BiggerPockets Real Estate Podcast - 185: How “Rent-to-Own” Can Increase Cash Flow and Maximize Equity with Bill Powers

Episode Date: July 28, 2016

On today’s episode of The BiggerPockets Podcast, Josh and Brandon sit down with Bill Powers, a real estate investor from the Chicago suburbs, to learn how he went from zero to over 70 units in five yearswhile focusing on lease options — also known as “rent to own.” This powerful strategy is one that anyone can begin using in their business to achieve more cash flow and equity — and today, you’ll learn all the details. Get your pen and paper out for this show — you’ll want to take some notes! In This Episode We Cover: How Bill got started in real estate All the mistakes he made on his first house Tenant screening must-haves How exactly rent-to-own works What the first look program is What you should know about the 2% rule How to not be a predatory investor Tips for running your business the right way A discussion on “instant equity“ Why some people are not fulfilling their lease options A profile of common tenants who go for rent to own What is Dodd-Frank is and how it affects people who use lease options Things to note before going for a lease option What the future of his business is How many hours he works in a week And SO much more! Links from the Show How I Found My Five Latest Real Estate Deals! (Five Different Strategies) BiggerPockets Webinar BiggerPockets Forums Zillow Rent.com Trulia Secure Pay One Books Mentioned in this Show The Book on No or Low Money Down by Brandon Turner The Book on Estimating Rehab Cost by J. Scott The Golden Rules by Bob Bowman Tweetable Topics: “Where rents are highest and acquisition of capital is lowest, that’s where we focus.” (Tweet This!) “I think you can always flip. I think there’s spread on properties all the time.” (Tweet This!) “There are ways to lose money on flips even if you make money — because opportunity cost is a big factor on that.” (Tweet This!) “Don’t be enticed completely by the flip side of things. Look long term.” (Tweet This!) Connect with Bill Bill’s BiggerPockets Profile Bill’s Company Website Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast, show 185. And now the properties are falling out of what I call formula. What you call the 2% rule, we call the $200 for every $10,000 invested. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Stay tuned and be sure to join the millions of others. who have benefited from biggerpockets.com. Your home for real estate investing online.

What's going on, everybody? This is Josh Dorkin. Host to the Bigger Pockets podcast here with my co-host, Brandon Turner. Hey, how's it going, Josh? What's going on, big poppy? Not a whole lot, you know. I went for my first walk yesterday with my new little girl,

like I'm a stroller and everything. She screamed the whole time. Wow. We turned around and just held her the whole walk back. Oh, so you were that guy that annoyed all the neighbors. Yeah, exactly. Yeah, you know, I try. Nicely done.

What about you? What's up? What's up? What is up, Joshua? Oh, you know, all's well. We've seen a couple movies lately with the kids, some fun family movies, the BFG and the life of dogs, which I loved. I thought it was amazing.

I got the house to myself for a couple of days. Wife and kids are off to the in-laws. So, you know, just- Party at Josh's tonight. I'm putting the word out. Bachelor life. Party of Josh's tonight. Kegger, B-Y-O-K.

I'm located at X-Y-Z Street, Montesana, Washington. Yeah, I'll send them all here. All right. Well, no one cares about your party, so no one's going to come. Okay, fine, fine, fine, break my heart. Yeah, so, hey, man, we got a cool show. Today's a cool show. Yeah, we're tackling a topic we haven't done in a long time.

Yeah, we're talking about lease options or rent-to-own a little bit and kind of a cool strategy, especially if you're a newer investor, this can be a really, really good strategy. for getting involved, getting started, getting some really good cash flow and some good equity at the end. So you guys will love that. So stay tuned for that. Awesome. Awesome. Well, before we get into the show, why don't we do today's? Today's quick. Love it. All right. A lot of enthusiasm there. Yeah, it was. It was. I'm sorry to everybody for that. No, I'm not. No. All right, guys, today's quick tip is check out our YouTube channel and subscribe to it.

You can go to YouTube.com slash biggerpockets or biggerpockets.com slash YouTube. Either one is going to take you to the same place and go check it out and hit the big subscribe button. We've got, you know, we've got hundreds of videos on there. 422 to be exact. We do. We do. And we're putting out new videos every week. So definitely subscribe so you can see what is to come.

Yeah. I actually just put a video there yesterday called the five or a few days ago, the five ways I bought my latest five properties. So if you want to know the five different ways that I bought my five different properties, check it out. Subscribe today. Subscribe today. All right. Have you ever lost a DSCR deal because the financing just took too long? Red flags popped up late.

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Otherwise, guys, obviously you're probably listening to the show somewhere not on our page. Most people don't listen on the page. They listen through some kind of application like iTunes. So if you are doing that, please take a minute and leave us a rating and review on iTunes, Stitcher, Google Play, wherever else it is that you're listening. That would be very good and helpful for us. Let's get to this thing. Today's show. Today's guest is William, aka Bill Powers. Bill's a real estate investor. He's been in the game for about five years now and is building a very successful rent-to-owned business. Over 70 properties in five years. It's pretty legit. Yeah, that's great. It's got a nice portfolio, building a nice business and all around really good guy. So great show, very, very good stuff, great for newbies, lots to learn for everybody, lots of good strategies for experienced people as well. So tune in and let's bring them on. Bill, welcome to the show, man. It's good to have you here. Thanks. Thanks, Josh. Yeah, so let's start at the very beginning of your story today and talk about how you got started in the real estate world because you weren't doing real estate for long.

I mean, you haven't been in this game for 50 years, right? No. All right. He's not even 50 years old. He's not even 50 years old yet, I know. I'm not going to make fun of his age like I do other guests. Thank you. Actually, 51, but yeah.

Oh, look at that. Wow. Okay, so how long have you been in this game? When did you get started? What did that look like? Sure. So in about, it was 2010. I was just exiting a printing company.

And I'll back up from that. In 2007, my wife actually asked me after when I was looking for something else to do from a moving out of a career position, she said, well, why don't we buy a house? And I said, no, I don't want to buy any houses. You know, that's not for me. So I decided to invest in a printing company and for three years did that. And in 2010, exited that business in kind of an uninvited way. So yeah, I got canned. Oh. I like how you spun it. Exited. I exited the company. I exited the company. No, no, no, I exited in an uninvited way. Which was the biggest favor they could have done for me. I was a partner in a label company. So you started to look for something to do and real estate looked like a good opportunity. So bought our first house and, you know, as many people do, you make all the mistakes on that first house, right? We bought it for too much. We took too long rehabbing it. We rented it to the wrong person.

and all those mistakes and got those out of the way and then started buying heavy in 2011, looking at the numbers. And we just purely looked at cash flow from the beginning. And the cash flow numbers worked. I'm kind of a numbers guy. So that's what we did and invested in our local town here. And where is that? Where are you?

So yeah, we're in north of Chicago. We're in Lake County, Illinois. And our office is in a town called Waikigan, which is a C plus, B-minus community, working class, largely Hispanic and we've invested largely here and in the surrounding towns. Awesome. Awesome. Yeah, we were just in Chicago a couple weeks ago, Brandon and I. Great town. Yeah. Yeah, it didn't quite make it to Waikigan. There was nothing really pulling us there. No, there probably wouldn't be. You know, we got a nice lake front here and we're trying to redevelop that. But other than that, it's just your basic blue-collar town.

Right on, right on. So you saw real estate as an opportunity. You went, you bought that first house. I'm assuming you bought that first house as an investment house, right? You're not talking about like a home to live in, right? Correct. Okay. So tell us about that first house and how did that kind of go about it. You said you made all those mistakes. So people love hearing how people school.

Oh, yeah. So talk to a couple local investors and introduced me to a real estate agent. And he said, yeah, I got the perfect REO for you. We went and bought it off the MLS. And yeah, the numbers looked good. You know, from the get go, we decided we were going to rent it, of course. and that's really where the majority of our business has been focused. And so I was at the time working with a partner who was in the construction business, and he was a union carpenter.

And we rehab the house slowly because he was working full time. And I was doing this full time at that point because it was my start of my new career. And yeah, so rented it to the wrong person, got weekly rent payments instead of monthly. You know, just all the mistakes. In cash. Some cash. some check, you know, whenever we could get it, just didn't have the right processes or procedures in place to begin with. But then you start to make it a business. Like, you know, I've had a couple

businesses that I've run in the past. And so we just started to look at it more as a business and grew it from there. So the wrong person, how did that happen and how did somebody avoid doing what you did? You know, we put out a yard sign, which to this day is still the way that we get most of our leads, although we use a lot of, you know, Zillow rent, truly a type of, you know, free stuff out there, but didn't screen him the correct way, right? Didn't ask for employment verification and, you know, all the things that you really need to do that's kind of typical in our business now. I mean, our standard procedure is those credit applications and employment verifications and, you know, background checks and criminal checks and all those

things that you really need to do with some type of service out there. What you're saying is if somebody's going to do a proper job of screening a tenant, they've got to do the employment verification, the credit, the background criminal, and not just say they're going to do it, but actually go through the process and verify and validate all that stuff. What else do you check on tenants these days? We get a full report that costs us 30 bucks per person, and it gives us credit scores, gives us just everything, complete debt profile, you know, every single debt that they have, whether there's any evictions or credit actions against them. So, you know, we have a full picture. because our company, what we do is we do rent-to-own homes. So we really have to follow the Frank Dodd guidelines of really being a company that, you know, checks you A to Z. We have to follow that 43% debt load ratio for all of our clients because they're doing a rent-to-own program.

Okay, we need to dig on that because that's a- Yeah, we'll climb into that for sure. So I wrote down some notes. We'll cover rent-to-own, Frank Dodd, and 43% here in a minute. I just had a curiosity of the while we're on topic, who do you use for your screening stuff? Boy, I knew you were going to ask me that. My office manager does it. That's fine. Don't worry about it.

We'll put it in the show notes. Okay, we'll put in the show notes. Yeah, look at you. You got this down. All right, so you got that first deal. So you said Waukegan, I think it was? Well, actually, our first one was in a town called Mundaline, but then I quickly learned that rents were similar.

And you have to look at this as an investor, where rents are highest and acquisition of capital is lowest. Yep. That's where we focused. And Waukegan was that town. Mundelline is a good town for appreciation in our area, but Waukegan is really the cash flow king. So what are we talking about in terms of purchase price and what are we talking about in terms of rent? Sure. So I'll use that first one. Bought it for 84, put about 15 into it and rented it for $1,300.

Now today that property is worth about a buck 60 and we rent it for $1,600. But the real cash flow opportunities came more in our local area around here, which acquisition back in the day. was $20, $30, $40,000 at the high end. Rehabs are typically about $25,000. We do everything A to Z from mechanicals to windows to, you know, if a roof is necessary. Kitchens and bathrooms are largely what we focus on too. And we rent on average for about $1,400. Oh, wow. So we try to focus on a net cash flow on a monthly basis of about $600 a month after debt payments, which we do all of our debt on a 15-year 5% formula. That's what our local banks either give us in fixed rate or we elect 15-year mortgages for even if it's a balloon.

Right on. So let me transition this a little bit. So you've built that first property. Now you've got a full-fledged business that you're running and you're working with other investors on and we'll kind of get there. How did you transition from, you said in I think it was 2011? you started buying heavy, north Chicago. What did that look like? You went from that one house to how many did you do the next year?

Right. So February of 11, I bought half a dozen in February and March that time frame. And then our bank, our local credit union that we've been with for 20 years, came to us and offered the opportunity to put some debt on the properties. So we debted out those properties for 80% of what we invested in them. And we took that roughly quarter of a million dollars and turned it over again and turned it over again. And it was portfolio loans from local credit unions and banks that have really driven all of our success in our business. So did you start, you paid cash

for those properties? Correct. Okay. So you put debt on it, you took money out and then just kept kind of repeating rinse and repeat the process. Yeah. Right. And we do them in bundles of five at a time. We have friends and clients who do them one at a time or three at a time. They'll take those packages to the local banks and they'll cross collateralize them and provide them new equity to invest. Got it. Yeah. Very cool. All right. So I want to go back then or move forward and talk about this rent-to-own thing because it's something that we haven't covered very much on the show. Something that I'm a fan of. I'm doing a lease option right now. And I like the concept of rent-to-own. And so let's talk about for those people who have no idea what we're even talking about.

What does that mean? What does your business structure look like in that regard? Like, how does that work. Sure. So what we do on a universal basis, that's every single home we approach the same way, and that is that we offer it on a rent-to-own basis. So when we have a prospect that comes in the door, they know that because of our signs and because of our website that our homes are rent-to-own. And what that means is that $150 of your rent every month goes towards a predetermined purchase price on the home. So we set a strike price before a resident moves into the property and they know what they can buy the house for in three years. All of our rent, all of our leases are three years long, right?

So they have time to sort out credit issues. They have time to acquire additional down payment money if they need it. But most of the time they don't because the monies they're accumulating from the rent to own program are enough for them to qualify or use for an FHA loan. We also require from all of our residents first month's rent and last month's rent as well as first month. So they have those pockets of money to draw from when they're executing their contracts. Okay. So can you walk us through a hypothetical or a real life doesn't matter? Like, I mean, you buy it for what? You put what into it. You option it for what, you know,

do a rent-own for how much? And how does that all work? Yeah, very different today than it was three or four years ago. I'll take three years ago, buy it for 30 or 40, put 25 on average into it and then we put a rent to own price on it which is largely based on a current appraisal which would be in the 100, 110, 120 type of range. Now we've started to bump those up because the last thing we thought would happen in our market is significant appreciation and voila, right? You've never seen it. Bonus.

It's a bonus. It's a huge bonus. When you base your business solely on cash flow and you get those appreciation numbers that have been staggering in our market. Average purchase price of a house in 2012 was $52,000 in our market. Now it's $110,000. Wow. So it's just exploded.

And so after three years, we adjust those purchase prices if they haven't executed their option or when a new resident moves in, we make it more market-specific or more price-specific to the current market. But a lot of the homes that we've sold lately, I wish we sold them for $20,000 more, but the price that we set on them was, you know, $99,000. You know, that's the price that they bought the house for, which it was worth 120 or 130. So good for them.

So it's to the advantage of a buyer to get into a rent-a-hone on an appreciating market if they can get so lucky as to lock in a low-option price. Correct. Yeah. Okay. And so that was three years ago. Now, what about today? So today, you know, a typical purchase might be 40, 50, 60,000.

$2,000 with similar rehab, and now the properties are falling out of what I call formula. What you call the 2% rule, we call the $200 for every $10,000 invested, right? $200 in rent on a monthly basis for every 10 grand that you've spent. So if it's 60 grand that we spend on a home, we want to get 1,200. If we spend 70, we want to get 14. If we spend 80, we want to get 1,600. That's kind of our formula. And it's hard to stay in formula now.

but we do still find deals like that. We buy directly from banks where we have those opportunities. We actually work with a local nonprofit now where we buy houses before they go on the first look program. If you're familiar with the first look program. Can you explain that? Sure. So the first look program is available only to owner occupants through Fannie Mae.

And Fannie provides you the opportunity if you're going to live in the home to buy it at a certain price before it's opened up to us investors. What we've started to do is partner with a local nonprofit where they can actually buy the homes before they go on the first look program and sell them to vetted contractors in the area who will rehab the houses and either rent them out at a high level or they'll flip them. And the program is called the National Community Stabilization Trust.

I would suggest investors all over the country look into a nonprofit that partners with the NCST, because it's a great resource or great source for distressed property. That sounds awesome. Yeah. I'd never heard that before, so that's cool. By the way, your 200 per 10,000 is semantics. It's the 2% rule.

Exactly. Right. That's what I've, you know, when I started getting out bigger pockets two years ago or so, I was like, oh, that's exactly what I'm doing. That's funny. Now, a lot of, let's talk about that real quick before we get into the, where I want to go Dodd-Frank a little bit. So the 2% rule, I hear people all.

the time and they say this to me. I probably get an email a day that says this. I can't find two percent deals in my area. Should I'm one percent in a lot of issues? Should I not, should I not invest? I should quit. I should give up. What do you say to those people? I say that there's different types of investments out there. I've started to go to markets that are more appreciation based. So I'm sub, I'm one percent or sub one percent on a few investments. But I know that the appreciation value on those, or opportunity is greater than my. cash flow properties that I have in C plus areas. So yeah.

Let me just call you out there really quickly. You said, you know the opportunity is greater. Now, for the listener, he didn't say he knows he's going to get appreciation. He's just saying he knows the opportunity is greater. I think it's really important, especially for new investors to kind of to point that out because you get a lot of people who are like, oh, I'm buying here because I know it's going to appreciate. Can you make that distinction and explain particularly to a newer investor why that's not the case and what they need to be thinking about?

Sure. It's quality of schools, right? So the cash flow opportunities that we have have lower quality schools in Waukegan and Beach Park than they do in a town like Libertyville or Munderline or local communities. They sound like Simpson towns. That's, I guess so. It's Lake County. So better schools relate to what I say or what I envision as a better opportunity for appreciation in the long term. And it's proven itself out over the last couple of years. But some of these towns are building little downtown areas for shopping and restaurants. And, you know, the schools drive it a lot too.

And the tear downs that you see constantly in those communities, too. are an indicator that, hey, you know, there should be some future appreciation. But we always buy properties with, you know, what I call IE, right, instant equity. Instant equity is something that you've got to have, whether it's a cash flow property or whether it's something that you're looking at as an appreciation play long term. Yeah. You know, minimum $30,000, you know, you target 50, but sometimes you don't get there. But on the appreciation plays, we look for instant equity of $75 to $100,000 plus.

that we could sell it for right now if we wanted to with that buffer in it. But keep it as a rental and hopefully it goes up long term. But you focus, and again, you focus on cash flow, you look for the instant appreciation. Again, to the newer investor, a lot of them are tempted by appreciation. You know, hey, it looks like this is a hot market, you know, such and such as hot Denver, for example. Yeah, it's crazy. Oh, my God, Denver is appreciated 100% or 20%. percent in three years or two years or two months as it probably stands. And so they get excited.

They're like, oh, I'm going to start buying in Denver because it's going to keep going. You tell them, no, you need to look for other fundamentals in there, correct? Absolutely. I mean, it's not just about betting on the come, right? I mean, you can't just hold. That was a gambling term, right? Exactly, right. You know, you're, you play craps. I do. Do you play grass? No. Neither do I.

I know. You can't hope that that's going to happen just solely. I mean, the property's got to support itself with minimal cash flow. Some of our properties in A plus areas, I'll call them, they have cash flow of, you know, a couple hundred bucks a month. They're still supporting themselves, but they're not the big cash flow properties that we have in C-plus areas like Waukegan that you make 600 bucks. But it's supported by that cash flow. because I know a lot of people, it's just, you know, a lot of people go and buy properties and say, hey, I'm going to buy these properties because I know it's going to go up.

And it's okay if I buy it and I'm at a loss of $2,000, $500,000 a month. I'll eat that because I know in five years this thing's going to be, you know, worth 10x that. And so I personally, I say that's crazy. That's just me. I mean, everybody's entitled to their own way of running their business. I could never do that. But it just And to give you some, yeah,

to give you some understanding of my portfolio, I have five properties in the appreciation areas. Yeah. I have over 70 in the cash flow. So I had to have the cash flow first in order to look at those higher end investments and invest in those areas because otherwise I just couldn't,

I couldn't sustain a business on that. And I think that's a big part is where are you at in your investing, right? And what's your mix? Yeah, what are you trying to do? I mean, I think about when first started, my goal was to quit my crappy job at a bank. And so, like, I didn't want the job. So I was buying cash flow and property that had no money. I was just trying to acquire what I could. But today,

like, I don't, I mean, is adding one house that gives me $100 a month and cash flow going to do that much for me? So now today, I'll play a little bit more of the appreciation game. I'll buy a nicer. I'm not going to buy a bad deal, but I'll expand and I'll buy some of the nicer areas, hoping that it goes up in value because I can support that today better than I could before. So just where are you at today versus, yeah. To that, I mean, it's a good question, though. You know, where's the line, right? I mean, if it loses $100 a month, is that okay? Well, for somebody, you know, further in their career, further in their portfolio, in their mix,

maybe that makes sense because it's supported by all the other properties. But particularly for somebody new, I mean, you don't want to be looking at that. Right. Yeah. Absolutely not. You know, and even with all the debt coverage ratio, overages that we have and the, the, you know, the large cash flow that we do have off of our strong properties in our portfolio, you know, it's still not, you know, because we do everything on 15-year mortgages,

it's still not this massive amount of cash that's available at the end of the month. And if they were tight, you know, they would turn out like a lot of people did in 07, 08, 09, investing in properties in that time frame. Hey, you had mentioned the 15%, 15 years, not 15%. Why have you guys elected to go with 15-year terms versus 30-year? I think one of the things that it's, yeah, or 20 or 25, which had been offered to us, I think it keeps us financially responsible. So it keeps us focused on, you know, making sure that the profitability and the business is there

and we're using it to pay down our debt. You know, at this point in my business, we've looked at refying some of our properties so that we can use some of that cash to do more. more things like flips and maybe even invest in more rental properties, even though the prices are getting to a point that they don't hit formula. It was just what we did in the beginning to really keep ourselves on track. Right on, right on. All right on. So we, as we often do, we went off track there a little bit. So let's rein it back in. You were giving an example. You were talking about the current property types. So on a rent to own, so you guys, you go, you purchase the property, right? Yep. How then how does the tenant buyer kind of fit in? How does all that kind of work out?

So we find a property that we think is a good investment from a cash flow standpoint. And then we rehab it with one of a half a dozen subcrues that we work with on a consistent basis, you know, get the property rehabbed and then we put it out onto the market. We set our strike price, Josh, at a price that's about what the appraisal value would be if we went to go set. it. It's not always 100% might be a little under, it might be a little over. It always depends on the appraiser, right? But that's where we set our price. And then we put our properties out on Zillow, which infiltrates everything out there. It's free. It's a great way to market your properties. And then we do it through yard signs. And a lot of it's word of mouth now. So we have

enough clients out there, enough residents that talk about us. We do annual resident events. So we invite them to come to a session on credit repair or there's mortgage brokers that they can work with to find out what the best opportunities are for grant programs. I'm involved with a nonprofit that's called the Affordable Housing Corporation. And they provide grants, assistance, education to learn how to buy homes, learn how to work through foreclosure or then they also rehab. blighted properties. But that's how it works is, you know, we find that client who's interested in actually owning. We don't want people who are interested in just renting that we want people who want to own a home. And unfortunately, we're not getting as many people to the finish line as we'd like to. I was just at the Single Family Home Investors Conference in May down in Miami. And they talked about,

you know, some of the folks that are doing what we're doing at a much bigger scale, talked about the fulfillment rates or the completion rates on rent-to-own programs. And they're terribly low at, you know, six, eight percent. You know, ours is in that range, unfortunately, too, even though we try to do this education and get people to the finish line and give them longer term leases to get them there. So, yeah. Why do you think that they're not fulfilling their lease options? You know, some of it's that they're afraid of it. Some of it's, they just never get their credit in a position that it's, it's ready to do what they need it to do. I think it's a variety of things that just, you know, people aren't motivated to own a home. But when you find

those people that are, they really are motivated. You know, they know that it's a good deal, that they can buy a house for 100 grand or 120 grand. And they can, you know, an example I use is one that we sold a couple months ago. The lease payment was in the 1300s when his mortgage payment turned out to be $806. And he walked, he came to the table with $200, you know, after being in our program. It was great. You know, it was great to see him, you know, buy a house and get to that point of home ownership. And in our town, there's about 50% rental, 50% ownership. My wife grew up here.

So it was one of the things that we said, you know, hey, we want to help the town along with making money. And we're going down that road. How does somebody find tenants? I know you said you just put it up on Zillow or somewhere else. But, you know, I guess what's the? difference between in the mentality of somebody who is going to rent to own versus buy a house versus just straight rent. Is the rent to own?

I mean, it's a definitive persona. It's somebody who strives to own but can't just own outright. Isn't that right? Yeah. I mean, they're in a position where either their credit is not ready. Their income, you know, there's a lot of requirements above and beyond your income, right? income is that, you know, 43% debt load ratio. You know, we always qualify candidates with if you don't make three times your rent,

then you're not going to be a good fit for our program. So it doesn't get them in a, you know, their house poor type of situation where they're spending 50% of their income on a house, right? We work with a lot of people who are coming out of foreclosures, coming out of short sales, even sometimes coming out of bankruptcies, but they have good jobs. and they can be homeowners again someday, just not today. So you mentioned the 43% debt thing.

You said that earlier too, and I wanted to touch on that. Was that a, maybe we need to step back for a, but talk about Dodd-Frank. So, of course, you're not a lawyer, not giving legal advice and all that. But can you explain, you know, what is Dodd-Frank and how is it affecting people who do lease options? Because it's very different today than it was 10 years ago before Dodd-Frank. People get in trouble over doing lease options the wrong way. So what can you talk to about that? Yeah.

Yeah, in 2014, obviously, it went into effect where you have to qualify. Somebody who's doing a rent-to-own program or a lease option has to qualify under the same guidelines that they're doing a mortgage. Now, if they don't have the credit score, they can still do the program. You're just working with them to move them down that road of homeownership. And, you know, you have to do a lot more analysis on a renter or resident than you would normally. But that's kind of the direction that we've gone to make sure that people are going to be in a financial position. and actually buy the house at the end if they elect to do so. Okay.

So Dodd-Frank is basically just telling people, like it's telling people who do owner financing or who do lease options and don't take advantage of people. You can't just, because, I mean, lease options have had a bad name and rightfully so over the years. What a lot of investors will do, just for those people who don't know, like they will say, hey, you know, tenant buyer who obviously will never qualify for this house,

you just come up with a $20,000 down payment, and we'll put you in a six-month lease option here. And if you don't get it, you lose the entire option fee. And then nobody ever fulfills it. They lose that big upfront fee. Their hopes are dashed. And you just put them in a worst financial position. So how does your company go outside that?

Yeah. So we don't require any down payments. We just do, you have to come up with your first month's rent, your last month's rent, and your security deposit. Okay. And all of those monies go towards the purchase. I love that. Yeah, I really like that.

And it's $150 per month of your rent goes towards the buy as well. well. And we allow that to roll over. So let's say you lease on us for three years, you're still not ready to buy and you want to re-up. You don't lose that money, that $5,400 that you've accumulated over the course of your three years. So we let people, you know, keep those funds moving towards an ownership position. Okay. Is there any point in which they do forfeit those funds? If they move out. Okay. Right. You know, if they move out. We also allow them to transfer So if we have a new house come on the market, right, a new rehab and they go, you know, we really want to move to this house because it's bigger. Our family situation has changed.

That money moves with them. That's awesome. Yeah. So, yeah. So it really is much more flexible than a lot of these. I've heard the predatory programs of, yeah, right, you put 20 grand down or whatever it is. And they have no time to correct their credit. This sounds very, very reasonable.

And I definitively respect you for that. I think that's fantastic. for everybody listening, Dodd-Frank, Chris Dodd and Barney Frank, it was a law that there's wonderful politicians, and I say wonderful with politicians facetiously, obviously put together. But again, I do think for this purpose, it does good things. Yeah, they're trying to do the right thing, I think. Yeah. You know, whether or not the whole law is, you know.

Correct. But it pulls out, you know, that predatory function. There's still, I think, the capacity for people to be predatory with large down payments and things. but yeah. People love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams,

busy worrying they pick the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details so you don't have to. In some cases, investors even receive 50 to 70, of their down payment back at closing, and there are interest rates as low as 3.75%.

They've been trusted partners with BiggerPockets for over a decade, and if you want to learn more, visit BiggerPockets.com slash retirement. If you own a short-term rental, here's something worth knowing. Not all landlord policies are built for your type of property. And with holiday bookings, chilly weather, and higher guest turnover, having the right coverage is more important than ever. Steadily offers insurance designed specifically for short-term rentals, covering property property damage, liability, lost rental income, and even unexpected issues like bedbugs.

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It's an IRS compliance strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost segregation guys is the go-to firm, having done over 12,000 of these studies with $500 million in total depreciation identified. Head to Costsegregationguise.com slash BP to get a free proposal and see your potential tax savings. So what about repairs in the middle of the property? Do they do their own repairs? Do you do their repairs? Do you do their repairs? Or a certain amount? How does that work? Yeah. So what we stipulate in our agreement is that they're responsible for the first $300. We'll take care of anything that's major for our residents like roofs and appliances, hot water heater, HVAC, things like that. But we ask them to be, act more like homeowners and less like tenants who, you know, call up and ask for every last little thing.

Do you guys do, you guys do a full overhaul before somebody moves in, correct? I mean, you're not, you're not like just taking something with a dilapidated roof or HVAC systems that's screwy and put them in it. No, absolutely not. You know, we've gone to the point now where a lot of our rental properties have granite countertops, stainless steel appliances, new HVAC systems, you know, roofs, windows, you know, it's a complete overhaul. So it's a, It's basically a new home. Right on. Yeah.

Cool. Cool. Well, yeah, I mean, again, I like, I've always loved the lease option because of that. The benefit of you can get the tenant to pay a little bit of the amount, you can potentially avoid having to use a real estate agent to sell the property because you're selling it directly. I mean, there's just a lot of benefits to using it. One thing that a lot of people aren't aware of that I was not aware of, and I'm assuming you are, but I'll say it anyway.

So when you have a mortgage existing on a property, let's say I, like, let's say, my, my own personal house right here where I live. I have a mortgage on my house right now. And if I were to go and sell it to somebody else and not pay off the loan, that's, we would trigger the due on sale clause and the bank could foreclose, right? So that's just a common thing in real estate. You can't really, well, people do it anyway with subject to, but anyway, that's another topic. Anyways, what I'm getting to is a lot of mortgages actually have the words lease option written in there as well. So like my personal house, I looked at my mortgage and it says, if I do a lease option to somebody, the bank could foreclose on me. And now I've never, I've never heard of a bank

foreclosing on somebody doing a lease option. But it was, it wasn't my mortgage from my house at about last year or two years ago. And anyway, just something for people to consider if you're going to do it, just make sure you're not violating and do on sell clause. And if you are violating and do on sell clause, make sure you know that you are so you kind of have a, you know, what you're getting into. How about this? Make sure you talk to a lawyer before you go and do lease options. That's probably the best thing. Probably good advice. Don't listen to us. Turn it off right now. Writers and bigger pockets. Don't listen to the forums. go talk to a lawyer.

I mean, you should listen to us to learn all this stuff, but at the end of the day, you want your lawyer to sign off. Every state's different. You know, you need to talk to a lot of people and do it the right way. There you go.

Very cool. Well, hey, let's get kind of wrap up this little section of the show. We're going to move on to the fire round here in just a second. Before we do, I do want to ask just a couple of final quick questions. Where are you headed next? Oh, okay. Well, as I say, where are you headed next?

What's your business doing? Just cut me off. Where are you going? Is that your question? Co-host, God. Co-host. So we started to do flips a couple of years ago. And I'll, like you guys always referenced, you know, that's my day job.

Yep. My rentals is my long-term investment. So we do those for clients, which our clients are all friends and family. We did we, I've used financing companies to do flips in the past, but I like to do them in a more of a client investor type of relationship rather than just on my own with a financing company. So that's part of our business too. We do about 10 flips a year and been fairly successful in that. And now we add about 40 rental properties to our portfolios a year. And by portfolios, I mean, again, friends and family who I've gotten into this business,

they wanted an alternative way to invest their dollars. So we build portfolios for other people now. That's awesome. Yeah, it works well. It fixes up a lot of the blighted houses in the area. The more deeply distressed, we say, the better. and it really does, it helps them with an alternative investment. It makes a really good return and helps the community.

So that's what we do. So that's, I mean, that's the turnkey, quote unquote, right? That's the turnkey business. So you're doing that only with friends and family. We do. Right. So it's different than the turnkey that a lot of folks referenced in, like when I went down to Miami for the single family home investors conference, they talked about

buying them, fixing them, and then selling the cash flow piece to investors. and that cash flow was 8, 10, 12%. We have our clients actually buy the house from the beginning. We rehab it or they rehab it with their money. And so there's much less in it for me, but enough that we sustain our business and grow and put them into a good investment. But there's a lot more money out in turnkey

than the way we do it right now. So where are you going? I mean, I know Brandon kind of asked this, but with your own personal portfolio, you know, what's the goal? I mean, are you, do you want to have thousands of houses? You know, where do you want to go? When is enough enough?

When do you kind of slow down, stop, put on the brakes, stop flipping, stop buying? Yeah, I mean, I think you can always flip, right? I think there's spread on properties out there all the time. So that's what we'll continue to do too. Now, rentals, we've slowed down. We've actually stopped for now with our own personal portfolio. We're adding them for other folks. But for ourselves, my wife and I, we, you know,

we've stopped buying them just because we want to focus on the flip and the larger income that that provides us and the size of our portfolio is big enough that we're comfortable with it right now. And one thing I'd say to viewers too, you know, flips are very enticing, right? There's a lot of money to be made. It's immediate and everything else. But there's ways to lose money on flips even when you make money because opportunity costs is a big factor in that.

What do you mean by that? Yeah, I want to hear more. Yeah, rentals long. I view rentals long term as more profitable than a flip that you might even make $50,000 or $100,000 on right now. So you do a flip and it takes time. It takes resources. It takes all those things that are necessary to do a flip or a rental. But when you're focusing on flips, you're foregoing the opportunity to invest in those rental portfolios that long term are, you know, they're gold.

They're absolutely gold. So don't be enticed completely by the flip side of things. Look long term. Yeah, that's cool. And so just let everyone know also there is a webinar this coming week. If you're interested in buying more rental properties or buying your first rental property, we're doing a webinar specifically on that topic on Wednesday. So hopefully you guys can make it.

Come to BiggerPockets.com slash webinar to sign up for the webinar called How to Buy Your First or Next Rental Property and 90 days or less. It should be a lot of fun. So we'll do that. But before we go to the fire on, I have one last question. I don't know, but Josh probably does too because he's always got, you know, stupid questions at the end. Oh, wow.

Just kidding. All right. How many hours a week do you work? Too many. Okay. More than four. I probably work 60 hours a week, but I'm trying to back that off and play a little more golf and travel a little bit more. Work hard, but you love what you do. I do, you know, I don't look at it as work, you know.

It's time away from family sometimes, but it's fun. You know, I'm having fun with what I'm doing because it's really rewarding. That's fantastic. And it doesn't sound like you're in an opportunity where you'll be exiting your job against your will. No. No. All right. You've got control of your destiny.

I love it. I think it's awesome. I think it's awesome. No, I'm good. I'm good. No, good questions. Why don't we move on to the fire run?

No, I've asked all my good questions. I've got plenty of others I could always ask. But, you know, we'll let the listener. Are you hurt? I'm never, you can't hurt me as big and as ugly as. you are you have no way you can't hurt me i'm a stone wall here you can't damage me bradden okay well let me let Josh let me try okay so when i was uh so so bill let me ask myself this question it sounds like he's got a story do you have a story bill oh i do want to hear the story we love stories

okay so when we when i was young so my uh two sisters and i we'd made fun of each other a lot and and one of the things we'd say to each other when the other one was being kind of a dork is they go, well, you're dork. You're dorking. So the first time I heard your name, Josh, I was like, God, that's exactly what I said to my sister all the time. Dorkin. I just thought it was fun, you know. That brings me great pleasure, Bill.

And I appreciate it. And of course, you know, I still, by the way, I still have grown people who will walk up to me and be like, your name is dorkin. Like, what are you a child? I mean, like, my goodness. I think I still make fun of you for that. But I am a child. Obviously, you are a child. A little bit, right?

I think we all are. We ought to be a little bit of a child. We do. We do. We do. We do. Anyway, can we move on? Let's move on.

All right. Time to get violent in the world famous fire round. It's time for the fire round. These questions come direct out of the bigger pockets forums, which our users can jump into it and interact on by going to BiggerPockets.com slash forums. And guess what? It's free. All right, time for the fire round. All right. Question number one of the fire round. Do you use any specific formulas when you're thinking about investing in a market? Like, what do you look for? We already talk about 2% rule.

Is that the only formula you use or is anything else? Two percent rule. And when we're looking at a flip, we try to target a minimum gross spread of $80,000 and a minimum net spread of $40,000. So we try to target those two numbers on flips. But on rentals, yeah, it's basically the 2% rule. Can you explain the 80 and 40 thing and work with the flips a little bit? Give us an example what you mean. Right. So if we're going to, I bought a house this morning on a sheriff's sale, I think, is a 130 house.

Okay. We bought it for $50,000. So now I've got back taxes to pay on it because when you buy a house at a sheriff's sale, you know, they don't take care of the usually. the current or previous year tax liabilities like they would on a MLS purchase. And then the estimated rehab, the selling costs and everything else, we think that it'll come in somewhere around 40 grand on the net. And it was an $80,000 spread gross from buy to sell. Right on. And a sheriff's sale is an auction, correct? Right. Public, it's a public auction process here in Illinois and Lake

County in general, they go through what's called the sheriff's sale process here in Lake County, and that's where we buy some of our properties along with bank direct or wherever. But back to that spread, it's, yeah, it's $80,000 is what we try to target on the lower end. As the price point goes up, we try to get more gross dollars in that differential between buy and sell. Awesome. All right. So next question.

Thank you for that little bit of information. Should people invest in distress properties in areas where they don't live or is it too hard to get properties remodeled? So if you're kind of on your own, does that make sense to go and invest at a long distance in properties? For me, it doesn't. I know for a lot of investors that might work. I've tried at once. And I mean, it's very, very challenging because, you know, I like to put my stamp on the property of being involved in the process. It's the main thing that I do at our business here.

I handle the development or purchase and development of the properties. So it doesn't work for me. I did it down in Sarasota, Florida. I had to bring my crews down there to rehab the property. They drove down there twice, come back. It's just a laborious process for me to try to process something like that, along with finding quality contractors in the area that you can rely on. and they can do the quality and complete things in the time frame that you want them to.

But I know it works for some people, just not for me. Right on. Hey, really quick, and I know this is not fire around. I knew I was missing something. How big is your team today, by the way? So we stay small, right? Office manager, accounting manager, maintenance manager is what we run our little 160 properties that we, I won't say I manage them because we have a management company that does all the back office work.

of collecting the rents and, you know, all the pieces that a managing broker can do. They do it remotely. They do it all over the country. It's a nice little way for us to alleviate the way that we or the work that we have to do internally. So that's how we stay small. Right on. Where's the best place to get a loan, a bank or a credit union? Yeah, we use both, but we use small banks and credit unions. You know, we look for banks or credit unions that are doing portfolio loans. The key for us is to try to find money below 5%, 5% or below. And the portfolio loans that we get locally. We're mostly with banks right now, although in the past we've been mostly with credit union.

So it just depends on rates and their ability to take on what size loans we're looking to package. Okay. Right on. All right. Last question. Where should investors start when looking for a new property management team? And does it vary on the type of property that they have? Oh, that's a good question.

So property management. We use a property management company called Secure Pay 1, which does all of our management. But you can have success or failure, and I've seen it with a number of our clients that local companies really have to be managed. One of my friends and clients says that his job is to manage the property managers. And so it's still a process for the property owners, even if they do hire a property manager. Yeah, for sure. Yeah. All right.

Cool. Perfect. Well, that concludes today's fire rounds. So that means there's one segment of the show left. You know what it's called? Famous Four. All right, the Famous Four, these questions are the same questions we ask every guest, every week, and we're going to throw them at you and see what you've got to say. So number one, what is your favorite real estate-related book?

It would have to be the book of estimating costs of rehab, right? Okay, Jay Scott. Yeah, Jay Scott. I read that. And I keep reading it because it's my belief that you never get that 100% right. And if you keep going back and educating yourself and whether it's through books or your local RIA or wherever, it doesn't charge you $50,000. Bigger pockets. And bigger pockets, of course, right?

Excuse me cough. I'm sorry. I'm sorry. You can always learn more, right? I mean, if you're not learning more, you're dying. I mean, you've got to continue to build that knowledge base. And people can pick up a copy of that book, along with the book on flippinghouse, is at www. www.biggerpockets.com slash flipping book or get it on Amazon.

There you go. There you go. All right. Next question. What about your favorite business book? You know, I happen to have that here. It's called The Golden Rules by Bob Bowman. It's new book out, right? Bob Bowman is Michael Phelps coach. Oh, cool. Swimming coach. Yeah, I was a swimmer. Swim coach. Okay. Swim coach, right. Thank you for clarifying. Yeah, yeah, Bob Bowman. And he talks about the 10 steps to whether it's in your business, in your work, in your athletic endeavors, what you need to do in order to be successful.

So good book. Excellent. Cool. Cool. Awesome. Awesome. What about hobbies? What do you do for fun?

Golf. I like to go watch my kids play soccer, and whether it's high school or college, they play them both. And yeah, flipping houses is kind of a hobby, too, right? So, yeah, go do that a lot. Awesome. All right. My last question of the day. What do you believe sets apart successful real estate investors from those who give up, fail, or never get started? Yeah. And a lot of your guests say this, but it really is just perseverance and focus. In my career, I've always had a belief that people, passion, and product really drive your business. My three peas, right? There's a, I think a TV show that talks about process, but mine is people and process. and product.

And so, but staying passionate is also just really, really important. And, you know, knowing that what you're doing is valuable, not just to yourself, but to other people and just persistence. Just keep going out there, finding the deals. And if you don't find them, keep at it. And, yeah, persistence, for sure. Right on. Awesome.

All right, cool. Well, before we let you go, where can people find out more about you? tell us the name of your company, anything you want to share? Sure. So the name of the business is RTO property with a Y. Bill at RTO property is an email address. You can find me on LinkedIn and bigger pockets. But yeah, that's RTOproperty.com. Awesome. Awesome. Well, Bill, thank you so much for taking the time to enlighten us. I share a little bit about your business and yourself. And we definitely appreciate it. So thanks for coming on board. All right. Appreciate it, guys. Thanks for the time. Yep, thank you. We'll stay around.

Our guys, that was Bill Powers. Big thanks to Bill. That was great, man. A lot of cool info. He's so legit. Yeah, he does. He does it the right way. I mean, if more investors ran their business the way he did or he does, I think we'd have a lot less people. Bad press. Yeah, bad press. You know, people, because rightfully, I mean, people have a right to be irritated and angry at predatory investors. So, you know, do it right. Know the law. Go study Dodd-Frank. Talk to lawyer, but definitely look into lease options. And of course, if you want to know more about lease options, there's an entire chapter in the book on Invested in Real Estate with No and Low Money Down, all on that topic. Of course, it was coming. I know. I didn't play. Where would they get that? BiggerPockets.com.com slash no money. Nice. Nice. And to Brandon's point on predatory investors, don't be one. Seriously. Like the word, the word gets out there. People find out that you're

predatory, whether it be that or, you know, you go and you do crappy jobs on flips and trying to turn over, you know, garbage properties to people. It makes everybody. body look bad. And by the way, people, people get really bad reputations in their markets, and they quickly go out of business. So, you know, don't be cheap. Don't, don't take advantage of people. Run your business the right way because that's the way to build a sustainable enterprise. That's very true. Wise words from Joshua Dork in. All right. All right. Leave it to my child, man-child co-hosts to, you know. Do you like my cackle, by the way? That's my ridiculous. That's my witch-

You're ridiculous. All right, let's get out of here. I feel bad for the people who put up with you. I know. Heather, I'm sorry. Yeah. It's a rough life. Yeah, yeah, yeah.

All right, guys, we'll see you next time. Jump on the forums, biggerpockets.com slash forums. Link up with guys like Bill and create your account today on our site. We'll look forward to talking to you next week. I'm Josh Dorkin. Signing off. You're listening to Bigger Pockets Radio. Simplifying real estate for invest.

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