Landlording & Rental Properties

Meet the Investors: How I’ll Retire on Income From Just a Few Properties Featuring Ron Gallagher

Expertise: Real Estate Deal Analysis & Advice, Real Estate News & Commentary, Real Estate Investing Basics
48 Articles Written

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.

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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. 

Related: Meet the Investors: I Quit My Government Job to Do Real Estate (& Never Looked Back) With Tanya Salseth

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. 

Related: Meet the Investors: From 1 to 37 Rental Units in Under 2 Years

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.

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 How do you deal with unexpected property ownership hurdles?

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

Alex has spent his career in sales and finance industries and now invests in rental real estate along with working in the underwriting department at a bank in Las Vegas. Alex is an expert in long-distance single family rental real estate, debt and leverage strategy, and financial analysis. He spends most of his free time teaching investors through writing and coaching to ensure their best possibility of success. Alex has been buying real estate for nearly three years and currently owns eight single family houses. He also helped fellow investors directly purchase over 20 properties in 2018. Alex’s writing can be found at BrokeIsAChoice.com, and more of his story can be heard on the BiggerPockets Podcast episode 301.
    Garrett May Investor from Cleveland, Ohio
    Replied 24 days ago
    Thanks for the inspiration.
    NA Jordan
    Replied 23 days ago
    Wow, this article reminds me that I'm an expert in the buy and hold field. On my worst investment, my ROI is 20-40% rental income profit. My last 2 deals - I bought 2 fourplexes for under 160k. Increased rents by 40% and equity by 30-45%. Another foreclosure I bought years ago, I made the condo association pay for 90% of the rehab cost then I sold it for 2.5x what I paid for the home:) On average my renters stay with me for 7yrs. Lmao, someone should write an article about me.
    Kevin Murray
    Replied 21 days ago
    Does NA stand for needlessly arrogant?
    Seth Hochberg
    Replied 21 days ago
    HAH!
    Ritch Shepherd Specialist from Indianapolis, IN
    Replied 23 days ago
    I don't see how this is much different then renting to college students. My roommates and I, all signed individual leases and were responsible for our own utilities. Also, how is screening for multiple tenants better then screening to find one good tenant for 12 months? I find one good tenant and sign them for a 2 yr lease, and workng with one tenant vs multiple for the same property reduces issues.
    Armando Gomez
    Replied 23 days ago
    Awesome info for room remting, had a question for rental insurance for each tenant, how would that work to protect their personal property? Investor and Realtor in So Cal
    Lori Bernardo
    Replied 23 days ago
    My co worker who inspired me to go into travel nursing and invest in real estate did something similar. She rented rooms in her home in a college town. She said she lived there but was only had to be there so many days out of the year. This was really to get the tax free stipends in travel nursing. I am also assuming it helped with the financing as she could say it was her primary residence. There is always a way around financing. I bought my home fo 9k and did a complete remodel owner builder. My husband is in construction. I couldn't get a loan due to a forecloser when my home was upside down and bank backed out of my short sale. I borrowed from my 401k. I didn't want to pay rent any more. I am now debt free. I invested in stockmarket and want to do more real estate investing.
    Michael Haynes Investor from Tampa, Florida
    Replied 22 days ago
    Hello Alexander Felice. There are a thousand ways to sking the R.E. Cat and you found one. I live in Tampa, Florida where we don't have basements that flood. You that have basements should know the history of flooding in your area? No?? Don't you have ways to prevent that from happening, like water sealed windows, big outside door that is also waterproof etc. I worked on oil tankers and all ships have sump pumps with alarms in the bilge to alert when water builds up in the lower holds. Maybe that is a new business that someone could start up in those areas with basements. The cost of replacing your water heater etc. looks like three times what we pay in Florida. I studied and worked in the Oil Field in Louisiana and Texas where we had Rooming Houses or Workingman's Hotel houses that were usually run by old widowers. They were able to charge by the Day. $10 a Day to stay in a clean room with the bathroom down the hall and parking in back. Same kind of two story, wood frame houses that you showed. There were all kinds of them in downtown St. Petersburg when I got here 35 years ago. I stayed in the same kind of house in Ft. Lauderdale when I was working in a shipyard there 35 years ago. In Houma, La. the owner lived next door and his son ran the show. In Ft. Lauderdale the owner had an old guy living in one room and managing the show. I have seven Kitchinettes in Brazil and my girlfriend runs them. I rent by the month with no long contract based on one Minimum Wage per month. The idea is to have two people split the rent to make it affordable. I have light meters for each Kitchinette and the Water is a flat rate. The way to have control over any Eviction problem is to register as a Hotel. Then, you can just call the cops and get them out. Like the Motel guys do. Airbnb is what the world ended up with and Rooms to Rent. Same thing as Trailers. Great Cash Flow Cows.
    A Schwartz Investor from Raleigh NC USA
    Replied 22 days ago
    The rooming house sounds great on paper, but there is going to be more wear & tear. It might be mitigated if you let one roomer free rent to watch the place for you. On financing: you might have just said it would be your primary residence; moved in for a year, then moved out and rented out by the room.
    Jeff Bosaw Rental Property Investor from Saint Louis, MO
    Replied 21 days ago
    How do you convince tenants to split the utilities evenly on a shared house? what about when there are 3 out of 5 tenants in place? Do they pay more until someone else moves in? I guess it is small beans in the grand scheme of things. Even with tenant screening I still worry about the liability of rooming people that do not previously know each other. Another fear is co gender housing. Hopefully, your rental insurance would cover your butt...lots to think about basically managing a college dorm for adults.
    Ronald Rohde Attorney from Dallas, TX
    Replied 19 days ago
    glad it works for you, we do lots of room rental agreements as well. They are very specific and you need clear rules because of the shared space and shared duties. Parking and messes are a huge deal for renters as well.