Should You Ever Buy a Rental Property with Negative Cash Flow? (Rookie Reply)

23:17And there's groups that. really want to help make this a better industry. When we got into it in 2008, it was really the Wild West. It did not have a good reputation. And so when we got into it, we were really shocked that the licensing had a very low bar of expectations and they treated us as such, right? We're like, wow, they really are like not trying to work with us. So we realized that very early on and we found that to be an opportunity. So we turned that around and really worked diligently to connect with our local licensing members, go to them for questions, get them involved. And going back and looking at that now, I really think it made a big difference because we were probably one of the only ones in our area that was doing that.

24:04And they came to us, trusted us. They used us as that model, as the example in our market. And so we became that flagship where it over time, they really came to us asking us for advice. We were able to work with each other to make the industry and raise the bar for our industry to really, you know, give it a better name because there's such a good, there's such a need and these folks need help. They need a good place to live. And with, you know, with, with, you know, getting an owner that really cares about the business and getting the regulatory system that, that, that wants to help, we're really able to move the needle and make it a much better, much better place for, for these, for these seniors to live.

24:45Hans, you mentioned something about there, there being such a strong need for this. And I feel like oftentimes you hear about like the, you know, that there's this boom of people, the boomers who are going into this age of where they're starting to need more of this help and more of this assistance. Do you, do you have like any data or like, have you seen anything macro-wide about like there being maybe a shortage of assisted living facilities? I'm just trying to get a sense of supply versus demand, right? Because if there's this imbalance there, then there's this opportunity for investors to leverage where they can fill this need, but also financially, it'd be a really strong investment.

25:19So do you have any data that might tell us about that balance of supply versus demand? The first thing I would say is look at the population and then look at it over the next 30 years, there's a long runway of demand, right? There's nowhere near enough of supply right now to supply that demand. And I don't know when there will be. I can tell you right now, it's nowhere close. I mean, we have a waiting list at all times. We have free facilities and we always have a waiting list of folks that want to move in that we have to turn away. I don't know that it's, there's no solution out there right now, right?

25:58There's, as far as I can see, there's, there's more demand. And I don't know that there's going to be enough. I think what happens is we see a lot of folks that want to get in the business. We think this is a cash cow. You know, they think this is such an easy, you know, way to make, make extra money. I think you have to be very careful in understanding what is your approach? You know, if you're an owner operator, it's not easy, but it can, And your profit is going to be, you know, that's the area where you can, you know, maximize your profit. But you have to understand the business. If you want to get into it and just own the property and rent it to a business, a huge opportunity there.

26:36Less risk, right? You're going to be able to double instead of maybe, you know, we're looking at like six to seven times what the fair market rent is. If you go in and just own the property, rent the facility, you're looking at maybe, you know, two to three times. Well, two to three times with no risk is still a really great opportunity.

26:52Tony Robinson:Okay. So Hans, we went through the licensing. What about the lending side of things? How should a rookie investor approach a lender with this type of deal? Well, the first thing I would say is make sure that you secure your financing before you open doors as a business, right? Before you apply for your license, make sure you have your financing in place. That is the number one rule. And you look at it depending on how you purchase it. Are you going to purchase a primary residence? You know, you need to plan on living in there six or 12 months. Maybe it's going to take you a long to renovate it and prepare the house.

27:25So maybe you can purchase as a primary residence. If not, purchase it as an investment home because those interest rates are still going to dramatically, you know, those interest rates are going to be so much better if you try to get financing afterwards because the private lending financing is going to be, the terms are nowhere near as good. Secure your financing early.

27:47Tony Robinson:Yeah, we're going to look at this property. So your example is we're buying a property, we're going to turn it into assisted living. The best way to buy it is it's an investment property, it's going to be a rental. What if you're buying an existing one? How does that change how you're purchasing the property and what you're looking at? I feel like that would definitely complicate it. Do we have to go to the SBA and actually get like a small business loan to buy it? So there's a couple of ways you can approach it, right? I guess the first thing is, is it currently an operating business? Generally what happens when you purchase a facility, the license doesn't transfer.

28:26So the owner has to go get a new license, right? So if I'm going to purchase that facility, it's going to shut down. So then I would go about getting financing as an investment property because it's going to be vacant at that point, right? So that would be the best option if you can secure it as such. Otherwise, yes, you would have to go look at maybe SBA financing or private financing in order to purchase it as one. But generally what I see is a licensing does not transfer. So they have to shut down the facility and then reopen it once the new license is secured. And that would be the time when you want to obtain financing.

29:02Hans, one more question for me. I keep going back to the economics of this because I want to understand, or I want rookies to understand, how do we actually validate these deals? Two questions. First part of that question is, how do you validate the market to know if there's demand for that specific area where your property is? And then once you've validated that demand, how do you know what's reasonable to charge on a per room or per resident basis? Great questions. First thing I would say is an aging population. An aging population, they're going to need a place to live. The second thing I would look at is the aging population, what is your income source?

29:37What we have found is very beneficial for us is we looked at the market, understanding their money, where is their money coming from? In our market, we have a lot of teachers, we have a lot of government workers, and so they almost all have pensions and retirement. So that is what's funding their rooms at this point. other markets where if they don't have that financing, it is much more difficult. And obviously, the return on your investment is going to be much lower because they're going to be looking for ways to pay for this. Whereas if they've got fixed income, it's going to help secure and be a better investment for you.

30:14So I would look at making sure of an aging population and making sure that they have a source of income to fund it. And then on the actual rates for the rooms or per resident, is there like, are you looking at other facilities and kind of like secret shopping them to see what they're charging or how do you land them with the right prices? It's funny you said secret shopping because early in the days, that's what we used to do because we didn't know, you know, we're like pretending to be a resident, you know, what are you charging?

30:39Tony Robinson:I did that with long-term rentals that I first started too, you know, do you have any available? It's so funny because we were like, you know, then we realized later on that we're all in it together. So then we just all started drawing each other. It's like, hey, what are you charging? And we're open and we share, you know, and you have to look at your facility and what amenities you're providing, just like anything else. You know, another home in our market, you know, they may not provide as much service. They don't provide as much, you know, entertainment and activities. So they charge a lesser fee.

31:10We know what we're going to do. So we charge we figure out what we're going to be able to, you know, to charge to support our families. So ask, just ask, you know, I don't think you need a secret shop. I don't think it's necessary. I think you can just, you know, ask because it is a small industry and you will need to know everybody. You will need to know the others that are operating your business because you need to share. Maybe you've got a referral that you can't fulfill and you want to share it with them. They're going to share it with you. So you do become a network is, you know, your friends.

31:40It's not your, it's not your enemy or competition at the end of the day.

31:42Tony Robinson:Hans, what is like your, I don't even know what the term would be called, but like your eviction rate or non-payment? Like, you know, we look at long-term rentals and we know like, okay, in this area, you know, we're going to have probably more evictions. It's a lower class area. But what about with this model for you? Like, how often does that happen where a family can't pay or, you know, their pension, they no longer have it or, you know, the money is no longer coming in. And does that happen that often? And have you actually had to go through an eviction process for someone? And is it similar as a long term rental?

32:21Yes, we have had to do this. Surprisingly, only once, maybe twice in the last 18 years that we actually had to go through the process. You know, it's a little bit different because it's somebody's mother, grandmother, grandfather in the home. right you're not going to leave them no one's going to leave them there like you know there's more involved so it's a little bit different in that case what we want to do is when we interview families on the front end we it's part of our interview process is understand how is the funding going to be paid and how much is there what's the you know what's the length of coverage that's available what's going to happen when that runs out right so we really have those conversations on the front end to prepare for it so that we can come back and revisit to seeing where things are.

33:10If a family gets to a point where they have run out of money, and then so then at that point, we prepare for a transition over to like a state-funded facility where the cost is less, state can get involved, and at that point, the state can help pay for those facilities or pay for the services as well. So, I think you could go into it having the conversations, planning up front, then you can prepare for it. But the default ratio is extremely, extremely low because no one wants to leave grandma, you know, at the home unattended. We wrap our arms around to take care of her. Well, we've talked licensing, we've talked financing, and there's obviously some real process here.

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37:38Tony Robinson:One size absolutely does not fit all. Get a quote or find an agent today at the Hartford dot com slash small business. All right, so we've covered what the play looks like and what makes it complicated, but now let's zoom all the way in. For the rookies that are listening right now who have the capital, they're convinced that maybe this is the right thing for them to do. We want to talk about where to start. You talked about this a little bit already, but what does the right property actually look like for a rookie looking to get started? You mentioned bedroom count, square footage, layout-wise.

38:09I guess what separates a good candidate from a bad candidate from a property perspective? We talked about size, right? Our perfect home is right around 2 ,000 square feet. You know, we look for three bedrooms, two bath. We want an open floor plan. That is the key. You want a large sitting area where you can have your dining room, your activity room in an open area, and then you want to have your bedrooms in one section of the home. You don't want bedrooms, you know, one side of the house, another one's on this side of the house. You want them together. So if the house isn't already designed that way, you look at the house, can I update it, rehab it to make it work that way?

38:49If not, it's not the right house. It's going to cost you too much in rehab money to make all those corrections, move around plumbing and everything else. So large centralized space with bedrooms and baths close in proximity in one part of the home. And in terms of the renovations, and obviously this will vary, but I guess let me provide context here. For us, when we think about traditional rentals, there's always this idea of over-rehabbing for that area. It's like, man, I could put the nicest things into this rental unit, but if it's only going to get X for rent, then it doesn't quite make sense.

39:26How do you draw that same line for the residential assisted living facilities? Because if anything, like the ceiling is so much higher, I feel like it would be easier to like kind of go gangbusters on the rehab budget. So for the projects you've done, how have you drawn that line for yourself about, okay, here's probably where the ceiling is and what we should spend on renovations? Tony, I wish you would have asked me that question 15 years ago. It would have saved me a lot of money. In the early days, we made that mistake. We overbuilt it. We did more than we should have. We were going for, you know, making it look great versus functional.

40:00home. At the end of the day, you have to remember, you have eight people living in a 2 ,000 square foot home 24-7, right? These homes, they get worked. They get beat up, right? You want commercial everything, faucets, knobs, showers, everything. Get the strongest, baddest that you can find, and it'll still break, but at least it'll last a little bit longer. You don't have a plumber out there once a week.

40:29Tony Robinson:Are you doing like for the flooring and stuff too, like commercial flooring and everything throughout now too? Yeah, now we're doing a lot of vinyl because it's just so durable. You know, you've got spills and things, it's easy to clean up. So we used to do tile, kind of moved away from that more so going towards the vinyl now. But yeah, industrial everything. Look, at the end of the day, I'll share this with you, Tony. I think you'll appreciate this. So the very first home we've had for 18 years. It was built in 1954. It hasn't been updated that much. We just updated the kitchen two years ago.

41:05When you see this house, it is a normal house in Long Beach, California. It looks like grandma's house from the outside. It's kept up, but it looks like grandma's house. You walk in, we've got paintings of Italy on the wall. We've got a mural over here. You walk in, it's grandma's house, right? It feels, it looks like grandma's house. We have another house that we built six years ago. This home, we tore it down and built it from ground up. And it is designed specifically for this. It's beautiful, right? Grandma's house gets more demand than the brand new home that we spent so much money on. So after 18 years, we still really haven't learned our lesson that grandma's house, they want to feel it.

41:52You have to remember, you know, their 70s or 80s or 90s. They want to feel like home. They want to be comfortable. Right. And and that's what they want. Don't think about you. Think about what it's always think about your customer. What does your customer want? They want to be familiar and comfortable.

42:09Tony Robinson:Now, Hans, this is where my mind always goes with any kind of strategy or specifically a business that you're operating. What does the liability look like? What's the insurance? Is this like an outrageous insurance policy that you're having to get to cover yourself? Well, I can only speak for California and our insurance here is pretty high. It has gone up a lot. Yeah. I mean, I would say, you know, going back 10 years ago, you know, liability insurance was costing us about$2 ,500 for the three homes. And now it's up to about$15 ,000,$16 ,000 a year for liability. It covers the three homes. Yeah.

42:49Tony Robinson:So you're on average about five grand per property done for you. Yeah. And then also, too, you have to also, an area where folks make mistakes is the insurance policy. It's not, you can't, you can get a standard, you know, HOI, homeowners insurance policy for the home, but you're setting yourself up because it will not cover you in a case of event. You need an actual commercial policy. And that also is going to cost a little bit more. that's going to cost you probably three or four thousand per home per year. Now, are you doing two entities? So are you putting the property in one entity and then operating the assisted living out of another entity?

43:28That's a great question, actually. Yeah. And spot on. So we have one corporation that runs the business and then we have an LLC that owns the properties. And then, of course, we rent, you know, rent the properties to the corporation. And Hans, just for folks that are listening, like what is the benefit of doing that versus it's just running everything through one entity? Well, because our business is an escort, I'm not a fan of owning real estate in my escort because I can't change it in the future. If I keep it in LLC, I have absolute control over it and I can change financing in terms. And then I consult with my CPA.

44:01We weighed the options and they looked at it and we said, okay, we have option A, B, or C. And I chose this option because it gives me more flexibility and control over my assets. And I think there's, I'm not an attorney, So like no one quote me on this because talk to like an actual legal professional. But I believe there's also some separation of liability because if someone sues the business that's operating the residential assisted living facility, there's some separation there between the entity that actually owns it because they weren't the ones operating it. Right. So there's some some legal, I think, protections as well by separating it into two different entities as well.

44:36There is an extra layer. My attorney says that I'm protected with the liability, but I like the extra layer. I've got the S-Corp, the liability insurance, and the LLC for that extra layer protection to protect my family just in case.

44:51Tony Robinson:And then the umbrella policy. You get to be my agent. You've got family, your kids. You want to hug and protect them no matter what. So I'm a little more cautious than I was in my 20s, let's say. Well, Hans, last question, right? So for the rookies that are listening, if they ran numbers today, you know, modest market, right property, right operator kind of helping them behind the scenes. What does a realistic first deal look like in terms of potential revenue, potential expenses and net cash flow? And we can talk about something maybe in your area of Southern California. Like if I, you know, me, if I wanted to go start something in SoCal where I'm at, like what's a reasonable thing given today's rates, today's prices and so on?

45:29So, I'm going to give you a little bit of hack here. Okay. I'm going to give you an RC FB hack. Right? So I'd say, look, you need to acquire a property in Southern California. You're looking at maybe 900 ,000. You're going to need a budget, probably 250 ,000 to renovate the property. Then you need 12 months of reserves on top of that to make sure that you can get through that window renovation licensing and start and start getting residents in your home. And then I would look at it. Boy, it was my train of thought. Yeah. I'm like, okay, take your time, brother. It was a great start. You got me on the edge of my seat right now.

46:06I went totally with left. My ADD kicked in.

46:12You can pick it up wherever you want, huh? There you go. Ask me the question again. I'll get back on track. Sorry. What's reasonable for today? So you were going over the costs associated with getting that deal. What's reasonable in terms of total revenue, expenses, and net cash flow? Okay. Got it. All right. So then now that you have the property up and running, here's what most people are not going to tell you. You need a second one. So you want to be able to go into this knowing that one is good, two is 10 times better. Because now you can share your employees across the two, and you can have them cross ones off because somebody's going to call in sick.

46:50Somebody's going to be late. Somebody needs an extra night shift. Now you can use your employees for both properties and also to your cost. Now for your groceries, everything else goes, your cost of doing business goes down significantly. And we didn't realize that in the beginning. Once we opened the second location, that's when it really kicked in and started making a nice profit. And obviously the third one, it just elevates that because you hit your profit a lot sooner with your cost of doing business much lower. So if you're going to get in this business, don't think one, think two from the get go so that you can make sure that you prepare yourself to get there as quickly as possible.

47:29So looking at the numbers you mentioned, Hans, you know, 900K for the original purchase, another 250 or so for the renovation costs. So we're all in on acquisition is what is that like 1.125? Tack on another couple of six figures somewhere in that ballpark for those 12 months of reserves. So we're looking at probably like an actual cash investment somewhere around, what is that, like 400K if I'm doing that math correctly, assuming that we can get a loan on that initial purchase. What kind of return can someone expect, like cash on cash return can someone expect in those first, call it 12 months, or maybe even like the first five years on average?

48:04Because I know you said it takes some time to ramp up. But if rates are at, you probably know better than I do, 7.5%, maybe 8 % if we're doing like an investment loan like this right now. What kind of return can I expect today if I were to deploy that amount of capital? So your rates have gone up a little bit, but you would be able to structure a deal like this. How I would look at it is paying a few points to buy the rate down, to get that rate down into the low sixes. You put 25 % down, buy the rate down, you're in the low sixes. That's really going to help you keep your overhead low, right?

48:36And then once you're up and running, like I said, you're looking at six to seven times what the market rent would be for long-term rent. So you could easily, in this market, have gross rents of$40 ,000 a month. And you have to expect it's going to probably take you six to nine months to ramp up because you're new in the business. You've got to find your residence. So just plan for that. But again, as long as you're planned, you've got business for as long as you can see. As long as you operate and do the business correctly, there is no shortage of demand. And I don't see how they're going to fulfill it.

49:19I mean, we look at these large homes facilities now, and they provide a different level of service. What we provide at these small residential care homes, people want, people love the care. I mean, we're one to three. So we have one caregiver for every three residents, and sometimes it's two to one. So they're getting personal care. And for most families, that's what they want. If they can't take care of their mother, father, they want somebody else to do what they can't do, and they want that personal care. So the demand is there, and there's real opportunity if you look at this the right way.

49:58Tony Robinson:Well, Hans, thank you so much for joining us today and enlightening us. So with the model and the strategy of assisted living and investing in that, where can people reach out to you and find out more information about what you are doing? You know, I'd be happy to share my experiences and give some, you know, some some provided assistance to those looking into it. I'll be happy to share my phone number and email address. Please reach out. I'm happy to talk with you and, you know, and and give you guys some guidance in this. There's a real opportunity. Well, we'll include that for you guys in the show notes.

50:30Tony Robinson:You can check that out if you're listening on YouTube or if you're listening on your favorite podcast platform. Well, Anz, thanks again for joining us today. I'm Ashley Keyes-Tony, and we'll see you guys on the next episode of Real Estate Rookie. Hey, rookies. If you're watching this, we want you to apply to be a guest on the Real Estate Rookie podcast. That's right. Ashley and I are looking for amazing stories just like yours to be a part of our Real Estate Rookie podcast. Now, look, you don't need to be an expert. You don't need to have done thousands of deals. Even if you've done one deal, your story could help inspire the next listener.

51:02Tony Robinson:As a rookie investor, especially if you just got your first deal, it is all fresh in your minds and you are the best person to tell your story, give your experience on how you got it done to help someone else get their first deal. So head over to biggerpockets.com slash guest if you want to be a part of our show. Again, that's biggerpockets.com slash guest. And we'd love to have you on. Did you know if your windows are bare, indoor temperatures can go up 20 degrees. Turn the temperature down with Blinds.com and get up to 50 % off custom window treatments like solar roller shades and more during the Memorial Day Mega Sale.

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