Making $3,000/Month Cash Flow (Per Property) with This Scalable Rental Strategy

0:00Ashley Kehr:Most investors underwrite the upside. Today's guest underwrites for everything that can go wrong first because that's how he was trained to plan missions as a Navy SEAL. And he's applying that same discipline to a real estate niche most rookies have never even considered, residential assisted living.

0:18Tony J. Robinson:Today, we're talking with Luke Frizzell, who went from a struggling house hack on active duty to running a$975 ,000 assisted living deal that nets his investors an 11 % return, while he still collects roughly$2 ,000 a month in cash flow, all without ever becoming a licensed care operator himself, which is crazy to think about. We're going to break down exactly how he built this out and how he uses a military framework to make every single deal decision.

0:50Ashley Kehr:This is the Real Estate Rookie Podcast. I'm Ashley Kerr.

0:53Tony J. Robinson:And I'm Tony J. Robinson. And with that, let's get into it, Luke. So thank you for joining us on the Real Estate Rookie Podcast today, brother. Guys, I'm so excited to be here. Bigger Pockets was a huge part of my early investing journey. And it's really cool to see how time has gone on. And it's kind of a full circle moment for me. So I'm honored to be here. And thank you guys for having me. Yeah, Luke, the pleasure's all ours, brother. And before we jump in, thank you for your service. I'm, I'm very, um, confident in my manhood, but whenever I get on the line with like a Navy SEAL, I just feel like I'm, I'm like a rung lower because you guys have gone through so much, man.

1:26Tony J. Robinson:So thank you for the service and appreciate you joining us today, brother. I appreciate that. I gotta say, um, we're just normal, normal guys. Um, maybe with a little bit of a crazy streak in us, but, um, definitely, uh, maybe a screw loose. I don't know, but, um, I gotta say it was, it was, it was my honor and it was like all I wanted to do. Once I found out what a Navy SEAL was, that was all I wanted to do. So it was just a desire to do that. And that's what got me through everything. And it was the time of my life I was in.

1:57Ashley Kehr:Well, Luke, you actually got started in real estate investing while you were a Navy SEAL. Then you found a bigger pocket. So kind of give us the 60 second version of how that all happened while you were a Navy SEAL. Yeah, I actually didn't even know what investing was until I was a Navy SEAL. So I actually looked over the shoulder of one of my buddies who was in my platoon with me and saw that he had like$150 ,000 in his TSP, which is military's version of a 401k. And I was like, how do you have that much money? And he was like, oh, you just put it into this thing that grows over time. And I was like, oh, I thought that was risky.

2:34You're supposed to go into the low risk things. And he was like, no, no, no, let me explain. So that was my first investment experience and learned a lot about what risk means in the investment space. But real estate is really where what I consider myself as an investor. I got my start actually with a mistake, which maybe we can talk about, because my first investment was a syndication that did not go according to plan. And that's why you need to have good due diligence. And that's why you need to understand what you're investing in and not go for appreciation only. But my first real estate deal was just buying our own house.

3:14And it was using the VA loan in Southern California. And we could barely afford it, but ended up making it an asset and copying that strategy again. That got my start into it. And with the help of BiggerPockets, I turned into an investor after that.

3:32Ashley Kehr:So with that first property, where was it and how did you purchase it and how was it actually an investment as your primary? With the first property, we just bought our primary residence with the VA loan. So we got to put 0 % down in a seemingly unfinancially feasible market of San Diego on a young military salary,$650 ,000 purchase price. We could hardly afford it at the time. But and as I would go and deploy and go on training trips, I would like be mad at myself for having bought the property. Because in 2017, the interest rates hadn't really dropped down to the bottom. And because it was just a liability, we weren't making any money on it.

4:19It was just draining our our bank account. But this is where copying what works comes into play, because I had seen other investors and my mentor doing what was then the ADU strategy and now has been coined that. So what we did was we converted our garage, which was 400 square feet into a studio apartment, started making fifteen hundred dollars a month off of that. And I was like, OK, I can get behind this because this was a way to actually cut down the cost. also forced some appreciation and I decided to do it again. So we did that a second time. And that was kind of like what scratched my itch on, okay, this is going to work.

5:01And when I looked at the TSP that I started investing in versus the real estate appreciation and value and cashflow, I was like, okay, I'm just making little TSPs for myself, except they're paying me every month. So I think I can get behind this.

5:15Tony J. Robinson:Luke, how much did it cost? And obviously this was, as you said, 2017 or 2018, how much did it cost to build out the ADU? How did you fund it? And then what impact did it have on the actual value of the property once you were done? So a lot of my early investment journey was a, let's call it luck. Sure, I put myself in the position to get lucky by purchasing the house, but we bought in Southern San Diego, which obviously has appreciated well over time. We refinanced out of the VA loan into a conventional loan, pulled out some money and put that$50 ,000 into the garage conversion, put an extra$20 ,000 from our own pockets into that conversion.

5:59And the way I figured it, hey,$1 ,500 a month times 12, can't do that math off the bat, is going to over time pay for that$70 ,000 into this conversion within five years. So that makes it a no brainer on the cash flow side. And then separately, it forced over$200 ,000 of appreciation on our home. So you add a lot of value with that. And I'm a huge proponent of house hacking and ADU strategy because of that. But ultimately, we found an even better situation with residential assisted living. And that's why I pivoted over to that in 2022.

6:40Tony J. Robinson:Luke, I just want to make a quick comment because I did do the math really quickly and$1 ,500 per month over the course of a year is$18 ,000. $18 ,000 in cash flow, because I mean, essentially the mortgage and everything you're already paying for yourself. So this is just like pure income coming back into your pocket. On a$70 ,000 investment, that's a 25 % cash on cash return. That's a really, really solid cash on cash return in most investment vehicles, right? So I think for a lot of new investors, sometimes we get so caught up in how can we go take down the next deal, the next deal, the next deal.

7:12Tony J. Robinson:But sometimes it's like, what if I just reinvest a little bit more capital into some of the real estate that I already own? Can I actually get a better return by doing that as opposed to going and buying something new? And this feels like the perfect example of taking an asset you already have and just extracting more value from it. Yeah, in a time where interest rates are high and prices have not gone down, you got to look at what you currently have. And if you're not in a home yet, we can talk about that. But if you're already in a home, how can you maximize what you currently have to generate an ROI and make it make sense?

7:46Like my wife and I had a young family at the time. My wife didn't want to share the house with someone else and house hack the traditional way where we have roommates. But we could put a wall in between our garage in our main house, live in the main side and then have kind of a separate unit where we rented that side out. And it made sense for us. We were already living kind of in a smaller footprint of a home. So we just didn't use the stuff in the garage and made that into a unit and made it make sense for us. And that move really set us up to open my eyes to the opportunities that we saw with residential assisted living and into my entrepreneurship journey that allowed me to confidently leave the military the way I did.

8:29So definitely, definitely agree with that sentiment.

8:32Ashley Kehr:Now, how about other ways that serving in the military has kind of helped you as a real estate investor? So, for example, kind of taking your mission planning frameworks and putting that into deal evaluation. What does that look like and what does that even mean? That's a really good question. So I look at every deal and I couldn't help but think this way because the SEAL teams, I was a SEAL before I was an investor. So I just looked at everything through that lens and I figured every deal is like a mission and we want the mission to be successful. And in the SEAL teams, we pick the missions that we do.

9:08We don't like to just go and be told and wait for something to happen. We want to go and do something that we pick on the battlefield of our choosing so that we stack the deck in our favor. So first and foremost, you have to know your buy box. And what I equate that to is mission first. First, you tackle the mission, and then you can talk about the execution. So if you know your buy box, then you can look at what your mission is going to be, and maybe that's a home. and then figure out how to make it happen on the execution side. First, you have to look at the situation, which is the macroeconomic environment, what deals are being done by other investors in the area and where money is moving.

9:48So the whole framework that I use is called SMEAC, Situation, Mission, Execution, Admin and Logistics, and then Command and Control. That's the acronym. It's super simple, but it works. So starting with the situation, as I talked about, getting into the mission, which is your buy box. I'm going to buy this type of home for this return on investment by this amount of time. And then you've got to figure out how you're going to do that. And that's the execution. Who do I need to talk to? What parameters do I need to set? What underwriting do I need to practice? So that when I see a deal, I can figure out by looking at the property price and looking at the picture of the home within about one minute.

10:28If I'm going to dig deeper into that home and actually do the underwriting to figure out if it's a deal or not, and it's going to match the mission. Then you go and execute admin and logistics. You set up your lenders who you need to talk to. You set up the bank financing, figure out with a letter from them how you're going to tackle the home. And you know what that interest rate's going to be because you've already talked to them. And then command and control, who are you going to talk to once everything's done? How do you manage the tenants? Do you have a property manager? How do you run the whole ecosystem with you as the commander setting the parameters for your mission and how you communicate with everybody on the team.

11:05Tony J. Robinson:All right, coming up, Luke is going to walk us through the model that's actually generating his cashflow right now, which is residential assisted living and specifically a structure that lets you own the real estate without ever running the care business yourself. That's right after a quick break to hear a word from our show sponsors. 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.

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14:01Ashley Kehr:Okay, welcome back. So Luke, let's get in to the residential assisted living and the lease to operator model, because I think that is going to be brand new territory for a lot of our listeners. So for someone who has never heard of assisted living as an investment, What is it and what made you walk away from comparing doors and chasing appreciation to focus on the strategy instead? Yeah. So back to kind of the core tenets of my investor philosophy, I believe in cash flow over door count. And what that really equates to is quality over quantity. There's this fallacy in the real estate space that however many doors you have is how successful you are or how you can measure yourself.

14:46And I've never subscribed to that mentality. I would rather have five homes that are generating well over the cash flow of a hundred doors because that's going to be a whole lot less hassle and you can actually manage that a whole lot better. No matter how you skin it, if you have a hundred homes, a hundred doors, or maybe it's a huge apartment complex, That's just going to be more problems that you have to deal with. And as entrepreneurs and as investors, we need to think about the mental fogginess that that's going to bring about whenever you're clouding your space and what you own with more and more things.

15:27So I got into residential assisted living because I noticed that. And as we had done the Southern California deals and I was not seeing as interest rates increased and prices increased, I was not seeing more opportunity for the mission that I wanted to complete. So that was the pivot. I looked macroeconomically at the city of Phoenix, Arizona, as a major metro and a place that seniors retire to. And all of this was brought about because I was looking for cash flow first and I was looking for hands off because I was a working professional in the Navy and I was not able to have a bunch of extra time to go and visit properties.

16:12But I did want cash flow because I wanted that base to work off of for future opportunity. So that's what made me find residential assisted living. and I can get into deeper into the why, but that was kind of how it started and what got me into it.

16:29Ashley Kehr:Now tell us about the lease to operator model. How does that work with assisted living and kind of explain it to us in plain terms what that actually means? Yeah. So my two things were cashflow and hands-free. So I needed a model that worked with that, that worked with the numbers. So my ADU strategy in Southern California wasn't going to work anymore. I had looked at short-term rentals. And sure, I had talked to people who made a decent amount of cash doing that, but every single person that I talked to was pulling their hair out with the stolen paper towels and the guests that were a huge problem and the legal issues.

17:07And I wanted no part of the amount of bandwidth that that was going to take for me to do that. When I found out about residential assisted living, I saw that you can buy a regular assisted living home or a regular, let's say my house that's a four bed, three bath here in Virginia. And you can convert that into an assisted living home that can fit, let's say in this house, eight residents, two per room, or in Southern California, where I had the three bed homes, six, six residents. And in Phoenix, it was 10, 10 residents. So I was looking for four or five bedrooms. And I actually find an operator who's going to run the care home because I don't live in Phoenix.

17:48I lived in Virginia whenever I found this. So I needed to find the right operator, vet them, make sure that they had the right mindset, the right mentality. They were going to actually care for the residents the way I wanted to actually happen. And I got them in there and they run the actual home and they pay me a commercial lease to be in the house. There's a lot of operators out there that just don't want to buy a home right now, but they do want to operate and care for residents the way we want to see. So just on the macro level, I knew that there was a senior care housing problem. I had personally experienced bad care through loved ones.

18:29So I knew that in everybody, when you hear senior care or assisted living, you're not thinking good thoughts generally. You're thinking where people go to die and not be taken care of. But I wanted to affect that. And I didn't know a way how until I saw this strategy. So lease to operator encompassed is buy a regular residential home, convert it into ADA compliance, set up an operator in the home to pay you a commercial lease and let them run it. And I set those leases up for three to five years. So it's long term. They have ownership in the home. They treat it like it's their own. They cover the utilities and everything inside the home cosmetically.

19:07And I talk to my operators once or twice a year. If there's more problems, maybe more frequently than that. But it is not that even the bandwidth suck that I had managing my own single family rental properties.

19:22Tony J. Robinson:Luke, this is a really interesting take because you're basically doing or allowing for rental arbitrage from these operators. So they're leasing the place from you at one price, but then they're getting their spread by charging the residents a little bit more. We interviewed Han Stone back on episode 714, and he also does assisted living facilities in Southern California. But I think he has three facilities. But he said part of the reason that he's kept his portfolio small is because he actually operates those himself. And as he talked to folks that kind of scaled beyond a certain number of facilities, the headache started to outweigh the potential profits.

20:03But with the model that you're talking about, it's basically like a triple net lease, right, where they're kind of coming in and they're taking care of everything.

20:11Tony J. Robinson:So I can see the benefit to this. I think the question that I have, maybe it's a two-part question, but number one, what kind of spread are you able to make in terms of your own expenses, mortgage, whatever else is associated with owning that property, property taxes, all those things, versus what you're leasing it out for to these operators? And then how are you actually finding them? Is there like a Facebook group where there's a bunch of operators you're going to, or are you going to other facilities and ask them, hey, do you want to convert my other one? So what's the margin look like? And then how are you finding these folks?

20:42Yeah, that's a great question. There's so much in there that I can expand on. But I'll start with just commenting on the model. You can set this up and let these operators run it. And if you look at the numbers across the country, it's about$6 ,000 a month across America for a resident to be taken care of at this level. So when you look at a home like our homes in Phoenix, and we have five of them, you can just – and 10 residents per house. So if there's 10 residents in a home and the average cost of care is about$6 ,000, that's$60 ,000 gross coming in for that operator. Now, that operator has the ability to pay you a little bit more in lease than you would normally get from a regular single family rental.

21:39My first deal in Phoenix,$875 ,000 purchase price. It was listed and the asking price was a million dollars. But the lease amount over the course of five years is$8 ,000 a month. If I were to rent that out as a regular single family rental, the rental rate is about$3 ,000,$3 ,200 a month. That would not even cover my principal and interest on the property. My principal and interest is about$4 ,150 a month. And with taxes and insurance, it gets up to about$4 ,600,$4 ,700. But$8 ,000 a month in lease well covers that amount and the spread. So my cash flow in the$3 ,000 plus range. And what I'm covering is basically the taxes, the insurance, and overall CapEx, and everything else is them.