How to 2X Your Cash Flow (or More) on the Property You Already Own (Rookie Reply)

Ashley:What if you could take the exact same property you are already looking at and rent it out for two to three times more than a standard single family rental without buying anything bigger or more expensive?

Tony:And what if not having money for a down payment is not actually the thing that’s stopping you? I mean, there are creative ways to get into your first deal right now that most rookies might never even.

Ashley:This is The Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:And I’m Tony J. Robinson. And rookies, today we are answering three questions coming straight from the BiggerPockets community and they line up with topics that we’ve been getting the most questions about lately, co-living, getting into your first deal with limited capital and a strategy that is genuinely one of the most overlooked cashflow plays in all of residential real estate. So let’s get into it. Our first question today comes from the BiggerPockets Forums and it says, “I keep seeing people talking about co-living and renting by the room as a way to dramatically increase cashflow. I own a three bedroom, single family home that I currently rent to one family for $1,600 per month. Someone told me I could potentially rent the same house, buy the room for six to $700 per room and make close to double. Is that actually realistic? What does it look like to transition from a single tenant model to a buy the room model?And what are the biggest things I need to think through before I make that change? This is great. I think we’ve heard a lot about co-living over the last couple of years and BiggerPockets actually has a guide that was authored by Miller McSwain, who we’ve had on the podcast a few times. So if you want to learn more about co-living, you can check out the BiggerPockets of Bookstore and find that guide by Miller McSwain. But let’s talk about what co-living is first and how it’s different from traditional long-term rentals. Co-living is a strategy where instead of renting your entire three bedroom property to one tenant, to one family, you individually rent out every single room. So you rent out bedroom one, bedroom two, bedroom three. There are some folks who kind of take this to an extreme, like we’ve interviewed the Nawsums and their strategy in the Pacific Northwest is they’ll buy a four bedroom and convert it to an eight bedroom.And they’re converting the formal dining area into sleeping spaces, maybe the garage into a converted bedroom as well. So they’re taking four bedrooms and making it eight, but then effectively renting out every single space that’s there. And the benefit to the point that was made in this question is that when you rent by the room in a lot of scenarios, you can actually make more money than renting out the entire space. So that is the idea behind co-living and why it’s important. Now the demand for co-living I think is also growing because people want more affordable places to live. And if you can get them into a nice neighborhood, into a nice home, for a fraction of what it would cost them to maybe rent an apartment by themselves, that is something that a lot of folks are looking for. And maybe it could be folks who are young professionals just getting started in their career.It could be people who are maybe living there temporarily for work. They’re only going to be there for six months to a year and then they don’t want a big place of their own. It could be people who are in transitional housing. Maybe they’re just recently divorced, maybe whatever it may be. They’re in some sort of life moment where they just need something for the short term. But there’s a lot of demand and I don’t think we’ll ever lose demand for affordable housing. So there’s a lot of upside both to you as a landlord and to the tenant when you can do co-living strategies correctly.

Ashley:I think the piece that I think about most with co-living is the operational difference from renting to a single tenant to doing room by the room model. So you’re collecting rent from multiple people instead of just one tenant that’s in that one unit. But also you’re now having to manage these people, manage the common areas. They don’t get along what happens. So I think there’s maybe more management at first, or at least putting in the operational pieces as to who buys the toilet paper for the one shared bathroom, who’s cleaning the bathroom. And we’ve had so many guests on that share the different rules, the different operational models that they have for some of these things. Some landlords will supply all of the paper products for the house. They supply the toilet paper, the towels. Then they also have, we’ve had guests on that they split it.So they are in charge of splitting it and supplying it. And then we’ve had tenants that just are guests on that are just bringing it for themselves. They have their own toilet paper. I don’t know if they take it into the bathroom with them and then take it out with them, but there’s so many different ways to actually set up the co-living model that I think that is probably the biggest difference from just renting to one person or one family that’s going to be living in the unit is really setting up how that operational piece will work.

Tony:Yeah. Now there is a part of the question that talks about the transition. And honestly, I think it’s a prety straightforward transition. It’s, hey, whenever your current lease expires or if they’re already on a month to month, you give them their notice and then you start to market the place for co-living. We’ve seen it done in different ways, but oftentimes you’ll want to furnish some of the main living spaces. I know some folks do co-living where they’ll also furnish the room. Others say, “Hey, you got to bring your own stuff.” But oftentimes the communal spaces are furnished. So maybe it’s just a matter of getting the furnisher kind of set up in those core places. And then you’re basically just starting the screening process in the same way that you would if it was a traditional long-term tenant. So I don’t think there’s a huge massive jump you need to make.Now you do want to do the math. I know you said someone told you that you could get six to $700 per month, but I try and validate that. Are there other rooms for rent in the area? And if so, what are they renting for? If you compare that to maybe a studio apartment or maybe a one bedroom apartment, are one bedrooms going for 400 bucks per month in your market? Well, then it’s probably going to be a little hard to get a six or 700 bucks on a room rental. But if one bedroom apartments are going for 1,200, well then yeah, 700 for a room seems pretty reasonable at that rate. So I think just doing a little bit of research as well on the actual revenue potential will be important before you jump into actually converting this property into a co-living strategy.

Ashley:And there will also be more work upfront. So yes, you are going to hopefully potentially make more money, but you are going to have to go out and find these tenants. So instead of just one tenant for the unit, you’re going to have to go out and find one for each bedroom, which will take a significant amount of work instead of just having to place one tenant. You can outsource this to a leasing agent. I actually have never heard how they would charge on that. Typically, a leasing agent charges one month’s rent to rent out a unit and probably would be similar to renting out by the room, whatever that person is. So you’re paying them one month’s rent per each room that they rent out. But one other thing that I want to add on to the operational piece to actually think about too is the utilities.Are you going to cover all of the utilities? Will they split the utilities, things like that. So easily transition, I would say into it as far as the property. I don’t see like you don’t have to really do a rehab or anything like that, but it’s more just getting these operational pieces in order. And some of them you might have to add in and figure out as you go, but there’s so many people that are doing it that if you go to the bigger pockets forums and you just ask in there, if someone could give you what their guidelines are, what their rules are or a copy of their lease agreement and how they handle co-living situations, you’ll get so many people that will actually send you a list of like, “Here’s what I provide, here’s what they provide, here’s what I’m responsible for, here’s what they’re responsible for.” It can be really beneficial.

Tony:There’s also a PadSplit, which is an option for investors as well to kind of help source and list your co-living opportunities. And I’ve heard a lot of investors having some success with PadSplit as well. We’re going to take a quick break, but when we come back, we’re answering the question that is probably the most search thing on our entire YouTube channel right now. It’s how do you actually buy your first rental property when you don’t have a lot of money? We’ll be right back after this.

Ashley:Okay. Welcome back. Our second question is from the beggar pockets forums. I am 27 years old and I desperately want to buy my first rental property. The problem is I only have about $8,000 saved. Every time I look at a deal, the down payment alone is 20,000 to 40,000 and I feel like I am years away from being able to actually do this. My income is solid. I make $65,000 a year, but I cannot seem to save fast enough. Is there a way to actually get into real estate investing right now with only $8,000 or do I just need to keep saving and wait? I’m starting to feel like I’m going to miss the window. First of all, no window to be missed. You don’t want to just jump into real estate for fear of missing out on the window and think that you need to buy something now.But on the flip side, the sooner you start, the more appreciation, the more equity that will build up over time in your properties. So there definitely is an advantage to starting now compared to later, but don’t rush into it because you think you’re going to miss out on perfect timing of purchasing a deal. So the first recommendation I’m going to give is doing a house hack. It’s a powerful way to own an investment property. Have some of your living expenses covered if not all of them and you can buy a two to four unit property, live in one unit.I don’t think in this question we know where the person is living as far as how much they’d actually need for a down payment, what their purchasing power is in their area. But with an FHA loan, if you’re going to live in it in your primary and rent out the other units, that’s three and a half percent down. Or we just talked about co-living, buying a property and maybe you live in one unit, your one bedroom and then rent out the other bedrooms. So house hacking is such a powerful way to actually get started. And then after a year, once you’ve satisfied the loan requirement of living in the property for a year, you can move out and rent out that area and now you have a full investment property.

Tony:I think one of my favorite loan products, and we’ve talked about this before, but it’s the NACA loan and we’ve interviewed folks who have used it before. Nancy Rodriguez, I know she used it. There’s some other folks we brought in as well, but NACA is a nonprofit that’s partnered with, I believe it’s Bank of America to offer what I think is potentially the best house hacking loan product that I’ve seen, but it’s essentially 0% down with zero closing costs. I think the only thing you might have to pay for, I think is either your inspection or your appraisal or there’s one minor thing you have to pay for and the interest rate is typically about a point lower than whatever the prevailing interest rates are today. I’m going to pull up the NACA website because you can go onto their website at any point in time and pull up the mortgage rates that they’re offering.And if I look today, I’m just going to type in today’s mortgage rates and it looks like coining at least to… All right, as of today, at least as of this recording, the 30 year fixed is about 6.73%. On NACA’s website, they’re offering a 30-year fixed at 5.6%. So they’re an entire point lower right now than where prevailing interest rates are. And that’s just how they operate. That’s not like a promo. There’s nothing special you need to do to get that. That is just simply the loan product that they offer and you can use a NACA loan product up to four units. So you can buy small multifamily, live in one unit, rent out the others. There are definitely some restrictions that come along with that loan in terms of purchase price in terms of your ability to move out. I want to say it’s longer than a year.I want to say it’s maybe two years, might even be three years, you have to live with the property before you can move out of it. And you can only have one NACA loan open at a time. So if you ever decide to try and use the NACA loan again, you’d have to sell that existing property. So there are some restrictions there. But if you want to talk about getting started and potentially the most cost-effective way possible, I think that the NACA loan product is one of the best that I’ve seen.

Ashley:Next we have creative financing. So there’s multiple different ways to get creative with your financing and one of them is seller financing, finding a property where the seller is willing to hold the mortgage on the property. So you’re negotiating the terms of your financing with them and you’re making payments directly to them. So you negotiate what your down payment is, you negotiate with your interest rate is and you’re actually just paying them and they’re holding the mortgage on the property instead of having to go through a bank and need a large down payment amount. The next thing is if you decide that you don’t want to live in the property, you don’t want to house hack, the NACA loan won’t work for you. The creative financing options, you can’t find a seller who will do seller financing. Then there’s also the save faster method, I guess per se, is increasing your income.How can you increase your income to aggressively save more money each month? I’m not a budgeter. I can’t stand budgeting. I did the Dave Ramsey way of paying off a debt and I love a lot of things about Dave Ramsey, but I prefer to increase my income. And yes, if there are some expenses you know you could easily cut, go ahead, but I’m not saying live frugal on race and beans like Dave Ramsey, see if there is any side hustles. With AI today, there are so many different ways to make money doing side hustles, social media even, that is there a way that you could increase your income consulting or doing jobs on Upwork, things like that and use that to aggressively save for the next year to increase the amount that you actually have for a down payment. Okay. We have one more break and then we’re going to get into the question that honestly blew my mind when I first learned about it and it involves the same three bedroom house everyone is already buying just used in a completely different way.We will be right back.

Tony:All right guys, welcome back. Our last question today is covering one of my favorite topics that we’ve covered recently and it’s a strategy that’s genuinely hard to believe until you understand how it actually works. So we’ll get into our final question, but this one comes from the forms. It says, “I’ve been hearing a lot about assisted living as a real estate strategy where you can make eight to $12,000 per month on a standard single family home. I own a three bedroom, two bath home that I currently rent for $1,800 per month. Is it actually realistic to turn a home like this into a assisted living facility? What does it take to get started, licensing, renovations, staffing? And is this something regular real estate investors can do or do you need a healthcare background? What are the biggest risks?” Man, we recently interviewed Hans Stone. So if you want to go back and listen to Hans’s episode, it’s Hans Stone, but he’s based in Southern California just outside of Los Angeles.So very high cost of living market and he’s been able to cash flow incredibly well with, I think he has two or three residential assisted living facilities and that episode is honestly a really well laid out kind of mini masterclass on how to get started in the residential assisted living facility space. But for folks that aren’t aware, assisted living facilities are homes for typically elderly individuals who are unable or maybe no longer desire to live on their own and they’re looking for basically twenty four seven support and care to help them continue to live with some level of independence. So these are homes where typically all of your meals are included. There’s activities they’re doing for the residents that are there. Obviously your room, utilities, furnishings, all those things are included as well. So it’s truly a place where the elderly can get the care that they need without having to go into a traditional, call like an old folks home, a senior kind of place like that.Now, Hans’s numbers were incredible. I don’t recall off the top of my head, but they were pretty close to like 12 to 14 grand per month, which is phenomenal cashflow, especially if you’re doing this in a high cost of living market. But there are also some very important things to call it as well. There is a licensing process you have to go through in order to set up one of these residential assisted living facilities. There’s a renovation process typically where you have to have certain elements in the home that abide by the rules of your specific state or county or whoever is a licensing body for where you live. So his strong recommendation was like, you need at least about 12 months of just like holding costs set aside when you close this deal in addition to your renovation budget to make this type of asset work.So even if you already have the property itself, you’d still want to make sure that you set aside the funds to renovate it, to meet whatever requirements your state or city or county needs, but then also have enough funds for the 12 months it’ll take to convert it into an assisted living facility and to get it fully leased up. So it’s not like an immediate spigot where you get a rental today and you can maybe have someone sign on a lease tomorrow. The runway’s a little bit longer with assisted living than it is with traditional rentals.

Ashley:One thing that I actually didn’t realize was when you do assisted living, you don’t actually need a healthcare background and in some cases, neither do your employees. I think it was even Hans that we had on that I was also on a panel recently where someone else was doing this too, and they didn’t have a healthcare background that you are hiring people to work and they’re not necessarily nurses or doctors. You can have some kind of relationship with nurses and doctors that come into the facility, but you are acting as assisted living, which you are not acting as a healthcare facility. So you don’t need to have people in the property that are actually licensed. So there’s restrictions on what you can do and can’t do obviously if you don’t have healthcare workers, but that’s why you’re offering your assisted living where they need assistance with maybe bathing with maybe having somebody cook their meals for them, maybe getting dressed or things like that where it’s definitely not like you’re thinking a nursing home where there is nurses on staff at all times too.So that was a big myth buster for me was I didn’t realize you didn’t need to have a background in healthcare at all to have one of these facilities.

Tony:But to the point of the original question, the income potential here is pretty big. I want to say Hans was charging, I think it was like 7,500 for someone who was sharing a room, I think it was like 10 grand a month or something. It was a pretty big number for someone who had their own room. Now again, this is Southern California outside of Los Angeles. So that number’s not going to translate everywhere, but that’s what allowed him to cash flow 10 or 15 grand per month was that he had three bedroom houses, four to five residents per house, each paying somewhere between 7,500 to 10 grand per month. Now there are obviously expenses as well. You got to pay staff to be there. You’ve got to buy all the groceries and do all those things and the activities, the insurance to kind of hold as well.That was one of the biggest risks that Hans talked about was you’re caring for elderly people, you got to make sure that your I’s are dotted, T’s are crossed, but the profitability margins are definitely there.

Ashley:Yeah. And I don’t remember what his insurance was, but I do remember it not being as expensive. My insurance on a five unit I have was way more expensive than what he was even paying in for insurance. And one last thing I think about this strategy too that we learned from him was it was definitely, it’s an operational business. It’s a hospitality business. It isn’t just like, oh, let’s fill these rooms, we’re getting these people and they’re paying, that’s great. It’s hands off. It’s definitely an operational business, that hospitality piece, just like short-term rentals. So many people got into short-term rentals not realizing how much they have to do with – The work. Yeah, really the work that they have to do to provide that customer service that experienced things like that. And that’s the same with assisted living. He said they have a waiting list for the properties because of the care and the activities and different things that they do in their property.And I guess one more thing is too is he mentioned that he doesn’t take insurance and he said that’s just like less hoops they have to jump through. So if somebody gets to that point where they financially cannot afford to pay there, he has different programs, different people that they can talk to to help get that person into some kind of assisted living where insurance does cover it on their behalf, but he said most of the time, I think there was maybe one person that he had a problem with in his whole time doing this that didn’t pay and he ended up helping them getting to somewhere where they could pay.

Tony:It is really one of those asset classes and strategies that truly is a win-win. It reminds me of, we interviewed Devonna, and this was a while ago, but she did sober living homes and it’s one of those asset classes where it truly is a win-win.You’re providing meaningful housing to a population that’s in need. The elderly, folks recovering from addiction who are searching for sobriety in the right environment to turn their lives around. So you’re truly giving them an incredible opportunity, but yet you’re also making a really great investment into your own financial future and ability to provide for your family. So I do like these… Again, they’re businesses that are just kind of disguised as real estate investing, but I do like these strategies because it makes it better for everyone involved.

Ashley:Well, thank you guys so much for joining us today on this episode of Real Estate Rookie. I’m Ashley. He’s Tony, and we’ll see you guys on the next episode.