How to Turn One Condo Into a 17-Unit Rental Portfolio!

16:23Ashley Kehr:Like it I'm excited. I'm super excited But yes, we use some of that software and then for the leases cuz it's out of state unless they have access to those There's a lot of like trade organizations that have leases. So the latest one we used was the American apartment owners association They have those. And then we just add our own addendum to kind of fill in the gaps.

16:44Tony J. Robinson:Most deals don't fall apart because of the numbers. They fall apart because of the financing. You find a property that cash flows. The deal makes sense. But then the lender looks at your personal income, your tax returns, your debt to income ratio, and suddenly the deal doesn't qualify. That's the disconnect. Because as investors, we're not buying based on our W-2. we're buying based on the asset. That's why Host Financial offers DSCR loans designed for real estate investors, where qualification is based primarily on the property's income, not your personal finances. So no W-2s, no tax returns, and no DTI requirements.

17:26Tony J. Robinson:And with loan-to-value options up to 80 or even 85 % on eligible deals, you can keep more capital available as you grow. If you're buying rentals, refinancing, or scaling your portfolio, go to hostfinancial.com. That's H-O-S-T financial.com and see what you qualify for. You know that thing where you discover a feature you wish your software had? And it turns out it already exists just on a different platform. Like, oh, you want rent payments processed in two days. RentReady does it. Oh, you want to block tenants from making partial payments mid-eviction. RentReady does that too. Oh, you want full accounting and tax-ready reports without paying for a second tier?

18:08Tony J. Robinson:RentReady does it. And oh, you want tenant screening that doesn't overcharge your applicants? RentReady also does this. Basically, if you've ever complained out loud about your property management software, RentReady probably already built the fix. It's$12 a month. You're welcome. Sign up right now for$50 off your first year of RentReady with promo code BPCASH. BiggerPockets Pro members get it completely free. Sign in through your pro account at rentready.com slash biggerpockets. That's rent, R-E-D-I dot com slash biggerpockets. Some listeners may wonder why their insurance quote only took 30 seconds.

18:48Tony J. Robinson:Some listeners may wonder why their insurance quote took 30 seconds. A better question is, how long will that policy actually hold up when you need it? At NREG, the goal isn't just getting coverage in place. It's making sure your investment property is properly protected when a real claim happens. That's why they take time to evaluate each property's unique risks and build coverage design for the realities investors face. Because anyone can sell a policy. NREG focuses on standing behind it. Visit nreig.com slash bplc to learn more. So the condo sounds like it worked out well for you as a first house hack, but you didn't stop.

19:31Tony J. Robinson:Obviously you've grown your portfolio. So explain to us how that$225 ,000 condo funded your, your next deal. Yeah. So, um, I had a roommate, he got engaged, moved out. So I had my own place. I was going to get another roommate, but then I knew I was going to propose to my girlfriend at the time. Like that'd be kind of awkward. So I was like, okay, I'm going to not have a, not house hack for a couple of months proposed. And then we did a HELOC home equity line of credit. So it was like a second on it. What I like to do yearly is review all of our properties to determine values. So what's the property worth today?

20:07Is there anything I can do with that equity? Does it mean selling? Does it mean line of credit? Whatever. And at the time, it was like they had good rates. I went with actually a big bank on that one. And we just did, it was up to 80 % loan to value. So I pulled out the, it was like 80 ,000, 84 ,000. And then use that as the down payment and closing cost for the second house hack that we did.

20:27Tony J. Robinson:Define HELOC for folks that aren't familiar with that phrase. Like how is that different from a refinance or even selling your property? Sure. So a HELOC is a home equity line of credit. It's like a loan in a second position behind your main loan. So sometimes you don't want to refinance the first one because it could have a really good interest rate, some other good terms. And but then also more importantly with a HELOC, home equity line of credit, you only pay on the money you use. Imagine like a credit card. So why would I do a cash or refinance, get all the money out, and now I'm stuck with this high payment, but I haven't bought anything yet.

21:01So it gives me that more like flexibility on what to do with it. And so we use that to go buy the next one.

21:07Tony J. Robinson:It's a great tool. And like for all of our rookies, if you live in a house right now that has a good amount of equity and you're thinking about moving, get the HELOC before you move because it's significantly harder to get lines of credits on traditional rental properties than it is to get it on your primary residence, right? So get the HELOC first, then move on to the next one.

21:27Ashley Kehr:And there's nothing in most documents and most lenders, there's nothing wrong with you getting the HELOC and then moving. You're not violating any kind of mortgage fraud or anything. There's no requirement that you have to live in the house like there are with a lot of mortgages, like FHA mortgages and stuff like that.

21:45Tony J. Robinson:But this little condo gave you$80 ,000. Yeah, which is incredible. So what'd you do with the 80? Where did that go next? I convinced my now fiance to house hack again bless her heart if she's watching and Originally actually the plan was to buy another condo and then it was 20 like 17 So 80 you started coming into play which is the accessory dwelling units so you can convert a garage or build from scratch most people build from conversion of a garage and it's basically a rentable guest house. So it has its own address, it could have its own separate utilities and you can legally rent it out. And so we're like, this is cool.

22:23And I had clients who had done it where the garage is already partially converted. I was the first in my like kind of group to do one from scratch. So I had to explain to my fiance that we're going to be a guinea pig.

22:34Tony J. Robinson:Let me ask, why did you decide? Because I'm assuming the reason that people are doing the garage conversions first is because it's easier, right? Like the structure is there. It's more cost efficient. Why did you lean away from the garage conversion into actually building something from the ground up? So building from the ground up is very expensive. There's different building codes yet they'll abide by different fees for construction, right? The permitting fees might be different. There's probably school fees, things like that. You're not selling me on, on like the reason why to build from the ground up yet.

23:04Tony J. Robinson:All those sound like reasons not to. Well, no, but to be fair, like the rent's not gonna be that much different.

23:08Ashley Kehr:If you already have the garage there. Exactly. So the only advantage to doing it is if you want to keep your garage, like maybe you want to build on top of it. But even then, you're basically rebuilding the garage anyways because the garage skipped leg day, right? Can't support the weight. Or if you just want to build bigger. If you're going to build bigger anyway, sometimes it's just easier to scrap it and start over. So, you know, at the time, it was more, people were doing more of the garage conversions. Now we're seeing more than new construction, 1 ,200 square feet, building a couple of them on a property.

23:38We're seeing a lot more of that now.

23:40Tony J. Robinson:But sorry, let me clarify. You did do new construction or you did not? Oh, you didn't. Sorry, my apologies. I did the garage conversion.

23:46Ashley Kehr:They did the garage from scratch. His other friends bought them partially. Yeah, they were already partially converted, so they finished the process. Okay. I was the one who did the garage. I'm a center.

23:55Tony J. Robinson:That's why I was confused. I was like, tell me why you did it. And you just listed all these bad things. I was like, that is not selling me on why we should do it that way. But it makes sense.

24:02Ashley Kehr:How did you, when you bought this next property then, how did you calculate into your numbers what the cost would be to do this renovation? And was this cash you had saved up? Was this part of the HELOC? Yeah, so really good question. And it was really tough because not everybody really had an idea of what the actual cost was going to be. Because not everyone had even heard of it yet. So we did what was called the FHA 203k loan. That is where you put three and a half percent down of the purchase price plus construction costs and you finance everything else So we did an addition on the house remodeled it and then we did the garage conversion

24:40Tony J. Robinson:I just want to pause you there because a lot of folks know about the traditional FHA loan, but you're saying there's another version the 203k loan where you can fund both Your your acquisition and the renovation costs if it's your primary residence. Yes I would assume that there's probably some stipulations around that, right? Like they're not going to let you maybe take a house that's worth$500 ,000 and spend like another$500 ,000 like building up. So how do they put a cap or put guardrails around the type of renovation you're allowed to do? Yeah. So right off the bat, you can do like additions, but you can't do something brand new.

25:15So you can't add a pool. I couldn't do an ADU from scratch. So you had to work with what you had. and I think part of that is also because they they're probably assuming that the people who are getting these loans don't have that kind of experience and then in terms of the calculations it all has to appraise for the after repair value that's all they care about what makes this interesting especially in my case because the challenge with ADUs at the time was there are no comps right people haven't been building them they haven't been selling them so it's a little bit of a shot in the dark with the FHA 203k loan they're allowing you to basically they'll lend up to 110 % of the appraised value.

25:53So you got that little extra bump, which worked out for us because our appraiser gave the value zero because he's like, oh,$10 ,000 for the ADU. Oh, but you don't have parking. I'm gonna take away$10 ,000. I'm like, this is hilarious. But whatever, we got the loan done. And it still caps out at your county's loan limit. So at the time it was like 700 ,000, I think basically all in.

26:15Tony J. Robinson:So you're saying that when you did yours, the person who appraised it literally did not account at all for the fact that it was an ADU. Yeah, it basically canceled itself out because I talked to him on the phone. He didn't know what it was. And I'm like, it's a rentable guest house. You're an appraiser. You should be doing your research. Just throwing that out there.

26:30Ashley Kehr:That actually happened to me on a property. It was a single-family home with a guest house, and we completely finished it until they counted it as three bedrooms. It was one bedroom and two lofts, and the lofts each had a closet. And so it was three bedrooms and one bathroom. But since it wasn't the primary home and it was just the guest house on the property, I mean, brand new kitchen, granite countertops, you know, beautifully redone. They only counted it for twenty thousand dollars because it was just the guest house. Yeah. And it was like, oh, my God. So we actually bought it and they brought it up a little bit more, but not by much.

27:08Ashley Kehr:Yeah. But that was like a big lesson is like we dumped probably like, I want to say$80 ,000 into getting this to where it was. And then it only added$20 ,000 in value.

27:20Tony J. Robinson:Well, your situation is probably even trickier because you have to do the work first, right? Like you have to do the work first and then go back and get the appraisal, but yours is done before. Yeah. So was that done while you were in escrow? Yes. Gotcha. So you knew before you even closed if you were going to have enough to actually execute. Yeah, so that was the idea. We ended up, well, I guess I should backtrack because I think you guys would appreciate this. We were one of 17 offers on the property.

27:45Ashley Kehr:Wait, and this was in 2017? This was 2018, 2018 by then. Yeah, because the agent was smart. I'll give him credit. He purposely priced it low. Smart or annoying? That's happening in my market right now. Fair enough. Everyone is raising so low. I mean, just list all properties for a dollar and just let the market decide, right? Why do we go through the stands? There was a guy that did that in my area. It was like a national news he made or whatever. He listed it for a dollar? Yeah, there was one in Oklahoma that did it too.

28:18Tony J. Robinson:I have a flip.

28:22But sellers are doing that now. I heard of someone who was a developer. He couldn't get his property sold. He dropped it to like a million, which is cheap for new construction. He ended up getting like close to 1.4.

28:32Tony J. Robinson:I literally have a flip right now. We talked about this in the podcast. Like my listing agreement just expired yesterday. So I don't even have an agent. I got to find an agent right now. But we've been sitting on it. It'll be two years this fall. It's like in a mountain town in Idlewild. And that, who knows? Maybe I'll list it for a dollar and just like see. At this point, what else? You know, it can't get any worse, you know? You don't have to accept it. Like that's the part that I mean people don't get. You don't have to accept the offer that comes in. But yeah, so in this case, he didn't list it for a dollar, but he still listed it low.

29:03my wife liked the property. I was like, sure. And so we did an escalation clause, which basically said we're going to pay, I think,$2 ,000 over any bona fide offer. Most people put caps on it. I did not. I think caps are kind of silly because just like a seller doesn't have to accept, a buyer doesn't have to accept.

29:22Tony J. Robinson:So actually, I didn't know that. So if you add an escalation clause, it's not an automatic acceptance. You still have to come back and sign that final. Yeah, because they get to tell you what the number is. I didn't. I never thought about that so like our thought was my wife's like well should we put a cap on it i'm like no because like if it gets way too high we don't have to buy it yeah and so it went really high and i'm like there's no way this is going to appraise they the buyer did this intentionally because they know it's not going to appraise i want that benefit so i said we're going to accept it so it was listed for 499 we were an escrow at 567 the guy was selling because his wife had passed away so he was just telling me to move on get accepted I'm like on my way out flying out to Peru my broker who's representing me at the time called me he said or no I was in the office and he's cracking up he's like the listing agent got a call from a lady saying why are you selling my

30:13Ashley Kehr:house she was not dead yeah oh my god yeah and so I called my fiancee and I'm like cracking up she's like this isn't funny I'm like well it's better than the alternative so like I'm like this is fantastic. She's like, what do we do? I'm like, nothing. We're going to go to Peru. We're going to go to the jungle with no reception. I lined up all the inspections, let them figure it out. And once we had a reception, they figured it out. We entered escrow and then we renegotiated the price down to 525.

30:41Tony J. Robinson:So did it not appraise? No, that wasn't the issue. So what we did, there was actually two reasons why we did price reductions. The first one was from inspections. So everybody negotiates differently. What I do, and I'll say it on the podcast. So basically what we do is we do personal letters with the request for repairs. Because the problem is you don't know what's being communicated between brokers. You don't know.

31:06Ashley Kehr:Like playing telephone. Exactly. So what we do is we have the request for repairs form, and it says, see, letter attached. therefore the seller has to read the letter to determine what the request is and that way there's no confusion we're not being jerks so we did that that's how we got the first price reduction

31:28Tony J. Robinson:let's pause there though because i've never i've never done that before we almost always ask for some sort of concession when we do inspections but i've never attached a letter to that so is this like is this like an emotional appeal or like a logical thing like what are you writing in these letters? Both. So because it's a house hack, it's still primary residence. It's still my home. And my wife and I, we're going to start a family. It's so sweet. We're so excited. But the sewer line shot. And the fireplace doesn't work. And there's all this work that needs to be done. And also, by the way, it's California.

32:04So any disclosure, any reports you have you have to pass on to the next buyer so you kind of have to play ball so we negotiated that and then the second round was there was an addition done that was clearly it was done without permits which we knew it was done pretty poorly but I knew I couldn't necessarily ask for both because that would have been too big of a bite for them and I was like maybe we can make the numbers work well we realized we couldn't make the numbers work with the loan right because the cost to tear it down to be built. So then we had to go back and say, we need another like 20 grand because we got to tear this thing down.

32:43And they're like, well, we already gave you based on your due diligence. I'm like, this isn't due diligence. This is the lender requiring me because it's the FHA 203k loan. The lender, they're the bad guys in this, not me. The lenders are requiring me to tear this down and rebuild. And the only way to make the numbers work is if you give me another price reduction.

32:59Tony J. Robinson:We talk about this on the podcast a lot too, where it's sometimes the, and obviously you were, you were the beneficiary, the beneficiary here, but a lot of times the highest price isn't necessarily the best offer because had someone come with a non two or three K loan, cause you had a, what a two K escalation clause. Yeah. Had they just accepted the offer that was two K cheaper, they might've saved the 20 grand from the lender requirements. Right. So just as, as on both sides, just like be aware of that for the rookies that are listening, because you can use that to your benefit or I guess to your

33:28Ashley Kehr:disadvantage maybe i had a deal like that too where i was the buyer and i offered them i will take it as is leave everything you want in there i will get rid of it whatever it was like border quarter house or whatever you know like not too bad but bad and they said no no we need this money we need x amount and i said okay fine but i want to do an inspection i want the whole house cleared out, broom swept, and I will pay the full amount. After the inspection, after the repairs that needed to be done, after the FHA inspection, after all of those things, and then it delayed closing because we were doing the FHA loan.

34:14Ashley Kehr:We did the inspection. They had to make the repairs, get that all done. On closing day, the basement flooded, and then we got a 20K closing credit for the HVAC and the hot water tank. But if they would have accepted original offer back, and then, because literally we spent months negotiating, and then, but they would have been better off accepting that first offer of just a quick close, taking that price reduction, than what ended up happening over time. I see that a lot. Yeah. Yeah.

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40:08Tony J. Robinson:So I make sure I understand the sequence here. So for the$2 ,000 or$3 ,000 loan, is there any additional qualifications that you need to borrow as opposed to a traditional FHA loan? or is it? Good question. No, they still look at your credit, your debt, your income. Not like construction background or like you don't have to do anything.

40:26Ashley Kehr:Do you have to have a licensed contractor though approved by them and stuff? Correct. So the process, my understanding was fairly easy. I used, I worked with a contractor I've used on the development side. So he obviously has it. So they look at, I think like their reserves, their license, all of that. And then once they're in this system, in theory, they could be an FHA 2 or 3 contractor for whoever else they want. Yeah. But yes, it does need to be a licensed contractor. There are little nuances to that where they might make some exceptions. But generally speaking, for most people, they have to have a licensed contract.

40:59Tony J. Robinson:So you have to submit both the contractor and the bids during your due diligence period to make sure that they approve both of those. Correct. And that's usually the biggest delay is getting the bid in in time. Yeah, so what I did and I've even done one of my clients to the same loan is we just kind of like created a bit up front and Then sent it in immediately because really for the contractor a lot of them not all all they care about is really that bottom number What's the total so it's like they don't really care how it's broken down as long as they get paid And so that helped in getting the process moved a little bit

41:31Ashley Kehr:So you actually built out the scope of work and then assigned the dollar amounts exactly Exactly. And then, you know, the lenders want like, oh, split between materials and labor, which no contractor will do. And I'm like, this is ridiculous. So I'm like, whatever. Because again, like you just kind of figure it out. And again, as long as the contractor is cool with it. Right. Then you do the work for them and they say, yeah, that's OK. Hand it in.

41:52Tony J. Robinson:Exactly. So what was your closing period? Were you able to like a 30 day escrow? About 45. OK, so not that much longer. Typically, they're 45 to 60 days. OK, I just want to talk a little bit. So like once you close, how is it actually getting the money from FHA to pay the contractors? Like, are you do you get a big lump sum at the beginning or are they doing draws or there's inspections? Like, what is that process? Really good question. It's super annoying. Not the question, the process. So you have what's called a HUD consultant and the HUD consultant. You can kind of pick your own, but typically they just assign one.

42:27And their role is to basically represent the lender. so they'll come out do an inspection see what work's been done and then cut a check accordingly that process takes a while and that was one of the issues we had was it was taken like in the beginning it would take i think one check took three weeks and then one took six weeks i just start like threatening the lender to like get on it um and so eventually they're supposed to

42:50Ashley Kehr:typically do it within 14 days so was this like a small lender no this is a nationwide lender i was I was livid, livid, which I guess kind of makes sense. Smaller banks would probably be better. I would think.

43:02Tony J. Robinson:So, but did you have to come out of pocket at all for anything on the renovation or did they cover all of those costs or like, were you floating anything in the meantime? Yeah. So we ended up floating some money in the meantime because just like how I told my fiance that we were the Guinea pigs on the garage conversion. I also told her we were the Guinea pigs on the FHA two, three K love. Yeah. Fun fact. We're still married. It worked out. Yeah. Yeah, yeah, yeah. She hasn't killed me yet. So we learned a lot in that process. Because they were taking so long, my contractor's like, I got to get paid.

43:34And then it got to the point where I was like, hey, good news, I got a check coming your way for like 12 grand. He's like, Rick, you owe me like 60. I'm like, crap. So we had a conversation. I was like, look, the lender won't let me not finish this project. Like they're not going to not let me. They check in all the time, which means you're guaranteed to get paid. It's just a matter of when. So what I'm going to do is I have some money saved up for our wedding. I'm going to front that to kind of float you along. And then he was willing to work with us on that. And that was extremely helpful.

44:07Ashley Kehr:Was there anything that was signed between the lender and the contractor, like agreeing on timelines or a draw schedule or anything like that? Yeah, and most contractors will just sign off on it. Yeah. And not realize that. Realize how long it's really going to take. So yeah, there are certain agreements between the contractor and the lender to get all that squared away. And then sometimes the HUD consultant will participate in that process. You do pay the HUD consultant to come out. Usually as part of your bid, it probably depends on the scope of work, to be honest. I think ours, we had like five visits.

44:42So then what we started doing is we actually paid extra for him to come out more often to cut out smaller checks. So I'd rather spend, at the time it was like$350. 50 rather spend an extra you know a couple thousand bucks to come out more often to get smaller checks going to prevent the contract because it's also not fair to the contractor to be fair like i get it they have a business to run too and being a contractor is tough they're fronting a lot of

45:04Ashley Kehr:money that's still quite a bit of money to have them come out and do their inspection i know i know

45:09Tony J. Robinson:i know so i mean aside from the payment delays how long did you initially project this renovation to take and how long did it actually end up taking? Yeah. So part of the problem was the inspector for our area, he had fallen off a roof, not ours, a different property and broke his back. So then the city and all their glory was short staffed. So it was taking like every time we call the city for inspections, it would take 10 days for them to come out. So what was supposed to be a four month project took a year. Yeah, it was, it was rough. Were you guys living there during that time frame? So what happens to the loan?

45:49Tony J. Robinson:Because I'm thinking about a traditional hard money loan or a renovation loan. There's a cap. And if you go beyond that time frame, the debt gets more expensive. There's penalties and fees. Does that same thing exist on the two or three K loan? Yes and no. So it depends on how you have it set up. In our case, we were making monthly payments over the course of 30 years. So they didn't really care in that sense. They did care that they wanted the project done because in theory, if I foreclose, now they have a half built property. So in that sense, they didn't care. So your mortgage payment started on day one.

46:18Tony J. Robinson:Uh-huh. Your full mortgage payments. Uh-huh. What you can do, we didn't have it in the budget, but what you can do if you have the money in the budget is you can finance some of those payments. So I think it's up to 12 months. So you can not have payments, quote unquote, for up to 12 months if you finance it. But only if your ARV after the fact is high enough, right? And you guys just didn't have that budget to - Exactly. We maxed it out. Yeah, exactly. Interesting. So you guys carry the mortgage for a year. Yeah, we carry the mortgage for a year. And then as I mentioned earlier, we were the guinea pig.

46:50So we actually under budgeted for the garage conversion. And part of that was also like building codes change. Right. So it needs its own sewer line. We knew that we're like, OK, we budgeted when I called the sewer company like 3000 to go from the back house to the main house and just connect. Nope. We close building codes change. They want us to run a line all the way down the driveway and then connect. so I was like well that sucks so that was around$7 ,000 at the time. What we did do to get creative was we actually had them cut the driveway in the middle of the driveway and instead of pouring new concrete I just had to put a gravel so it looked aesthetic and people were like this is so pretty I'm like thank you I saved$1 ,000 so you get creative very fast very very fast.

47:37So yeah so we did that and then a year later it was actually like right after our wedding, the house was basically done.

47:47Tony J. Robinson:If you were starting this renovation project over today, now in everything that you know, having gone through this process the first time, what things would you do differently? Like on day one starting, like what are the differences you would change? Yeah. So I'm assuming I was in the same financial position, which was no money. Then I would have paid extra for the draws. I would have been like, look, contractor, You may still be behind, but I'm going to pay extra. That's my contribution to have them come out faster. Like on a regular schedule, I'll pay the extra few thousand dollars if it means you get paid on a more regular basis.

48:20And that would have helped because there were times when I went by the property and he either didn't have guys there or he'd have two guys there and they're barely working, which, to be fair, happens regardless if you're not checking in on it. But I also understood because we weren't paying him fast enough. He had to work other jobs that we're paying. So that's probably the biggest thing. If I actually had money saved up, I would have fronted the money and then just get reimbursed. There are some other nuances. At the time, you could buy actually materials and get half the money. So let's say you buy the flooring ahead of time.

48:53You get half that money back and then you pay the difference once the flooring is installed. So that's another way to kind of speed things up as well because at least the materials are there. and then you just don't reimburse yourself. You give the money all to the contractor to keep them ahead.

49:05Ashley Kehr:Now, once that was finished, after the year, you rented it out. So what did the numbers look like? Yeah, so the payments all in were about$4 ,600 and we had no money because the project took a year. We also slightly under budgeted for the garage conversion. So I told my then wife, I said, hey, I've been doing research. There's something called the Streamline FHA refinance, which is basically if you have an FHA loan, you can just do a refinance into a new FHA loan, but it doesn't require appraisals because I knew there were no ADU comps and the FHA 203k loan naturally is a higher interest rate, right?

49:43Because you're taking on more risk. As I said, so she's like, oh, that's fantastic. I said, haha, but to do that, we got to move into the studio ADU. And she just like took a second. I'm like, this is the only way it's going to work. So she's like, cool, let's do it.

49:57Tony J. Robinson:Why was that the restriction there? Why couldn't you stay in the main house? We couldn't afford it. So I was like, look, we move into the ADU and rent out the main house. That's a bigger chunk of our mortgage paid. And it's still considered to be owner occupied. The lender doesn't care where I'm living. I just had to pay movers to move a couch with the receipt that showed the main address, which the movers looked at me like, why did we just pay to move a couch? I'm like, not your problem. That's mine. Just take my money. And so, yeah, we actually moved into the studio ADU and rented out the main house.

50:28at the time.

50:29Ashley Kehr:And what did you get for rent for that? Just under$3 ,000,$299, which was actually about$400 more a month than what the comps were showing. But I looked at it and said, well, the house isn't quite finished yet. So we technically have time. And two, we originally designed it for ourselves. So we knew that it was a slightly higher level of like floor plan and things that you wouldn't typically see in a rental. Funny enough, we only got one application and they were the ones that got it. Yeah, things happen for a reason. And then they came from Facebook Marketplace. That's how we ended up finding them.

51:05And then we didn't know if we were going to move into the ADU or not until I learned all that stuff. And then we ended up moving back there. And we actually designed the garage conversion to have its own washer dryer. And because it was detached in the back, it had its own backyard. We fenced off the front, so it had its own front yard. And there was no windows peering into the yard. So it was actually very private because we did two glass French doors on the back and then the front door had a built-in window So we still got natural light without having to see anyone

51:34Ashley Kehr:It was as close to us a little casita as you can get and what would you have gotten for rent for the adu? at the time um, probably 1400 it's so big difference from what you could get for the main house exactly Yeah, it was definitely worth it and then so we did the refinance and then later on when rates really dropped below three percent then we did the big refinance and then then at that point we were living there for about 600 bucks a month was our portion before eventually moving into the main house so we lived back there through quarantine and through all that um for about two years i we i don't know if we've had

52:11Tony J. Robinson:anyone who's leveraged the two or three k loan maybe we have it maybe it's been a while but definitely haven't gone to that detail because i learned a lot about the two or three k loan Would you like do you recommend it to people like because you work as an agent in a very expensive market? Like do you do you recommend that as a as a loan product that makes sense? Yeah, it's tough. You have to really navigate through it. And I tell people that my look, it's it's annoying, but it works. And if it's to be fair, if it's the only way you're going to get the job done, then it's the only way you're going to get the job done.

52:41Things are a little bit trickier now. Right. ADUs for a long time haven't really appraised out. right like the cost to do you know back then it cost us we thought it was going to be closer like 40 to 50 000 it cost about 75 000 to do the garage conversion now it's about 150 but appraisers aren't giving it 150 000 in value so we just have to kind of like navigate that a little bit more um one of my clients she did do it but what we had found which was great was it was an illegal conversion and it was already two bedrooms so really she used the fha 203k loan to convert it to a legal unit. So it cost her about$100 ,000, but it would have cost her$200 ,000 to actually do it.

53:23So I actually would probably encourage people to consider that loan for like unpermitted work. Oh, okay. That way you're not going through that whole headache. It's still a headache, but it's...

53:33Ashley Kehr:Right, not as much. Exactly. Like the kitchen's there, the plumbing's there, that sort of deal.

53:37Tony J. Robinson:Can you... Because we have friends who invest in like Seattle, like Dave, the thatch wind does this a lot too, But they're they're doing the same process, but then they're actually separating it out as a as a new parcel That way it like they have to appraise it separately because it's it's its own now home They talked about doing that here in California, right? Like I think the first one finally sold and like San Jose or something. It's so like over 500 ,000 I haven't really seen it here. I mean on a practical basis. It's a little awkward Just because like how do you access it? but also and I'd be curious maybe you guys could do the research how much value does that hurt the main house because now you don't have a garage well more so for the detached yeah I mean yeah we just haven't really seen it much yet I feel like that almost solves it right because like for your specific example like you already fenced everything out and like if you can just get a an imaginary line you know drawn on the map now it becomes its own thing yeah so then yeah and he's like well if a condo would sell for a few hundred Why wouldn't this?

54:38Yeah, it might be.

54:39Ashley Kehr:Would you have to get two different mortgages then? Because they're two separate parcels. Would you piss off the lender? That's a good question. Because like I've parceled off like pieces of property. And when you survey it and divide it, the lender that's on the current property has to sign off that you're releasing that property from the mortgage. Or like if you do a portfolio loan, like where you have two or three properties under it, you still need to get the lender's permission if you're like selling one of them. So like if you already had the loan in place And yeah, like how does that look like to separate if you have these answers?

55:16Ashley Kehr:Yeah, I mean the only thing I could think of is like you're gonna go and like get a new loan for that new person But then it's like you're buying it again I know also then wouldn't you be technically underwater on the main house then because it was purchased with the expectation of an ADU. Now you're a hundred grand short. So yeah, it'd be interesting to look at. Well, let us know if you're watching on YouTube.

55:44Tony J. Robinson:So how did, how did living in the ADU for you and your wife, you said you were there for how many years? Two years. Two years. How did that change, if at all, the way that you guys think about design, like living, renting, managing your tenants, being so close? Like what did it change for just you as an investor in general? Yeah. So there's a lot of things, right? Because a lot of people build out these adus and never live in them and so they're designed horribly so there's three things that i've noticed with the bonus four so with adus privacy is super important oftentimes i see investors they'll pop a window that goes into the yard like nobody wants to see each other like that's the whole point um so but the fact that ours was very private was a big deal we couldn't see them they couldn't see us uh washer dryer is a big deal you're already doing the plumbing so we actually had it set up to where you could put a stackable but we ended up putting in an all-in-one unit like i guess you kind of see them in europe they're expensive becoming very

56:36Ashley Kehr:popular now yeah but they're really high maintenance really it costs we ended up swapping our first one out after uh we lived there for about two years then with the next tenant i ended up moving in yeah it's like three years because it costs like i don't know 500 bucks to get it fixed so for 2 ,000 bucks after so many times you're better off just swapping it but we did do it to where it was um i should probably preface the entire ad was all electric we did do that so we only had to separate electric we didn't have to worry about separating gas um so yeah it was 110 volt she plugged it in because it was in the bathroom you could just turn on the exhaust fan there so we didn't didn't have to vent out so that made it a little bit easier but yeah privacy washer dryer hookups um if you can have off street parking great if not that didn't seem to be a big deal um but yeah living there even little things like we had a light and we ended up swapping it out with like a ceiling fan because we kind of realized that like oh yeah it gets kind of warm in here you don't always want to run the mini split um and then also some sort of yard space was huge for us and it helped us get it rented out much faster than the competition because people might have pets or they just want to be, I mean, Southern California, right?

57:48Like we kind of paid this premium to not have to deal with some of the other stuff. So to be able to hang out in the backyard, uh, was a, as a big plus. So there's a couple of things and you can do that for pretty much any property. If you convert the garage, even if the garage is attached, you could do it on the, in the setback kind of credit yard space. You can do something.

58:08Tony J. Robinson:Interesting. Yeah. I feel like we should spend more time, especially for like the high cost of living areas, just talking about the

58:13Ashley Kehr:80 years of strategy because we don't know how to navigate it yeah yeah yeah well let's go back

58:18Tony J. Robinson:to the condo right because you you end up selling it yes walk us through i mean it was the the golden goose right that helps you get into the next deal why did you decide to sell it yeah um so i had the same tenant there for four years um because he was another friend of mine right reached out through my network and i was like look i'm gonna cut your deposit in half because we all know they're gonna trash the place anyways but i'll give you a two-year lease that made me feel more comfortable going into the second house hack um and then we had covid the hits so anyway they were there for four years they moved out um so we had to make a decision we're like do we continue to rent it do we sell it and there were a lot of factors it did have some good equity in it so it's like okay is there a better source of equity unfortunately the ultimate decision was in 2022 la still had the eviction moratorium in place because of the covid and so we could put in the most perfect tenant and literally the next day they could stop paying and there'd be nothing we could do about it so my wife god bless her she puts up with a lot so when she says something i listen and she's like is it really worth the risk and i said probably not i mean it's still a condo right so there's still hoas to deal with which have its pros and cons um so we just decided to sell at that point and it took about three weeks and then all of a sudden we got three offers over asking and got it sold.

59:34Yeah. Yeah. It was a little lulled, but we got it done. Yeah. We sold it for 453 ,000.

59:38Ashley Kehr:And you had bought it for 225 ,000. Yeah.

59:41Tony J. Robinson:But now you've got a, what a$200 ,000 problem of like, what are you going to do with that capital that you just made? Right. So what, where do you, what's the next move when you saw the company? So the next move was we wanted to try out estate. So one of, um, he's actually my brother-in-law. We talked about him earlier. I moved in with him, worked with his dad. Um, he's also one of my biggest clients and he started investing out estate. So he's like, hey, do you want to go 50-50? Because now we have our properties. You know, I had my house, he had his house. So we did the HELOC, home equity and credit.

1:00:11At the time we found a credit union. They were willing to do up to 90 % loan to value, fixed rate for five years at 4.75%, interest only payments. I'm like, this is a no brainer. So we quote unquote bought that property cash. So we ended up going 50-50 on a fourplex in Nashville and bought that so that was part of the exchange and then on our own because it was my first time investing out of state so I'm I try to be more risk adverse if I can so I was like okay I'm reducing risk by having a joint partnership with someone right so we're both sharing in that risk the next one is like what are some of these lower cost markets that still have a decent population different job opportunities and so that's where Alabama came up right very landlord friendly.

1:00:54There was a triplex. It was listed for 180 ,000. It didn't have hot water heaters in it, so it couldn't be financed. And he got full price offers, but he wasn't taking them. I'll buy it. So I paid cash because I had the sale of the condo. We ended up negotiating it down to 90 ,000. Yeah, yeah. My wife now has this expectation that I can get any property for half off. it's really tough even my realtor who's great uh he was even surprised i'm like he didn't want to so yeah we ended up buying it for like 90 ,000 put the hot water heaters in we ended up sending like around 55 ,000 or so and that was my first introduction to the burr method and did that and we put out of our own cash about 55 ,000 and we were able to do a cash out of about 120 ,000

1:01:39Ashley Kehr:and then are you just going to keep rolling that capital into more burrs that that's kind of the idea. Right now we're taking a little bit of a break. I don't know what you guys are experiencing. I'd love to get your feedback, but we've been experiencing really high vacancy rates lately. Things are taking longer to rent and that's happening across multiple markets. And so this year has been a much slower in terms of getting stuff rented. So my, we're almost there and having a hundred percent occupancy again. So my, once that's done, then I'll start buying more. And I really want to explore the five to 10 unit apartment space.

1:02:10I think the economies of scale are becoming more and more important with the rising cost of construction and things like that.

1:02:15Ashley Kehr:Yeah. In my market, I'm seeing the opposite, but I'm also very small rural areas. I've done, listed three units in the last 45 days and two or one just got listed yesterday. The other two rented within three days. We had over, I think, 70 leads for each of them. We had to take the showings and do an open house because we had so many people requesting, but they rented so quickly. And I think this third one will. But I just think that's that very specific small market. Like I can't say for a nationwide scale, but Tony is about to find out pretty soon what this market is. You can tell us how it is.

1:02:58Tony J. Robinson:Ask me in like three weeks and I'll let you know. We got a rental coming up. I mean, I'm noticing it more like we are noticing in L.A. we're actually at a four year low for rents. part of that's because a lot of the new construction that started years ago are finally getting finished but yeah markets like texas florida um tennessee you know because it's easier to build and all that you know they're all those projects are coming online i mean we almost wrote an offer on a place just outside austin and right before we signed off on the offer we took one last look at comps and we're like there's a new construction apartment complex there's a new and it's like we can't compete except on price which means i'd have to offer so low be offensive yeah see i don't

1:03:37Ashley Kehr:have any of that in my market there's no new construction rentals probably there's probably been one in the last 10 years i would say one in their patio homes so you have the garage everything so they're still not even comparable to a smaller apartment unit yeah that's fair no i will say here in la um i rented out my adu twice the first time took about two weeks the second one took about three days. It's pretty fast here because inventory in general is low when it is super expensive to bill. When you do have rent control and all those things, it actually keeps inventory low. So things typically rent faster.

1:04:15So it just kind of depends.

1:04:16Tony J. Robinson:I mean, you've got a really unique perspective, Rick, because you're an investor, house hacker agent also. So for all of the Rickies that are listening who live in a high cost of living area and they maybe want to house hack, If you were to kind of button up the the best practices of Rick's story What what would that be to the person that's listening right now? Um One look just outside desirable areas So it's because the desirable areas are super expensive as people get priced out They have to go somewhere It's like my condo part of the reason why I appreciate it so well is I was surrounded by more expensive markets So my hi, I'm your only option.

1:04:53You all of a sudden become the prettiest girl in the room Um, so there's that But don't be necessarily afraid of townhouses and condos if that's all your budget can allow. You just have to really look at the HOA docs because a lot of HOAs are getting hit hard right now. But I've had clients do it. And what we've been looking at is actually three plus bedrooms because it becomes a house alternative later on as a rental. Right. So if a family can't afford a house, but they need the bedroom count, that's where you kind of come in. So we are looking at those in terms of high cost of living. And, you know, with house hacking, you get all the benefits of being an expensive market.

1:05:30So, you know, a 3 % appreciation on a$100 ,000 home is$3 ,000. Do that on a million dollar home, you just made$30 ,000 in appreciation. So you're actually developing wealth arguably faster in these higher cost markets than you might elsewhere. So it just depends on what your goals are.

1:05:46Ashley Kehr:Okay, so before we wrap up here, I've got to ask, is there one thing during your investing journey or maybe your career as an agent? that you think was maybe unique or different than what most other investors do that you could share with us? Yeah, so Tony, when you asked me earlier about the closing cost for the condo and I hesitated, it's because I actually forgot. And the reason being is most people know about buying points. So you pay the lender money to lower your interest rate. What you can do is the opposite. You can actually raise your interest rate and then the lender gives you a credit.

1:06:22So the reason why I hesitated on that question because I remember raising my interest rate and the lender gave me the money to cover part of the closing costs.

1:06:30Ashley Kehr:Okay, so let's use numbers for this example because I didn't even know this was a scenario that happened. I just did it like last year. Say the lender is saying it's$1 ,000 and we'll lower your interest rate by half a percent. If you pay that, we will lower it. You're saying instead they'll raise your interest rate half a percent and pay you$1 ,000. Correct. Interesting. Yeah, so because I knew it was a fixer, Right. So I already knew I was going to refinance and get the PMI taken off and do all that. So I was like, fine, I'll temporarily have a higher interest rate. So that money went was almost like you think of it as like a seller credit.

1:07:07Ashley Kehr:Exactly. Where it just goes on to your closing statement and decreases your closing costs. Exactly. But it came from the lender.

1:07:13Tony J. Robinson:I've never heard of that. Do most lenders offer that? All of them do. Interesting.

1:07:18Ashley Kehr:You just got a note to ask? It's because like people don't think about it because they're like, well, I don't want my payments higher. But it's like but if you know you're gonna refine it like I'm in the middle of refinance my current house because I raised my interest Right to have some my closing costs covered because I knew it was a fixer So once we're refinance if all goes as planned knock on wood, we'll be saving like 900 bucks a month Um, it's happens to be a higher price point, but yeah, you can raise the interest rate and to be fair It barely moves the dial. I had a client do it once Because it didn't appraise which we actually knew going into it.

1:07:48It wasn't gonna appraise but we're like hey, let's use a negotiation interest rates were already ticking up so she raised her interest rate to match what the rates would have been anyways had we canceled and the lender not only gave her enough to cover the five thousand dollar difference in the appraisal but an extra fifteen hundred bucks in her pocket and her payments went up like 70 bucks a month she's like i'll live

1:08:08Ashley Kehr:well rick thank you so much for joining us i appreciate the opportunity drive out here where can people reach out to you and find out more information yeah so um i try to be active on Instagram and on YouTube at Rick B. Albert. I have started a podcast myself. You're both welcome to come on as guests. I would appreciate it called the key to the city of angels, where we do explore all things real estate. And then we try to tie it to Southern California because it's such a unique market. I can talk about my experience in the airport today. There you go. And yeah, the building codes are probably just about the same, long and rough, I could imagine.

1:08:43Ashley Kehr:Well, thank you guys so much for joining us on this episode of real estate rookie. I'm Ashley. He's Tony. And we'll see you guys on the next episode.