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Real Estate Rookie
Should You Ever Buy a Rental Property with Negative Cash Flow? (Rookie Reply)
00:48:04
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- [00:00]
A
Most deals don't fall apart because of the numbers, they fall apart because of the financing. You find a property that cash flows, the deal makes sense. But then the lender looks at your personal income, your tax returns, your debt to income ratio and suddenly the deal doesn't qualify. That's the disconnect, because as investors, we're not buying based on our W2, we're buying based on the asset. That's why Host Financial offers DSCR loans designed for real estate investors where qualification is based primarily on the property's income, not your personal finances. So no W2s, no tax returns and no DTI requirements. And with loan to value options up to 80 or even 85% on eligible deals, you can keep more capital available as you grow. If you're buying rentals, refinancing or scaling your portfolio, go to host financial.com that's h o s t financial.com and see what you qualify for.
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B
You've upgraded how to buy properties, but did your insurance get the memo? When investors start scaling, insurance can't be an afterthought. Most policies were designed for a single property, not multiple rentals, LLC ownership, short term stays or properties mid rehab. That's where blind spots can creep in. NREG works exclusively with real estate investors. They understand portfolios, how risk compounds as you grow, and why insurance should protect your upside. Not just a checkbox. One uncovered claim can undo years of progress. Before your next acquisition, review your insurance Talk to NREG and get investor specific coverage from specialists who actually understand real estate@nreg.com bppod that's N-E-I-Com bppod the rise of the tech savvy investor is here. You don't need a huge team or tons of overhead to manage rental properties, just the right tools. So I want to tell you about how I use RentReady to get ahead. For landlords who treat their time like capital and recognize the cost of sweat equity, this tool gives you everything you need to scale the rent collection, tenant screening, maintenance, accounting so that you're organized come tax season. And you can run numbers in preparation for future deals and more all in one platform via a mobile app or desktop. Modern landlords don't just own property, they optimize it. Rent ready will keep you organized, running leaner and ready to grow. Start with RentReady. Visit rentready.com biggerpockets that's rent R-E--I.com biggerpockets and use code BP2025 to get RentReady's six month plan for a dollar.
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C
Most investors are buying the exact same houses you are a three bed, two bath, maybe around $300,000 and renting them out for $1800 a month. But today's guest is buying those same houses and renting them for 8,000 to $12,000 a month. The difference is not the property, but actually what's happening inside of it.
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D
Yeah.
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E
If you've ever wondered whether there is a higher cash flow play hiding inside a house you could already buy, today this episode is going to change the way you think about residential real estate. We're talking about residential assisted living and our guest today is one of the people who's actually.
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C
This is the Real Estate Rookie podcast. I'm Ashley Kerr.
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E
And I'm Tony J. Robinson. Let's give a big warm welcome to Hans Stone. Hans, thanks for joining us today, brother. Excited to have you on, man.
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D
Hey, thanks for having me.
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C
Hans. Welcome to the show and I want to talk about your, your days that you spend as a top mortgage lender. You see many deals that come across your investors are investing in. So what did you see in residential assisted living that made you say this is the strategy I want to do. This is where I want to put my money.
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D
In 2008 it was extremely unstable. So we were looking for a way to diversify our business and take advantage of the real estate market, you know, with the booms and then also have stability during the bus cycles so that we could stabilize our income source.
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E
And what was it about residential assisted living that kind of piqued your interest to say okay this, this might be a good, a good way for us to diversify?
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D
You know, it was really the stability and understanding of where the market was as far as, you know, having an aging population coming through and the long term opportunity to be able to support, to be able to support, you know, a demand. And in real estate, you know, it's, look at that time in my market we were getting about 2,500 to $3,000 a month for long term rent. And we looked at this opportunity to increase that to about 12 to 15,000 per month.
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E
So for folks that aren't familiar, Hans, just like define what, what is residential assisted living? And is this the same thing as like, you know, for lack of better phrase, like an old folks home? Is it like a retirement place? Like what is residential assisted living?
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D
Yeah, we get that question a lot. And what we do is called residential care facilities for elderly. And what we're going to do is really support poor at Elderly that need assistance in their day to day living. Right. So we focus on six bed homes and providing them with just a better, a better supportive living. Right. And so we, we handle the day to day living for their food, for their medication, making sure they're getting exercise, entertainment. And it's really more of a hospitality than it is healthcare. And we get that a lot of thinking that we providing health care. And the reality is it's just hospitality. We provide a nice place for them to live, they rent a room for us and we have 24 hour, you know, 24 hour assistance.
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C
So you're actually operating the business too or you're just renting the property out to somebody who's operating the assisted living.
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D
So we take the approach of being an owner operator. There's really three ways we look at it that you could an owner operator. Number two, you could own the property and own the business, but then hire an administrator to run the business. Or the third option is you own the property and then rent out that property to a business that wants to perform and a home that will fit the needs for such business.
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C
Now with your first property, is this the same approach you took? And can you walk us through what the first property looked like and some of the things you had to set up to actually operate it?
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D
So we got lucky. The first house that we, that we purchased, it had already operated as a business and, and you know, during that 2008 there was some struggles going on in the economy and they wanted out and it was a great opportunity for us to come in. So we took over. We had to reapply for license, we had to rehire do all things. We just really had a property that fit the needs for a business. But we had to go learn the business very quickly and get it up and running.
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E
Now Hans, I know you're based in Southern California like I am, but are you also buying these properties, properties in Southern California as well?
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D
Yeah, so we, we're very local. So we found because we are an owner operator, we want to stay close to the business. My wife is actually the one that handles the admin side of it. So we need to be close in and out in the early days. You know, we were both there many hours a day, day and night, weekends. And as time progresses, we've been able to step back and scale higher administrators that can handle the day to day. But yeah, going back to your question for us, we keep it local because we are the owner operator.
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E
Yeah. Now Hans, I think that's interesting, right? Because for a Lot of folks, when they think about high cost of living areas like Southern California, they just assume that any traditional type of buy and hold real estate is really just like an appreciation play, not a cash flow play. But you found a strategy that makes buying real estate work in a higher cost of living area. So, you know, you said you bought your first deal in 2008, and if you have just like a ballpark, because, I mean, you're getting the cash flow off the deal. Right? Which is great. But I would assume that since 2008, that property's probably appreciated to some extent. So for that first one that you bought, do you remember what you bought it for and just like ballpark what it's worth today?
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D
Yeah, and that's, that's, that was really our play too. It was to create stable income and also plan for retirement. You know, for example, that first house we mentioned, I believe we purchased it for about 450,000, and it's easily worth 1.3, 1.4 today.
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E
Wow. So you've gotten all of that appreciation and all of this cash flow off of one house. Man, the worst part of me and actually being co host of this podcast is that every time we talk to someone who's got a strategy like this, we just want to, like, drop everything that we do and change course. Because that, that is amazing.
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C
My brain is already racking, like, which properties.
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E
Now you talked about being an owner operator and not kind of farming that out to someone else. So maybe take us back to the begin. You said you and your wife spent a lot of time there early on. What did those roles and responsibilities look like? And I guess, were there any people that you had to hire on day one that you couldn't do yourself? Just give us a scope of like, what the. The org chart looked like on that first property.
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D
You know, sometimes in life, opportunities present itself, right? It's those who take actions. And that was us. We saw an opportunity and it was either going to be a great opportunity for us or it was going to be a disaster. And we knew it going into it because we knew nothing about the business. The opportunity presented itself, we saw it, we jumped in. We had to learn the business very quickly. So we didn't have any caregivers, so we had to go hire caregivers quickly. And in the meantime, until we could staff up, you know, I'm a caregiver, my wife was a caregiver, you know, out of the gate. And we're calling, you know, friends and people and nurses and how do you do this and really understand it because also remember our business, we're not health care, we're simply providing, know, providing a service of hospitality. So we identified very quickly that we needed to understand or connect with physicians, nurses that would come into our facilities and perform those services that were needed because we couldn't do that and we didn't want to do that. Right? So identifying the right people that can help you with the areas that you don't have expertise in.
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E
So you can, you can hire those folks in. But I guess, and this is even going back maybe earlier, but, but you talked about that they rent by the room. Is, is the actual income or like the rent that's being paid, is it typically the, the elderly folks who are paying that themselves or is this some sort of like government subsidized program where like the government's paying all or a portion of what they're spending to live
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C
there or even health insurance?
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D
So there's many ways it can be paid, right? We take the policy that we're considered private. So for us it doesn't matter where the money comes from. When it comes to us, it comes from the family because we don't want the limitations of an insurance company not paying. We don't want the state not paying for whatever reason. So for us, our policy is we don't care where the money comes from, comes from the family and it's an easier transaction and more stable.
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E
We had someone on the podcast before, but her and her husband focused on sober living facilities and, and they were also self pay where they opted not to focus on like, like government subsidized residents who were there. And she said there was a trade off. Right. It's like with, with the government subsidies, there's maybe a steadier flow of folks that you can get into your property, whereas with the self pay, you're maybe a little bit more in charge of filling those rooms yourself. And she told us how she did like she would go and talk to different, like rehab facilities and kind of, you know, network with them. What have you found is like maybe the, the right or the best way to fill your rooms if you don't have this pipeline of folks coming in from different government programs.
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D
So initially you really have to get creative, right? And you got to get out, go to skilled nursing facilities, go out. There are referral agencies out there, there's quite a few of them. You partner with referring agencies, they'll send you business. And obviously the point, the goal I should say is eventually to establish a business and then you Get a stream of referrals. You're not having to pay for services to, to fill your, you know, your beds through these referral systems. So it is like any other business, getting out there, networking and, and doing a great job at the end of the day. Now we look at 18 years later, 100% of our business is just from word of mouth and referrals from other families that are going through the same situation that friends or families did last year, five years, 10 years ago.
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C
What services are included with assisted living as far as like, are you providing meals? Are you, you know, there's somebody there at the property 24 7. Give us like a little detail into what you're responsible for and what's like included when someone comes to live there.
- [12:16]
D
So there are different levels, you know. You know, there's some that are like, we have three homes now, so we kind of, we try to place our residents so that we have one home that's more active and we have one home that is very, you know, they're not as active, right? They're much going to be a little bit older, a little bit further down, you know, with, with some of their, you know, with some of disabilities. And then we've got one in the middle. So we try to keep the homes balanced, you know, so that they, they. There's a good flow going through the house, but across the board it's going to be, you know, we're providing meals for everybody, we're giving them, you know, baths, we're making sure they get ample sleep, we're waking them up in the morning, making sure they have activities, games, exercise. We're keeping them, we're giving them a lifestyle to stay active so that they're living a good quality of life. So we're giving them medication as well. So medication, lifestyle, and it depends on what their level is. You know, we try to incorporate everybody, but some days some are not willing or not wanting to participate. So then we have to, you know, understand that and analyze it and go find a different game, you know, for the residents. Because for us we don't want them just sitting there watching tv. We want them to engage and be involved because that's a better quality of life.
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E
And so things, it sounds like all the activities and things are included, I'm assuming meals, all of their utilities, all the consumables they need for like all of those things are included as well.
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D
Everything. Yeah, everything is included.
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C
So this isn't like co living where you break down who supplies the toilet paper this week and Things like that.
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E
Okay, that's a good point.
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D
Right, because you can, some homes do that. Some homes, especially when you go into those other larger facilities, they will break everything down itemized, you know, for the fee. We do a lot, we just do a flat fee and we, of course we'll come back and reassess it, you know, every six months unless, unless needed. And if we have to give more care, if we need more night staff, then we have to raise obviously to accommodate. But we try to just keep it a flat fee to keep it simple for the families.
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E
Just last question, Hans. On the, on the staffing side, um, you said you, you typically go after like larger property, six bedrooms. What, what level of staffing do you need to maintain a home of that size? And, and what are the exact roles that, that you fill for each house?
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D
So let me kind of start with the property itself. I think it's important to understand really what's needed because there's six bed facilities. But usually what we'll do is we'll, we'll acquire a three or four bedroom house. And what we're looking for is about 2,000 square feet. You need at least two. Three bedrooms are great. Two bedrooms will suffice. And then you have to go in and rearrange this house so that it's going to conform to having seven to eight people living in full time. And that's really what it is because you're going to have six residents and one to two caregivers that will always be on, on site. So you need a place for them to be able to rest as well. So you go in, redesign the house. Personally, we found it most beneficial to have of four private rooms and one shared room. And that's because of the way that it flows. It allows us, not everybody can afford necessarily a private room, which these days may go for 7,7000. 7,500 you know, per month. And a shared room maybe is 5,000 in our market. Right. So we found that 4, 2 scenario works best for our clients where we can continue to make sure that we have, we can stay at capacity.
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C
Now, Hans, before we go to ad break, I wanted to ask real quick about the meals. Now, are you having a chef on site that you hiring? Are these the aides that are preparing the meals? Give me a little insight as to how you coordinate serving meals to everyone.
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D
So it depends on who our admin is. Right. So in the beginning we created menus for each house. So we went in and we create a menu. Now we also, obviously, when a New resident comes in, we have to understand their dietary needs. Right? So some will have very specific needs, and we have to make meals to that dietary need and others don't. So we go through and look at it, you know, on a monthly basis, and we create menus that they're going to enjoy, find out what they like, what they don't like. We're going to serve new foods probably they've never even had before. But that's kind of the fun in it and getting to experience new things. But there's a lot of conversation that goes into it with the family and also understanding who our resident is, because we could be from any national, you know, background, and we want to make sure that they are going to feel comfortable and also want to make sure they're comfortable and enjoy, you know, what we're. What we're serving them to eat.
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C
And do you have a chef that's doing this? I mean, you got to do all the shopping for the groceries and, you know, somebody prepare all these meals. Is that one person's job? I feel like, as a mom,
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D
it's a. It has changed over the years. It's a combination of my wife and our admin. You know, again, depending on what the dietary needs are, we go through and they'll create a menu. We don't have a chef, but my wife is very good at going and looking, getting creative and getting ideas, different recipes, and keeping it fun and exciting around the house.
- [17:30]
C
So this first deal really reframes how you started into this and took a property and transitioned it into assisted living living. But the income is completely different from just renting out to a standard rental. But getting into it wasn't frictionless. And a big part of that friction is that most lenders have no idea what to do with these properties. So after the break, Hans is going to walk us through exactly where that wall is and more importantly, how to get through it. We'll be right back. Okay, so now that we understand what this strategy actually looks like, let's talk about what makes it difficult. So. Because if this were so easy, everyone would be doing it. So, Hans, you've seen this from both sides of the table. As the lender and as an investor, where is the friction in starting this? And maybe let's start with the licensing. Do you have to actually have a license at all to operate an assisted living facility?
- [18:27]
D
You do, yeah. License is required. It's a state license. You know, I would start with the home itself, Right. Because you asked me about the financing side of it. I think it's really important to be prepared because it is much easier to obtain financing before it becomes an active licensed facility than after the fact. So we made. We make sure that when we identify a property, we obtain and it's just standard, usually conventional financing to acquire the property. But then we need to go in and rehab the property to make it retrofit to what the needs are, because once it becomes a licensed facility, you're operating a business out of that facility and which at that point makes it much, much more difficult to obtain standard financing. So now you have to look at more like non QM or private lending in order to obtain financing. And obviously it's going to be, you know, not as good of terms as we can get on conventional. As long as we plan ahead for
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C
this and what is like the realistic timeline that it took for, you know, you want to start this process to get your license until like the day that you open your doors.
- [19:33]
D
In 2008, it took us almost a year to get a license in California. It's much quicker. Our most recent was about six years ago and that one took about three months. So it has sped up pretty quickly. I think it's important, understand you have to acquire the property, you have to prepare the property so that it is business ready. Then you apply for your license, they come out and they'll inspect the property. So it has to be ready, has to be furnished, it has to be ready to do, operate and do business when you, you know, it has to be ready to perform business when the inspector comes out. At that point, when they come out, it could take another three, four, five, six months. It just depends on their capacity to come out before they'll actually provide you with the, the license approval. And then you can start filling your beds with, with residents.
- [20:23]
E
So there is a little bit of, or maybe not even a little bit. There could potentially be a lot of holding costs as you're going through this process of finding the right house, going through all the renovations, then getting it business ready and then waiting on the permit. I mean, it could be, you know, six to maybe nine months that you're going through this process of renovations and permits. So it sounds like someone who want to jump into this would have to make sure that they're budgeting for that appropriately as well.
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D
Tony, you're exactly correct. Right. You know, I would say you need to plan for the renovation period. Then I would budget for another 12 months. And that is because it may, it maybe you're able to open your doors, you know, Six months after you've completed the project. Well, you're not going to get six residents. Day one, you're going to get one resident and then another one. Right. And it may take you 3, 4, 5, 6 months to completely fill your beds. And so there's a ramp up period. It's absolutely important to make sure you have sufficient reserves to make sure that you are able to, to work through that initial phase.
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E
Yeah, Hans. So you know, I do mostly short term rentals and you know we, we have to follow the ordinance of whatever city or county that we're operating within. So do you also have to apply for a permit at like the, the local municipality level or once you have that state license, you know, I guess. Are there any other city level requirements that might conflict with that?
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D
So I can only speak for California because that's where I own and operate. So each state may be a little bit different. In the state of California, there are no restrictions. As long as it's a six bed facility. So six beds or less, it's a single family residence. There is no restrictions, which was surprising to us at that time. But yeah, once you have the state license and the home is, it fits the requirements, then there's no more restrictions beyond that.
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E
Interesting. And just lasting on the, on the licensing piece, Hans, are they like, I guess is there only one layer of licensing where it's just at the property level or is there two layers where first you have to get approved as an operator owner and then the property itself has to get approved? Does that make sense? Like are they doing any background research on you as well or is it just the property level?
- [22:29]
D
All three. All three, you're right. So the property has. Property has to be qualified. Fire marshal comes out, you know, the state, the, the local, the local permitting comes out to make sure that everything meets the code requirements and then we have to get state licensing. And of course during that process they're going to do a background search on the owner operator as well to make sure everything's in good standing. So yeah, it's all three. To make sure that you're checking off the boxes. You're going to be a good owner operator to support, you know, these, these residents that need assistance.
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C
Hans, where do I find out this information? Where am I finding out where I need a handrail to comply with code and all of this stuff for an assisted living property?
- [23:13]
D
So there's a. I would start with researching RCFE compliance and RCFE training. There are several groups out there that will provide training. They will help you prepare the paperwork. We, we, we absolutely looked into that and that was a huge help because the first time we had no idea how to submit the application. So there's way, there's services are out there to guide you through and educate you on, on the business. Highly recommend that and then along the way, continue to do research, get involved, get involved your communities get involved. And there's, there's, there's groups that really want to help make this a better industry. When we got into it in 2008, it was really the wild west. It did not have a good reputation. And so when we got into it, we were really shocked that the licensing, it had a very low bar of expectations and they treated us as such. Right. Wow. They really are like not trying to work with us. So we realized that very early on and we, we found that to be an opportunity. So we turned that around and really worked diligently to, to connect with our local licensing, you know, members, go to them for questions, get them involved. And going back and looking at that now, I really think it made a big difference because we were probably one of the only ones in our area that was doing that. And, and they came to us, trusted us, they used us as that model, as the example in our market. And so we became that flagship where it over time they really came to us asking us for advice and we were able to work with each other to make the industry and raise the bar for our industry to really, you know, give it a better name because there's such a good, there's such a need, and these folks need help, they need a good place to live. And with, you know, with, with you know, getting an owner that really cares about the business and getting the regulatory system that, that, that wants to help, we're really able to move the needle and make it a much better, much better place for, for these, for these seniors to live.
- [25:16]
E
Hans, you mentioned something about there being such a strong need for this. And I feel like oftentimes you hear about like the, you know, that there's this boom of people, the boomers who are going into this age of where they're starting to need more of this help and more of this assistance. Do you, do you have like any data or like, have you seen anything macro wide about like there being maybe a shortage of assisted living facilities? I'm just trying to get a sense of supply versus demand, right? Because if there's this imbalance there, then there's this opportunity for investors to leverage where they can fill this need. But also financially It'd be a really strong investment. So do you have any data that might tell us about that balance of supply versus demand?
- [25:55]
D
The first thing I would say is look at the population and then look at it over the next 30 years. There's a long Runway of demand, right? There's nowhere near enough of supply right now to supply that demand. And I don't know when there will be. I can tell you right now it's nowhere close. I mean, we have a waiting list at all times. We have three facilities and we always have a waiting list of folks that want to move in that we have to turn away. I don't know that there's no solution out there right now. Right? There's. As far as I can see, there's. There's more demand and I don't know that there's going to be enough. I think what happens is we see a lot of folks that want to get in the business. We think this is a cash cow. You know, they think this is such an easy, you know, way to make, make extra money. I think you have to be very careful understanding what is your approach. You know, if you're an owner, operator, it's not easy, but it can. You're going to. Your profit is going to be, you know, that's the area where you can, you know, maximize your profit. But you have to understand the business. If you want to get into it and just own the property and rent it to a business, a huge opportunity there, less risk, right? You're going to be able to double instead of maybe, you know, we're looking at like six to seven times what the fair market rent is. If you go in and just own the property rental facility, you're looking at maybe, you know, two to three times. Well, two to three times with no risk is still a really great opportunity.
- [27:24]
C
Okay, so Hans, we went through the licensing. What about the lending side of things? How should a rookie investor approach a lender with this type of deal?
- [27:32]
D
Well, the first thing I would say is make sure that you secure your financing before you, before you open doors as a business, right? Before you apply for your license, make sure you have your financing in place. That is the number one, number one rule. And you look at it depending on how you purchase it. Are you going to purchase as a primary residence? You know, you do plan on living in there six or 12 months. Maybe it's going to take you along to renovate it and prepare the house so maybe you can purchase as a primary residence. If not, purchase it as an investment. Home because those interest rates are still going to dramatically. You know, those interest rates are going to be so much better if you try to get financing afterwards, because the private lending financing is going to be. The terms are nowhere near as good. Secure your financing early.
- [28:19]
C
Yeah, we're going to look at this property. So your example is we're buying a property, we're going to turn it into assisted living. The best way to buy it is it's an investment property, it's going to be a rental. What if you're buying an existing one? How does. Does that change how you're purchasing the property and what you're looking at? I feel like that would definitely complicate it. Do we have to go to the SBA and actually get like a small business loan to buy it?
- [28:45]
D
So there's a couple ways you can approach it. Right. I guess the first thing is you have to. Is it. Is it currently an operating business? Generally, what happens when you purchase a facility? The license doesn't transfer, so the owner has to go get a new license. Right. So if I'm going to purchase that facility, it's going to shut down. So then I would go about getting financing as an investment property because it's going to be vacant at that point. Right. So that would be the best option if you can secure it as such. Otherwise, yes, you would have to go look at maybe SBA financing or private financing in order to purchase it as one. But generally what I see is a licensing does not transfer. So they have to shut down the facility and then reopen it once the new license is secured. And that would be the time when you want to obtain financing.
- [29:34]
E
Hans, one more question for me. Just, I keep going back to, like, the economics of this because I want to understand, or I want. Ricky said understand, like, how do we actually validate these deals to two questions. First part of that question is how do you kind of validate the market to know if there's demand for that specific area where your property is? And then once you validated that demand, how do you know what's reasonable to charge on a per room or per resident basis?
- [29:59]
D
Great questions. First thing I would say is, you know, an aging population, right? An aging population, they're going to need a place to live. The second thing I would look at is the aging population. What is your income source? What we have found is very beneficial for us is we looked at the market, understanding their money. Where is their. Where is their money coming from? In our market, we have a lot of teachers, we have a Lot of government workers. And so they almost all have pensions and retirement. So that is what's funding their, you know, their rooms at this point. Other markets where if they don't have that financing, it is much more difficult and obviously the return on your investment is going to be much lower because they're going to be scrambled, you know, looking for ways to pay for this. Whereas if they've got fixed income, it's going to help secure and be a better investment for you. So I would look at making sure of an aging population and making sure that they have a source of income to fund it.
- [30:51]
E
And then on the actual rates for the rooms or per resident, is there like, are you looking at other facilities and kind of like secret shopping them to see what they're charging or how do you land on what the right price is?
- [31:02]
D
It's funny you said secret shopping because early in the days that's what we used to do because we were, we didn't know, you know, we're like pretending to be a resident, you know, what are you charging?
- [31:10]
C
And I did that long term rentals that I first started too, you know, do you have any available?
- [31:16]
D
It's so funny, like, you know, then we realized later on that we're all in it together. So then we just all start calling each other. It's like, hey, what are you charging? And we're open and we share, you know, and you have to look at your facility and what amenities you're providing. Just like anything else, you know, another home in our market, you know, they may not provide as much service, they don't provide as much, you know, entertainment and activities. So they charge a lesser fee. We know what we're going to do, so we charge. We figure out what we're going to be able to, you know, to charge to support our families. So ask, just ask. You know, I don't think you need a secret shop. I don't think it's necessary. I think you just, you know, ask because it is a small industry and you will need to know everybody. You will need to know the others that are operating your business because you need to share. Maybe you've got a referral that you can't fulfill and you want to share it with them, they're going to share it with you. So you do become a network is, you know, your friends. It's not your, it's not your enemy or competition.
- [32:13]
C
At the end of the day, Hans, what is like your, I don't even know what the term would be called but like your eviction rate or non payments. Like, you know, we look at long term rentals and we know like, okay, in this area, you know, we're going to have probably more evictions. It's a lower class area. But what about with this model for you, like how often does that happen where a family can't pay or you know, their pension, they no longer have it or you know, the money is no longer coming in? Does that happen that often? And have you actually had to go through an eviction process for someone? Is and is it similar as a long term rental?
- [32:53]
D
Yes, we have had to do this surprisingly only once, maybe twice in the last 18 years that we actually had to go through the process. You know, it's a little bit different because it's a, it's somebody's mother, grandmother, grandfather in the home. Right. You're not going to leave them. No one's going to leave them there. Like, you know, there's more involved. So it's a little bit different. In that case, what we want to do is when we interview families on the front end, we, it's part of our interview process is understand how is the funding going to be paid and how much is there, what's the, you know, what's the length of coverage that's available, what's going to happen when that runs out? Right. So we really have those conversations on the front end to prepare for it so that we can come back and revisit to seeing where things are. If a family gets to a point where they have run out of money and then so then at that point we prepare for a transition over to like a state funded facility where the cost is less, stay can get involved and at that point the state can help pay for those facilities or pay for the services as well. So I think you go into it having the conversations, planning up front, then you can prepare for it. But the default ratio is extremely, extremely low because no one wants to leave grandma at the home unattended. We wrap our arms around and take care of her.
- [34:18]
E
Well, we've talked licensing, we've talked financing and there's obviously, obviously some real process here. But after the break, Hans is going to give us the actual entry point, like what someone listening today should do to get into their first residential assisted living deal. And we'll cover that right after a quick word from today's show sponsors. All right, so we've covered, you know, what the play looks like and what makes it complicated. But now let's zoom all the way in, right. For the rookies that are listening right now, who have the capital. They're. They're convinced that maybe this is the right thing for them to do. We want to talk about where to start. So what does the. And you talked about this a little bit already, but what does the right property actually look like for Ricky? Looking to get started. And you mentioned bedroom count, like square footage, like, layout wise, I guess. What, what separates a good candidate from a bad candidate From a property perspective?
- [35:00]
D
We talked about size, right? Our. Our perfect home is right around 2,000 square feet. You know, we look for three bedrooms, two bath. We want an open floor plan. That is the key. You want a large sitting area where you can have your dining room, your activity room in an open area. And then you want to have your bedrooms. In one section of the home, you don't want bedrooms or, you know, one side of the house, Another one's on this side of the house. You want them together. So if the house isn't already designed that way, you look at the house, Can I, can I, can I update it, Rehab it to make it work that way? If not, it's not the right house. It's going to cost you too much and rehab money to make all those corrections, move around plumbing and everything else. So large, centralized space with bedrooms and bath close in proximity in one part of the home.
- [35:50]
E
And in terms of the, the renovations and, you know, obviously this will vary, but I guess let me provide context here. Like, like for us, when we think about traditional rentals, there's always, like this idea of over rehabbing for that area, right? It's like, man, I could put, like, the nicest, you know, things into this rental unit, but if it's only going to get extra rent, then it doesn't quite make sense. How do you, how do you draw that same line for the residential assisted living facilities? Because if anything, like, the ceiling's so much higher, I feel like it would be easier to, like, kind of go gangbusters on the, the rehab budget. So for the projects you've done, how have you drawn that line for yourself? About, okay, here's, here's probably where, where the, the ceiling is and what we, what we should spend on renovations.
- [36:32]
D
Tony, I wish you would ask me that question 15 years ago because it'll save me a lot of money. In the early days, we made that mistake. We overbuilt it. We did more than we should have. We were going for, you know, making it look great versus functional. At the end of the day, it's. You have to remember you have eight people living in a 2,000 square foot home. 24, seven. Right. These homes, they get worked, they get beat up, right? You want commercial everything. Faucets, you know, knobs, showers, everything. Get the strongest, baddest that you can, that you can find. And it'll still break, but at least it'll last a little bit longer. You don't have a plumber out there once a week.
- [37:15]
C
Are you doing like, for the flooring and stuff too? Like commercial flooring and everything throughout now, too?
- [37:20]
D
Yeah, now we're doing a lot of vinyl because it's just so durable. You know, you've got spills and things. It's easy to clean up. So we used to do tiles, kind of moved away from that more so going towards the vinyl now. But yeah, industrial everything. Look, at the end of the day, I'll share this with you, Tony. This is. I think you'll appreciate this. So the very first home we've had for 18 years. Okay. It's built in 1954. It hasn't been updated that much. We thought we just updated the kitchen two years ago. Okay. When you see this house, it is a normal house in Long Beach, California. It looks like grandma's house from the outside. It's kept up, but it looks like grandma's house. You walk in, we've got paintings of Italy on the wall. We've got a mural over here. You walk in, it's grandma's house, right? It feels it. It looks like grandma's house. We have another house that we built six years ago. We this home, we tore it down and built it from ground up. And it is designed specifically for this. It's beautiful, right? Grandma's house gets more demand than the brand new home that we spent so much money on. So after 18 years, we still really haven't learned our lesson that grandma's house, they want to feel it. You got to remember, you know, their 70s or 80s or 90s, they want to feel like home. They want to be comfortable. Right? And. And that's what they want. Don't think about you think about what it's always. Think about your customer. What does your customer want? They want it to be familiar and comfortable.
- [38:55]
C
Now, Hans, this is where my mind always goes with any kind of strategy or specifically a business that you're operating. What does the liability look like? What's the insurance? Is this like an outrageous insurance policy that you're having to get to cover yourself?
- [39:11]
D
Well, again, I can only speak for California and our insurance here is pretty high. It has gone Up a lot. Yeah. I mean, I would say, you know, going back 10 years ago, you know, liability insurance was costing us about 2,500 for the three homes, and now it's up to about 15, 16,000 a year for liability for the covers of three homes. Yeah.
- [39:35]
C
So you're. You're on average about five grand per property, then free.
- [39:40]
D
Yeah. And then also too, you have to. Also where an area where folks make mistakes is the insurance policy. You. It's not. You can't. You can get a standard, you know, homeowner's insurance policy for the home, but you're setting yourself up because it will not cover you in a case of event. You need an actual commercial policy. And that also is going to cost a little bit more. That's going to cost you probably 3 or 4,000 per home per year.
- [40:06]
C
Now, are you doing two entities? So are you putting the property in one entity and then operating the assisted living out of another entity?
- [40:14]
D
That's a great question, Ashley. Yeah, and spot on. So we have one corporation that runs the business, and then we have an LLC that owns the properties. And then of course, we rent, you know, rent the properties to the corporation.
- [40:27]
E
And Hans, just for folks that are listening, like, what is the benefit of doing that versus just running everything through one entity?
- [40:33]
D
Well, because our business is an S Corp, I don't. I'm not a fan of owning real estate money, my escort, because I can't change it in the future. If I keep it in llc, I have absolute control over it and I can change financing and terms and then I can sold, like I can sort of with my cpa. We weighed the options and they looked at it and we said, okay, we have option A, B or C. And I chose this option because it gives me more flexibility and control over my assets.
- [40:56]
E
And I think there's, you know, I'm not an attorney, so like, no one quote me on this. Go talk to like an actual legal professional. But I believe there's also some separation of liability because if someone sues the. The business that's operating the residential assisted living facility, there's some separation there between the entity that actually owns it because they weren't the ones operating it. Right. So there's some, some legal, I think, protections as well. By separating it into two different entities
- [41:22]
D
as well, there is an extra layer. My attorney says that I'm protected with the liability, but I like the extra layer. I've got the S Corp, the liability insurance and the LLC for that extra layer of protection. Protect my family just in case, you
- [41:37]
C
know, and then the umbrella policy.
- [41:41]
D
You get to be my age and you've got family, your kids, you know, you're just like, you want to hug and protect them no matter what. So I'm a little more cautious than I was in my 20s, let's say.
- [41:51]
E
Well, Hans, last question, right? So for the rookies that are listening, if they ran numbers today, you know, modest market. Right. Property. Right. Operator, kind of helping them behind the scenes. What does a realistic first deal look like in terms of potential revenue, potential expenses and net cash? And we can talk about someone maybe in your area of Southern California, if I, you know, me, if I wanted to go start something in SoCal, where I'm at, like, what's a reasonable thing given today's rates, today's prices and so on?
- [42:15]
D
So I'm going to give you a little bit of hack here, okay? I'm going to give you an RCFB hack, right? So I say, look, you need to acquire a property in Southern California. You know, you're looking at maybe 900,000. You're going to need a budget, you know, probably 250,000 to renovate the property. Then you need 12 months of reserves on top of that to make sure that you can get through that window. Renovation, licensing, and start, you know, and start getting residents in your home. And then I would look at it, lose my train of thought.
- [42:48]
E
Okay, thank you, brother. It was a great start. You got me on the edge of my feet right now.
- [42:53]
D
Kicked in.
- [42:58]
E
You can pick it up from wherever you want. Huh? There you go.
- [43:00]
D
Ask me the question again. I'll get back on track.
- [43:02]
E
Sorry, like what. What's reasonable for today? So you're going over the costs associated with getting that deal. What. What's reasonable in terms of total revenue, expenses, and net cash flow.
- [43:10]
D
Okay, got it. All right, so then, now that you have the. The property up and running, here's what most people are not going to tell you. You need a second one. So you want to be able to go into this knowing that 1 is good, 2 is 10 times better. Because now you can share your employees across the two, and you can have them cross ones off because there's somebody's going to call in sick, somebody's going to be late, somebody needs an extra night shift. Now you can use your employees for both properties and also to your cost now for your groceries. Everything else goes. Your cost of doing business goes down significantly. And we didn't realize that in the beginning. Once we opened the second location, that's when it really kicked in and started making, you know, making a nice profit. And obviously the third one, it just elevates that because you hit your profit a lot sooner with your cost of doing business much lower. So if you're going to get in this business, don't think one, think two from the get go so that you can make sure that you prepare yourself to get there as quickly as possible.
- [44:15]
E
So looking at the numbers you mentioned, Hans, you know, 900K for the original purchase, another 250 or so for the renovation costs. So we're all in on acquisition is what is that like 1.125 tack on another couple, you know, six figures somewhere in that ballpark for those 12 months of reserves. So we're looking at probably like an actual cash investment somewhere around what is that, like 400k if I'm doing that math correctly. You know, assuming that we can get a loan on that initial purchase,
- [44:43]
D
what,
- [44:43]
E
what kind of return can someone expect? Like cash on cash return can someone expect in those first, call it 12 months or maybe even like the first five years on average? Right. Because I know you said it takes some time to ramp up, but if you know, rates are at, you know, you probably know better than I do, seven and a half, maybe 8%. If we're doing like an investment loan like this right now, what, what kind of return can I expect today if I were to deploy that, that amount of capital?
- [45:02]
D
So your rates have gone up a little bit, but ie would be able to structure a deal like this. How I would look at it is paying a few points to buy the rate down. To get that rate down into the low sixes, you put 25% down, buy the rate down, you're in the low sixes. That's really going to help you keep your overhead low. Right. And then once you're up and running, like I said, you're looking at six to seven times what the market rent would be for long term rent. So you could easily in this market, you know, have GROSS Rents of 4,40,000amonth, you know, and it may take, you know, and you have to expect it's going to probably take you six to nine months to ramp up because you're new in the business, you've got to find your residence. So just plan for that. But again, as long as you're planned, you've got business for as long as you can. See, as long as you operate and do the business correctly, there is no shortage of demand and I don't see how they're going to fulfill It, I mean, we look at these, these large homes facilities now and they provide a different level of service. What we provide at these small residential care homes, people want, people love the care. I mean, we're one to three. So we have, you know, one caregiver for every three residents. And sometimes it's two to two to one. So they're getting personal care and for most families, that's what they want. If they can't take care of their mother, grandmother, mother, father, they want somebody else to do what they can't do and they want that personal care. So the demand is there and there's real opportunity if you look at this the right way.
- [46:44]
C
Well, Hans, thank you so much for joining us today and enlightening us with the model and the strategy of assisted living and investing in that. Where can people reach out to you and find out more information about what you are doing?
- [46:58]
D
You know, I'd be happy to, you know, share my experiences and give some, you know, some, some, you know, provide assistance to those looking into it. I'll be happy to share my phone number and email address. Please reach out. I'm happy to talk with you and, you know, and, and give you guys some guidance in this. There's a real opportunity.
- [47:14]
C
Well, we'll include that for you guys in the show notes. You can check that out if you're listening on YouTube or if you're listening on your favorite podcast platform. Juan's. Thanks again for joining us today. I'm Ashley Keys. Tony. And we'll see you guys on the next episode of Real Estate.
- [47:29]
D
Ricky.
- [47:30]
E
Hey, rookies, if you're watching this, we want you to apply to be a guest on the Real Estate Rookie podcast. That's right. Ashley and I are looking for amazing stories just like yours to be a part of our real estate rookie podcast. Now look, you don't need to be an expert. You don't need to have done thousands of deals. Even if you've done one deal, your story could help inspire the next listener
- [47:48]
C
as a rookie investor. Especially if you just got your first deal. It is all fresh in your minds and you are the best person to tell your story, give your experience on how you got it done to help someone else get their first deal.
- [48:01]
E
So head over to biggerpockets.com guest if you want to be a part of our show again. That's biggerpockets.com guest and we'd love to have you on.