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Today we’re talking with Devin Redmond, who is the Head of Customer Success for a company called Stessa.
Stessa is free software that allows landlords to automate their rental property financials. We actually did a pretty detailed review of how it works in this blog post.
I also wanted to talk with Devin and get a bit of input from him about his own rental property portfolio.
Devin owns a few properties in Hawaii, but he lives in California… so he’s become a bit of an expert in “laptop landording”, where he manages his rentals from afar. This is a concept that seems a little intimidating, or many even unrealistic to some, so I thought he could help us understand what goes into this, where the pain points are in trying to manage properties from across the ocean, and break down how this works, who it’s for, and maybe you’ll realize that you can actually do a lot more than you thought you could.
Links and Resources
- Stessa Review: Free Software for Your Rental Properties
- Stessa Website
- Blog Post: TextExpander Review: A Simple App That Changed My Life
- Terms Article: What is Tenancy in Common (TIC)
- Terms Article: What is CAPEX?
- Terms Article: Cash on Cash Return Explained
- Terms Article: What is Net Income?
- Terms Article: What is the Internal Rate of Return (IRR)?
- Deal: TextExpander (get a 20% discount through this link!)
- MyRental by CoreLogic
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- Leave your thoughts about this episode on the REtipster forum!
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Thanks again for listening!
Episode 093 Transcription
Seth: Hey, everybody. How’s it going? This is Seth from the REtipster podcast. And today I’m talking with Devin Redmond. Devin is the head of customer success for a company called Stessa.
And some of you may already be familiar with Stessa. I know it’s a quickly growing real estate software that a lot of people know about. In case you’re not familiar with it, though, Stessa is a free software that allows landlords to automate their rental property financials.
We actually did a pretty detailed review on how it works on the blog, which you can find on the show notes for this episode. So yeah, I just want to quickly talk about the software in this conversation, but also I wanted to talk with Devin a little bit about his own rental property portfolio.
Devin owns a few properties in Hawaii, but he lives in San Francisco. So he’s become a little bit of an expert in what we call a laptop landlording where he can manage his rentals from afar. And this is one of those concepts that, I think, seems a little intimidating to a lot of people or maybe even unrealistic to some.
So I thought it’d be kind of interesting to just understand what goes into this, where the pain points are, and trying to manage properties from across the ocean like this. And just break down how it works, who it is and isn’t for and maybe you’ll realize that from the conversation, that this is something you actually can do, or at least you can do a lot more than you thought you could. With that said, Devin, how are you doing? Welcome to the show.
Devin: I’m doing pretty good. Thanks for having me, Seth.
Seth: Yeah, absolutely. So maybe you can help us understand who is Devin Redmond. What’s your experience as a real estate investor in the real estate industry?
Devin: Sounds good. So I got started personally, I think it was 2001. I was a couple of years out of undergrad and I took a job as a tenant rep broker on the commercial side in LA. And so that was my first introduction to real estate. And I spent a couple of years there doing that job, went back to business school and I worked for a real estate developer, big company, with assets all over the world.
I was in the Bay Area then. And, we did a lot of commercial office building acquisitions in ‘06, ‘07. The exact wrong time you want it to be doing acquisitions and I spent the next four years, living with the consequences of those investments. You know, these are the things where the company I worked for and our investors were putting up 99% of the money.
I put in a little bit personally as did some of the other partners. So we were invested, and we had a lot of incentive to kind of stick around and see it through. And that was a really tough 4-5 years where I learned more than I had in the 7-8 years prior about real estate.
And those are lessons that I bring to what I’m doing now, on the residential side. So I’ve been with Stessa for a couple of years now. I run the customer success side, I was there from the very early days when we weren’t totally sure what our product was going to be and who was going to serve, what things we were going to try to accomplish. That first year for me at Stessa was about meeting with rental property owners, people who just bought their first fourplex at Mesa, Arizona, or somebody with 3-4 bigger multifamily buildings and a portfolio of 50 properties.
They need very different things. And so we spend a lot of time figuring out what keeps them up. where are they struggling with, especially on the financial management side, which is where we had an inkling where we wanted to focus. Since then, we’ve built out our software product at Stessa and, those conversations, I still have them regularly with our investors and people on the platform, but we’ve been able to kind of narrow our focus a bit more and find our market, which has been great.
Seth: Yeah. Maybe we can just kind of start talking about that. So where exactly does Stessa fit into the overall puzzle for most rental property owners? Like what exactly does it do? Why would a person be interested in using this?
Devin: I describe it as financial management-slash-bookkeeping for rental property owners. It was purpose-built for folks that own residential income-producing rental property. We support short-term rental owners, long-term rental owners. You can make fix and flips work, although that’s not really our core focus.
If people are familiar with Mint or Personal Capital, they’ve done a great job of building an overall financial dashboard for you personally and your investments, what’s going on in your bank accounts. You can connect everything up. Stessa is heavily influenced by that approach, but from a rental property perspective that’s all about your portfolio. In Personal Capital, they do a terrible job. Once you put in an address and say, this is an asset I own, they might get you a valuation, and that’s kind of the extent of what you can do.
So with Stessa, you can connect all your bank accounts, all your credit cards, you can connect to your lender. And that transaction flows every month or weekly, however often you check-in and pull down your data, it flows into Stessa seamlessly, and then starts to populate all your financial reports. There’s a nice visual dashboard, so you can really see how you’re doing.
And that was one of the things that we heard most often from people when we were talking to them in the beginning was. “I bought an investment, I paid X for it. All of a sudden I’ve got capital projects to do.” “I’ve got a tenant moving in, a tenant, moving out, and I’m so focused on the operations and the day-to-day, I have no idea how I’m doing.” And a lot of people give this pile of stuff of info to their CPA. And then their CPA comes back once a year and says, “Here’s your schedule.” And, you get a sense for how you’re doing.
But really, you want to know how you’re doing on a month-to-month basis throughout the year, so you can make adjustments along the way. It’s not going to work if you only find out once a year that, you know, you’re actually losing a lot of money.
Seth: So, in terms of, you know, for those people out there who are not familiar with Mint. This idea of connecting to bank accounts, and that kind of thing. As an expense comes in, do you have to classify every single expense that happens so that Stessa knows where to put it? Like what type of expense it is? And if you don’t do that, does it not help as much because it’s not as clear about what the expense is and where it should go?
Devin: Yeah, that’s a great question. So we’ve built some machine learning. Systems on the backend that do a lot of that busy work for you. I would say anywhere, depending on your bank you’re using and how much information they tag onto each transaction, and then also the nature of your transaction flow anywhere from, 50 to 90, 90-plus percent of your transactions will come in and be auto-categorized by our system. It’s not perfect and you may need to go in and tweak things a little bit. You may need to categorize some things from scratch that come in without enough information, but our system pays attention to that. It learns over time. And so the more you do, in the beginning, the less you have to do later because it’s being automated.
And then all of those categories, we look at it from two perspectives. One, we want to help you with your taxes, but we’re not doing your taxes. We’re not giving official tax advice. You still need a CPA, but we try to get you to kind of the five-yard line so that you don’t have to spend as much money with your bookkeeper and your CPA to get over the finish line.
So all those categories are really lined up nicely with scheduling but then there’s also a lot more details. So you can see operationally in Stessa’s reporting how you’re doing. It’s not just the, you know, 12 or 13 lines that are available on schedule league. Cause that’s not really what you want operationally, that’s tax.
Seth: Yeah. I do know. I mean, just my own experience of my own rental properties. Like I kind of hate them on tax time every year. It’s one of those times historically where I’ve thought, “Okay maybe I do want to sell these things” because this is just so painful every tax time. And it would be nice if there was a way to close that gap, like make some of this work to handle itself every single year. I can see that it can be a pretty useful thing.
Devin: Yeah. If you don’t have a bookkeeper, And you’re thinking your CPA is going to do all that groundwork, you’re in for a surprise, because that gets really expensive. They don’t want to do that work, right. They want to give tax advice and do sophisticated things and the bookkeeping is something that often gets missed.
People don’t have it in their pro forma. They don’t think of it as an admin expense that they’re going to have. But then when you actually try to do it yourself, you know, you get lost in spreadsheets and it’s really hard to keep track of things. There’s a couple of things that I’ve done that you can do on the front end, whether you use Stessa or not, or another software platform, or QuickBooks or spreadsheets. Having a dedicated bank account per address per property or per mini portfolio, if you’ve got them organized by geography or whatever it is, is really helpful so that you can see what everything going on in this account, this account number is related to this specific property. So you don’t have to have that added layer of which property was this for? How do I allocate this? You can do the same thing with credit cards, usually, your lenders are lined up by property anyway, unless you’re doing portfolio loans.
So the more you can do kind of a one-to-one not really helps, especially because a lot of software now, Stessa included, you can link an account to a property and it automatically does that association for you. So, as your portfolio grows, those sorts of things become really important.
Seth: This is free, right? Like it’s not like it cost anything?
Devin: Yeah, Stessa is free. We are working on some subscription plans that’ll have more premium features, probably sometime in early 2021, but the core product right now is free. You get all the reporting, you can export your data out no problem and you can do as many bank account connections as you like. We do monetize through things like mortgage refinancing, referrals, insurance referrals, in part just because a lot of that data’s in the system and so we can make very relevant offers based on, “Hey, you know, your interest rate is, looking a little high from where we’re seeing the market. Well, you know, why don’t you go talk to these guys, see if you can save some money there?”
Seth: And, you guys have a really good mobile app as well right? I know. I’ve heard a lot about it and it’s kinda like a perfect rating in the iOS app store, anyway. Would you say, do most people use the app or do they use the desktop version?
Devin: Yeah, I would say most people start with the desktop version. Although lately we’ve been pushing the app more and we’ve had more sign-ups on the app. I think you really need both to make it really efficient. Things like reporting, viewing a spreadsheet-like document or PDF report on your mobile device is a little tricky. Maybe not the ideal experience and when you’re cleaning up a lot of data, categorizing things, making sure you’ve got everything in the right bucket. For me personally, that works a lot better on a laptop or desktop computer. There are things you can do on the app—and we have both iOS and Android—that you can’t do on the desktop. So receipt scanning, we’ve got some great OCR tech that scans receipts. You take a photo, our system parses the data and creates a transaction or associates that receipt image with an existing transaction, if there’s a perfect match.
Seth: Wow, that’s awesome. That’s really cool!
Devin: Yeah, you get out your shoebox and get that stuff online in a way that’s really efficient, that can save a ton of time.
I think having both is the way to go. The other thing that I use our app for all the time is, let’s say, in Hawaii dealing with a rental property situation and I need to look up a vendor that I used a year ago. I can go into my transactions and do a quick search for who was that cesspool pumping company.
I got to get them back out here, and I can real quickly pull it up, and I can see what I paid so I can see if their rates have gone up and kind of compare, am I getting the same deal I got a year ago. If not, I’m going to ask for that.
Seth: Yeah, man. So just trying to think of like, why wouldn’t somebody use Stessa? I mean maybe if their property management software has something similar built-in? I know, like a tenant cloud, I think has something sort of similar to this. it just seems like such a valuable service for not having to pay anything for it.
Devin: I mean, I would say there’s definitely some investors who it’s not perfect for. So, if you’re investing in a bunch of syndications and you’re not really the owner of record for the property, you don’t have that much control. It’s not great for that, it’s really designed for a hundred, maybe 50%, owner.
If you’ve got another partner, we have some tools you can make that work, but if you’re in a big TIC deal and you’ve got a tiny slice, it’s not great for that. That’s more of a financial investment instrument, right? For note investing, we don’t really support that cause you don’t actually own the real estate yet. Hopefully, you never will. And then, for people that are doing fix and flip, it can work for that. It’s not perfect. It’s not custom-built for that, but you can make it work and I’m not really aware of anything else for fixing flippers that is really honed in for them.
Seth: So it sounds like there’s a very clear purpose that it serves, but what it doesn’t serve is property management, like payment collection, running credit reports… there’s a separate thing for that right? Or does Stessa have anything to do with those functions?
Devin: At the moment, yes. We’re careful not to try to redo property management, right? That’s a whole industry. That’s not where we want to be and there’s great property management software out there. If you’re an investor who has property managers on your various addresses across the country. You’re probably getting reports through a portfolio or property where whatever your PM is using. We’re not trying to duplicate that. Although we do integrate with some of those platforms so that you can get your data into Stessa.
The challenge is your PM probably isn’t paying your mortgage. Sometimes they’re not paying your insurance. There’s a gap there, there’s a blind spot in that reporting, Stessa can help you get all the way to a hundred percent visibility on all those other expenses that you have. We are going to get into things like rent collection, credit checks, eventually that’s something we hear a lot of requests from our users about, and we actually have a really, lively community forum online with a wishlist. And so that’s continually one of the top requests that gets the most votes is. “Hey, it’d be great if I got all my leases in here, got my rent roll, all my finances are coming in through the bank account. It’d be great if tenants could just pay through Stessa too.” That’s the place we definitely want to go. We’ll eventually support them.
Seth: Cool man, kind of pivoting a little bit. So just talking about your experience as a landlord in this thing you’re doing, where you’re able to, you know, somehow make this rental property thing work in Hawaii, even though you typically live in, San Francisco, is that right?
Devin: Yeah, I’m Bay Area. We’re actually a little bit east of Oakland.
Seth: Okay, gotcha.
Devin: Yeah. I lived in San Francisco for a long time and that’s actually where my personal real estate investing got going. In 2006, I just started a new job out of grad school and everything was just super unaffordable in San Francisco. I was paying rent, I was like renting a house, I had a room that was 1200 bucks a month or something. I actually teamed up with four other guys, we bought a six-unit property that was actually just an apartment building… it was actually two buildings. So the courtyard in between, and we turned it into a tenancy in common which is somewhat common in San Francisco, New York City, some other big cities with high housing costs.
Over the next three years, we actually split the lot. So we had a building with four units, a building with two units, refinanced and then condo-converted refinanced again. I ended up with, this was my first experience with entitlements and going to the city and figuring out, okay, what’s the next step?
You got to go to the zoning commission, get a hearing, etc., but at the end of it, my wife and I ended up with a condo in San Francisco. When we had kids, we moved out of the city, we actually rented that condo out for a couple of years and then sold it and did a 1031, which got us into a rental property in Hawaii.
Seth: Cool, interesting. Are there other properties in Hawaii, or you said you’ve got, is it five units total?
Devin: Two, two properties now, five units total. One’s got some major work on one of the structures. You know, a lot of where I am in Hawaii, it’s on Maui, like upcountry where long-term residents live. There’s a lot more stability, so that part of the thinking was that would be less churn. You know, easier to do remotely. Also for us, like this was a way to get into a market where there’s potential, we might want to retire someday and not having the idea of not having to like sell a bunch of stuff and then buy something somewhere else is appealing. And then as capital projects come up on some of the stuff we own here, I can do it the right way.
Cause I know, I might actually be living there myself someday, you know, is this something we’re gonna keep for the long run? And so that’s worked out pretty well so far.
Seth: Yeah, I don’t know why, but I don’t know a lot of investors who own properties in Hawaii. Is that—I mean, the reasons you just listed off there make sense—but what are the challenges of doing it in Hawaii versus some other place in the country?
Devin: I think for a lot of the population in the U.S., it’s hard to get to Hawaii, right? It’s two flights, it’s five and a half plus hours. I mean, it’s five hours from the West coast. So if you’re, if it takes you three or four hours to get to the West coast and another 40 gets to Hawaii, like that’s far, that feels like a different country.
It’s also expensive. and it’s perceived as just a place you go to vacation and hang out at the beach. And if you look at real estate, just along the coastline, it’s really expensive. The numbers don’t work at all. Even if you’re maxing out short-term rental, if you bought seven or eight years ago, you’re doing great with your short-term rental or you were pre-COVID, right?
You had to pivot now and maybe do a long-term rental, but it’s starting to come back. You’ll be fine. You can’t really go buy a condo at a walking distance to the beach anywhere in Hawaii now and make the numbers work even on a short-term rental basis. You know, the second home market is just very strong and there’s a lot of people who will pay to have it sit empty and be available for them.
So you’re competing with all of them. That’s not great. But if you start looking sort of, you know, some of the other towns and places, especially on the big island, great, values there. You can start to make the numbers work. You don’t get the yield that you get in the South or in the Midwest.
And so for investors that are really focused on the yield, it’s hard to justify it. From my perspective, I value appreciation. Having grown up in California, having invested in California, both residential and commercial, you know, I’ve seen the power of appreciation. To really cut through any operational problems and if the market’s going well and you’re appreciating, it almost doesn’t matter if you rented it out in some ways, depending on how long you hold it, right?
Appreciation can be that powerful. I like having that potential, upside, and knowing that the investment could go there. If things work out and then, I really am careful about the price per square foot. So for me, that’s how I put a floor on how poorly something can perform.
So if you’re, if you’re buying the lowest price per square foot property in the neighborhood or county, right, or you’re down in that range, lowest 10% price per square foot. You’re the last one to lose money in that market. And so I like that potential upside now that comes with it. These properties need some work sometimes, and you’ve got to fix things that are broken.
But you know, as I did with my property in San Francisco, the entitlements on that were broken. It was an apartment building that needed to be condos to maximize the value. And so I think you usually get paid for fixing things that are broken.
Seth: Yeah, that makes sense. If I’m understanding this, right, you don’t have any property managers involved with this, right? This is all on you to manage this stuff?
Devin: I mean, legally, you need a person on the island that you’re investing in Hawaii. If you own property, you got to have a person who’s available and that was another key for me. I have a really good friend that I’ve known for 20 years who grew up on Maui and still lives here with his family, and so he’s connected me to the brokers and a plumber and an electrician, so I have my Rolodex of people that I can call. I’ve actually never had to call my friend to deal with the property because I have this layer of folks set up who can be out here within 24 hours to deal with something, so that works pretty well.
Seth: Do you have to pay your friend anything?
Devin: I don’t, but we’ve known each other a long time. He’s a lawyer. I know real estate, so we always have questions for each other. We generally help each other out with whatever’s going on in our lives and, you know, professionally and careers.
So that works pretty well. Yeah, I would say that having property managers, I’ve seen this with users. It’s a double-edged sword. It can take a lot off your plate and it can blind you to what’s actually going on at the property. How much things should actually cost.
So sometimes property managers don’t get the bids they should, they don’t negotiate very hard and then there’s some awesome property managers that do all that and are really good at their job. But like with anything, you get what you pay for and so the good ones are expensive. It can end up being a lot off your net cash flow. And for me personally, I really like to be involved. I like to know if the water heater’s not working. I like to talk to the plumber who’s out there working on it to make sure they fix it the right way. So they’re not out there every three months dealing with it. It has worked so far; I will say you have to be super available.
So all my tenants have my cell number. They text me, they call me when something’s going on. if that’s annoying to you or not what you had in mind for your passive real estate investing that can be a little bit of a surprise, but I was ready for that. I would say the hardest part is doing, showings remotely when a unit is vacant. So I’ve got lockboxes set up. When the unit’s vacant, there’s not that much to steal. You’ve got appliances but it’s just not the greatest experience for someone to show up and have to self-tour, put the key back in the lockbox. But for whatever reason there’s people that move here to try to make it work and then they move back to the mainland. There’s enough temporary situations like that, that people seem okay with doing that sort of touring. So far,the market’s pretty tight and people need places to live.
Seth: Yeah. Oh, for those lockboxes, is there, like, “Hey, here’s the number go do it?” Or is it some fancy thing you control from an app on your phone or a satellite from space tells it what to do?
Devin: Yeah, no, I wish. I think there are both options. I’m in the process of trying to upgrade. So I would love advice for that. If anyone knows. I’ve seen a couple that are basically algorithmically based that don’t need a wifi. But, have codes that regenerate based on what time of the date and the time sort of internally, set up.
I think those are the best because if your wifi goes out or you don’t have power, someone can still get in and out of the lockbox, but it’s a code that’s constantly changing. So I think those work via an app on your phone, you give someone the code for a certain time window on a certain day and they can get in and out.
Right now I’ve just been using the like, changeable code ones that are like a master lockbox. It’s been okay but we’ve lost a few keys and that’s kind of annoying.
Seth: Yeah. Every couple of years or so somebody reaches out to me from a startup company that has these electronic locks that you can change from your phone and all that stuff. But I don’t think anybody has quite cracked it where it’s easy like it works, you don’t have to change the batteries every couple of months. Like there always seems to be some hassle with it. So it’s like, I just don’t know if it’s worth it yet until somebody figures out how to master that.
Devin: I’m sure there’s a perfect solution out there. Maybe they don’t have the marketing dollars to get it in front of everyone. It’s just up to us to find it, I think, but I agree the locks that try to do too much and are too wifi-connected and have like the power deadbolt, like the battery, the deadbolt doesn’t line up, and then it tries 20 times and then that defeats the whole purpose of having a lockbox. You gotta get on a plane and go deal with it. That’s not where you want to be.
Seth: Yeah. Outside of Stessa, what other software do you use? Like how do you collect payments and how do you screen tenants, that kind of thing?
Devin: For background checks, credit reports, I use something called MyRental. I think it’s called CoreLogic now. I like it cause you can pay for it yourself or you can tee it up for the tenant to pay. They don’t ask for more information than they need to actually run the credit report, and then they give you a like, a “safe” score that takes into account all the data they’ve been able to find. They check off all the court records and that sort of thing. And I think it’s like, 30 bucks with the coupon. That’s worked pretty well.
I actually use a little piece of software called TextExpander quite a bit. I use this at work, for Stessa, all the time. And now I use it personally too for emailing plumbers or some tenant type things. You know, when it’s time to sign the lease, I use Hello Sign for electronic lease signatures. I ended up sending out a lot of emails to coordinate people.
We’re doing something on the property or maybe moving in, when I posted an ad, I put it on Craigslist often and I get a lot of incoming. And then, you know, when I go back out with an email with more info about the property, I use TextExpander for that. It’s really powerful because you can tee up these snippets of text with blank spots for the variables, the part of your message that changes each time. You know, it’ll pop into email or pop into a Word doc and is really helpful just with a keyboard shortcut.
Seth: I use it dozens of times per day. Yeah, I can vouch for it. It’s pretty awesome. It’s kind of like a simple concept, but like it’s so useful. Cause everybody has things that they either can’t remember how to spell or like little snippets of code or like things they say again and again and again, and you don’t have to think through it every time it can just hit a couple letters and it pops the whole thing out.
Devin: I’m amazed. It’s not like pre-built into Word or Google Docs or something, right. Like it’s a great little thing.
Seth: Yeah, I think I’ve never used this, but I think HubSpot and I think Facebook might even have something like this where you can make these pre-generated messages, but again, like I’ve never done. I’ve never done it. So TextExpander is just so easy and it coordinates to everything else on my computer, it’s just a pretty easy thing to use. We actually have an affiliate link where you can get 20% off text expander. If anybody out there listening wants to check it out. It’s just REtipster.com/TE.
Devin: I highly recommend it. I mean, you, you save the subscription fee and like a week.
Seth: I remember when I was in banking, I used to have to write these credit memos, and like half the credit memo would be just regurgitated stuff. That was always there. I didn’t have Textexpander back then, but it could have saved me just hours and hours of time.
Devin: Yeah, it’s faster than cutting and pasting for sure.
Seth: Yeah, definitely. So how many years now have you had the Hawaii rentals?
Devin: It’s only been a couple of years. but you know, it’s been a line enough, I’ve had a few tenants churn. I’ve gotten to know the local market. You know, I’m still doing some of the capital project cleanup, stuff prior owners didn’t deal with. In particular, a kind of nasty cesspool situation.
I couldn’t get there. There is a risk, there is a downside of investing in remote places, right. The islands went into lockdown. You had to do a two-week quarantine from the moment you arrived, if you were coming from the mainland and so I couldn’t get here basically from, I was here in March. I’m here now and it’s November, right? So, eight months I couldn’t physically get there. And because of the way, one of my two properties is set up on four different levels. And the properties here had cesspools that dates to the early seventies.
It was what kind of precepting they should put a big hole in the ground, basically, that’s where your sewer goes. And it’s got a concrete lid and a lot of them are starting to fail. And apparently, mine started to fail. And because of the way the property is on four levels, it’s on its own level. And so none of the tenants even notice, you know, I showed up after eight months and I got raw sewage on my lawn.
Right, so these are the things that like a property manager would get in the way of and figure out and deal with, right? But when you’re doing this remotely, like some of those things, you know.
Seth: Yeah, man. That’s crazy.
Devin: So we’re sorting that out right now.
Seth: Speaking of, quarantining and diseases coming up from the mainland. It’s funny. I was actually doing some random research about trying to find some interesting real estate facts and a bunch of stuff came up about Hawaii for some reason. Apparently, there was a, I don’t know if you’ve heard this, but one of the facts was back, before white people came to the islands of Hawaii, the population of the tribes that lived there was pretty close to what the population is today of Hawaii. But when the sailors came, they brought all kinds of diseases that killed off a lot of people to the point where, I think 30,000 people left. Since then, obviously, everything has changed and totally different people live there. But, I was kinda blown away by that.
Devin: Yeah, absolutely. I mean, you’d hope society learns its lessons over time, right? It gets better at these sorts of things, there’s definitely a sort of tortured, sad history to Hawaii. Generally on the mainland too, to some extent, if you take out Honolulu, which is a different thing. I would say from the rest of why it’s a huge city, it’s over a million people, that’s a different kind of investing. There’s people there that have been doing that for a long time and you really got to know Honolulu and the city and everything. You kind of have the rest of the islands that have the more resort thing going on. I think there’s a good thing that the sort of native vibe language, all of that is making a comeback, and for me, that’s part of what I find really interesting about getting to spend time here to, you know, deal with my investments.
Also, you get to do a lot of fun, cultural things that are not really available on the mainland. It’s different in that sense, but you still have the safety of it, being a state in the U.S. It’s not Tahiti or something where it’s just uncomfortable putting money in a lot of places like that.
Seth: Yeah, my wife and I went to Kauai and Oahu about 10 years ago. And to this day I’ve been to a lot of places, Hawaii was just amazing. I mean, there’s something really special about that place. Kind of what you’re just talking about. Like it has that, you know, I mean, it’s a tropical place, but it’s also the U.S. So there’s a lot of like built-in familiarity and I loved it. So I’d love to go again someday.
Devin: Yeah. You know, and there’s a windward side where, you know, the weather comes in, it’s real lush and tropical, and then there’s a leeward side. That’s more desert-y and sunny and reliable beach weather and you’ve got that on pretty much in every island, which is very cool. You know, my son and I did a 12-mile hike on Sunday, up in the crater, in the national park, up at Haleakala and he did great. I’m still sore two days later. And not sure I could do that again, but this is the kind of thing you can do here. It’s not just hanging on the beach too.
Seth: That’s what you get for being an adult. You know, it’s like if you sleep the wrong way and you know, your neck is hurting for the next month, so.
Devin: I’ve got all these responsibilities too.
Seth: I know, so I know one thing that we had emailed about before this whole call. There are apparently some best practices that you recommend, kind of in conjunction with Stessa, maybe that can save people a lot of money if they own rental properties. I don’t know if it’s saving on taxes or with 1031 exchanges, things like that. Did you have any suggestions or ideas on that? Maybe common things that people are doing wrong and it’s losing them lots of money?
Devin: Sure, I can tick through a few. I would say on the front end, researching buying properties, paying too much is the worst mistake. You can change a lot about your investment after you buy it, but you can never change your purchase price once you’ve closed, right? And so being really selective, negotiating, passing on a lot of deals, I think is really important, especially when you’re getting started.
Paying the right number can make everything work out in the long run. Even if you have negative surprises. You gotta fx some foundational issue you didn’t know about or whatever it is, right? You want to leave yourself some buffer that can be really hard in a market like we’ve seen the last six or seven years where things kind of just seem to keep going up.
That can be challenging, especially when you want to get started, you want to get going. But it really pays to be patient. Do your research and pay the right price for something in whatever neighborhood or market you’re looking at. I would also say you got to model your CapEx, so operating expenses are one thing.
Those, you know, everyone kind of gets that into their model on the front end, but capital can be really hard to predict and so you have to set up a reserve. I see people set up a reserve that’s too low generally, and they don’t really understand what things can cost when it’s a major repair and how things add up.
Seth: And for anybody out there who doesn’t know what CapEx means, that’s capital expenditures and that’s what you’re referring to. There is like if you need a new appliance or a new roof for a new flooring or something like that, is that what you’re getting at?
Devin: That’s right. And when you’re buying from the sellers, they’re going to tell you as little as they can legally. And they’ll go beyond that and not tell you what they should be telling you about the condition of the roof or whatever it is. So you really got to go in there and look yourself or have a professional give you an opinion on it. And the inspection report you get, those guys often don’t know what it costs to fix those things. They know what they look like when they’re broken, but they don’t always put a good number on actually getting it fixed.
So I see a lot of people get surprised by that. Once they get the keys and own it for a year or two or whatever it is, things start to break. And it’s not always in their model. I would say something I mentioned earlier too about, get your banking sort of organized and efficient way where you’ve got a separate account or a sub-account for each address that saves just a ton of time and hassle.
You can even get separate credit cards. Different numbers for each property. You know, when you get up to 10, 20 properties, you may want to start grouping them in portfolios to make things more efficient. But that helps a lot, especially as you start using, more automated systems software to help you be more efficient.
For us, one more thing for remote investing, you really do need that Rolodex, vendors on the ground. And so one of the things I did when I closed on the first property, here in Hawaii, I flew over and I spent a week living in the main house rental unit so that I could see everything that’s broken and then I had a plumber come by, I had an electrician, I had a septic guy come by and, got to know each of them personally, face to face, and have them fix something or work on something. It doesn’t have to be much, but you’re able to observe their work ethic, how they’re doing.
Are they telling you what’s going on? Are they coming to you for decisions? And then, if you don’t find the right person, you get somebody else out to work on some other little thing. And then when you fly home or back, a thousand miles away, you know who to call and you can get them there fast.
For me, a big part of the business of owning rental properties is making sure your tenants have a great place to live and that things are functional, and that you’re responsive. Tenants will stick around, and that saves you a ton of money and hassle over time.
Seth: Yeah, what do you think are some of the most important metrics that a rental property investor should be paying attention to? Is there a certain, I guess not only when you’re evaluating a property to buy it, but then once you do own it? What exactly should they be measuring to know this is going well, or this is not going well? What do you think is the most important?
Devin: Yeah. I mean, at the end of the day, net cash flow is kind of the most important, right? Like how much money did the investment kick out last month, this month? What’s it looking like for next month? After everything is accounted for, including capital. Because that’s a real cost.
So that’s really important. Something to focus on. It’s not necessarily a metric, it’s a result, some of the metrics that, Stessa supports cash on cash is something we do the calculations around and so that’s a really good one to give you a sense as to how things are going, especially in the early days, as a percentage of the actual cash dollars you’ve put in, after the impact of your debt and everything else. What is that cash return each month? So that’s a good way to measure how you’re doing. Are you living up to expectations, your proforma? When it’s all said and done, IRR is really important but it’s something you can only calculate in the rearview mirror, once you’ve sold and you have that exit value. IRR is great for comparing real estate to stock investments or all the other things you could do with your money. So it’s definitely an exercise you should do when you wind down an investment.
Because if you go forward to know, “Wow, it felt like I was doing really well that whole time, but the IRR is not great.” It’s not great compared to like these two other investment opportunities I thought might be in the mix. But I would say between cash-on-cash and IRR, right when you’re owning the property, but maybe you’ve refined it, or put some capital in cash-on-cash becomes less reliable and less important just because of the way the math works. Well, what’s my cash invested now? I had a year when I got great cash flow, then I had a big capital expense or money back in, does that count? Does it not count? It’s sort of funky and there’s a couple of ways to do it.
So at that point, return on equity is what you want to be looking at. That’s okay. What’s my return this month or this year as a percentage of the value of the property now? Because your value changes over time. When you’re thinking about, “Do I want to keep holding this? Do I want to sell it?” It’s really return on equity that matters the most. And really, it’s a relatively simple calculation. It’s easy to do. As long as you can nail down that current value number.
Seth: I’m actually curious. How do you define IRR?
Devin: So internal rate of return. It’s basically your going-in investment number, right? Which is negative. Then it’s the string of all of your net cash flow results, whether negative or positive. And then it’s your hopefully very positive cash out number at the end, whatever you sell for, less commissions, everything else. And it’s really the NPV that would give you that flow of cash results over time. It assumes you’re reinvesting the money that comes out of it along the way. So that can be a little bit misleading over time. It’s really an all-in number that takes into account the dates of each of those cash results.
That’s the important part that can be missed with cash-on-cash, like, okay, great. You’re getting great cash-on-cash, but you’ve had your cash sitting there a long time.
Seth: Yeah, cause Jaren and I, we actually both worked long and hard trying to make, not only an article but also a video explaining IRR. And the reason it was so hard is because, I mean, first of all, we needed to understand it, but also, we found lots of conflicting definitions. And sometimes, they weren’t even necessarily conflicting, but they were just really confusing because they started introducing this net present value into the definition.
And most people are like, “Well, what’s the net present value?” And they got to go on and explain all that. And I think what we ultimately came down to was it has a lot to like, if you’re comparing the IRR of two different things, what you’re looking for is which one pays you faster. So if you go at 10 years and they both pay the exact same amount of money at 10 years, but one of them pays the bulk of that money back sooner in that 10-year span, then that’s the one that’s better. Is that accurate?
Devin: Yeah, absolutely. Because IRR takes into account the timing. And so I think the technical definition is something like it’s the discount rate that would produce a net present value of zero for this series of cash flows, right?
And by series, they mean the timing. And so, to move it from the theoretical place to practical place, what I do is I put the cash flows into Excel. I put the dates across a row above them, right? And I use the XIRR function to tell me, for this series of dates, this series of cash flows, what’s the XIRR, and that XIRR ties each cash flow to a specific date instead of using a rough annualized, kind of approach. But it’s tricky. You can’t do the math on your own because it’s, iterative, you know, like actuarial tables and, you know, amortization.
Seth: Yeah. Because that’s one thing that we’ve been trying to do with our library of terms, definitions that we’ve been working on in this whole past year. And it’s been, especially for things like IRR, it’s really hard because part of the goal of what we’re trying to do is explain things so that literally a fifth-grader could understand it.
Like you shouldn’t have to know. What does the discount rate mean? What does that NPV mean? Like, shouldn’t have, do any of that. We want to just try to get it out in like two to three sentences. What is this telling you? And man, that one was a trip, trying to figure out how to explain that without any prior knowledge of any other complex math or Excel formulas or any of that stuff.
Devin: No, I think it takes a couple of years working in commercial real estate or banking or whatever it is. We’re building models to really get an appreciation for why it’s important and what it tells you. Each of these metrics has its faults, right? You need to use them together to make decisions. They don’t tell you what to do.
Seth: Yeah, I hear ya. I think that was always part of my struggle when I was early in banking. I so wanted just very quick, concise black-and-white answers. Is this deal good or bad? Tell me and it’s like, it’s just not that simple. Like, there are so many different things you got to look at and understand the implications of each thing and, such as life.
Devin: Yeah, the future has an infinite number of variables.
Seth: Yeah, definitely. So, are there any examples of people who have used Stessa to like, bring about some huge end results, like saving a ton of money in taxes, or freeing up their time or any of those, like, you know, glowing success stories?
Devin: Yeah, there’s definitely quite a few of those. We actually have some, on our blog, regular profiles of Stessa users, who talk about their experience investing. How Stessa has helped them, how they use it.
So not everyone uses it in the same way. I think of one of the very first investors that spent a lot of time with just figured out what his need was. He bought a unit place in Mesa, Arizona. He was in California, so he was doing kind of the remote thing. He had a property manager there, but he wanted to kind of keep tabs on what was happening. And he was slowly upgrading each unit over time. And so he was using Stessa to track expenses and his costs and to kind of keep an eye on the property manager.
We got another woman who had, I think, properties in four states: Virginia, North Carolina, and a couple of South Carolina and one other, I think, and it’s a mix of long-term and short-term rentals. They’ve got a lot of data coming in. They were also doing some, some fixers. And so they kind of pieced Stessa together to give them a single view of all of their holdings, even though they were different types of investments, generating different types of cash flow. So she had to spend a little more time getting things set up in the right way. I think they reorganized their bank accounts a little bit. but that was a huge time-saver for them. That then let them grow their portfolio faster than they would have otherwise been able to.
Seth: Yeah, that’s awesome. Yeah. And if anybody wants to check out Stessa, if they haven’t already, we actually do have an affiliate link, which you can find at REtipster.com\Stessa. You can also obviously check out the app, which I assume is on both Android and iPhone. Is that accurate?
Devin: Yeah, we’re in the Play Store and the App Store. Those are both there. There’s a bunch of reviews. You can see what other people are saying about it. And then, on the customer side, we’re super responsive. So once you get in, you get things kind of set up. If you’ve got questions, there’s a little blue circle in the lower right corner. And that kind of goes through a bot, but to a real person, we see all of them. And then we get back to people. There’s a big, online support center with help articles. And then, our forums are really helpful too.
Seth: Well, Devin, thanks again for talking with me today. It was good to learn more about you and about Stessa and, again, if you guys want to check out the show notes for this episode, it’s going to be at REtipster.com/93 because this is episode 93. You can find our affiliate link. You can also check out a really in-depth, blog post review that we had that Brian Davis do for us. He’s got a video and everything, it’s pretty cool. So, definitely check it out. Thanks again, Devin.
Devin: Cool, yeah. Thanks for having me.