I don't accept this, I don't accept that, and she has a great tenant. I've had them for about six years so far and they're still there. Then I have other property managers where they'll compile the information and send it to you. They might give you their thoughts, but you are the ultimate decider after seeing their credit report and the full application. So it really just depends on that particular location, if you're doing the work yourself or working with a property manager. The biggest thing I have noticed in my experience is you can have a ding or something, one or two things bad on your credit, especially in this price range, working class neighborhoods where the funds are not so flush and plentiful. So you're going to see maybe some blemishes. But one thing I have noticed directly correlates to them not paying rent is how many charge-offs they have. A charge-off on the credit report is a very technical term, meaning they did not pay. They attempt to pay then they just charged it off. There's other type of negative items on a credit report, but I've noticed there's a correlation. If they have multiple charge offs, they are not going to pay your rent. They are okay with nothing, something, having it out there and just sitting there. I had to learn that the hard way, but that's what we do. We learn the hard way so we can tell other people. So that's one of the red flags, the charge-offs. But pretty much a lot of people at all income and price ranges might have one or two blemish. The charge off is my biggest thing. The other big thing is that you want them to make two and a half to three times their income. Because I've had people who like my properties because I do put these little small touches in it to make them look so nice for that neighborhood, and they're very budget minded, but they come and they went in, and I look at what they're making and I was like, "You just don't make enough." You can take them because they really want it and you feel that energy, but you also have to understand it's going to put both of you guys in a bad situation. If they literally can not afford this and their other expenses, you know when it comes down to it, there's going to be other expenses that come first. You're putting them in a tight position that you should have known better as the landlord to circumvent. For you, why deal with the anxiousness? So the two and a half and three times the rent has been a very consistent, stable way of making sure we get really good consistent tenant. So the charge offs are one thing and being very strict with the two and a half to three times the income.

Deidre Woollard: I think that makes a lot of sense, the charge-offs versus the credit score, because the credit score can mean one or two things happened. Certainly, I think just about all of us when we're younger, we make dumb decisions with credit. That can affect people. But yeah, a charge-off really says that they are comfortable with what happens when you don't pay it.

Lisa Phillips: Yeah.

Deidre Woollard: That tends to mean it's someone who maybe isn't going to care about the property the same way you are and won't have a problem with just walking away with it in any state.

Lisa Phillips: A little too comfortable not paying people. That's one of the things. You're correct.

Deidre Woollard: As we wrap up, I wanted to ask you for one piece of advice that you give people that maybe they tend to ignore when they're first-time investors.

Lisa Phillips: I don't just see one thing. I see a couple of different things. One of the things I see that I tell them to stop doing is sometimes, they're like, "I found a random house that's $50,000 on Zillow." They get fixated on a random house. I'm like, "What market is it in? What's going on in this market? What's the economy? What's the neighborhood like? What's this?" I start actually asking them questions and trying to vet. They're all over the place just looking at cheap houses, but not being discerning, looking for the right market, and making sure the right market has the right kind of house for their budget. It's a little different and more nuanced. So I tell people don't just focus on a cheap house. Look for the right market that has the kind of houses you want. Those are the skill sets that I teach people. But I do sometimes have clients who think they know more than I do. When they find out a couple of weeks in that, "Let me just go back to finding the right market because I'm all over the place. I'm not getting anywhere." So that's one thing that I have to wait for people to find out on their own that they should listen to, because the right market will have all that. We've already vetted that it had properties in this price range. I would also say energy. I dropped it in through here that business can be more than business. You can bring a higher aspect and a higher perspective to it. One of the things I try to tell people, and some resonate with immediately, and some have come around to, is that the energy you put into it is the energy that you get out of it. So if you think you can't, you can't. If you come to this optimistic and going, "I couldn't necessarily find this myself, but I believe they're out there," I'm seeing other people in your Facebook group post and they're optimistic and they have that energy of like, "Well, why not? This could definitely happen for me," they do a lot better than those who have a little lower energetic presence, and they're like, "I couldn't see it. Do you think I can if I work with you?" They couldn't do it and they're just mired in disappointment and then they get more disappointment. Then I might have a coaching call where I have three people looking in the same city. The one that was disappointed from the beginning sees nothing. The other two have 10 properties we're analyzing and looking at together to see which ones they want to buy. That's something that not everyone can get or pay attention to, but the energy in which you show up to do your businesses in is the energy in which you get back. So you show up to just start your business and you are ready to go. You're like, "Why can't this happen to me? Why can't it be my lucky break?" Of course it can. I find that not only do I like working with them better but they get exactly what they are expecting. But I also notice that if they show up and their energy is like, "I don't think this could happen. I don't think this can do it," sometimes I tell them, "Well, maybe you can take some time to think about it before joining." But I do find that your energy will bring to you what you put out. What your expectations are is exactly what you get. It's just something that some people just can't really understand at the point that they're in right now. So I try to say something. Maybe they get it, they don't. Eventually, it'll work itself out.

Deidre Woollard: Well, I think that also reminds me of some of the case studies that I read on your website. I think that one of the things that I really loved about reading some of those case studies was that there were people who wanted to build wealth. That was obviously important to them. But they also wanted to give back to their community, or they want to give back to other communities that they saw that there was a potential to both do well for themselves and also do good for other people. I think that's an important thing in rental investing, that you actually are elevating a community. You talked before about making those nice little touches at a house and how that level of care, people feel that care from an energetic standpoint.

Lisa Phillips: Absolutely.

Deidre Woollard: I think that's really important.

Lisa Phillips: It's just the conversation that up until now wasn't really being spoken about loudly. But now, it's time to be loud, and especially in the current climate. There are governments talking about you don't get to evict anyone even if they don't pay for a year. We're in this climate right now where the tides are really turning towards a disregard for landlords and more regard for tenants. So if your individuality of your portfolio, caring about those little things means that during this economic down turn, your client wanted to stay with you, communicated with you because they know what they're getting compared to the other people, that's your difference in weathering the storm. I have a Facebook group of 11,000 and during this pandemic over 2020, I asked them, how's it going? They might have had one client who was already trouble that they let go. But 75 percent to 80 percent and 100 percent of my portfolio, it's been okay. But the thing is, it's something that you've invested in, and you put all that care and energy in. So when S-H-T-F happens, all that work and energy you put into it pays for itself. It's something that not everyone can see because it's not necessarily immediate, but you are correct. The energy you put into is the energy you get out. It can really help when you go through the bad times. I tell you, in my group, we are doing okay. That is not the same for every other group. It really isn't.

Deidre Woollard: Let's give people the name of your Facebook group. Can anyone join?

Lisa Phillips: Yes. It is the Sub30k Mastermind Group. I can send you a link if people want to join, which is really good, because then you can see what people are doing all over the country, what the houses look like, what the price ranges are.

Deidre Woollard: Perfect. Well, great. Yeah. We'll put that in the show notes. Thank you so much for your time today. I think this was really very, very helpful for people. Just to remind everyone, you can always find out more about rental properties on millionacres.com. Please check out Lisa Phillips on affordablerealestateinvestments.com. Thank you.

Lisa Phillips: [MUSIC] Thank you so much, Deidre.

Deidre Woollard: Thank you for tuning in to The Millionacres Podcast. I hope you liked today's show. If you enjoyed this episode, please consider subscribing through your favorite podcast provider. If you have any questions, please feel free to drop us a line at help@millionacres.com. Stay well and stay invested. People on this program may have an interest in the deals, offerings, or services they discuss. Millionacres or The Motley Fool may have a formal recommendation for or against. Always consult a certified tax professional before acting on tax advice. Do not buy or sell assets based solely on what you hear. [MUSIC]