{"id":21784,"date":"2026-09-21T14:22:31","date_gmt":"2026-09-21T14:22:31","guid":{"rendered":"https:\/\/imsfund.com\/?p=21784"},"modified":"2026-09-21T14:22:31","modified_gmt":"2026-09-21T14:22:31","slug":"how-to-turn-one-condo-into-a-17-unit-rental-portfolio","status":"publish","type":"post","link":"https:\/\/imsfund.com\/index.php\/2026\/09\/21\/how-to-turn-one-condo-into-a-17-unit-rental-portfolio\/","title":{"rendered":"How to Turn One Condo Into a 17-Unit Rental Portfolio!"},"content":{"rendered":"


\n<\/p>\n

Getting into an expensive market<\/strong><\/a> can feel completely out of reach <\/strong>for a rookie. But today\u2019s guest looked at the numbers<\/strong> and realized that if he worked this in his favor, he could build reliable, long-term wealth<\/strong>. That math led him to 17 doors across three states<\/strong>, and today, he\u2019s breaking down all his tips so you can start, and scale<\/strong>, too!<\/p>\n

Welcome back to the Real Estate Rookie<\/em> podcast! In December 2009, Rick Albert<\/strong> was a broke college senior when he was introduced<\/strong> to a successful real estate investor.<\/strong> That meeting sent Rick down a path that started with an LA condo that many overlooked<\/strong>. He managed to see past the issues, and house hacked<\/strong><\/a> the unit with just 10% down.<\/strong><\/p>\n

That single deal became the foundation for everything: a HELOC<\/strong><\/a> that funded<\/strong> an ambitious ADU<\/strong><\/a> conversion<\/strong>, a renovation<\/strong> that took three times longer than planned, and eventually a portfolio spanning 17 units across 3 states<\/strong>, with his business partner.<\/p>\n

Today Rick breaks down his advice on investing in high-cost markets<\/strong>, the numbers behind his deals, and what he\u2019d do differently<\/strong> if he had to start over with no money. He also covers the unusual trick he used to cover his own closing costs<\/strong>, and<\/em> what he did with the $228K he walked away with when he finally sold that first condo!<\/p>\n

If you\u2019ve ever assumed a market like LA is off-limits for a rookie<\/strong>, this episode says otherwise!<\/strong><\/p>\n

\n

Ashley Kehr:
Buying a first home in a market like Los Angeles already feels out of reach for many rookies. Rick Albert did it with a $225,000 condo that had been occupied by a heavy smoker for more than 30 years. He put 10% down, fixed it up, and rented one room for $800 a month.<\/p>\n

Tony Robinson:
And that first house act eventually helped Rick fund a far more ambitious second one, a renovation he expected to finish in four months that ended up taking 12. And today we\u2019re breaking down the financing, the warning signs he ignored, the unusual living decision that helped the numbers work, and how those two Los Angeles deals became a 17 door portfolio across three different states.<\/p>\n

Ashley Kehr:
This is the Real Estate Rookie Podcast. I\u2019m Ashley Kerr.<\/p>\n

Tony Robinson:
And I\u2019m Tony J. Robinson. And with that, let\u2019s give a big warm welcome to Rick. Rick, thanks for joining us today, brother.<\/p>\n

Rick Albert:
Thank you so much for having me. I really appreciate it.<\/p>\n

Ashley Kehr:
So Rick, take us back to before real estate investing. What was your career? What was your life like before you even knew real estate investing was a thing?<\/p>\n

Rick Albert:
Yeah. So December 2009, I was still in college, didn\u2019t know what I wanted to do. A good friend of mine convinced me to come down and visit and I met with actually his dad and we just talked business and he happened to be really big into real estate. So I was like, \u201cHey, I kind of like this. You can exercise both sides of the brain, creativity, financing.\u201d And he\u2019s like, \u201cCool. You want to come down here? I\u2019m happy to help and mentor, but you had to meet certain criteria, which was work on getting your real estate license. Here\u2019s three books you got to read and get an internship.\u201d And so that\u2019s what I did. I started studying for the real estate exam, got an internship at a commercial real estate office, just helping property management. And I started reading the books, which was Gary Keller\u2019s Millionaire Real Estate Investor, Gary Keller\u2019s Millionaire Real Estate Agent, even though at the time I didn\u2019t know I wanted to become an agent.
And then The Richest Man in Babylon, which is a fantastic book if anyone hasn\u2019t read it yet. That\u2019s my favorite.<\/p>\n

Tony Robinson:
I have not read that book yet. Yeah. I hear it a lot, but haven\u2019t dove in.<\/p>\n

Rick Albert:
Yeah. No, it\u2019s basically the basic fundamentals of financing, like only talk to experts, things like that, but it\u2019s more like storytelling.<\/p>\n

Tony Robinson:
Like a fable.<\/p>\n

Rick Albert:
Exactly. Exactly. It\u2019s like a hundred pages. So yeah, I did that. Then my friend said, \u201cHey, I\u2019ll give you cheap rent. Just bought a place, but you got to move down here to Southern California.\u201d So I moved down here the weekend I graduated college and I worked for him in his IT office doing some stuff on the back end. But then primarily for his dad, I helped him buy foreclosures because they were flipping properties. So I was the kid at the courthouse steps with cashier\u2019s checks bidding on \u2013<\/p>\n

Ashley Kehr:
How fun. With someone else\u2019s money<\/p>\n

Rick Albert:
Getting<\/p>\n

Ashley Kehr:
To bid.<\/p>\n

Rick Albert:
It was wild. And then there\u2019s also different strategies, right? Because people, what they\u2019ll do is they\u2019ll bid up properties they actually don\u2019t want. So that way other people spend their money so that way they leave so money spent and the properties are left for them. Oh,<\/p>\n

Ashley Kehr:
Interesting.<\/p>\n

Rick Albert:
Or what I would do is I would do different dollar amounts when I would raise. So if let\u2019s say my cap was a million and the property started at 800, I might be like, \u201cAll right, 50,000 more, 5,000 more, 10,000 more, 100,000 more.\u201d And I do that because what they noticed is if people started shrinking how much they were willing to bid up, it gave the impression that they were hitting their max. I didn\u2019t want them to know what my max was. Whether it worked or not, I have no idea, but it was a lot of fun.<\/p>\n

Ashley Kehr:
So once you got comfortable with your decision to start investing, what was the first property that you decided to buy?<\/p>\n

Rick Albert:
Yeah. So one of the great things about house hacking is you do look at the numbers, but you also have to do look at your lifestyle because you\u2019re going to be living there. So I knew I wanted to go with the condo route because it was the low barrier to entry. I also didn\u2019t have to worry about the roof, the sewer line, those risks were kind of taken off the table. And a lot of my friends and clients that were house hackers started with condos. I\u2019m like, \u201cWell, if they\u2019re doing it, so should I.\u201d And so I found a great condo that had really good walkability. It was 10 minutes from the office and she was a heavy smoker. It was a major fixer. Imagine the condo complex was motel style where everything was outdoors. So you could open the door. She was on the second floor, you could smell the smoke from the first floor.<\/p>\n

Tony Robinson:
Man, that smelled like a deal to you, right? Right. I<\/p>\n

Rick Albert:
Was like, this is so bad. I have cologne that smells worse.
And so yeah, we went in, it was actually me and my girlfriend at the time. She wasn\u2019t buying it with me, but I valued her opinion and we were just looking. It had vaulted ceilings. It was fairly private with the balcony. I\u2019m like, \u201cThis is a cool place.\u201d And with condos, the cost of renovation isn\u2019t as big a deal because you\u2019re dealing with smaller spaces. You\u2019re not really dealing. Yeah, we had replaced the electrical panel. That\u2019s not that big of a deal. It\u2019s a sub panel. New kitchen, updated the bathrooms a little bit. Re-glazing goes a long way, changing up floors, things like that. And so yeah, that\u2019s how we bought it. Bought it for 225, put about 18 grand into it. Then later on when it was a rental, we ended up replacing the HVAC and there you go.<\/p>\n

Tony Robinson:
I think a lot of times people hear house hack though, they think of small multifamily, but you said that you bought a condo. So how did you house hack a condo?What did that process look like?<\/p>\n

Rick Albert:
Sure. So I bought the condo, bought it for 225,000. The previous owner, she had lived there so long. So what people don\u2019t know necessarily about LA is a lot of these condo complexes used to be apartments. So she was there when it was a rental and then she ended up just buying it.<\/p>\n

Tony Robinson:
She\u2019s like, \u201cI\u2019m not moving.\u201d<\/p>\n

Rick Albert:
Right? That\u2019s super efficient. You don\u2019t have to move. So she was just a heavy smoker and she just lived there for over 30 years. And so we decided on a condo primarily because of budget.
It was budget and location was really the big ones.This was very much before ADUs came into play, the accessory dwelling units. So it wasn\u2019t like I could buy a house and add a second unit. Some of the multifamily was kind of expensive and I only had so much money to play with in terms of down payment and the renovation costs. So that\u2019s why I went down the condo route and I knew a lot of my friends who started house hacking with condos. I mean, when I first moved down here, he had owned a condo and was just renting out the second bedroom.<\/p>\n

Tony Robinson:
Can we talk a little bit about 30 years of smoking? Because I feel like for a lot of people that would immediately turn them off. And Ash and I talk a lot about things can seem like maybe red flags on the surface level that turn a lot of people away. We talk about mold. Mold, yeah. We talk about even foundation issues and people always walk away from those deals. I feel like smoking is one of those other issues. Why didn\u2019t that scare you away?<\/p>\n

Ashley Kehr:
You\u2019re also a heavy smoker. I\u2019ve been<\/p>\n

Rick Albert:
Able to pull up not coffee once and here we are.
No, so it\u2019s funny because it was one of those condo complexes where it was almost like motel style. Everything was outdoors. It was an upstairs unit. You open the door and you could smell the smoke from downstairs and I\u2019m like, \u201cThis is a good one.\u201d I\u2019m like, \u201cThis is good. This is good.\u201d It didn\u2019t scare me because I was like, \u201cAnything can be fixed.\u201d I don\u2019t really have the belief that properties can be money pits. Yeah, they might be expensive, but at some point there\u2019s an end to it. And so I saw it and I did a little bit of research and I\u2019m like, \u201cIt\u2019s not that big of a deal to get rid of cigarette smoke.\u201d<\/p>\n

Ashley Kehr:
Do you remember what you did? What was the exact process?<\/p>\n

Rick Albert:
Yeah. So air purifier, which I\u2019m pretty sure broke at the end of it. And then you do what\u2019s called TSP, tri-sodium phosphate. And it\u2019s like a chemical you just buy it at Home Depot. And so the guys just scrub the walls with it to clean it off. And then \u2013<\/p>\n

Ashley Kehr:
Is that like a Kill\u2019s paint?That\u2019s<\/p>\n

Rick Albert:
The second step. You\u2019re getting ahead of me. Thank you. So yeah, Kill\u2019s is the. They actually have one that locks in nicotine. So I think we had to do two or three coats of that.<\/p>\n

Ashley Kehr:
Wow.<\/p>\n

Rick Albert:
And then you just paint over it and then you just try to forget about it.<\/p>\n

Tony Robinson:
Did that actually work?<\/p>\n

Rick Albert:
Yeah, it worked. Yeah. You smelled it for a little bit afterwards, but you leave the windows open, stuff like that. And eventually, yeah, it actually got rid of it. I was super nervous because I had also heard sometimes you have to replace drywall.<\/p>\n

Tony Robinson:
That\u2019s what I though you were going to say, like replace the drywall.<\/p>\n

Rick Albert:
Did you have to replace the<\/p>\n

Tony Robinson:
Flooring?<\/p>\n

Rick Albert:
We did that anyways. It was carpeting. I mean, everything seemed original. When the furniture was moved, you could see where the outlines of all the furniture was brand new remnants of carpet. But yeah, no, I mean we did anyways. We got rid of the kitchen. We just re-glazed actually the tub and countertops and painted the countertops for each of the bathrooms. So it didn\u2019t do a lot there. It didn\u2019t have lighting in the bedroom, so I just did ceiling fans so that way we wouldn\u2019t put a lot of work onto the AC because we didn\u2019t replace the AC until years later.<\/p>\n

Ashley Kehr:
How much do you think you spent altogether for the rehab?<\/p>\n

Rick Albert:
Initially spent about 18,000. And then later on when it was a rental, I had to replace the ACs. That was like 13 just because it was on the second floor, so you had to do the whole bring a crane up and do all that.<\/p>\n

Tony Robinson:
I just want to break down the numbers a little bit, right? Because you said the purchase price was how much?<\/p>\n

Rick Albert:
225.<\/p>\n

Tony Robinson:
And what was your down payment on that?<\/p>\n

Rick Albert:
10%, so 22,500.<\/p>\n

Tony Robinson:
And then closing costs, maybe another.<\/p>\n

Rick Albert:
Yeah. I mean, I used my commission to help cover some of that, but yeah, it probably would\u2019ve been a couple thousand bucks.<\/p>\n

Tony Robinson:
So you\u2019re all in for like 25K to get into this condo. And then you said another 18 to get it renovated. Were there any other costs associated getting into the deal and getting it ready? I mean, because that\u2019s what, 18, 35, 40-ish thousand bucks that you spent to get into this condo.<\/p>\n

Rick Albert:
That was about it. With these condos, one of the reasons why they\u2019re a good start is because they\u2019re smaller. So you have economies of scale when it comes to renovations, but it was 938 square feet. So it was like flooring wasn\u2019t bad. It was also 2015, so costs weren\u2019t as high. It didn\u2019t cost as much to do those type of renovations.<\/p>\n

Tony Robinson:
Was it listed on the MLS or were. Yeah.<\/p>\n

Rick Albert:
Yeah, it was listed for almost 250. But again, the smoking I think turned off a lot of people because properties were still selling back then. So that didn\u2019t scare me.<\/p>\n

Ashley Kehr:
And then what did you end up charging someone for rent? Was it 800? Yeah. And then what was your<\/p>\n

Rick Albert:
Expenses? Yeah. It was about 1600. I included utilities because I didn\u2019t feel like going through the effort of splitting on a condo when it\u2019s like $8 for gas and 25 bucks for electricity. So I\u2019m like, \u201cOh, I\u2019ll eat that cost. I\u2019ll take that one.\u201d And then I actually did include twice a month house cleaning. Oh, cool.<\/p>\n

Ashley Kehr:
Okay.<\/p>\n

Rick Albert:
I learned that my best use of time was not to clean the place, and so I didn\u2019t want to have the fight over who\u2019s cleaning what. And so I was like, look, I think it was like 60 bucks a visit or something for someone to come clean. I was like, \u201cLet her come.\u201d<\/p>\n

Tony Robinson:
How did you find this person? Because I think for a lot of people, when they think about house hacking, especially when you\u2019re sharing the same actual living space, for a lot of people that turns them off because they\u2019re worried about, \u201cHey, who\u2019s going to come live with me?\u201d So how did you source this person? How did you get to a point where you felt comfortable living with them?<\/p>\n

Rick Albert:
Yeah. So I actually reached out to my own personal network of people I knew, and I had a friend of mine who was already renting a one bedroom, and I already knew he was paying more. So I\u2019m like, \u201cI already know he\u2019s well qualified because I\u2019m going to offer him way less.\u201d I\u2019ve known him for. Oh, it was 27, so most of my life because our moms were best friends. So I actually just asked him. I was like, \u201cHey, I\u2019m buying this place. Are you interested in renting? 800 bucks. It includes everything.\u201d And he was paying 1300 at the time. So he\u2019s like, \u201cYeah, done.\u201d He was a little nervous because he would come by when I was still under construction and I\u2019m like, \u201cIt\u2019s going to be ready. Don\u2019t worry. I got this.\u201d<\/p>\n

Ashley Kehr:
Did you ever worry that you wouldn\u2019t be able to rent it out? You\u2019ve already got it under contract. Did you worry that you wouldn\u2019t be able to find a roommate at all? No. Or what made you confident that you would?<\/p>\n

Rick Albert:
Yeah. I do a lot with networking, just with friends. When I was in college, I joined a fraternity. So there was chapters nationwide, so there\u2019s multiple chapters. I could always reach out to one of them and be like, \u201cHey, does anyone need a room?\u201d And so you do that. Obviously there\u2019s Facebook groups, things like that. So I wasn\u2019t really concerned and it was a good area, so it<\/p>\n

Ashley Kehr:
Was more desirable. I think that\u2019s a lesson right there is you didn\u2019t just wait for somebody to come to you. Oh no, not at all. You started putting it out everywhere as to Facebook groups. You had all these different networks or these ideas of where to go to find someone instead of just thinking. Because I see that commonly as people are like, \u201cWell, I don\u2019t know if I\u2019ll find someone. I don\u2019t know if I\u2019ll get a great tenant.\u201d Well, you\u2019re not even doing the things to try and put yourself out there. It\u2019s like you got to do some marketing, especially if you\u2019re house hacking, you got to market yourself and the house. I\u2019m a great roommate.<\/p>\n

Rick Albert:
I agree. I mean, there\u2019s two reasons why, I guess three reasons why a rental doesn\u2019t rent, right? It\u2019s either the price, the marketing or the rental criteria. So if you\u2019re not doing the right marketing, maybe you\u2019re just not reaching out to enough people. To your point, you just can\u2019t post it online and hope for the best.<\/p>\n

Tony Robinson:
I\u2019m glad that you found someone that you knew, but then that kind of opens up a different can of worms where it\u2019s like, well, now there\u2019s this personal relationship, but there\u2019s also this tenant landlord relationship. How did you navigate being the landlord to a friend who you\u2019re also right next door to?<\/p>\n

Rick Albert:
Who\u2019s also a paralegal? Yeah. Yeah. Let\u2019s talk about that.
So there\u2019s a couple things. One, we did have a sit down and I always like to explain, look, we\u2019re friends. Our mom\u2019s have been friends for over 60 years, but I got bills to pay. So that\u2019s the relationship here. And then we kind of went through scenarios of like, okay, what would happen if this happened or that happened? And we just realized it was a good fit. And to be fair, we were both super busy professionals, so he was busy going to work every day. I was busy out and about. So I knew it was going to kind of work to begin with just because we wouldn\u2019t be doing a ton of hanging out in general anyways.<\/p>\n

Ashley Kehr:
I think sometimes too, it gets over complicated as we get adults because think about as college students, so many, not necessarily house hacking, but you\u2019re living with roommates, you\u2019re living with your friends, you\u2019re each expected to pay rent. So a lot of times it\u2019s not that much different. If one friend doesn\u2019t put in their pool of money to pay the rent, you\u2019re still going to have the same conflict you would if you\u2019re the landlord and living with your friend. 100%. I think that we sometimes over complicate real estate investing with that fear of analysis paralysis or that you\u2019re not doing everything right and you got to do it by the book and do it this. Sometimes it\u2019s not that hard.<\/p>\n

Rick Albert:
What I love about real estate is you can stumble as long as you\u2019re stumbling forward, you\u2019ll be fine. You\u2019ll live. Just don\u2019t buy a house on a hillside that might be slipping, that\u2019s an exception. But generally speaking, most deals eventually work out if you give it enough time.<\/p>\n

Tony Robinson:
Knowing what you know now, is there anything you would\u2019ve done differently with the lease or just anything with that first house hack tenant to make that process gone a little bit smooth for you? Or was it just simply smooth enough where it\u2019s like, \u201cHey, I nailed it that first time?\u201d<\/p>\n

Rick Albert:
We did pretty well, I will say. And part of that was because I talked to my friends who were also already house hacking. So things like, because I included the utilities, I still had to put a cap on the utilities to make sure the AC wasn\u2019t being blown all day. So we did a lot of that. I guess in hindsight, again, with him it was fine, but typically now with leases, I\u2019ll put quiet hours. What are those quiet hours? Is it from 10:0 PM to 70 AM? Something to kind of more like, \u201cHey, we\u2019re all living in the same community. Let\u2019s have some guidelines.\u201d I probably could have had more of that. I didn\u2019t actually need it with him, but I did add that in my leases going forward.<\/p>\n

Ashley Kehr:
We\u2019re screening your tenants, managing them. Are you using any kind of software?<\/p>\n

Rick Albert:
Yeah. So in the beginning I didn\u2019t. It was a lot of spreadsheets, things like that. We did use, there was a website called mysmartmove.com for the tenant screening because they also did evictions, full on background checks, things like that. And then for the leases, being in real estate, I can use the realtor forms with all the disclosures and all that.<\/p>\n

Ashley Kehr:
You\u2019re probably already paying for all those anyways, right? Exactly. With your license.<\/p>\n

Rick Albert:
Right. So now that we do investing out of state, me and a business partner, we actually own two properties together. One, we do self-manage. I handle more of the front end stuff, so dealing with tenant relations, vendors. He does the backend stuff and he\u2019s using more of the property management software. I think he uses Tenant Cloud, which has no been bought out by TurboTenant. So we\u2019ll see how that plays out, but we<\/p>\n

Ashley Kehr:
Still \u2013 I love TurboTenant, so you\u2019ll like it. I\u2019m<\/p>\n

Rick Albert:
Excited. I\u2019m super excited. But yeah, so we use some of that software. And then for the leases, because it\u2019s out of state, I don\u2019t necessarily have access to those. There\u2019s a lot of trade organizations that have leases. So the latest one we used was the American Apartment Owners Association. They have those. And then we just add our own addendum to kind of fill in the gaps.<\/p>\n

Tony Robinson:
So the condo sounds like it worked out well for you as a first house hack, but you didn\u2019t stop. Obviously you\u2019ve grown your portfolio. So explain to us how that $225,000 condo funded your next deal.<\/p>\n

Rick Albert:
Yeah. So I had a roommate, he got engaged, moved out. So I had my own place. I was going to get another roommate, but then I knew I was going to propose to my girlfriend at the time.That\u2019d be kind of awkward. I was like, \u201cOkay, I\u2019m going to not have not house hack for a couple months, proposed.\u201d And then we did a HELOC, home equity line of credit. So it was like a second on it. What I like to do yearly is review all of our properties, determine values. So what\u2019s the property worth today? Is there anything I can do with that equity? Does it mean selling? Does it mean line of credit? Whatever. At the time it was like they had good rates. I went with actually a big bank on that one and it was up to 80% loan to value. So I pulled out the.
It was like 80,000, 84,000, and then used that as the down payment and closing cost for the second house hack that we did.<\/p>\n

Tony Robinson:
Define HELOC for folks that aren\u2019t familiar with that phrase. How is that different from a refinance or even selling your property?<\/p>\n

Rick Albert:
Sure. So a HELOC is a home equity line of credit. It\u2019s like a loan in a second position behind your main loan. So sometimes you don\u2019t want to refinance the first one because it could have a really good interest rate, some other good terms. But then also more importantly, with a HELOC home equity line of credit, you only pay on the money you use. Imagine a credit card. So why would I do a cash or refinance, get all the money out, and now I\u2019m stuck with this high payment, but I haven\u2019t bought anything yet. So it gives me that more flexibility on what to do with it. And so we use that to go buy the next one.<\/p>\n

Tony Robinson:
It\u2019s a great tool. And for all of our rookies, if you live in a house right now that has a good amount of equity and you\u2019re thinking about moving, get the HELOC before you move because it\u2019s significantly harder to get lines of credits on traditional rental properties than it is to get it on your primary residence. So get the HELOC first, then move, move on to<\/p>\n

Ashley Kehr:
The next one. And there\u2019s nothing in most documents and most lenders, there\u2019s nothing wrong with you getting the HELOC and then moving. You\u2019re not violating any kind of fraud<\/p>\n

Rick Albert:
Or<\/p>\n

Ashley Kehr:
Anything. There\u2019s no requirement that you have to live in the house like there are with a lot of mortgages, like FHA mortgages and stuff like that.<\/p>\n

Tony Robinson:
But this little condo gave you $80,000, which is incredible. So what\u2019d you do with the 80? Where did that go next?<\/p>\n

Rick Albert:
I convinced my now fiance to house hack again.
Bless her heart, if she\u2019s watching. And originally actually the plan was to buy another condo. And then it was 2017, so ADU started coming into play, which is the accessory dwelling unit. So you can convert a garage or build from scratch. Most people build from a conversion of a garage and it\u2019s basically a rentable guest house. So it has its own address, it could have its own separate utilities, and you can legally rent it out. And so we\u2019re like, \u201cThis is cool.\u201d And I had clients who had done it where the garage is already partially converted. I was the first in my group to do one from scratch. So I had to explain to my fiance that we\u2019re going to be a guinea pig.<\/p>\n

Tony Robinson:
Let me ask, why did you decide? Because I\u2019m assuming the reason that people are doing the garage conversions first is because it\u2019s easier, right? The structure\u2019s there, it\u2019s more cost efficient. Why did you lean away from the garage conversion into actually building something from the ground up?<\/p>\n

Rick Albert:
So building from the ground up is very expensive. There\u2019s different building codes you have to abide by, different fees for construction. The permitting fees might be different. There\u2019s probably school fees, things like that.<\/p>\n

Tony Robinson:
You\u2019re not selling me on the reason why to build from the ground up yet, although sound like reasons not to.<\/p>\n

Rick Albert:
Well no, but to be fair, the rent\u2019s not going to be that much different.<\/p>\n

Ashley Kehr:
If you already have the garage there.<\/p>\n

Rick Albert:
Exactly. So the only advantage to doing it is if you want to keep your garage, maybe you want to build on top of it, but even then you\u2019re basically rebuilding the garage anyways because the garage skipped leg day, can\u2019t support the weight. Or if you just want to build bigger, if you\u2019re going to build bigger anyway, sometimes it\u2019s just easier to scrap it and start over. So at the time people were doing more of the garage conversions. Now we\u2019re seeing more of the new construction, 1200 square feet, building a couple of them on a property. We\u2019re seeing a lot more of that now.<\/p>\n

Tony Robinson:
But sorry, let me clarify. You did do new construction or you did not? Oh,<\/p>\n

Rick Albert:
You didn\u2019t. Sorry. My apologies. I did the garage conversion.<\/p>\n

Ashley Kehr:
They did the garage from scratch. His other friends bought them partially. Yeah, they<\/p>\n

Rick Albert:
Were already partially converted. So they finished the process. I was the one who \u2013<\/p>\n

Tony Robinson:
I misunderstood. That\u2019s why I confused. I was like, tell me why you didn\u2019t just listed all these bad things. I was like, that is not selling me on why we should do it that way, but it makes sense.<\/p>\n

Ashley Kehr:
When you bought this next property then, how did you calculate into your numbers what the cost would be to do this renovation? And was this cash you had saved up? Was this part of the HELOC?<\/p>\n

Rick Albert:
Yeah. So really good question. And it was really tough because not everybody really had an idea of what the actual cost was going to be because not everyone hadn\u2019t even heard of it yet. So we did what was called the FHA 203K loan. That is where you put three and a half percent down of the purchase price plus construction costs and you finance everything else. So we did an addition on the house, we remodeled it, and then we did the garage conversion. I<\/p>\n

Tony Robinson:
Just want to pause you there because a lot of folks know about the traditional FHA loan, but you\u2019re saying there\u2019s another version, the 203K loan where you can fund both your acquisition and the renovation costs.<\/p>\n

Rick Albert:
If it\u2019s your primary residence, yes.<\/p>\n

Tony Robinson:
I would assume that there\u2019s probably some stipulations around that, right? They\u2019re not going to let you maybe take a house that\u2019s worth $500,000 and spend another $500,000 building up. So how do they put a cap or put guardrails around the type of renovation you\u2019re allowed to do?<\/p>\n

Rick Albert:
Yeah. So right off the bat, you can do additions, but you can\u2019t do something brand new. So you can\u2019t add a pool. I couldn\u2019t do an ADU from scratch. So you had to work with what you had. And I think part of that is also because they\u2019re probably assuming that the people who are getting these loans don\u2019t have that kind of experience. And then in terms of the calculations, it all has to appraise for the after repair value. That\u2019s all they care about. What makes this interesting, especially in my case, because the challenge with ADUs at the time was there are no comps. People hadn\u2019t been building them. They hadn\u2019t been selling them. So it was a little bit of a shot in the dark. With the FHA 203 loan, they\u2019re allowing you to. Basically they\u2019ll lend up to 110% of the appraised value. So you got that little extra bump, which worked out for us because our appraiser gave the value zero because he\u2019s like, \u201cOh, $10,000 for the ADU.
Oh, but you don\u2019t have parking. I\u2019m going to take away $10,000.\u201d Oh my God. I\u2019m like, \u201cThis is hilarious, but whatever, we got the loan done.\u201d And it still caps out at your county\u2019s loan limit. So at the time it was like 700,000, I think basically all in.<\/p>\n

Tony Robinson:
So you\u2019re saying that when you did yours, the person who appraised it literally did not account at all for the fact that<\/p>\n

Rick Albert:
There was no loan. Basically, yeah it basically canceled itself out because I talked to him on the phone. He didn\u2019t know what it was. And I\u2019m like, \u201cIt\u2019s a rentable guest house. You\u2019re an appraiser. You should be doing your research. Just throw that out there. That actually<\/p>\n

Ashley Kehr:
Happened to me on a property. It was a single family home with a guest house and we completely finished it into, they counted it as three bedrooms. It was one bedroom and two lofts, and the lofts each had a closet. And so it was three bedrooms, one bathroom. But since it wasn\u2019t the primary home and it was just the guest house on the property, I mean, brand new kitchen, granite countertops, beautifully redone. They only counted it for $20,000 because it was just the guest house. It\u2019s painful. Yeah. And it was like, oh my God. So we actually fought it and they brought it up a little bit more, but not by much. Yeah. But that was a big lesson is we dumped probably, I want to say $80,000 into getting this to where it was, and then it only added $20,000 in value. Well,<\/p>\n

Tony Robinson:
Your situation is probably even trickier because you had to do the work first, right? You have to do the work first and then go back and get the appraisal. But yours is done beforehand. Yeah. So was that done while you were in escrow? Yes. Gotcha. So you knew before you even closed if you were going to have enough to actually execute.<\/p>\n

Rick Albert:
Yeah. So that was the idea. We ended up. Well, I guess I should backtrack because I think you guys would appreciate this. We were one of 17 offers on the property.<\/p>\n

Ashley Kehr:
Wait, and this was in 2017?<\/p>\n

Rick Albert:
This was 2000. We ended, I think, 18, 2018 by then. 18, but<\/p>\n

Ashley Kehr:
Still.<\/p>\n

Rick Albert:
Yeah. Because the agent was smart. I\u2019ll give him credit. He purposely priced it low to \u2013<\/p>\n

Ashley Kehr:
Smart or annoying? That\u2019s happening in my market right now. Fair enough. Everyone is raising so low. And just list<\/p>\n

Rick Albert:
All properties for a dollar and just let the market decide, right? Why do we go do this dance?<\/p>\n

Ashley Kehr:
There was a guy that did that in my area. It was a national news he made or whatever. He listed it for a dollar. A dollar, yeah. There was<\/p>\n

Rick Albert:
One in Oklahoma<\/p>\n

Ashley Kehr:
That did it too. I<\/p>\n

Rick Albert:
Have a flip. But sellers are doing that now. I heard of someone who was a developer. He couldn\u2019t get his property sold. He dropped it to a million, which is cheap for new construction. He ended up getting close to 1.4.<\/p>\n

Tony Robinson:
I literally have a flip right now. We talked about this in the podcast. My listing agreement just expired yesterday, so I don\u2019t even have an agent. I got to find an agent right now. But we\u2019ve been sitting on it. It\u2019ll be two years this fall. It\u2019s in mountain town in Idlewild. Who knows? Maybe I\u2019ll list it for a dollar and just see at this point what else can\u2019t get any worse. You<\/p>\n

Rick Albert:
Don\u2019t have to accept it.That\u2019s the part that I think people don\u2019t get is you don\u2019t have to accept the offer that comes in. But yeah, so in this case, he didn\u2019t list it for a dollar, but he still listed it low. My wife liked the property. I was like, \u201cSure.\u201d And so we did an escalation clause, which basically said we\u2019re going to pay, I think, $2,000 over any bonafide offer. Most people put caps on it. I did not. I think caps are kind of silly because just like a seller doesn\u2019t have to accept, a buyer doesn\u2019t have to accept.<\/p>\n

Tony Robinson:
So actually I didn\u2019t know that. So if you add an escalation clause, it\u2019s not an automatic acceptance. You still have to come back and sign that final \u2013<\/p>\n

Rick Albert:
Yeah, because they get to tell you what the number is.<\/p>\n

Tony Robinson:
I never thought about that.<\/p>\n

Rick Albert:
So our thought was, my wife\u2019s like, \u201cWell, should we put a cap on it?\u201d I\u2019m like, \u201cNo.\u201d Because if it gets way too high, we don\u2019t have to buy it.
And so it went really high and I\u2019m like, \u201cThere\u2019s no way this is going to appraise. The buyer did this intentionally because they know it\u2019s not going to appraise. I want that benefit.\u201d So I said, \u201cWe\u2019re going to accept it.\u201d So it was listed for 499. We were in escrow at 567. The guy was selling because his wife had passed away, so he was just selling it to move on, get it accepted. I\u2019m on my way out, flying out to Peru. My broker who was representing me at the time called me, he said. Or no, I was in the office and he\u2019s cracking up. He\u2019s like, \u201cThe listing agent got a call from a lady saying, Why are you selling my house? She was not dead.<\/p>\n

Ashley Kehr:
Oh my God.<\/p>\n

Rick Albert:
And so I called my fiance and I\u2019m cracking up. She\u2019s like, \u201cThis isn\u2019t funny.\u201d I\u2019m like, \u201cWell, it\u2019s better than the alternative.\u201d So I\u2019m like, \u201cThis is fantastic.\u201d She\u2019s like, \u201cWhat do we do?\u201d I\u2019m like, \u201cNothing. We\u2019re going to go to Peru. We\u2019re going to go to the jungle with no reception.\u201d I lined up all the inspections, let them figure it out. And once we had a reception, they figured it out. We entered escrow and then we renegotiated the price down to 525.<\/p>\n

Tony Robinson:
So did it not appraise?<\/p>\n

Rick Albert:
No, that wasn\u2019t the issue. So what we did, there was actually two reasons why we did price reductions. The first one was from inspections. So everybody negotiates differently. What I do, and I\u2019ll say it on the podcast. So basically what we do is we do personal letters with the request for repairs, because the problem is you don\u2019t know what\u2019s being communicated between brokers.<\/p>\n

Ashley Kehr:
Oh, it\u2019s like playing telephone. It\u2019s<\/p>\n

Rick Albert:
Awful. Exactly. So what we do is we have the request for repairs form and it says, \u201cSee letter attached.\u201d Therefore, the seller has to read the letter to determine what the request is. And that way there\u2019s no confusion. We\u2019re not being jerks. So we did that. That\u2019s how we got the first price reduction.<\/p>\n

Tony Robinson:
Let\u2019s pause there though because I\u2019ve never done that before. We almost always ask for some sort of concession when we do inspections, but I\u2019ve never attached a letter to that. So is this an emotional appeal or a logical thing?What are you writing in these letters?<\/p>\n

Rick Albert:
Both. So because it\u2019s a house hack, it\u2019s still primary residence. It\u2019s still about my home and my wife and I, we\u2019re going to start a family. It\u2019s so sweet. We\u2019re so excited. But the sewer line\u2019s shot and the fireplace doesn\u2019t work. And there\u2019s all this work that needs to be done. And also, by the way, it\u2019s California, so any disclosure, any reports you have, you have to pass on to the next buyer. So you kind of have to play ball. So we negotiated that. And then the second round was there was an addition done that was clearly. It was done without permits, which we knew. It was done pretty poorly, but I knew I couldn\u2019t necessarily ask for both because that would\u2019ve been too big of a bite for them. And I was like, \u201cMaybe we can make the numbers work.\u201d Well, we realized we couldn\u2019t make the numbers work with the loan because the cost to tear it down to be built.
So then we had to go back and say, \u201cWe need another like 20 grand because we got to tear this thing down.\u201d And they\u2019re like, \u201cWell, we already gave you based on your due diligence.\u201d I\u2019m like, \u201cThis isn\u2019t due diligence. This is the lender requiring me because it\u2019s the FHA 203K loan. The lender, they\u2019re the bad guys in this, not me. The lenders are requiring me to tear this down and rebuild. And the only way to make the numbers work is if you give me another price reduction.\u201d<\/p>\n

Tony Robinson:
We talk about this on the podcast a lot too, where it\u2019s sometimes the. And obviously you were the beneficiary here, but a lot of times the highest price isn\u2019t necessarily the best offer because had someone come with a non two or 3K loan, because you had what, a 2K escalation clause? Yeah. Had they just accepted the offer that was 2K cheaper, they might have saved the 20 grand from the lender requirements, right? So just as on both sides, just be aware of that for the rookies that are listening because you can use that to your benefit or I guess to your disadvantage maybe. I had a deal like<\/p>\n

Ashley Kehr:
That too where I was the buyer and I offered them, I will take it as is. Leave everything you want in there. I will get rid of it, whatever. It was like
Quarter house or whatever, not too bad, but bad. And they said, \u201cNo, no, we need this money and we need X amount.\u201d And I said, \u201cOkay, fine. But I want to do an inspection. I want the whole house cleared out, broom swept, and I will pay the full amount.\u201d After the inspection, after the repairs that needed to be done, after the FHA inspection, after all of those things, and then it delayed closing because we were doing the FHA loan, we did the inspection, they had to make the repairs, get that all done. On closing day, the basement flooded and then we got a 20K closing credit for the HVAC and the hot water tank. But if they would\u2019ve accepted original offer back and then, because literally we spent months negotiating, but they would\u2019ve been better off accepting that first offer of just a quick close, taking that price reduction than what ended up happening over time.
I see<\/p>\n

Rick Albert:
That a lot.<\/p>\n

Ashley Kehr:
Yeah.<\/p>\n

Rick Albert:
Yeah. Yeah. Oh yeah. I was a happy camper.<\/p>\n

Tony Robinson:
So just so I make sure I understand the sequence here. So for the two or 3K loan, is there any additional qualifications that you need as a borrower as opposed to a traditional FHA loan or is it \u2013<\/p>\n

Rick Albert:
Good question. No, they still look at your credit, your debt, your income.<\/p>\n

Tony Robinson:
Not like construction background or you don\u2019t have to do anything.<\/p>\n

Ashley Kehr:
You have to have a licensed contractor though approved by them and stuff?<\/p>\n

Rick Albert:
Correct. So the process, my understanding was fairly easy. I worked with a contractor I\u2019ve used on the development side. So obviously he has it. So they look at I think their reserves, their license, all of that. And then once they\u2019re in the system, in theory, they could be an FHA 2-3 contractor for whoever else they want. But yes, it does need to be a licensed contractor. There are little nuances to that where they might make some exceptions, but generally speaking for most people, they have to have a licensed contractor.<\/p>\n

Tony Robinson:
So you have to submit both the contractor and the bids during your due diligence period to make sure that they approve both of those.<\/p>\n

Rick Albert:
Correct. And that\u2019s usually the biggest delay is getting the bid in time. So what I did, and I\u2019ve even done one of my clients did the same loan, is we just kind of created the bid upfront and then sent it in immediately. Because really for the contractor, a lot of them, not all, all they care about is really that bottom number. What\u2019s the total? So they don\u2019t really care how it\u2019s broken down as long as they get paid. And so that helped in getting the process moved a little bit faster.<\/p>\n

Ashley Kehr:
So you actually built out the scope of work and then assigned the dollar amounts.<\/p>\n

Rick Albert:
Exactly.<\/p>\n

Ashley Kehr:
Then you<\/p>\n

Rick Albert:
Broke it all up. And then the lenders want, oh, split it between materials and labor, which no contractor will do. And I\u2019m like, this is ridiculous. So I\u2019m like, whatever. Because again, you just kind of figure it out. And again, as long as the contractor\u2019s cool with it, then it\u2019s<\/p>\n

Ashley Kehr:
Fine. You do the work for them and they say, \u201cYeah, that\u2019s okay. Hand it in.\u201d<\/p>\n

Rick Albert:
Exactly.<\/p>\n

Tony Robinson:
So what was your closing period? Were you still able to like a 30 day escrow? About<\/p>\n

Rick Albert:
45.<\/p>\n

Tony Robinson:
Okay. So not that much longer, right? No.<\/p>\n

Rick Albert:
Typically they\u2019re 45 to 60 days.<\/p>\n

Tony Robinson:
Okay. I just want to talk a little bit. So once you close, how is it actually getting the money from FHA to pay the contractors? Do you get a big lump sum at the beginning or are they doing draws or there\u2019s inspections? What is that process?<\/p>\n

Rick Albert:
Real good question because it\u2019s super annoying. Not the question, the process. So you have what\u2019s called a HUD consultant and the HUD consultant, you can kind of pick your own, but typically they just assign one and their role is to basically represent the lender. So they\u2019ll come out, do an inspection, see what work\u2019s been done and then cut a check accordingly. That process takes a while. And that was one of the issues we had was it was taking, in the beginning it would take, I think one check took three weeks and then one took six weeks. I had to start threatening the lender to get on it. And so eventually they\u2019re supposed to typically do it within 14 days. Was<\/p>\n

Ashley Kehr:
This a small lender or \u2013 No, this was a<\/p>\n

Rick Albert:
Nationwide lender. I was livid, livid.<\/p>\n

Ashley Kehr:
Which I guess kind of makes sense. Smaller banks would probably be better about paying<\/p>\n

Tony Robinson:
It.But did you have to come out of pocket at all for anything on the renovation or did they cover all of those costs or were you floating anything in the meantime?<\/p>\n

Rick Albert:
Yeah. So we ended up floating some money in the meantime because just like how I told my fiance that we were the guinea pigs on the garage conversion, I also told her we were the guinea pigs on the FJ 203K loan. Yeah. Fun fact, we\u2019re still married.<\/p>\n

Tony Robinson:
It worked out. Yeah.<\/p>\n

Rick Albert:
She hasn\u2019t killed me yet. So we learned a lot in that process because they were taking so long, my contractor\u2019s like, \u201cI got to get paid.\u201d And then it got to the point where I was like, \u201cHey, good news. I got a check coming your way for like 12 grand.\u201d He\u2019s like, \u201cRick, you owe me like 60.\u201d I\u2019m like crap. So we had a conversation. I was like, \u201cLook, the lender won\u2019t let me not finish this project. They\u2019re not going to not let me. They check in all the time, which means you\u2019re guaranteed to get paid. It\u2019s just a matter of when. So what I\u2019m going to do is I have some money saved up for our wedding. I\u2019m going to front that to kind of float you along.\u201d And then he was willing to work with us on that and that was extremely helpful.<\/p>\n

Ashley Kehr:
Was there anything that was signed between the lender and the contractor agreeing on timelines or a draw schedule or anything like that?<\/p>\n

Rick Albert:
Yeah. And most contractors will just sign off on it. Yeah. And<\/p>\n

Ashley Kehr:
Not realize that.<\/p>\n

Rick Albert:
Realize how long it\u2019s really going to take. So yeah, there are certain agreements between the contractor and the lender to get all that squared away. And then sometimes the HUD consultant will participate in that process. You do pay the HUD consultant to come out usually as part of your bid. It probably depends on the scope of work, to be honest. I think ours, we had five visits. So then what we started doing is we actually paid extra for him to come out more often to cut out smaller checks. So I\u2019d rather spend, at the time it was like 350. I\u2019d rather spend extra a couple thousand bucks to come out more often to get smaller checks going to prevent the contract because it\u2019s also not fair to the contractor to be fair. I get it. They have a business to run to and being a contractor is tough.
They\u2019re fronting a lot of money.<\/p>\n

Ashley Kehr:
That\u2019s still quite a bit of money to have them come out and do their inspection.<\/p>\n

Rick Albert:
I know.<\/p>\n

Tony Robinson:
I know. So I mean, aside from the payment delays, how long did you initially project this renovation to take and how long did it actually end up taking?<\/p>\n

Rick Albert:
Yeah. So part of the problem was the inspector for our area, he had fallen off a roof, not ours, a different property and broke his back. So then the city and all their glory was short staffed. So it was taking, every time we called the city for inspections, it would take 10 days for them to come out. So what was supposed to be a four month project took a year. Yeah, it was rough.<\/p>\n

Tony Robinson:
Were you guys living there during that timeframe? So what happens to the loan? Because I\u2019m thinking about a traditional hard money loan or a renovation loan, there\u2019s a cap. And if you go beyond that timeframe, the debt gets more expensive, there\u2019s penalties and fees. Does that same thing exist on the two or 3K loan?<\/p>\n

Rick Albert:
Yes and no. So it depends on how you have it set up. In our case, we were making monthly payments over the course of 30 years, so they didn\u2019t really care in that sense. They did care that they wanted the project done because in theory, if I foreclose, now they have a half built property. So in that sense, they didn\u2019t care.<\/p>\n

Tony Robinson:
So your mortgage payments started on day one, your full mortgage payments.<\/p>\n

Rick Albert:
What you can do, we didn\u2019t have it in the budget, but what you can do if you have the money in the budget is you can finance some of those payments. So I think it\u2019s up to 12 months. So you can not have payments for up to 12 months if you finance it.<\/p>\n

Tony Robinson:
But only if your ARV after the fact is hig enough, right? And you guys just didn\u2019t have that budget to \u2013<\/p>\n

Rick Albert:
Exactly. We maxed it out. Yeah, exactly.<\/p>\n

Tony Robinson:
Interesting. So you guys carried the mortgage for a year?<\/p>\n

Rick Albert:
Yeah, we carried the mortgage for a year. And then as I mentioned earlier, we were the guinea pig, so we actually under budgeted for the garage conversion. And part of that was also like building codes change. So it needs its own sewer line. We knew that. We\u2019re like, okay, we budgeted when I called the sewer company like 3,000 to go from the back house to the main house and just connect. Nope, we closed. Building codes change. They wanted us to run a line all the way down the driveway and then connect. So I was like, well, that sucks. So that was around 7,000 at the time. What we did do to get creative was we actually had them cut the driveway in the middle of the driveway and instead of pouring new concrete, I just had to put a gravel. So it looked aesthetic and people are like, \u201cThis is so pretty.\u201d I\u2019m like, \u201cThank you.
I saved $1,000.\u201d So you get creative very fast, very, very fast. So we did that and then a year later, it was actually right after our wedding, the house was basically done.<\/p>\n

Tony Robinson:
If you were starting this renovation project over today, now in everything that you know, having gone through this process the first time, what things would you do differently? On day one starting, what are the differences you would change?<\/p>\n

Rick Albert:
So I\u2019m assuming I was in the same financial position, which was no money, then I would\u2019ve paid extra for the draws. I would\u2019ve been like, \u201cLook, contractor, you may still be behind, but I\u2019m going to pay extra. That\u2019s my contribution to have them come out faster on a regular schedule. I\u2019ll pay the extra few thousand dollars if it means you get paid on a more regular basis.\u201d And that would\u2019ve helped because there were times when I went by the property and he either didn\u2019t have guys there or he\u2019d have two guys there and they\u2019re barely working, which to be fair happens regardless if you\u2019re not checking in on it. But I also understood because we weren\u2019t paying him fast enough, he had to work other jobs that we\u2019re paying. So that\u2019s probably the biggest thing. If I actually had money saved up, I would\u2019ve fronted the money and then just get reimbursed.
There are some other nuances. At the time you could buy actually materials and get half the money. So let\u2019s say you buy the flooring ahead of time, you get half that money back and then you\u2019d pay the difference once the flooring\u2019s installed. So that\u2019s another way to kind of speed things up as well because at least the materials are there and then you just don\u2019t reimburse yourself. You give the money all to the contractor to keep them ahead.<\/p>\n

Ashley Kehr:
Now once that was finished after the year, you rented it out. So what did the numbers look like?<\/p>\n

Rick Albert:
Yeah. So the payments all in were about 4,600 and we had no money because the project took a year. We also slightly under budgeted for the garage conversion. So I told my then wife, I said, \u201cHey, I\u2019ve been doing research. There\u2019s something called the streamline FHA refinance, which is basically if you have an FHA loan, you can just do a refinance into a new FHA loan, but it doesn\u2019t require appraisals because I knew there were no ADU comps and the FHA 203K loan naturally is a higher interest rate because they\u2019re taking on more risk.\u201d So she\u2019s like, \u201cOh, that\u2019s fantastic.\u201d I said, \u201cHa ha, but to do that, we got to move into the studio ADU.\u201d And she just took a second. I\u2019m like, \u201cThis is the only way it\u2019s going to work.\u201d So she\u2019s like, \u201cCool, let\u2019s do it.\u201d<\/p>\n

Tony Robinson:
Why was that the restriction there? Why couldn\u2019t you stay in the main house?<\/p>\n

Rick Albert:
We couldn\u2019t afford it. So I was like, \u201cLook, if we move into the ADU and rent out the main house, that\u2019s a bigger chunk of our mortgage paid and it\u2019s still considered to be owner occupied.\u201d The lender doesn\u2019t care where I\u2019m living. I just had to pay movers to move a couch with the receipt that showed the main address, which the movers looked at me like, \u201cWhy did we just pay to move a couch?\u201d I\u2019m like, \u201cNot your problem, that\u2019s mine. Just take my money.\u201d And so yeah, we actually moved into the studio ADU and rented out the main house at the time.<\/p>\n

Ashley Kehr:
And what did you get for<\/p>\n

Rick Albert:
Rent for that? Just under 3,299, which was actually about $400 more a month than what the comps are showing. But I looked at it and said, \u201cWell, the house isn\u2019t quite finished yet, so we technically have time.\u201d And two, we originally designed it for ourselves. So we knew that it was a slightly higher level of floor plan and things that you wouldn\u2019t typically see in a rental. Funny enough, we only got one application and they were the ones that got it. Oh, perfect. Yeah. Yeah. Things happen for a reason. And then they came from Facebook Marketplace is how we ended up finding them. And then we didn\u2019t know if we were going to move into the ADU or not until I learned all that stuff. And then we ended up moving back there. And we actually designed the garage conversion to have its own washer dryer.
And because it was detached in the back, it had its own backyard. We fenced off the front, so it had its own front yard and there was no windows pairing into the yard. So it was actually very private because we did two glass French doors on the back and then the front door had a built-in window. So we still got natural light without having to see anyone. It was as close to a little casita as you can get.<\/p>\n

Ashley Kehr:
And what would you have gotten for rent for the ADU?<\/p>\n

Rick Albert:
At the time? Yeah, do you think you would\u2019ve? Probably 1400.<\/p>\n

Ashley Kehr:
So a big difference from what you could get for the main house. Exactly.<\/p>\n

Rick Albert:
Yeah. It was definitely worth it. And then so we did the refinance and then later on when rates really dropped below 3%, then we did the big refinance. And then at that point we were living there for about 600 bucks a month was our portion before eventually moving into the main house. So we lived back there through quarantine and through all that for about two years.<\/p>\n

Tony Robinson:
I don\u2019t know if we\u2019ve had anyone who\u2019s leveraged the two or 3K loan. Maybe we have, or maybe it\u2019s been a while, but definitely haven\u2019t gone to that detail because I learned a lot about the 203K loan. Do you recommend it to people? Because you work as an agent in a very expensive market. Do you recommend that as a loan product that makes sense?<\/p>\n

Rick Albert:
Yeah, it\u2019s tough. You have to really navigate through it. And I tell people that. I\u2019m like, look, it\u2019s annoying, but it works. And to be fair, if it\u2019s the only way you\u2019re going to get the job done, then it\u2019s the only way you\u2019re going to get the job done. Things are a little bit trickier now, right? ADUs for a long time haven\u2019t really appraised out. Back then it cost us, we thought it was going to be closer to like 40 to 50,000. It ended up costing about 75,000 to do the garage conversion. Now it\u2019s about 150, but appraisers aren\u2019t giving it 150,000 in value. So we just have to kind of navigate that a little bit more. One of my clients, she did do it, but what we had found, which was great, was it was an illegal conversion and it was already two bedrooms.
So really she used the FHA 203K loan to convert it to a legal unit. So it cost her about 100,000, but it would\u2019ve cost her 200,000 to actually do it. So I actually would probably encourage people to consider that loan for unpermitted work. That way you\u2019re not going through that whole. It\u2019s still a headache, but it\u2019s \u2013<\/p>\n

Ashley Kehr:
Not as much.<\/p>\n

Rick Albert:
Exactly. The kitchen\u2019s there, the plumbing\u2019s there, that sort of deal.<\/p>\n

Tony Robinson:
Can you, because we have friends who invest in Seattle, like Dave, the Thatch Wind does this a lot too, but they\u2019re doing the same process, but then they\u2019re actually separating it out as a new parcel. That way they have to appraise it separately because it\u2019s its own now home.<\/p>\n

Rick Albert:
They talked about doing that here in California, right? I think the first one finally sold in San Jose or something. It sold over 500,000. I haven\u2019t really seen it here. I mean, on a practical basis, it\u2019s a little awkward just because how do you access it? But also, and I\u2019d be curious, maybe you guys could do the research, how much value does that hurt the main house? Because now you don\u2019t have a garage.<\/p>\n

Tony Robinson:
Well, more so for the detached areas. For the detached? Yeah.<\/p>\n

Rick Albert:
I mean, I just haven\u2019t really seen it much yet.<\/p>\n

Tony Robinson:
I feel like that almost solves it, right? Because for your specific example, you already fenced everything out and if you can just get an imaginary line drawn on the map, now it becomes its own thing.<\/p>\n

Rick Albert:
Yeah. So then yeah, then he\u2019s like, \u201cWell, if a condo would sell for a few hundred, why wouldn\u2019t this?\u201d Yeah, it might be.<\/p>\n

Ashley Kehr:
Would you have to get two different mortgages then because they\u2019re two separate parcels? Would<\/p>\n

Rick Albert:
You piss off the lender? That\u2019s a good question.<\/p>\n

Ashley Kehr:
Because I\u2019ve parceled off pieces of property and when you survey it and divide it, the lender that\u2019s on the current property has to sign off that you\u2019re releasing that property from the mortgage. Or if you do a portfolio loan where you have two or three properties under it, you still need to get the lender\u2019s permission if you\u2019re selling one of them. So if you already had the loan in place \u2013 What does that look like? Yeah, how does that look like to separate?<\/p>\n

Tony Robinson:
If you have these answers, let us know. Yeah, seriously. I want to know. I<\/p>\n

Ashley Kehr:
Mean, the only thing I could think of is you\u2019re going to go and get a new loan for that new parcel, but then it\u2019s like you\u2019re buying it again. And<\/p>\n

Rick Albert:
Also then wouldn\u2019t you be technically underwater on the main house then? Yeah. Because it was purchased with the expectation of an ADU and now you\u2019re a hundred grand short. So yeah, it\u2019d be interesting to look at.<\/p>\n

Ashley Kehr:
Well, let us know if you\u2019re watching on YouTube, but let us know in the comments.<\/p>\n

Tony Robinson:
So how did living in the ADU for you and your wife, you said you were there for how many years?<\/p>\n

Rick Albert:
Two years.<\/p>\n

Tony Robinson:
Two years. How did that change, if at all, the way that you guys think about design, living, renting, managing your tenants being so close? What did it change for just you as an investor in general?<\/p>\n

Rick Albert:
Yeah. So there\u2019s a lot of things because a lot of people build out these ADUs and never live in them, and so they\u2019re designed horribly. So there\u2019s three things that I\u2019ve noticed with a bonus four. So with ADUs, privacy is super important. Oftentimes I see investors, they\u2019ll pop a window that goes into the yard. Nobody wants to see each other. That\u2019s the whole point. The fact that ours was very private was a big deal. We couldn\u2019t see them. They couldn\u2019t see us. Washer\/dryer is a big deal. You\u2019re already doing the plumbing. So we actually had it set up to where you could put a stackable, but we ended up putting it all in one unit. I guess you kind of see them in Europe. They\u2019re expensive. They\u2019re<\/p>\n

Ashley Kehr:
Becoming very popular now. Yeah,<\/p>\n

Rick Albert:
But they\u2019re really high maintenance.<\/p>\n

Ashley Kehr:
Really?<\/p>\n

Rick Albert:
We ended up swapping our first one out after. We lived there for about two years. Then with the next tenant that ended up moving in three years because it cost, I don\u2019t know, 500 bucks to get it fixed. So for 2000 bucks, after so many times you\u2019re<\/p>\n

Tony Robinson:
Better<\/p>\n

Rick Albert:
Off just swapping it. But we did do it to where it was, and I should probably preface, the entire ADU was all electric. We did do that, so we only had to separate electric. We didn\u2019t have to worry about separating gas. So yeah, it was one 10 volt, plugged it in because it was in the bathroom, you could just turn on the exhaust fan there so we
Didn\u2019t have to vent out. So that made it a little bit easier. But yeah, privacy, washer, dryer hookups. If you can have off-street parking, great. If not, that didn\u2019t seem to be a big deal. But yeah, living there, even little things. We had a light and we ended up swapping it out with a ceiling fan because we realized that, oh yeah, it gets kind of warm in here. You don\u2019t always want to run the mini split. And then also some sort of yard space was huge for us and it helped us get it rented out much faster than the competition because people might have pets or they just wanted to be. I mean, Southern California, right? We kind of pay this premium to not have to deal with some of the other stuff. No offense. So to be able to hang out in the backyard is a big plus.
So there\u2019s a couple of things. And you can do that for pretty much any property if you convert the garage. Even if the garage is attached, you could do it in the setback kind of credit yard space. You can do something.<\/p>\n

Tony Robinson:
Interesting. Yeah. I feel like we should spend more time, especially for the high cost of living areas, just talking about the ADU as a strategy because we don\u2019t a lot. How<\/p>\n

Ashley Kehr:
To navigate it.<\/p>\n

Tony Robinson:
Yeah. Yeah. Well, let\u2019s go back to the condo because you end up selling it.<\/p>\n

Rick Albert:
Yes.<\/p>\n

Tony Robinson:
Walk us through. I mean, it was the golden goose that helps you get into the next deal. Why\u2019d you decide<\/p>\n

Rick Albert:
To sell it? Yeah. So I had the same tenant there for four years because he was another friend of mine reached out through my network and I was like, \u201cLook, I\u2019m going to cut your deposit in half because we all know they\u2019re going to trash the place anyways, but I\u2019ll give you a two year lease.\u201d That made me feel more comfortable going into the second house hack. And then we had COVID that hit. So anyway, they were there for four years, they moved out. So we had to make a decision. We\u2019re like, \u201cDo we continue to rent it? Do we sell it?\u201d There were a lot of factors. It did have some good equity in it. So it was like, \u201cOkay, is there a better source of equity?\u201d Unfortunately, the ultimate decision was in 2022, LA still had the eviction moratorium in place because of the COVID.
And so we could put in the most perfect tenant and literally the next day they could stop paying and there\u2019d be nothing we could do about it. So my wife, God bless her, she puts up with a lot. So when she says something, I listen and she\u2019s like, \u201cIs it really worth the risk?\u201d I said, \u201cProbably not.\u201d I mean, it\u2019s still a condo, right? So there\u2019s still HOAs to deal with, which have its pros and cons. So we just decided to sell at that point. And it took about three weeks and then all of a sudden we got three offers over asking and got it sold. Yeah. It was a little lull, but we got it done. Yeah, we sold it for 453,000.<\/p>\n

Ashley Kehr:
And you had bought it for 225,000.<\/p>\n

Tony Robinson:
Wow. But now you\u2019ve got a $200,000 problem of what are you going to do with that capital that you just made, right? So what\u2019s the next move once you sell the condo?<\/p>\n

Rick Albert:
So the next move was we wanted to try out of state. He\u2019s actually my brother-in-law. We talked about him earlier. I moved in with him, worked with his dad. He\u2019s also one of my biggest clients, and he started investing out of state. So he was like, \u201cHey, do you want to go fifty fifty because now we have our properties?\u201d I had my house, he had his house, so we did the HELOC, home equity and the credit. At the time we found a credit union, they were willing to do up to 90% loan to value, fixed rate for five years at 4.75% interest only payments. I\u2019m like, \u201cThis is a no-brainer.\u201d So we \u201cbought that property cash.\u201d
So we ended up going fifty fifty on a fourplex in Nashville and bought that. So that was part of the exchange. And then on our own, because it was my first time investing out of state, so I try to be more risk averse if I can. So I was like, \u201cOkay, I\u2019m reducing risk by having a joint partnership with someone.\u201d So we\u2019re both sharing in that risk. The next one is like, \u201cOkay, what are some of these lower cost markets that still have a decent population, different job opportunities?\u201d And so that\u2019s where Alabama came up, very landlord friendly. There was a triplex. It was listed for 180,000. It didn\u2019t have hot water heaters in it, so it couldn\u2019t be financed. And he got full price offers, but he wasn\u2019t taking them. I\u2019m like, \u201cI\u2019ll buy it.\u201d
So I paid cash because I had the sale of the condo. We ended up negotiating it down to 90,000. Yeah. My wife now has this expectation that I can get any property for half off. It\u2019s really tough. Even my realtor, who\u2019s great, he was even surprised. I\u2019m like, \u201cHe didn\u2019t want to.\u201d So yeah, we end up buying it for like 90,000, put the hot water heaters in. We ended up spending around 55,000 or so. And that was my first introduction to the Burr method and did that. We put out of our own cash about 55,000 and we were able to do a cash out of about 120,000.<\/p>\n

Ashley Kehr:
And then are you just going to keep rolling that capital into more burrs?<\/p>\n

Rick Albert:
That\u2019s kind of the idea. Right now we\u2019re taking a little bit of a break. I don\u2019t know what you guys experienced. I\u2019d love to get your feedback, but we\u2019ve been experiencing really high vacancy rates lately. Things are taking longer to rent and that\u2019s happening across multiple markets. And so this year has been much slower in terms of getting stuff rented. We\u2019re almost there and having 100% occupancy again. Once that\u2019s done, then I\u2019ll start buying more. I really want to explore the five to 10 unit apartment space. I think the economies of scale are becoming more and more important with the rising cost of construction and things like that.<\/p>\n

Ashley Kehr:
Yeah. In my market, I\u2019m seeing the opposite, but I\u2019m also very small rural areas. I\u2019ve listed three units in the last 45 days and one just got listed yesterday. The other two rented within three days. We had over, I think, 70 leads for each of them. We had to take the showings and do an open house because we had so many people requesting, but they rented so quickly and I think this third one will, but I just think that\u2019s that very specific small market. I can\u2019t say for a nationwide scale, but Tony\u2019s about to find out pretty soon what this market is. You can<\/p>\n

Rick Albert:
Tell<\/p>\n

Ashley Kehr:
Us<\/p>\n

Rick Albert:
How it<\/p>\n

Tony Robinson:
Is. Ask me in three weeks and I\u2019ll let you know. We got a rental coming up.<\/p>\n

Rick Albert:
I mean, I\u2019m noticing it more. We are noticing in LA, we\u2019re actually at a four year low for rents. Part of that\u2019s because a lot of the new construction that started years ago are finally getting finished. But yeah, markets like Texas, Florida, Tennessee, because it\u2019s easier to build and all that, all those projects are coming online. We almost wrote an offer on a place just outside Austin, and right before we signed off on the offer, we took one less look at comps and we\u2019re like, \u201cThere\u2019s a new construction apartment complex.\u201d We can\u2019t compete except on price, which means I\u2019d have to offer so low to be offensive.<\/p>\n

Ashley Kehr:
Yeah. See, I don\u2019t have any of that in my market. There\u2019s no new construction rentals. There\u2019s probably been one in the last 10 years. I would say one in their patio homes. So we have the garage, everything, so they\u2019re still not even comparable to a smaller apartment unit. That\u2019s<\/p>\n

Rick Albert:
Fair. No, I will say here in LA, I rented out my ADU twice. The first time took about two weeks. The second one took about three days. It\u2019s pretty fast here because inventory in general is low when it is super expensive to build. When you do have rent control and all those things, it actually keeps inventory low. So things typically rent faster, so it just kind of depends.<\/p>\n

Tony Robinson:
I mean, you\u2019ve got a really unique perspective, Rick, because you\u2019re an investor, house hacker, agent also. So for all of the Rickies that are listening who live in a high cost of living area and they maybe want a house hack, if you were to kind of button up the best practices of Rick\u2019s story, what would that be to the person that\u2019s listening right now?<\/p>\n

Rick Albert:
One, look just outside desirable areas, because the desirable areas are super expensive. As people get priced out, they have to go somewhere. My condo, part of the reason why I appreciate it so well is I was surrounded by more expensive markets. So I\u2019m like, \u201cHi, I\u2019m your only option.\u201d You all of a sudden become the prettiest girl in the room. So there\u2019s that. Don\u2019t be necessarily afraid of townhouses and condos if that\u2019s all your budget can allow. You just have to really look at the HOA docs because a lot of HOAs are getting hit hard right now. But I\u2019ve had clients do it and what we\u2019ve been looking at is actually three plus bedrooms because it becomes a house alternative later on as a rental. So if a family can\u2019t afford a house, but they need the bedroom count, that\u2019s where you kind of come in.
So we are looking at those in terms of high cost of living. And with house hacking, you get all the benefits of being an expensive market. So a 3% appreciation on a $100,000 home is three grand. Do that on a million dollar home, you just made 30 grand in appreciation. So you\u2019re actually developing wealth arguably faster in these higher cost markets than you might elsewhere. So it just depends on what your goals are.<\/p>\n

Ashley Kehr:
Okay. So before we wrap up here, I\u2019ve got to ask, is there one thing during your investing journey or maybe your career as an agent that you think was maybe unique or different than what most other investors do that you could share with us?<\/p>\n

Rick Albert:
Yeah. Tony, when you asked me earlier about the closing costs for the condo and I hesitated, it\u2019s because I actually forgot. And the reason being is most people know about buying points. So you pay the lender money to lower your interest rate. What you can do is the opposite. You can actually raise your interest rate and then the lender gives you a credit. So the reason why I hesitated on that question is because I remember raising my interest rate and the lender gave me the money to cover part of the closing<\/p>\n

Ashley Kehr:
Cost. Okay. So let\u2019s use numbers for this example because I didn\u2019t even know this was a scenario that happened. I just did it<\/p>\n

Rick Albert:
Last year.<\/p>\n

Ashley Kehr:
He\u2019s a lender saying it\u2019s $1,000 and we\u2019ll lower your interest rate by half a percent. If you pay that, we will lower it. You\u2019re saying instead they\u2019ll raise your interest rate half a percent and pay you a thousand dollars.<\/p>\n

Rick Albert:
Correct.<\/p>\n

Ashley Kehr:
Interesting.<\/p>\n

Rick Albert:
So because I knew it was a fixer, so I already knew I was going to refinance and get the PMI taken off and do all that. So I was like, \u201cFine, I\u2019ll temporarily have a higher interest rate.\u201d<\/p>\n

Ashley Kehr:
So that money was almost like you think of it as a seller credit<\/p>\n

Rick Albert:
Where<\/p>\n

Ashley Kehr:
It just goes onto your closing statement and decreases your closing costs.<\/p>\n

Rick Albert:
Exactly. But it came from the lender.<\/p>\n

Tony Robinson:
I\u2019ve never heard of that. Do most lenders offer that or is that \u2013 All<\/p>\n

Rick Albert:
Of them do.<\/p>\n

Tony Robinson:
Interesting.<\/p>\n

Ashley Kehr:
You just got to know to ask.<\/p>\n

Rick Albert:
It\u2019s because people don\u2019t think about it because they\u2019re like, \u201cWell, I don\u2019t want my payments higher.\u201d But if you know you\u2019re going to refinance, I\u2019m in the middle of refinancing my current house because I raised my interest rate to have some of my closing costs covered because I knew it was a fixer. So once we refinance, if all goes as planned, knock on wood, we\u2019ll be saving like 900 bucks a month because it happens to be a higher price point. But yeah, you can raise the interest rate. And to be fair, it barely moves the dial. I had a client do it once because it didn\u2019t appraise, which we actually knew going into it wasn\u2019t going to appraise, but we\u2019re like, \u201cHey, let\u2019s use a negotiation.\u201d Interest rates were already ticking up, so she raised her interest rate to match what the rates It would\u2019ve been anyways had we canceled and the lender not only gave her enough to cover the $5,000 difference in the appraisal, but an extra 1,500 bucks in her pocket.
And her payments went up like 70 bucks a month. She\u2019s like, \u201cI\u2019ll live.\u201d<\/p>\n

Ashley Kehr:
Well, Rick, thank you so much for joining us today. I appreciate the opportunity. The drive out here. Where can people reach out to you and find out more<\/p>\n

Rick Albert:
Information? Yeah, so I try to be active on Instagram and on YouTube at @RickBalbert. I have started a podcast myself. You\u2019re both welcome to come on as guests. I would appreciate it called The Key to the City of Angels, where we do explore all things real estate. And then we try to tie it to Southern California because it\u2019s such a unique market.<\/p>\n

Ashley Kehr:
I can talk about my experience in the airport today.<\/p>\n

Rick Albert:
There you go. Hey yeah, the building codes are probably just about the same, long and rough. I could imagine.<\/p>\n

Ashley Kehr:
Well, thank you guys so much for joining us on this episode of Real Estate Rookie. I\u2019m Ashley He\u2019s Tony and we\u2019ll see you guys on the next episode.<\/p>\n

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