Killer Cash Flow with This “Tenant-First” Section 8 Rental Strategy

David:
This is the BiggerPockets Podcast show 575.

Joe:
All those calculations of ROI, cash-on-cash return and so on, all those comes to zero if you don’t have a tenant who’s going to pay you, 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’ll have that revolving door where they stay for a year and then they’re gone. And so all your calculations goes to naught if you don’t do this part well.

David:
What’s going on everyone? It is David Greene your host of the BiggerPockets Real Estate Podcast here today with a phenomenal episode with our returning guest, Joe Asamoah. Now, Joe is a Section 8 expert. So if this is your first time listening to BiggerPockets, 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, rented out, refinanced, it 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, let us know what you think about what we’re doing. In particular, we recently did a show with Andrew Cushman who’s my multifamily investing partner. Now, Andrew and I break down our system for how we identify, screen, do our due diligence on and then close on multifamily 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, not too long after the show happened, using the same system.
So go there if you would like to learn exactly what multifamily investors do, you’ll get a ton of information, similar to what you get if you paid at a bootcamp, 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 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?

Rob:
Howdy. Man, I’m really excited about this interview for a very specific reason. I think what I really have always appreciated about BiggerPockets 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 encapsulated by Joe and the way he really took on this renovation, a complete glow up. I don’t know if we’re going to 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.
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 discussed a 25-year tenant, and for me, that’s unheard of.

David:
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, that’s probably, I got to be thinking like 50 to $100,000 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?

Rob:
Yeah. Pay special attention to 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, he took the space and he really made it his own. Man, I’m proud of him, man. Now, I’m just kidding now. It’s really great, it’s very inspiring. So lot of lessons to be learned today.

David:
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 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 guest, 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 BiggerPockets Podcast. How are you today?

Joe:
Hi dude. Fantastic, Dave. Thanks a lot, Rob. I’m amongst geniuses here. This is inside joke.

Rob:
Inside joke. Y’all had to be there before. It’s all good.

David:
Yeah. I made a comment about, because Joe Asamoah 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’ve 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 Asamoah, you can check out episodes 3566 and 498. Now, Dr. Joe, you are known as a Section 8 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 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 brief rundown of how you bought this property, how you found it, and then what your vision was for what you wanted to make of it?

Joe:
Oh yes. And essentially the strategy is as follows. I try to buy COD properties in B neighborhoods and rent A tenants. You got it? And that’s the gist of it all is that you buy houses that’s bad condition or something’s wrong with the house in a good neighborhood and you rent to the top tier tenants you can find. So in this particular case, this is a house in the B neighborhood in Washington, DC, and there was something wrong with the house. It was pretty okay, but pretty not great, the greatest condition. It was a three bedroom, one bath house. And I bought it for five 555,000. That’s it. Just over half a million dollars.
And in this area, that’s the way it is. Other areas may be higher, but it’s 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 because it’s so expensive is to increase the rent. And that’s the beauty of Section 8, is that Section 8, 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 rent from 3,700 to $5,400.
So at 5,400, I can cash flow, at 37, I’m breaking even. So that’s the gist of the Section 8 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 in part one, I pretty much talked through the design where I did the two bedrooms, which is in the basement. And I had another bathroom in the basement and the house was permitted. So we had the rough-in, we did the rough-in plumbing, the HVAC, the electrical, and saw the framing. All that stuff was done as part, what’s it called, session.
And we left it whereby the house was ready for rough-in inspection. So we’re going to get the first lot of inspections, we called in the city and the city inspectors came him over. And that’s where we left it.

Rob:
Awesome. Well, you briefly covered this 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 is it worth now? Before we jump into this to give us a little bit of context.

Joe:
I bought it for 555, it was listed at 675. This is a listed property. 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. Anyway, this was listed at 675. And I was able to negotiate it down to 555. This is in the B neighborhood. And 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.
So it’s 555 is what I purchased before. 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 pretty much redo the house, new systems. And so that’s the initial as in going in estimates. And I’m looking forward to reveal how inaccurate I was, but that was a surprise though, because of the market and I’m sure it’s everything everywhere. I was expecting an ARV over about 850, but we had the appraisal come in at 900,000. So the appraisal came in higher than what I estimated. And even since then, house on the same block now go from 925, 950,000,

Rob:
I feel like that doesn’t happen as often as I’d like it to, but I’m always super jealous when I see an ARV come in higher than expected.

Joe:
I’m sure David can probably relate to that given the way he is.

David:
That’s a very good point. In the BRRRR book, 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 8, 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, “I have to create a deal or make a deal.” You realized, “If I could add two bedrooms to this, I could bump the rent up.” Can you give me a rough idea of what the bump would be from three bedroom to five bedroom?

Joe:
It’s almost $1,800.

David:
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 going to 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 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.

Rob:
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, the curb appeal really is unparalleled, I think, for 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 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.

Joe:
Yeah. We have a particular color scheme I use for most of my houses. It’s modern, it’s very attractive and 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’s sparkles, it’s modern, it’s inviting. And so that’s what I wanted to do is to make sure that at least from the street level, it looks great, it looks engaging, and then it’s going to attract people to want to go inside. The landscaping looks pretty decent, and not a whole lot was spent on the landscaping, is just in this house, I did put a front porch.
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 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, stay here a long time, five, 10, 15, 20 years. That’s my endgame here. And so I look at the neighborhood as well, the street, the area, the proximity to schools, transportation, recreation and all those things. These are things which I look for in addition to the numbers as well.

Rob:
It’s really amazing what a coat of pink can do to a house because before it was a red color, and then you went in and changed it to this gray color, it looks like it was the original look of the house whenever it was first built.

Joe:
That is a popular modern color scheme around here. And it’s very inviting, 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. You may not be able to see it on this one, I’m thinking ahead that in the future if I do sell, decide to sell this house, it’s going to be an expensive area. And therefore, whoever buys this house will probably want to implement the house hack strategy. They’re probably a BiggerPockets user. So we do create an entrance on the front.
So if they wanted to rent the basement as a separate unit, he’ll have his own entrance on the front, also have his exit 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 looking ahead and said, “Okay, since we’re going to renovate the house anyway, 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 makes it more attractive as well.

Rob:
Yeah. Awesome. So take us inside the house because you really did knock it out of the park with the exterior, but with looking through the photos here, the inside has actually gone through quite the glow up or the transformation itself.

Joe:
Yeah. The first thing you’ll notice when you come in is it’s an open-plan concept. Probably the first thing you’ll see is that you’ll see furniture there and you probably say, “What is this? I’ve never seen a rental where there’s a furniture there.” And again, the idea is that I want to differentiate my house from competition. I’m trying to get A quality tenants, A tenants. And so the A quality tenants have choices. They can go to Dave’s house, they can go to your house, Rob, and they can go to my house. I’m trying to differentiate my house from yours and Dave’s.
So I try to stage my home 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 the walls that were in the original have been taken out, we relocated the kitchen from its original place to a new place towards the center. And we have a very, very inviting space and we have vinyl flooring. As you can see, we have a very nice kitchen. We have granite countertops, stainless steel appliances. It’s a nice home. For a voucher holder, this is unbelievable. This is something that never in their wildest dreams would they ever feel that they’ll get opportunities to live in this neighborhood, in this type of home.
And the A-type tenant, this is a dream come true for them. And if they don’t get this house, they’ll never see something like this again. I hope that this is making sense, Now, for a new investor, they don’t have to go through all of this. 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.

Rob:
Yeah. Because staging isn’t particularly a small cost. I know a lot of realtors that some stage their houses when they’re selling it, some don’t and there is an immediate ROI for something like that. If you stage a home, you can get a lot more offers, that 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?

Joe:
No, I think I’m the only one I know of who does this. Again, I’ve done the calculation, it makes sense for me. Whoever moves into this house, the tenant that moved in, her intent is to be here for 15 years. So I’m not going to stage this house again for another 15 years. So if you amateurize that cost, it’s insignificant. So to me, it is money well spent to attract the type of tenant I’m looking for. 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 going to pay their rent, the tenant who’s going to take care of the home, the tenant that’s not going to 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. 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 got to pick between okay versus, mm, okay, but I need to pay my mortgage. And I don’t want to get into that situation, I want to have multiple choices, multiple applicants. So that’s why I do this. It pays itself off over time.

Rob:
Yeah. I also wanted to talk a little bit about the rehab here. Obviously, this is really nice. It’s a sparkling listing, you knocked it out of the park, it feels very homey. The journey to get here, I got to imagine, was probably pretty long and strenuous, is my guess. So can you tell us about any of the problem areas that might have occurred during the rehab? Is there anything that was a thorn in your side or anything that didn’t go according to plan?

Joe:
Well, first of all this is a fully permitted house, so it took a bit longer to get the permits from the city. Normally it takes a few weeks, but it took us a lot longer. It took us over almost five weeks to get the permits through. So that was the first setback. The second thing was that in terms of, after we did the renovations, some of the walls that we thought we could sort of salvage, we could not. So we had to do some additional repair costs there. The price of lumber went up, so that blew some of the renovation costs out of the window. But the important thing is that we had good contractors and we were able to manage that process.
So the key, I think, is that if you are 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 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. We meet under my home, 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 BiggerPockets community, is take time to screen your 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 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 that relationships. And therefore, as we run into problems, we were able to reduce those problems and keep moving forward.

Rob:
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. 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 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?

Joe:
Sure. Good question. There are legal requirements for a bedroom in the basement, and there are essentially four of them. When I first go into a house for the first time, I’m thinking through my head, can this basement meet those requirements? And there four are as follows, one is the height. It’s got to have at least seven feet height 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 an extra half of foot. You follow me? So you got to have a certain height. That’s number one. Number two is that it’s got to have what we call egress windows, it has got to have two egresses.
Egress is a way to get in and a way to get out in the event of the emergency. So there has to be two forms. Typically, 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 from that basement in the even 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 so on. So we always put a closet in the bedroom like here, there’s a door here to the closet. And 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. 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 so once you know that, you can plan that as part of the process, plan that as part of the renovations.

David:
This is really good. So let’s say you’re looking at a property, you’re walking it with your realtor, he go, “Ooh, look at this basement.” And this is where all of us Rob, me, everyone, We start picturing in our head, we turn into like this automatic architecture program. We’re like, “The bedroom would go there. Where’s the plumbing? 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 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?

Joe:
No. Every bedroom has to have two forms of egress. The other thing is that, again, it’s just for code if there’s a fire and the door to the room is blocked, then what? So you’ve got to have a second form of exit from there. And this is the tricky part for some people in certain area. An egress window means that it’s got to be big enough whereby somebody can get out. Sometimes these windows in the basements are real small, so it’s not big enough. So that technically is not an egress window. So in order to make it legal bedroom, be people advertise those bedrooms all the time, but I’m just saying legally, technically, it’s supposed to be a certain minimum size.

David:
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 encloses that and make it into a living space to have its own little unit. It already had the bedrooms. The problem is that in closing the patio would block the window of one of the bedrooms. So I wasn’t able to do it because I didn’t know of the four. So this is very valuable information. 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

Joe:
I’m shocked David, I thought you never made mistakes.

Rob:
We learn the hard way so everyone at home can learn the easy way.

David:
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 so they wouldn’t have to. Thank you, Rob

Rob:
We do it for you at home.

David:
Not my ignorance, but my benevolence that made that mistake.

Joe:
Right. The other thing is that if we have two bedrooms in this basement, we also put a bathroom in the basement because before there was only one bathroom upstairs. In the 1930s, 1920s when this house was built, it was okay to be in the basement and go all the way to the top floor to go to the bathroom. But in 2021, 2022 people expect not to go to two flights stairs to go to the bathroom. So we put another bathroom on the basement as well.

David:
Well, I’m sure that had to do with increasing your ARV also. That’s good to highlight. If you can add the bathroom in the area where people are, the appraisers know that that makes the house worth more.

Joe:
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 use the basement as a separate unit.

Rob:
The house hack, right?

Joe:
Yes.

Rob:
Yeah. It’s all the rage right now. Can you break it down for us a little bit, Joe, on the largest cost that was spent on this, was it the basement or was it the main level? Where did most of your funds go into this project?

Joe:
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, because all the plumbing system ultimately get down to the basement and they then connect to the main city services. So if you’ve put a bathroom in the basement, you have to take 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. And this house, this is a Washington DC house, I think this house was built in 1905. So it’s pretty old.
So we decided we wanted to replace the electrical, 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 HVAC, and then obviously putting bathrooms was a little bit expensive and so on. Again, I made a decision to spend the money now, I have great contractors, they know how to do all these things, they have the technical know how to do this. Do I spend it now or do I just do the bear minimum to get through and then deal with it later on? I just made a business decision that I’d rather spend a little bit more money now, and that way, I don’t have to worry about it in the future.

Rob:
I think it’s the right move, I really do. A lot of people do go into projects, I see it all the time where they want to do half of it now and then they’re like, “I’ll do more of it later. And maybe I’ll do it in six months or a year.” And what they don’t realize is once there are tenants in place, it’s a lot harder to go in and do any rehab. And with you, Joe, 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.

Joe:
I think so as well. It just makes more sense to just do it now, get done with it, spend a little bit more because technically, the money is made in the bedrooms. I don’t get any more money by making a nice kitchen, I don’t get more rent by having a nice bathroom. I only get the extra rent because of the bedrooms. But since we’re going to do this work now, I’d rather just do it now and be done with it.

David:
There’s a lot of wisdom with what you just said with 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, 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. 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 going to 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. 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 the future David doesn’t have to live like that if I make decisions differently. So thank you both for sharing that.

Rob:
We got to watch out for future us. This is the most important version of us.

Joe:
The future Rob. It’s just easier to do it that way, just do it now. Your capital expenses are done, you don’t get many calls from the tenants the plumbing’s bad or something’s wrong with this. And so you don’t have those issues because everything is new and you get heist customer satisfaction. They tend to be happier with the property, which means that they stay longer.

David:
Higher ARV also when you go to do the refinance.

Rob:
Higher ARV and high higher quality tenants, happier tenants in the long run, which I think is probably going to be.. That’s obviously your strategy. So can you tell us a little bit now, walks through the rent part of the BRRRR here. The actual, getting the tenants, the selection, 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?

Joe:
Sure. Yeah. At this point, the renovation’s done, the house is staged and it’s looking good. 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. I have to advertise, I got to market. So I start off with taking professional quality photographs and videos, similar to what you just seen here and make sure that they reflect 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? It could be ABC., it could be Zillow, it could be Go Section 8, it could be Craigslist, whatever.
I want to know where they tend to send people. I want to make sure I advertise there and I advertise everywhere else. What I’m finding is for some reason, Zillow is very good. 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 descriptions of the property, I focus on all those emotional language which appeals to the tenant I looking for. I always say, “Section 8, welcome.” I always say, “If you are looking for a great landlord, you have found him or her.”

David:
I love that.

Joe:
And I always say, “If you are a great tenant who’s looking for a quality house and a quality area renting from a quality landlord, then look no further.”

David:
Ladies, Mr. Wonderful. You’re looking at him.

Joe:
Exactly. And so that’s the adverts. So it’s the marketing. Again, I’m trying to differentiate myself from my competition, and the competition is out there and so on. So the amateurs is good. At some point people will call and I have an assistant that takes the calls. And she does the initial pre-screening to make sure that the person’s qualified in terms of the voucher size, in terms of the rent, and ask all those basic questions that people ask, where is it, how many bedrooms does it have? What school is it nearby? blah, blah, blah. All those questions my assistant takes those.
And then we schedule what we call open houses. We are in COVID, so it’s changed a little bit, but I do open houses versus what some other management companies or some other landlords do, which is they do everything virtually. They essentially, you can fill an application online, You can go to the house online, physically to the property whatever they want to do and so on, they don’t need to see the actual tenant. I’m of the opinion that’s okay, but I like to showcase the house, answer any questions, get to answer any issues that the tenants may have, explain qualities of the house, and also showcase to them who I am, what kind of person I am and what kind of landlord I’m going to be, and what separates me from my competition.
I tell them that many of my tenants stay for five, 10, 15. My longest tenant is 25 years now. I regularly have 17, 18, 20-year tenants. And two, a person who’s used to living in a bad house, in a bad area with bad landlords, that is music to their ears. And that’s stability that they’re craving for. And I like to be able to explain that to them up front and again, differentiate myself. And then if they like the house seeing the house, then I give them an application form. have an eight-page application, it’s very detailed, it’s very intimidating. I ask a lot of questions about the individuals. And once they complete the application, then I’ll then start the screening process, which is a whole other discussion, which I’ll go through in a second.

Rob:
I think there seems to be a few schools of thought here and some people are the faceless landlord. I really respect that you want to get in there, get your elbows dirty. 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? do you have a pretty good rapport with all of your tenant? And do you feel like actually meeting them face to face and being there from the start has really drastically improved the vacancy of your different units?

Joe:
Here’s the key, this part in my opinion is going to make or break the BRRRR, your decision on who you select, because you make a mistake here, all those calculations of ROI, cash-on-cash return and so on, all those comes to zero if you don’t have a tenant who’s going to pay you. 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 if you don’t do this part well.
And that’s why I place a lot of attention into the screening and selection, because it’s been the key to my success. Some people are saying, “25 years? 18 years? Are you lying?” No, it’s not lying, it’s a strategy. 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 put a lot of… I go to this, this is the part which I do the actual 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. First of all, we check for the ID.
When somebody comes in, let’s just say for instance, you Rob, you show up at the house. I don’t know who you are, you could be Dave and you could fill the application as Dave, I wouldn’t know. And so you’re pretending to be Dave, when in fact you’re Rob, and if I don’t ask for your ID, because that’s another thing, if I ask for your ID, that usually catches people in that game. You may say Dave, is your landlord when in fact he’s not, there’s a lot of things that tenants do to try and get over. 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 so I place 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, I’ll just call them professional tenants, they pay their car notes with 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, but they don’t report to the credit bureaus.
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… So it’s very intense in terms of the screening process. And then finally, I do make an appointment to go visit their home. That’s pretty controversial, I get it, but it’s something which is the key to finding 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 to their home? They will do that because I have a product, as you can see, that is very unique and it’s in high demand is low supply.
It’s a pretty thorough application, screening process, an eight page application. That’s a lengthy app. That definitely would weed out a lot of people, I’m sure, but you have the proof here, with a 25 year tenant. David, what’s your longest tenant? I’m curious that you’ve ever had, is it close to 25 years?

David:
I don’t know. Definitely not that, but my property manager would know better than me. 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?

Joe:
In this particular house we had, this is COVID, in the space we had eight applications, applications now, not showings, not 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. It came down to three, five fell by the wayside, part of that screening process. I visited three homes and selected the family as a result of that. So I started off with a lot of applications and ended up with a funnel whereby some fell by the wayside and I got the best one at the end.

David:
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 could give us a heads up to look out for?

Joe:
The renting and the refinancing. On the renting side, people lie, and don’t always tell the truth. 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. That’s also, people lie. On the refinance side, it’s several. The ARV on this house was higher than I expected, so it wasn’t an issue, but it could be an issue. When I first started out, I didn’t understand the concept of seasoning when you do these BRRRRs. Seasoning is when you buy a house and there’s a time lag between when you are on title to when you can refinance again. The particular lender I 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 onto this asset until you’re able to refinance. That’s one thing which I’ve learned. The other thing is that the appraisal, the refinance is when everything comes to play. You’ve found the house, you’ve renovated the house, you found the tenant. All roads leads to this point where you’re trying to recoup your money. This is where you’re going to realize that your business was actually successful or not. So the appraisal may go undervalue, I’ve had that. So now what? What do you do now? I have a strategy for that, make sure that I document before the appraisal comes the improvements that were made to the house.
I show the before and after. And I have some comps, which I put it all in a nicely three leaf binder and have it available for the appraiser when they come. Therefore, again, it differentiates me from other investors. It tells this appraiser that this guy knows what he’s doing. It lets them know that, yes, this guy’s different. So that’s what I do in terms of… So that’s the appraisal side. It could go under value, and if it 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?

David:
What about you, Rob? Do you have any issues in those two areas that you can enlighten us with?

Rob:
On the appraisal side of things?

David:
No. Just when it comes to getting the tenant or doing the refinance, just 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?

Rob:
Yeah, I do. I do. I always tend to dig myself in a hole because I always like to build weird random things like tree houses or tiny houses or anything. And so for me, it’s 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, 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. Here’s what the appraiser said.” So the appraiser came back and actually gave me a really good ARV on it. I think they praised it at $276,000, I had built it for $165,000. And then the bank was like, “Yeah, we don’t really buy, we don’t buy that 300 square foot tiny house is worth that.”
So they made a second appraiser come out and they appraised it at like 175,000 and I was like, “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, they dictate everything, but I really fought for this, I needed this. And when you need something, you make it happen. And 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 it appraised to the dollar that I needed it to get all of my money back.
So I can’t say for certain that will always work because I do always fight my appraisals when they come back, I’m typically unsuccessful, but now having in some success, I will always be the squeaky wheel, and I will always fight for what I think a property is worth.

Joe:
I went to a scenario whereby, this is when I flipped a home, I bought it, rehabbed it and sold it. Well, had the appraiser come in and the appraiser, we agreed with the seller what the price was and the appraiser came in lower. And so now what? The buyer didn’t want to cough up the difference, and so is 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 have my own appraiser come in beforehand and give me an appraisal. And therefore, I have appraisal and I put it in my back pocket. I don’t use it, only when necessary, because sometimes when you try to contest an appraisal, an appraisal may not buy into the comps, but if they see 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 from nurse. However, if they get another recommendation to another doctor, then it’s the same peer level. and therefore, they may consider that. So that’s what I sometimes do is have a secondary appraisal just in case I need it and I want to contest an appraisal that was done by the buyer and things like that.

David:
Rob’s that guy that will build like a gymnastic park for squirrels in his backyard and then go to the appraiser and be like, “You don’t understand, this is worth $50,000.” That’s exactly how you get yourself in the mess.

Rob:
I’m always like, “Excuse me, sir. I put my life savings into this.”

David:
Yeah. Look at there’s nothing like this in the world, 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 piece to take away from this is, it depends on what the other houses 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 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 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?

Rob:
Because at the end of the day, it’s a pretty small expense, five to 700 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 to 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 curious about that and then cashflow, what is a property like this cash flow for you now, some of those details.

Joe:
Okay. After the tenant was in, then I started the refinance process and I was able to document income and therefore, that will allow for the refinance. So I did the refinance, got a local lender, a local commercial lender. This was bought in my entity, it wasn’t bought in my personal name. So I refinanced it in my entity as well. So we got a local commercial lender as opposed to a Fannie Mae lender. We were able to get an interest rate at 4%. It’s a commercial loan, it’s 4%. It is what it is. You do pay a little bit more for commercial loans versus residential.

David:
That’s pretty good on a commercial loan on investment property. That’s not bad at all. Yeah.

Rob:
Yeah. I’ll take that any day.

Joe:
You think so?

David:
Oh yeah. Absolutely.

Joe:
I was getting 3.5 before, but that was before.

Rob:
No need to brag. No need to brag.

David:
Hang on, rates have got up, Joe, and you got three and a half percent on a conventional loan most likely. It was probably Fannie, 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.

Joe:
I’m 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 readjust and so on. The principal I borrowed was 700K, which works out about 78 or 79% loan to value, which is not bad for a commercial. This lender, they normally go higher, I’ve got up to 85% loan to value on a commercial, which is very, very unheard of, but they normally do. But this time round due to some changes in the bank, we were 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 a principal and interest. The insurance on this property is about $2,000 a year, which works out about $167 a month. The taxes is about 4,500, which works out to about 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. So the PITI, principle, interest, tax and insurance is 3695 plus 542, which works out to be $4,237 a month. So the PITI is 4,237 a month, the rent is 5,462, therefore the gross cash is 1,225 a month. That’s the gross cash flow. Obviously there’s some expenses that you incur on a monthly basis. I manage these properties myself, but even if you knock off four or 500 bucks a month for expenses, you’re still cash flowing five or 600 a month. But that’s not really the key here. The key here is that I’ve got $200,000 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 10 years such that I’m going to write that appreciation. That’s it, that’s the gameplay here.

David:
Well, what does Section 8 rental rates do over time, Joe? How much would you expect them to go up every year for a property like this?

Joe:
It varies. Typically it’s around 1.8 to two, to two and a half percent annual increases. It just depends on the dynamics of the area and so on. So the rent does increase. It may not be as rapid as a market rent, but it does increase. But what’s more important to me, you see, the rent here is 5,462. Nobody, no market renter in my opinion is going to be paying 5,462 a month for five, 10 years. At some point, they’re going to say, “This is crazy. Let’s go buy our own house.” So you’re not going to have that stability, where you will get that with a voucher holder because they’re not paying, although the rent is 5,400, their portion may be significantly less. So they’re in a very nice neighborhood for a lot maybe four or five, 600 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 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 stay five, 10, 15, 20 years, which will not be possible with market renters, unless you disagree. Feel free to disagree if you think that people will pay 5,600, $6,000 for five, 10 years.

David:
No, I wouldn’t disagree on that. Well, first off, you could just look up what the comparable rents are if it’s not Section 8. And I would imagine they’re lower than what you’re getting, it’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 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 wants-

Rob:
I’m here for it, man.

David:
One of them is that there’s this 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 rent’s just stop. And people ask me, why does that happen? How come I can’t rent out my $7 million property for the 1% rule. Why can’t I get $70,000 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.
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 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 I’ll 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 firs. You’re playing the smart game. It’s 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 hare 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 10 years down the road and the property’s got a million dollars in equity and the cash flow is way higher and you can refinance it and buy four or five more properties and you don’t have a headache. You’re doing it the right way, and that’s just what we want to highlight.
It doesn’t have to be the Section 8 way, but the principles that you’re operating under in this Section 8 method are the right way to invest in real estate in my humble opinion.

Joe:
Oh, thank you. It’s true because a lot of people don’t realize the cost of turnover. It is a month to two months, typically, sometimes three months lost rent after all is said and done. So if your rent is, let’s just keep it simple, 3,000 bucks a month, a turnover is, this is the cost of, you got to clean it, you got to paint it again, you got to 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 6,000 bucks gone. And if you don’t contain that, you can’t have that every year, every two years, because you make no money. The cashflow that you make gets wiped out every time there’s a turnover.
And that’s what I realized is that I couldn’t sustain this business unless I had long term tenants. And therefore, in this high price market, the other way I could get it was the strategy which I’m sharing with you today.

David:
What we would like more than anything is when you go look at your next house and you’re walking in, 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 it 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 the deal Joe and your time. I appreciate you. Any last words before we get out of here, guys?

Joe:
If you want to follow me on Instagram, I’d love to connect with people, drjoeasamoah, drjoeasamoah. I’m trying to encourage more people to do what I’m doing. My goal this year is to provide housing for 50 children, children, not me, but also teach other people such that they can provide housing for 50 children. And so that’s my goal. The more people I can teach and show them what I do, hopefully we can make money, but also do good and 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 Wednesday at 7:00 PM Eastern Time on Instagram. So you can check me out there as well and so on.

Rob:
I got some good news, Joe, I think this episode is it. I think you’re going to hit your goal with this episode because I think a lot of people will have a pretty big pivot from probably the path they were going on just to pursue some of the things we learned today.

Joe:
Thank you.

Rob:
So we do appreciate it. David.

David:
Thank you, Rob. I can be found @davidgreene24. So follow me on Instagram. I’m starting to do a little bit more Instagram live and putting together some more content.

Rob:
I see that.

David:
Thank you. I also[crosstalk 00:56:33] YouTube.

Rob:
As soon as I see him, I’m like, “Here I am.”

David:
Yeah. Rob’s been walking me through how to stop being an old man and get on YouTube and even TikTok, believe it or not. Brandon scared me to death by telling me about the horrors of how addictive TikTok is. So I’m committed to making content, but not actually consuming content. If you want to get your life clean and you want to get off of TikTok and you need to detox, follow me on there. How about you Rob? Where can people find out more about you?

Rob:
Oh, you can always find me on the Tube, the YouTube @robuilt, Instagram robuilt, and then TikTok, you can find me if you want to consume the content and be victims.

David:
What’s your name on TikTok, Rob?

Rob:
It’s robuilto. Just add an O to Robuilt because we won’t labor this one in this episode, someone stole my handle.

David:
Someone stole your name. All right. Well, thank you both very much for joining me today. This was a really good time, Joe. 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, because we’ve already 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 going to be? Where can I put the window? Where’s the door going to 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’ve asked us more.
We do read those and for the reasonable ones, we make every effort to accommodate them. When people criticize my hairstyle, I just let that go. You can’t make everybody happy.

Rob:
Hey, me too, man. Don’t worry.

David:
All right. Well, thanks again, Joe. We really appreciate you. This is David Greene for Rob “The Fancy Aristocrat” Abasolo, signing off.