3 Ways to Turn a House into a Cash Flowing Machine

three ways to turn a house into a cash flowing machine hi I'm Phil bustillos with freedom intercom I'm a full-time real estate investor real estate mentor and coach to many of the most successful real estate investors all across North America best-selling author of this book how to be a real estate investor in my newest best seller real estate investing gone bad this is a fantastic book by the way you loved it and thank you thank you thank you to all the viewers out there for making this the number one youtube channel for real estate investors this video I think you're absolutely going to love it because I'm going to reveal to you three ways that you can turn a single-family home into a cash flowing machine and you may or may not even have heard of these three techniques and even if you have you may not understand just how powerful they can be so before we dive into those three I need to first explain to you the phrase highest and best use that's what it was designed for and that is as a primary residence for someone to live in primary residence now this is critically important to investing because if the highest and best use of a single-family home is as a primary residence for someone to live in then that explains what the best ways to typically make money on them are and so for the most part and I know it can differ depending on area we're going to get into this but for the most part a single-family home is best monetized or profited from either if you're the Builder you build it from the ground up and then you sell it or if you're a house flipper you know if you wholesale it if you fixed up and resell it that's typically the best way to make money on a single-family home and conversely it's typically a lot more difficult to profit significantly from a single-family home if you rent it out because that's not really its highest and best use now by contrast a multi-family such as a do play so triplex a quad on up five flexes on up those were designed for renting out so that is their highest and best use now you can live in one side of a duplexer and 1/4 of a quad but still you're renting out the other units that's their highest and best use single family homes highest and best use primary residence so in this video as I'm sharing with you these three techniques what these do is these help overcome some of the problems with renting out a single-family home the existing occupant doesn't pay their rent you're getting no money on that unit which is a real problem because you still got taxes you still got insurance you still got maintenance you might have management fees and you also may have a big fat mortgage to pay as well so the first major issue with renting out a single-family home it's just the occupancy is just one person if they or one family and so if they move out you've got a real financial issue on your hands it is real easy to have one month vacancy removes all of the cash flow for the entire year on a single-family home very common so you have to have literally a 0% vacancy a lot of the times to make this thing work which that's unrealistic in the real world renters don't always pay you I've got a great video on what every landlord should know about property management you need to check it out if you're ever going to rent property it's incredibly important to have some of those foundational lessons on the get-go before you get started okay so number two the other problem is that and I'm going to use a commercial real estate term they have low cap rates what's a cap rate all right this is going to be a simple calculation that is going to be a great way for you to understand how to best assess how well something is going to cash flow as far as investment property is concerned all right here's what you do first we need to establish what the rental income is minus those expenses that are going to happen no matter what whether you pay cash or not so we're going to have and I'm going to use for this exam well I'm going to say we have $1,000 that's the right amount okay that's what the ten is hanging on there little single-family home okay now you got to pay taxes right there's your property taxes we're going to say that's a hundred bucks if you're in the state of Texas you're going to say a hundred a month are you out of your mind fill triple that because in Texas it's very expensive for property insurer Texas next we have insurance let's say the insurance is $50 okay maybe it's a whole lot more but we'll just do this for the calculation okay all right so we've got taxes we've got insurance but there's more to a single-family home costs let's see for example you have a property manager at 10% I have a whole video on that as well but we'll just run it for the sake of this example we're going to say $100 for the property manager but what else well you may have this thing called maintenance riding so let's say that there's $100 and that's to save up for all the maintenance issues that may come up and so once we get down here what we get to is you have the thousand dollar rental - these expenses you come up with six hundred and fifty dollars make sense 650 and the in the world of commercial real estate they call that net operating income Noi but you know what you can think of it as this is how much money you get at the end of paying all these expenses when you get to rental money if you pay if you own it all cash how much can you actually spend what can you what can you go use for your own personal financial benefit and that's the 650 Noi okay all right so what do we do next we multiply the 650 by 12 months and you get right here $7,800 okay so you got seventy eight hundred dollars is what you get each and every year after you paid all your expenses and that's assuming you don't have a mortgage okay make sense so get your 780 all right so now in order to determine cap right what we're going to do is we're going to take whatever the total price of the property is and we're going to divide it by that 780 so the typical single-family home that rates out for thousand dollars now every part of the the world is different but let's say for this example when it's very customary it probably sells for about one hundred and fifty thousand that's probably what the purchase price would be unless you got just the steal of a deal so you take that hundred and fifty thousand you take this seventy eight hundred and here's what you get you get this thing called cap ring and the cap right now this one is five point two five point two okay that's terrible that's awful if you are a real estate investor and you are doing commercial properties 5.2 depend on your financing is absolutely horrendous for the majority of commercial real estate investors they look for 10 caps or above if they're an individual investor they're not some institutional investor okay so the cap rate is terrible why is it terrible because the cost to purchase that single-family home is so much more than that what the round rate is and why is that the case what we talked about at the beginning highest and best use single-family homes are not designed to be cash flowing machines they're typically designed to be a primary residence for somebody all right so having said that now that you understand that single-family homes by and large have two major problems one is the occupancy at number two is these very low cap rates because of the relation between what's coming in this thousand dollars a month versus the one pick you'd have to pay that gives you an understanding that in order for a cash for a house to be a cash one machine they're going to have to get creative so let's get creative it's very important that we not change anything about the property itself we want to keep it as a single-family home in the way that it would be for someone to move in and purchase the property as their primary residence that's critically important because that's one of the beautiful things about single-family homes there liquid there are so many prospective buyers of these kinds of properties that if you ever had to get out real quick and sell immediately the beautiful thing about a single-family home as you usually can so when I'm going to describe with these three ways do not involve you may be adding a mother-in-law suite or doing anything to the property to improve the rental income but then you start to in a way change with the primary of the highest and best use is which is as a as a residence okay so the first idea you can see it here student housing if the property is in proximity to a college and you'd be surprised how many colleges there are it's not just the big universities I'm talking about here sometime there are small little niche colleges I had an example of an apprentice I was talking to the other day they had a had a dental school right near where they're where they were located and there just isn't enough housing for these dental students so student housing near a college what you have to do in most cases is you may have to put in some furniture because that can be a big deal for people in college they don't have the money to go out buy a bunch of furniture but you can go to a secondhand store because they're not looking for the greatest furniture in the world but when you do that this is the key you can rate by the room now it is still going to be one lease but from a pricing standpoint you can price it by the room so let's say this is a four bedroom you know you can rent that for say five hundred dollars you know Peru which totals two thousand now right there if we go back to the previous example we are at a normal rate of a thousand okay so that was that was market rate as if you are going to just run it the normal way but now all of a sudden you can get two thousand because you threw some furniture in there and you market it directly to a local college now the other problem with the college angle is you do have to time it right because there usually are certain times of year that those students are looking for their housing and once they get it locked in they're locked in for the year so that's a problem so timing is an issue I got a lot of stuff going on here timing is an issue and I'm not worried about them partying I've had student housing I don't right now because I'm in Florida I'm on Eric college but when I was in Nashville I did you know it works up pretty darn well and here's the greatest part for me as a landlord you get the parents to co-sign you know so when you get parental co-signing that's when you're in great condition because if they don't pay you you're going to get paid because the parents have co-signed so love student housing it allows you to crank up the rental rate quite a bit if you market it correctly to the right people throw some furniture in there you may even it might cost a little bit you may even offer free internet or free Wi-Fi and cable TV that sort of thing so that you're that you're appealing to that audience but it doesn't cost nearly as much as the extra thousand you're going up to so that's a great way to turn into a cash flow machine and then they'll pass it down for their friends and friends and friends it could be the other cool off-campus house for the next 25 years so student housing wonderful way to turn a house into a cash flowing machine number two is the vacation rental I absolutely love this I have a great video on this about vacation rentals how to buy them correctly what to do with them so you can check that out actually I'll put that here on the screen for you check out for this example what I want to share with you is that most vacation rentals you're renting by the night now it does depend on the area and you may have a minimum number of nights and there may be some laws related to you getting the right licensing for it so obviously check that out but by the night what can end up happening is especially a four bedroom you can rent out for quite a bit more per night than even a three or two because you can get bigger families in there and this can easily go into a position of four thousand dollars a month very very easily I have several vacation rentals it's amazing the difference between you know kind of your normal rental rate on a thousand that you would get per month the normal way and then what you do as a vacation rental when you're going by the night it's incredible now there are a couple of expenses that we need to clarify on number one you've got the you've got the expense of furniture and when you're dealing with the vacation rental furniture is a little bit more expensive because you're going to have a little bit nicer stuff and you want to get good reviews and those kind of thing so furniture is gonna be little bit more expensive maybe ten twenty thousand dollars in some cases depending where you're at but if you've got the right furniture in there you got the right property it's super nice then you're you're gonna just I mean if you're booking up at four thousand dollars a month you got some money to pay for that kind of stuff it'll pay itself back quickly now you've also got to pay utilities and now that could be a big one to pay on the house when utilities can really hit you and I'm not talking about just of gas and in water in electricity I'm also talking about internet and in some cases cable although these days that the internet is good enough you can do one of those systems whereby it says it's the television is coming through the internet there's some services that do that okay so furniture utilities I mean these are extra expenses but this things can throw off so much money so much money it's wonderful and so what ends up happening is we earlier the video we're talking about cap rates right now when we were giving you an original example of a thousand dollars a month I think we had a cap rating like 5.2 but then we show with a student housing we could take it up to $2,000 a month and there might be slightly more expenses if you were to throw an Internet but that pretty much doubles your calf rate if not triples so your cap right all of a sudden goes to 210 plus with it with a student rental but you get to a vacation rental now all of a sudden you're your cap rate can go to 20 plus and then we're talking huge huge cap rates amazing I also love about vacation rentals is they're in they're out you're not worrying about eviction because they're on vacation so it's amazing from that perspective as well you're not dealing with having to get eviction attorneys involved in paying for all that mess it's fantastic you've got so much money coming in you can afford some of the hassles that come along with people coming in and out I mean little things will break those sorts of things but so what you got the money to pay for it this turns a single-family home into a cash flowing machine now I live on the beach in Florida and so many of the properties around here you can't just do the normal realm because all the owners have figured this out it's so obvious why would you do a normal rental when you can do a vacation rental it makes so much more money okay so that's number two number three is the rent to own this is fantastic I have built my career on this technique I've made a fortune doing it and the greatest part is so few people do it it's because they don't know about it they don't understand it their concern because there's not a lot of people to call and ask for help but this technique is humongous because for the most part student housing and vacation renting is not an option there's not a school nearby and it's not a vacation destination so what are you doing that case to turn that house into a cash flowing machine you offer it on a read to own here's how it works number one you're going to get an up front non-refundable option payment option payment what this means is when they first move in they're getting a lease with you that's one documents the lease and the second document is an option to purchase the property at a specified price when they move in and to get that option they're going to pay you up front how much is that going to be that could be anywhere from on the low end about five thousand on up you can get ten thousand or more my record is eighteen thousand so um but anywhere in that range and yes you can settle for two thousand if you want to but if you're good at marketing you can find a lot more than that you wouldn't believe how many people have mattress money they've got five thousand dollars especially right now when this video is being shot during tax return season when they're getting a tax refund this is a huge time of year for the rent-to-own okay so when you offer a rent-to-own you get this option payment five ten thousand dollars fantastic the next thing is you push all maintenance on the tens so there's no more maintenance they're becoming the owner so if something goes bad hey there they're becoming the owner of the house that's all then you literally can push every bit of maintenance off on them now there are certain Landlord and Tenant laws that somehow will supersede this I've learned this the hard way such as what an air conditioning system goes out and they're able to look at it later intent Act to be able to prove to me that even though they signed an agreement that said they'd fix it I still fix it all right that can happen but for the most part you can push all the maintenance off on the tenant so that just saved you hundred dollars a month in our previous example in management and in another one hundred dollars a month as it relates to to fixing things up you're saving money with a rent-to-own because when there's no maintenance issues because the tenant deals with it you don't get calls from them it's not a property management headache anymore they're handling it okay so upfront money no maintenance and here's the next day higher rental amount now let me explain I've got it I've got to explain this because it's not a higher rental amount normally unless you structure your rent to own intelligently here's how it works when you do it rent to own for the most part the people are going to expect to pay at or below rental rate so normally even if you offer rent to own they're not going to want to pay more than our example thousand dollars a month okay but what you can do is this you can offer what's called rent credits not every state allows this an example would be Texas and a few others but you can offer Ric credits almost everywhere and what rent credits do is allow you to raise the all right so follow me if it's normally $1,000 a month you bump it up to say $1,200 a month 1,200 a month and then you give them a rent credit of say $300 a month now you may you may be thinking but but wait a minute Phil you raised it by $200 but you're gonna give them a 300 our rent cray all right here we go here's the big secret to rent to owns big secret ready for this over 90% of the people that will do a rent to own will never exercised their option to purchase they are not going to buy it in almost all cases don't worry you're not going to sell your home almost ever why it's because that's the way people are they typically don't have a better financial situation tomorrow than they do today for the most part people that are watching videos like this or not try to improve their financial life right so what happens is they have this optimism when they move in and they're going to become the owners they're gonna be able to get a loan everything's going to work out right it's going to improve their jobs going to give them a raise all these great things are going to happen but then a year goes by and it hasn't happened in fact they've had a couple of emergencies come up and they've got a daughter that's now in jail if they had to bail out they had this probably had that problem and these issues occur and next thing you know they're in a worse financial position than they were before despite all the work you may have done to try to help them you may have tried to help them with credit repair services you may have gotten in touch with a mortgage broker you may have done all those things and they still aren't unable to do it that's editing is a fact of facts in this business so what happens is your right to own you would rather gamble on raising around rate and giving them a big fat rent credit for doing so because you know more than they do about the future because you know that 90% of the time sometimes more that what's going to happen in here is they're not going to exercise the option and your extra $200 a month is positive cash flow so what's happened here is we've gotten rid of maintenance we raise cash flow all of a sudden this cap rate is approaching 10 it's getting close to 10 but they you add this puppy in that nice down payment and all of a sudden your cap rate is now maybe 12 to 15 so you see how this becomes the cash flowing machine as well slightly different than the other two but this can apply everywhere I'll tell you this every single family home that's not a vacation rental that's not a student housing that have ever done I always do a rent-to-own always what's the worst case scenario they buy it and if they buy it well I've put the price up at a high price so I make a lot of money so it's a win win no matter what what okay so what so maybe one out of your 10 you end up selling it and then you take that extra money what you let's go buy another property it's okay I also love the fact here that I've got this money up front and that can help if there is a problem the person stops paying you have to a victim right you if you have to a victim you've got the money to do it yet the way you pay the attorneys to replace the carpet replace the paint it's wonderful the right to own is so exciting because so few people do it ah this is going to blow your mind but here's the reality if you put up a side I'm going to show you sign looks like here's your here's what you do you put a sign up you can just test it don't you don't even have a house just test this put up a sign that says rent to own in big letters on the top put no banks need at the bottom and then you can put like three to home here and put your phone number you put some signs up like that around town you'll get hundreds of phone calls hundreds I'm not kidding you're gonna have to set up a different phone because it will ring off the hook it's crazy rural areas urban areas it doesn't matter it's because there's a huge population of people that want to rent to own their own home and almost no one offers it so when you do it it's just gonna be a bonanza of phone calls now the majority of those people don't have a job don't have the money don't have the ability to do it so you're going to have to filter through potentially hundreds of phone calls no what I do is I take him to a voicemail and that voicemail is very clear it says you know you've got to have at least five thousand dollars to put down and you going to do one to at least a four thousand dollars a month if you can't leave your leave your information so you're going to have to filter these people because I can get hundreds of phone calls but the exciting thing is you won't have an issue with potential people there's no concern over the dearth of people that want to do a rent-to-own so this right here this technique alone could greatly improve your cash flow moving forward every time you have a single-family home and I think it is a bedrock of any creative real estate investor that they offer rent to owns this will build you all kinds of wealth because when these people move out you move somebody else into somebody else in always getting that big fat down payment upfront and you're also getting in most cases you're getting additional income that you normally would on the rental right because you can bump it up and you have less maintenance all right so those are the three ways to turn a house into a cash flowing machine student housing vacation rental both of those may not fit for the majority of single-family homes but you can always do a rental home all right I hope you enjoyed this video if you got any questions feel free to make some comments down below I try to carve out time out of my schedule to answer those questions feel free to go to our website freedom mentor.com to learn more about my apprentice program and how I work with people individually to help them become cash flowing machines themselves if you haven't already grabbed my new book real estate investing gone bad this is a winner and please subscribe to this YouTube channel if you haven't already because I put out some amazing videos some of which only the subscribers can see alright well thank you so much for watching and I will see you on the next video

Channel: Phil Pustejovsky

Views: 779,327

Rating: 4.8183956 out of 5

Keywords: Single Family Home, House, Cashflow, Real Estate Investing, Real Estate Investment

Id: wyooI5J91UM

Length: 26min 8sec (1568 seconds)

Published: Fri Feb 05 2016