Ep002: 4 Ways to Ensure Your Property is Up to Neighborhood Standards

Laci Leblanc
Yeah, I'm excited to be here, chris. As you know, my family has been in the real estate business, both as agents and investors, since before I was born, so it's all really fascinating to me. Just happy to hear your expert take on it. What are we talking about today?

Chris McAllister
Well, today we're going to talk about neighborhood standards. So we're going to be discussing ways to ensure that our listeners' properties maintain or live up to, but, more importantly, don't surpass, the standard of the neighborhood that they reside in. So that's what this one's all about today.

Laci Leblanc
That's a great topic, I think, especially right now. I think about how the price of literally everything is going up so rapidly, and in real estate investing I feel like that's particularly tricky because costs are going up for investors and for the renters that they want in their properties. So finding a balance that covers your cost as an investor and makes you a little money each month but also doesn't overextend a good renter in your area has to be pretty difficult, I imagine.

Chris McAllister
Yeah. So I always coach our property managers and clients that when they buy a property, you know you get all excited, you know you get caught up in the moment and you want to really create something that you're proud of, right. But what you want to be conscious of is, wherever you buy the property, what are the standards of the neighborhood and how can you know? I want to say, live up to them, but not go crazy either. So the term neighborhood standards and compasses, like you said, a lot of different elements of ownership.

It comes from you know, first of all, how much did you pay for the house? You know how much our house is selling for in that neighborhood. Did you get a great deal in underpay or did you not get such a great deal? You know and overpay. And then the other issue is you know how much money do you put into rehabbing the house and how much money is that house going to cost you to maintain, you know, over the next 5, 10, 15, 20 years? So you got to make sure that the property, got to make sure it keeps up.

Laci Leblanc
Yeah, do you have some examples of you know neighborhood standards and it's kind of a I don't know, it's not a term you can find in Webster's dictionary. So just some examples of what we're looking for as investors on what commonly you need to know about neighborhood standards.

Chris McAllister
Well, let's start with the very beginning. So you know, I always urge all of our listeners and any client that we deal with. You know we have a lot of property management clients that work with other real estate professionals to buy properties and we have many that work with us to buy and we manage for them. But the first thing is you've got to have a partnership with your realtor, with your real estate professional, and they have to be very clear on not just your goals but what your strategy is for creating a real estate portfolio. So if you've got, if you've decided that you there's a certain type of house or a certain neighborhood that you want to focus on because it's your sweet spot that works for what you need in your portfolio, that's great. Just, make sure that your realtor understands it as well. And your realtor can always give you, you know comparable sales for the properties, right? So you know, if you've got a neighborhood that you know the houses generally cost 150,000, you know that you can rent that out for, or you hope that you can rent that out for, you know 1500 a month, that's great, right? So but obviously, if the houses sell on that street or in that neighborhood for 150,000,. The last thing that you want to do is to pay more than 150,000 for that house because you're immediately outside the standard.

But you've also got to think through. It's not just what the house retails for, it's how much you have in the property all in after getting it ready to rent again. So obviously if you find a house that's $150,000, it's move-in ready, fantastic. You've hit your numbers, no question asked. But if you happen to find a house that's I don't really care what it's listed at, but let's say it's listed for $150,000, but it's going to require $40,000 out of pocket to get it rent ready and get it to the neighborhood standard, then obviously the most that you can spend on that property to purchase it is $110,000, right, because you can't have more than $150,000 in. So the neighborhood standard just isn't about the list price or how much you can close the house for. The neighborhood standard is about your all-in investment on the street or in the neighborhood. So if you don't have access to those kind of comparables, then you want your real estate partner, your realtor, to be able to get that information for you. So that's the first step. That's critical.

Laci Leblanc
Yeah, part one of three-ish, it sounds like, is just for investors to purchase the property and to my untrained eye, the market is crazy, seems crazy right now. Interest rates alone are a nightmare. So it sounds like research and partnering with somebody who can help you with that is key. I mean, research is I guess it's easy to do, but it's easier not to do. It somehow always falls to the bottom of the list, like leaving you scrambling at the last minute, and I feel like investors could use this is almost like a checklist of what they should be looking at prior to investing in a particular neighborhood.

Chris McAllister
Yeah, exactly. And again, when it comes to price, you got to research, like you said, you got to understand the price range of the properties in the neighborhood before you dive in. You've got to compare the property's price with similar properties in the area so you don't overpay. And that's where you get into. If all the other houses in the neighborhood are four bedrooms and this one happens to be two bedrooms, that's an issue. You've got to know that up front.

If you find out that all the other houses had a bath and a half and yours only has a bath, you know, but it doesn't necessarily work. Conversely, the last thing you want to do is to pay 150,000 for a house when the house isn't exactly like the ones that have been selling for 150,000, because the rental math doesn't work both ways. So if the average house in the neighborhood is 150,000 and it rents for 1500 and has four bedrooms and two baths, and the house you bought, you know, only has two bedrooms and one bath, no matter how much you want it, you are not going to rent that house for anywhere near the same price that the other houses in the neighborhood has. Now, I know that sounds obvious and dumb, but here's the thing, though, that people forget. Let's say that the standard in the neighborhood is four bedroom and you've got a house with six bedrooms and two and a half baths. Don't expect that you're going to rent that house for $17, $18, $1900 just because it's got a couple of extra bedrooms, if that's not what the neighborhood standard is.

Your market for people who are going to be willing to pay more because that house has additional square footage, that's not a big group to choose from. So what you tend to find yourself is if you don't buy the standard you're going to get. You know, if the house you buy is enough to the standard, you can expect to take less rent, but if the house you buy is ahead of the standard, you cannot expect to get a commensurate extra amount of rent to justify your purchase. So you know, we really urge you to keep that in mind and, again, that's where your partnership with your realtor is going to come in very handy.

Laci Leblanc
Yeah, I think that's, in my opinion, the kind of the most riveting part of this conversation we're going to have today. You know why is it important to avoid renting a property. You know, trying to rent a property for more than the neighborhood standard and I like this question because it deals directly with profit. You know it's numbers. You can justify just about anything when you're talking about buying a property maybe throw a little too much or and I've heard it all from Nana and my parents and you know my Nana is an agent and she owns several rental properties but what you can't argue with are the numbers. So when you talk about if I start talking about profit and numbers, it's always how I make my point when I'm discussing my family's business with them as a marketer and a business person. So I know yours will perk up here when we start to talk about avoiding renting, trying to rent a property for more than the neighborhood standard.

Chris McAllister
Yeah, I mean I can't tell you how many investors that and I'm one of them.

I'd like to think I'm better now, but when I first got started I was guilty of just the most Rehabilitated, I mean, but I was guilty of just the most incredible magical thinking that you know I was going to buy this house and I'm a nice guy and I'm going to treat everybody well and I'm going to fix it up. You know so nicely and everybody's going to be coming out of the woodwork to pay me money and pay me extra money, and you know it's all just going to be sweetness and niceness. And you know this, great, you do, yeah, and it just doesn't happen that way. So, just as important as you know, not overpaying for a house relative to the neighborhood standards, you've got to make sure that the house you purchase or the house that you rehab, is that the numbers work in such a way that you are going to be cash flow positive and get a suitable return on your investment. But the only way that you can calculate that is to look at the numbers. So you know your realtor can help you find rental rates. You know in the area. Your property manager certainly can give you input on what rental rates are in the neighborhood. You can, of course, check the internet, apartmentscom, whatever you want to look at.

But please don't do what I did, you know, when I first started out. Don't kid yourself. The numbers are the numbers and you know I don't care if somebody tells you that they're getting. You know way above them, beyond, what somebody else is getting If they did, if they're telling the truth. I can't guarantee anything, but I'm going to say it. I guarantee you that they did not collect rent for the whole year. It's easy to find somebody with cash burning a hole in their pocket and give a landlord you know, first month's in the security deposit, but if that rent is outside of the standard, it just simply will not last. So you know I don't want to harp on this, but it's so critical and I see it happen so many times.

So if you're going to charge, if you're going to try to charge, excessively high rent compared to the neighborhood standard, you are not going to have the number of qualified applicants that you need to have to find a tenant that not only is going to pay the rent every month for the next 12 months but is going to leave that property in at least as good, and hopefully better condition than when they found it.

So you've got to hit that rent sweet spot. That's at the standard you know for the neighborhood and, let's face it, you know prospective renters, especially ones that do well managing their money. You know they've got all the information that we have right. They know what the neighborhood standard is. They know how much rent is supposed to be. I mean, you know they're savvy, and probably more savvy than they used to be, and anybody that is going to be willing to pay above and beyond that you should be suspect, because there's probably a good chance that you know something in their background or history or income or employment is going to make it less likely that they're going to, you know, successfully complete the lease terms. So setting the price within the standard range increases the likelihood that you're going to attract, I guess, what I like to call perfect bit tenants that are going to live up to the terms of the lease and minimize vacancies down the road.

Laci Leblanc
Yeah, I think when we talked about this in the past. You talk about how it's, about what the market demands, and again that goes back to just the numbers and, as a marketer, that really resonates with me, because it's the same conversation, whether we're talking about, you know, a smartphone app for $1.99 that's targeted to my kids and my bank account in the end? Or a $75,000 luxury car or a $500,000 real estate investment. So, knowing who your target market is, who's going to live in that neighborhood, what the market will bear, you know what the neighborhood standard is. And then this is going to lead me to an obvious next question. But how to get the most out of what you're offering is just a paramount conversation when it comes to marketing anything really. So talk to me about why investors should avoid falling below the neighborhood standard when rehabbing a property.

Chris McAllister
Well, the most critical thing is, of course, that we want to be offering properties as owners and as property managers that are I guess, for lack of a better term safe and secure right. I don't care what the property is, whether it's a $500 a month property or a $2,500 a month property. The property has to work right, the plumbing has to work, the electric has to work, the roof has to be secure. You know, it's just absolutely paramount that the property is safe and secure. So, even if safe and secure is above the neighborhood standard you're looking at, I guess that's one case that I'm going to break the rule right. But if that's something that you want to invest in, you know safety and security, it's just a basic human need. It's what you owe your tenants and, quite frankly, as a property management company, we don't work with owners who don't follow that logic. So basics come first. Now, having said that, you know if every other house in the neighborhood let's just use the bathroom as a bath and a half and yours has a single bath, you know it's not going to be a complete deal breaker, but you're not quite to the neighborhood standard. The other direction, lacey, is actually easier to talk about and make the point, and it's something that you know I did wrong at the beginning again.

So let's say that you get caught up in the moment you buy this house. You're all excited, you're going to make a beautiful. You know it's fun to decorate, pick out paint colors, whatever. And you know you say to yourself oh my gosh, I'm just going to make this the best. Everybody's going to want to rent it. And you do some silly things like you put a dishwasher in. No, dishwasher sounds like a pretty basic thing, but it's not right. There are many neighborhoods where kitchens don't have dishwashers. Or take the next extreme you know you're going to put in a jacuzzi tub, because you know jacuzzi.

Laci Leblanc
You add up the day right because you want one, so you're going to put one in your rental property.

Chris McAllister
So to spend that money to go above and beyond the neighborhood standard because it feels good to you is going to be, you know, money that you're fleshing down the drain. There is no tenant that is going to be excited about paying you an extra 50, $100, $200 a month because you know there's a brand new dishwasher, jacuzzi cup and a bidet and that house. If that's not what the neighborhood standard is Now, if you're in a neighborhood where that is the standard and you don't have those things, you're going to have a problem. But you know, for most, 90% of the folks that we work with, you're going to stay within the standard and any money you spend above and beyond the standard for I guess what I would call whether they're frivolous items, it's just quite simply going to be money down the drain.

Laci Leblanc
So what the thing is, and this is hard for me to hear, but this is not the time to be an overachiever or an underachiever. Really, this really is the time to just kind of toe the line and maintain the status quo and, really, you know, make it timeless, make it work and let it be after that. So what are the areas, like the key areas, that investors should focus on? You know when, when we're talking about meeting neighborhood standards we talked about, you know, safe and secure. Obviously, I'm guessing there are some areas of a home that you know it's more important that it be, you know, newer or nicer, I don't know what. So what are the areas that investors should focus on and how do you meet the neighborhood standards in those areas without going too far one way or the other?

Chris McAllister
So, again, I think you have to start with the basics. You got to make sure the plumbing, the electricity is working, it's all safe, that the house is structurally sound, right, that the porch isn't falling off the front of the house, you know there's no water damage, and so forth. The other thing that you that again it sounds terrible, but that I feel strongly about is the first thing is you've got to catch up on any deferred maintenance. Right, if you know some, it could be as simple as the gutters not getting cleaned out. Because, right, if the gutters are clogged over time, you're going to have to have basement problems, you're going to have foundation issues.

If you know, in Ohio we've got a lot of older houses with these great grump porches and I can't tell you how many front porches are in disrepair, you know, just because of the weather and the rain and the hot and the cold over the years and years. So any deferred maintenance has to be dealt with first, safety deferred maintenance absolutely critical. If you haven't done those things, and if not doing those things takes you below the neighborhood standard, you're not going to make money on this property. And the sad part is, if you are in a neighborhood where that's not the standard, god, you're kind of on your own because we can't work with you.

Laci Leblanc
I would say that's a really good point. That's a good point like lipstick on a pig, right if it, if you're it is, but you know everything.

Chris McAllister
Everything also comes back to what did you pay for it? Right? And if the max is 150,000 and you know you've got 50,000 or 40,000, whatever it is to put in it to make sure you buy it right so that there's enough room and to get that property back to where it needs to be, right? So I can't stress that strongly enough. It's. You know there's so little inventory on the market right now that I think people are, you know, overpaying for properties and hopes that you know it's they're going to make it up over time. But the reality is, if the property in that neighborhood is 150,000, you've got to put 50 in it just to make it standard. Then you cannot be paying.

Laci Leblanc
You know more math doesn't math, the math isn't mapping the math doesn't math.

Chris McAllister
That's exactly right. And the other thing you got to keep in mind is you know what kind of house are you buying, right? And what is it going to cost to be paying it? So let's, let's say it's as simple as is this house already have aluminum siding? Or is this house, you know, painted clapboard, right? You know, with aluminum siding, the house is probably going to last quote longer without major repairs, although you know there's many times that it's going to be exciting.

But if you have a house that is painted and it's already peeling or faded or chipping or on the way to, you know, disintegration, you've got to take that into account as well. So and again, I feel like I'm talking out of both sides of my mouth but so let's say that you've got enough room to get that house to the standard. You get a great tenant in there. They work out their lease for a year or two, what have you? You put some money aside. Then it becomes appropriate to do some things to that property because you're going to hold on to it. So maybe it is. You know you're going to put vinyl siding on the property, right, because if you make that investment and vinyl siding on the property. That property is going to serve you far better and more economically, you know, forever.

Right, you got to have a good roof. But you know, there's times when I've seen landlords just continue to spend hundreds of dollars fixing a roof, and maybe it's because they don't have the capital to replace the roof. But there comes a point where the repair costs are more than you know. Putting a new roof on it's almost like, you know, having a used car that's paid for it. It feels great and you keep fixing it and then finally you get to the point where you realize, my god, I just need to buy a new car. So there is some talking on both sides of your mouth.

Right, you got to stay into the neighborhood standard. But if you bought the right house, you've got income. You know you can rent it and it's time to improve it for the long term. Then it's time to do that. And maybe it is a higher efficiency furnace, maybe, depending on the neighborhood, it's air conditioning, it probably is vinyl siding I think I said aluminum earlier, but that just shows my age but vinyl siding, a roof and so forth.

And you know one other tip on that there are there's things that you can do to the interior of the house too, that maybe in the moment could exceed the neighborhood standard, but in the calculation of holding onto that house for the long term makes sense. So you know, I've had houses and we've had owners that just every other tenant, they're changing out cheap carpet, right, and that might be $500 to do cheap carpet and maybe it costs $1,000 to do laminated flooring. Well, you know, there does come a point where, when you're in this game for the long term, that making the investment in a flooring product that is going to, you know, hold up for the next 10, 12, 15 years is the right decision, even if in the short term, you know, suddenly you do have the nicest house in the neighborhood. But at that point you're doing it for yourself, you're doing it for your family, you're doing it for your financial future.

Laci Leblanc
Yeah, this conversation sounds very familiar, probably because we just did a rehab and maintenance guide right, which just reiterates how important the whole cost-effective rehab and maintenance of a property is for you, the investor, for the tenant, for maintaining neighborhood standards. It also reminds me about how important it is and this is something that, like my family, struggles with being a family business. My family has always kind of relied on whoever's working my brother, my dad, my uncle, my grandfather, my grandmother to maintain the property. So they'll go in and make the fixes or they'll call the AC guy or whatever the case may be. But they don't have a great property management team that is dedicated to either, you know, in-house or outsourced that's dedicated to keeping a property up and kind of maintaining it, and that's been a real headache for them.

So I think that's another good point when you're talking about neighborhood standards is just having a system in place whether you do it in-house or you outsource it to a property management company to make sure that you're incrementally making these you know, you're maintaining it and you're rehabbing and you're adjusting and you're upgrading as you can so that you don't end up, you know, with a long-term tenant, which is everybody's goal right, a good long-term tenant that pays their rent and keeps the property up and leaves it better than they found it. But if they're there for 10 years, then if you haven't kept up with things, then you got a lot of work to do before you can rent that property out again. So that's just another fair point.

Chris McAllister
That's very true. You know, we've, you know, we've seen it, We've had that situation many times where I think you become complacent, right, You've got somebody who's in the property for years and years to continue to pay the rent. They don't ask for anything, and you know, out of sight, out of mind, and then suddenly you know they're gone after 10 years and you've got, you know, a giant renovation on your hands. Now, if you actually, you know, kept your reserves in place for that 10 years, you'd probably, you know, in a perfect world you'd have a nice chunk of change to do that renovation with and if you raised your rate with the market which a lot of people also don't do right a long-term tenant.

Laci Leblanc
10 years ago they were paying $4.75 and it's $20.23 and they're still paying $4.75 and you're just paying your property tax. That's really.

Chris McAllister
Exactly, and you know that's why property management is so all-encompassing and most of us don't have all those skills you know ourselves. But you're right, you know a long-term tenant, the rent should go up. You know, incrementally Doesn't have to go up crazy, it just goes up incrementally. And I don't. It's easy to have a tenant become, you know, out of sight, out of mind, but you could end up with a giant bill on your hands. You know when that person leaves.

So what would you do in a perfect world? You know, having interaction with the tenant on an annual basis, doing an inspection on the property of an annual basis, negotiating the new rent with the tenant. And you know it's always a great conversation to have to check with the tenant. Hey, we're coming up in the end of the lease, we're hope you're going to stay. You know we want to. You know, hopefully, improve the property, make sure that you're happy and we're happy. Can we take a quick look?

And sometimes you know you can keep a tenant for years and years just by. You know, checking in with them. You know, even once a year, and maybe you know you've got to raise the rent 50 bucks because that's where the market's at. But that doesn't mean that they wouldn't be thrilled with the fact that you're going to install a new ceiling fan for them, because the old one is all wiggly and raggedy and all that stuff right. So there are things that you know you have to do to protect yourself, even with a long-term tenant. What a fabulous opportunity, what a great relationship. But that doesn't mean it's not a business. It doesn't mean that the rent doesn't go up. It doesn't mean that you don't make incremental improvements. And better you maintain the property over that 10-year period than wake up 10 years later without a tenant and a giant bill on your hands.

Laci Leblanc
Yeah, for sure. And there's so much psychology that goes into this. And you know tenants, I know there are tenants out there who if something breaks, that's minor, they're happy to live with it, as opposed to saying, hey, you know, this broke, it needs fixing, it's a you know a light switch or a ceiling fan, or but because they don't want their rent to be raised, right, they don't want, they don't want people to come in and raise their rent because they had to do work, because sometimes they just don't want to be bothered and they deserve that too.

Chris McAllister
But you still have a business to run and you've got an asset to protect. You mentioned something too that's interesting. You know we, when I talk about you know I know it sounds really arbitrary that you know it's going to cost $40,000 retail, you know, to fix a property to the neighborhood standard. That doesn't take into account that we have a lot of owners that we work with that either have construction companies or, you know, are handy or retired and they love doing that work Right. So you know, and that's everybody has give some advantages, capabilities, whatever.

And if you are somebody who is handy and can do things and if not, just manage the construction of the rehab or actually do a lot of the work, obviously you're going to save a tremendous amount of money. And if it's a house that really makes sense for your portfolio and you can pay 125 for it, that maybe I can only pay 110 for it, that's an advantage that you should exercise, as long as you're willing to go in and do that work yourself. So we do have quite a few owners like that. On the other hand, we have quite a few owners that have full-time jobs, professions, dentists, lawyers, whatever they are into real estate investing to diversify their overall financial portfolio and they want a more hands-off approach and they know that they're going to have to pay more than somebody else might, and they're okay with it. There's no right or wrong way, but you want your property manager to understand what your personal advantages are and help you leverage them, just like you want your realtor, who's helping you purchase properties, level your personal advantages and help you leverage them.

Laci Leblanc
Yeah, that all makes sense and we've covered so much on this topic. I think the neighborhood standard is just kind of an all-encompassing. It's like a jumping off point for all things real estate investing, it seems like. But above all, what I'm hearing is there are so many variables. You have to know your market, you have to know your sweet spot and you have to be willing to make the hard decisions to make sure you're in that sweet spot. Does that pretty much sum it up?

Chris McAllister
It does. You've got to know the market you're in. You've got to know the tenants who live in that market. You've got to know what your personal capabilities are. You've got to know, you've got to be informed, and you can't advocate that responsibility to anybody. But you do need partners around you that understand that knowledge is power and to not have that knowledge or to back in the face of it is going to cost you money.

What are the assets I wanted to say today? I'm going through my notes real quick as we wrap up here. But again I guess, lacey, just to sum up please, as an investor, don't sink your cash into unnecessary updates and amenities because you're not going to get paid back for it. Make sure that you're taking care of the tenants, that you're giving them a safe place to live and that it's a fair price and that it works for both of you. You can't be renting your properties out at a price that doesn't allow you a suitable return on investment or maximum investment that you can possibly get. You're a business person. You deserve that, but the only way that works and the only way you get to enjoy that is if your tenant that's renting the property gets what they need out of the property as well.

Laci Leblanc
Yeah, I think these are words that almost everybody in this industry need to hear. I personally, when this episode comes out, I'm going to anonymously email it to my entire family, so with your contact information for any question that they may have.

Chris McAllister
Well, I guess. To wrap up, I would really urge everybody. If you haven't already downloaded the Landlord Profitability Playbook, I would love for you to do that and take a look, and you can do that at wwwprofitabilityplaybookcom. If you're new to the investment game or if you've been at it for a while, I think you may find some helpful tips and ideas in there to help you take your residential real estate investment business to the next level. And I'd be remiss if I didn't ask you to check us out at roosterillestatecocom. Blasey, thank you very much.

Laci Leblanc
My pleasure. Thanks, Chris.