Joe has been building his portfolio by renovating and adding value to his properties, pulling out the equity, and reinvesting into his real estate investing business. We’ve covered that with him previously, today he is going to tell us how to “tenant proof” our investment properties. Not only does Joe tenant proof his properties, he maximizes the ROI while doing so. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“All the flooring is pretty much indestructible, no plastic plumbing or fixtures” – Joe Cornwell
Joe Cornwell Real Estate Background:
- Realtor and investor for three years
- Owns 16 units through the BRRRR method
- Based in Cincinnati, OH
- Listen to his previous episode:
- Say hi to him at jcornwellATrealtyonestop.com
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
First off, I hope you’re having a best ever weekend. Because today is Sunday, we’ve got a special segment for you called Skillset Sunday. The purpose of this episode is to help you acquire or hone a skill that will be beneficial for you as a real estate investor. Today we’re gonna be talking about tenant proofing. Do you know what tenant proofing is? I didn’t when I looked at my notes for this episode, so I asked the guest, and the guest said — first off, guest, hello! Joe Cornwell, how are you doing, my friend?
Joe Cornwell: Good, how are you?
Joe Fairless: I am doing well. What Joe told me when I asked about what is tenant proofing – he said “Well, that is making the unit look good, but durable”, so that you’re not having to constantly replace things, and it’s just a better situation for them, because it looks good, but then you, because you’re not replacing things constantly.
We’re gonna be talking about tenant proofing and ways that Joe does that with his units. He owns 16 units through the BRRRR method, and he is a realtor, as well as an investor, and he’s been both for three years now. If you recognize Joe Cornwell’s name, that’s because you’re a loyal Best Ever listener. Episode 1330, and the title of the episode is “BRRRR 101, Real-life example of scaling using this famous method of investing, with Joe Cornwell.”
With that being said, how about you give just a little refresher of how you got to the 16 units, and then let’s get into the specifics of tenant proofing.
Joe Cornwell: I started, like you said, about three years ago. I picked up a duplex after about 18 months of searching for a good deal, just outside the city of Cincinnati, in a little suburb. It was a massive renovation project, like most of my other buildings I’ve purchased. I did the entire renovation, and I was able to pull out most of my capital in that process, and that was really what opened my eyes to the value of the BRRRR method, the construction, tenant-proofing, and just the general ways you can add value by bringing units up to the top of market rents by making them better than anything that they’re in competition with.
Joe Fairless: So you are self-managing, correct?
Joe Cornwell: Yes.
Joe Fairless: You’re self-managing, you’ve got 16 units, and you have a primary residence, and then you don’t rent that out, right? You don’t house-hack that…
Joe Cornwell: Right.
Joe Fairless: …but you have the 16 units across Cincinnati, Ohio that you have tenants in.
Joe Cornwell: Yes. I have two duplexes, which – the new duplex is my current project, and then I have two six-units side by side in Eastgate, which is just East of Cincinnati.
Joe Fairless: Cool. Two six-units and two duplexes… And you do the work yourself to get the units ready to be rented…
Joe Cornwell: Some of it, yeah.
Joe Fairless: Some of it, okay. So what do you do, versus what do you hire out?
Joe Cornwell: Basically, at this point I have pretty steadily about two full-time contractors that work for me, and then a lot of the specialty stuff I’ll sub out myself. I do generally general contracting, as far as the hands-on work; there’s only a few things that I really do, and mainly it’s just because I enjoy it, or it’s high-dollar stuff that I can do myself and save quite a bit of money.
Joe Fairless: What’s in that category?
Joe Cornwell: Electrical. On this new project, the duplex, I’ve done a lot of the electrical the work, I’ve run a lot of the wire myself, because those are things you’ll typically pay an electrician $100/hour to do, but at least here in Cincinnati, Hamilton County, if you’re doing the work yourself, you can pull your own permits, and then you can do the work yourself and save yourself quite a bit of money… And again, it’s something I enjoy. I don’t really need to do it necessarily to make the deals work, but if it’s something I enjoy and it saves me a ton of money, then I’ll do it.
Joe Fairless: So let’s talk about tenant-proofing. I gave a summary of it, but I’m sure I short-changed a little bit… So how are you defining tenant proofing?
Joe Cornwell: Even to back up a little bit from that, I look for highly distressed properties, especially my duplexes, so the things under five units… I look for something that I can basically gut down to the foundation and the frame. That is the ideal property for me. Because I know, going from that point, if I get it torn all the way down to nothing but bricks and sticks, so to speak, I can do everything the way I want it done, and I know that the final product when the house is completely renovated is gonna be extremely tenant-proof, it’s gonna be extremely efficient, it’s gonna have all new mechanicals, all new plumbing, new electrical, new HVAC, and I’m not gonna have any problems for 10, 15, 20 years going forward, other than maybe minor wear and tear stuff. So that’s why I look for these properties in general, but more so as far as the tenant proofing, that is when I go through on our actual cosmetic finishes and I make everything as durable as I can, while still looking great for the tenant.
I put in tiles, I put in vinyl plank flooring, the stuff that’s scratch-resistant or scratch-proof in all of my areas, so I don’t have any carpet that’s gonna get torn up. Pretty much all my flooring is relatively indestructible, even for large dogs, and kids, and things like that, that cause more tear on a rental property… So I don’t use any of the really low-end fixtures, I don’t use anything with plastic as far as plumbing pieces… Everything is brass fittings, brass valves, so that stuff doesn’t go bad and leak. That’s typically where you’ll see your maintenance in-calls, and things like that.
Again, with replacing all the mechanicals – water heaters, HVAC – I’m not gonna be getting called out for a new water heater three months after I finish the construction project.
Joe Fairless: So you replace all the mechanicals, usually?
Joe Cornwell: Yeah. Especially on this current project.
Joe Fairless: Okay. And you don’t do plastic plumbing or any fixtures, so it’s brass fittings, brass valves…
Joe Cornwell: Yeah. Some of the really low-end plumbing fixtures, if you see chrome with the plastic handles, so to speak – I’m sure you’ve seen those in certain properties or buildings – that stuff is very cheap, and that’s why a lot of landlords choose to buy those, because they’re looking at that dollar amount… But when you have to call a plumber or a contractor out (or yourself) to fix things that are leaking constantly, I’ve kind of done the math over time, in the three years I’ve been doing it, and to me I’d rather spend $50-$75 on that plumbing fixtures – and then obviously new showers, and things like that, you may be spending $150 – but it’s gonna save me so much time and effort, and my time, in the future, when things aren’t going bad.
Joe Fairless: And in terms of the vinyl plank flooring – have you ever had any complaints about not having carpet in, say, the bedroom?
Joe Cornwell: I have not to this point, and I think it’s the market we’re in, at least here locally. A lot of people are transitioning away from carpet, not only in retail housing, but even in rental properties… So I think it’s just kind of the sign of the times, so to speak; because if I was in this business 10-15 years ago, it would have been a lot more common to have carpet, especially in the bedrooms.
Joe Fairless: Sure. Any noise complaints from people who are on the first floor, from people on the second?
Joe Cornwell: I don’t, and part of the reason why, going back to my initial point, is I actually insulate all of my common area floors. If I have a bathroom let’s say above a kitchen, I’m gonna actually insulate that entire [unintelligible [00:08:35].07] cavity because I don’t want those noise complaints. Nobody wants to be sleeping and hearing toilets and sinks running in the middle of the night, or people walking around. So anything I can insulate for sound-proofing, I will, and it’s really not that much more money to not ever have complaints for noise.
Joe Fairless: How much is it to insulate the common area flooring?
Joe Cornwell: You’re just talking the cost of your actual rolls, how big your cavity is. You’re gonna have to buy some higher R-value, which is thicker insulation… But let’s say all-in, with a 1,700 sq. ft. house that I’m working on right now, with labor, materials, maybe $1,000-$1,200. It’s really nominal when you’re looking at not having to deal with any complaints for 30 years.
Joe Fairless: And you said you also have tiles… Is that just an entryway?
Joe Cornwell: All my wet areas. Any kitchen, bathrooms, anything where there’s a sink or water, I will put down a ceramic tile.
Joe Fairless: Okay. And the cosmetic finishes that you want to look good – have you gotten any comments from potential residents about things that they thought looked good?
Joe Cornwell: Oh, yeah. I will say that almost every tenant I’ve placed in the past three years has been a renter in the past, pretty much, so they do have some experience renting from other similar landlords, and every single one of those has commented on how my units in contrast look way nicer, and they’re willing to pay that top of market rent to have a nicer, more well-kept building… Specifically, I usually put in new cabinets; it’s like a white shaker cabinet, so it’s probably you’re seeing in flips nowadays, so it’s a little bit higher-end cabinet. I put in a nice, laminate, flat top countertop, so it almost looks like a granite, but it’s not, and it’s a lot cheaper; I don’t do any formica. And then I always do a tile backsplash in all of my kitchens.
Just these little things that really aren’t that much more money, tenants look at as just an extreme value, and they’re willing to pay that little bit extra for rent to have something nicer than, let’s say, what’s next door.
Joe Fairless: What are the rents you’re commanding? And maybe if you wanna get specific to a certain property, compared to what the competition is commanding.
Joe Cornwell: Okay, so a prime example would be the Eastgate six units that I was talking about. When I bought those on the front-end, the first building was averaging around $475, and the second units was averaging around $450. These are one-bedroom apartments. So all of my new units post-construction are being leased at $625.
Joe Fairless: Wow.
Joe Cornwell: That gives you a range of the value being added… And obviously, those are commercial, so we’re working off a cap rate. It’s a pretty extensive increase in value when it’s all said and done.
Joe Fairless: Yeah, it certainly is. And how much would you say you’re putting into the unit in order to get that increase of $150 or so?
Joe Cornwell: If we are doing a full gut, basically all the way down to the walls – leaving the drywall, but everything other than the walls, we are right around $8,000, and that’s for everything; new paint, new flooring, new fixtures, new kitchen and bathroom. If I have to replace all the appliances, we’re closer to $10,000, obviously… But it just depends on those things. As far as just the actual material and labor, it’s usually around 8k.
Joe Fairless: So let’s say you average a $150 rent increase, you multiply that by 12, that’s $1,800, and let’s say worst-case it’s $10,000. That’s 18% return on your money, and if it’s $8,000, it’s a 22.5% return on your money.
Joe Cornwell: Exactly. And as you mentioned, I’m a realtor, so I work with a lot of other investor clients, some in state, some out of state, and I kind of explain this process to them, and a lot of them don’t see the value, and saying “Well, why would I wanna spend 8k-10k to renovate a unit if the tenant is happy?”, and it’s not whether or not the tenant is happy; it’s, like you’ve just said, you can increase your ROI on that specific unit by 18% or 25%. I think that second six-unit, right now my cash-on-cash is like 27%. So you can add a lot of value, even within just maximizing the potential of your own building, and sometimes that’s actually a better return than looking for a new deal with that cash you have available.
Joe Fairless: And then if you go to exit – if you go to exit – your value, if you’re working on a commercial property and you’re working with cap rates, then that income is gonna exponentially increase the amount that you’re gonna get for the property.
Joe Cornwell: Exactly. Just on that second six-unit I bought last year, I’m all-in with my renovation loan and purchase loan at 303k, and my exit (either on a refi or a sale) would be around 440k. That would be the market value.
Joe Fairless: That’s great stuff. Anything else specific that you do to — we called it “tenant-proofing” at the beginning, and I think that it is not doing it complete justice, because not only is it tenant-proofing meaning you’re getting things in there that are durable, but you’re also maximizing the rents and your ROI on the project too, because you’re getting things that look good, but are durable, therefore you’re able to spend efficiently and get a good ROI… But anything else that we haven’t talked about that you do specifically to a unit?
Joe Cornwell: No. I think the main point to this whole system I’ve been working on here is that you wanna look for these highly-distressed buildings. And again, I work with a lot of investors, so I have a good idea of what’s going on with the market, and you have a lot of investors, especially new investors, who are terrified of buildings that are distressed; they want things that are turnkey, which is great, and there’s certainly a market for that, but you’ll never be able to generate the value that we’re talking about unless you’re finding these deals, whether they’re on or off-market, unless you can go in and actually do the value-add through the construction.
I think right now, in the current market we’re in, with values as high as they’ve been selling for, this is the only real way you can create high value with your properties – to do the construction end of it… Whether you are hiring it out, obviously, and there’s certain challenges with that of course, but I think that’s really the focus to creating a good deal, because you’re not necessarily just gonna find a good deal like you could 5-6 years ago.
Joe Fairless: Anything else you wanna mention that we haven’t talked about, as it relates to this topic?
Joe Cornwell: No, I think that’s it.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Joe Cornwell: Best way to get in touch with me is e-mail – firstname.lastname@example.org.
Joe Fairless: Awesome. Tons of value today, thank you so much for sharing your business model — or really your business plan, which ties into your business model… And some specific ways that we can renovate our units, so that it is cost-effective and we’re maximizing the ROI through these cosmetic updates, but that are still durable and really have the wow factor for the resident, and the long-term durability for us as owners.
Thanks for being on the show again. I hope you have a best ever weekend, and we’ll talk to you soon.
Joe Cornwell: Thanks for having me. See you.