DGS 66: Predicting Your Rentals Profitability with RentFax

Today, I am talking with Scott Abbey of RentFax, which is a tool that helps you figure out the answers to all these questions. It helps you, as a property manager or investor, grow your business.

You’ll Learn…

[03:25] Each door doesn’t require the same bandwidth, which is a critical metric for determining whether you want a door or not, and how to charge for it.
[04:37] RISC Index: Features 15 sub-indices of census data that identify demographics about properties to indicate probability of an income stream and interruptions with it.
[08:45] RISC Index weighs comps based on proximity and likeness of the demographic; it considers square footage, number of bathrooms, and other factors to predict rent.
[10:05] Cycle of Suck: If you take on bad owners and bad properties, you’re going to get bad tenants and a bad reputation in the market; operational cost is much higher.
[12:05] Shift from being a service provider to a consultant to give advice with supportive data that improves customer satisfaction and wins you more deals.
[14:09] Areas can change over time; something can happen in the area that materially reduces the demographic forces and causes a decline or absence of improvement.
[14:55] RISC Index enhances range of rents that are probable for the address by taking additional algorithms to the data; if the range is too wide, it’s not helpful to you.
[15:20] RISC Index is only product that quantifies relative risks of an address for every U.S. neighborhood; when looking at rents, it’s helpful to know the risks.
[16:00] Rent affordability is #1 factor for disrupting rents; be sensitive to demographics of the people who are going to be attracted to the property to adjust rents.
[17:30] Rent Package includes a risk report, rent analysis, and historic vacancy number.
[21:10] RISC Index can be used as an indicator that helps make buying decisions; property manager turns into a deal maker to help existing clients grow their portfolio.

Tweetables

Resources

RentFax

RISC Index

Census Bureau – Year 2000 Results

Shane Sauer

RentRange

DoorGrowClub Facebook Group

DoorGrow Live

Transcript

Jason: Welcome DoorGrow Hackers to the DoorGrowShow. If you are a property management entrepreneur that wants to add doors, make a difference, increase revenue, help others, impact lives, and you are interested in growing your business and life, and you are open to doing things a bit differently then you are a DoorGrow Hacker.

DoorGrow Hackers love the opportunities, daily variety, unique challenges and freedom that property management brings. Many in real estate think you’re crazy for doing it, you think they’re crazy for not because you realize that property management is the ultimate high trust gateway to real estate deals, relationships and residual income.

At DoorGrow, we are on a mission to transform property management businesses and their owners. We want to transform the industry, eliminate the BS, build awareness, change perception, expand the market, and help the best property management entrepreneurs win.

I’m your host, property growth management expert, Jason Hull. The founder of OpenPotion, GatherKudos, ThunderLocal, and of course, DoorGrow. Now, let’s get into the show. Our guest today is Scott Abbey with RentFax. Scott, welcome to the show.

Scott: Hello, Jason. Thanks for having me.

Jason: Thanks for being here. RentFax is a really cool piece of technology, I guess you could say. Maybe you could just tell us briefly what it is. I want to hear the backstory. What is RentFax for those that are listening?

Scott: Well, it’s a tool to help investors and property managers to define the areas that they’re managing and the bandwidth that’s going to be required for those areas. It’s a tool to help create presentations for prospective owners. I provide a gorgeous take away; great calling card if you will. It’s a tool to help establish rents and to reduce time in convincing owners of the correct rents. It’s a tool that help turn your business into a consulting business and to drive leads and deals to you as opposed to chasing just the doors as a property manager.

Jason: They’re these beautiful, really nice rental report that show them what their property could and should rent for and give them details on the market in the area. Correct?

Scott: Correct.

Jason: Alright. Awesome. How did you get into this? Give us some backstory on you and who’s Scott and how did he get connected to property management or RentFax and where did these all come from?

Scott: I’ve been on planet for a while and so I have had a mixed career, but I ran a large company for 20 years, and then I decided I wanted to pursue real estate. It started out actually as a corporate housing business and it quickly morphed into a property management firm. As the company was growing—and as I think we spoke before—we had as many as 1200 doors and mostly single families. But one of the things I learned is that each door does not require the same bandwidth. The bandwidth required to manage the door is a critical multiplier, a critical metrics for deciding whether you want the door or not and how to charge for the door.

Jason: True.

Scott: In the year 2000, I started studying the free data because I’m also a hacker and a nerd for data. I pulled down all the data I could get from the Census Bureau for the 2000 census. I studied multiple properties […] properties but in dramatically different areas of the city. I put the same manager on them, we did the same screening, every practice was identical. We were able to determine that there were measurements within the census data that we were able to acquire. It gave us indications as to whether this was going to be a high-risk property requiring a lot more bandwidth or a lower risk property which required less bandwidth.

Over that course of many years, I’ve joined up with Shane Sower who is my partner when we launched the product. We put it on steroids, we got consultants and then we introduced rentfaxpro.com. The product is called Risk Index. Essentially what it is, is an index of 15 sub-indices rolled up from hundreds of data points that tells demographics information about the property that are indicators of the probability of an income stream interruption or probability of an income stream, depending on which point of view you want to look at. High numbers are reflective of a broader chance of having a good income stream; lower numbers are reflective of a greater chance of an interruption to income stream.

Through that, we’ve tailored it, we took it to 12 different cities to test it, we now have a tool that for every census tract in the United States, a client can pull a report and it’ll tell them this index and it’ll give them the relative number for that metro area. If you’re looking at three properties in your city, you can see what the numbers are. Those relative numbers will tell you the probability of an income stream interruption or not. It also compares it for the entire United States, so investors that are looking at multiple cities can review that on a comparative basis.

Jason: Are some cities significantly just more difficult than other cities then in the US? Because property managers’ usually in a city, they’re probably not going to move the entire business.

Scott: Kansas City is a little more challenging, Detroit is a little more challenging but there are areas in nearly every city that have their challenge. Now, if you’re in a really high demographic census tract or if you’re in a really high demographic area, what’s low to that demographic is going to be considered high to others. But in most cities where most investing’s done, there is wide diversity and it can be blocks apart in terms of that diversity.

A three-bedroom, two-bath house, 1200 square feet, across town, across even a short period of space, can have dramatically different performance attributes based on the demographics because the demographics are where the location is. It’s a determining factor for the people that are drawn to [07:01] there, and so rent affordability is a big issue, crime is a big issue, schools are a big issue.

Again, there’s 15 sub-indices that are all weighted with different weights in the secret sauce of this algorithm. But it is an uncannily accurate tool for helping investors recognize how much margin they want to make in the deal. Because the higher the risk, the more margin you want because there are things that you will not predict accurately in your analysis as you start the purchase.

For property managers, it’s a great tool because for one, it’s a take away tool for when you are presenting to a client. Every property manager that’s listening today has been faced with two or three people that they’re competing with on a call. One of those persons, at least one, has come in with a red value to that investor that’s just ridiculously high. That investor sees that as the brilliant guy in the room because he can get more for his property than the rest of us. If you come in with data and you provide consulting with data as support and then a nice legal way so that the end-user can read that data and see for himself that you’re not blowing smoke, you will win more deals, you will win more client.

The rent component of the tool is one where we’ve taken rents that we pulled live data every single pull–so many of the tools that are out there, some are free, some we pay for, they have a very wide range. The wider the range, the less helpful the tool is. What we’ve done with our algorithm is we’ve pulled the ranged down to a smaller metric and we’ve weighted the comps based on the proximity and the likeness of the demographic. We look at square footage and we weighted on square footage, we weighted on the number of bathrooms so that you have a better tool for predicting rent. When you get one of these free products that are out there and you send it to an owner and it has a wide range, inevitably his eye goes to the high number.

Jason: Oh, sure.

Scott: Which will not promote longevity in the tenants, and which will generally create longer duration of time for you to lease the property up.

Jason: Sure. An increased vacancy can be pretty painful for the homeowner.

Scott: In my practice, if I have a high-risk property location, I charge more for it because it takes more bandwidth. I used to be very reluctant to take very high-risk properties but if I’m being compensated for my effort, why not? Because those investors tend to stay long. The people that are in the ideal spot to sell the house when the market heats up—like we just went through—they don’t keep their properties on rent less long because they want to capitalize on the appreciation gain. For me, longevity in my client is key.

Jason: Yeah. One of the things that a lot of our listeners are really keen on is what we call the cycle of suck. This idea that if we take on really bad properties or that are bad situation, the operational cost would [10:15] would be significantly higher. Maybe 10x higher than that of a really easy, good property, so there’s a big difference there. If they take on bad owners and bad properties, they’re going to have most likely bad tenants because the tenants are going to feel like the owner’s pushing back on things, and then you end up with a bad reputation in your market. You get trapped in this loop of high operational cost, not being able to scale and grow your operations, dealing with lots and lots of problems. That’s what I call property management hell, the cycle of suck, it’s getting caught in that.

This sounds like a really handy tool—for those that are listening—to escape the cycle of suck which everybody’s heard and talked about if you’ve been listening to this podcast for a while to get out of that. This will help you identify which properties are going to be high-risk, which properties should you just maybe charge more if the owner is still a good fit for you.

Scott: You nailed it. A high-risk property with a bad owner, that’s suicide. It just absolutely fails every single time. If I interview an owner and he sound like the kind of guy that’s, “Okay, we’re going to fix things when they need to be fixed.” You can make a high-risk property work, but you do need to charge more for it because it does require more bandwidth. There are certain operational things that you do need to do differently when you’re managing the property. The most important thing with the report is telling an owner that he has a high-risk property. It goes one way not the other because you have nothing to quantify that with. With this report, send it to them and in 30 seconds you’d get a phone call back, “Okay, I see. I bought a property that I probably shouldn’t have. Now, what are you going to do to help me?” That’s when you’re in-charge of keying on as opposed to them charging you.

Jason: That puts you at a tier above maybe a potential competitor that you’d be dealing with because you’re shifting from being somebody that’s a service provider to being somebody that’s now a consultant, that’s in a position of giving advice. When you’re in the position of giving advice, it’s like the highest tier of the customer satisfaction pyramid. I mean, they’re trusting you. The level just below that is partnership, “I’m in this with you.” If they trust you and if they feel like you’re in it with them, great. If you move into that next level status where you are now the advice giver and you are letting them know and see this potential problem. I love the idea that you can justify higher fees. You can say, “Hey look, this is a high-risk property. In order for us to take this on, this is what we’d be willing to do to have allowed this into our portfolio.” That allows you a level of safety. I mean if they decide, “Oh that’s too expensive. We’d go with somebody else.” Then you’ve avoided a potential problem and they’ll probably be back.

Scott: One thing I will say too, I wanted to point out is that you’re giving advice, I had found giving advice without supportive data does not carry the same weight as if you provide supportive data with the advice you’re giving. This report was actually formulated for your audience, for property managers. Initially, the project was a self-interest tool. I was tired of trying to second guess the quality of the neighborhood and then finding out I had missed guess it because you can’t necessarily drive around depending on the market you serve. If you serve a fairly tight and small geographic area, you can know your area pretty well, but many cities are sprawled out. Many of my competitors are covering large areas. When you have those large areas, you really need data. The other thing I found is an area that was good three years ago can change, there can be something happen in that area that will materially reduce the demographic forces and cause a decline or the absence of improvement in the area.

Jason: Help people understand the RentFax thing in terms of, how does it compare or is it different than things that they might be familiar with like the Rent Range Report for example. Are these complimentary or are this competing sort of products.

Scott: Rent Range Report is a very good report. We’ve used it for years, so Rent Range is a good report. However, the thing that we found with Rent Range is that we wanted to enhance is the range of rents that are probable for the address by taking additional algorithms to the data to try to drive a closer range because if that range is too wide, you’ve actually hurt yourself as opposed to help yourself.

Jason: Sure. Narrowing that is going to be a lot more effective.

Scott: The other thing that we’ve done, and I think we’re the only product out there that quantifies the relative risks of an address for every neighborhood in the United States. It is a huge factor because I will tell you this, when you’re looking at rents, it’s helpful to know what the risk is, why you’re looking at the risk. Because if you have a high-risk neighborhood and your client is not allowing you to use Section A, you want to lean to the low side of that rent range because of the rent affordability issues because what your client tells you is you’re going to have a harder time getting a 2 ½ to 3 turn rent to income ratio.

Rent affordability is the number one factor for disrupting rents. Being sensitive to the demographics of the people that are going to be attracted to the property is critical for adjusting your rents. You’re far better off with less rents and longevity than you are at an extra $50 or $60. You can convincingly make that argument to your client by providing the data to support it.

Jason: Right. Do you think there might be situations in which people would leverage and use both reports then or do you feel that would be redundant?

Scott: Well, if there’s a cost associated with both, I would argue that I think if you buy into the idea of a tighter ration of rents, I don’t see a need to have both. But I compliment Rent Range, they’re an excellent company and its good data.

Jason: Okay, cook. Interesting. I know there’s a lot of people that are using Rent Range that I’m familiar with and maybe they haven’t seen RentFax. I think they’d be really interested to compare the two and see the difference. That’s one of the things you think they would notice is that there’s a much narrower space and it helps quantify or qualify the level of risk.

Scott: When we try to adjust rents, we’re sensitive to square footage and we’re sensitive to number of bathrooms which is not the case. The format of our report is it prints out nicely with the risks. The report that we sell the most of is the rent package. The rent package is inclusive of a detailed risk report, a rent analysis and a historic vacancy number. When you look at those three numbers, that’s what I lead with every new client, that’s the first thing I send them then we start talking business. As you learn to read the report and understand the dynamics of the report, for example, it tells you how many comps you have and how big of an area.

I’ve got a case right now where I’ve got a client that we struggled of getting this property rented because we’re high and he was comparing the first time we went to market with the current time we were on. It so happens in the system, it retains all these reports, so as you run these over the years, you’d be able to go back and look at the old reports. I did in this case. What I found was the level of competition today was far greater than the level of competition that he had when he first established the rent that was his de facto, that’s the price we should charge. I was able to illustrate that, and we relaxed the rent without getting into argument or without me being accused of being incompetent and proceed. Being able to produce that kind of information, to your point, it changes your role from service provider to a consultant.

Jason: I would imagine that it gives you a level of confidence that you’re able to have during these conversations that you just won’t have otherwise.

Scott: That’s exactly right.

Jason: I mean if a property manager, they know the rent might be too high, they might be feeling that in their gut, and they might that they’re getting the feedback but trying to relate all that to the property owner without some real data or some real justification that they sell on paper becomes really a challenge, and that puts the property manager in a really frustrating situation.

Scott: It does. The other thing it helps internally is if you have a leasing folks that keeps saying, “You’re too high. You’re too high. You’re too high.” You will come back with a little bit of data, study it, and you maybe too high but they may not be pushing to do the right things to get the business. It’s a useful tool for both owner and the internal staff.

Jason: Yeah. I like it. What are some of the biggest questions that people have asked you about your reports before they start using them or become a client? Maybe some things that I haven’t asked you.

Scott: Well, things that we’ve somewhat covered is, “Does it cover the entire United States?” The answer, “Yes.” This is a question I was asked frequently, every data pull is a fresh pull, so we’re not using an old database since it’s there forever. No. Each single pull, we go out to a variety of data sources and we API in the information that we’re going to need to compile that report. It takes about 45 seconds to get all that brought in and then run the algorithms and the present the report.

Jason: That’s cool. That’s interesting. You can run the report at the next month, if the market shifts and it could be different.

Scott: It would most definitely change, yes.

Jason: Do you guys go beyond the US at all? Canada, anywhere else. Not yet? Okay

Scott: No.

Jason: Any other questions that people would typically ask?

Scott: Yes, particularly the risk index. The tool can be used as an indicator for helping making buying decision. This is where property manager turns into a deal maker—your point earlier. Deals are important but internally growing your property by helping your existing clients grow their portfolio is huge and it’s less expensive from a marketing standpoint because a motivation and a desire for these investors to grow but they need help. The market is tight so it’s tough, but we’ve developed a number of ways to help our clients.

For one, I always ask my clients, “Where is your risk tolerance? Where are you at in risk tolerance?” because if he has a high-risk tolerance and he’s got some capital as reserve, he’ll see more cash flow. As the scale of 0-100, lower numbers generate lower cash flow on paper; higher numbers tend to skew more towards the appreciation side with less cash flow on paper. There is a sweet spot where the investor can stay that helps him minimize his risk but have a nice balance between cashflow and appreciation, and that sweet spot is between 35 and 70. It maybe different in different markets. It’s what you do as you learn your market by using the tool and you can tweak that.

The other thing that we, because there’s cost associated with this, we suggest that you set up a matrix where you decide what numbers can you most readily get as you’re scanning problems. You’ll get that position cost price and the rent. If you establish a ration between the monthly rents—the old 1% rule. That 1% rule has been around since the beginning of time. That 1% rule is fine, but it needs to be a variable value at 1% and so if you’re in higher risk, that number needs to be more like 2%. If you’re in a lower risk area, you can bring down that 1% so that you are looking more carefully at the available property opportunities. Once you find one that fits that really high-level general matrix then you can just start driving down into what other matrix do you want to examine as you’re doing your due diligence. Helping clients bring in deals, adding doors, is a great way to meet the goals that you have for what you’re doing.

Jason: Absolutely. They say the number one prospect is your existing customer. That’s your number one prospect because there’s already relationship there; there’s already trust, they are already a warm contact or lead in your database. They could […] that they’re interested in rental properties because they have one. If you can get them into some additional properties, you’re avoiding that whole cost of acquisition to get on a new door or a client. It sounds like a win-win win.

How can people get in touch with RentFax or get a sample report or experience this?

Scott: They go to rentfaxpro.com and there’s a way there for you to log in and there’s an opportunity to have a sample report. I would encourage you to do that. It’s a subscription-based product but it’s no contract. If you want to terminate, you can. You can upgrade or downgrade at will. A really simple and straightforward approach. It’s a real friendly site. We put a lot of time and money into the UI to make sure that it is easy-to-use. We have tools to help you as you’re picking your property. There’s a variety of reports for you to run. There’s also a lot of video online. My partner and I have spent quite a bit of time developing tools to teach how to use the product, how it can benefit you in your search for property and for helping your clients.

Jason: All this video material then it is, I guess, largely geared towards how you can turn yourself into a consultant by leveraging these reports.

Scott: Well, it’s teaching the values of the report and how it applies to an investment. By default, yes. As you learn that and as you use the report to substantiate your council and you are already street knowledge, you just leverage all those tools to help you become better at what you do.

Jason: Cool. Scott, it sounds like a very intelligent product and it sounds like something that will make a lot of sense to our listeners and clients, so I encourage everybody to check out RentFax. I appreciate you coming out and hang out on the DoorGrow Show with us.

Scott: It’s been fun.

Jason: Everybody go and check out rentfaxpro.com. Scott, any final words for those listening?

Scott: I just wish everybody a great holiday season. I think you’ll find the RentFax to be a real tool that can help you grow your business.

Jason: Awesome. Thanks so much for coming on.

Scott: Thank you.

Jason: Alright. There you heard it, rentfaxpro.com so check that out. It sounds really interesting. I’ll be really curious to get feedbacks from clients and listeners on what you think of RentFax.

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