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Building a Portfolio of 300+ Long-Term Rentals: A Story of Success in Baltimore City | All Roads LTR Podcast | Ep.40
27 Plays6 months ago
Today Matt is joined by Matt Derby of Derby Real Estate Development. In this episode they delve into Derby's transformative journey from flipping his first house to establishing a robust portfolio of more than 300 long-term rental properties. Derby reveals his strategies, from the initial quick profits of flipping to the long-term stability and cash flow of rentals. He provides a wealth of tips and in-depth insights, discussing the ins and outs for managing properties, dealing with inspections, navigating Section 8 housing, and honing in on local market expertise to make informed investments. You’ll find invaluable advice on balancing risks, maximizing cash flow, and achieving sustainable growth in the ever-evolving real estate landscape.
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Transcript
Transitioning from Flipping to Renting
00:00:10
Speaker
So what made you have to switch to say, you know what, I'm not gonna just sell these things, I'm gonna keep them and rent them. What was the impetus to start that transition?
00:00:18
Speaker
Yeah, I mean, I started with a flip, but I really pretty much right out of the gate wanted to really do both. So it wasn't anything that kind of clicked over. It just kind of happened that really I did the flip because it was kind of the quick money thing. Okay, I can do it real quick. We'll sell it. We'll make some money. And then that will kind of give me a little bit of capital to, you know,
00:00:45
Speaker
Go on to accumulating rentals and and and doing more deals. So it was just kind of
00:00:52
Speaker
I don't want to say dumb luck, but it was just kind of like, that's kind of what I landed on. I looked at a couple properties to buy as rentals before. And again, the first opportunity that I actually got on a contract just happened to be a flip. Right. Interesting.
Property Investment as a Side Hustle
00:01:06
Speaker
So now that you started doing, you have a few. So do you, when did you go full time? I'm interested to know you had a couple. So did you have your, were you still a loan officer? Were you still doing the lending side? Yeah. Yeah. And so you just started doing this on the side as like a side hustle.
00:01:21
Speaker
Yeah, very fortunate. I had been with my bosses at the time on the mortgage side for a very, very long time. And I kind of came to them and said, look, I really have a passion for this. I want to kind of explore, go down this road. Are you flexible with my schedule? And they pretty much said they gave me their blessing and said, sure.
00:01:45
Speaker
you know, if you want to be here two hours a day or 10 hours a day, as long as you still close a couple of loans for us every month, go for it. So again, very fortunate in that sense, because a lot of people that have a nine to five just can't be running around and looking at houses and meeting contractors and stuff like that, you know, pretty much whenever they want. So that certainly did help.
00:02:07
Speaker
So and what do you say, because I know you've gone to investor meetings and you still do, which I commend you for. A lot of more seasoned people don't go to those anymore.
Mentorship and Risk-taking for New Investors
00:02:16
Speaker
But what do you say to someone that that wants to start that's still in that early stage where what you just described and they don't know exactly what they're going to do and they don't know they're nervous, right? They might have some savings, but
00:02:28
Speaker
There's a lot of eager people out there that want to start down this path. It sounds fabulous. But all they hear from the people that don't do it is how risky this is and how terrifying this is. So what advice do you give to the people to get things started?
00:02:43
Speaker
I mean, I would, I guess, shameless plug, I'm doing coaching. So, but in all seriousness, I very, very early on hired a mentor. I paid a lot, a lot of money to have a one on one mentorship. So I would.
00:03:03
Speaker
I would seek somebody out that can kind of help you, who's local, knows the, you know, if you're gonna be doing it in the Baltimore market or surrounding areas, knows the market. I think that there's some good educational stuff online, the bigger pockets, stuff like that. I do think that sometimes people get a little bit of information overload and they can almost get kind of that paralysis by analysis and, you know, they start reading so much stuff that it almost kind of locks them up.
00:03:31
Speaker
Mentally, right? So I think you you know Tread a little bit lately as far as that goes but again You know getting a mentor and at some point you just really kind of need to take the plunge, you know try and Mitigate risks and and stuff like that is as much as possible But you know, sometimes you just got to kind of
00:03:55
Speaker
Uh, take your shirt off and jump in the swimming pool and yeah, you know, see what temp the water is and go from there. Basically.
Overcoming Perfectionism in Real Estate
00:04:03
Speaker
Well, it's interesting. You talk about perfection because that's what I see with people that I talked to about investing there. They've read the, they've read the books, they've gone to some of these seminars, they've,
00:04:12
Speaker
I mean, they know way more than I think I knew even when I started, but they they're looking for the perfect deal, the perfect opportunity. And it's really difficult or I don't want to overpay or I don't want to make this mistake. And they, you know, five years go by and they still haven't done anything. Yeah. I mean, do you do you feel that's something that you've seen out there? Oh, yeah, absolutely. You know,
00:04:35
Speaker
I've said it before and I'm sure I've heard it from somebody else, but being a perfectionist is basically being a procrastinator. And sometimes people don't know they're doing it, but they're doing it. But either way, it is holding them back. And as you all know, in this market, perfect opportunities, unless you, they almost never kind of just fall in your lap.
00:05:00
Speaker
I mean, unless you have a friend of a friend and it just so happens that maybe their grandmother passed away, you know, there are some some. That does happen, but it happens very rarely. So if you're going to sit back and wait for all the timing, all the stars online, everything to be perfect.
00:05:23
Speaker
It's probably, probably not for you. Well, and so that's one extreme, right? So the person is looking for that perfect opportunity.
The Power of Relationships in Property Deals
00:05:30
Speaker
And then I, I mean, I literally, as you walked into the studio, I got to hear you on the phone. What I would consider is the opposite. You're relying on your, your experience and your connections. You were literally tell everyone what you were doing on the phone when you were coming in, you were buying another property.
00:05:45
Speaker
Yeah. Yeah. So, you know, we're just off Charles Street in Towson and a guy that so actually tied together a little bit more. I actually I signed for a house about 10 minutes before I came. I got on the road.
00:06:02
Speaker
I signed the documents, I have a notary in my office, so it's nice and convenient, it's on purpose. So I'm not having to run from title to company, I don't have to go up to Bel Air and back down to Columbia. So sign for the house with this wholesaler, wholesaler is somebody that goes out, finds a property and basically assigns the rights to that contract.
00:06:27
Speaker
So they're kind of like a middleman, they're finding a good opportunity and then they're finding an end buyer like somebody like myself. So I bought this property literally again before I walked out the door to come up here and then I'm literally, I don't know, two miles away at best and he sends me pictures and the pictures are good enough for me to make a decision on and says, hey, you know, do you want this house? I don't, I would bet that he probably didn't even send it to anybody else. So, um,
00:06:56
Speaker
I said, yeah, sure, I'll take it. It was priced well enough where I know that I have some room for error. I'm not just looking at a couple handful of pictures and buying everything, but if it's priced correctly and I know that if I get in there and oh, wow, that's maybe $5,000 cost that I didn't really see in the pictures or something like that,
00:07:22
Speaker
then I'm going to pull the trigger on it because I don't know, you know, maybe not in that case, but everybody is now, now, now. And he might say, well, look, if you don't want it, I'm just going to send it out to twenty five other people. Sure. And I might wake up tomorrow and and when I have a chance to see it or someone like I see it and before I know it, it's gone. You know, so it helps a lot for him. I mean, obviously he made a sale by sending me to one
Understanding Wholesaling in Real Estate
00:07:51
Speaker
text message.
00:07:51
Speaker
And to clarify, so a wholesaler might get something under contract for making up numbers, but let's say a hundred thousand and that's his assignable price and he can give you a price as well that's above that. And so his his profit is going to be the difference. Is that essentially how that works? Yeah. And he was he disclosed it to me. In that case, he's making twelve thousand five hundred hours on that deal. Right. By finding a motivated buyer for a distressed property and.
00:08:17
Speaker
Knowing him knowing me a good end buyer So and how much risk does that wholesaler take how much money did it take of his to do this? It can really really vary Yeah, I mean some of those deals because we do it as well We do direct to seller marketing some of them can cost five six seven thousand dollars to get in the door on
00:08:38
Speaker
At one point, I was running commercial ads on TV. And yeah, I mean, you know, you can blow through twenty thousand dollars a month for running some commercials. And during, you know, Jerry Springer at ten thirty a night. Well, we lost our Jerry Springer recently. Yeah. Yeah. RIP Jerry. So and then sometimes he might just know an agent.
00:09:03
Speaker
So I guess my point is, so you're referring to marketing costs, you're thinking of the business of it because you can't do what he just did, that wholesaler consistently without some form of inbound opportunities or leads. But if he knew the person, it could have cost him nothing and he didn't put any money into the deal.
00:09:20
Speaker
Right. Potentially. Right. Or it could be it could be an agent that said that actually the deal that I signed for before I came up here, an agent was involved. So in that case, he didn't put any marketing money into it. It was just a relationship based deal. The agent said, hey, do you have a buyer for this? He said, yeah, sure. Send it to me. I said, sure. I'll take it. And it could be a win, win, win. Right. So the seller had a quick sale as is, got out the door and it's
00:09:46
Speaker
You know, I like it as someone who lives in the state and wants the state to do well because you're going to invest money. You're going to beautify it. You're going to get it rented. It's not going to be a boarded up home anymore.
Convenience vs. Top Dollar in Property Sales
00:09:56
Speaker
Right. So we only can hope this continues for the city. Right. Yeah. So I just hear some people just hear it. They're just cringing, thinking like somehow we're taking advantage of someone. But in reality, you're solving a problem. Yeah. Yeah, absolutely. And you're 100 percent correct. A lot of people
00:10:15
Speaker
don't quite understand that with a lot of sellers, even myself included, we're actually selling a property that it was my wife's first house. We're selling it. And it turned out that the tenants in the house wanted to buy it. And we could probably have the tenants move out.
00:10:34
Speaker
maybe put a little time and money into it, and maybe get, say, $25,000 more for it. But that's not, you know, we're at a price that we're happy with, and sure, it's great to sell properties at top dollar, but in this case, again, we're happy with the price point, and there's some ease and convenience to it, and ease and convenience, a lot of times, is more important than getting top dollar.
00:11:04
Speaker
That's right. So you're you're some of these people you're bringing a lot of value to. And, hey, they're a lot of times are very enthused with the number that they're getting to sell their house. So it's great. It is a win win. You know, they're they're getting a price they're happy with. And it's a very quick and easy transaction.
00:11:24
Speaker
That's right. Now, I wanted to highlight something. I know you know this, but you might just not think about what you just said a little bit earlier.
Importance of Local Market Knowledge
00:11:31
Speaker
And when I think of someone that's newer to this or that wants to get going or only has one or two and once more, it's to become a subject expert in an area. Because what you were saying that you could tell on your phone looking at a few photos, what was appropriate,
00:11:46
Speaker
You're not buying these in Texas in a county in an area that you're not familiar with, right? This is these are zip codes. These are neighborhoods and streets that you've been on many, many times, right? So you're using your experience and knowledge. So when I hear that, would you agree that if you're going to start maybe become an expert
00:12:03
Speaker
in a specific area and know everything that's sold, right? Go and look up tax records, like become the expert. So you might not know as much as you know, but at least in one little neighborhood or one area, you should, even someone just starting could be an expert, right? And have a pretty good idea as to what's appropriate and what's not.
00:12:21
Speaker
Yeah, yeah, absolutely. I mean, I started on the northeast side of the city, which ironically is where that property is. And yeah, I still buy in in certain areas. You know, I certainly do not buy in every part of Baltimore City. There's certain neighborhoods and areas that I want to be in. I know them well. Actually, I didn't even mention it to you for that house. I think I own two or three right on that block.
00:12:46
Speaker
And I think I own five on that street. Yeah, I don't know. It's probably six or seven blocks long. So, yeah, very, very familiar with that area. I know what it's going to rent for. But yeah, absolutely. And that helps with the urgency of it. You know, if you know.
00:13:05
Speaker
What that the footprint of the houses are generally going to be like what you know your your rehab numbers are what you know what you know it's going to appraise for what it's going to rent for. You know in that it's just it's second nature I know immediately from having that that data kinda.
00:13:23
Speaker
embedded in my brain. So yeah, finding an area that you think you like and really kind of like your farming area and starting, going real deep instead of wide is a great strategy, I think.
00:13:40
Speaker
And so my investment strategy and any of my clients that might be listening to this, I'm sure you've probably heard me discuss this many times individually with you. But I had several in the city and my experience wasn't quite probably as as positive as yours. And I'm going to want to express what's happened with me and in the city and why I personally am now investing just in the county.
City vs. County Property Experiences
00:14:04
Speaker
And so I now have an area specific in the county and I invest in Carroll, Harford, Howard, the counties in which I've lived and I actively am a real estate agent in. And I know those numbers inside and out. And my experience in the city has been, it's been less positive, maybe 10, 15 years ago when I first started buying in the city, it was different for me. And so as a man who has a lot of properties,
00:14:29
Speaker
I want to first describe like how is what is your experience like in the city specifically? Do you feel it's relatively easy to work with the city and to get permits and to do get rental applications or inspections done? What's your experience and how is that potentially changed in 10 or 15, 20 years?
00:14:46
Speaker
Yeah, well, first of all, we're doing pretty much all subsidized housing. So we are dealing with- Section 8. Yeah, Section 8 or BRHP is another one, which they're one of the same. One is a different name from the other, but they're operating all the same, essentially.
00:15:09
Speaker
And, you know, really for us, again, we're pretty much only in the city and the county. I have one property in Anne Arundel County, which I'm actually selling right now. So I really kind of know those two things. You actually invest in more counties than I do.
00:15:29
Speaker
But for us and for me, there's challenges in the county and the city. There's some stuff that's easier in the city and there's some stuff that's easier in the county and vice versa.
00:15:46
Speaker
But none of it's a cakewalk. You know what I mean? There's there's there's some stumbling blocks and some some bumps in the road, really kind of regardless of of, you know, what municipality you're working in. But I don't find that this city is
00:16:07
Speaker
Really much much more challenging But in a weird way I can kind of see how people might feel that way or think that way Well my experience now it's much more limited than yours with section 8 but I had several section 8 Properties with a head vouchers and my experience was that every year when I had an inspection Because yearly they have to come out and inspect
00:16:29
Speaker
And every time it would fail and I rehab these homes prior to them, you know, the tenants moving in and every year it was almost destroyed.
Managing Inspections and Tenant Issues
00:16:37
Speaker
And I would get thousands and thousands of dollars basically of repair items requested. And they were told that you can get the tenant to do it and enforce your lease, which basically means evict them.
00:16:48
Speaker
Or I would have to do it and to make all these repairs in order to keep the voucher active and continue getting paid as a landlord. And so for me, it was very challenging to earn a profit with that system. And I don't know if it was luck of the drawl or is it new proper screening? That's what ultimately one of the reasons I ended up leaving those properties. But is that similar to your experience or do you not see those same challenges at scale the way that you've done it?
00:17:13
Speaker
Yeah, no, I mean, for sure. That is certainly one of the downsides. I will say that really they they claim to be doing annual inspections, but they, from my perspective, at least they still have not recovered from covid. So they're
00:17:36
Speaker
They are doing annual inspections, but we are certainly we have, I think. In terms of just this is just simply section eight, we have some some properties with the other housing agency that I mentioned in the city, but I think we have about one hundred twenty five tenant occupied ones in the city. OK.
00:17:55
Speaker
I would say we're probably having four or five annual inspections per month. So you multiply that by 12 months, they're seeing about half of them. But yeah, I mean, 100%
00:18:10
Speaker
those annual inspections, you can get a laundry list that's 20 items long and before you know it, you're spending two, $3,000 on them. So yeah, that is not one of the benefits or the fun parts of doing a subsidized housing. And you're correct, a lot of times,
00:18:31
Speaker
They are pushing it back on the owner and not really some some stuff on rare occasions They'll make the the resident the tenant responsible for it, right? but more times than not they will give them the benefit of the doubt and We're responsible for it. So yeah, it's certainly When you get to scale like like we have it's it's it's a big cost and
00:18:57
Speaker
Now, is it a little bit easier? I would assume in my head that when you only have a couple of them, you know, I think I had four, you know, before I got rid of those in the city. But if you have 100 of them or more, is it easier in the sense that you have the crews? It's not as cumbersome when you have to figure out how to do things where you just, you know, the system, you know, the drill.
00:19:16
Speaker
Like there's only so many things that can go wrong at a home. So you know, the railing needs to get repainted or secured. You know, there's basic things that consistently show up. Does that, does he think that has made it easier for you to continue to scale?
00:19:27
Speaker
Yeah, I would say so. Especially on the initial inspection, we know pretty much exactly what they're going to be looking for. We don't do inspections prior to housing coming out for the annual. But yeah, all in all, to build on what you just mentioned there,
00:19:51
Speaker
My advice to pretty much anybody out there is that, kinda like we were talking about the city versus the county. Section eight, sub-size housing, it's got some great benefits to it. It also has some downsides. What are the benefits? I've only illustrated some of the hardships, but what are some of the benefits from the investor's standpoint?
Benefits and Drawbacks of Section 8
00:20:10
Speaker
Well, obviously, you hear the guaranteed rent. And one thing that a lot of people don't know that aren't familiar with real estate, Section 8 is not always paying 100% of the rent, probably only about
00:20:28
Speaker
20 maybe 25% of our tenants. They're literally not coming out of pocket a dollar But also you have it really runs the gamut there I mean you can have somebody with a zero tenant portion, right? And then you can have one with a thousand dollar tenant portion So it's based on their income and their needs. Yeah. Yeah, so but
00:20:50
Speaker
More times than not, Section 8 pays, let's say, 75 percent of our overall rent. So it's nice to know that when you wake up on the first of the month that that money is going to be in there, especially with COVID. Sure. You know, a lot of people that had your traditional market tenants were, I mean, you know, they were really losing some sleep there for, you know, a good couple of months.
00:21:14
Speaker
So that really kind of gave me an even firmer belief that, hey, outside of getting into some sort of lawsuit, the biggest downside or biggest risk of renting real estate out is not getting rent and having to evict them.
00:21:32
Speaker
And we're actually in the process of having our first eviction ever for rent right now. So that's really number one. And then number two is just the longevity of the tenants. The tenants tend to stay a lot longer, typically two to three times as long as
00:21:54
Speaker
your market tenants. So, you know, we've we've had houses, again, before we we jumped on here talking about the house down or we were the house in Fells Point. You know, you see a lot of turnover and turnover is just is just a killer. People don't really people. That's right. A 12 month lease. And then every year they they they leave or it's just it's it's killer. Yeah. One month vacancy kills your profit for the year.
00:22:20
Speaker
Yeah, and you might have one month's worth of rent for turnover, just doing little odds and ends. Right, and a placement fee if you hire somebody. Yeah, you know, so unless your margins are really, really strong, if your tenant's moving out in less than, certainly less than two years, maybe even if they don't make it through that third year,
00:22:47
Speaker
I would challenge you that you're really being profitable. You know, you might be making a few bucks, but you're not really.
00:22:58
Speaker
cash flowing sufficiently unless you can have that tenant. I mean, there's exceptions to the rule there. Maybe they move out and maybe you can fill it, pre-fill it to them moving out, but more times than not, I mean, we've had it where you have a month or two vacancy and it kills your numbers.
00:23:19
Speaker
Well, and I in the way I described my experience with section eight, it was I did that for cash
Cash Flow vs. Appreciation in Investment Strategies
00:23:24
Speaker
flow. I was able to buy these properties for lower dollar amounts than I would elsewhere. And the rent was pretty solid in my monthly expenses were in my mind, very low until that end of year inspection seemed to happen.
00:23:38
Speaker
But it was a cash flow proposition. I was making decent money. And then now I'm investing in the county. It's much more expensive. So now I'm going after a very different type of property. And and with it, the profit in terms of cash flow has been tighter. I don't make.
00:23:56
Speaker
the type of money I was making cash flow. But the appreciation seems to be very strong. It's very fast to fill. And so it's been a it's been a different field to me. But I mention that because I want to go over the difference in your mind. So are you doing this primarily for cash flow benefits?
00:24:15
Speaker
or are you doing this for other reasons? How do you, because you've really honed in on that, you know, the voucher portfolio. So is that primarily for cashflow purposes? Is that how you're selecting these? Yeah, cashflow is certainly at the top of the mountain and number one on the list.
00:24:34
Speaker
But I tell people you have to take that with a little bit of a grain of salt. Cash flow, as I say, is not created equal. You know, you could go and invest in very rough areas of the city and you could cash flow great. It'll look like a great property or project on paper. And then before you know it, you know, you might get a bad tenant if they're if they're a market tenant or again, like we just talked about with turnover, they might live there for three or four months.
00:25:02
Speaker
So I'm looking for areas, the best areas where I'm going to cash flow sufficiently because you can buy. We talked about board ups very briefly. You know, you can you can buy houses and rent them almost anywhere, especially right now, because there's there's such a demand for housing just in general, whether it's tenants, buyers, you know, we're kind of at this massive shortage across the board. Yeah. So but yeah, I mean, cash flow
00:25:33
Speaker
We're obviously coming from kind of different worlds. I'm doing it as a business and not to say that you're not doing it from a business perspective, but it's not your number one form of income, obviously. Yeah, I've looked at it and many of the clients that I work for look at this. These are doctors, lawyers, attorneys. These are professionals that have additional income that want to spend, but don't want to assume tremendous risk. They want to feel comfortable going there.
00:25:59
Speaker
It's just, to them it's a safer play in the sense that, you know, to them it feels less risky than going into the business model that you're in. And so that's predominantly why I feel like they've gone that route. And it's been my experience that
00:26:23
Speaker
I self-managed mine now. I used to have a management company and I only get a call maybe once every other month. And I own a bunch now. And so it's just 800 credit score folks that sign multi-year leases and it is so competitive. I'll get 30 applicants.
00:26:42
Speaker
the first day I put something on the market and they'll offer me above what I even have it listed for. And this is not a balanced market currently in 2023 for renters or for buyers. And so it's a crazy challenging time. But, you know, what I want to hear is like, also, if I was analyzing a deal from your perspective, what are the basic numbers that make sense to you?
Key Numbers in Real Estate Deal Analysis
00:27:04
Speaker
What's what's a typical, let's say, purchase renovation or improvement? And then what do you try to cash flow it for?
00:27:12
Speaker
Yeah, I mean, it's kind of, I feel like it's kind of an industry buzz number if you will, but I'm typically looking right at $500 in terms of just cashflow, meaning that's kind of like,
00:27:24
Speaker
almost gross cash flow, so all I'm looking at is the rent and minus the mortgage, which includes the taxes and the insurance. I'm not putting in other factors. We manage all the properties ourselves, so there's no third-party management to be paid. I would factor that in, by the way, if I did have- And for most people, it's eight to 10% in that.
00:27:46
Speaker
Ballpark, right? Yeah, I mean, yeah, you have some that do a flat fee service for like 100 or 150 dollars. But yeah, I would I would plug in maybe eight to ten. That's that's a good number to throw in there. OK, so I'm looking at really just two factors. I'm looking at that cash flow number.
00:28:04
Speaker
And then I'm also looking at does it have sufficient equity because I'm usually buying with short-term money Getting essentially a hard money loan or renovation loan And then I'm kind of forcing that's what you refer to as short-term money. Yeah. Yeah
00:28:20
Speaker
So I'm renovating it and kind of forcing that instant appreciation. You know, I'm taking a junker and I'm, you know, the one that I showed you today certainly needs some work. The ceilings were falling down in a lot of areas. So, you know, that's why I'm able to buy at a discount and we renovate them. The renovations really vary. I mean, as far as my sweet spot,
00:28:49
Speaker
Really the the smaller the better. I don't really like doing renovations more than $50,000 and even getting to $50,000 It's got to be a really really good deal. I'm searching for stuff in a perfect world That's just cosmetics, you know, maybe we throw a new kitchen in there. We throw some some paint on the wall maybe some new flooring right new tiles around in the bathroom and We're out of there