\n<\/p>\n
How can a simple pressure washing business <\/strong>make you six figures of income<\/strong> a year? With a startup cost of only a couple hundred dollars<\/strong>, today\u2019s guest Chris <\/strong>expanded his pressure washing, Christmas light-hanging, gutter-cleaning operation into a profitable business with multiple employees <\/strong>and a stacked schedule. But, as Chris has started to expand, he\u2019s seen his personal profits decline<\/strong>, so should he outsource less so he can keep more of the revenue he\u2019s working hard to bring in?<\/p>\n Welcome back to another Finance Friday<\/strong> episode, where we talk to Chris, a twenty-six-year-old entrepreneur <\/strong>learning to navigate profits, payroll, customer acquisition, and more in his pressure washing business. Chris found an interesting niche to serve; older communities in his home state of California. He\u2019s been able to build a brand, grow his business, and have a Rolodex full of repeat clients, but he still doesn\u2019t know the best way to scale<\/strong>. Not only that, Chris also started investing in real estate<\/strong><\/a>, with a cash-flowing house hack <\/strong>allowing him to eliminate his housing costs<\/strong>.<\/p>\n Chris wants to know the best way to expand his business<\/strong> while still retaining his high margins, what type of healthcare<\/strong><\/a> plan he should be on now that he\u2019s twenty-six, when he should look to buy another house hack, and how to keep investing. Chris is on a bright path already, but with a few tweaks, he could be financially free<\/strong> in only a few more years!<\/p>\n Mindy: Chris: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: Chris: Mindy: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Mindy: Chris: Mindy: Chris: Mindy: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Mindy: Chris: Mindy: Chris: Mindy: Chris: Mindy: Scott: Chris: Scott: Mindy: Chris: Scott: Mindy: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Mindy: Chris: Mindy: Scott: Chris: Scott: Chris: Scott: Mindy: Chris: Scott: Chris: Scott: Chris: Scott: Chris: Mindy: Scott: Chris: Scott: Chris: Scott: Mindy: Chris: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes<\/a>\u00a0by leaving us a rating and review! It takes just 30 seconds.\u00a0Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Welcome to the BiggerPockets Money Podcast, Finance Friday edition, where we interview Chris and talk about fi when you own your own business.<\/p>\n
I found out that the real problem there is in sticky garbage cans. It\u2019s that, old ladies and grandmas don\u2019t want to climb ladders. So, that\u2019s pretty much what we do is, ladder related home maintenance for grandmas living in these communities where we do their home maintenance so that they ultimately have the opportunity to maintain their independence in the place that they love the most. And, graduated college, came back home to grow it. We\u2019ve, as you\u2019ve described, hired employees and doubled every year largely since I came back home. So, that put me on the, kick-started me to interpersonal development and find it all about podcasts, and real estate and investing, so here I am today.<\/p>\n
Hello, my name is Mindy Jensen, and with me as always is my way too corporate for a startup, co-host Scott Trench.<\/p>\n
Thanks Mindy. Unlike our guest today, I never had to climb the corporate ladder.<\/p>\n
No, you quit the worst company to work for ever.<\/p>\n
Get it? Because, he\u2019s got a ladder bus.<\/p>\n
Oh no, I missed it. Oh, that\u2019s because puns are terrible, Scott. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.<\/p>\n
That\u2019s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own ladder business, Mindy, we\u2019ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.<\/p>\n
Scott, I apologize for missing your amazing pun. You\u2019re so great at these amazing puns. I am excited to talk to Chris today. He has started a really cool business right out of high school. I think that he shows an enormous amount of initiative, and he continued to go to school while running the successful business and now is looking towards his financial future to determine when he\u2019s done running this business what he wants to do. He wants to set himself up for financial freedom, but he\u2019s not that interested in the early retirement part of fire, which I think is great, because I don\u2019t think you should focus on the retire early part. I think you should focus on getting enjoyment out of your life, but I did enjoy talking to him, Scott.<\/p>\n
I thought it was really interesting. I think that, look, Chris has a services business, and a challenge in the services business for somebody who starts off as a self-employed entrepreneur just themselves, which is what Chris started as, is that when you begin to expand, you inevitably erode your profits. Because, if I\u2019m billing out, if I do a service for a $100 an hour, and then all of a sudden I hire somebody for $20 an hour to do that same service, unless I\u2019m getting more hours in, I\u2019m eroding my margin, I\u2019m losing at least 20 of those dollars. And so, that\u2019s the challenge that Chris is facing right now, and I think it\u2019s just a really good framework and lesson and thought to think through. If you have a services based business and you want to expand it, you have to take this period of sacrifice and there has to be a clear path to making more than you were in the first place. Because, running a services business is much harder than being an individual service provider.<\/p>\n
It is. I think we gave him a lot of things to think about, and I think he has a good business head on his shoulders and now it\u2019s just balancing the very different goals of growing your business and showing a lot of income to qualify for a new house purchase.<\/p>\n
Absolutely. Well, should we bring them in?<\/p>\n
Well, we can\u2019t yet, Scott, because we have to satisfy our attorneys. They make me say the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate. All right, before we bring in Chris, let\u2019s take a quick break. And we are back. Chris is a 26-year-old entrepreneur who started his business right out of high school as a way to graduate from college debt free. Who knew it would turn into such a successful actual company that employs eight people providing handyman and home services throughout the year. Now, he\u2019d like to think about his retirement plans so he\u2019s financially ready when he\u2019s actually ready to give up his handy manning. Chris, welcome to the BiggerPockets Money Podcast. I\u2019m so excited to talk to you today.<\/p>\n
Thanks so much for the opportunity, Mindy and Scott.<\/p>\n
Before we jump into your conversation, let\u2019s look at your money snapshot. I see self-employment income that varies, of course, because it\u2019s self-employment income, but $75,000 approximately for the year with additional income from a house hack of 4,350 per month. We have monthly expenses that total around $2,100. So, we\u2019ve got 1,200 for rent or your portion of the house hack, $66 for utilities, 250 for gasoline, 250 for groceries, 50 for restaurants, 50 for household, gym membership is $10, clothing $20, car about a 100, gifts 15, mostly for Christmas, entertainment $20 a month, travel about 25, and internet Wi-Fi $85. Those seem good. I just want to caution you that those are your actual expenses, but you seem to have a good handle on them. Your investments, I\u2019m sorry, your debts, let\u2019s look at your debts, oh, nothing but the mortgage.
That\u2019s a great position to be in at 26 years old. And, investments, you don\u2019t have a 401(k). You can bet I\u2019m going to talk about that later. You do have a Roth IRA with approximately $44,000 in it at 26, that\u2019s awesome. A SEP IRA with an additional 39, that\u2019s also awesome. Personal brokerage of 106, which makes me eat my words about that 401(k), but we\u2019re still going to talk about it anyway. So, 106 in a personal brokerage that\u2019s fantastic. $1,500 in cash reserves, I would normally want to have a conversation about this, but you do have a business where you can take business draws if you need to, so I\u2019m not going to harp on that too much. So, Chris, I would like to know your biggest money pain point, your goals and a brief history of your money story?<\/p>\n
So, I think really my money story started out of high school. I didn\u2019t have the greatest choices for college, fortunately in hindsight, really the best decision I ever made was going to community college. It wasn\u2019t where I wanted to be, but it helped me get to where I wanted to go, which was ultimately transferring to UC, Santa Barbara, that was my dream school. And I was a caretaker and a paperboy at the time, kind of alluded to at the precipice from high school to community college, and I needed more money. And I was working as a caregiver for a grandma, and I got that job from a friend who went door to door cleaning garbage cans. So, at that time I was trending towards almost graduating and transferring to UC, Santa Barbara, and I realized, I need to make more money than I can make us a paperboy or a caretaker.
I thought back to my friend and I said, well, I\u2019m above nothing. I\u2019m going to go clean garbage cans. So, I started doing that in a local retirement community, it\u2019s what called a 55 plus active living retirement community. I found out that the real problem there is in sticky garbage cans, it\u2019s that old ladies and grandmas don\u2019t want to climb ladders. So, that\u2019s pretty much what we do is ladder related home maintenance for grandmas living in these communities, where we do their home maintenance so that they ultimately have the opportunity to maintain their independence in the place that they love the most. And graduated college, came back home to grow it. We\u2019ve, as you described, hired employees and doubled every year largely since I came back home. So, that put me on the, kick-started me to interpersonal development and find it all about podcasts, and real estate and investing, so here I am today.<\/p>\n
What\u2019s the revenue and profit from this business, and how much do you take in salary?<\/p>\n
So, interesting. Historically it\u2019s been structured as a sole proprietorship. So, I think my net income last year was really good because I was the epitome of being self-employed. I was doing almost all the work. Our payroll was very little, so last year I made about 103 in net income. This year, effectively we\u2019ve grown a bit, but our expenses are outpacing our growth. So, I\u2019m going to take home a little bit less this year, probably closer to 54, 55, something like that. But, top line, last year we did 164 and we grew a little bit this year.<\/p>\n
And you do not take a salary then? Is it all distributions?<\/p>\n
Currently, right now I do not take a salary, I just take distributions, exactly right. I think over time we\u2019re going to be implementing a different business structure and I\u2019m going to have to pay myself a reasonable salary, but I\u2019ll let my CPH choose that.<\/p>\n
Awesome. And can you walk through the employees? So, these are not full-time employees. They sound like hourly contracted guys.<\/p>\n
So, we have several really part-time employees. Most of our staff are current college students. We have one full-time operations manager, so he\u2019s on a salary. I think there\u2019s one other full-time person, one close to being full-time, but you\u2019re right, about five or so are pretty part-time.<\/p>\n
Awesome. And then, can you walk us through anything about seasonality in the business?<\/p>\n
Absolutely. We do four core services, gutter cleaning, window cleaning, solar panel cleaning, and Christmas lights. So, we do really well during this time of the year, November and December. We do a lot of gutter cleaning and Christmas lights. Grandma\u2019s have a high willingness to pay for those services during that time of the year, and during spring and summer it\u2019s more about window cleaning, but it is a clearly seasonal business. We have a couple lulls, shoulder seasons between those two.<\/p>\n
Awesome. What do you bill at, and what do you pay your staff?<\/p>\n
So, I know the operations manager. He\u2019s salaried exempt in the State of California, so he makes two times a minimum wage. The other staff, they\u2019re all being paid living wage, it just depends on the role, but somewhere typically around $20 blended across all forms of compensation.<\/p>\n
Well, you\u2019re paying these guys 20 bucks on an hourly basis. I presume you\u2019re billing the client more than $20, otherwise you wouldn\u2019t be in business. So, I\u2019m wondering how much that spread is.<\/p>\n
Absolutely. We don\u2019t typically really bill by the hour in that case, we bill by the project. Typically our revenue per man hour is north of a $100. It really depends on the service, but about that.<\/p>\n
Awesome. So, you got a profitable unit economics, very profitable on a services based business here, and the challenge is filling up as many man hours as possible on that. So, Chris, what\u2019s driven growth over the last couple of years, and what are the plans going forward for your business?<\/p>\n
So, I\u2019d say what\u2019s driven growth is, obviously the first several years it was me doing the work. I maybe played the role of the ideal grandkid where I was actually there to help them. So, we had a lot of great referrals and word of mouth in these communities. They gossip like teenage girls. These communities are largely 65 to 85-year-old retirees, and they oftentimes socialize and talk to their neighbors and friends. So, I\u2019d say that\u2019s what really allowed me to get the foothold in these communities is, we take every opportunity to advertise in these communities, newspapers, publications, store hangers, signs, et cetera, but nothing really beats word of mouth. And I\u2019d say that\u2019s what allowed us to initially succeed. And ultimately we use those other forms of print media as I already explained, to expand out to the other 55 plus communities in the area. There\u2019s about 20 of them, and we\u2019ve so far serviced about half of them.<\/p>\n
Awesome.<\/p>\n
I was telling Scott before we started this show, I\u2019m so excited about this idea because I live in a neighborhood where there\u2019s probably 30 or 40% of the people who live here are still original homeowners from the \u201970s, so they\u2019re in their 70s and 80s and 90s, and this would be an ideal neighborhood for you to come in if you lived here. But, how much did it cost you to start this business? It was probably very low startup. You need a ladder, that\u2019s not that expensive.<\/p>\n
Exactly right. Initially really to start, I got a pressure washer to clean garbage cans, and then over time I found out, oh, they need this thing done and that thing done. And it\u2019s very asset light, it\u2019s equipment light, so it\u2019s really a business pretty well positioned for an 18-year-old to get into. That also makes it a very competitive space that there\u2019s a low barrier to entry. But, absolutely, it costed very little to get into this business. I literally think it was a $200 pressure washer that I just put in the back of my car and started going door to door.<\/p>\n
And you use their water, their electricity?<\/p>\n
Exactly, pretty much. So, there\u2019s really no cogs to put a business word to it besides obviously the cost of service as we were talking about.<\/p>\n
Have you thought of franchising this idea?<\/p>\n
Absolutely. I initially pursued the idea of franchising the last couple of years. Early in COVID I called, I\u2019d say played the role of a college student doing a marketing project or a class project for an entrepreneurship class and talked to a bunch of franchisees in the space. So, that gave me good insight as to maybe the expectation of the size of a franchise to really justify going that route. I don\u2019t think there\u2019s enough territories for the markets that we really target with type of business. Ultimately the most opportunity are in places like Florida or Arizona where they have a really high density of these types of communities. So, ultimately long term, three, five years, our plan is to expand out to those other places, Florida and Arizona to offer the same services. Because, if we can target and convert a 75-year-old lady that lives in Sacramento area, 55 plus community, we can do the same in Florida and Arizona and really go the corporate route ultimately.<\/p>\n
How many total billable hours did you bill last year?<\/p>\n
I could look up our KPIs. We probably did about 500 appointments. Each appointment is going to last somewhere between two to four hours. So, I\u2019d probably say, how many billable hours? If we\u2019re doing, we did about 164 last year in revenue. We do about a 100 or so plus or minus per man hour. So, what would that be? 1,500, something like that.<\/p>\n
So, here\u2019s a question just to be frank with you and, well, a statement and a question. This business has to scale for you to continue operating the way that you\u2019re operating, because the work year is 2,000 hours. So, that simple math says you could just do all of those hours yourself, you don\u2019t need any employees, and you would\u2019ve made $164,000 last year instead of 54,000. And so, that I think is something to noodle on conceptually and say, is there a path to getting this thing there? Because, on paper at least you don\u2019t need any of those employees and the time is there. You have another 500 hours on top of that as bonus to actually schedule, and coordinate, and market and all that stuff to get that time. So, what\u2019s your reaction to that observation?<\/p>\n
I would argue that half of our staff, four of the employees are really part-time, and they\u2019re what I call a canvasser. So, they\u2019re really stirring up leads and marketing for us, distributing the door hangers, the banded sign. So, I need them to get some proportion of the leads that we already generate. And this year was a big step in my business, because I recognize exactly what you\u2019re talking about. This type of business is really profitable when you do it all yourself, what also happens, you get burned out. That\u2019s what happened last year with me. I was overworked. I was working way too much, spending too little time with friends and family, and this is the messy middle in terms of the size of this business.
We need to get to 750, a million dollars to really get back to the level of profitability that we were prior, where I can take as much home as I was when I was doing all the work on the ladder. But, I think it\u2019s a natural progression with this type of business is, the cost structure changes as you start to hire employees. We need to continue to grow to justify that change in that cost structure instead of just reverting back to what I had done the first six or so years and doing it all myself.<\/p>\n
How long will it take you to get to that point, 750 to a million where this business brings in more than if you just did it yourself?<\/p>\n
Sure. So, I think, I\u2019m confident there are five or so businesses in the Sacramento area that do the same exact services like us that do a million dollars plus, so I know it\u2019s a possibility, and so much so that there\u2019s franchises in this space, so that really is what validates the opportunity. So, I think realistically, to get to the size that I had stated, 750, a million dollars, that\u2019s going to take us locally here probably three, five more years. It\u2019s tough to continue the pace of doubling what we\u2019ve done historically, but I think we could get to 360, 400 this coming year. And if we have two or so years of slower growth, we could get to that 750 or so mark.<\/p>\n
I think that\u2019s too vague, would be my observation. I believe you. This is a good business model. You\u2019re clearly solving a problem. Your customers clearly like you, you\u2019re getting word of mouth referrals, things are good. You\u2019ve got something here. But, I think that this is a major problem we\u2019ve uncovered in your personal financial situation, which is the purpose of what we\u2019re trying to do here, where you could be making way more money by just going back to what you\u2019re doing two years ago, and your outcome is five years away and we\u2019re way too vague about how we\u2019re going to move forward in the near term. I think that some suggestions I\u2019d have for you are, let\u2019s boil this down to a process perspective. I like the approach in a general sense. You don\u2019t want to just be getting on a ladder and dealing with all these maintenance issues, hanging on Christmas lights for the next five years. We don\u2019t want to do that.
But, the business side of it has to make sense in order to justify spending the next three years building your business, which is maybe even harder than that. So, let\u2019s boil this down to a process. I think you should document, what are the steps to getting a lead in my business? We have door knock, door hangers, we have word of mouth, we have all this. Do I have a system to track all of that and understand the ROI? What if I\u2019m paying these guys to hang door knockers, and that was a complete sinkhole for me. I got one deal out of it last year and I spent 20 grand. Do you know that in your business?<\/p>\n
Absolutely. You bring up a valid point. And I think one thing, one challenge historically is we\u2019re very print marketing based because demographically we serve 75-year-old ladies. And what do they respond best to? You could argue physical print media instead of Facebook ad. I think the digital media strategies that we\u2019ve yet to really undertake are probably easiest to grasp, like cost of customer acquisition ultimately is what you\u2019re getting at. We\u2019ve done a poor job of tracking that historically. We are using a CRM. I have an office manager. She\u2019s asking that on every call that she receives is, ultimately where did you find out about us, so that we can do an analysis on, what are the most cost effective marketing channels so we can pull the right levers.<\/p>\n
Great. And then, what\u2019s the process once you do get a lead? How many of them convert into appointments? What\u2019s your process for setting an appointment, quoting the job if you have that, completing the job and then getting feedback?<\/p>\n
So, I\u2019d say historically our close rate was about 40% blended over all of our services. Well, this year it\u2019s gone down a bit as our prices have changed because the cost structure has dramatically changed to the business as I described. So, how it currently works is, most commonly we get 75% or so of our calls from these 55 plus communities. Typically, they see us from some print media, a door hangar, a sign. They see us at an in-person event perhaps, but some community-centric form of advertising. They see our number, they call our office manager, they say, I need gutter cleaning, how much do you charge? She gets a few questions asked. She prepares a quote that same day, very likely in the next hour or so after they had called. We send that quote via the CRM that we recently paid for and utilized. And from there they receive the quote, receive follow-ups, et cetera. And once it\u2019s approved we contact them to book the service, so that\u2019s the customer journey from prospect to book deployment.<\/p>\n
So, is this all automated? Are you a part of any of that?<\/p>\n
And as explained, this year\u2019s been a dramatic change of me stepping operations and not doing all the cleaning, all the hanging Christmas lights, et cetera, and same with answering phones. Historically I was answering every phone call until I hired my office manager. And these maybe overhead costs are to explain some of the change in profitability, but I would much rather be where I\u2019m at right now and make less money and not be burdened with doing everything in my business than reverting back to where I was.<\/p>\n
So, I have a couple of customer acquisition ideas for you. You said that there\u2019s what, 20, 55 plus communities and you\u2019re in about half of them?<\/p>\n
Correct.<\/p>\n
So, have you considered having an age appropriate brand ambassador in each one of these neighborhoods? You go and you clean Gladys\u2019 garbage cans for free, and she\u2019s so delighted that you did this, that she tells all of her friends and then all of a sudden you\u2019re in that neighborhood now too. Are there services that your clients are asking for that you don\u2019t currently offer, or have you pulled your clients to see if there\u2019s anything else that you can help with? Because, you already have a client, getting that client to spend more money with you is going to be easier than finding a whole brand new client. You already have them, they already appreciate your services. Ask if there\u2019s anything else that they would like around the house. Maybe you can help move heavy stuff, or rearrange furniture, or get rid of stuff or something like that.
And have you ever done a, like we are going to be in your neighborhood. We\u2019re going to bring eight guys into your neighborhood this Saturday and we\u2019ll take, we\u2019ll clean anybody\u2019s garbage cans for 10 bucks, or a 100 bucks, I don\u2019t know how much it costs to clean a garbage can. But, some ideas where you\u2019re already there, how much time does it take to clean yet another can? And that could be another way to introduce your services to people. Obviously you can\u2019t hang up Christmas lights in a 5,000 house community in one weekend, but introducing people especially on some of those slower weekends.<\/p>\n
Absolutely. I particularly love the idea, that brand ambassador. I haven\u2019t thought about that particular phrasing. We definitely do get great referrals on these communities. We could probably do a better job of catalyzing and asking for the referral, so that\u2019s super valid. And ultimately lots of the people in these communities, they\u2019re widows, they\u2019re widowers, they\u2019re vulnerable. They really rely on people that they can trust and they most trust who they\u2019re referred to, so I think that\u2019s a very valid point. Other services, we\u2019ve definitely thought about adding on different types of services. I think one of the reasons we\u2019ve really niched down on what we do is because they\u2019re the things around the house that are the most physically demanding that we most frequently get asked about.
So, we do some small things like moving, or yard work, or changing a smoke alarm battery, air filter, name your other task that an 80 year old woman might struggle with. But, I also don\u2019t want to get too spread out and going inch wide in a mile deep, or an inch deep and a mile wide, I want to do the opposite. So, in terms of other services, I think one hesitation is that it\u2019s just operationally complex. This is already a very operationally intensive type business. I\u2019m confident we can do what we currently do great, but lesser so if we continue to expand our set of services.<\/p>\n
Sure, and that\u2019s a great point. But, if you ask all of your customers, hey, is there anything else you would want us to do, or are having trouble finding somebody to do? And everybody asks for the same service, that shows you that there\u2019s a demand. So, I love polling customers and asking, what are you looking for? If everybody wants 19 different things, well then, oh, we\u2019ll look into that. But, if everybody wants the exact same thing, that\u2019s something really valid. Now, you just mentioned something I think is very interesting, changing out smoke detector batteries. Those are always way up on the ceiling and they\u2019re very difficult, and lights too. I don\u2019t know if these neighborhoods have big high ceilings. I think they\u2019re more like manufactured homes, aren\u2019t they, some of them?<\/p>\n
Manufactured isn\u2019t right. They\u2019re stick built single family residences, but it\u2019s a normal suburb just full of elderly folks largely. But, absolutely, we have done all these little things around the home. They\u2019re not revenue drivers for the business. What\u2019s really most profitable are the four main things that we do, the gutter cleaning, the Christmas lights, the window cleaning, the solar panel cleaning.<\/p>\n
So, these non-revenue drivers are super helpful for these little old ladies who can\u2019t get up on that ladder themselves. So, you go in on a Saturday, we\u2019ve got eight guys for 20 bucks, we\u2019ll come in and we\u2019ll get all the cobwebs and change your batteries, and change your lights, and do all this stuff for 50 or whatever. And then, you go and you bang out all these houses and they\u2019re so pleased that you were there. They call you back to do their gutters, and to do their, hey, by the way we offer all these services too. If you ever need anything, please give us a call. It\u2019s not a revenue driver, it\u2019s a lead gen. But, anyway, just something to think about. Another thing is with the referrals, like you said, you can get 10% off of your service and 10% for me, if you use my name, just tell them that Gladys Smith sent you.<\/p>\n
Well, is there anything else you\u2019d like us to cover from the business perspective?<\/p>\n
I think one topic that I was thinking about is obviously insurance, and as it relates is I could start to offer that as a benefit over time. I think the thing that you\u2019re probably going to point out is, we need to continue to grow to really justify doing that, but that\u2019s something that I\u2019ve entertained, but I think we\u2019ve pretty well covered the business front.<\/p>\n
I agree. I don\u2019t think you\u2019re ready to offer health insurance as a benefit to your employees yet.<\/p>\n
That\u2019s really expensive.<\/p>\n
But, would love to do it over time.<\/p>\n
You could join a PEO if you need to, for you and your one full-time employee.<\/p>\n
Well, let\u2019s talk about this house hack. Give me the numbers. What did you purchase it for? What is it rent for? All the things.<\/p>\n
Absolutely. So, over the last several years I\u2019ve really tried to prioritize getting my financial life in order. So, over the last couple of years I was obviously increasing my net income. Trying to show to a lender that even in the State of California I can buy a home, you can trust me. And last year was really the first year in which I met the threshold that they look at in terms of debt income and supporting the mortgage more or less. And during that time I had contacted a friend because I was under the impression that he was house hacking based on a Facebook post that I had seen. And I hit him up about a year ago, maybe a little more than that. And he was describing that, yes, he was house hacking currently. He was in contract to buy his second property with a friend, and that friend happened to drop out and he was put in a tough spot and he needed some help.
So, I was in the perfect position. It fell in my lap and we bought the home together, my first home. I currently live here. We bought it for 740 purchase price at the end of August, 2022. So, 740 purchase price, we put 10% down. Our rate was 6.125. We went with the preferred in-house lender because they give us some credit. Over time, we\u2019ll very likely be five, hoping that rates eventually dip below five. And, so far I rent, I live in the master. The other five rooms are rented. So, how we qualify and count income varies, but it cash flows in a sense greater than the pity payment, which I think is a little over $4,900.<\/p>\n
Awesome. If you did not live in the property, how much total rent would you collect?<\/p>\n
I think it\u2019s 5, 550. It\u2019s a little over 5,500.<\/p>\n
And your mortgage is 4,900?<\/p>\n
Correct, hair over.<\/p>\n
Awesome. And how much do you think it will rent for in a year or two?<\/p>\n
Each of the rooms, we probably increase each of the rooms by 25, 50 bucks. I don\u2019t think dramatically, but some marginal amount greater than it is today.<\/p>\n
So, we\u2019re probably close to break even when we factor in CapEx, vacancy, turnover and maintenance on it. But, we\u2019ve got an asset that we can hold here probably without bleeding on a monthly basis for the long term in a good spot.<\/p>\n
I would hope so. And really my plan here is to do the same thing over the next couple of years, is to qualify for primary residence, live in it for 12, 18 months. I don\u2019t have a kid or any dependents, a wife that can tell me otherwise. So, I\u2019m at a stage where that seems like a worthy sacrifice to make, and ultimately that\u2019s one big reason I wanted to go on this call was just to make sure that I\u2019m positioning myself to do so and ultimately achieve my goals of reaching some semblance of financial independence so long-term I can take the entrepreneurial risks that I desire.<\/p>\n
Awesome. Whose name is the mortgage on?<\/p>\n
So, we\u2019re both on title, so it\u2019s my buddy and I.<\/p>\n
Great. So, your question is, how soon can you purchase your next house hack?<\/p>\n
I think that\u2019s one major concern is obviously that\u2019s something to figure out with my CPA, is how we report income, et cetera, and meet the DTI requirements. But, that is definitely a point of maybe contention or conversation that I need to navigate, because as someone that bought a home with someone else, from a lending perspective, I\u2019m liable for the whole mortgage. But, renting rooms doesn\u2019t count income wise from what I\u2019m familiar with. So, I think that puts me in a tough position DTI wise, but that is definitely some challenge to circumnavigate if I want to follow through on the goals that I just explained.<\/p>\n
That\u2019s new to me that renting the room would not help you count on a DTI perspective.<\/p>\n
Perhaps you\u2019re right. I trust your expertise more than my own. I know that-<\/p>\n
I\u2019m not a 100% confident, I\u2019m just surprised to hear it. So, I should know that probably, but I don\u2019t. So, are you pretty confident, or has a lender told you that?<\/p>\n
From what I understand about living in a single family residence, they\u2019re not going to count renting rooms as income, like income for their purposes. But, if I lived in a multiplex and I rented other units or, they would count some proportion of it, I\u2019ve heard 75%. It probably depends on the lender, and the time, and that might change, but that\u2019s what I\u2019m familiar with, with the income reporting.<\/p>\n
Oh, I\u2019m not sure. I know you face challenges just by being self-employed. Even though you\u2019ve been self-employed for a long time, lenders are very squidgy about that. I don\u2019t know that you can\u2019t count any of this rent towards your debt to income, and I would definitely speak to more than one lender. I have a lender based in California, but they\u2019re licensed at all 50 states, and they can do self-employment after one year. You\u2019ve got multiple years and you have shown a profit and you\u2019re growing. I don\u2019t think they would have an issue with your source of income. I think that we are looking at a problem with the amount of income based on the rent, so that\u2019s where you would need to have the rental income counted in order to qualify. What would this whole property rent out for if you rented it out completely? If you moved out, and all the people moved out and you rented it as one property instead of by the room?<\/p>\n
I would need to look at comps to really verify this. We haven\u2019t really considered going other than rent by the room, because we knew we could make more money doing it that way. I\u2019m pretty confident somewhere in the realm of 3,000, probably a hair more would be my intuition, but you guys probably have a better pulse on that.<\/p>\n
So, then rent by the room is definitely the way to go. Now, once you don\u2019t live there, rent by the room is just, it\u2019s still a rental, so I would think you could qualify that. And then, having a year of rental history, even though you\u2019re living there, you still have a year of rental history to show the lender, look, I\u2019ve been renting these rooms for 5,550 consistently over the course of this whole year.<\/p>\n
I think that\u2019s right. This is something, we\u2019re getting into really a place where the tactics really matter in terms of your timing for when that will hit. My guess, and you got to talk to a lender and your CPA about this, but my guess is, you want to report the income from this property on your tax return as much as you can, that makes sense. So, you don\u2019t want to play games to reduce the income liability because, well, that way save you a little bit on taxes. You\u2019re probably going to have a loss on the property for the first couple of years given what you just shared with us, a taxable loss once we factor in depreciation, so there won\u2019t be much of a tax benefit, there\u2019ll be some. But, more important to you it will be the income qualifications. And if you can show two years of tax returns with this rent income hitting there in a way that will qualify for the lender, you\u2019re going to be in good shape.
So, if you can get that rent on your tax return in year 2022, which it sounds like you will, that\u2019ll probably be in pretty good shape. And what that does is, it has a multiplier effect on your ability to borrow once you are able to report that income. Because, not only does the current rent from your property help you with this debt to income challenge, but as a landlord with experience, you\u2019ll also be able to count the potential income on your next property as helping you with your debt to income.
So, if you buy a duplex, for example, next and it\u2019s empty, but it would rent for three grand, 75% of that will help you qualify for your next conventional mortgage, which it won\u2019t right now. So, somehow some way we got to figure out a solution to this problem. I would talk to a couple of lenders and I would not just listen to your CPA on this. Your CPA is going to give you great tax advice, but sometimes the consequence of getting great tax advice can be there\u2019s less income to borrow against. And so, you want to make sure that you\u2019ll also run that by your lender and get good advice from a lender who knows what they\u2019re talking about in this area.<\/p>\n
Absolutely. More research is needed for your point.<\/p>\n
Is that a helpful starting point? We\u2019re not quite answering your question, but is that a helpful starting point to think about how you get the two years of tax returns or at least one year of tax returns on there with the highest number possible for rent collections?<\/p>\n
Absolutely. I know I need to talk to lenders because probably different firms are going to have different lending criteria and such, and I know my situation is probably peculiar relative to a lot of the situations they deal with. But, absolutely, I agree. I need to talk to multiple lenders and ultimately brokers probably have the best source of the plethora of options that I can explore.<\/p>\n
It may be as simple as this as well. It may be that you live in the property this year and then you move out and you rent a place, half your buddy\u2019s bedroom or something like that. I think you said there was some arrangement like that, that you had worked out. And so, you use that situation, you say, I have a true rental right now. It\u2019s fully booked, and I\u2019ve got the income on my tax return last year, I\u2019ve been doing this. So, now you may be three months, we\u2019re recording this in December 2022, you may be three months away from being able to qualify, because you have the cash for a down payment or you could access it from the brokerage side. So, that might be a really powerful booster there if you can create that situation. Because, it may be, I got the rent on my tax return for 2022, but I can\u2019t be living in the property while I\u2019m actively looking for the next one and using rent from roommates essentially to qualify.
But, I have a true rental. I don\u2019t know, I\u2019m getting really way in the weeds here, but I have a true rental because I\u2019m actually renting another place right now and that is operating as a standalone rental property, or I have half of it, or whatever it is that you\u2019ve worked out. So, that\u2019d be the path I\u2019d go down exploring this, and I wouldn\u2019t be surprised if you\u2019re not too far away from at least having a substantially brighter outlook on the debt to income side.<\/p>\n
Oh, I was going to say, I wouldn\u2019t be afraid to ask lenders, do you have any creative solutions? Do you have any suggestions for me? I\u2019m willing to do a lot of things. I\u2019m not married to anyone\u2019s solution. I\u2019m looking for ways to expand my rental portfolio, to expand my home ownership, to get into a property sooner, to do a lot of different things.<\/p>\n
Absolutely. I need to have these conversations with lenders, brokers, et cetera. I think the last resort option is ultimately to probably circumnavigate the 100% liability that I face with having two people on the title and me being really a 100% liable from the mortgage at the end of the day from a lending perspective is, either sell out to my buddy or vice versa and get one or the other off the title to circumnavigate these DTI challenges.<\/p>\n
Or just don\u2019t repeat the problem the next property.<\/p>\n
I would agree.<\/p>\n
So, I think from a bird\u2019s eye view, from my standpoint, you just got this place, it seems like it\u2019s going reasonably well. You need to set yourself, start thinking about the next property purchase, but I think it boils down to make sure that you file your taxes. Probably the earlier the better with that. You think through if there\u2019s new ramifications. If you do have any options in that, you probably don\u2019t. But, if you do have any options, you want to report in such a way that your lender will be aligned with that.
And then, you want to ask, well, does that rental income, if it doesn\u2019t count from roommates for my next loan, does it count the day after I move out of the property towards my DTI or what? And, I think that, at this point I wouldn\u2019t fiddle too much with the structure you\u2019ve got with your friend, that\u2019s done. The property\u2019s purchased and you\u2019re going to have to transact the property in order to change things that has all to do on sale ramification ramifications potentially and would potentially give either one of you trouble if you couldn\u2019t qualify for the mortgage on an individual basis.<\/p>\n
I absolutely agree. It\u2019s a last resort, but it is a resort if needed.<\/p>\n
So, Chris, we\u2019ve talked about your business, we\u2019ve talked about your house hack. What else can we help you with today?<\/p>\n
I\u2019d say, as a 26-year-old, 20 something, I\u2019m relatively healthy, but the responsibility of insurance was recently bestowed upon me as a 26-year-old, so that is something that I\u2019d love some advice on. I\u2019ve heard some harsh criticisms of perhaps, like medical sharing programs, but I know I recently signed up for a Kaiser bronze high deductible plan so that I can start contributing to an HSA, but if you guys have high level thoughts, I\u2019d love to hear them.<\/p>\n
I have a lot of thoughts. First off, you\u2019re healthy, that\u2019s great. We have posed this question several times. We have made comments a lot on this podcast, and somebody reached out to the Facebook group and said, Mindy, you always say that unless you have a chronic condition, you should have a high deductible plan. He said, except in some very specific cases, even if you have a chronic condition, you should have a high deductible plan. And he was talking about the difference between the high deductible plan versus a regular plan. I\u2019m talking about the difference between the high deductible plan with the HSA versus the health sharing plan. Because, the health sharing plan isn\u2019t health insurance, and the health sharing companies haven\u2019t negotiated with the healthcare providers to provide any healthcare.
And you can\u2019t deny somebody who is in an emergency state. You can\u2019t deny them health services, but you don\u2019t have to take their health sharing money. So, essentially the way it works, and I\u2019m really paraphrasing, but you go in with a broken leg, you go to the hospital, the hospital treats you, then they send you a bill for, let\u2019s call it $20,000, because I don\u2019t know, and that sounds good. Then your health sharing company sends them $2,000 and says, hey, would you take this for it? The healthcare provider can say, no, it\u2019s $20,000. And then, either they negotiate back and forth, or ultimately you\u2019re responsible for this until it gets paid. And traditionally they will take the negotiate with the health sharing provider back and forth, but they don\u2019t have to. And things are not great in the insurance industry right now. So, having a high deductible plan, you\u2019re footing the bill for the first, what is it, 3,500 or something like that, and then healthcare kicks in.
And the insurance company that you have that plan with has negotiated with this provider, provided you a network and make sure that you are, and you mentioned Kaiser, and there\u2019s people who don\u2019t like Kaiser. I think Kaiser\u2019s fine. You go to a Kaiser doctor. If you don\u2019t go to a Kaiser doctor, then you\u2019re on the hook for it. So, just make sure you go to a Kaiser doctor. Step number one when you have health insurance is, read the rules of the health insurance. The book\u2019s only about this thick, so it\u2019s great reading, light reading, but it\u2019s super important to understand what you\u2019ve signed up for. And my favorite, Brandon, the mad scientist, has written an article called the HSA is the ultimate retirement account in 2022. He\u2019s updated it several times. It is a fantastic account, especially if you can cash flow your expenses.
I have a medication that I take every night and I can cash flow that because it\u2019s $5 or something for a month\u2019s supply. And then, I save my receipts and in several years I will cash those in and collect some money for that. And the same with my copays, and the same with minor surgery if I need it, anything that I can cash flow, I just save the receipts and then down the road I can cash those in after my HSA has grown so much. You don\u2019t need to take your expenses in the same year that you incur them. So, you can allow your account to grow and then take out the money when it\u2019s less of a hit. If you\u2019ve only got a $100 in the account and you take out $50 for the expenses, then you only have $50 to grow.
But, if you can cash flow these expenses right now and then allow this to grow, it can be a great way to pay for expenses down the road. It can be a great way to just recoup some of your expenses down the road, or you can even wait until you\u2019re actually retired and then you can start withdrawing this money without the expenses attached to it. It\u2019s a really great plan if you qualify, if it\u2019s available to you, and I\u2019ve used it every year that we have had it available at BiggerPockets.<\/p>\n
So, the only thing I\u2019ll add to Mindy\u2019s great points here is that, there\u2019s no good solution. Healthcare in this country is very expensive and you\u2019re going to go from not paying for it, presumably because of the, you turn 26 Obamacare protections and all that stuff where you were on your parents\u2019 plan most likely, are going to go away and you got to start paying for this. So, it\u2019s expensive and it\u2019s just terrible, and it\u2019s something that we got to fix in this country and we have not. And so, the answer is, the bronze tier plan with the high deductible and the HSA qualifier probably sounds like the least bad option at the highest level for this. That health share ministries can be one option that can be worth exploring. However, there\u2019s a lot of issues that some people have with those types of plans.
One of which, at least at 26, would\u2019ve been for me is, if you don\u2019t live in accordance with those values and those sometimes Christian organizations, certain things won\u2019t be covered. So, just something to think about there. So, I think that for most people, for your situation, this sounds like a great option. I don\u2019t know the details about it, but the bronze tier is clearly not the gold tier. You\u2019re a healthy guy. Get something that\u2019s as affordable as you can, max out that HSA if you\u2019re interested, if that\u2019s something you want to do and take it from there. So, not great, not a fun answer, but that\u2019s the truth I think.<\/p>\n
An answer nonetheless, thank you.<\/p>\n
Well, Chris, this has been great. Thank you very much for coming on the BP Money Show. We really enjoyed talking to you and hopefully this was helpful.<\/p>\n
Thank you guys for the opportunity, and I know it\u2019s helpful for me, hopefully it\u2019s applicable to someone else out there too.<\/p>\n
Absolutely. I think a lot of people will learn from this.<\/p>\n
Chris, this was a lot of fun. I\u2019m super excited for your old lady ladder job. I think that\u2019s a really great opportunity and a really great service that you\u2019re providing because like you said, older women and ladders don\u2019t mix.<\/p>\n
Not a great combo.<\/p>\n
Not a great combo. Well, this has been a lot of fun and we really appreciate your time. We\u2019ll talk to you soon. All right, Scott, that was Chris. I thought you had some good advice for him for his business. I am excited to see the possibilities for his business, and I do think that he will be able to grow it. I think he\u2019s got, like I said in the beginning, I think he\u2019s got a really great business head on his shoulders, and now he\u2019s just in that weird little, I want to grow, I\u2019m not quite sure how to grow or let me try a few different things period of service-based growth that you have to get through before you find what works and grow from there.<\/p>\n
I love that he\u2019s experimenting with it. I think that the plan for achieving that growth needs to be more aggressive and more specific. And, I think that\u2019s the big homework I\u2019d have if I\u2019m Chris. And, Mindy, I thought you had some really good advice as well and some great tips.<\/p>\n
Oh, thank you, Scott, I try. I think that there\u2019s a lot of value in a brand ambassador who is the same age or similar age as other people that he\u2019s trying to target and they all speak the same language. He can give her a free garbage can cleaning or whatever, and then connect with her, she\u2019ll connect with other people. Just having somebody that you trust, like he said, that\u2019s going to pay off in spades.<\/p>\n
Absolutely. Should we get out of here?<\/p>\n
We should, Scott. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying, park your truck rubber duck.<\/p>\n
If you enjoyed today\u2019s episode, please give us a five-star review on Spotify or Apple. And if you\u2019re looking for even more money content, feel free to visit our YouTube channel at youtube.com\/biggerpocketsmoney.<\/p>\n
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kalin Bennett, editing by Exodus Media, Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.<\/p>\n