From Condo to Empire: Section 8 Real Estate Investing w/ Tom Cruz

welcome to the rei mastermind network where host jack haas gathers amazing stories from leaders in real estate investing in each episode our guests will tell you what they're doing that works what they've tried that failed and best of all you'll learn actionable steps to take your real estate investing to the next level now here's jack with another value-packed episode we have tom cruise on the call and tom i really appreciate your time here today and before i start things off i want to send everybody to this because i think they're they're in for a bit of a treat if they head over to free you you're offering a free section 8 webinar and you can find that at section8webinar.com great domain name make sure you use the number eight in that um because section 8 is something that we typically we haven't talked about much um but i i feel that it's it's something that a lot of people should be aware of and in some cases some people might even avoid because of of the perceived or perceptions around it um so let's let's start things off i know that you have a pretty significant portfolio of your own correct let's start there like how did you get into real estate investing yeah um it was a complete accident i had bought a condo right after uh college and i lived in it for about a year decided that i wanted a single-family property sick of living in a condo i bought a dog all the reasons why i would get it so try to sell my condo this is right after 08 i had put 3 down on an fha loan so i had no equity in it so i couldn't sell it so i just decided to rent it out and see what happened and at the time i was renting it out for 500 over my mortgage that was kind of the you know light bulb moment for me was wow i'm doing nothing set it up on a venmo payment every month i had great tenants i screened them very aggressively i mean to the point where i had lunch with them because i had no idea what i was doing i didn't know who i was putting in this property and that's really where it got me interested in it because here i was you know spending 500 a month on a marketing client and spending weeks on reporting and work whereas here i had my section 810 or my not she wasn't section at the time regular tenant at 500 bucks and the scalability and the predictability of it was very nice so then after that you started to acquire additional property correct yeah so what i did was i was doing marketing at the time so i was doing website design like i said in local seo and i used that money along with the cash flow that i was retaining from my condo to buy my second condo um i already had you know proven concept of my first condo so i was like let me try a second one so i continued buying these 70 to 90 000 uh units i quickly found out after getting several of those over you know three to five months span that dealing with the hoas and the coas and the assessments and having my tenants fight with neighbors you know that are in the same building it wasn't worth it and then i decided to to go into the single family world um i went a little bit further upstream i started at like 160 180 000 starter homes um brick ranch homes locally i was only able to swing two or three of those because the 20 down payment on 180 000 house here you're almost putting up 40k up front and i wasn't able to make that much money it took me like four or five months to be able to save that from my condo rentals from um i was also doing wholesaling at the time i started doing real estate wholesaling um it just took too long to be able to accumulate that much of a down payment so that's when i went you know to the other side of the spectrum and i started buying sixty thousand dollar homes in non-hoa neighborhoods and the first one that i bought the day after closing i paid 55 grand for it there was a tenant in there at thirteen hundred and fifty dollars which should be my first red flag but the day after closing um the seller calls me i was like hey we need to switch you over to section eight i was i was completely confused no idea what was going on he's like yeah how did you think the rent was 13.50 on a 55 000 house if it wasn't section 8 and i didn't know at the time i had no idea so i freaked out um jumped in learned everything i could about it fortunately the tenant on my first experience was very good um they were also disabled so section 8 was paying 100 of their rent so i mean it was about as a good experience on the first one as as i could have then i learned about inspections i learned about managing them um the the inspection process learned about managing the tenants learned about screening um because the screening process that we do in section 8 is very different so that's essentially kind of i accidentally got into real estate and i accidentally got into section 8 it's been a lot of accidents as far as getting away from my active source of income into passive real estate so the section 8 thing actually happened by accident as well then exactly yeah i did i had no idea when i bought that unit the the owner was probably around 85 years old he was retiring was sick of dealing all of his properties he was just dumping them all and um owner was retiring so i was able to acquire it from him and i was able to get a solid loan from a local credit union and they went as low as i think it was forty thousand dollar loan at the time so yeah that's how i got into it well well that's that's really interesting so you know you you brought up uh some of the things that you've learned along the way um let's let's go down that short list that you you had there um so i'm gonna guess that with section eight you're experiencing some different things you mentioned inspections yeah inspections are the biggest difference between section 8 and a market rate tenant with section 8 they have annual inspections and upfront inspections so when you first get a section 8 tenant involved with the property they want to come out make sure the 3ds is sanitary structurally sound and and safe make sure that all the outlets work all the flooring is in good shape there's no massive holes in the roof the foundation's not crumbling and once you pass that it's only about an hour long inspection then they give you a green green light and then they start paying you the rent and the tenant can move in so that process the first few times i mean there's a learning curve i mean they will ding you on things that on a regular inspection you know that you would never even consider for example i had a tie a regular probably 150 square foot kitchen all with ceramic tile and on the corner of one of the tiles there was like a hairline fracture on it that the tile wasn't even loose it wasn't a hazard but they considered a tripping hazard so you have to pull that one tile put a brand new tile that does not have a you know fracture on it um in order to pass the inspection i've had you know parts of the house on the exterior have some like you know green moths or growth or algae on you know the shady side of a house and they'll make you power wash it like oh that could potentially cause you know holes or intrusions of water so on a private rate tenant market tenant they would have never cared about a quarter of the bottom of the back of the house on the final siding having some growth on it but section 8 will ask you to power wash it so there are additional hoops you have to jump through that's really the only difference everything else attended as a tenant if you screen them correctly the probability of them causing problems is very low sure so you know you you you mentioned uh this the screening like what what additional steps or have you has your screening method changed when dealing with section 8 tenants it does so we kind of have like a four prong approach we obviously check credit um we check credit even if section 8 is paying 100 of their thing we're still making sure because i mean that gives you a lot of background if they have four foreclosures three bankruptcies a bunch of repossessions um there's gonna just be ongoing issues with them there's no way around it there's gonna be drama involved there's gonna be creditors involved there's gonna there's always something involved if their credit report is that ugly so that's the first red flag then we look at background you know if they have multiple violent felonies or you know long incarceration periods and they just got out and uh depending on what they did you know that's obviously a disqualification and then eviction history any evictions whatsoever it's an automatic disqualification we're not even considering it and then if they pass through all that then we'll just straight up we'll do a home visit we'll have my property managers will go to their property um we'll give them a two or three day notice and make sure that the property is in good shape um the best indicator of future results is you know what they're doing currently here in the past so we'll go by check it out exterior interior um i mean it takes five minutes there's only so much you can hide in that time frame right i mean if there's holes in the walls or if the rugs are soaked in pet urine you can guarantee it's going to happen at your house so what kind of actions let's say the the tenant is going off the rails like that and they're damaging your property like how quickly or what type of resolution do you typically enforce um it really gets that point because we've already done all the screening but if it does happen we do buy annual inspections so we have two inspections ourselves and then section 8 has there so we're in the house at least once a quarter on average in a year so if any of that happens it normally doesn't get to be that bad because we're able to fix it beforehand and it's just one that's the big advantage of section 8 is you have leverage one email to their section 8 counselor with pictures showing how they're treating the property and how they're breaking the lease in multiple ways then for the most part they're going to fix it because they don't want to lose their voucher if they lose that housing assistance it's a federal program they get blackballed for life they will get their social security number ends up on our list and they just won't get an assistance for their family forever so it's it's a really serious thing and for the most part they do take it seriously [Music] you know and if they get evicted it's bad for them sorry yeah no that's that's really interesting that you're you're essentially using that program as your your enforcement arm exactly and that's exactly what we do because i mean we could send them one of our contractors over there you know they can be as assertive as they want but the second you call you know their 80 year old end up property manager at section 8 their counselor she emails him and says hey look this is your last warning any more breaches of the lease you know we're going to pull the voucher or if we file an eviction action and we successful in it and we send that eviction to section 8. they'll pull them you know they don't want that dealing with other landlords so i'm going to guess that depending does section 8 typically the rules associated with it vary from one state to the next it's a federal program so it's obviously administered on a county level uh we do see some nuanced differences obviously it's different inspectors it's different councillors some counties i've heard some counties you know they don't care as much so if you complain about a tenant they might say hey it's between you and figure it out um the counties that i'm operating in north carolina south carolina uh tennessee and ohio we've had good luck with it you know me and my property managers i think it's a big part of how you start the relationship you know i'm being very attentive to the to the inspector making sure that everything he requests gets fixed because imagine the amount of people that he works with that just like bulk and everything he says that gives him an attitude that doesn't fix what he says we're on a such good relationship with most of our inspectors that if we fail an inspection which does happen even with a checklist they'll just say hey i'll mark you as past send me some pictures later today after you fix it and then we'll be good i mean and that's really the level of kind of trust that i force you know i make my property managers do this i have a checklist if i'm out of state i want before and after pictures i i require you know videos so my property managers here can see the inspection as it goes on so that's just the level of control you have to have um at least at the beginning when you when you're building that relationship with them so is majority of your portfolio then section 8 is that what you focus on correct yes about 350 out of my 400 existing units are section 8. oh wow and the 50 or 60 that are not are regular tenants we have a few airbnb stored in there a lot of the tenants that are not section 8 are the ones that we've inherited from previous landlords that are good we don't get rid of good tenants so you know with all that being said i'm sure there's like a when it comes to the acquisition of those rental properties are they all they're all single family homes for the most part uh we do buy duplex inch triflexes i try to avoid it if it's not submetered on a utility level because i'm not my name is not on any utility bill in my entire portfolio um it's just the easiest way to fit immediate your cash flow is if your power's in your name they're running that ac with the windows and doors and everything open they don't care so um if it can be submitted i'm buying small multi-family if it can't then i'm just buying a single family and not a non-hoa neighborhoods are there any re have you found that sweet spot regarding the acquisition on on the price and the location and that for your residents yeah so moderate crime sub hundred thousand dollars three bedroom one or two baths under a thousand square feet that is a gold mine for section eight um especially if you have vinyl siding and a decent roof and a newer hvac you have years of maintenance free assuming you're screening the tenants correctly tenant you know headache-free issues there and then it's just ongoing is there a machine is there a uh a maximum that you can charge and rent on a on a monthly basis then so section 8 publishes what's called the fair market rent through their hud website so you can see what they will pay they do do waivers meaning if you find a tenant that can't find housing anywhere else they will pay above what that fair market rent is we've seen it happen before as high as like 15 over that um but it gives you a very good sense of what the market's like in that area so if you go into a market and you're seeing a ton of houses like an akron ohio for example you could buy a move-in ready three-bedroom two-bath or 60 grand in akron i mean you're picking up what uh 50 or 48 thousand dollar mortgage refinance you know 20 down that's going to be a 350 payment principal interest the tax insurance there or nothing and section 8 pays 1200 a month on it the cash flow is insane even with property management making vacancy our turnover is so low with section eight that we don't even calculate vacancy into our cash flow numbers it just doesn't it really happens and if we do get a vacancy the weight for section 8 to be on their program is two to three years you can call any housing authority in the country that you want right now doesn't matter what the county is and pretend that you want to get on section eight and they're going to tell you good luck jump in the line it's going to be three years before we can get to you so there's a never-ending demand of tenants on the program uh they don't turn over for that reason because where are they gonna go there's no other landlords scrambling to accept section eight right the demand is so high in the supply of properties is so low that i mean we we have units rented inside of two weeks every single time that's really interesting so you you essentially have a baked in constant flow of tenants i mean how yeah we don't market we don't no the flow is find the property close on the property get the address send it to section eight they will either advertise it through an email list to the existing tenants looking for housing or they'll put a list in the housing authority and that's it they contact you we have a funnel application funnel they go in get pre-screened pay their 49 application fee um and then from that point on it's just you know automated and then yeah how soon do you get somebody in then let's say you close on a property you get added like that whole process from to to getting edited from closing to tenant movements about three weeks if you do it right uh from the closing then you have let's say 10 days for finding 10 minutes screening tenants collecting security deposits scheduling inspection the only bottleneck there is inspections and how long how if they're backed up especially with cova we seem to take it you know ten to two weeks for that but once you pass the inspection then they can move in same day and then you're getting paid on the next billing cycle so if let's for example today is the 19th if we close on the property today found a tenant by november 1st you're getting your payment for that entire period on december 1st so just remind everybody if you want to learn more about this head over to free section i'm sorry section 8 webinar.com like i keep looking at my first line there it's a free section 8 webinar but it's just section 8 webinar use the number eight dot com uh for more information from tom and his team yeah you know you guys can also follow me on social media too that's t cruise nc if they want to contact me yeah you have a pretty big following on your socials yeah so uh tick tock is where i started um and that's teasing tom cruise c-r-u-z-n-c like north carolina and i'm also on instagram those are the two big platforms that i'm on and i'm answering dm's myself so if you guys have any questions about section 8 feel free to reach out so um you know it this almost sounds a little too good to be true like what are what are you what are some of the gotchas here yeah um the main thing is you have to be careful where you're buying a lot of people will fall into the trap of like oh it's cheap housing like let me go buy the first one that fits kind of the criteria but you have to watch out for crime rates just because people are in section 8 they still care where they live they don't want to live in you know a drug trafficking corridor they don't want to live where there's drive-bys so the gotcha is property selection and market selection if you're able to do that correctly then there's really nothing else um the process to get attended in there is the same as like a market rate tenant you know except you might want to do additional screening like i've described um and inspections if if you have a bunch of units like right now with us with 250 inspections that's 350 inspections per year granted they're obviously spread out pretty equally throughout the year but if you don't have systems or people in place or you know software place to handle that it can be just one more bottleneck in your in your in your pipeline but for the most part there's no real gotchas um don't be a slumlord if you don't fix the problems that the inspector tells you they will stop paying you until you fix them and if you don't fix them again they'll put it into an abatement process and then you have to go through like an entire thing with the inspector housing authority gets involved but if you take care of the property if the tenant is happy they will stay there forever i still have tenants that were there when i started real estate eight years ago or from my first you know property that i bought seven seven years ago for section eight so all of that plays into it you have low turnover you have higher than average market rents you have a ton of properties that fit the bill and these properties that are 70 grand they're not like quarter million properties where people are paying 30 40 50k over sticker or over asking for right it's um properties that are in areas that don't have the huge appreciation that you're seeing in more you know middle of the road housing um i mean guys if you don't believe me just go to realtor.com type in ohio and look up properties under a hundred thousand dollars that are not under contract and it will blow your mind what you can buy for that little money and section eight does not care what you pay for the property that's the that's the magical part you can literally pay 40 000 for the property if it is will pass their inspection and it conforms to their guidelines and it's a three bedroom or two bedroom or four bedroom then you're gonna get the rate that they're advertising so i i suppose during the whole pandemic and the covet thing i mean it probably had did it impact you at all i mean you're getting most of the money from the states or federal governments yeah we had the best driver in 2020 because it was the perfect store we continued to get all of our section 8 properties paid for so we never had any laps in debt service to any of our lenders or banks or or institutions that way and then everybody was looking for housing everybody was uh looking for properties we have already everything set up with contactless showings you know we have the doorbells that are the locks that you can go in and schedule for we already had everything in place so we were still showing units we were still renting units we're almost at 100 occupancy which has never happened ever i think we got up to 98 occupancy on 400 units uh during during the pandemic so uh we were buying units we were actively looking for units acquiring as much as we could because there's a lot of landlords that didn't have that set up imagine if you had four properties and you still have a full-time w-2 income and your four tenants lose their job and now you're stuck you know with five thousand dollars a month in debt service you can't swing it and there's no support for them so for months that happened we were buying properties not at fire sales not at 08 rates but we were getting good deals and that's because we hatched the bats in section 8. so it's pandemic proof recession proof future proof marketproof that's all the proofs well you you mentioned uh you know uh keyless entry and a few other things what other systems did you put in place to manage i mean the level that you're talking about you you was 400 properties um you're you're managing for 400 most of them are single-family homes correct um what type of systems or tips in place are do you have for people to try to manage to scale to this level yeah so i had my own software built out called cruise control um coincidentally and we use that to manage uh it's just my own software that i built in-house and it's designed for section eight so it splits invoices it you know integrates with these different platforms that allow you to do these um content showings um it you can get deposits to you know in order to give a key access all of that's part of it um i'm not selling the software it's just something that we use internally but there's a lot of other good ones out there i like indigo inn ago i'm not a partner of them but they can spot three if they want um and that's what we used from before and it worked really well i've used all the appfolios and buildiums and i think i think it's overrated i think it's not very good software honestly um and it's designed more for multi-family you know multiple property managers not investors that are looking to scale their portfolio sure well you know this is this is really interesting especially uh this aspect and and the focus yeah it's one of those examples again of what you focus on grows and and you really found you found a niche here and i have really built out the the the importance of processes i mean this is and that's really the only way to do it especially with the financing piece which we didn't really have time to talk about but being able to you know scale the financing aspect finding investors finding banks portfolio lenders finding hard money that's all goes into just another funnel that i set up to be able to continue acquiring um but yeah i mean if you can get that down and no one's talking about it section 8 is not the sexy airbnb it's on the sexy you know flips or the birds that everyone loves talking about but there's nothing better from a predictable predictable guaranteed and scalable way of growing a portfolio there's nothing better well i mean it goes back to what i mentioned before there's kind of a misconception you know you when you talk about section 8 you're you're you automatically go to the trailer park boys yeah and that's and that's the case the way you have to think about it though which is the way that this investor originally told me he's like section 8 is simply a payment method if you get two tenants and you don't know if they're on section 8 or not they're the exact same you know type of person that they're going to be going into the unit one person might be paying with a cashier's check or a credit card and the other person just happens to be using the federal government's wallet in order to pay you and when you look at it that way if you screen both tenants you'll instantly find out if they're going to be a good fit or not for your property so um the way that they pay us we don't care the fact that it's guaranteed and it's on the first of the month and we don't have any billing issues we don't have you know accounts receivable issues you know our property managers can focus on managing the properties and not chasing rents every month it works wonderfully sure well you know i really appreciate you giving us this time here today and chatting about this um again i want to direct everybody to section eight webinar dot com and i got it right that time section eight webinar.com for the free webinar on section 8. um before i let you go is there a question you wished i would have asked you here today uh probably just back to financing i think that would have been it like how did i finance that many deals i think a lot of um you know listeners are like oh great you bought your first house i can do that okay how did you buy your 10th house your 20th house so that could always be something for another uh podcast well i think we could we could if you have the time we could spend a little time on that right now how do you how did you scale to this level yeah so a big part of it was you have to be creative so my first 10 units that i bought were with fannie mae traditional fannie mae freddie mac financing um it was you know 20 down investment loan uh deals through fannie mae freddie mac federally backed loans uh they're conventional and every borrower they're limited to 10 10 10 finance loans right under fannie mae freddie mac so after i hit that cap i had to start looking for other alternatives so the next step up was portfolio loans i you know started looking for local banks that would do in-house loans credit unions for example that would say hey look you know we'll give you um in five units that's our maximum exposure we're okay with half a million dollars or five units whichever one comes first um so i'd say okay that's great that's really not enough because i was buying at this point i was buying 70 000 houses i was putting 20 down it's only 14 grand it took me maybe two months between wholesale deals and reinvestment in my cash flow to get to that point so i knew that i could buy like six to eight houses per year but if a bank was only letting me do three or four at a time i needed to be able to expand that so i went to every bank in my community and not the wells fargo's not the boas not all the big institutional lenders i was going to you know first south national bank you know those kind of there's one teller and one you know vice president there and they can make the decision and that's really helpful because a they're a lot more liberal with their with their financing they know the area they're only lending within maybe 100 miles of where you're at and getting an approval is a same-day process i bring my you know w-2 tax returns i bring the whatever income i was making for my marketing company and that i was paying myself for the w-2 and then i also had cash that i could bring in and create a deposit relationship with them banks like that of that size checking accounts are everything if you can say hey i'll throw ten thousand dollars in or five thousand dollars in and oh by the way all the rents that i collect every month i'll put into your checking accounts they love that so that's all part of um growing it and then obviously at some point i wanted to grow past the amount of down payments that i had so i think that happened around 20 or 30 units i wanted to be by signifying one or two at a time so i had to look at other people's money you know networking and i already had a pretty extensive like linkedin network i had you know local people that i'm a big car guy so i go to a lot of car events so i just started talking to people about real estate um i started i had posted a lot of this on instagram and facebook about what i was doing when i was buying these properties kind of my section journey up until this point and as everyone that's doing real estate knows when you talk to other people about real estate they already inherently know real estate's a good investment um they know that most people are you know millionaires from real estate or more millionaires are created from real estate than almost any other industry so when you go to them with a track record hey look i have 10 properties i've sectionated them i'm making 13 000 a month gross 6 000 of that is net income to me it's guaranteed and here's my last trailing 12 months profit loss balance sheet everything you need to see asking them for half a million dollars to go buy another 20 units is not a big stretch so that's what i did i essentially started building partnerships with other people in my area so i can continue buying it so you can actually google like tom cruise wilmington north carolina portfolio and i had the largest single family portfolio acquisition in my county in history in my county it was 100 units and we bought it for six million dollars uh most of them were empty or had you know just terrible tenants in them we cleaned house we you know fixed up a bunch of the units i reoccupied them two years later we sold it for 10 million dollars and that all came from forcing appreciation through section 8. most of the units were on section 8. the buyer was ecstatic i mean he almost didn't believe it he was asking for bank statement certifications he wanted you know cpa audited documents you wanted everything because he was like there's no way you have almost 100 tenants on section 8 paying you on the first of the month for months on end you know it's just it's when you look at most investors portfolio you have all these late fee charges you have eviction charges you have legal charge you have all this other stuff we didn't have that we had a stable portfolio mostly guaranteed rent and from that point on um i did a cash out refinance on those hundred units um sorry i know the hun those hundred units i sold there was another portfolio with 80 units i did a similar deal with my partner instead of selling it though i did a cash out refinance on it and i took that cash i bought him out because at the time we were buying properties at five five and a half percent interest rate and a couple years ago it dropped down to what three three and a half percent so once i did that cash out refi i was able to um keep my payment about the same keep a pull a bunch of cash out i bought him out and then i retained those 80 units myself and added to my portfolio so that's essentially the progression is over years of time i now have a relationship with six different banks because they would each say hey look i'll give you three here i'll give you five here i'll give you four here and then eventually i consolidated all those loans into one one bank with one commercial bank blanket loan and now i'm able to go back to any of those and you know hey look i i need a million dollars i'm trying to buy these 50 units you know can you can you work with me it's obviously a lot easier because they have more collateral to lean again so that was the financing aspect of of uh getting to 400 units in less than eight years yeah wow 400 units a lot of them that's a lot you know i i the reason that that it it perplexes me is frankly the only time i've seen anybody climb that many units so quickly are multi-family to to do single-family homes at this scale is is very impressive there's a lot of reasons for that um i don't like multi-family there wasn't much to buy locally so single family made more sense i like the liquidity of it i can easily go right now take 10 single family houses at 150k a pop sell them overnight i mean you know how fast it is um appreciation when you're on the dirt and the the those individual properties i just feel appreciate at a much higher rate than a big apartment complex i don't like dealing with on-site amenities i don't like dealing with a competition from other apartment complexes in town i don't like having to deal with tenant issues my property managers hate dealing with attendant issues living in that proximity section 8 homogenized like that if you have a 300 unit apartment complex and they're all on section 8 it becomes not the best living situation so there's a lot of reasons why i didn't go multifamily and i stuck to single family yeah no it sounds like it's really working well for you yeah again uh just a reminder uh section eight webinar.com i really appreciate your time here today tom this is a great conversation and hope uh you'll come back again sometime of course i really appreciate it thank you for having me on have you learned at least one actionable step to incorporate into your real estate investing if so please consider returning some of that value by leaving a positive review subscribing to our youtube channel or joining our growing network on facebook and twitter you can find links to all of our social media accounts in the show notes see you next time [Music]

Channel: REI Mastermind Network

Views: 21,363

Keywords: real estate, real estate investing, real estate wholesaling, fix and flip houses, fix and flip, fix and flip real estate investing, fix and flip houses for beginners, brrr, rental property investing, rental property, how to invest in real estate, investing, mindset, leadership, real estate investing with no money, real estate investing for beginners, real estate investing strategies, real estate investing step by step, wholesale real estate, wholesaling, wholesaling houses, turnkey

Id: LgF3RiQwp-A

Length: 32min 13sec (1933 seconds)

Published: Thu Feb 03 2022