How I'll Retire on Income From Just a Few Rental Properties

What’s up, BiggerPockets? Alex Felice here! On this episode of “Meet the Investors,” we’re going to talk to a guy who is renting his properties out by the room—something we haven’t talked about in the series yet. And it is incredible.

Let’s meet him.

Hey, everyone! I’m Ron Gallagher. I am a buy and hold investor in the Washington, D.C., area, and I have perfected the rent-by-the-room strategy to maximize my cash flow. And I’m going to tell you about how you can maximize your cash flow doing the same thing.

Meet the Investor: Ron Gallagher

I got into real estate in 1999, when I bought my first primary residence. I was in my early 20s and I always knew that buying was better than renting. I knew I was just throwing money out the window if I was renting.

Four years later, in 2003, I wanted to upgrade my living situation. So I bought a house in D.C. and then rented out my condo—and that’s how I got started.

I realized that real estate is the answer. It’s the only way the common man can build wealth quickly (that I’m aware of). It’s within reach for everyone. You don’t need any special talent or skills to get started. So that’s why real estate, for me, was the answer.

I was freelancing for about nine years before I got back into real estate investing. I had two properties that I had rented out during my freelance time, and then I moved back to D.C. and I found myself in a government job that was completely unfulfilling—a boring IT job.

For most people, it would be a dream job because you just sit around in the office and do nothing. But for me, I didn’t want to wake up in the morning. I hated going anywhere at 8 a.m. I wanted to sleep in and I wanted to get back to my freelance lifestyle.

I started listening to the BiggerPockets Podcast. I was exposed to BiggerPockets because any time you do a search for anything regarding real estate investing, you’re going to happen upon the BiggerPockets website. And then I realized they have a podcast. So I started listening to the podcast and there was something about Russell Brazil’s episode, where he was the guest. Russell said that he was working in the Washington, D.C., area.

I was like, “OK, great. I finally found my real estate agent.”

I wanted a real estate agent who was knowledgeable about real estate investing, not some real estate agent that was on a billboard or the side of a bus. So, I connected with Russell. That’s where BiggerPockets really came in handy: being able to connect me with local people in the Washington, D.C., area that were real estate investors.

Russell also helped me close on another deal, which took five months to do. There were so many hurdles, hundreds of hurdles that I had to go through to get this property and get this deal done. And there were so many times when I wanted to just give up and Russell was able to talk me off the ledge saying, “you know, we just have to do this one little thing. The deal’s back on.” So we worked through it and I finally took the property down.

It’s a nightmare property, but I turned it into my dream property.

Real Estate Investment Is Challenging—But Worthwhile

Everyone talks about the good. Everyone talks about their successes. But I’m going to tell you, there’s some bad to it. Real estate investing is not all about rainbows and cash flow. There are some bad things that happen.

If I’ve looked miserable recently it’s because I’m dealing with a flood right now. We had a flash flood last week. I’m dealing with replacing all the mechanicals in my basement that was full of water, about six feet of water. The entire bottom of the house was full of water and everything was ruined. Even the internet box was ruined.

We can see the basement and you can see the damage. If you wanted an indoor swimming pool, it would have been great. But that’s not what I wanted down here.

The waterline came all the way up about six feet. There’s debris everywhere. The HVAC system was destroyed. We just had a brand new hot water heater installed. It’s an 80-gallon hot water heater that cost $3,300. So I hope this is the Cadillac of hot water heaters, because this is actually more than my car cost.

It’s going to cost about $10,000 to replace the HVAC system. It was so bad the water got all the way up, ruining the Verizon Fios box. So they lost internet as well.

Luckily, the water line came up to the bottom of the breaker box, but it only hit the bottom three breakers. But if the water was any higher, I don’t know what would have happened. You touch the water, you get electrocuted. I’m not really sure. But luckily, the water was not electrified. So there’s one saving grace.

One thing that’s unique about my strategy is that I do rent by the room. All my other rentals are in D.C., where the rent by the room is possible because a lot of 20-something young professionals are moving into D.C. and an apartment building where the one-bedroom or studio is over $1,000 a month is out of reach for a lot of these people.

Renting out a room for $800 makes more sense for them. But properties in D.C. are so expensive. So I went on the MLS to look at where else I could do this rent by the room strategy. And I found this college town. So I figured, let me go check out this college town. And when I looked on the MLS, this property came up on the market. It’s a five-bedroom. For lack of a better term, it’s a rooming house.

But the problem is, if you look at the FHA guidelines and government-backed mortgages, rooming houses are not financeable. So this property is impossible to get financing on.

I called over 100 lenders, reached out to people on the Internet, sketchy lenders that I don’t know what they were doing, but no one would give me a loan on this property because it’s a mix. It’s zoned single-family residential, but it’s a rooming house, so no residential mortgages would be available for this property. And the commercial lenders didn’t want to touch it because it’s zoned single-family residential. It’s in this purgatory state.

There was one local bank that luckily Russell had introduced me to, this local lender, and he was the one guy in town that didn’t tell me no. So I was able to get a commercial loan on this property and take it down.

But I didn’t like the terms of the commercial loan. It was 5.5% interest. It was amortized over 25 years. It was 25% down. It took a lot of my cash to make it happen and there was going to be a three-year call.

I wasn’t really interested in reporting my finances every year. And it was like they were babysitting me because they did their due diligence on this loan.

I was able to take another property that I had owned since 2003 that I owned free and clear. I was able to put a mortgage on that and then basically pay off this commercial loan and get myself out of the commercial loan terms.

Advice for Other Real Estate Investors

I told you about this deal, told you about this house. I told you about some of the bad, some of the good. But now I want to tell you about some of the things I’ve learned along the way.

One is that you have to think holistically, like I was talking about before. I was talking about how I was swapping mortgages out on different properties, things like that. You have to be able to look at your whole portfolio, put it all together, and look at everything portfolio-wide, look at everything holistically.

Another tip that I have is what I call maximizing and stabilizing and optimizing properties.

When I buy a property, sometimes I inherit tenants, sometimes I don’t. Sometimes the previous owner was billing back the utilities to the tenants. Most of the time they aren’t. So I always bill back the utilities to the tenant. Add up all the utility bills, divide by five, and then use my property management software to bill back to the tenants.

That saves me about $500 to $600 per property per month by billing back to utilities to the tenants.

And the final thing is something that everyone’s going to tell you, and you’ve probably heard it a million times before. But I just want to reiterate how important it is to do tenant screening.

I’d rather have two or three months of no cash coming in from that vacant room than signing a 12-month lease with a problem tenant. Save yourself the stress and drama. Do the tenant screening.

The tenant is going to pay for it. You put it in the rental application that the tenant has to pay the $40 or whatever it is for the tenant screening. It’s no cost to you. And don’t compromise on your tenant screening rules.

I did all of this in two years with three properties on a meager government income. It’s not like I was a doctor or a lawyer. If I can do it, you can do it.

How do you deal with unexpected property ownership hurdles?

Tell us how you’ve balanced the good with the bad in the comments.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.