Her intro to real estate came when the family farm was being used for a new interstate. Rather than pay capital gains tax, she suggested that her grandparents use a 1031 exchange to buy investment properties. Shortly after, she went and got her license, and was buying investments for herself. Now she helps other investors find properties and has good tips for investors looking to find value in this low inventory market.
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Jennifer Spencer Real Estate Background:
-Owner and Broker of Spencer Properties
-Began career in real estate as an investor buying and managing her own rental properties in 1997
-After five years, she left her corporate job in commercial insurance and became a full time Realtor
-Based in Raleigh, North Carolina
-Say hi to her at http://spencerprop.com/ or 919.602.7411
-Best Ever Book: Millionaire Real Estate Agent
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Jennifer Spencer. How are you doing, Jennifer?
Jennifer Spencer: Doing great, how are you?
Joe Fairless: I’m doing great as well, nice to have you on the show, nice to meet you, and looking forward to diving in. A little bit about Jennifer – she is the owner and broker for Spencer Properties. She began her career in real estate as an investor, buying and managing her own rental properties in ’97, and after five years she left her corporate job in commercial insurance and became full-time.
She is based in Raleigh, North Carolina. With that being said, Jennifer, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Jennifer Spencer: Yes. As you said, I got started in real estate as an investor myself, and my husband and I started buying rental properties and fixing them up and renting them out. Then where I grew, my family home, my grandparents had inherited the farm. [unintelligible [00:02:13].06] was going to be put through the family farm, and I said “You know, instead of paying capital gains tax on that entire inheritance, why don’t you roll it over, do a 1031 tax exchange and put it in investment properties?” They said “That’s a great idea.” I said “I’ll help you with that, but in order to do that I need to get a license”, so I got my real estate license at that point and helped them buy a few properties.
I then started helping other friends or neighbors get into buying investment properties, and before I knew it, I had a real estate company. That was 20 years ago.
Now I do all types of residential real estate resales, working with investors, and I kind of cover the full spectrum. My love was and always has been working with investors and invest in real estate.
Joe Fairless: When you have a farm and they are now going to put an interstate through it, do you have any way of that not happening?
Jennifer Spencer: Well, they [unintelligible [00:03:13].21] and you can; there’s a process you can go through to appeal that decision. Very rarely have I seen people succeed in stopping the process, but you can also negotiate. They offer a formulaic value to the property, and it’s usually pretty low. You can go in and appeal that as well. With that we’ve seen more success.
Joe Fairless: Okay. 1031 right out of the gate… You’ve just received your real estate license and you’re already involved in a 1031 exchange – what was that like?
Jennifer Spencer: It was actually a good process. I think a lot of it is having a good intermediary, having a good attorney. In the very first round we had great experiences and from that I learned a great deal about the process.
Joe Fairless: How did you find your intermediary and your attorney?
Jennifer Spencer: Both were referred to us from other investors who had been through the process and had a good experience. Then we did a little bit of our own due diligence, kind of checking into it. [unintelligible [00:04:09].27] and then they were to shut down – bankrupt, or what have you – that’s a little bit of a scary thought, so that’s why we did a fair amount of vetting. Things went well.
Joe Fairless: I’ve seen an episode of American Greed about that. [laughs]
Jennifer Spencer: Yeah.
Joe Fairless: Well, Spencer Properties – you mentioned earlier you work with investors… What is a challenging part of working with investors?
Jennifer Spencer: I think there’s always challenges in any particular market. Right now the challenge for investors is the low inventory, and it’s very difficult to buy homes below market value, which is what investors often wanna do, and get the kind of returns that they wanna get when you’re competing with first-time home buyers and competing with down-sizing buyers for all the properties in our market under about $400,000. The inventory is low, and you’re paying above a price/value in many cases.
Joe Fairless: So hypothetically an investor reaches out to you and says “Jennifer, I’d love to buy some investment properties that I can put in my own portfolio.” What do you tell them?
Jennifer Spencer: I tell them that there’s opportunities out there, but we’re gonna have to be creative in how we approach it. First of all, right now if you pay market value for a property, as long as you’re getting a good cashflow on it, I’m okay with that, and I think that that’s one option to look at.
But if you are looking to buy a property below market value, I think there are some opportunities out there, but they’re fairly limited, and it’s gonna take some creativity. For example, even in this low inventory market, we’re seeing that buyers want move-in ready, cosmetically updated houses, and they just don’t have a lot of tolerance. Even after they may have lost three or four houses in bidding wars, they still don’t have a lot of tolerance for houses that aren’t updated.
A great opportunity for an investor is to go buy a house that has ugly carpets, dated appliances, dated finish work, needs paint, and has an overgrowing yard… And put $3,000-$4,000 into it to get it cleaned up and somewhat updated, and rent it out. Those tend to cash-flow really well, and we are getting a little bit of an opportunity on the purchase with those.
There’s still some short-sales and some foreclosures out there; people wanna mess with the long timeframe of a short-sale in particular. I think there’s opportunities there, there’s just not many of them. Also, another place that’s good for investors to consider is houses that are on challenging lots. Houses that [unintelligible [00:06:44].18] to a water tower, or that have a [unintelligible [00:06:48].11] driveway, or one of those types of lots that a lot of people are gonna pass. They tend to rent really well. You can generally get market rent, but you pay below market for the house because of the challenging lot. Now, we know going in that when you get ready to sell it, you have it to sell below market, but if it cash-flows during the years you hold it, that can be an opportunity.
I think there’s opportunities out there, not only with cosmetic updates. Houses that have kind of the scary stuff — we just worked with an investor who got a great historical home, and it had some structural issues. It scared everybody else away; it needed five [unintelligible [00:07:25].23] under the house… About $16,000 worth of work, but it scared everybody else off. We were able to get the house under contract below market, we were able to get the seller to pay for the structural repairs, had a structural engineer sign up on it, and now we’ve got a really good house because we were willing to really understand what the issues were and not be scared off because we heard “structural.”
Joe Fairless: Was there some education involved with your client, or did he/she already know “Hey, this is an opportunity”?
Jennifer Spencer: No, there was education. When they heard “structural issues” their first reaction was “Move on to the next one.” We said “But let’s look into it a little more. That very well may be what we need to do, but let’s look into this and investigate a little more, because I think there might be some opportunities here.”
They knew that there were structural issues before they made an offer on the house, so that helped… So we were able to really negotiate good terms on their behalf, and they made a good purchase.
Joe Fairless: What would have been some red flags where you would have suggested moving on?
Jennifer Spencer: Well, I think you just have to look at if the seller, for example, still wants market price for a house with those kinds of issues – I’d say “Let’s move on.” But this seller understood that they had a house that’s gonna be tough to sell as is, and they were willing to work with us on the price and getting the repairs done.
Joe Fairless: How have you seen clients – or maybe yourself, just how you do it – calculate the cashflow when looking at investment properties?
Jennifer Spencer: Well, we have a spreadsheet that we put together, and we look at what our mortgage payment will be, we look at what the tax is in homeowners’ association and insurance, and we project rent based on comparable rental properties.
What I’ve done is I went back and looked at the properties that we have managed over the long term, and just as a rough number we use 5% for repairs in vacancies right now… And vacancies are very low. If you look at the long-term – air conditioning repairs and what not – we’re averaging about 5% of the rental income in repairs and vacancies. So that’s what we’re using in that number.
Depending on the investor, we sometimes — well, this is getting into return, not cashflow…
Joe Fairless: That’s alright.
Jennifer Spencer: Sometimes we include appreciation, sometimes we don’t, when we’re looking at returns. Some investors say “I wanna make my decision entirely on cashflow”, others say “Let’s look at appreciation and put a number in for that.” In this area, the long-term appreciation has been — whether you look at 20 years or you look at 30, you come up with the same number. And also, if we look at it for the last 10 years – which I find very interesting – the number is the same, it’s 4%. So that’s what we use for appreciation for our market… Or less. Some people wanna use half [unintelligible [00:10:24].13]
Joe Fairless: So you also manage properties?
Jennifer Spencer: We do. I have managed properties for the last 20 years. Last year I partnered with a property management company who now manages all of our properties for us… So we’re outsourcing that part at this point.
Joe Fairless: And why would you ever not wanna be on the management side? I don’t understand… [laughs]
Jennifer Spencer: Well, you know what? This may or may not surprise you – the tenants are fine. It was not the tenants; it was, in many cases, the landlords. I felt like a lot of times they were making decisions that were not in their own best interest, and certainly not in the interest of the tenants, and I just got frustrated with that.
Joe Fairless: What would be an example or two?
Jennifer Spencer: Well, for example I had one last year that the landlord was taking their time and making the repairs; there had been a series of water leaks in this very nice, high-end townhouse, and it made one of the bathrooms unusable and it made the kitchen unusable, and they delayed in hiring a contractor to do the work, and then they decided to hire a different contractor and started the whole process all over again. So what should have been a few weeks of inconvenience for the tenant ended up being several months of inconvenience for the tenant. So the tenant said “We feel like we shouldn’t pay the full rent for those months that so much of the house was unusable. We have a small child and it really was difficult”, and the landlord said “I’m not gonna refund any of your rent”, so the tenant ended up suing the landlord.
Joe Fairless: Do you get caught in between with the legal aspect of that if the tenant is suing the landlord? Wouldn’t they name you as —
Jennifer Spencer: They did, yeah.
Joe Fairless: Yeah, and that’s why you don’t wanna be involved.
Jennifer Spencer: Yeah, that was kind of the final straw [unintelligible [00:12:14].01] “You know what? I’m done with this.”
Joe Fairless: It’s all fun and games until someone gets sued.
Jennifer Spencer: Yes. [unintelligible [00:12:20].10] with the tenants. I thought the tenants were being reasonable in what they’ve expected, and [unintelligible [00:12:27].28] It ended up costing the landlord a lot more money because they didn’t try to get it resolved.
Joe Fairless: Oh, yeah… Anytime an attorney gets involved, everyone’s gonna lose.
Jennifer Spencer: That’s exactly right.
Joe Fairless: And just to clarify, for my attorney friends, I mean for litigation purposes, not to review contracts and to advise on other aspects.
Jennifer Spencer: The attorneys are the first ones to tell you that.
Joe Fairless: Yeah, exactly. Well, what is your best real estate investing advice ever?
Jennifer Spencer: Well, I think my best real estate investing advice ever is to do it sooner rather than later. I think a lot of times I talk to people who say “I’d like to invest in real estate someday”, and there’s always a reason that they put it off. When they finally do it, almost every single one of them say “I wish I would have done this a lot sooner.” There’s not really any other investment that compares to the benefits and the risk/reward to real estate investing, and I think the earlier we get into it, the better.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Jennifer Spencer: Yes, I am.
Joe Fairless: Alright, great. First, a word from our Best Ever sponsors.
Break: [00:13:45].29] to [00:14:43].20]
Joe Fairless: Okay, Jennifer, what’s the best ever book you’ve read?
Jennifer Spencer: Millionaire Real Estate Agent by Gary Keller.
Joe Fairless: I love that book. That book inspired me to hire an administrative assistant.
Jennifer Spencer: Right, exactly.
Joe Fairless: Best ever deal that you’ve done?
Jennifer Spencer: I’m doing it right now – I’m developing a piece of land, rezoning it from residential to commercial.
Joe Fairless: What is the intended use for the commercial once it’s rezoned?
Jennifer Spencer: It will be a mixed use. It will have high-end single-level condos, it will have a high-end grocery store, several restaurants with patio dining and little shops. We’ll have some office and gym and that kind of thing upstairs… It’s gonna have parks and walking trails, so it will be a really neat development.
Joe Fairless: That sounds like a big ol’ piece of land.
Jennifer Spencer: It’s 17 acres.
Joe Fairless: What’s your role in it? Did you buy this piece of land and now you’re the one leading the charge to rezone it?
Jennifer Spencer: I bought the piece of land, I’ve got it under contract with the developer, and the developer is leading the charge, and I’m certainly involved.
Joe Fairless: Okay. And how do you structure, when you buy a piece of land — did you already know what your plan was gonna be and who the developer you were gonna partner with would be?
Jennifer Spencer: No, I bought the land just knowing it was a great location to potentially rezone into commercial, but I did not have the developer identified. I’ve met with several, and heard different ideas and plans and proposals, and then chose the one that made the most sense.
Joe Fairless: How do you structure an arrangement with the developer if you own land?
Jennifer Spencer: The way we structured it is the sale is contingent upon the rezoning, and he is responsible for all expenses and all communication and managing the process of going through the rezoning. In the mean time, he is knowing that this could take a few years – and it has; we’re two years into the process now – and he’s just been paying us a monthly non-refundable fee for having the contract in place. If the land gets rezoned and we close on it, that fee will be applied to the purchase price. If it doesn’t, then it’s non-refundable. That takes the urgency off of him and us in terms of either one of us feeling like we need to move faster than we should.
Joe Fairless: I like that. That’s a really good structure for both of you, assuming that the rezoning takes place. Does that mean he’s buying it outright, or are you gonna maintain a partnership?
Jennifer Spencer: He’s buying it outright because I do wanna do a 1031, and if I maintain the partnership I wouldn’t be able to do that.
Joe Fairless: Right, right. Interesting stuff. That’s exciting. You’ve found a way to speculate while still receiving monthly cashflow somehow. I didn’t think that was possible.
Jennifer Spencer: Yeah, it’s actually worked out to be a good arrangement for everybody.
Joe Fairless: You said you bought it knowing it was a great location… What were some specific things that you had identified? And I ask this more to call out things for Best Ever listeners who are in their markets and they would look for the similar things.
Jennifer Spencer: Well, it’s on one of the primary arteries coming from downtown into the suburb, and it’s in the most affluent zip code in the state of North Carolina. It’s surrounded by high-density housing, there’s very little commercial in this area, so high need for the commercial, and a lot of demand and very little supply.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Jennifer Spencer: Oh my gosh, there’s so many… How will I even know where to start? I would say looking at patterns. Probably some of the biggest mistakes we’ve made is missing things that we should have known, should have seen, and failed to disclose. I guess those are the ones that upset me the most.
Joe Fairless: For example…?
Jennifer Spencer: Well, we’ve had one just recently… There was an underground storage tank and we didn’t disclose that; we knew it, we just missed checking a box. We had one last year where the previous seller had said the HVAC was four years old, and it was actually eight years old. Should we have known, should we have relied on the previous disclosures or not – that’s questionable… But it’s things like that. Those are the things that really make me lose sleep at night.
Joe Fairless: Best ever way you like to give back?
Jennifer Spencer: Well, I am very involved with the [unintelligible [00:19:21].21] My family, my children — I’ve got four teenagers in an exchange student. We go down and cook at the homeless shelter, prepare meals and buy the groceries, and we also do fundraisers to make contributions to the rescue mission, and that’s just a place where — I’m in the business of homes, and to think about people who because of life circumstances don’t have one, that kind of tugs at my heart.
Joe Fairless: How can the Best Ever listeners get in touch with you or your company?
Jennifer Spencer: They can call me at 919 602 7411, or they can e-mail me, jennifer@spencerprops.com.
Joe Fairless: Jennifer, thank you for being on the show. Thanks for talking about your experience with both management and how you’re contracting it out, but then also opportunities for how to be creative in a hot market to still find deals, and you talked about houses with challenging lots; there are still some short-sales and foreclosures… But then also knowing “What does the majority of buyers want?” They want move-in ready homes, so you buy an ugly house, ugly carpet, dated work or dated kitchen (whatever), and then make some improvements and then you can get an opportunity that cash-flows.
Then also – holy cow – this speculative purchase that you made, and you’ve turned it into a monthly cashflow opportunity with the developer partnership, and the monthly distributions that you’re receiving (or payments) will then be credited towards him at closing should he actually get it rezoned in close, and if he doesn’t, then you just keep the non-refundable monthly fees that you’re charging.
Thanks for sharing these deals… Really interesting stuff. I hope you have a best ever day, and we’ll talk to you soon.
Jennifer Spencer: Thank you, I enjoyed it. I appreciate the opportunity to be on the show.
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