13 Rental Units with a “Rinse and Repeat” Investing Method

Summary

BiggerPockets Real Estate Podcast - Episode Summary

Title: 13 Rental Units with a “Rinse and Repeat” Investing Method
Host: Dave Meyer, Head of Real Estate at BiggerPockets
Guest: Mike Johnson, Chicago-Based Real Estate Investor
Release Date: March 24, 2025

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Introduction

In this engaging episode of the BiggerPockets Real Estate Podcast, host Dave Meyer sits down with Mike Johnson, a successful real estate investor based in Chicago. Mike shares his journey from purchasing his first duplex with a modest down payment to expanding his portfolio to 13 rental units within four years. The conversation delves into his investment strategies, tenant management, challenges faced, and the lessons he's learned along the way.

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Mike's Real Estate Journey Beginnings

Starting Point:
Mike Johnson began his foray into real estate investing during the COVID-19 pandemic in 2020. With a background as a medical device sales rep and having recently paid off his student debt, Mike sought investment avenues to grow his nest egg. Real estate emerged as the ideal vehicle for long-term returns.

Mike Johnson [02:11]: "Naturally, I started looking at investment vehicles... that's when I stumbled upon real estate and kind of started edging my way to my first deal."

First Investment:
Mike's inaugural investment was a duplex in Milwaukee, purchased in November 2020 for $128,000 with a 10% down payment of approximately $19,000. Securing a favorable 2.8% interest rate, his monthly principal, insurance, taxes, and interest (PITI) amounted to $922, while the property generated $1,700 in rental income.

Mike Johnson [06:12]: "My PITI is 922. So principal, insurance, taxes, and interest. The building's bringing in 1700 a month."

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Strategic Market Selection: Milwaukee and Chicago

Choosing Milwaukee:
Mike selected Milwaukee for his first investment due to its concentrated market of duplexes and the ability to invest with minimal cash outlay. Proximity to his job in Chicago allowed him to manage the property effectively, ensuring he could address any issues promptly.

Mike Johnson [04:23]: "Milwaukee is one of the most heavily concentrated duplex cities in the country. And so there's a lot of options."

Expanding to Chicago:
After establishing a foothold in Milwaukee, Mike expanded his investments to Chicago, leveraging his local presence to manage properties efficiently. He emphasizes staying within familiar markets to maximize control and minimize complexities.

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Tenant Management and Retention

Building Trust with Tenants:
Mike attributes his high tenant retention rates to his personable approach as a landlord. By maintaining open communication, addressing issues promptly, and keeping rents slightly below market rates, he fosters tenant loyalty.

Mike Johnson [07:49]: "I just try to be a human... they trust me, there's open communication."

Low Vacancy Rates:
Thanks to his tenant-friendly strategies, Mike has maintained zero vacancies across his properties for over four years, ensuring consistent cash flow and minimal turnover-related hassles.

Dave Meyer [06:35]: "There's a nice spread on there. And I've had the same tenants all four years."

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Challenges Faced: The Squatter Incident

Unexpected Tenant Issues:
Mike recounts a particularly challenging experience with a squatter who occupied one of his Chicago properties, leading to extensive property damage. Despite following all legal protocols, Mike lost the eviction case due to the squatter's strong legal representation.

Mike Johnson [19:55]: "He had a good attorney that brought up case law. That is rough."

Resolution and Recovery:
The situation culminated in significant property damage, but insurance covered the $55,000 rehab costs. Post-renovation, the unit now commands higher rents and boasts reliable tenants, turning a negative experience into a profitable outcome.

Mike Johnson [21:46]: "Now I get $750 more a month in rent. I get better tenants because it's completely rehabbed."

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Scaling the Portfolio: Creative Financing and Strategic Moves

Second Investment - Chicago Fourplex:
Mike's second deal was a four-unit brick building in Chicago's North Side, acquired with a 3.5% down payment of $27,000. By maximizing seller credits and taking advantage of tax prorations, he minimized his out-of-pocket expenses despite a higher property value of $750,000.

Mike Johnson [12:53]: "The building is performing well year to date."

Third Investment - Three-Unit Property:
Expanding further, Mike purchased a three-unit property on Chicago's West Side with a 10% down payment of $51,000. Challenges with a litigious tenant led him to hire a reputable property management company, allowing him to maintain a largely hands-off approach to his growing portfolio.

Mike Johnson [27:01]: "My portfolio is honestly very, very hands off... and so I'm happy to pay the price to be hands off and focus my attention elsewhere."

Fourth Investment - Wicker Park Brick Building:
In August 2024, Mike secured a $1.5 million four-unit brick building in the prestigious Wicker Park neighborhood using a new Fannie Freddie 5% down loan. By closing early in the month and leveraging seller credits, he only invested $38,000, demonstrating his adeptness at creative financing.

Mike Johnson [31:14]: "I was able to capitalize on that pretty much right as that loan package came out."

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Key Investment Strategies and Tips

Maximizing Seller Credits:
Mike consistently aims to maximize seller concessions to reduce his cash required at closing. This tactic enhances his return metrics and allows for strategic reinvestment.

Closing Early in the Month:
By scheduling closings at the beginning of the month, Mike secures prorated tax credits and creates a cash reserve buffer, enhancing his financial stability.

Mike Johnson [31:58]: "I just did it as earliest in the month that you can. First is great, second is good."

Leveraging Loan Programs:
Utilizing various loan programs, such as the FHA loans for initial deals and the newer Fannie Freddie 5% down loans for premium neighborhoods, Mike effectively balances leverage and investment quality.

Property Management:
Recognizing when to delegate property management, especially after encountering tenant-related issues, Mike ensures his portfolio remains profitable and stress-free.

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Lessons Learned and Future Plans

Tenant Verification and Legal Preparedness:
Mike emphasizes the importance of verifying tenant occupancy before closing to avoid legal entanglements. His experience with the squatter taught him the value of meticulous due diligence.

Mike Johnson [18:06]: "Don't ever close unless you verify the tenants are out."

Adapting Investment Strategies:
As his debt-to-income ratio reaches its limit, Mike contemplates diversifying his approach by considering live-in flips or transitioning properties to fully rented units, ensuring sustained growth without overleveraging.

Future Growth:
Looking ahead, Mike plans to explore larger multifamily properties and potentially expand into different investment strategies, maintaining his methodical and adaptable approach to real estate investing.

Mike Johnson [36:00]: "I may, I may need to cool it for a year or so... rent to retirement... start maybe scaling up a little bit."

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Conclusion

Mike Johnson's journey exemplifies a disciplined and strategic approach to real estate investing. By leveraging creative financing, maintaining strong tenant relationships, and learning from adversities, Mike has built a robust portfolio that generates substantial cash flow and positions him for future growth. His "rinse and repeat" method serves as a valuable model for both novice and seasoned investors aiming to achieve financial freedom through real estate.

Dave Meyer [29:07]: "This is just one of those types of approaches to real estate investing that works no matter where you're coming from."

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Notable Quotes:

• Mike Johnson [02:11]: "Naturally, I started looking at investment vehicles... that's when I stumbled upon real estate and kind of started edging my way to my first deal."

• Dave Meyer [07:28]: "I love hearing that your PITI is under $1,000. Like that three-digit monthly payment is a rare thing, probably pretty hard to find these days. Hold on to that for dear life."

• Mike Johnson [07:49]: "I just try to be a human... they trust me, there's open communication."

• Dave Meyer [34:08]: "Anytime you have the option or some flexibility about when to close on a property, just do it as earliest in the month that you can."

• Mike Johnson [35:45]: "It's double the rate limit so you can buy twice as expensive of a property and there's no self-sufficiency test."

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Key Takeaways:

1. Start Small, Scale Strategically: Begin with manageable investments like duplexes and gradually expand your portfolio using proven methods.

2. Maximize Financing Options: Utilize seller credits, tax prorations, and favorable loan programs to minimize upfront costs and enhance ROI.

3. Prioritize Tenant Relationships: Foster trust and open communication to maintain high tenant retention and low vacancy rates.

4. Learn from Challenges: Adversities, such as dealing with problematic tenants, offer valuable lessons that strengthen your investment approach.

5. Adapt and Delegate: Recognize when to delegate property management to maintain profitability and reduce stress as your portfolio grows.

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For More Insights:

To hear more inspiring stories and gain actionable real estate investment strategies, subscribe to the BiggerPockets Real Estate Podcast available on YouTube, Apple, Spotify, and other major platforms. Whether you're a seasoned investor or just starting out, the BiggerPockets community offers the resources and support you need to achieve financial freedom through real estate.

Transcript

[Dave Meyer]

This investor bought a property worth one and a half million dollars in a.

[Unknown Co-Host]

Great neighborhood in a major US city.

[Dave Meyer]

With only $35,000 cash in 2024, it is actually possible. Hey, friends, welcome Back to the BiggerPockets podcast. I'm Dave Meyer, head of real estate investing here at BiggerPockets, and today on.

[Unknown Co-Host]

The show, we're talking with Mike Johnson.

[Dave Meyer]

An investor in Chicago. Mike started his investing journey with a $13,000 down payment on a duplex in 2021, and he has house hacked his way into 13 units in just four years. Now he's living in one of Chicago's most desirable neighborhoods with thousands of dollars in monthly cash flow and the potential for millions in appreciation over the next couple of years. And Mike isn't doing anything that the vast majority of people can't do. He, he's found deals on the market, he's putting down as little as possible. He's done relatively hands off renovation, and now he's sitting on this incredible portfolio just a couple of years later. Mike today is going to tell us how his deep analysis of investing options has led to real estate in the first place, how one of the more extreme problem tenants I've ever heard of led to a free rehab for him, and why he's a fan of the extremely long closing flows.

[Unknown Co-Host]

So here we go.

[Dave Meyer]

This is me talking with investor Mike Johnson. Mike, welcome to the podcast. Thanks for being here.

[Mike Johnson]

Nice to meet you, Dave. Thanks for having me. Excited to be here.

[Dave Meyer]

Yeah.

[Unknown Co-Host]

So give us a little bit of background.

[Dave Meyer]

What were you doing when you first got into real estate and how long ago is that?

[Mike Johnson]

So I got into real estate four years ago during COVID in 2020, and I was a medical device sales rep that sold devices in the operating room. So once Covid happened, we were restricted access to hospitals, which was a major part of my day. Ironically, this was about the same time where I had no student debt anymore and I had this nest egg that was building. So naturally I started looking at investment vehicles on where do I park my money for the best return long term. And that's when I stumbled upon real estate and kind of started edging my way to my my first deal.

[Dave Meyer]

Great. Congrats on paying off your student debt, by the way. That's always a really good feeling and an important step on anyone's early retirement or financial freedom journey. So tell me a about the types of investments you're interested in, because I think, you know, people get to this point where you have a little bit of capital. It's A great place to be. You could choose to go into flipping. You could do long term rentals, short term rentals. What appealed to you first about real estate?

[Mike Johnson]

I know when some people invest in real estate, they use it as a means to an end, to kind of get out of the daily grind, quit their W2 and kind of do this full time. I have the kind of contrary approach to that where I enjoy my W2 job. So I am a long term buy and hold investor. I've done four house hacks essentially at this point in my investment journey. So up to 13 units across four buildings. And for me it's really just to build that passive income and it gives me security in my W2 job so that I can take more career risks with positions to get new experiences that may entail a pay cut. Whereas if I didn't have this as a fallback, maybe I would be less prone to taking those risks in my W2 where long term, I think that's going to pay dividends for higher level roles that require that you have some diversified experiences. And so it's actually helped progress me in my W2 career. And, and I just. It's a fun side hustle. It's your own business, it's yours. And it's fun to see it grow.

[Dave Meyer]

So set the scene. Where do you live? And is that where you chose to invest as well?

[Mike Johnson]

It is. So I was born and raised in Wisconsin, small town of 5,000 people. But I moved to Chicago about seven and a half years ago. So I've been here ever since I took the medical device sales job. But interestingly enough, my first deal was actually in Milwaukee. You know, we can kind of get into the reason why I chose Milwaukee Market, but. But then the other three deals have been in Chicago, where I. Where I currently reside.

[Dave Meyer]

All right, yeah, let's get into it. Because I mean, if you listen to the show, you know, Henry has, I love the term he dubbed of lake effect cash flow, which is just that anywhere the Great Lakes region, the Midwest, there is high potential for cash flow. I think Chicago falls into that. But Milwaukee is always kind of one of those standouts when you look at lists of places that do offer cash flow, Milwaukee is always up there. So is that why you targeted it?

[Mike Johnson]

It is. So for me actually, you know, once I got into the Bigger Pockets podcast, the books did the free webinars on how to underwrite. After I kind of took that in, I looked at the markets, right. A duplex two to four unit in Chicago versus Milwaukee. Dramatic difference. In the cash that you need to invest. So for me, in my geography, for my medical device sales job, I covered Milwaukee, a lot of rural Illinois and parts of Chicago. So I could technically move and live in Milwaukee and still do my day job, but I would have to invest far less cash. And so for me, Milwaukee is one of the most heavily concentrated duplex cities in the country. And so there's a lot of options. And so that's why I decided that if there's any fires that I have to put out in person for some reason, I could drive there and be there in an hour 20. So just having that comfort of my first investment property, that's kind of all the reasons why I chose Milwaukee.

[Dave Meyer]

Oh, cool. And did you house hack? Like, did you actually live there?

[Mike Johnson]

So I did a 10% down owner occupancy loan. And it's kind of funny, so right around when we closed, my geography changed from. They took away all my Wisconsin and they gave me Iowa. So I called my lender, I called my lender and I said, hey, I got to just be honest with you. Here's my geography, and when it's shifting in the new fiscal year, I can't move to Milwaukee, but, like, what do I do? And he just said, you know, as long as you change your insurance, he's like, you had intent when we closed to live there, we're okay with it, but obviously confirm with us, write us a letter telling us what happened. And I had the documentation right. With my geography change changes every year. And so I never ended up moving into that property, But I did do a 10% down owner occupancy loan. So that was November of 2020, and the duplex was 128,000. Milwaukee, to give some context.

[Dave Meyer]

All right, nice. 128 grand, you put 10% down. So I assume with closing costs and everything, somewhere around 17, 18, maybe up to 20 grand was kind of like what you needed to get into that deal.

[Mike Johnson]

Yeah, 19,000 is essentially, you know, what I put into the. Into the deal itself had a 2.8% rate. So of course we all know that the rates were very low at that point.

[Dave Meyer]

Do you remember what it took to carry that? Like what was your monthly expense? All in.

[Mike Johnson]

So my PITI, I mean right now is it's 922. So principal, insurance, taxes and interest. The building's bringing in 1700amonth.

[Dave Meyer]

Wow, that's awesome.

[Mike Johnson]

There's a nice spread on there. And I've had the same tenants all four years.

[Unknown Co-Host]

Wow.

[Mike Johnson]

Zero vacancy they're happy to live there. You know, the units were recently redone when I bought the place and so it's been, yeah, very low lift to kind of maintain that property.

[Dave Meyer]

That's amazing. Well, very cool. I just want to reemphasize what Mike just said to everyone listening is that Mike was able to get into his first duplex for under $20,000 total. Of course prices have changed, but this type of strategy where you're getting an owner occupant loan with 10% down, even if that went up to 250, you know, maybe it goes from 19 grand to 25 grand, but just demonstrates that these types of lower money down options are still available. I love hearing that your PITI is under $1,000. Like that three digit monthly payment is a rare thing, probably pretty hard to find these days. Hold on to that for dear life.

[Mike Johnson]

Yeah, nothing's really come close to that since that, but it was a great first step into real estate investing and, and you know, no regrets with the first property at all up to this point.

[Dave Meyer]

Why do you think that you've had tenants for four years? Like is there anything you did in the screening, anything that you looked for that you attribute that success to? Because as we, as we all know, vacancy kills deals.

[Mike Johnson]

So for me, I just, you know, first and foremost, yes, I am the landlord, but I try to just be a human, right? So, so I have conversations with them. If there's any issues, I just say, just text me directly. They didn't have a very good property management company managing the building before. So you know, I introduce myself and I just kind of talk to them and say, hey, you know, are there, is there anything that you basically want fixed right off the bat? Can we take care of that? And then anytime there's an issue, I get it taken care of right away. So they trust me, there's open communication. And so when it comes to resigning the lease, I've, I've increased rent two to the four years, but I always provide comps, I always give them under market rent. But then they have justification of all right, if I move, I'm going to pay more per month. And then it's moving costs. And so they've just decided to stay every year. And so it's worked out. It's just funny because sometimes when you're looking at getting into real estate investing, you think that there's all these special things you need to do. It's just you do the same things again and again. You're a good person, you take care of issues when they occur. And most of the times over time, the investment's going to work out just fine.

[Dave Meyer]

You know, I love your approach to this because I feel kind of the same way. I'm just like, don't overthink this. Like, just be a good human being. Underwrite deals. It's going to work out. Be patient. I think patience is another, another big one that some people have a challenge with. But hopefully listening to this podcast, preaching to you, real estate's a long game. Just be patient. It's going to work out. All right, we do have to take a quick break, but we'll be back with Mike right after this.

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[Dave Meyer]

Hey everyone. Welcome back to the Bigger Pockets podcast. I'm here with investor Mike Johnson. All right, so that, that was your first deal. What, what came next for you?

[Mike Johnson]

Actually, I closed in the next house hack in Chicago and north side of the city. This was my FHA loan that I used. So three and a half percent down. It was a $750,000 four unit brick building, which is great.

[Dave Meyer]

Oh wow.

[Mike Johnson]

I got a 2.75% rate on this building and the cash I invested to acquire the building was only 27,000.

[Dave Meyer]

Okay. Because I was, I was about to say that you really must have gone up in an out of Pocket expenses because you went paid 19 grand out of pocket for the first one. Yeah, you know, if you put 25% down on a $750,000, you know, you're talking something closer to 200 grand. How did you pull that one off?

[Mike Johnson]

Yeah, so this one, you know, inherently with the 3.5% down, you're not putting a lot of cash into the deal for a $750,000 four unit. But you know, I always try to maximize seller credits. So maybe they're willing to do the repairs beforehand. Sure. You're capped out. I believe for a 2 to 4 units, a 3% of the purchase price is how much seller credit you can do. So I always try to advise that, try to maximize that. That can bring your cash to close as low as possible and that helps push up your return metrics. So I always try to do that. I don't know if this is common in every state, but here in Illinois, we pay taxes in arrears for property tax. So if I close six months into the year, you get six months of the prorated tax amount at closing. So if you Pay, you know, 20,000 in annual taxes, you're going to get $10,000 credit. And you don't actually feel that until you sell the building. So you get all the benefits of lower money down. Oh, that's all time value of money and getting a return on that money, all just because they haven't paid the current year's tax bill. And so you just address that so that all those things combined, you know, and ended up me bringing only $27,000 to the table. And there's some very interesting stories with this building. And I had some rehabs I also did along the way. But yeah, all in all, it's performing well year to date.

[Dave Meyer]

Is that one of the reasons you chose to invest in Chicago rather than Milwaukee or were you just living there? Why, why switch markets?

[Mike Johnson]

So for me, it's comfortable with real estate investing at this point. I kind of got my feet wet in Milwaukee. I understand this. I've had some tenant interactions. It's not the first time anymore. And so now, you know, I think for me, I don't like to do out of state investing. I like to do it in my backyard house hacking. Money is finite. Right. So for me, I only have so much of it. So I want to maximize and extend my money. And even when I did the FHA loan, I always try to go to the maximum loan limit for the. So. So the building that I have, the units are huge. They're four bed, two bath, 1800 square feet.

[Dave Meyer]

Cool.

[Mike Johnson]

So a little bit harder to place tenants, but you can ration higher rents. And so for a four unit, you're. You're maximizing the rental income. Right. And the reason why I chose Chicago or just the Midwest in general is I always kind of use an analogy with the stock market. So you have the tech stocks. If you invest in Colorado, California, some of these, maybe sexier states, appreciation wise, I think of that as like a tech stock. Right. You're going to get a lot of appreciation. But cash flow is hard in the Midwest. I feel like it's a bit of both. It's like a dividend stock, a little bit of cash flow, maybe a lot. But it's Chicago. You're paying more for the property, but you get a mix, you get a little bit of appreciation. I've had cash flow in all my properties and so I've had success here and, and I live here. So if there's any issues, I have eyes on the property. I have all the contacts for, you know, maintenance, repairs, and it makes it a pretty seamless transition from one property to the next.

[Dave Meyer]

What about tenants? Like, have you had similar ability to retain tenants in the same way we did in, in Milwaukee?

[Mike Johnson]

Interesting enough. So kind of ran into some issues at closing and this was a hard lesson learned. But essentially for this building, I did my final walkthrough the day before closing and the top floor tenants were all moving out. Right. There's barely anything in the unit. The seller's agents there, again, I see them physically moving things out. I believe the best in people. Good to go. They did the repairs they said they were going to do. Fast forward. I close the next day, I come back and the door is locked. Like, well, this is, this door shouldn't be locked. So I try to open it and I see a piece of paper on the door and it's a signed eviction moratorium. So during COVID you couldn't evict. And long story short, it wasn't even one of the tenants that was on the lease. It was a guy that was paying them a few bucks a month to crash on their couch. He's who ended up squatting in the unit. And it took me nine months to go through eviction court. I actually lost the case, by the way. Did everything by the books. I lost the case, professional tenant and moral story is he ended up vacating on his own accord, thank the Lord. But he completely vandalized the unit. He painted everything purple hardwood Floors, tiles, cabinets, appliances, broken windows, crazy vandalism. And at this point I'm like, I'm just happy to get the unit back. But I haven't gotten the rental income for nine months and now I, I see the whole unit's trash. And like I mentioned, this is a 1800 square foot, four bed, two bath unit. So it's not, it's not like a 2:1 rehab. It's everything. So that was a wonderful experience, but it was covered by insurance.

[Dave Meyer]

Oh my God. Well, I'm sorry to hear that. I have a couple of questions because I do think when people think about investing in real estate and get nervous about it, it's exactly this that people get nervous about. So can you just tell us a little bit like how this happened? Like, did you interact with this person at any point and talk to them about what their intentions were or how this whole unfortunate situation unfold?

[Mike Johnson]

Yeah. So I mean, in retrospect, don't ever close unless you verify the tenants are out. Right. That's a hard lesson learned. You know, in retrospect, it's 2020, but once we got to the point where somebody's living in the unit, I don't know who it is at this point. I eventually reach out to the, to the, the previous owner of the building and I said, hey, like, do you have any idea, can you like, reach out to the tenants and see who's maybe still staying there? Do you have any insights? And it was through actually the seller and the seller's agent where I found out that it was somebody that was paying the previous tenants to crash there, essentially. And so I founded his name, I got his contact information and so I made contact, you know, and of course you want to, you want to try to solve things without involving attorneys. So I tried, you know, offering him cash to move. I try to find him subsidized housing. I talked to people in Chicago and is there any place that we can help kind of, you know, relocate him? I even offered money to the previous tenants to see if I could pay them to have them move in with them for a few months. He didn't, wasn't interested, you know, in any of this. And that's when I kind of decided that I going to have to go the legal route.

[Dave Meyer]

And so you were just going back and forth with him being like, what about this? What about this? And he was just like, nah, I'm cool, I'm staying here.

[Mike Johnson]

Yeah. Like I even offered to say, hey, you, you can't afford to live here alone, right? It's a four bed bedroom unit, but what can you afford? And so I even offered, I will place tenants in the other bedrooms so that you can stay there, you don't have to move, you can afford it. And then, you know, it's rented by the bedroom. I'm getting the full rental income. And I thought that was maybe a good solution. Just wasn't interested. He kind of, he led me along to make it seem like he was thinking about it. But, you know, I found out at the end, at the end of the day, this isn't the first time this guy's done this. It's funny how they can afford a really good attorney, but they can't afford any of the rent.

[Dave Meyer]

So from what I'm hearing, you were clearly sort of the victim in this situation. How did you lose that case?

[Mike Johnson]

So accepting money was the first mistake. He said, hey, I can afford to pay you partially right now. I accepted the partial payment. But the moment you accept money from him, it's no longer a squatter. He's a paid tenant. Right. Regardless of if they're paid in full or not. Essentially, I did everything with serving him the notice, given the court date, et cetera. Correct. Did everything correctly. The reason why I lost the case is because he had a good attorney that brought up case law.

[Dave Meyer]

That is rough.

[Mike Johnson]

Eventually in my mind, I'm like, well, this is vandalism. It's not really covered under my policy. But since it was so bad, obviously it was more than just wear and tear. So they ended up covering the entire rehab, which was around $55,000. Now the unit, I pretty much replaced everything. So Now I'm getting $750 more a month in rent. I get better tenants because it's completely rehabbed, and those tenants have been there for two years now. And so it was a crazy experience. It worked out in the end, but not knowing if it was going to work out, that was probably one of the most stressful times in my life, to be honest.

[Dave Meyer]

Sorry to hear that. That's crazy. Well, I'm glad it worked out long term. You know, I always ask people this because inevitably every real estate investor has maybe not to this extreme, but a story where they lost money. Something unfortunate happened. It was a pain in the butt. And oftentimes it happens earlier in your career because you're still learning like this. So were you ever considering giving up or sort of thrown in the towel?

[Mike Johnson]

It crossed my mind because once I lost the eviction case, that's where it kind of started us thinking that this could be another nine months. And with COVID nobody really knew at this point what it was and how long it was going to last, how infectious things were. And so in my mind, I'm like, if this drags on another nine months, I mean, I'm paying out of pocket for stuff, you know. But retrospect, it's my most profitable building now at this point. You know, where the Piti, I think is 5,300amonth, and it's bringing in 9,150amonth.

[Dave Meyer]

Oh, my God, 9,150.

[Mike Johnson]

Very nice.

[Dave Meyer]

Okay, that's awesome.

[Mike Johnson]

And I rehabbed one other unit where I put $50,000 into a unit. So one year I didn't buy a property. And so I, you know, nothing penciled out. So I spent 50,000 on a rehab for one of the units. But now I have all newly rehabbed units. Slow repairs, great tenants, and the spread is really nice.

[Dave Meyer]

Okay, wow. Well, you mentioned at the beginning of the episode that you had four deals we've talked about to a duplex in Milwaukee. And next we talked about your fourplex in Chicago. We do have to take a quick break, but I want to hear about.

[Unknown Co-Host]

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[Dave Meyer]

Right after this.

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[Dave Meyer]

Everyone. Welcome back to the Biggerpockets podcast. I'm here with investor Mike Johnson talking about his portfolio between Milwaukee and Chicago. Talked about two of the deals so far, but the third one, what did you do after that four unit with the unfortunate squatter situation?

[Mike Johnson]

So at this point, you know, I, I had the bug and you know, I'm into real estate investing and want to house hack again. I'm starting to look at different neighborhoods and so I end up landing on a three unit property in a West side neighborhood of Chicago. So this one wasn't a brick building, but ultimately ended up doing a 10 down loan. Owner occupancy. I moved into the top floor unit and I got a 3.87 rate. So nice. Rates are starting to go up at this point. Right. Still competitive market. And for this deal, I ended up putting about $51,000 into this deal.

[Dave Meyer]

Okay.

[Mike Johnson]

So by far the most, you know, I've put into a deal at this point. But you know, I better understand underwriting kind of the little tricks you can do to minimize cash to close. And so that was deal number three.

[Dave Meyer]

Nice. Okay. And how's it worked out? Hopefully no squatters.

[Mike Johnson]

No squatters. But I will tell you, there's been, there's been tenant issues.

[Dave Meyer]

Oh, gosh.

[Mike Johnson]

I had a litigious tenant fix some injuries. Whoa. And so at that point I said I am not well equipped and suited for this. I don't want to make any errors. And so I just decided to hired a property management company that is well known in the Chicagoland area. Him and his team has done a great job and they have attorneys, they have people that are going to do things the correct way and document things. And so ever since they took over, the relationship is good. Right. There's no issues. But I think they see a private landlord and they think that they kind of take advantage of the situation and I was living in the unit, right. So they could gain access to me at any point they see me. And so one thing that yeah, I want to do is just separate myself from the tenants. I don't want to interact and I don't want to say or do anything incorrectly that's going to affect me in the court of law in Chicago. And so I can still self manage the other properties. Again, have good tenants, very low vacancy, and so it doesn't really require much work on my part, but very happy that I offloaded this one property.

[Dave Meyer]

So the reason you're self managing the other ones though is because you're not living there and it's just like you have sort of that like physical separation from tenants that makes you better able to manage.

[Mike Johnson]

Right. I'm not quite ready to forego the, that 7, 8% of gross income. And I've also, I used to do all the showings myself, but now I use an agent. So I don't pay property management, but I will pay an agent to do the showings for me. So my portfolio is honestly very, very hands off. Couple hours a month maybe, you know, but I have contractors that I trust, plumbers, maintenance people, so that search is over. Right. In the beginning you're trying to find like a reliable person and that's stressful. But now that I have a team, it's very low stress, you know, and so I'm willing to pay a little bit more the cash flow and so I'm happy to pay the price to be hands off and focus my attention elsewhere.

[Dave Meyer]

That's great. I mean, I just want everyone to hear how this just methodical approach Mike is taking can build a portfolio that's super exciting. Like, I mean, no offense by this Mike, but you're not doing anything super flashy. You know, it's like you bought a duplex, you placed great tenants, you have no vacancy, you bought a four plex, you dealt with a lot of the headache, now you're generating amazing cash flow. Yet another one where you learn to adapt and rather than dealing it with yourself, you're sort of offloading the stuff you don't want to do. And now that's going to cash flow. And this is over the course of what, three or four years at this point?

[Mike Johnson]

Yeah, I mean in less than four years I acquired, I think it's valued at $3.4 million in properties. And yeah, I think it was in three years, in like nine months. So it's not like this took me a long time to do and to Your point? It's rinse and repeat, the same house hacking method. And as you gain experience, you know, and rates go up. My most recent deal is a few months ago and at a 6.5% rate.

[Dave Meyer]

Yeah.

[Mike Johnson]

But I still was able to close in an A class neighborhood. And so it's just kind of funny following the investment journey. Right. You know, it's like, okay, Covid, interest rates, everything pencils. And then as the rates go up, it's. I've still managed to make things work and I haven't done anything to your point, really outside the box.

[Dave Meyer]

I just want to point out to everyone that these types of deals that Mike's doing do still work today. Like the numbers might be a little different. I don't know if you're going to make the same exact level of cash flow, but if you're trying to inherently just improve, improve your financial position. These types of house hacking strategies where you move from one to the other, this is just a time tested thing that works in pretty much every type of investment environment. Just a couple weeks ago on the show we were talking to investor who started doing this in 2005 and did it through the 2010s during a totally different type of environment. This is just one of those types of approaches to real estate investing that works no matter where you're coming from. So just want to encourage people even if you're thinking, hey, yeah, these were low interest rate environments, that this is still something that's possible. And it sounds like, Mike, you can tell us about how it's still possible with a deal you recently did within the last year or so.

[Mike Johnson]

Yeah, within a few months ago. So it closed on this one in August of 2024. This deal is a little bit different. This was a $1.5 million four unit brick building. Three units in the front with a brick coach house in the back. But it's in Wicker park, which if you know anything about Chicago, this is a very nice neighborhood. So it's an A class neighborhood, very nice buildings, very walkable. And I use the new Fannie Freddie 5% down loan. So very highly levered but conventional loan. And so I got a 6.5% rate. But this one I had to get very creative because I only ended up putting $38,000 into this $1.5 million building, which is kind of crazy when you think about that. That's less than I put in a building that I paid 694, which was the three unit.

[Dave Meyer]

Whoa.

[Mike Johnson]

So for this one, again with 5% down, of course, you know, you have that again, maximize seller credits. So 3% on about 1.5 is around $43,000 in seller credits. I got on top of that. I think this is another popular real estate strategy that people use. But I always close in the first or second of the month.

[Dave Meyer]

Oh, I love this. Yes.

[Mike Johnson]

Because this building brings in almost 13,000amonth in income. So if you have two months without a payment, you have a $26,000 cushion for future repairs. Anything that maybe you need to do. And it's lower cash to close. And just the last thing was the tax proration. Right. Expensive building, pay a lot of taxes, closed the middle of the year. So I got all that tax credit as well. That lowered my cash to close, which I only had to bring, I think $12,000, I think, to the closing table. But my all in with earnest money was, was 38 on this building. Wow.

[Dave Meyer]

Unbelievable. That's super cool. I just wanted to explain the thing you said about doing the closing on the first or second of the month, because this is just such an easy way to build a cash reserve and lower your expenses. But basically, when you take out a traditional mortgage, let's say you close on May 1, you're not going to pay for May. You're also not going to pay for June. Your first payment will be due July 1st. And that might not sound like a lot, but like Mike said, if he's generating 13 grand a month in May and June, that's $26,000 he has. Without his biggest expense, you're still going to have other expenses. You're going to probably still have financing. And depending on the state of the building, you might have some turnover costs or upgrades that you want to make, but you're basically taking that profit that you're just sending to the bank and never going to see again. And you're pushing it off for two months. And of course you're still gonna have to pay that money back. That's how a loan works. But just the mechanics of running a business, this is a really fortunate way to do it. So anytime you have the option or some flexibility about when to close on a property, just do it as earliest in the month that you can. First is great, second is good. Even the first week, you're really going to give yourself a big benefit there. Obviously, when you close, it's the same amount of capital, but you won't need to, for example, set as much aside for a cash reserve.

[Mike Johnson]

And the tenants here are, you know, people that are like working professionals. Good jobs, high income and just no issues. Right. I mean that. So the tenant pool is great.

[Dave Meyer]

I love it. You deserve it, man. After two rough ones with tenant situations that weren't really of your own making. Good to hear that you got a relatively calm one. But it sounds like, honestly, this kind of deal, you did a lot of creative stuff and kudos to you for doing your research. You learn the tricks, you learn some of the little hustles that you could do on each deal to sort of reduce the amount of money that you're putting into it. But realistically, like this kind of deal, you know, people could do this deal right? Like this is this, I think, serves as a model for people listening of a great deal that you could execute on today.

[Mike Johnson]

100%. And there's two good things too. So with an FHA, you have the self sufficiency test, which makes it really hard sometimes to have enough rental income to pass that test and even do an FHA loan. The nice thing about this 5% down Fannie Freddie loan is it's double the rate limit so you can buy twice as expensive of a property and there's no self sufficiency test. So all of a sudden you can afford to buy in these A class neighborhoods like where I'm in, whereas an FHA loan would never pass here because the buildings are just too expensive. So it actually opened up the neighborhoods that I was coming to because I think a lot of people don't want to house hack and they're like, I don't want to live in that neighborhood. Which is very. It's valid, right. It's personal preference. But this new Fannie Freddie 5% down loan, it gets you into the A class neighborhoods in most cities. Right. And so, yeah, I was able to capitalize on that pretty much right as that loan package came out. So maybe not as common knowledge and there wasn't as many people utilizing it yet, but it's a great option.

[Dave Meyer]

That's a great tip. Yeah, I didn't even realize that about that they don't have the self sufficiency test. That's a really cool tip.

[Mike Johnson]

Yeah, it's really nice.

[Unknown Co-Host]

Awesome.

[Dave Meyer]

So what's next for you, Mike? It seems like you're sort of doing this like methodically. Are you just going to keep trying to do these kind of small multifamily is every year, every two years.

[Mike Johnson]

So the thing about my me maximizing my leverage on these properties is my DTI is pretty capped out right now.

[Dave Meyer]

Yeah.

[Mike Johnson]

So I may, I may need to cool it for. For a year or so. But. So one of two things I think I may do like the live and flip strategy where I buy like a condo kind of by the lake in Chicago and then, you know, I live there two to five years, do a rehab, and then, you know, you can sell that within five and not pay taxes on it. So still kind of use the tax advantage method of real estate that I'm familiar with or look into maybe just renting, you know, because this unit that I'm in rents for more than what I'd be willing to live in myself. This is a three bed, two bath.

[Dave Meyer]

So.

[Mike Johnson]

And I'm by myself.

[Dave Meyer]

Yeah.

[Mike Johnson]

So I'll probably like move into a smaller unit, rent this out and then I could maybe get into like a five plus multifamily and kind of start maybe scaling up a little bit, do doing some larger deals.

[Dave Meyer]

Awesome, man. Well, congratulations. And just want to reiterate, this is the, the example I always give where people say, like, is your primary residence an investment? Clearly you've shown us, Mike, that yes, it can be. You've managed to acquire millions of dollars worth of real estate just by using your primary residence. And even going forward, I love your thinking because, yes, at some point in almost every investor's career, your debt to income ratio becomes a challenge. You have to cool off. And that's okay. It's totally fine. I've gone years without buying deals for sure. But also, Mike, thinking of good ways to do it too. Like, I love that you're flexible enough to think about renting. I've also done that. When you do the math, sometimes it just makes sense to rent or do a live in flip. That's what I'm doing right now. It's just another good way to make money. All right, I think that's all we got for today. Mike, thanks so much for joining us. Congrats on all your success and for navigating some pretty tricky tenant situations. We appreciate you being here.

[Mike Johnson]

Thanks for having me. This was fun.

[Dave Meyer]

It really was.

[Unknown Co-Host]

And everyone remember, we are always looking.

[Dave Meyer]

For more investors like Mike to feature on the show. If you'd like to tell your real estate story to the BiggerPockets audience, you can [e-mail] Guest thanks again for listening. We'll see you next time.

[Unknown Co-Host]

Thank you all for listening to the Biggerpockets 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 and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com.

[E]

The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose, and remember, past performance is not indicative of future results. Biggerpockets LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.