BiggerPockets Real Estate Podcast

BiggerPockets Podcast 185: How “Rent-to-Own” Can Increase Cash Flow and Maximize Equity with Bill Powers

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On today’s episode of The BiggerPockets Podcast, Josh and Brandon sit down with Bill Powers, a real estate investor from the Chicago suburbs, to learn how he went from zero to over 70 units in five years while focusing on lease options — also known as “rent to own.” This powerful strategy is one that anyone can begin using in their business to achieve more cash flow and equity — and today, you’ll learn all the details. Get your pen and paper out for this show — you’ll want to take some notes!

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In This Episode We Cover:

  • How Bill got started in real estate
  • All the mistakes he made on his first house
  • Tenant screening must-haves
  • How exactly rent-to-own works
  • What the first look program is
  • What you should know about the 2% rule
  • How to not be a predatory investor
  • Tips for running your business the right way
  • A discussion on “instant equity
  • Why some people are not fulfilling their lease options
  • A profile of common tenants who go for rent to own
  • What is Dodd-Frank is and how it affects people who use lease options
  • Things to note before going for a lease option
  • What the future of his business is
  • How many hours he works in a week
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Tweetable Topics:

  • “Where rents are highest and acquisition of capital is lowest, that’s where we focus.” (Tweet This!)
  • “I think you can always flip. I think there’s spread on properties all the time.” (Tweet This!)
  • “There are ways to lose money on flips even if you make money — because opportunity cost is a big factor on that.” (Tweet This!)
  • “Don’t be enticed completely by the flip side of things. Look long term.” (Tweet This!)

Connect with Bill

Real strategies that work for real people seeking to build wealth through real estate investments. Co-hosted by Brandon Turner and David Greene, this podcast provides actionable advice from investors and other real estate professionals, who chat about failures, successes, motivations, and lessons learned.

    Kelly Arthur from Scotch Plains, New Jersey
    Replied about 3 years ago
    Bill, Good podcast. I like the rent to own concept. I learned a lot. Can you please provide the name of the tenant screening you talked about. Thanks.
    Neyvin De Leon Investor from Metairie, Louisiana
    Replied about 3 years ago
    +1 on this request. Please share with us the tenant screening service you use. Thanks!
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    Creditlink.com is the service we use. Provides me all the info – criminal, credit, judgements, etc….
    David Krulac from Mechanicsburg, Pennsylvania
    Replied about 3 years ago
    Bill, Great show. glad to see somebody who is doing lease options right, as opposed to others either intentionally or unintentionally doing it wrong. Getting your clients educated and moving forward to a settlement is to be commended. Dodd-Frank is a mess. One of the requirements is that you need to have the applicant approved by a Federally licensed mortgage broker. And if you give rent credits that the law defines that as offering financing. some people have NOT been giving rent credit so as to not come under Dodd Frank. David Krulac
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    HI David, Thanks. We like the program because we are trying to build ownership in this community. The city and building department have been very helpful to us, so we like to help how we can. My wife grew up here and my mother law still lives here, so it nice to see when we have a resident purchase the home, even if we could have made a few more bucks if they didn’t. Bill
    Carolyn Lorence from Round Rock, TX
    Replied about 3 years ago
    Great podcast Bill, and admire your business model. Would you mind sharing more specifics on how you structure your current flips for friends and family? I.e. Financing and how you’re building a rental portfolio for them? We would like to do the same. Also – you state your minimum net cashflow is $600/month. Is this net of all maintenance and vacancy reserves, or only debt service (PITI)? Thanks so much!
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    Hi Carolyn, Thanks. On the flips, we let our “clients” provide all the funds to do the flip, and we put it in their name, so they have the security of owning the asset. Then we manage the project from selection of the home to rehab to selling it, and we split the profits. The split varies based on the type of client – flip only or flip and rental portfolio. We could probably get hard money for alittle less than the split, but it is more rewarding to do this with a “clients” that want to learn how to do it themselves. I encourage everyone to go out on their own to do the flips, but most just stay with us to do it – its a lot more work than most folks want to do, especially if they have a full time job away from real estate. On the rentals, we select homes for them, rehab them and have them managed by a management company – Secure Pay One. Secure Pay One provide what I call “Lite” management services – collect the rents, take the calls for maintenance, etc… They charge a very minimal fee, only $50 per unit per month, and they do all the back office work. We provide the accounting services, work on property tax appeals, etc….We only build portfolios for family and friends, so it is a small business. We do the flips for a larger base of clients. As for the $600/month, that is a net number. Here is how it works. $1500 rent (average number) $250 interest payment (5% on $60K – 80% of a $75K total investment) $50 insurance $210 maintenance/accounting/management fee (15%) $200 taxes (we work hard to keep these down) $100 capex/vacany/reserve (we don’t have vacancy, and capex is almost non existent – at least so far- since our rehab is very extensive.) $810 total expense $790 Net ($240 of this is principal payment on 15 year am – so $550 free cash flow) Just an example of how we figure an investment. If you use the 2% rule, it works. Good luck and let me know if you have other questions. Bill
    Carolyn Lorence from Round Rock, TX
    Replied about 3 years ago
    Hi Bill, Thank you for a very thorough break down – very much appreciated! Makes sense that you don’t have vacancy in RTO scenario – bonus! You’ve got a great niche market there. Makes me want to move back north again! Best of continued success to you.
    Jefferson Gan from Matawan, New Jersey
    Replied over 2 years ago
    Hi Bill, Nice detailed breakdown. Does this breakdown only applies to properties you bought? Not sure if you enter transactions where seller has 70 to 80% remaining mortgage and house need little to no rehab. I am wondering what transaction will look like if there is an existing mortgage (Subject To)?
    William Powers from Waukegan, Illinois
    Replied over 2 years ago
    Hi Jefferson, We purchase all our properties with cash and do have existing mortgages on them. After we complete rehab, we finance 5 or more with local banks or credit unions at interest rates of 5% or less. This is the only way we have been able to make the numbers work. Hope that helps. Bill
    Julius
    Replied about 3 years ago
    I wish I knew this when I was living in Waukgean work for Habitat for Humanity
    Carrie Alluri Real Estate Agent from Gurnee, Illinois
    Replied about 3 years ago
    Julius, When did you work at Habitat? My dad, Bruno, worked there for a while and I may have run into you there.
    Julius Christian from Chicago, Illinois
    Replied about 3 years ago
    2013
    Carrie Alluri Real Estate Agent from Gurnee, Illinois
    Replied about 3 years ago
    Bill, I plan on listening to this tomorrow. You should have mentioned you would be doing this podcast at our last LCPIA meeting! I feel like I know a local celebrity now :). Maybe I can pick your brain or just buy you a beer after next month’s meeting.
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    Look forward to seeing you there!! Always up for a beer.
    Chris T. Investor from Downers Grove, Illinois
    Replied about 3 years ago
    Great information! Thank you again for sharing. Hope to meet you in the one of the local REI. Go bears!
    Ben G. Investor from Indianapolis, Indiana
    Replied about 3 years ago
    Bill, Great show! Love the idea and am flipping one now, but considering your strategy. I sent you a private message. Have a few questions and ideas on working together. Ben
    Steve Anderson Real Estate Broker from Wadsworth, IL
    Replied about 3 years ago
    Did you mention that I applied to be your “driver” next time we go to the Kenosha Auction?
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    More than a driver Steve. I rely on your market knowledge up there. Thanks for the shout out.
    Michael Andrassi
    Replied about 3 years ago
    bill, i am here in longmont co, the market is crazy here. i am an electrical contractor, and i have been in construction for over 30 years. i would like to do the flips, where do i look for investor parnter,s we have a property in n. florida, we signed a lease option, this guy was a fraud, he cancelled on us when the funds were due to the title company, our fault we did not get a deposit, now he owes us three months rent, we have an eviction case filed.
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    Hi Michael, We find all our clients through word of mouth. It takes time and building a reputation, but now we have lots of folks that want to get into deals with us, so we just have to find the profitable projects. I would suggest starting with family and friends, and see where that takes you. Bill
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied about 3 years ago
    Taking “rent credits” IS offering occupant financing, thus you are acting as a bank (and probably unlicensed per Dodd Frank regs as many have read them to mean). But backing up, sounds like you are doing similar to the mobile home park community Sun Communities “Rent Credit” program where the tenants are paying into a Christmas fund your $150/mo to buy “Some home”. Like a saving program. Both Sun and this program need some case law to sort this out. I agree with reading between your lines, best to stop doing these and do flips instead. I would not do rent credits and take a one payment option fee, which per the option contract is a price reduction, not a part of the down payment. The tenant buyer needs to still save their down payment to satisfy the lenders and program down payment requirement.
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    Hi Curt, We have had a few attorneys look at our model, and actually had a real estate attorney draft agreements, but I will have them take another look. The “Christmas Fund” or “one time payment option fee” is interesting. Can you explain more. Best Regards, Bill
    Brian Dowling Investor from Chicago, Illinois
    Replied about 3 years ago
    Bill – Thanks for sharing your story on the podcast. It was both entertaining and educational. I’m in Chicago, and my partner and I are looking to ramp up our operation. And your comments on the Neighborhood Community Stabilization Trust really piqued my interest. I know this is very forward, and I’ve done some searching and am going to head to the Regional Field Office in the city later this week. But do you have any tips for us on getting involved with the program? Questions we should ask or info they’ll need? I know that’s a broad question, and I really do appreciate any insight you can provide. Many thanks!
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    Brian, We gain access to this pool through a non profit in lake county that we partner with. I would suggest doing the same in cook county or whatever county you are in. Do you want to ask about partner for a list of the NCST non profits in cook county? I can pass it on to you. Bill
    Katie Rogers from Santa Barbara, California
    Replied over 2 years ago
    The NCST partnership you have is discouraging. The whole point of the First Look program is so that homebuyers have first crack at these houses before investors scoop them up. How is this nonprofit making sure homebuyers still have that chance? It sounds like yet another way buying home is made more difficult for the common homebuyer who maybe wants to fix it up the way they like, rather than pay not only for someone else’s tastes but also pay a profit premium on top, and in most cases, higher commissions and a larger interest payment on the larger loan, in addition to the higher property tax as well. The homebuyer who must buy a flip because they are pushed out of buying a distressed home pays interest on the profit until the loan is pad off, and property tax on the profit for as long as they hold the house. My son is in this situation right now. He wants to buy a fixer that HE fixes up, not someone else. He has been trying for seven years but keeps being outbid by hedge funds who do not seem to care how much they pay to acquire, or whether the house will cash flow for them.
    William Powers from Waukegan, Illinois
    Replied over 2 years ago
    Katie, I missed your comment. The property that is offered to this non profits is typically DEEPLY distressed. An experienced flipper is going to have a better chance to complete the projects successfully than a home owner looking for a deal. Where is your son located? Based on his qualifications (contractor/tradesman), to reach out to a local NCST partner and see if he can qualify to acquire a home that would renovation. These properties typically require cash to purchase given the condition of the property. Hope that helps. Bill
    Guy DeBoor Investor from Indianapolis, Indiana
    Replied about 3 years ago
    Bill, thanks for the inside look at your approach to doing Lease options. I found it very informative. You mentioned collecting first and last months rent. Can you expand on that? ie. is this option money collected up front? Apologies for not understanding how this is applied. Thanks.
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    Hi Guy, All the funds are applied to the lease. If the resident purchases the house before the 36th month then we reduce the purchase price of the home by this amount and the monthly credit they have accumulated. Hope that helps.
    David Krulac from Mechanicsburg, Pennsylvania
    Replied about 3 years ago
    Bill, Is applying rent credits Dodd Frank Law compliant? Is this legal to do?
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    We have been advised that it is. The rental rates that you charge have to be “above market” rates, so the amount of rent above the market rent level can be used to lower the price of the home they are purchasing. We have done it several times with different mortgage brokers.
    Joseph Young Investor from Portland, Oregon
    Replied about 3 years ago
    Lease to own seems like a great way to do service for the renters, but can I profit from the deal without being dishonest? Does it make acquisitions easier? Is there a time in the market cycles where it is easier to get your units filled? I love to help people, but my brain sees buy and hold forever as my preferred strategy, considering the risk one is assuming in buying and renting units.
    William Powers from Waukegan, Illinois
    Replied about 3 years ago
    Hi Joseph, The simple answer is yes. You can profit from these deals while being honest. You do leave money on the table when you do business the way we do it, but we believe it is a good approach to building ownership in our community and giving our resident a “fair” deal. We “sell” homes today that are worth $10-$20K more than the sales price because we set the purchase price 3 years ago when the market was depressed, but we don’t pay commissions and our residents have been paying rent for 2-3 years, so it is win-win. Maybe not as big a win as some greedy landlords want, but that is our choice and the choice of all our friends and family that also have homes offered on this program. Everyone has to decide for themselves, but we find rent to own a very low risk approach to “buy and hold”. If you want to discuss, please call anytime. Best Regards, Bill Powers