The Section 8 BRRRR Strategy That Beats Regular Rentals

this is the bigger pockets podcast show 5.75 this part in my opinion is gonna make or break the burr okay your decision uh on who you select uh because if you make a mistake here all those calculations the roi cash on cash for their return and so on all those comes to zero if you don't have a 10 it's gonna pay you uh if you don't have a tenant who's gonna take care if you have a tenant who's gonna trash your property destroy your property not pay you give you drama and you have that revolving door where they stay for a year and then they're gone and so all your calculations goes to naught okay if you don't if you don't do this part well what's going on everyone it is david green your host of the bigger pockets real estate podcast here today with a phenomenal episode with our returning guest joe assama now joe is a section 8 expert so if this is your first time listening to bigger pockets i just want to let you know you're in the right place this is the show where you can come to learn how to find financial freedom through real estate we do that by bringing on different guests highlighting different topics and explaining different strategies from people that have done this well so you can learn from them and achieve the same success that they have today's guest dr joe is a repeat guest and he's going to be explaining the specifics of a property that he bought rehabbed rent it out refinance and is now in the process of repeating but he's doing this specifically with section 8 tenants he gets rent that's guaranteed he can have his pick of the litter when he wants to choose who he wants to rent to he gets to make the strategy work in an appreciating market instead of chasing after cash flow in somewhat sketchy markets it's a great story it's a great strategy and we are excited to bring it to you today all right today's quick tip take a notice that we have done things a little bit differently on the podcast here we are trying to bring you as much detailed information as possible i'd love it if you'd go on youtube and leave us comments to let us know what you think about what we're doing in particular we recently did a show with andrew cushman who's my multi-family investing partner now andrew and i break down our system for how we identify screen do our due diligence on and then close on multi-family property and we give you the exact steps that we have put in place to pick the right ones and then we actually just put one in contract very recently like not too long after the show happened using the same system so go there if you would like to learn exactly what multi-family investors do you'll get a ton of information similar to what you get if you paid at a boot camp but without having to pay and then rob abasolo and i do the same thing we have episodes coming out about how we identify do the due diligence on and lock down short-term rentals we break it into the exact steps that we're taking how we choose the location what type of property we're going to go after what type of financing we're going to get all the way down to the rhythm of our meetings and what we talk about in those meetings to make sure that we stay on track i'm trying to bring you guys into my world and show you how i do work with my partner specifically so that you can benefit from it so please let us know if you like this type of content if you appreciate it and if you'd like to see more of it here with me today to take down this awesome interview is my good friend and co-host rob abasolo rob how's it going howdy man i'm excited i'm really excited about this interview for a very specific reason i think what i really have always appreciated about bigger pockets and just the real estate community is how people attack the same problem differently and everyone has so many different creative solutions to everything that's definitely definitely encapsulated by joe and the way he really took on this renovation i mean a complete glow up i i don't know if we're gonna really talk through the befores but i got a sneak peek of the befores of the transformation that we're talking here and it's a night and day difference i mean he really really changed every aspect of this house in a way that not only makes it look beautiful not only does it increase cash flows but it also brings tenants that stay for a very very long time he kind of discussed a 25-year tenant and that i mean that is for me that's unheard of if you just did the numbers on how much money you save having one tenant for 25 years like if you figure every two years you have a turn you have vacancy you have repairs that have to be made like that's probably i gotta be thinking like fifty to a hundred thousand dollars that he's probably saving with this strategy and no one really thinks like that but here on the biggerpockets podcast we bring it to you rob any last words before we bring in dr joe yes pay special attention to you know what he did to actually transform this which is a whole basement renovation and it really just drives home the point that when you're a real estate investor it's very important to see a property for what it is and what it isn't and joe really just you know he took this space and he really made it his own and uh man i'm i'm proud of him man no i'm just kidding no it's it's really great it's very inspiring so a lot a lot of lessons to be learned today oh one last thing if you're listening to this and you're listening on the podcast not on the youtube if you can if it's safe not if you're driving look us up on youtube and watch this episode there we have some really good before and after pictures of the rehab that was done and if you see the before pictures you sort of get into joe's head as what he saw when he looked at the property that made him think this is the one i want to buy and that's what we really are trying to do today is we're trying to get you into the head of our guests looking from their perspective so that when you're looking at properties you know what to look for so go follow us on youtube watch the video there if possible if not check it out when you get home dr joe welcome back to the bigger pockets podcast how are you today happy fantastic good day thanks a lot rob i'm amongst geniuses here this is my joke inside joke y'all had to be there before it's all good yeah i made i made a comment about how because uh joe osmond here is a doctor that everybody tries to talk smarter than they really are when they're in the presence of a doctor and i was asking him like if everywhere you go at every cocktail party people just try to use seven syllables when one or two would have done in the word and so we were jumping into that now dr joe here is so popular we brought him back for a third episode if you want to be caught up to speed on the story of joe asama you can check out episodes 356 and 498. now dr joe you are known as a sort of section a specialist i don't know if you consider yourself that but that's how the bp community sees you you're probably the biggest name here when it comes to why rent out section 8. in episode 498 we had a deal that you bought and you were in the middle of rehabbing it i believe you had the rough-in that was finished and so like none of the finishing work was done but now it's done and we're actually going to dive in really deep today on this particular property and how this strategy works so if you don't mind could you give us a like a brief rundown of how you bought this property um how you found it and then what your vision was for what you wanted to make of it sure yes uh welcome everybody and uh essentially the strategy is as follows i try to buy c or d properties in b neighborhoods and rent a tenants you got it see it and uh so that's the gist of it all is that you you kind of buy houses that's uh in a bad condition or something's wrong with the house in a good neighborhood and you rent to the top tier tenants that you can find okay so uh in this particular case uh this is a house instead of the b neighborhood in washington dc and uh there was something wrong with the house it was uh pretty okay but yeah pretty not great with the greatest condition it's a three bedroom one bath house okay and i bought it for 555 000 that's just over half a million dollars and that's in dc area that's the way it is uh in other areas may be higher but this is an expensive market here anyway i bought this house at 555 there's a three bedroom one bath at three bedrooms the house would not cash flow and therefore the only way i can get cash flow because uh it's you know it's so expensive is to increase the rent and that's the beauty of section eight is that section that if you add more bedrooms you get a higher rent and so the only way the numbers could work here was to add two extra bedrooms to make it from a three bedroom to a five bedroom and to turn the drent from thirty seven hundred to fifty four hundred dollars okay so at fifty four hundred i can cash flow at 37 i'm breaking even okay so that's the gist of the the section eight strategy is how do you turn a non-performing asset into an appreciating cash flowing asset and so that's what we're doing here that's so in part one uh i pretty much talked through the design uh where i did the two bedrooms which is in the basement and i had another bathroom in the basement and uh we done the house was permitted so we had uh the roughing we did the the roughing plumbing the hvac the electrical you know and sort of the framing all that stuff was done as part uh the first uh what's it called uh session and we had left it whereby the house was ready for roughing inspection so we're gonna get the first line of inspections we called in the city and the city inspectors came over and that's where we left it awesome well you kind of briefly cover this uh at the beginning with some of the numbers but just to take a step back can you refresh us what did you purchase this for how much did renovations come out for what what is it worth now before we jump okay just to give us a little bit so i bought it for 5.55 it was listed at 6.75 this is a listed property okay so everyone i know people say you can't get deals on the mls and so forth it's the same here in washington dc you can't find a deal anywhere this was listed as 675 okay and i was able to negotiate it down to 555 okay this is in the b neighborhood and uh so the deals are out there you just have to create them you have to have relationships and you have to be able to differentiate yourself from other people in fact the seller had another offer at 585 and they chose mine even though mine was lower okay so it's 555 is what i purchased it for the original estimate for the rehab was 175 000 that's what i estimated going in here i'll have to spend about 175 000 new kitchen new bathrooms new bedrooms in the basement and uh pretty much uh redo the house new systems and uh so that's uh the initial as is going in estimates and uh i'm looking forward to reveal how inaccurate i was uh but the but what was the surprise though because the market's so uh so hot i'm sure it's everything everywhere i was expecting an arv of about 8.50 we had the appraisal coming at 900 000. so the appraisal came in higher than what i had estimated and even since then how's on the same block and now go from nine twenty five nine fifty thousand i feel like that doesn't happen as as often as i'd like it to but i'm always super jealous when i see a arv come in higher than expected i'm sure david can probably relate to that given where he is that's a very good point in the burbook one of the things i talk about because what you're describing is what you want the after repair value to be because that's what the amount that you can borrow against the property will be based on but what i like about what you're doing joe is you're not only looking at the value of the property arv you're actually looking at the rents after it's been finished so you saw this as a three-bedroom property it would rent as a certain amount on section eight which would not be enough to cover your mortgage or at least make a profit so other people would just move on from the property and say it doesn't work but you said like you said i have to create a deal or make a deal you realize if i could add two bedrooms to this i could bump the rent up like can you give me a rough idea of what the bump would be from three bedroom to five bedroom it's almost eighteen hundred dollars there you go that could be a difference in making it cash flow and cash flow in a healthy way so you figured out hey i can add two bedrooms in the basement and then it's gonna go for this much and then the value of it's going to be even higher because i fixed it up and the arv went up from what i thought now what a deal it would be that everyone else passed up on looks really good for you and that's what we're going to highlight is kind of getting in your head and seeing it from your goggles so other people when they're looking at properties can see something similar so if you don't mind rob's got some pictures here if you guys are not listening to this on youtube consider checking out and watching today's show on our youtube channel so that you can see the before and after pictures that we're going to be showing of what was done to this property and how value is added i saw the before pictures here and honestly i was very stunned at what you were able to do with the place it's amazing it's so the curb appeal really is unparalleled i think for for what what it looked like before so can you talk us through a little bit of the transformation that you did on the exterior here and you know for those listening at home again it is going to be on youtube but joe if you wouldn't mind just giving us a little bit more color in the description here for those listening on the podcast yes so we have a particular color scheme i use for most of my houses it's modern it's very attractive and uh it gives that first impressions when you're walking down the block so you're walking down the street all the houses look okay and then you see this house it sparkles it's modern it's sort of inviting and uh and so that's what i want to do is to make sure that at least from the street level uh it looks great it looks engaging and then it's going to attract people to to want to go inside the landscaping looks pretty decent and not a whole lot spent on the landscaping it's just um in this house i did put a front porch uh if you look on the before there was no front porch and in the final there is a front porch there as well so the idea is that uh it's appealing but the important thing i do want to stress is that i'm looking for somebody who's going to go in here and stay here a long time okay 5 10 15 20 years okay that's my end game here and uh so i look at the neighborhood as well the the street the uh the area uh the access uh you know proximity to schools transportation recreation although those things these are things which i look for in addition to the numbers as well it's really amazing what a coat of paint can do to a house because before it was kind of a red sort of color and then you went in and changed it to this gray color it kind of looks like it was the original look of the house whenever it was first built that is a popular sort of modern color scheme around here and it's it's very inviting it's got it pops the door is what we call the blue inked door it pops and so we have three color schemes on the exterior also i do want to add though what we did here is quite creative um you may not be able to see on this one we i'm thinking ahead that in the future uh if i do sell decide to sell this house it's gonna be an expensive area and therefore whoever buys this house will probably want to implement the house hack strategy okay they're probably bigger pockets uh used and so we did create an entrance on the front okay so if they wanted to rent this the basement as a separate unit he'll have his own entrance on the front also have his exit on the in the back as well in the basement and therefore the family or whoever buys this house could live upstairs and have a self-contained unit downstairs so that's another strategy that we implemented here i was kind of looking ahead and said okay since we're going to renovate the house anyway uh what can we do here to differentiate this house if i decide i want to sell in the future to a possible buyer and if we can inform them that they could use the basement as a separate income dwelling unit then it sort of makes it more attractive as well yeah awesome so take us inside the house because you know you really did knock it out of the park or the exterior but you know looking through the photos here the inside has actually gone through quite the the glow up for the transformation itself yeah the uh the first thing you'll notice when you come in is uh it's an open plan concept uh probably the first thing you'll see is that you see furniture there and uh you probably say what what is this i've never seen a rental where where there's furniture there and uh again um the idea is that i want to differentiate my house from competition i'm trying to get a quality tenant a tenants okay and so the a quality tenants have choices they can go to dave's house they go to your house rob and they can go to my house i'm trying to differentiate my house from yours and days okay so i try to stage my home and such that it makes it very very appealing when they walk through that front door so what you can see here is an open plan concept whereby um you know the walls that were in the original have been taken out we relocated the uh the kitchen from its original place to a new place right sort of towards the center and we have you know a very very inviting space and we have vinyl flooring as you can see we have a very nice kitchen we have granite countertops um stainless steel appliances it's a very it's a nice home um for a voucher holder this is unbelievable okay this is something that never in their wildest dreams would they ever feel that they'll get an opportunity to live in this neighborhood in this type of home and the a type tenant this is a dream come true for them and this is if they don't get this house they'll never see something like this again so uh you know i hope this is making sense now for a new investor they don't have to go through all of this okay this is a bit more advanced but what i'm trying to do here is to make my place inviting such that i can attract the quality tenant i'm desiring yeah because i mean staging isn't particularly a small cost i mean i i know a lot of realtors that some stage their houses when they're selling it some don't and there is a an immediate roi for something like that right if you stage a home and you get a lot more offers you can get into bidding wars it can be more money that's captured from the sale of the property it's not really something that's done very often with long-term rentals in general right no i think i'm the only one i know of who does this um again uh it it it i've done the calculation it makes sense for me i'm not getting whoever moves into this house the tenant that moved in her intent is to be here for 15 years okay so i'm not going to stage this house again for another 15 years so if you sort of uh amortize that cost uh it's it's it's insignificant uh so to me it's it's it's money well spent to attract the type of tenant i'm looking for okay as i said before i've been through this so many times so many markets where we are all vying for this top tier tenant the tenant who's gonna pay their rent the tenant who's gonna take care of the home the tenant that's not gonna give you any drama and the tenant that's looking for a long place to stay for a long time we're all vying for that person okay and there's nothing worse and i've been through this before whereby you got a house and you don't get that many applications and now you've got to sort of pick between okay versus okay but i need to pay my mortgage and uh i don't want to get into that situation i want to have multiple choices uh multiple applicants so that's why i do this it pays itself off over time yeah so i i also wanted to talk a little bit about the rehab here i mean obviously this is really nice it's a sparkling listing you knocked it out of the park it feels very homey um the journey to get here i gotta imagine was probably you know pretty long and strenuous is my guess so can you tell us about any of the problem areas that might have occurred you know during the rehab is there anything that that was kind of a thorn in your side or anything that didn't go according to play well first of all you know this is a fully permitted house so it took a bit longer to get the permits from the city um you know it's because normally it takes a you know a few weeks but it took us a lot longer it took over almost five weeks to get the permits through so that was the first setback uh the second thing was that you know in terms of after we did the renovations uh some of the walls that we thought uh you know we call this salvage uh we could not so we had to do some additional repair costs there the price of lumber went up um you know so that sort of blew some of the the the renovation cost out the window and uh but the important thing is that we had good contractors and we're able to manage that process so the you know the key i think is that if you're doing a project like this you want to make sure that you manage the relationship with your contract because there's so many moving parts here and uh and so i usually meet with my contractors every week we discuss what's going on with the project any issues that's going on any problems that we're encountering and solutions okay we meet in my home uh we provide food we provide lunch but the idea is to build trust build a relationship such that the project can keep moving and i think that's been really the key to the success of this project and that's probably something which i would recommend for all the bigger pockets community is take time to screen your uh potential contractor develop a good scope of work which documents exactly what it is that you want to do get several quotes as you can and uh and try to work with that contractor from start to finish if you have a problem try and work it out if obviously if you can't work it out then you have to move on and maybe get somebody else but the key to my success on this project was having good contractors and working at relationships and therefore as we went into problems we're able to reduce those problems and keep moving forward so joe as we wrap up the rehab part of this project i know that one of the heavier parts of that rehab was the basement you know that's a very scary thing to take on especially when you look at the before photos there's vents and air ducts and furnaces and all that kind of stuff down there so tell us a little bit about the process that goes into that some of the pain points and maybe some of the requirements that are needed to actually put bedrooms down in a basement sure good question i mean there are legal requirements for a bedroom in the basement and there are essentially four of them uh so when i first go into a house for the first time i'm thinking through my head can this basement uh meet those requirements and there are four are as follows one is the height it's got to have uh at least seven feet height okay from the floor to the ceiling that's number one so if it's six and a half feet then you can't make it into a basement bedroom unless you dig okay an extra half a foot you follow me so you gotta have a certain height that's number one number two is that it's got to have what we call egress windows it's got to have two egresses uh egress is a way to get in in a way to get out in the event of an emergency so it has to be two forms typically it's the um there's a window as you can see here there's a window here that's a form of egress that's not just any old window that is what we call an egress window so it allows somebody to get out uh from that basement in the event there's a fire that's closing that front door if you see the door on the side there that's the second form of egress so there are two egresses into this bedroom one to get in through that front door and if that door is blocked for whatever reason then they can escape through that window so that's the second form the third form is that it's got to have a closet a place where you can store your clothes and uh and so on so we always put a closet in the bedroom like here there's a door here to the closet and uh and the third thing the fourth thing is that it's got to have electrical outlets at least two electrical outlets so they're the four requirements for a bedroom it's also got to have a minimum of 70 square feet okay so you can't have the closet there and say that's the bedroom because it's less than 70 square feet so the bedroom has to have a minimum of 70 square feet so they're the requirements for a code and uh so once you know that you can plan that as part of the process a part that's part plan that's part of the renovations so this is really good so let's say you're you're looking at a property you're walking it with your realtor you go oh look at this basement and this is where like all of us rob me everyone we start picturing in our head we turn into like this like automatic architecture program we're like the bedroom would go there where's the plumbing okay there's the plumbing how would i run it to a bathroom and what you're telling me is there's four things you're looking for as far as section 8 regulations to be considered a bedroom minimum of 70 square feet has to have a closet two electrical outlets and then there needs to be a way to get two ways to get out of the basement a window and a door out now does every bedroom need to have a window or just two for the area no every bedroom has to have two forms of egress okay now the the other thing is that again it's just for code if there's a fire and uh you know the the door to the room is blocked yeah then what okay so uh you've got to have a second form of exit from there and and and this is the tricky part for some people in certain areas it's an egress window means that it's got to be big enough whereby somebody can get out yes sometimes these windows in the basements are real small okay uh so it's not big enough so that technically is not an egress window so in order to make it a legal bedroom people advertise as bedrooms all the time but i'm just saying legally technically it's supposed to be a certain minimum size i just ran into this problem myself on a deal that i'm doing where the property has a big covered patio and i was going to enclose that and make it into a living space to have it to have its own little unit it already had the bedrooms the problem is that enclosing the patio would block the window of one of the bedrooms so i wasn't able to do it because i didn't know these that that of the four so this is very valuable information and and believe it or not those of us that are experienced real estate investors still make mistakes and still have to learn the hard way sometimes for all the little nuances that are involved in this i'm shocked david i thought you'd never make mistakes hey we learned the hard way so everyone at home can learn the easy way that's exactly right it's not that i'm dumb it's that i will care so much about our listeners that i wanted them to learn from my mistakes they wouldn't have to thank you for you at home not my ignorance but my benevolence that made that mistake right but also the other thing is that if you have to we have two bedrooms in this basement so we also put a bathroom in the basement uh because before there was only one bathroom upstairs so i mean in the 1930s 1920s when this house was built it was okay to be in the basement go all the way to the top floor to go to the bathroom but in 2021 2022 people expect not to go to two two flights of stairs to go to the bathroom so we put another bathroom on the basement as well well i'm sure that had to do with increasing your arv also that's good to highlight right if you can add the bathroom in the area where people are the appraisers know that that makes the house worth more yes yes and as i said on this particular basement we made another exit as well in the front so that way in the event we decide to sell this house whoever buys it can uh use the basement as a separate unit that's right right the house the house hack right yes yes it's all the rage right now um so can you break it down for us a little bit joe on the the largest cost that was spent on this was it the basement or was it the main level like where where did most of your funds go into this project it was kind of uh the basement required a new bathroom and whenever you add a bathroom in the basement you're going to have to break the floor and run new pipes okay because all the all the plumbing systems ultimately get down to the basement and they then connect to the main city services so if you're putting the bedroom sorry a bathroom in the basement you have to take that bathroom wherever it is and connect it to the existing plumbing system which means that you have to break the floor you have to connect to that so that can be a little bit expensive uh and this house this is the washington dc house i think this house was built in 1905 okay so it's pretty old so we decided we wanted to replace the electrical uh we wanted to replace the plumbing and we also replaced the heating system from a radiator to a central air so systems were the most expensive part new electrical new plumbing new uh hvac and uh and then obviously putting bathrooms i was a little bit expensive and so on so it kind of again i made a cons i made a decision to spend the money now i have great contractors uh they know how to do all these things they have a technical know how to do this do i spend it now or do i just do the day and minimum to get through and then deal with it later on i just made a business decision that i rather uh spend a little bit more money now uh and that way i don't have to worry about in the future i think it's the right move i really do a lot of people do get go into these you know into projects i see it all the time where they want to you know do half of it now and then they're like i'll do more of it later and you know maybe i'll do it in six months or a year and what they don't realize is once there are attendance in place it's a lot harder to go in and do any kind of rehab and with you joe i mean with your portfolio and with how you're scaling up and how successful you've been the more time that passes the more valuable your time becomes and so by putting this off another six months you're burdening future joe with something that you could just deal with now with a little bit more effort yeah i think so as well it just makes more sense uh to just do it now given that we'd spend a little bit more because technically the money is made in the bedrooms okay i don't get any more money by making a nice kitchen i don't get any more rent by having a nice bathroom i only get the extra rent because of the bedrooms okay uh but since we're gonna do this work now i'd rather just do it now and be done with it there's a lot of wisdom with what was just said with your bed you're you're taking the burden off of future joe in fact most people i think don't understand that if they like things about their life right now it's probably because of decisions that they made three to five years ago right maybe two to three years ago if there's things that they don't like about their life it's usually because of decisions that you already made and this is the consequence right and it's that always trying to make one decision to get out of the thing we don't like that causes problems and so i just want to highlight that rob you said something incredibly wise right there the cost of doing this rehab will be more in the future than it is right now with the way inflation's going the difficulty of it will be way harder when there's a tenant in there you're gonna have to go find another contractor who's going to do a small job who doesn't want to do that versus the contractor you already have on the site doing a big job and you're just adding this onto it everything about it makes more sense to do it right now and then joe's life will be better in the future i'm just my mind's racing to all the things that i'm like oh i don't like this part about my life and i'm like well that's because two years ago i started doing the wrong thing and now i'm stuck with it right now but to future david doesn't have to live like that if i make decisions differently so thank you both for sharing that yeah we gotta we gotta watch out for future us you know this is the most important version of us the future rob [Laughter] okay yeah it's you know it's just it's just easier to do it that way just do it now your capital expenses uh are done you don't get many calls from the tenants you know the plumbing is bad or something's wrong with this and so you don't have those issues because everything is new and um you get high customer satisfaction they tend to be happier with the property which means that they stay longer higher arv also when you go to do the refinance yes higher arv and high you know higher quality tenants happier tenants in the long run yes which i think is probably going to be i mean that's obviously your strategies so can you tell us a little bit now walks through the the rent part of the borough here right the the actual getting the tenants the selection right marketing to your tenants and obviously staging is a really big component of that but can you tell us a little bit about your process on that too sure yeah so at this point the renovation is done the house is staged and it's looking good okay so the first thing i've got to do now is transition to the rent stage which i've got to go and find a tenant okay i have to advertise i got to market so i uh start off with taking professional quality photographs and videos like similar to what you just seen here and make sure that uh you know they reflect the the property i usually contact the housing authority because i like to rent to vouchers holders and ask them where do they tend to send their voucher holders to look for properties okay it could be abc it could be zillow it could be go section a it could be craigslist whatever i want to know where they tend to send people i want to make sure i advertise there okay and i advertise everywhere else what i'm finding is for some reason zillow is uh it's very good uh i get a lot of success so i advertise in the key places where i know my client base is likely to look that's number one i've got great uh descriptions of the property i focus on all those emotional uh you know language which appeals to the kind of tenant i'm looking for i always say section 8 welcome i always say if you are looking for a a great landlord you have found him or her uh i always try to a great tenant who's looking for a quality house in a quality area where they're renting for a quality landlord then look no further mr wonderful you're looking at him and so that's the that's the adverts okay so it's the marketing uh again i'm trying to differentiate myself from uh from my competition and the competition is out there and uh and so on so the the advertising is good and then at some point uh people will call and i have an assistant that takes the calls okay and she does the initial pre-screening to make sure that uh you know the person is qualified in terms of the voucher side in terms of the rent and that's all those basic questions that people ask where is it um how many bedrooms do you have uh you know what school is it nearby you know blah blah blah all those questions my assistant uh takes those and then we schedule what we call open houses uh we are in covid uh so it's kind of changed a little bit but i do open houses versus what some other uh management companies or some other landlords do which is they do everything virtually uh you know um they essentially you can fill an application online you can go to the house online uh you know physically to the property you know whatever they want to do and uh and so on they don't need to see the actual tenant um i'm of the opinion that's okay but i like to showcase the house answer any questions uh get to uh answer any you know any issues that the the tenants may have explain the qualities of the house and also showcase to them who i am what kind of person i am and uh you know what kind of landlord i'm going to be uh and what separates me from my uh competition i tell them that um you know many of my tenants stay for five ten fifteen my longest tenant is 25 years now um yes i have i regularly have 17 18 20 year tenants uh and to a a person who's used to living in a bad house in a bad area with bad landlords uh that is music to their ears and that's something stability that they're craving for and i like to be able to explain that to them um up front and again differentiate myself and then i then if they like the house i have to see in the house and i give them an application form i have an eight page application uh it's very detailed it's very intimidating it asks a lot of questions about the individuals and uh once they complete the application and then i will then start the screening process which is a whole nother discussion which i'll go through in a second so i i think the there there seems to be a few schools of thought here and you know some people are sort of the faceless landlord i really respect that you want to get in there get your elbows uh dirty and is that the phrase i don't know it's the phrase right now get in there roll your sleeves up and actually meet your tenants so how is that really panned out i mean do you have a pretty good rapport with all of your tenants and do you feel like actually meeting them face to face and being there from the start has really drastically improved you know the the vacancy of your different units well here's here's the key key this part in my opinion is going to make or break the bur okay your decision uh on who you select uh because if you make a mistake here all those calculations the roi cash on cash return and so on all those comes to zero if you don't have a tenant it's going to pay you uh if you don't have a tenant who's going to take care if you have a tenant who's going to trash your property destroy your property not pay you give you drama and you have that revolving door where they stay for a year and then they're gone and so all your calculations goes to naught okay if you don't if you don't do this part well and that's why i play uh place a lot of attention into the screening and selection because it's been the key to my success uh some people are saying 25 years 18 years what is you lying no it's not lying it's it's a strategy okay it's understanding who your customer is what they're looking for and taking the time to screen for that and that's essentially where i i put a lot of it i go to this this is the part which i i do the actual uh showings and i take the applications and i have an assistant that does the initial screening and we check for things like landlords references current landlord previous landlord oh first of all we checked for the id um when somebody comes in i mean let's just say for instance you rob you show up at the house i don't know who you are you could be you could be dave uh and you could fill the application as dave i wouldn't know and uh and so you're pretending to be dave when in fact you're rob and you know and if i don't ask for your id uh because that's nothing if i asked your id that usually catches people in that game uh you may say rob is dave is your landlord when in fact he's not there's a lot of things that tenants do uh to try and get over uh i'm not saying all tenants do that i'm not saying some tenants do that i'm just saying that's what happens and i've been through those experiences before and and so i placed a lot of attention on the screening process to make sure that we contact the current landlords previous landlords we do the background searches we do the credit checks but not just the credit check but also the eviction databases i found that some quality tenants well just call them professional tenants they pay their rent on time sorry they pay their car note and their credit cards and so when you do a credit check everything looks good but the reason why their credit is good is because they're not paying their rent and most landlords check the credit and but they don't report to the credit bureaus so uh so although you may have a good credit score you may not necessarily be paying your rent that's where the evictions database searches come in because that's uh yeah so so it's very intense in terms of the screening process and then finally i do make an appointment to go visit their home um that's pretty controversial i get it but uh it's something which is the key uh to uh to find out how your house is going to be in three months is to go to their home and you may think that why would they give you that opportunity to go their home they will do that because i have a product as you can see that is very unique is in high demand is low supply so it's a pretty thorough application screening process um an eight-page application that's uh that's that's the lengthy i mean that definitely would weed out a lot of people i'm sure but you know you you have the proof here right with the 25-year tenant dave david how long have you what's your longest tenant i'm kind of curious that you've ever had is it close to 25 years i don't know definitely not that but my property manager would know better than me i don't i don't keep track of that what i wanted to ask you joe would be how many tenants would you expect to go through this process with before you found the right one okay in this particular house we had uh this is covet okay in a space of a week we had eight applications applications now uh not showings uh uh not uh calls but applications people who went through this ritual which i've just described and decided to put their money down for an application so we had eight applications and then we started the screening and it came down to three five fell by the wayside uh as part of that screening process i visited three homes and selected the family uh as a result of that so i started off with a lot of applications and ended up with a funnel and whereby some fell by the wayside and i got the best one at the end now when it comes to the renting or the refinancing what are some problems that you've encountered as you've been trying to do this that maybe you didn't expect that you can give us a heads up to look out for the renting and the refinancing um on the renting side i mean people lie and you know donald always the truth uh they try to i mean they want the house and they'll do what they got to do to get it as much as possible and that's the reason why the screening process is thorough is to weed out those folks and uh so that's also is people lie on the refinance side um is several uh the arv in this house was uh was higher than i expected so it wasn't an issue but it could be an issue for when i first started out i didn't understand the concept of seasoning okay when you do these birds uh season is when you buy a house and there's a there's a time this a time lag between uh when you are on title to when you can refinance again and uh you know the particular lender i went to go through they don't have those seasoning requirements other lenders will have three months six months 12 months which means that now you've got to hold on to this asset until you're able to refinance that's uh that's one thing which i've learned the other thing is that uh the appraisal i mean the the refinance is when everything comes to play okay you've done you've found the house you've renovated the house you found the tenant all rows leads to this uh point where you're trying to recoup your money okay this is where you're going to realize that your business was actually uh successful or not so the appraisal may go under value um you know i've had that so now what what do you do now uh you know i have a strategy for that sort of uh make sure that i document before the appraisal comes the improvements that were made to the house i showed the before and after okay and i have some comps which i put on a nicely three leaf binder and have it available for the appraiser when they come therefore uh it again it differentiates me from other investors it tells this appraiser that this guy knows what he's doing uh it sort of uh lets them know that yes you know this guy is different so that's what i do in terms of so that's the appraisal side uh it could go under value and if you does then you're going to have to decide what do i do do i need to keep more money in the house or do i need to get a partner or something or maybe go to plan b in terms of exit strategy what about you rob you have any issues in those two areas that you can enlighten us with in the on the appraisal side of things no just when it comes to getting the tenant or doing the refinances things that went wrong like joe i think that's a really good point that not every lender is the same some have seasoning requirements of six months some have no seasoning requirements and that never gets brought up because the only question most people ask is what's my interest rate or maybe what are my closing costs they don't look at the big picture so that's a really smart thing to ask is like well how long would i have to wait before i refinance it do you have anything like that rob that you could share yeah i do i do yeah i always tend to dig myself in a hole because i always like to build like weird random things like tree houses or tiny houses or anything and so for me uh it's kind of self-inflicted pain here where i'll go out and build a tiny house and try to go and do a refinance on it and then my appraiser will say hey uh there are no comps for this and i actually had to go back and forth with my bank and say listen here's what it was built for um here's what the appraiser said so the appraiser came back and actually gave me a really good arv on it i think they they appraised it at 276 thousand dollars i had built it for 165 000 and then the bank was like yeah we don't we don't really buy we don't buy that a 300 square foot tiny house is worth that so they made a second appraiser come out and they appraise it at like 175 000 and i was like no no we're not going to do this we're going to send one more appraiser out which i'm really honestly to this day surprised that they even listened to me because most of the time the lenders do you know they kind of dictate everything but i really fought for this i needed this right and when you need something you make it happen and you know i was like let's get one more out there one more and they were like okay fine if you shut up and then they did send out a third appraiser and did a praise to the dollar that i needed it to to get all of my money back so i can't say for certain that that will always work because i do always fight my appraisals when they come back i'm typically unsuccessful but now having some success i will always be the squeaky wheel right i will always fight for for what i think a property is worth i went to a scenario whereby um this is when i flipped to home i bought it you know rehabbed it and sold it uh well had the appraiser come in and the appraiser we agreed with the seller you know what the price was and the appraiser came in lower and uh so now what uh the seller the buyer didn't want to cough up the difference and uh so it was on me so what i learned from that is that i don't want the appraisal process to be crossing my fingers and hope for the best hopefully i get a nice appraiser so sometimes what i do is i i have my own appraiser come in beforehand and give me an appraisal and therefore i have appraisal and i put in my back pocket i don't use it only when necessary because sometimes when you try to contest an appraisal an appraiser may not buy into the comps but if they see another appraiser another appraiser from a peer then they may consider that it's almost like a doctor you go to a doctor and you want a second opinion you go to a nurse another doctor is not going to think highly of the recommendation of a nurse however if they get another recommendation from another doctor there is the same peer level and therefore they may consider that so that's why i sometimes do is have a secondary appraisal just in case i need it uh and i want to contest an appraisal that was done by uh the buyer and things like that rob's that guy that will build a uh like a gymnastic park for squirrels in his backyard and then go to the appraiser be like you don't understand this is worth 50 000 that's exactly how you get yourself in the mess i'm always like excuse me sir put my life savings into this yeah look at there's nothing like this in the world like the way that these squirrels can run around in the backyard it's worth a lot but you'll get people that say hey david if i add an adu how much will that add to the value of my house if i put in crown molding how much will that add to the value of my house the sellers are always looking at it from that perspective and the the piece to take away from this is it depends on what the other house is around that have those assets are worth the appraisers need data and if data does not exist then it might not be worth anything you might spend 150 000 on an adu that they give no value to because no other houses have adus and they don't know if it matters or if you're in like san francisco and they know man a house with an adu is worth a lot more because there's so much demand here you might spend 150 000 and they give you 400 000 of value for that thing so i think that's very wise like to send your own appraiser in or to talk to an appraiser independently and say hey if you were looking at this home what are some things that you would look at and maybe work with your contractor based on that information i mean because yeah at the end of the day it's a pretty small expense right five to seven hundred bucks to have a pretty educated opinion on what the final project outcome is going to be so i guess actually that's a pretty good segue here joe we kind of understand some of the initial numbers but can you just take us through here where everything netted out so i think you said arv was around 900 000. so correct me if i'm wrong but i kind of curious about that and then cash flow what is the property like this cash flow for you now and okay some of those details so after the tenant was in uh then started the refinance process and i was able to document income and therefore that will allow for the refinance so i did the refinance uh got a local lender a local commercial lender this was bought in my entity it wasn't my personal name so i refinanced it in my entity as well so we got a local commercial lender as opposed to the fannie mae lender we're able to get an interest rate four percent wow uh it's uh yeah it's a commercial loan uh i think you know it's a uh four percent uh it is what it is yeah you do pay a little bit more for commercial loans versus resolution that's pretty good on a commercial loan on investment property that's that's not bad at all yeah i'll take that any day a lot okay three thousand five people all right hang on rates have gone up joe and you got three and a half percent on a conventional loan most likely is probably fannie mae freddie mac which meant you got to take that six-month seasoning period so this was a strategic move where you gave up maybe half a percent on your rate to be able to get your money out faster recycle that capital you will definitely make more in the long run with that strategy i just whining i get it 25 is a commercial loan so amortized over 25 years is a five year fixed so every five year they kind of readjust and so on uh the principle i borrow 700k uh which works out for that 78 or 79 percent loan to value which is not bad for a commercial uh this lender uh you know they normally go higher uh you know i've gone up to 85 percent loan to value on the commercial which is very very unheard of but they normally do but this time round uh due to some changes in the bank we're able to get about 79 ltv so i was able to borrow 700k and the pi turns out to be 3 695 a month that's the principle of interest uh the insurance on this property is about two thousand dollars a year which works that's about 167 dollars a month uh the tax sorry the uh the taxes is about 4 500 which works out about uh 375 a month so annual taxes and insurance annual is about 6 500 which break it down on a monthly basis works out to be 542. okay so the piti principal interest tax insurance is three six nine five plus five four two which works out to be four thousand two hundred and thirty seven dollars a month okay so the p i t is four thousand two hundred thirty seven a month the rent is 5462. uh therefore the gross cash flow is 1225 a month that's the gross cash flow uh obviously there's some expenses that you incur on a daily basis on a monthly basis yeah i i manage these properties myself um but you can knock off you know even if you knock off four or five hundred bucks a month for expenses uh you're still cash flowing you know five or six hundred a month but that's not really the key here the key here is that i i've got two hundred thousand 000 worth of equity from day one i'm in the b neighborhood which is going to appreciate in value i just want to hold this asset for five to ten years uh especially i'm going to write that appreciation that's it that's the game play here well what does section 8 rental rates do over time joe like what how much would you expect them to go up every year for a property like this uh it varies uh typically it's around uh anything 1.8 to two to two and a half percent uh annual increases it just depends on you know the dynamics of the area uh and so on so their rent does increase uh it may not be as rapid as a market rent but it does increase um but uh but what's more important to me see the rent here is 5462. okay nobody no market renter in my opinion is going to be paying 5462 a month for 5-10 years at some point they're going to say this is crazy let's go buy our own house okay so you're not going to have that stability uh where you you you you will get that with a voucher holder because they're not paying although the rent is 5400 their portion may be significantly less so they're in a very nice neighborhood for a lot you know maybe four or five six hundred bucks a month 700 800 bucks a month so in that sense they want to stay there a long time because their rent is based on their income and if their income stays the same then their rent portion stays the same as well so so in terms of stability i don't want turnover and i can get that even though these high rent values and still have tenants who are going to say 5 10 15 20 years which not which would not be possible with market renters unless you disagree uh i mean you know feel free to disagree if you think that uh people will pay five thousand six hundred six thousand dollars for five ten years no i wouldn't disagree on that i think well first off you could just look up what the comparable rents are if it's not section eight and i would imagine they're lower than what you're getting that's first thing i would think of second is that what you're describing so i have all these after doing this for a while i've sort of put together these principles that i operate by and rob has to hear about them all the time whether he likes it or not i'm like a grandpa who just i'm here one of them is that there's this uh pattern we see where as the value of a property goes up how much you can get for rent goes up with it so you start with like a terrible property terrible condition really low price low rent as the properties get better and more desirable the rents go up too but they don't do that forever you hit a point where the value keeps going up and the rents just stop and people ask me why does that happen how come i can't rent out my my uh seven million dollar property for the one percent roll right why can't i get seventy thousand dollars a month and the answer is because if you could pay 70 000 a month you would go buy your own house and you wouldn't do that right there's a there's a pool we play in as landlords where the price point has to be the place that somebody can afford to pay rent but not so high that they would just go buy their own property that's why it's very difficult to make money in luxury real estate if you need cash flow and that's how the short-term rental game has kind of changed the game because now we can finally get into expensive properties and make them work in a sense as an investment property but that's what you're describing is yeah no tenant that can afford that would ever stay renting for 15 years they would do what you're doing and so that's very wise what you're looking at and also just to add a cherry on top that you didn't say if somebody thinks they could make more doing it a different way they might in the beginning but they would not over the long term the amount of money that we spend every time a tenant leaves and we have to fix the place up and we have vacancy and put a new one in and pay the property manager company half of the first month's rent that adds up to be insanely more than whatever little bit you could think like you're playing the smart game it's sort of like i think of that story of the tortoise and the hare a lot of people look at real estate like i want to go invest in midwest indiana because i can get a 20 roi right out the gate and they're looking at that hair that just shoots out and says look how big my cash flow is but over a long period of time the house needs so much work the tenants are always leaving it's such a hassle that you realize you don't keep making that money it goes away whereas the tortoise just continually plods along you're not making mistakes you're not bleeding the property's going up the appreciation is happening and the next thing you know you look back five or ten years down the road and the property's got a million dollars in equity and the cash flows way higher and you can refinance it and buy four or five more properties and you don't have a headache like you're doing it the the right way and that's just what we want to highlight it doesn't have to be the section eight way but the principles that you're operating under in this section eight method are the right way to invest in real estate in my humble opinion oh thank you no it's true because a lot of people don't realize the cost of turnover it is a month to two two months typically sometimes three months lost rent after all is said and done so if your rent is let's say let's just keep it simple three thousand bucks a month a turnover um is this is the cost of the you know you'll clean it you gotta pay it again you gotta advertise there's no income coming through your time all that stuff will come into about at least a month probably two months or more that's six thousand bucks gone okay and uh if you don't contain that you can't have that every year every two years because you make no money the cash flow that you make gets wiped out every time there's a turnover and that's what i realized that i couldn't sustain this business unless i had long term tenants and uh and therefore uh in this high priced market the other way i could get it was the strategy which i'm sharing with you today what we would like more than anything is when when you go look at your next house and you're look and you're walking it you're trying to figure it out look at it through dr joe's eyes look at it through rob's eyes try to look at through my eyes we want you to see what we're seeing and then the right decision becomes clear so thank you very much for sharing your perspective as well as this deal joe and your time i appreciate you any last words before we get out of here guys uh if you want to follow me on instagram uh i'd love to uh connect with people uh dr joe asmr dr joesmar i do a wealth when i'm trying to encourage more people to do what i'm doing my goal is this year is to provide housing for 50 children children okay not me but also teach other people such that they can provide housing for 50 children uh so that's my goal the more people i can teach and you know show them what i do hopefully we can make money but also do good make a difference in people's lives as well so that's my goal and i love being able to share this knowledge with people i do have a wealth wednesday every every wednesday at 7 pm eastern time on instagram so you can check me out there as well and uh and so on i got some good news joe i think this episode is it i think you're gonna hit your goal with this episode because i think a lot of people will well we'll have a pretty big pivot from probably the path they were going on just to kind of pursue some of the things we learned today so we do appreciate you uh david thank you rob i can be found at davidgreen24 so follow me on instagram i'm starting to do a little bit more instagram live and uh putting together some more content thank you i also come on and as soon as i see it i'm like here i am yeah rob's been kind of walking me through how to how to stop being an old man and get on youtube and even tick tock believe it or not uh brandon scared me to death by telling me about the horrors of how addictive tik tok is so i'm committed to making content but not actually like consuming content if you want to get your life clean and you want to get off of tick tock and you need to detox follow me on there how about you rob where can people find out more about you oh you can always find me on the tube the youtube at raw built instagram raw built and then tick tock you can find me if you if you want to consume the content and be victims what's your name on tick tock it's raw bill tell it's just add a note to rob built someone stole your name yeah we won't be late for this one in this episode all right well thank you both very much for joining me today this was a really good time joe uh if you guys would like to listen to the rest of joe's interviews please check out episodes 356 and 498 they will give a lot more context into this one if you wonder why did we just jump into this and get into the details it's because we've already kind of covered the big picture on some of those shows so check them out also if you weren't watching this on youtube you missed out so consider following biggerpockets youtube channel watching the videos that are on there you can see the before and after pictures you can see the basement that joe saw when he made the decision this is the property i want to buy and get an idea of what you could look for and then your mind will start going into wait where's my egress gonna be where can i put the window where's the door gonna be do i have room for two electrical outlets is there 70 square feet do i need to bring a measuring tape with me when i'm walking a home and is there room for a closet those four things that were shared and then as always also please leave us some comments tell us what you thought about the show what you liked what you wish you would have asked us more we do read those and for the reasonable ones we make every effort to accommodate them when people criticize my hair style i just let that go yeah make everybody happy hey me too man don't worry all right well thanks again joe we really appreciate you this is david green for rob the fancy aristocrat abba solo signing off [Music] foreign

Channel: BiggerPockets

Views: 77,782

Keywords: biggerpockets, real estate, real estate investing, investing, rentals, rental property, investing in real estate, income property, bigger pockets, passive income, brrrr, brrrr investing, brrrr strategy, section 8 investing, section 8 housing, investing in section 8, real estate investor, brrrr method, brrrr before and after, home rehab before and after, home renovation before and after, section 8 rental property, section 8 landlord, section 8 voucher, cash flow, section 8

Id: _AST-i2d95o

Length: 61min 25sec (3685 seconds)

Published: Thu Feb 24 2022