Retired in His Mid-40s Using the Perfect “Small” Rental Property Formula

0:00If this investor can self-manage 150 units, you can manage one or five or 10. Today, the Lumberjack Landlord is here sharing how he's built a life-changing portfolio out of duplexes and triplexes, all with low vacancy and almost no tenant headaches.

0:22Hey, everyone. Welcome to the BiggerPockets podcast. I'm Dave Meyer, head of real estate investing at BiggerPockets. Our guest today is Matt, the lumberjack landlord. Matt has built himself a really impressive portfolio that allowed him to retire early from a tech career last year, but he didn't do it by scaling to bigger multifamily properties. He owns more than 50 different properties, almost all of them duplexes and triplexes. In this episode, he's going to share a few of the systems he's created to increase his time freedom, even while consistently adding more units. These include low-cost renovation ideas that can reduce your heat and water bills as much as 20 % every month, how working with local banks to lock in favorable financing that big national lenders just can't compete with, and stick around to hear his latest really awesome fun project, converting a local jail into housing units.

1:17Let's bring on Matt. Matt, welcome to the BiggerPockets podcast. Thanks for being here. Thanks so much for having me. I would like to, if I was telling you, it wasn't a dream coming true to finally be here. Very awesome. And fresh off of BPCon, which was absolutely spectacular. Love hearing that. It was awesome. So much fun. Yeah. So thanks for coming to BPCon and thank you for being here. We're excited that you're here. Maybe just start by giving us a little bit of background. How did you find yourself in real estate investing? Like where were you in life when you first started getting into it?

1:48Yeah. So me in a short description is I'm a ninth grade dropout. So any room I walk into, everyone's more educated than I am. Dropped out, started working every job I could, and then eventually got into software, worked my way up through a company and lost all my money in the stock market explosion in 2000, 2001. Lost it all then. And it was literally every dime I had. Oh God. Then I'm start doing research on what assets can I buy that actually give me a return on my capital, but they also give me cashflow. You know, it's a pretty short list of things that appreciate and give you cashflow. There's a limited number of stocks that do that, you know, with paying dividends.

2:27There's a bunch of different little niches out there, but I looked at it and then I said, all right, well, what do other wealthy people do? And then I looked and 90 % of millionaires became that through real estate. And so I started buying in 03 and the first place I bought, I was doing house hacking before anyone knew what that was. Called a mortgage broker and I said, hey, this is a house that I want to buy. And he goes, all right, well, here's all the information I need. I get him all the information. He looks at it and goes, you don't qualify. Even in 2003, they were saying, you don't qualify?

2:57Yeah. That's pretty rough because they were giving anyone a mortgage that. I found the only mortgage broker on the planet that didn't do ninja loan apparently. You might have. So he says, yeah, you just don't qualify. And I said, well, what have you seen other people do? And he just said, get a roommate on a lease. He goes, I'll count that income towards your income and you'll be able to afford the place that you're looking for if you get at least a thousand bucks a month. So I went on the search, send a bunch of people, acquaintances, hey, want to be a roommate and found one. And so that was it.

3:30The rest was history. I bought my first place and I house hacked it. That was the only way that I could afford it. Awesome. Well, good for you. I mean, it sounds like you overcame a lot of pretty challenging situations very, very early in your career. But maybe catch us up. So where are you today? So today we are 53 buildings, 150 plus units and about 400 tenants. But we really specialize in small multifamily, two, three, four unit stuff because bigger isn't always better. What is it that you like about that asset class more than wanting to go into commercial or any other asset class? What really attracted me to them was, as you know, with larger commercial properties or properties that are five units or greater, the value of the property fluctuates based on the amount of rents essentially collected.

4:16And so you can do a value add, you can make it a much nicer place, and then you can get more money for the rents. And then that means that the property is worth that much more money. On the residential side, 400 units and less, you don't have that option. It's really much more driven based on what the last thing like it sold for. So the idea was creating something that I call a rent box, which is understanding 17 crucial categories across the entire spectrum that tells me this is what a unit is renting for. Therefore, this is what my unit is worth. So it was then targeting and finding every type of asset, two, three, and four units as they come on the market.

4:55Are they well under market rents? Are they well cared for buildings? I don't want turnkey because there's no value opportunity there. But that was the challenge. The challenge was how do we grow a portfolio, not at a certain pace, but at a certain point where every deal that we do is a great deal. I love that. Yeah. So it's not a door count. You never were like, I need to get to 150 doors. If you listen to the show, you know, I hate door count. I think it's the silliest metric. So it sounds like you essentially created your own algorithm for lack of better word, right? Like you're going through these 17 variables you're evaluating.

5:33Can you share some of them with us? Sure. So it is, you know, whether the unit is been redone or not to what grade has it been redone, right? Have they just done painting? Okay. Have they done painting and trim work? Have they done painting, trim work, doors and kitchen? Have they redone a bathroom? Have they redone the floors? Have they redone the roof? What's going on with the basement? Then it's, you know, things like location, cause I can't change that. So I don't want things in a D zone, but I'll buy a D property in a B zone because I can make that D property a B property in a B zone. And now it's worth something.

6:07I love this approach. I feel like, you know, a lot of people like to label themselves as I'm a two unit investor. I'm a this kind of investor. I think most people are just kind of opportunistic within their own niche. And it sounds like that's kind of what you're doing. It's like you don't have some pie in the sky thing, but anytime something comes across your desk that fits your buy box and you feel good about, you're going to do it. And you can do that because you spent so much time and effort refining a buy box that you know you can execute well and that sort of fits into the lifestyle and financial goals that you're looking for.

6:43Yeah. Definable, repeatable, executable. I can define it. I can repeat it. And I can execute on it, whatever the plan is, whether it's large reno or small reno or light reno. It's an amazing approach to real estate. We all joke, everyone calls this boring. It's not boring. This is the way to go. This is just the right way to approach real estate. I'm sorry. I invest in syndications and do some of this other stuff, but my core is just buying these duplexes, buying triplexes. This is a really good risk-adjusted way to approach real estate. So I Couldn't agree more there. But I want to hear a little bit more about how you manage these properties, because this is a lot.

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10:55Welcome back to the BiggerPockets podcast. I'm here with Matt Hawkins talking about how he scaled using a repeatable formula that And honestly, most people listening to this show could realistically achieve. He's now sitting at 53 properties, over 150 units. And you manage these by yourself, right? Yeah. You know, essentially it's myself, my wife. So up until only three or four years ago, about four years ago, I did everything. But I was also working a 60 hour week job as a software executive. When somebody says they don't have time, listen, I built my 150 unit portfolio while I had a full-time executive.

11:33job. It's definitely possible. You can do it. It's the thing. It's definitely, I'm not the only one in the world that can do it. Like everybody can do what I did. It's just a matter of where I think a lot of people struggle is systems and processes and being an executive in a software company. We have systems and processes. Everything we do is systematic. It's got steps to it. And so that's, you know, having that career and being kind of a company fixer is where my skillset was able to shine through because we'd encounter a problem. And then we would understand how do we address this more quickly, continue to give a great experience to the end user, which is the tenant, and then allow ourselves to grow.

12:13So very often people do the growth and then figure out systems after. If you figure out the systems beforehand, then it allows you to grow to a level that you never thought you could grow to because it just snaps in. It's just adding another piece to it. It's really powerful. So I self-managed until we were 120 units. I self-managed. Oh, wow. Okay. That must've been crazy. It was nuts. There was always something to fix, always something to do. But the idea was when we would acquire an asset, we'd spend some of the money in that first year to make sure that that asset became stabilized. That's really the framework that I essentially invented for myself, which was acquire, stabilize, and then optimize.

12:57Very often landlords get all psyched about acquiring and then they forget about stabilization because they're already onto the next deal. And then almost no one optimizes. Almost no one. Yeah, that's so true. So when you say stabilize, I just want to make sure the audience all understand. That means you're taking a property, C-class, B-class property, whatever, and investing right up front to one, improve, I guess, systems, make upgrades, probably drive up rents, ensure a better tenant experience, but also front-loading some of the work so there's less maintenance repairs, right? Yeah. Our introductory letter to tenants when we acquire a building is, hey, we're really excited to be your landlords.

13:39Don't be nervous. We're not raising your rent, but we do have some questions for you. We'd like to understand two or three things that you were asking the previous landlord for that he never took care of for you. We recognize that we do things a little bit differently than they do them. So we'd like to understand what those things are to see what we might be able to do for you to get those things taken care of. It's the fastest way to unearth issues in the building. It's the fastest way to make the tenant happy. We're making a deposit into the tenant, recognizing that they need to know we're not here just to raise your rent.

14:09We're not here to evict you. We're here to partner with you on the new asset that we have, but it's your job just as much as it is ours to take care of it. So we tell them, if you see a leak, if you hear a leak, any of those things, please call our emergency numbers. We like to say fire, flood, gas, blood, pick up the phone, give us a call. So in managing it that way, you know, we've fully automated our entire process. So now my phone doesn't even ring when we get an emergency call. And the way that we've kind of built this framework, it says all procedure. It's all process. It's all standardized.

14:43So that way they get a quick return phone call. Things are addressed quickly and they get a much better, a much better experience than they would from most people. I absolutely love that. I just think this is the kind of mutual benefit investing that we talk about on the show. Like you are benefiting from this because you have an asset that's going to be stabilized. People are going to take care of it. They're going to like living there. You're going to have lower vacancy. You're going to have lower repairs. So much good stuff. And the tenant loves living. You're providing a service to your community, to your tenants that they are going to like.

15:14I think this is just the right mindset for how to have a sustainable portfolio. You do have to come out of pocket a little more upfront, but I promise you, ask any experienced investor. It is a worthwhile ROI over the long run. And you also just get to provide great housing to your tenants. But how, Matt, do you underwrite this? Because I think that's something people get hung up on is if you're buying, let's just throw out numbers and just make them up$400 ,000 duplex, whatever, you know, you're going to have to put a hundred grand down. If you're putting 25 % down, then you spend 30 grand, 40 grand renovating this.

15:55It makes your cashflow probably look negative at least for the first couple of years or the first year. So how do you like think about this from a math and underwriting perspective to make it make sense to you and make sure that you are still getting the kind of deal that you want to add to your portfolio? Sure. So for the first 13 years, I did nine house hacks in 13 years. Wow. Nine times would move in, do all the work that I could possibly do, get one side done, get it rented out, then move over to another side that wasn't done, live in that, get that done and then rent that out. But I was buying the next place, but I would do a cash out refi because now the value of the property is far exceeded what it was because I added all that value.

16:36And then after I did that the first four or five times, I then started hiring contractors that could do the work a whole lot faster and gave me a better turnaround and not living so much in construction mess. But as I'm underwriting deals now today, the idea is we've done this a number of different ways. I think what's really interesting is, is, you know, in the land of bird, you know, I was doing it before you had no BNRs. And that was the lifestyle. But what we basically did to help get deals done there was we would go in, we would get everything priced out, understanding exactly what things we had to upgrade, not want to upgrade.

17:11There are the things that actually drive getting you more value and more rents and more perceived value by a potential tenant than things that don't. The roof can't leak. The heat's got to work. Yeah, he's got to work. But outside of that, what are the things that we can do to make it a better experience for them? You know, we can use better cabinets, we can use better appliances that don't break as often we can change out the light setups, you know, we change out light setups in a lot of our apartments for 1000 or 1200 bucks, and everybody walks in and instead of seeing, you know, that light from Home Depot that we've all seen 1000 times with the with the metal tip, instead of seeing that you're seeing actually a nice light layout where it's actually like Like they took care of what this looked like.

17:54Are you saying that you have to put out a competitive product in the market to be successful? Amazing, right? I know. But that's the best part is you can actually put something out that is rehabbed, not as nice as brand new, but close enough where even if you're taking a 20 % discount over new, you're getting a 20 % premium over existing. Yeah, exactly. I think so many folks in real estate get caught up on doing things cheap. and it's penny wise and pound foolish. It is. You are trying to save money up front and you are not thinking about, everyone notices that. When you're a tenant and you walk into that, you notice it.

18:32And especially in the environment where we're going into now where it's not as easy to get tenants as it was a couple of years ago, you have to think about how you stack up against your competition. Like you can't just throw anything up on Zillow right now and expect to get rent or rent growth in the same way. And so these kinds of little things, it's not even that much money. It's 50 bucks here, it's 100 bucks there, usually on a rental unit that you should invest because this is an investment. That's the whole definition. You should put that money in upfront when you can because it's gonna get you higher rents.

19:07It's gonna get you great tenants and it's going to improve the value of your property as well. So I just really wanna emphasize how important this is to everyone listening right now. I agree. I think, you know, as, as people look at it, I think as they look at their asset, because this is what this is, it's an asset. I think that when you're able to understand where the improvement should be made, what's going to get you a return and get you a better tenant, these are, you know, essentially the, the, the path to where you're going to bring your successful business. If you ever had to sell, do you want to sell a house that has a bunch of issues or do you want to sell a house?

19:41That's pretty much turnkey. Yeah. I don't buy turnkey because there's no money to be made there or not enough money to be made there. My returns are quadruple what turnkey is. I'll do the extra work. I want to shift gears a little bit, Matt, because we talked a little bit about stabilizing, but you also mentioned optimizing, which I think is always important. But right now in the more expensive market, I see a lot of investors sort of turning their attention less towards acquisition and more towards optimization. So tell us a little bit about what you mean by optimizing. And if you have any processes or systems, our audience should know about that.

20:16Sure. I mean, the first thing is, you know, if you look at the maintenance snowball, as you increase number of properties, the reoccurring problems that you don't take care of will slow you down from being able to acquire additional assets. They'll do that by two things. One, time and two, money, because you're constantly throwing money at not fixing the problem the right way. It's better to bite the bullet, make the repair, make the repair the right way. and then close the chapter on that repair so you can then move on to the next. So one of the things in optimizing the business is get all the rats taken care of, get all the reoccurring issues that are constantly coming up, address those, fortify the house, get it ready.

20:59Make sure that all of the ongoing stuff is no longer an ongoing thing because that's gonna slow you down from acquiring additional assets. Other ways to optimize properties on an individual basis, make sure that heating systems are clean so they're running as efficiently as possible make sure that you put yourself through the process of evaluating i'm gonna say it toilets i'm a toilet i'm a toilet door it's always about toilets yes you know who cares about them guys that own a four plex that has two bathrooms per unit that's eight toilets and every single time it flushes it's a 3.6 gallon flush yeah but you could have half that i'm using a toilet that's It's a one, two.

21:41Yeah. Oh, a third of that. That's even better. A third. Yeah. But if you look at a typical building, right? And if you figure like, and this is how dorky it gets. If you figure number of flushes, and then this is what the number is, you could literally be saving a hundred to$200 a month in water and sewer fees. Unbelievable. That's money that ends up at the bottom line at the end of the year. And all it took was an evaluation of that being made aware of the problem and then swapping out the toilet, which is a couple hundred dollar expense, which largely per toilet pays for itself within a year.

22:13And then you're making that much more profit moving on. So very often people are looking for that. What's my next deal? What's my next deal? What's my next deal? I've got good news. You probably have 10 deals that you already have or five deals you already have, where if you just optimize them, you'd create a whole nother house plus of revenue. Wow. That's such an awesome tip. I've never heard that before. And yeah, I'll be honest with you. I don't know how much my water bills have gone up. It's probably a lot and I'm not paying attention to it. You know, it's like, Hey, I've been, I've been certainly noticed how much my insurance bills have gone up and my tax bills have gone up.

22:48And maybe that's sort of blinded me to some of the other expenses because I'm mad about the other ones, but clearly you're showing that these kinds of tweaks, especially if you're buying regular old properties, the difference between making $200 more a month is the difference between like a decent cash on cash return and a really good one. Like that actually does matter. So it does kind of attention to detail, Matt, I think is super important and impressive. I'd love to hear more about your optimization and property management advice, but we do have to take one more break. We'll be right back.

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