BiggerPockets Real Estate Podcast - Why Your Small Town Is (Probably) the Best Place to Buy Rentals

Episode Date: September 16, 2024

Your small town might be the best place to invest in real estate, even if it’s got only a few thousand residents. We know—everyone has told you to go to the bigger, growing cities where you can chase appreciation, but today’s guest might change your mind. He was able to scale to over twenty rental properties in just a few years, all by buying in his rural Ohio town that you’ve probably never heard of. Even better? He bought the rentals with none of his own money, AND he was cash-flowing THOUSANDS per month. So how do you do it, too? Josh Bauerle tried to invest in real estate back in 2006. What was supposed to be a “quick flip” turned into a thirteen-year investment, which (thankfully) made a bit of money by the end. After taking a decade off from real estate investing, he got back in the game, first by buying a rental from his father and then by purchasing a twelve-unit real estate portfolio from a local friend. He then scaled FAST to a serious amount of rentals, all in a tiny town with a small population. After that, he stumbled upon the best-kept cash flow secret in real estate investing: section 8 rentals. Today, Josh is sharing how he did it without using his own money, and how you can do it, too, whether you’re in a sizable city or a small town. In This Episode We Cover: Why living in a small town is a HUGE advantage for real estate investing Seller financing 101 and how to buy rental properties without getting a traditional loan Using other people’s money to build a rental property portfolio Section 8 rentals, the pros and cons, and why they get you MORE rent than regular rentals The simple way that Josh has found his off-market real estate deals with social media And So Much More! Links from the Show Join BiggerPockets for FREE Let Us Know What You Thought of the Show! Get Free Property Management Software for Landlords with Hemlane Grab Dave’s Newest Book, “Start with Strategy” Find an Investor-Friendly Agent in Your Area See Dave at BPCON2024 in Cancun! The Pros and Cons of Accepting Section 8 Housing Connect with Josh Connect with Dave (00:00) Intro (01:27) A Failed "Quick Flip" (05:47) Taking a 10-Year Investing Break (09:17) Buying 13 Units at Once (15:13) Quitting His Job/Business (18:26) Using Other People's Money (20:11) Moving to a Bigger Market (23:53) Making More with Section 8 (30:10) Scaling Fast! Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1018 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

Many investors would find the prospect of owning real estate in a small town of just 6,000 people too risky to even consider. But it's a little different when you grew up in that community and already know a lot of potential partners and tenants. Today, we're going to hear from an investor who made the absolute most of these connections and mind all these advantages of a rural community where everyone knows everyone. And we'll talk about how this guest applied these lessons to a big, market that he eventually moved to. Hey, everyone, welcome to the Bigger Pockets Real Estate Podcast.

This is Dave Meyer. And we're starting this week with a story from investor Josh Barley. Josh was a small town CPA in Ohio who took his portfolio to the next level by somewhat serendipitously acquiring 10 properties in a single transaction. And he did it without putting any of his own principle into the deal. We're bringing on Josh, and I'm excited for this conversation because we're going to talk to him about how his first supposedly quick flip investment turned into a somewhat disaster. He had to hold on to it for 13 years. We'll talk about the advantages he's found from investing in a small rural community and by the benefits of accepting Section 8 tenants far outweigh the bureaucratic downsides.

Let's get to Josh. Josh, welcome to the Bigger Pockets podcast. Thanks for being here. Hey, thanks for having me. I'm excited to have you, Josh, and eager to jump in. So tell me a little bit about your introduction to real estate investing. Where did this idea come from for you? Yeah, so my dad was a big real estate investor when I was in college, basically. He had had a lumber business. He sold it, and he kind of said he was going to go into real estate, and I had no idea what that meant. But he started buying some

rental properties, and my introduction, I would say, wasn't a great one. It was me working on all these crappy houses with him and making them not crappy. There was even a time he was having me tar or roof, but I'm sitting there walking backwards taring it and walk straight off the roof. Oh my God. It wasn't the best introduction. Are you okay? I was. It was like a 10 foot roof. It just scared the crap out of me. And of course, my dad said get back up there and finish. So, you know, it was an interesting start. So why do you invest in real estate now? This sounds terrible way to start. So no, but I was in my college library one day. And I was, and I was in my college library one day. I passed a book called the millionaire real estate investor, and I was like, I'm going to get that for my dad.

That sounds good for him. And I read the whole, I ended up just, got back to my dorm, read the first page, and then read it front to back in like two days, and became obsessed with it. And suddenly understood what he was doing and why it made sense. And a few years later, I bought my first one myself. And then this was 2006, right? So my first one did not go. It was right before the crash. It was a disaster.

It was supposed to be a quick flip that turned into a 13-year flip, basically. Oh, my God. So I got out of it for good 10 years, and then Dove headfirst in about 2017. Wow. Okay. So there's a lot to unpack in this story. So when you started in 2006, you said, so you had, I assume, just recently gotten out of college.

Is that right? So hilarious. I was still in college, had no income, and I was still given a mortgage, which shows why the market crashed shortly after. So you were able to finance this deal yourself? I would finance it myself. my mom lent me the down payment. They didn't care.

They gave me the loan and I had a house. Unbelievable. This is just side note here for everyone. If you want to know why today's real estate market is not like the lead up to the crash in 2008, here's a perfect example. The lenders no longer give loans to people who don't have incomes anymore. At least that I know, no conventional mortgage does that. So just a little bit of an aside here.

So why a flip, Josh? of all things, after reading the millionaire investor, why did you choose that strategy? Yeah, I mean, I was 22 years old at the time. Getting money right away sounded a lot better than putting into rental property and sitting and waiting for the equity to build. It's actually really funny looking back. I think I planned to sell it for 170 and I bought it for 142 and thought this was the best deal ever. And like now I'd look at it and wouldn't touch it.

Even before things crashed, it wasn't a good investment. But you know, at 22 years old, thinking I might be able to make $1. $10,000 off this. It sounded amazing. Yeah, it's just probably more money than you had ever imagined at that point in your life. Exactly. So were you doing the work yourself? No, I have no skills there. So this was, it was, everything was done. It needed no repairs, I was going to buy it as is, put it right back on the market. It was a situation where we knew the seller, so we were getting it a little less than they could have gotten it for. Yeah. Okay. And so what went wrong? Was it just bad timing of the market? Yep. It literally was months before the market crashed.

And this was rural Ohio. So if you think that got bad in the nation as a whole, rural Ohio got absolutely destroyed. I mean, it was unsellable. Wow. Okay. So that's why it sounds like you held on to it for 13 years? 13 years rented it out. Yep.

It's funny. My dad ended up renting it for a little while. And then my mom ended up renting it while she was between houses for a little while, then had some strangers that rented it. So some months I broke even, some months I lost a little bit was not a good first investment, but it was good learning experience. Yeah. What happened to it eventually? So you sold it in 2019? What did you sell it for eventually? 160. So I ended up making a little money after all of a sudden done, but not anything that you'd want to sit on 13 years to make.

No. From a time value of money perspective, that one's got to hurt. For sure. All right. So you said earlier that you jump back in in 2017. What were you doing between this first tough entry into the real estate market? and 2017. So after reading the Millionaire Real estate investor, I was majoring in criminal justice at the time, was telling people I was going to go to law school, but I did not have the grades to get into law school. So I had no idea what I was going to be. But I read this book, and I'm like, I'd really like numbers.

And I immediately switched my major to accounting. And I ended up getting my accounting degree, became a CPA. And in 2012, I started my own CPA tax practice. And so for the next five years, before getting into real estate again, I was just running my tax practice. Oh, wow. That's a pretty big shift from. law school to a CPA. So what happened? Where were you living? Were you still living in rural Ohio?

What was sort of your life like for the next 10 years? We were in Denver, Colorado for a while. I was a CPA there. That's where I started my business. And then we moved back to rural Ohio. And that's when my dad still had some rental properties. And actually, the way that I got back in, he went to sell one. And this was 2017 rural Ohio. So he was going to sell it for $30,000. and it fell through. And I was like, well, if you're going to sell for $30,000, I'll buy it for $30,000. I want to try this again. I want to try a rental property.

So I bought this property off them for $30,000, rented it for $5.50 a month. It was cash flowing $200 a month before repairs, which felt pretty good at the time. Yeah. But that's how I got back into it. Did you finance that deal? I did. Yep. I did.

I had to put 20% down, 25% down. Okay. And I financed the rest. It puts, yeah. Okay. Wow, that's, I mean, if you're looking for an affordable way to get back into the market, a $30,000 deal is a good one. And so what about that got you back interested to keep going with this the second time around? Yeah, it kind of hit like a either get out or get bigger situation because I had a sewer line issue that just every single month the sewer line would clog, someone would come out, unclog it, couldn't figure out what the issue was.

And in over like three months, I spent $2,000 trying to do this. I'm like, I just wiped out two years worth of cash flow with this deal. And I talked to my wife and I was like, we either got to go all in with this and get 10, 20, whatever properties so that when this stuff happens, we're covering it or we just need to sell this and get out. I don't feel like we can be having in between here. We're either all the way in or all the way out. And we decided to go all the way in.

Does that mean you quit your CPA job? Not quite. That didn't happen until a year later. So after we decided to go all in, I started looking at a duplex in town. and the seller happened to be a guy that my parents knew grew up. We knew him. And he called me after I'd contacted the agent. He's like, hey, if you're interested in this one, I have like 12 properties.

Do you, would you be interested in all of them? Well, it's like, I would be, but I don't have, I can't finance that. He's like, give me a small down payment and I'll finance the rest for you. As seller financing? It's seller financing. So I end up, I put 8% down to him and he financed the rest. Wow. And this is someone you knew.

I knew him growing up. Yeah. he was a family friend, yeah. So this is the benefit of investing in a small town, right? I've never really lived in a very small town, but everyone says, you know, everyone knows everyone, that kind of thing. Is that true? Is that really benefited your real estate business? A hundred percent has. I mean, this is a 6,000 person town, so everyone literally knows everybody. I mean, I didn't even talk to him directly. He just heard from the agent, I was the buyer interested in it and then reached out to me. It was like, hey, would you be interested in these other properties? Wow. Okay. And I'm just curious,

what's it like being a property owner in a rural area? I always, you know, I do a lot of analysis, look at markets, and there are a lot of rural areas that have great fundamentals. I've always personally shied away from them because I wonder where the renter pool comes from. A lot of rural areas have a very high home ownership rate, so there just aren't that many people who are renters. So what's that been like for you in your first few years as an investor?

Have you struggled to find tenants or tell us about it? Yeah. So this is an interesting, a lot of rural towns are, like you say, it's high ownership. This is the reverse. It's about 60% renters, 40% homeowners. Oh, wow. So there is plenty of renters. It's a lower income area.

So you have to be careful. But there's a lot of people looking. And once again, the benefit of knowing everybody in town is I can see a rental application come through and say, I went to high school with you and I'm not going to rent to you. I remember you. Wow. Yeah, so you got to be careful. I would say when you're looking, when I got into this, I was thinking these will never

appreciate, but they were crazy cash flow. I mean, I was bringing in when I bought these first, it was 13 units when I bought them. They were bringing in $7,000 a month rent and my payment to him was like $3,100. So it was insane cash flow. And why did he want to get rid of them? So he was getting older. They were a pain. He was a full-time agent as well, managing him.

himself. There's no property managers in this town, so you're going to manage yourself. And at the time, this was 2017, no one was buying. So if he could find someone that would buy all them at once, it was a benefit to him. Totally. Yeah, that makes a lot of sense. What was that like for you, though? Because it sounds like you did, you know, you got scored in 2006. You jumped back in and then you're looking for a duplex. All of a sudden, you're now managing, what, 13 units, it sounds like. Yeah, 13 and then the one I already had, or then two already had because I had the 13 year flip in there too. So we jumped right up to 15. Wow. And it was interesting. I mean, it was, I think we did a good job of creating systems as much as we could right from the start. So one of the

things you're going to run into in a community like this is people don't have bank accounts. So you have to figure out how they're going to pay you rent. So I went to my bank. I was like, hey, can I just get a bunch of deposit slips and give these to my tenants and they can come to the bank and put it directly in my account? They're like, yeah, that's not a problem. So we got all these deposit slips, just did everything we could to make it as easy as possible for them to pay rent. We didn't want to have, oh, I mailed it. It must have gotten lost in the mail. We want to take away every barrier and just make it easy for them to pay rent and easy to know whether they actually did pay rent. So we created as many systems as we could. I tried to be the best landlord

I could so that when people rented from me, they said, I don't, this is where I want to be. I don't want to rent from someone else. In the small town, you're going to have a lot of landlords that aren't very good landlords and they're not going to keep nice places. They're not going to respond to repair requests. We wanted to be the opposite. We made the places look as nice as we could. Every time we had a request for maintenance, we got on it right away. So people started to hear that and we'd have people reaching out to us like, hey, do you have

anything available? We want to rent from you. We heard you're good to rent to rent from. That's awesome. We tried to build that from the start and it paid off, I think. I love that. We talk about on the show a lot about the idea of creating mutual benefit and really wanting to create a good positive experience for your tenants. And that all sounds nice and good. And I think that is

nice and good. But it also has a real financial benefit to you. Like, clearly, you are now able to attract the best tenants in your area because they know that you're a good reputable landlord who provides a good experience. And you're hopefully going to find people. You're going to lower your vacancy rate. And you're going to probably just have less headaches because these people value living in the properties that you have to offer. 100%. And I mean, I, they don't want to leave either. And when they do leave, they say, hey, do you have something else available? I had a kid. I need something a little bigger. And they want to come to another one of your property. So it definitely pays off. And I mean, the vacancies alone, I think is the biggest thing.

If you can keep people in your properties, your costs go down dramatically. So cool. And it's so true. I was running a deal yesterday, actually. And I was, you know, I usually put eight or 10 percent vacancy rates in. And I was just curious because this is sort of in a family area. Like, if I could get my vacancy down to 4%, which would be about one month every two years, instead of what I normally budget for, which is one month per year. I've never actually had that, but I just do that to be safe. But it dramatically changes the return profile of a deal. If you're basically saying, like, you're giving up 8% of your revenue every year because you have turnover, like that could make it go from a deal that may not pencil to one that is really good. And I imagine that impacts

your underwriting now, right? Because you probably have more confidence that you don't have to set aside as much money for vacancy. And that means more deals are possible for you. 100%. Yeah. I mean, I think when people say, like, you can't find cash flowing deals right now, it is hard. It's more difficult, obviously. But there's ways you can manipulate that. You have two choices, right? If you want to make more money off that rental, you can either make the rents higher, which you're limited there, the market is what it is, or you can decrease your expenses. I think decreasing the expense side is where we've been able to get creative, whether that's managing ourselves, which takes 10% right off the top, or, like you said, getting people to stay

longer, which can drastically lower your costs involved. Yeah, self-managing and reducing vacancies, even by half, still having them from time to time, it's 15% of your revenue. It's a very efficient way to improve your cash flow if anyone out there is looking at ways to do that. Josh, I want to ask you where you took your portfolio next, but first we're going to take a quick break. Have you ever lost a DSCR deal because the financing just took too long? Red flags popped up late. The lender needed more time. The deal fell apart. Well, our friends at Dominion Financial just launched a program to help prevent that. With their new express rental loan, you can close in 10 days or less. And they still offer their price beat guarantee so you can get great pricing and a

timeline you can count on. Fast, simple, reliable. That's Dominion Financial. Check them out at BiggerPockets.com slash Dominion. That's biggerpockets.com slash dominion. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time consuming, and expensive. But imagine if real estate investing was suddenly easy. All the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Fundrise flagship fund. Now you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10. The portfolio features 4,700 a single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought after industrial facilities

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risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. We all joke that rentals are passive, but if you're spending nights matching receipts or guessing what a property earned last month,

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Sign up at baselane.com slash BP and get a $100 bonus. Base lane is a financial technology company and not a bank. Banking services provided by Threadbank, member FDIC. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand new construction homes, 10% below market value, and the best markets across the country, without making real estate your second job? That's exactly what rent-to-retirement

does. They're a full-service, turnkey investment company, handling everything for you. In some cases, investors get 50 to 75% of their down payment back at closing, plus interest rates as low as 3.75%. They've partnered with Bigger Pockets for over a decade, helping thousands invest smarter. If you want to do the same, visit biggerpockets.com slash retirement to learn more. Thanks for taking with us. We're back with Josh Bowerly. So back to your journey a little bit, Josh. You buy these, you're up to 15.

Is that when you quit your job so you can manage this full time? So we bought a few more after that. I think we got up to about 28 pretty quickly. Wow. At that point, I decided to sell my CPA business. So I found a guy that was willing to take it on, sold that, and we went all into real estate from there. So I will have two questions.

First, you got to 28. Was it more seller finance? Or were you re-investing the money you were making as a CPA into more properties? Yeah. So it was a little mix of everything. We were able to, the interesting thing was we were able to get other people in on that seller financing thing by saying, hey, Roger did this. He can vouch for me.

I pay him every month. He gets a check every month. I know you want to sell some of this stuff. and it's hard in this market in this area. I'll take it on. I'll give you a down payment and then we can finance the rest. So I think we got at least two, maybe three other deals by doing that. I'm laughing because it sounds so quaint.

You're like, oh, Roger did this and everyone knows Roger. He's having such a great benefit from this. And that may seem difficult to scale, but it does underscore this idea that having a good reputation gets you deals, it gets you tenants. And clearly you developed a reputation as creating win-win scenarios. And that's why you are able to attract these types of seller financing deals over time. Of course, that doesn't work for your first deal. But if you're trying to scale, this is a really good example of how to do that well. But I wanted to ask you, Josh, about selling your CPA business. At that point, was your real estate portfolio?

generating enough cash flow to replace your income as a CPA? It was not generating enough to replace that income, but between that and the amount I got for the sale of it, it came pretty close. And then the guy that bought the business, my business, he, I was like, I might be starting a new firm with my friend, and he's like, no problem. I don't need to non-compete. So literally the next day after that close, I started a new firm with my friend where he basically handled the day to day and I just did the sales and marketing stuff.

And between all of that, we pretty easily replaced the income from that. Was it a difficult decision for you? I imagine being a CPA is a stable, relatively high income job. And I'm curious what it's like to give that up. Yeah. I mean, it's interesting when you say that. I didn't think that at the time. I'm kind of one of those people that's like, I make decisions and I go, right?

Like, I got a really good offer on this firm. I'll think of this doesn't work out, I'll think of something else to make money. And having that real estate there in the background is, it does give you that cushion, right? Where I do have this guaranteed money coming in. It might not be quite what I was making before, but it'll least cover our living expenses if it needs to. That's very brave of you. I commend you for that. I hyper-analyze every situation because I'm a professional analyst, and sometimes that backfires.

So what, after you sold it, it sounds like you got some. some income from that, a chunk of cash. Did you reinvest it all relatively quickly? No. So to this day, I don't think I've ever put a dime of my own money into real estate. Wow. So even when I did the owner financing, I had to put 8% down, I went and got a personal uncollateralized loan from Lighthouse for the 8%. And then from there, we started taking the cash flow from those and putting that aside if we needed to for down payments. And my goal is when I buy a property, I want to get it low enough that I don't have to put my own money into it. I have a hard money lender at this point that will fund 100% of the purchase and rehab as long as I keep it under 75% of ARV minus repairs.

So at this point, we buy everything without our own money. So when you say your own money, though, the cash flow that you generate from your portfolio is technically your money. Sure. Yeah. I would think that as I said that, you're right. I didn't use that cash flow directly. I used that cash flow more to improve the properties. And then we would, let's, let's, let's leverage those properties to buy new property. So maybe I'd do a cash out refi on the property and then use that money to invest in another property. No, that makes sense. It's a great strategy. I just want to clarify for other people if they're thinking, hey, this guy, Josh, he doesn't put any money in.

But it's really that you're taking the proceeds from your existing investments and reinvesting them, which is awesome. But you're not adding what I would call new principle, right? You're not taking money out of savings and re-injecting into your portfolio, you've sort of created this system and portfolio that churns out enough new profits that you can just continuously reinvest that and still grow your portfolio. Exactly. Very cool. So after the deal, then, what did you do?

Was it more seller financing deals? Or what have you been doing over the last few years? Yeah. So when we bought all those, when we got up to 28 units, like I said, we planned for zero appreciation ever and then suddenly the market turned. And they did appreciate. And in 2021, we sold 25 of those 28 units to one seller as a package deal, moved out of our small town, moved to Columbus, Ohio, and kind of started over there and we're building a portfolio here now. Cool. Yeah. Columbus has been one of the hottest markets in the country. So what's that been like?

You got a big injection of cash again. How did you? How did you? you start to deploy that in Columbus? Yeah, so right when we first got down here, I bought a duplex. It was the only property I've ever bought at market value, I think, is an investment. I just, I feel like we made a mistake. I felt like I had all this cash. I had to buy something. Inflation was going crazy. So we bought a duplex right away. It's fine. It's not the best investment I've ever had. But then I kind of settled down, like, okay, let's go back to doing what we know how to do. Let's get these off-market deals below market value. And we started building it again from

scratch. So we bought another single family house, bought a few more. And then over the last couple years, we kind of sat down my wife and I and said, we let's make a goal. Let's look at exactly what we want to do with this. And we set a goal of how many units we went by, how much equity we want to get to, how much cash flow we want to get to. And we've been slowly building towards that. So that's a big change, Josh, because it sounds like some of the advantages you have were knowing people in this town. So how did you start finding deals when you got to Columbus? this. Yeah, so, like I said, the first one we just bought off the market. And then from there, we got involved, we started doing some marketing to off market sellers. And we started getting

some houses that way. And then one of the big things we did, honestly, we just started, I started posting, and my wife started posting on Facebook and Instagram, like, hey, this is what we're doing. We buy houses. We close quickly. We buy them as is. If you know anyone looking, we're looking to buy 10 more rental properties this year. And we started to get a return on that. Like people we go to high school with it, like, hey, my parents have to go into long-term care. They need to sell their house. Would you be interested? And we started getting a bunch of leads that way as well.

And what year was this? This, we moved to Columbus in 2021. Okay. So was this pre or post Intel moving to Columbus? So it started, that got announced, I think, early 2022, which is when we started really investing in Columbus as 2022. But yes, that was a big thing. Oh, man.

So you timed that one perfectly. Yes. So anyone who doesn't know this, Intel, the chip process, processor announced a enormous investment in the Columbus area as part of the Chips Act. The U.S. government is trying to improve domestic semiconductor and microchip creation. And so Columbus has been one of, if not the biggest, benefactor of that investment. And since then, it's been going crazy. I actually, maybe it was last year in 2023, I went to Columbus because there's so many good things there.

I was considering investing there myself. And there's just so much activity there. I wound up not investing because I was doing it remote. And I felt like there was too many good investors like you who were going to be hustling. And I wasn't going to be able to find good deals. But it's super cool what's going on in Columbus right now. We have to take a quick break, but we'll have more of this investor story on the other side. For decades, real estate has been a cornerstone of the world's largest portfolios.

But it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Funrise flagship fund. Now you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10. The portfolio features 4,700 single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought. after industrial facilities, thanks to the e-commerce wave.

The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship fund before investing. This and other information can be found in the fund's prospectus at fundrise.com

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Let's get right back to Josh. Tell me a little bit about what you target, what kind of deals you're doing in today's environment. Yeah, so we're doing mostly single-family houses. We do have some multi-family just bought a five-unit building a couple months ago, actually. My biggest thing is still, I don't want to put cash from outside the real estate business into the, into these properties. So we have a hard money lender. They will fund, like I said, 100% of the purchase, 100% of the repairs, as long as we get these deals for 75% of ARV minus repairs. So everything we're looking at, that's my standard. Are we 75% minus repairs? And then,

I'm looking, does it hit the 1% rule? Just as a basic guideline, I know it'll at least break even with mortgage rates right now if I hit the 1% rule. And how hard is that to do hitting the 1% rule? You know, that's where we've gotten creative. Number one, I talked about it that you can increase rent. That's one way it's usually really hard. One thing we went all in on this year is going to section 8 because in most places section 8 bases it on the county. They base their rental on the county.

So if we target some of these lower income areas that are kind of up and coming but still lower income, the rent that Section 8 will pay could be $100, even $200 a month higher than the typical market rent. So that's one way we're getting properties to cash flow. Josh, can you explain to people who don't know what Section 8 is? Yeah, so Section 8 is essentially government, the government paying the rent for extremely low-income individuals. They get on the program.

The government steps in and pays either, usually in most cases that we've had all their rent, sometimes a portion of it if they have a job that they can pay it. But they're paying the majority of their rent. So you're 100% guaranteed. You'll see that rent every month is going to come from the government. You don't have to chase anybody down. It can be a little bit of a pain up front to get the tenant in. There's a lot of hoops you have to jump through. But once you do that, it's pretty smooth sailing. Is the paying just bureaucracy? Yes. You're going to fill out this massive RTA packet that they have that you have to list everything about the property, the rent, what you cover, what the tenant it has to pay. It's going to take two to three weeks before they even respond to that.

Then they're going to send out an inspector to look at everything on the property and tell you if there's anything that they deem you have to fix. And after all that's done, you're finally going to get your tenant in and start getting your money. But it sounds like it's still been worth it for you. Yeah. I mean, it's literally letting me buy properties I wouldn't have been able to buy because it's, I'm getting maybe $200 more a month than I would have. And now all of a sudden, this deal that would have lost money, cash flows a little bit. It sounds great. I mean, I hear a lot of investors who shy away from it, whether it's from the bureaucracy or some stigma about the Section 8 program. But it's encouraging to hear that this works. It obviously helps people who

need housing, get into housing. And it seems like it allows you to generate a better return than you normally would, which again, just win-win situation. Yeah. Like you said, I feel like I'm doing a good thing forward for that part of our county here. There's a ton of people on this that desperately need housing, and there are a lot of investors that don't want to deal with it. So these people, I mean, when I post one of these for rent and I say except Section 8, I'm overwhelmed with response from people that want to look at it. But the other benefit is, not only, I mean, you have the government paying the rent every month.

So let's just say we hit a recession and a bunch of people lose their jobs. That government's going to sit there and pay their rent every single month. So I don't have to worry about that. I'm not taking that risk, especially when you're in a lower income area where that might typically be a higher risk. The other thing is, they stay forever. The average Section 8 tenant stays for five to seven years. years. So you're massively cutting down those vacancy rates that we talked about. And then the third thing is

section eight's almost going to act like a co-property manager for you for free. Because if these people violate their lease and either they're not paying the portion they have to pay or they're trashing your property or doing something that would cause them to get evicted, not only they're they're evicted, they're going to lose their section eight. And I mean, that's a massive incentive for most people to to do what they need to do. And not that I don't want to sound like, yo, you're hanging this over their head at all times, like, oh, I'm going to go tell on you.

But if they're doing something in your property that they shouldn't be doing, then it's more incentive than the average person has of, okay, you're just going to have to leave the property. It's, I'm going to lose this lifeline of paying my rent every single month. Yeah, so much of business in every business I've worked in is incentive alignment, just making sure that you and the people you work with

are all working towards the same thing. And that's what you're describing, right? It's basically just creating a scenario where your tenant and yourself both want this situation to go really well. They both want the property to be in good condition and for this to be a headache-free and positive experience. So I think that that sounds great. Do you run into people when you tell people you do Section 8 to other investors question why? I said the majority of people think I'm crazy for going to Section 8 route. And the first couple you do, you'll think you're crazy too.

But then you start to get the hang of it. I know these forms inside and out now. I can sit with the tenant and say, let's fill this out together. Let's get this done right. I would say if this is something that you want to be hands off on and you just think that you can just give the tenant the packet and relying on everything to work, it's probably going to be a nightmare for you. A lot of these people aren't going to understand the process.

You're going to want to learn the process front and back and you're going to want to hold their hands through it. You're going to want to stay on Section 8, call them up, say, hey, I submitted this packet two weeks ago, where are we at? If it's going to be, I just want to do this and be passive like everyone says they want, this isn't the route for you to go. But for me, the higher return has been worth it. Great.

I actually, maybe four or five months into having inherited my first Section 8 tenant, it's been going great so far, but I'm just benefiting. I'm just taking the benefit and didn't have any of the upfront bureaucracy yet. So far to me, it seems like just a positive. Yeah, yeah. And I have a property manager who's experienced in Section 8 and knows all that stuff. But I'm eager to learn more about it. I'm really interested in just the idea of being able to provide this type of housing.

And it just seems like it can be really beneficial as an investor as well if you're able to, you know, attract great tenants and get basically guaranteed rent payments. So Josh, what's next for you? What's your vision for the next few years? Yeah. So a couple years ago, we started getting to flipping as well. So right now we're flipping five to seven houses a year. And we want to just keep growing that rental portfolio. When my wife and I sat down about a year ago, a little over a year ago,

at that time, we had six units in our portfolio. And we said we wanted to be up to, by the end of this year, so end of 2024, we wanted to be up to 20 units. We wanted to have a million dollars in equity. And we wanted to cash flow $5,000 a month. And it was crazy because until about May this year, I'm like, we're not even going to come close. We're not even in the vicinity. We had a really good last few months.

and we cross the 5,000 cash flow. We're up to 21 units, and we're like 15,000 from hitting the million in equity. Wow. Amazing. Good for you. Yeah. So now we just got to sit down and kind of map out what the next couple years are going to look like with that. But we definitely want to keep growing the portfolio and see where it goes. I love how specific that goal is.

This is something I actually talk about in my newer book, start with strategy, is about when you come up with a very specific goal, it's so much easier to hit. You know, if you just come up with this, idea and say, oh, I just want to be a bigillionaire. It's really hard to work backwards from that and take actionable steps. But if you say, by this time, by the end of 2024, I want these specific things, it helps so much in analyzing deals because you say, hey, is this deal going to help me towards this very specific goal? And it becomes just an easier yes, no question. Whereas,

at least for me, earlier in my career, I'd look at a deal and I'd say, is this a good deal? I'd be like, yeah, kind of, but like maybe there's a better deal out there, or maybe I should consider flipping houses. But having that goal makes it so much easier to narrow down all the potential ways to invest in real estate into just the ones that make sense for you. 100%. And I think the other thing, if you're a competitive person at all, and you have that goal spreadsheet up on your computer while you're sitting there and you're seeing you're falling short, it's going to kick your butt a little bit and get you into gear. And you might sit there and say, well, how am I supposed to hit $5,000 in cash flow when nothing's cash flowing right now? And you're going to have to

rack your brain and say, all right, let's look into this Section 8 thing. Maybe we can increase cash flow a couple hundred bucks. And it just, if you're competitive, it lights that fire under you that you do not want to miss that goal that you wrote down for yourself. I love that. Well, Josh, thank you so much for joining us today. Really enjoyed this conversation. I will make sure to put Josh's Bigger Pockets profile and his contact information in the show notes below. Josh, can't wait to see what you do next. Thanks for joining us today. Yeah, man. Thanks for having me. and thank you all so much for listening for Bigger Pockets.

I'm Dave Meyer. See you soon. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico content.

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