Building a Passive 7-Figure Rental Portfolio with the Lazy Investor Method

0:00Did you work with specific turnkey housing providers or did you just find people who are rehabbing properties and you'd find a different manager to manage that property going forward or what did that look like for you? — You nailed it. You nailed it. The industry has like so many people have tarnished that word turnkey, which is why I've like I'm I'm trying to define it and make it better because there were so many and there there's always going to be shady people that come into a business where they see that there's going to be a profit.

0:33But also some people meant well where they're like, "Hey, I can do this. I can renovate these properties and I can do a good job with that." But then the other piece of it is property management. Maybe they're terrible property managers and I have seen that. So to answer your question, it's I've been doing this for 10 years. I've been in the turnkey world for 10 years. That's how I've helped, you know, so many investors buy these properties. So I'm seeing the back end. So I'm seeing what's actually happening to real people real time in my own portfolio. And so yes, there have been a lot of shady characters.

1:07I'm seeing the inspection reports. I'm seeing the communications. I'm seeing the property management. And so I have essentially been like, "Hey, I'm not doing this anymore. I'm not working with 30 different people and guessing who's going to be good and who's going to be bad." Like I'm I'm just done with that. I'm not doing that anymore. So yes, there is certain qualifications up at the on the front end where it's like, "Okay, if if you want me to work with you, I need to see, you know, standard renovation you know, policies.

1:41I need to see inspection reports. I need to see property management reports. I need to see, you know, like I know the questions to ask them now because I've been doing it for so long. I can point out a lemon pretty quickly. But then it's just a trust factor. I only work with the people that I know in longevity. I have a team in Indiana. I've worked with them for for over 10 years now. And I can honestly say — Anyone from Indiana you can trust. I I can just tell you that. — Well, yeah, right? Right? I have fun I have a couple good teams in Indiana and you know, yeah, people people are very I'm I'm very impressed.

2:19I'm very impressed. But yeah, I've known them for so long and I can honestly say I think out of like 10 years I've heard like one person complain and be upset. And the answer is like you can't make everybody happy. People are going to make up their minds and they're going to complain. But it's what does the company do and how do they respond? You know? Do they just get upset and mad and just be like, "Forget you." and just get mad? Or are they like, "Hey, let's help you through this.

2:51Let's let's figure this out." And at the end of the day you can't make everybody happy like I just said. But I see that communication and I'm in the middle and I'm sitting there going, "Hm, okay, there's two sides to this story." and it's it's a matter of setting expectations with anybody that's investing. And you know that. Like if you if you think that everything's going to be perfect with real estate, don't invest. Cuz it's not. — Exactly. — It's it's not. So don't don't even bother if you expect it to be perfect. — Yeah. — So that's kind of the attitude that I take too with everybody that I work with is I do my best to set expectations with everybody and try to be the matchmaker.

3:26So at this point to answer your question, I I've been doing it for so long now that I know where the lemons are and I know who the lemons like who the bad I mean, I wouldn't say everybody. I mean, I'm human, but I I know where to detour people and be like, "Don't look there. You're safer over here." — Yeah. So do you have a specific areas that you're like, "Okay, these are the like three submarkets that I think are the right place to invest because we have a team there, the fundamentals make sense, like that sort of thing.

3:57— Absolutely. And you know what's funny, I was talking to somebody yesterday and he kept on like talking about like the market, the market, the market and you know, and I was like, okay, we've we've already covered the market, you know, we've talked about it enough, like 50% of the population rent, the math makes sense, there's jobs, there's employers, you know, there's all there's these things, it's landlord friendly. You're asking the wrong question. The question you should be asking is, after I close, am I going to be successful with the team that's there? What are How are they going to help me be a successful investor? So, so all the markets I'm in are in are phenomenal.

4:31So, from, you know, I've got I'm in I have some phenomenal teams in Ohio, in Birmingham, in Missouri, Indiana, Little Rock, even like new construction stuff, in Florida, North Carolina, you know, I I've got phenomenal teams and and there's reasons why you would want to go to those states versus others. But then it's really about the team, the property manager. Like what's going to happen after you close? You close, you're 2,000 miles away. That's the important piece is like, okay, what are the warranties that were in place and are they living up to those warranties?

5:05Are you going to get a call 2 months after you own the property? That would suck and if they're like, hey, something happened, that that would be a bummer. Like we want to avoid that and then also tenant retention, you know, you need a tenant there paying rent and you don't want turnover. That's the fastest thing to see a bad property manager, if their retention rate is really low and tenants leave every year, that's a problem. That means you're paying for a rent ready and paying for a vacancy every year. So, you know, we need tenants to stay longer and that's the property manager.

5:38So, most of the property managers that I work with today and recommend will keep tenants 3 to 4 years on average and — they have over a 90 96% occupancy rate in their entire portfolio. So, those are the type of people that I work with and recommend. — Yeah, that's great. What what is that warranty that most of them are providing? — so, on the front end you're going to see a rehab warranty. So, you're going to get an inspection done. And then any repairs that the way that I have it arranged with the people that I work with is when you get that inspection report back, like look at it, glance at it.

6:19Make make sure you feel good about it. But, we're going to send that entire report back to them. And they're going to fix and take care of anything that's going to cause, you know, maintenance issues for you, safety issues for you, anything like that. They're going to fix it at their cost before closing. And then they're going to warranty those items. So, every team has different warranties. But, there's also factory warranties as well. So, I have a team that's like, "Hey, you're not going to see a a maintenance bill the first year you own the property. If there's a maintenance call that comes in, we're covering it." So, that one is pretty awesome.

6:51But, then you also know what they did on the rehab. So, if they put in a new AC unit, there's also factory warranties on top of that. So, there's like, "Hey, they installed it and they did the work and that's warranted." But, then the actual unit themselves is also warranted. So, I have a couple different layers of warranties. I also have some teams that I work with that will do do will do rental guarantees. So, that's pretty awesome. They have different varieties of that. They're all over the place. Anything from, "Hey, we'll you know, if there's not a tenant in place by the time you close, we're going to pay you the full rent." that's a good one.

7:27Or, "Hey, if the tenant for some reason stops paying the first 6 months, we'll cover it." Or, you know, there's just different things to make people feel better and safer and a little bit more secure. Just things like that to kind of you know, it it really is a mindset thing. And so, if there's different things like that, it definitely helps you feel safer. — Yeah, absolutely. Yeah. So, I guess switching then to to kind of the underwriting process, I I saw a video you did where you talked about the numbers that instantly tell you if a deal works.

8:01What is that that you look at to know like I know everybody has kind of different metrics that they they use to evaluate this is a good deal or it's not a good deal. But for you, when you're advising someone, like what what are the the main factors that you say yes, this this makes sense, move forward with this deal? — Yeah. So, anything that earns you more than your bank account is essentially the good deal. So, you know, the number that I look at and I and I hope I I want everybody to look at this number.

8:33It's the cash on cash return. So, it's a little bit different with a long-term rental versus a short-term rental because with the short-term rental, you can't really you don't know the numbers because, you know, I own short-term rentals, too. And, you know, if somebody decides to take a guest decides to take 20 baths in one day, you're paying for that water bill. So, there are some variables with short-term rentals that you have to like kind of plan for and put aside differently. With long-term rentals, the tenant pays for all their own utilities, their own yard care, their own everything.

9:08So, the only thing that you have to pay is taxes, insurance, property manager, and mortgage. So, those are the four. So, it's actually much easier to run the numbers. So, when we look at cash on cash return, that is the money that you are taking out of your savings account. So, if you're like, "Hey, I took $30,000 out of my savings account to put down on this property." And then we'll say let's just say 35,000 for some closing costs. So, that's your hard-earned money.

9:39I want to know how much that money is earning. And so, that's what cash on cash return is on my spreadsheet, and I tell everybody that is the most important number you can look at because it's going to take your If we're looking at the first year, which we always want to look at first year, and then we also want to look at future years, which I have a amazing plug-and-play tool that takes you from year 1 to year 30 to kind of anticipate your numbers, but you take your first year profit, you know, after all the expenses are done. And also, it's much easier to run because it's a newly renovated property with warranties, with a rental guarantee.

10:12So, year 1 is the easiest number to run because you can like — No maintenance, no, yeah. — Yeah, yeah, you don't have to worry about future unknowns. You We can kind of look at it pretty straight. And so, you take the profit, and then you divide it by how much you put down on that property. And you get a cash on cash return. So, you know, to me, I mean, some people complain about probably the lowest properties that I see for a newly renovated property, maybe in a good neighborhood, a good property, is maybe the lowest is about 7% cash on cash return.

10:47Most of the properties that I see that I have access to, they're all off-market, are going to be somewhere between 10 and 12% cash on cash return year 1. So, that's phenomenal. That means that your money is for just the first year, just the cash, just your cash flow, just the money you put in your bank account is earning way more than you would ever earn in a high-yield savings account or anywhere else. So, to me, I just look at it and go, "Okay, well, this is earning more than it would in a savings account, so it it's a win." that's just the cash flow, and then, of course, with real estate, we have all the amazing things with leverage and tenant paying down the mortgage and with tax benefits and and, you know, appreciation, and all those things are happening in there are the cherry on top.

11:32But, cash flow that cash on cash return is really my favorite number. — Got it. Okay, that makes sense. And then in terms of you mentioned the down payment. So so how are most people financing these? Are they I know some people buy them in their self-directed IRAs. Is that pretty common for you or is it just most people are getting just a traditional DSCR loan or how what what does that look like for who you work with? — DSCR loan all the way. I mean the rates are almost identical to a conventional loan rate right now.

12:08It's not that much different. You are putting 20% down. So this this model is perfect for the person that's like, "Hey, I have some money to allocate. I want to diversify. I don't want all my money in the stocks. I've got this money sitting in my savings account. I don't know what to do." $40,000, you know, I I'd say 30 to 50,000 that's the perfect person. Yeah, you can use your 401k. It's a little bit tougher because that cash flow isn't yours.

12:40The cash flow goes right back to your retirement account. And that's fine if if people are okay with that. I do have a lender. I actually just had him on the podcast that was released actually today. You have to do You have to do a special loan. It's called a non-recourse loan. If you're using your retirement account and his program is a 30% down payment. So if you've got, you know, money sitting in a 401k and you're like, "Hey, I want to diversify this." it's it's phenomenal cuz normally you have to put 50% down for a non-recourse — I was going to say, I've never seen 30% down.

13:14— Yep. Yep, 30% down and his rates are fantastic. And I've done many many of these with him. I've known him for a while, so he's legit. They're good. So anyway, so yeah, so you can use your 401k. You can, you know, take a HELOC out on your property or you can cash out refinance something else and, you know, what whatever you need to do to get your money to invest in real estate. But most people just save up and it's money sitting in their savings account. But yeah, to answer your question, the DSCR is so amazing. So, the DSCR, you're qualifying on the property itself.

13:46And this is where long-term rentals are different than a short-term rental cuz I've also done DSCRs on my short-term rentals. The the data that they're pulling is much easier for a long-term rental. They're just pulling rents. They they just want to see what the average rents are. And so, that's it. And that's very provable, that's easy to find. So, they're qualifying the property on how much money it's going to make. Super easy, super chill. Every single property that I get off market in my system qualifies for the DSCR loan.

14:19I don't put it up there if it wouldn't. — Got it. Okay. And what's the expectation or what what where do you see most people going with this? Is it Most people just wanting like to diversify with one or two properties or do you see people building like significant portfolios and actually getting to a place of, you know, cash flow that they can live off of? — Yeah, absolutely. So, there's a there's a cool strategy that to answer your question, both. Both. We I have I have clients that are just like, "Hey, I just want to buy one property a year passively.

14:52I don't want to touch it. I don't want to worry about it. It's This is for my future wealth. Just going to let the tenant pay down the mortgage. I don't care about the cash flow. You know, it's it's just kind of for this wealth piece for down the road, a retirement plan." And then by the time they get to retirement, they're like, "Okay, now we've got Let's say they had 10 properties. Now now what? I Hey, I want to retire in 5 years. How do I make these properties have a higher profit?" And And usually what that answer is is, "We're going to start to slowly pay them off.

15:22We're going to do the income snowball payoff. But the trick is you have to have the properties first. So we we get into this buy buy buy phase. So it's like save up and buy, save up and buy, save up and buy. So you buy as many properties as you can or you're comfortable with. Usually people land on that number 10 just because it it snowballs significantly when you have 10 properties. So if you have 10 properties and let's say they were cash flowing $3,000 a month. Then what you're going to want to do is when you get once you get to a point where you're like, "Hey, I own enough.

15:53I'm getting close to retirement. I want to make I want to earn more than $3,000 a month in passive income." So then you take that $3,000 and you just dump it into mortgage number one. And then in a couple years that one will be free and clear. Now you've got $4,000 a month in passive income. Now you dump that into property number two. So it's just kind of like the debt payoff snowball, but it's the real estate. And then, you know, the formula excels and it snowballs really quickly. When you're done, you've got a rental portfolio that is now cash flowing over $10,000 a month.

16:24So that's real and that's real math and that's significant. That's a significant retirement. And you can do that with these properties because these are 120, 150,000 dollar properties. You know, so you're paying them off pretty quickly. These aren't high-end luxury properties. So you can do it very quickly. I have a a client of mine who I worked with I met him about six years ago. I actually had him on my podcast. And he just completed his first so he bought I think it was 11 doors in the last six years.

16:59And then he just paid off his very first property. And so when they're all done and paid off, he's going to have about $12,000 a month in passive income. — Wow. That's awesome. Yeah. Do you do you worry once they're paid off that all of a sudden you can be like more of a target for frivolous lawsuits cuz there's all this equity there. Do you buy them in like LLCs to protect that or what what's your strategy around that? — Yeah. Yeah, especially with the DSCR loan, the lenders are going to require you you put it into an LLC. So whatever your your your strategy is there, I mean I definitely have recommendations and help people with that.

17:35Every every account and every CPA tells you to kind of do something different and everybody has their own opinions about it. But definitely I love LLCs. You should definitely put your property in LLC. But the first protection is insurance. End of the day, you have, you know, when you have a rental property, you're going to have hazard insurance or you're going to have landlord insurance. So, you know, if somebody tries to go after you, cool. Go for it. Go after the insurance company. You know, you can add as much insurance as you want. Stack your insurance if that's what you're afraid about. And then after that, the second one is just kind of moving it into an LLC so it separates you from anything in your private life.

18:10And then like you said, you know, yeah, it is scary to have a lot of equity in properties and a lot of people won't won't do that because they don't want anybody to get to their equity. So that's something to think about for sure. I think if you're getting near retirement years and you're going to be looking at passing it down to the next generation, some people want to pass it down debt-free with no loans on it. And you can move it into a trust and different things like that. So that would be something that, you know, individually. Personally, I love leverage and I love debt and I probably will never ever pay off any of my properties cuz I think it's the best tool out there.

18:44They're growing wealth. I'm just going to keep on using my income and properties and rolling it over and buying another one and taking cash out and buying another one. I I believe in leverage, but some people have different thoughts about that. — Yeah. — Oh. Oh.