2227: How to Turn Rental Properties into Cash Cows with Rent-to-Own with Robert Pellegrini

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I had that Northern Alabama rental near Huntsville that I bought a couple years ago and got that property all set up for a lease option. I got premium rent on it because put down a non refundable deposit of $15,000 on it. So I'm getting at least 100 to $150 premium on the rent. That's for the first year. The second year it's going to be 2,200. So first 30 days, you know, if something goes wrong, I'll take care of it. But after that, it's all on her to maintain it.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason. Jason is a genuine self made multi millionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 2227 and greetings from beautiful Coronado Island, San Diego. I'm here with our client and my good friend Drew Baker. I've been staying with him for the past few days and I want to report what I did mention on the show before, that home equity is massively increasing and looking at real estate this weekend in Coronado Island. I can definitely say that's pretty true at a record $35 trillion right now. So we will keep reporting on this, but mortgage debt is very reasonable in comparison with home prices and home equity. And there is just so little distress in the real estate market, it's almost not even worth mentioning it. And we'll go into that a little more in future episodes as we have in the past as well. But one of the things I did want to talk about is Drew and I just had lunch with one of his friends, an SEC attorney, and I thought that was really interesting. We talked about different types of financial crimes and different things that go on. You know, cryptocurrency crimes, Ponzi schemes, all of this amazing stuff that happens in the financial markets. Of course, there There will never be any end to financial crimes. They're just always going to be there. But one of the things I teased about is the issue of the good old boys network. Right. And how it really isn't right that government officials and SEC officials and, you know, any department of government, these people can get hired away by the companies they regulate. And that was kind of an interesting topic, wasn't it, Drew?

Yeah. Well, it seems like every institution has its own agenda.

Yeah.

So even within the own, you know, administration, whatever it is, you know, that agency has its own agenda under the umbrella of a larger agenda. And so, you know, when you have people bouncing in between private and sector, they use that to their advantage. So, of course.

As they should. Right. Anybody would do that.

Agenda comes down to the individual.

Yeah.

So you have the individual, you have the organization, and you have the government, and they all have their own agendas.

Yeah. No question about it. And this is why you want to be a direct investor. And, you know, you, you mentioned this a couple times over the weekend when we were talking how you just don't like, you know, an old friend of ours who's doing syndications. Right. You said you didn't like investing in someone else's deal and you own your own rental properties and your own personal residence. Of course, here in Coronado island, you got two houses. It's just interesting. Being a direct investor, you're so much better off because you're not susceptible to these problems of the non direct investor. Yeah.

The thing I didn't like about the syndication deals and when I looked at it, is I'm coming to the table with all the money. The realtor basically is saying, hey, buy this place. I have all the control and have no skin in the game. I'm taking my equity, which is leveraged, and I'm putting it back in the deal. So instead of me getting my 3%, now I have a 12% stake in the deal, and all I did was sell you the place with your money. And then I have control over when I want to sell it and then make money on the back end. So what are they making? 15% and they did nothing. And they're just a realtor?

Well, they're just, they're just managing cases. And but a lot of times they're, you know, they're finding the deal.

They're doing, they're finding the deal and they're doing it. But they're also making, getting all that control with the property management, all the, all the deals that come along with that, all the money, you know, so it just seems like a bad deal, you know, I mean, some of these syndication deals where you're a partner in it and it's favored nations and the incentives are aligned and it's a small pool sometimes I think that stuff can be.

But you know, being a general partner is always the best deal. But it does come with more responsibility to question about it. Okay. So anyway, remember, everybody, commandment number three, thou shalt maintain control, be a direct investor. Otherwise you leave yourself susceptible to three major problems. Number one, you might be investing with a crook. Number two, you might be investing with a fool or an idiot. And number three, assuming they're honest and competent, they take a huge management fee off the top for managing the deal. So that's important. Keep that in mind. All right. Drew, one of the things you've always done is self manage your properties. And you've been very generous in contributing to our audience and teaching them how to self manage. You've spoken on our empowered investor pro zoom meetings and so forth. And you know, do you have any comments about that just now?

Jason, I want to thank your mom.

Okay. Because she was the she stream self.

She was the OG of self management, you know, so. Absolutely, absolutely. And you know, the thing is, is if you take your property that you have in your portfolio, the thing about when you talk about having, you know, align your incentives for buying a place, I think what's nice is, you know, when someone buys a place through your network, they're not married to you.

Right.

You know, and a lot of they want.

It's their property.

They have control.

Yeah.

And if anything, you're a resource. You're not the general store where someone's enslaved in it. They can go off the reservation and come back and they can get a property manager that they. And you're just kind of a network of support. And that's what I found valuable. And so when I looked at the portfolio of looking at the statements that my property management company provided me, you can kind of pick out and kind of get a temperament of what the house is like, you know, is this house. And you can obviously see how.

Well you did have property managers in the beginning. I thought you all was self managed. I can't remember now.

Oh, no, I started.

Drew started investing about 13, 14 years ago, I think. Right. With us. And you bought in Indiana. Indianapolis, specifically. So you did have property managers.

I have had property managers longer than I've self managed.

Oh, wow.

So it's been a long time.

Okay. Yeah.

So I probably had self managed for maybe like six years and I had property managers for like eight or nine years. And so I started with one property and then graduated to that market and then graduated to my entire portfolio. So it was, it was baby steps. And I think the thing, you know, you're, we talked, had a conversation about Peter Thiel and one of his big things is like a lot of these decisions that you make, they are reversible. So it's not like you're doing something that you're gonna never be able to reverse course from.

Yeah, you're not self managing forever. Just give it a try everybody. That's what I want you to do. Just give it a try. Take one property, take your worst property manager, fire them. Self manage that one property.

You know. And I think the thing about self management that a lot of people have the reservation about is they feel like they were when they were kids and they were afraid to call the store.

Right.

You know, because an adult's gonna answer. They have that, that just novice fear of doing something new. And the thing is you're the one in control. It's your property. Yeah, the tenant is, they're the one that is calling. Yeah, they're the one calling the store here you're just the new owner, you know. And so I think there's sort of that fear of doing it again. The tenants appreciate the place more when they have the owner there saying, hey, you know, I have this problem, can you help me solve it? And sometimes you can say, hey, let's partner up and figure out how to solve it together.

Yeah, and the tenant will help you. They will be your free manager. A lot of times it's amazing.

And if you're in another market, you know, if you're in another place and they're there, the dynamic is such that they understand, they have sympathy for the fact like, okay, well I can't expect the landlord to be here at 2 in the morning, you know, doing something, something. There's limitations there and he's in another time zone. So they're kind of a partner in, hey, you're into the house. If there's a problem, please let me know. You know. And one thing I think with self management that I don't like is that I think some owners want to like never get a call and they feel like, oh, they create.

It's never a call, it's just an email or a text message. Yeah, right.

But, but like, oh, if I call the landlord, they're going to raise my rent.

Right.

I never connect Those two to the tenant, they never feel like, oh, I made this phone call. So this happened.

Right.

That is completely the wrong way to look at it. That's not how I do the management style. I'm like, hey, thank you for letting me know. Let me take care of this.

Okay, so without going too deep into.

Self management, because don't get me started.

We'Re getting off on a little tangent here. And you've shared a lot of that stuff.

Exactly.

So what I do want to tell people about today is that, you know, we're going to have a client on in a moment. He was was the first person to sign up for our fire your managers course with our special empowered investor guide, Scott Poirier. And he bought this course and we did the course with him. And now he is doing lease options and rent tone deals. He wants to convert his entire portfolio to this. It is a fantastic way to go. I think it really is the ultimate hack for your real estate investment portfolio. So I just wanted to bring this up again today. I haven't talked about it in many, many months, but go to fireyourmanagers.com join us for this course. Our course leader for this, Scott, has agreed to add two live sessions to this. Two live zoom sessions. I'll be on those. Scott will be on those. And they're really fantastic. You can increase your cash flow. You can build more equity. You can get deposits equivalent to five to seven, maybe even 10 times the current security deposit you have. You can delegate a ton of your repairs to the tenant and ton of your maintenance to the tenant and really make them feel like an owner and treat the property like an owner. It's just a whole better dynamic, whole better relationship. So go to fireyourmanagers.com check that out. And let's hear from one of our clients who's actually doing this exact plan. Drew, thanks for joining us today.

Greetings from Denver, Colorado. More specifically, Cherry Creek. I'm here with our great client, Bob Pellegrini. He's been a client for a long time and he just had a recent new success in real estate that I wanted to discuss. And I thank you so much for coming on to talk about this, Bob. Bob happens to live in Denver. And so I, I reached out to him. Yeah. And I said, hey, why don't we get together? So here we are. First of all, let's just give a little history.

Yeah.

How long you been Investing?

Started in 2012 with you.

Okay.

And I'm kind of one of the OG's original guys, for. With your. We did the Arizona property tour.

That was our very first property.

Yeah, yeah. And I've been in client ever since. We've been doing business with you a long time. Really. And you know, I really appreciate, you know, all the hard work and education that you've given us over the years.

Thank you. Thank you. And you've got what, about a dozen properties now, give or take?

Well, I had a dozen, but I paired it back to eight, you know, because I was, I had a lot of C properties.

Right, and so you upgraded. That's such a typical.

Right.

And I rolled them into upgrade construction properties and new construction. Start with the cheap properties and go from there. Okay. So the big thing that you did though lately, because we had you on the show to talk about all of your investing stuff before and I know it's been going great. You know, you had one kind of problem property, but the others were working great. We talked about that on prior episodes, but this time I want to talk about something special and that, that is rent to own deals or lease options. Yeah, Bob was literally the first person to sign up for our fire your managers course. So thank you for doing that. And he is basically taking his portfolio and turning them into lease options, rent to own deals. And this is getting you much better terms, much bigger security deposits by a long shot. Tell us about this deal you just did.

So the latest one was a new construction deal in north Alabama, Huntsville area that bought through the network and had America's rental managers as the company. They put a tenant in it and happened to be a section 8, which was okay, it was actually a pretty good tenant.

But yeah, not all section 8 is bad. Some people make out their whole business model. That's all they do.

A little bit of a roll of a dice sometimes. You never know.

I get it.

But after two years, I decided I want to get away from that. And when we took that course, the whole idea is to get rid of your management company.

Right. So you fire your manager and you turn your tenant into a would be owner and you get a much higher security deposit from them. You get better rent from them, you just get a whole better experience and you basically wash your hands of almost all maintenance responsibilities as well. So Right. Originally you put a tenant in there for two years, you had them, did that tenant leave and you got a new tenant to do the rent owned deal, the lease option.

Well, yeah, I did the same tenant. No, since she was getting 90% of her subsidy to pay for the rent, you know, so she couldn't afford the house anyway.

Okay. All right, so you got a new tenant.

Got a new one in there? Yeah.

Okay. So the question is, though, did you look for that new tenant as a rent to own lease option tenant? Is that the way they came in? Okay. Because you could do it. You could just do a typical rental ad and say, hey, you know, we've got a property for rent, and then bring up the conversation about red tone, or even put them in as a normal renter and then turn them in, you know, a year later to a lease tone. So you can do this with existing tenants or with new tenants. That's my point.

Right? Yeah. And you can. But when you're starting off, this is a different technique because you're screening differently here. Because when you have somebody that if it's just a straight up rental, you're looking for, you know, a pretty good credit score, a good background and somebody who can afford it, basically. So if that's all they're going to do, great, then your search is over with. But when you're doing a rent to own, you're looking for a particular client. So not only you want to make sure they can afford the rent, but you want to see, like, what's your credit score if they can't go to a bank and apply for a standard mortgage loan?

Usually they can't at first. Right. That's the point. They're on a program to basically rehabilitate their credit, and that's going to take them a couple of years. Right. And that's why the lease option is good for them.

Yeah. And that's the person you're looking for. You're not looking for somebody with a 700 credit score because they can go afford a house, you know, and a.

Lot of landlords would say you're not looking for that as a traditional renter either, because they're just going to move and buy a house.

Right.

You want someone going to be more likely to be a tenant.

Yeah, so. So the screening takes a little more work, it takes a little more diligence and time, and there's ways that you can make that a lot easier. That's what Scott Poirier, you know, was teaching us, that, you know, how to screen.

He's our empowered investor guide that we, we partnered with to do this program.

But when you do that, you know, it takes a little more time. You got to be a little more patient. But when you find the right person, because all it takes is one.

Yeah, right.

And once they, you find that person, you're able to get them in there because he can get a little more premium on the rent.

So tell us about the deal. Okay. How much you pay for the property?

Okay, well, I bought it for 3099.

Okay. So 399. And this is a now a two year old house, right?

Yeah.

Okay, 399, you paid for it. And what was the lease option or rent owned price that you offered it to the tenant for? What did you agree to? So tenant owner, I should say for.

The first year it's going to be three $39,900.

Okay. So they buy it for $339,900. If they exercise the option in one year.

Yeah. @ the end of the first year. Yeah. It's set up to where they have to be in the house for at least the first.

Year.

Okay. And then they can exercise the.

Option. Got it. Okay. So they've got to wait a year to do it, right? Yep. And what happens if it goes two years? Is the price.

Changing? Yes. Yeah. So if they don't pull the trigger on the after the first year, then it bumps up to.

$349,900. Okay, so it bumps up 10 grand.

More.

Yeah. O. How much option consideration or security deposit in a sense did you get from.

Them? Yeah, so the non refundable security deposit, you know, non refundable deposit was $15,000.

Right? Okay, yeah. So $15,000. And typically what's your normal rent on that property? About.

2,500. Well, in this neighborhood the normal rent is going to be from 2000 to about maybe 1950 to 2100 for this particular.

Neighborhood. Okay. That's not great by any means for a 309 property. But how much do you rent it to them for on the tenant.

Owner? 2100 for the first.

Year. Okay. And then the second year, 2200. Okay. And they've got a $15,000 deposit. And normally you would get about a $2,100 deposit. So basically you've taken that deposit and you've now multiplied it times more than seven. Okay. Or about seven. Yeah. You've got about a 7x higher deposit. And tell us about the agreement on the maintenance.

Responsibilities. So they are going to be responsible for maintaining the.

Property.

Right. So the only thing my responsibility is to is to maintain the insurance on the, on the structure and the property.

Taxes.

Okay. So but before she moves in, I make sure everything's 100% ready to.

Go. Got it. So you don't have to do any maintenance and because of this rent owned deal, you're really not managing a property anymore. You've done a deal with someone who is now thinking like an owner is going to maybe become an owner. Right. They've got the option to become an.

Owner. Yeah.

Exactly. In one year or two.

Years.

Right. Now does it extend out to three years or just two years? At the end of two.

Years? Well, at the end of two years, yeah. We just put a clause in that if two years we can roll it forward and we renegotiate. A new price and an.

Increase. A totally new deal. Yeah. New rent, new price, new.

Everything.

Yeah. And new deposit. New non refundable deposit or Enron. Correct. Right. And you have to really add back in the lack of property manager expense now to your.

Deal.

Correct. Because not only did your rent get higher, but how much were you paying your property manager? About 150.

$200? Yeah, it was about 100. Yeah, it was 152 bucks a.

Month. Right. And so now your cash flow is really increased by. It's about $350 a month.

More.

Yeah. Okay, Right. But it's even better than that because as we all know, and we have taught you so many times, everybody, that your property manager is never the deal you think it is because they're nickel and diming this, that and the other. That's really good, Bob. What else do you want people to know about it? Well, this is.

Great. You know, it's not for everybody, but if you have some properties that are, you know, in the more affordable range. Because I. Because I still have some Memphis properties type property. Yeah. And you know, there's people that would be interested, you know, this would be a good fit for somebody like that, you know, works hard, makes pretty good money, but they want to build some.

Equity. I mean, it really does. We have lots of student examples with people doing this with C class, B class, A class, you know, every strata of property. But of course, it does work a little bit differently. The advertising for it's a little different with each one, but it can work with anything. Yeah. You want to do this with all your properties.

Now? I am working my way towards doing.

That.

Yeah. Because some of the C class ones that I still have, so if I sell it, fine, you know, I just roll it into a newer 1031 exchange. Yeah, exactly. So, yeah, I'd be okay with it if I, you know, if I ended up selling most of.

Them. Yeah. And many times the tenant doesn't exercise the option. So that $15,000 deposit, unlike a security deposit it you don't have to give it back. That's the option they are paying you for the right to possibly buy it one year or two years in the future. And some people do these out three, four, five years even. You know, it's just a personal preference as to how long you do it. But that money is yours to keep. Yeah. So yeah, $15,000 you collect.

Yeah. It's just a great way to simplify your self management because now you know, you're putting a lot of the onus on the tenant owner to maintain the property. So it really eliminates a lot of those little stupid things, you know.

Like clogged drains and silly stuff. Yeah, the doorbell doesn't work. I mean just dumb little stuff, you know, which by the way, more and more in your contracts just eliminate these things by contract. All of these little things. Your tenant just get them to be responsible for it. Many times they will because you know they're not renting an apartment, they're renting a single family home. And so the attitude even as a renter is a not a lease option. Buyer, tenant owner, you know, their mentality should be different on a single family home. And we've taught you about that before. So good stuff. Bob, thank you so much for sharing this with our audience. We appreciate.

It. Yeah.

Thanks. And always appreciate the long term business. And you've been on the show a couple times before talking about it. Many people have met Bob at our events on the recent Empowered Investor cruise that we had. You were there, so it's always great to have you.

Thanks. All right, it's my pleasure. Thanks for.

Having.

The following is a blog post found on jasonhartman.com blog.

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Necessary.

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In competitive markets, an overhang of rehab properties results in sustained holding times and reduced selling prices. Homebuyers must build, brand, and implement the best marketing tactics in order to sell their properties fast. Conclusion on one hand, the search for and the rescue of ill fated properties can appear to be a tough decision, but on the other hand, it presents splendid opportunities for prudent investors through identifying and solving the primary issues that buyers are confronting. While searching for rehab properties, investors can unlock an enormous potential to grab the gold in this very dynamic market. By relying on methodical planning in depth research and persistence, it is possible to identify the potential of rehab projects and realize the objectives that were set out when the investment was.

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