Turning a “Failed” Property Into a $7K/Month Rental

Tony :
This is Real Estate rookie episode 421. My name’s Tony j Robinson, and welcome to the Real Estate Rookie podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, today’s guest, Kaylee George was able to save her real estate deal from foreclosure by listening to this show, the Real Estate Rookie. What a crazy story. But after listening to one of our podcasts, she was able to pivot to a new strategy that not only saved her deal, but offered her 100% more cashflow, and it’s called Sober Living. So today we’re going to learn from Kaylee’s trial and error of jumping into this new asset class by breaking down her first sober living deal, understanding where Ricky should start when it comes to sober living, how she screens tenants and manages this property, and how you as a rookie can take action today to get started. So Kaylee, super excited to have you on. Welcome to the Real Estate Ricky Podcast.

Kayley:
Thank you so much, Tony. I’m so excited to be here. I’ve been a listener for years and this is really a dream come true to be here right now.

Tony :
Well, look, you’ve listened to a lot of episodes, you’ve gotten value from other folks now. Now you get to pay it back to the rookie community, be the person’s here in some good knowledge as well. So I think maybe the first place that I want to start, right, because there’s a lot to unpack here, but how did the Rookie podcast save your real estate deal?

Kayley:
Yeah, so it was actually a crazy story and a crazy journey that I’ve been on since that episode came out just about a year ago. And so to take you back, I had bought this house, this really big old giant colonial style house, and I had visioned making into some kind of fourplex. I was just kind of thinking some kind of traditional rental. And then when we got into it, and we can go into all the crazy things that happened once you get into these old houses, but once we got into it, I realized this is not going to work. I thought it was going to work, the numbers aren’t going to work, the renovation’s not going to work. We are going to have to pivot and do something completely different. And so it was about a year ago that I was listening to the episode with Devon and Reed and they were talking about sober living.
And I had never heard about sober living before. I had no idea what it was I just heard in their podcast episode and I was like, that is what I need to do. And so I took it, I ran with it, and today I have a sober living home that I’ve been running for almost nine months now, and it’s been a crazy, crazy journey. I’ve learned so much. Just trial and error got thrown into the fire and I really want to share with the listeners all the lessons I’ve learned along the way going in as someone who had no idea what they were really doing.

Tony :
So let’s talk a little bit about this deal. You said it was like a massive property, I guess, big colonial thing. Maybe walk me through what the initial plan was for this property and why it necessarily didn’t work the way you planned it would.

Kayley:
Yeah. I live in Waco, Texas. This is a really big old colonial house, 4,500 square feet. I just got enamored with it because it was so old. I think it was built in the 18 hundreds. There’s even a little spot at the front of the house where you can type your horse. That’s how old the house is. That

Tony :
Is. So I just got to add something. Kaylee. I always trip out because I’m on the west coast and the city that I live in, my entire subdivision didn’t even exist until 2017. So when I hear people investing in homes that were built in the 18 hundreds, I can’t even begin to imagine how big of an endeavor that would be. So didn’t mean to interrupt there, but it always goes in mind when I hear 18 hundreds,

Kayley:
They don’t even know exactly the date it was. They put like 1900 on the appraisal district, but they’re like, we don’t really know. It was probably sometime in the 18 hundreds. And so you can type your horse. It took me a long time to figure it out, but there’s also a place where you can clean off your boots at the front. And so I was in love with this really big house. I thought it was beautiful. I wanted to bring it back to life and I found it on the MLSI got it for, it was listed for 250. I got it for 175,000. So I thought I was getting a steal. I thought I was getting this amazing historic home. But then when you get into these houses, you just never know what actually is underneath the surface. And so as we got in there, of course this is a house that it kept getting added onto and added onto.
So there’s the original house and there’s all these extra bedrooms that they added on. We discovered so many things like when we started tearing down all the walls, there were fireplaces everywhere that we didn’t know about. The biggest surprise though, was there was a swimming pool underneath the house. And so when we were getting in to do the foundation work, they had built this whole house on top of the swimming pool. So no wonder the foundation wasn’t any good. So we had no idea about that. We had squatters, we had a homeless community there we had to deal with. It just became a way bigger project than we could have ever thought going into it. And so our numbers just ended up being way off when we started really getting into the renovation. And then also just our timeframe started getting longer and longer and longer with all these different things that kept popping up, all these different setbacks, dealing with the squatters, dealing with the animals that came in the house. It started to get really expensive.

Tony :
Yeah. So let me ask a question, Caleb. Was this your first real estate deal?

Kayley:
No, I would never have done this as my first real estate deal. I’ve done single family, I’ve done duplex, I’ve done triplex. So I’ve done a little bit of small multifamily, but nothing of this size.

Tony :
So it felt like a natural progression for you as an investor at that point in your career because I mean, that’s what I was going to ask, what kind of gave you the confidence to take on such a big job and you listed potentially everything that could go wrong when you’re doing a renovation, you found out foundation issues. I’ve never heard of a pool being underneath a home that’s a first, squatters animals, everything that goes wrong. So I guess what was your renovation budget and what had it ballooned to you before you started to feel like, Hey, maybe we need to do something different here?

Kayley:
So our original renovation budget was around 125,000. And I think what really set us back though was the time that it took us to actually get this done. And so I had a hard money loan, actually still have a hard money loan. We’ll get to that. The financing part’s been really interesting at 15%. And so that’s just what really starts to kill you and eat away at your numbers that you budgeted when it starts going from six months to, it ended up being nine to 10 months before it was done and all the different fees that tack along with that. And so yes, our renovation went up a little bit, but it was really just the time that it took that really ate into all our numbers.

Tony :
But you are able to get through the rehab, you’re able to restore this 4,000 square foot behemoth. What was the initial strategy? You said maybe turning this into multifamily, I think you mentioned. What was the strategy and why did you deviate away from that?

Kayley:
Yeah, yeah. So I originally envisioned it being a fourplex because it’s a really big two story house. It kind has a central area that you walk into. It actually has a payphone in there that’s pretty cool too. So it has this central area and it kind of divides off from there. So I envisioned it off into four different units and I was thinking about a thousand dollars for each unit. There’s a lot of different bedrooms and bathrooms in the house, so I thought a fourplex would be the right way to go. But again, just as we got through all the renovations and all the numbers, I realized 4,000 isn’t even going to cut it at this point for our rental income. And so I was just freaking out. I didn’t know what to do. And it was on a drive to Dallas that I listened to that podcast with Davina and Reed and I said, sober living. That’s it. That’s what we have to do. And as soon as I finished that, I got to my hotel. I Googled sober living homes in Waco, and I found a list. I reached out to the first one that was a women’s home. I thought, great, I’d love to do a women’s home. I contacted them and two days later I was at their house having dinner with them and we were making a plan to turn this into a sober home. It happened so fast and it ended up just all the pieces fell into place.

Tony :
I want to get into how you were able to coordinate this and how you pulled the seal together, but maybe just give me the quick numbers on the sober living facility and how it compares. Had you tried to go down the traditional long-term rental route?

Kayley:
Yeah, so I’m thinking again, it would’ve probably rented about a thousand dollars per unit, and so $4,000 total. But doing it this way, we’ve been able to massively increase the cashflow. And so the rooms, it’s rented out by the room now. You can rent it out by the bed. Some people do that too. We just had enough space to where we could give everyone their own room and they really like that. But some people do it by the bed too. So we’ve been able to do it to where each room is about 700 to $900 and we have nine rooms. And so when it gets to full capacity, we’ll be making between seven and $8,000 a month compared to 4,000. So we’ve doubled the cashflow or doubled revenue, and it really didn’t take too much work to pivot and make this change with the construction.

Tony :
What an incredible story, Kaylee, and I’m sure everyone’s salivating right now trying to understand, man, how can I double the cashflow for my long-term rental? And I want to go in depth about not only how you set up the sober living home, but how you’re managing it on a daily basis as well. So again, this is the continuation almost of the episode we had with Devon and Reed and you’re kind of taking this baton and running with it. So we’re going to get into how you set it up, how you managed it right afterward from our show sponsors.
Awesome. So we are back with Kaylee George who just broke down the incredible numbers on the sober living facility, her first sober living facility where the traditional long-term rental was only 4,000 bucks per month, but stabilized. She’s looking at seven to eight, potentially more on the sober living model. Now, first thing I want to say is I love the sober living model because it truly is a win-win win for your tenants because they’re getting a safe place to say as they go through what could be a difficult time in their lives. And it’s a win for you as a landlord because you’re able to maximize revenue on a property that maybe otherwise wouldn’t make sense. So that is the definition of a win-win. But I guess from your perspective, Kaylee, what do Ricky’s need to think about before actually jumping in? Because everyone hears the numbers and I think that’s going to get everyone excited, but what do we need to know before jumping into sober living?

Kayley:
So I think there’s three things that I want to highlight that I think everyone really needs to do their research on and really be prepared for before they jump into this. It is very easy to get that shiny object syndrome, see the numbers, get enamored with this idea, but it’s a lot of work and I really want to emphasize that throughout this podcast. So first things first, you need to know if there’s a demand for it. And so that was the first thing I did. I googled, I saw what was in the area and what I wrote in my email to this organization was, Hey, I have this home. I see you have a sober home for women. Do you need more space? And are you looking to expand? I would love to partner with you. And so they emailed back right away and said, yes, we’re bursting at the seams.
We need more beds. And you have to remember, these are nonprofits. They don’t know how to buy properties, they don’t know how to get into real estate. And so they’re typically limited on what they can do. And so it’s a great partnership for someone who knows how to invest and make these properties available to these organizations. And so just knowing if there’s even a demand, there’s a lot of big cities that are kind of tapping into sober living. It’s getting really popular. My town, we just didn’t have a lot. So up until now, there are only 17 beds for women here in Waco until I opened my home. So there was definitely a demand. So I would start there, find the organizations, find the people, know what’s out there.

Tony :
Kaylee, before we go on, I just want to ask one follow-up question. I think it’s a really interesting point to make because as a short-term rental investor, I can go to different websites to pull kind of demand on short-term rentals to see how things are going. Same for multifamily, same for traditional long-term rentals. I guess there. Have you found maybe a good data source in addition to just calling and Google searching, or do you feel that’s the best approach?

Kayley:
I feel like that’s the best approach. You really got to dig into this world and get to know the organizations, get to know the people. That’s how you’re going to find out what’s going on. I don’t think there’s any data out there as to what’s available. Again, in Waco it was 17 beds for women, 60 beds for men. That’s all we had. And that’s just what I found through Googling and talking to these people. I don’t think this is kind of the wild, wild west. Sober living is still so new and there’s really not a lot of information out there. So talking to people is the best way to find out what’s going on.

Tony :
So you mentioned talking to people, and maybe this leads into one of the other points you were going to bring up, but you had a unique pitch when you reached out to them. You said, Hey, I want to partner with you. Not, hey, I’m looking to build my own and I would like you to mentor ’em, but you said a keyword. I want to partner with you. What made you choose to partner as opposed to just getting the knowledge and trying to do it by yourself?

Kayley:
So in that episode with Devon and Reed, what was different for them is that they came from a background of working in the recovery space. I knew nothing about this industry, nothing about this world. And I knew I wouldn’t be able to do it a service. I don’t know how to work with these types of tenants. I don’t know how to screen them. I really don’t know anything. And they are the experts. They’re the ones who are embedded in this. They do it day in and day out. They know what they’re talking about. And so I knew it needed to be a partnership because I couldn’t go in on this alone. I don’t even know anything about recovery. And so I think that, and that’s one thing I really want to emphasize, that if you don’t know anything about this, you have to find the right partnerships. Whether that’s an organization, a person who’s been in this world, a person who’s come from recovery and came out of that, if you don’t know anything, please, please find a partner because it’s almost impossible I would say to do this on your own, especially when it comes to the tenant management side of things.

Tony :
So networking then played a big part. So you worked with the nonprofits. Were there any other maybe strategic partnerships you sought out that helped you as you went on this journey?

Kayley:
I have networked all over the city, and so that was the other thing I was going to talk about is I really see this as a business. I have to go out and network and market. I do that continually. I was doing it today and I have networked in local business organizations with the city, any of their resources, police, parole officers, nonprofits, churches, salvation Army, pregnancy centers. I have reached out to anyone and everyone if they work with single women, I have talked to them. And so I had to get the word out. I couldn’t just open the doors and people would come flooding in. I had to get the word out. And so I really see it as a business more than a rental property. It is a hands-on investment that takes work.

Tony :
And I think that’s true for all of real estate investing. I feel like some people are not maybe fed a false narrative, but I think we live in the age of sensationalism where you got to have the crazy headlines to get someone’s attention. And I feel like because of that, people underestimate or maybe don’t understand the fact that investing in real estate is still building a business. And just like any business, there are certain things you have to do, even if you have a property manager, it’s not truly passive because you have to manage the property manager. So there’s always some level of involvement. So I’m happy to hear you say that. A few really good points that you’ve found on so far, Kaylee. I guess are there any other things Ricky should know before getting into sober living that you want to highlight?

Kayley:
I think just going along the same idea of this being a lot of work is I would just recommend people be careful with jumping into this because it is a really sensitive population. They’re in a very vulnerable place in their life. This is not something that you can just throw out and hope it works. The women, they are working so hard to stay sober on top of all the other challenges they already have in life. And so I just really want to emphasize, please take this seriously. Please be careful with what you’re doing because these women or men are in probably the most vulnerable state in their life and you really have to take care of them when you’re going to do this type of investment.

Tony :
And I appreciate you sharing that. Devon and Reed echoed a very similar sentiment when they were on the podcast as well. And you’re absolutely right. This is a very difficult time for many of these folks and obviously there’s a financial incentive for us as the owners of these properties, but we also want to make sure that we’re doing them a benefit as well. Now, one other question that kind of jumps to my mind Kaylee, is what about the location? You’re in Waco, which is a decently sized city, but how are you identifying where within that city actually makes sense? Are you looking at long-term rents to try and identify where the long-term rents make the most sense? Is there another data point you’re looking at? How are you determining the location?

Kayley:
Yeah, so that’s a really important piece you brought up because location, I didn’t realize this until I had already bought the property and it ended up working out, but location’s really key. So one thing I didn’t realize before getting into this is that most of, at least the tenants in my house don’t have transportation. I think one out of the seven girls we have has a car. And so if you’re going to do this, you definitely want to look for inner city and obviously inner city in an area that’s safe, but inner city and that has access to public transport and walkable to grocery stores and convenience stores and stuff like that. I just happened to work out that mine was in that type of location. Waco is kind of hit or miss on a lot. It turns good to bad in one street, but I would really recommend that I see people, there are types of sober livings that kind of go out in the country, but they’re more of a retreat style where you’re going there for intensive therapy. So that’s a different type of model. But if you’re doing something just like your general sober living, make sure it’s inner city and very accessible.

Tony :
And I think that’s a really good point because you have to think about the demographic of the person that’s coming into your property and they’re more likely to pick a location that is amenable to their situation. Right. Now going back to this nonprofit partner that you identified, I guess what resources did you gain by seeking out that partnership?

Kayley:
Yeah, so we kind of played around a lot with how the partnership would look at. First I wanted to go the easiest route possible and I said, Hey, will y’all just rent this for a flat fee for me for a year and just a traditional lease and they don’t have the money to do that, and it’s understandable they’re a nonprofit. And so I had to scratch that and work with them to figure out a different way to approach it because they were about to call it quits. They said, we can’t afford, it’s going to be like $6,000 a month. And they were like, we can’t afford this. We’re just going to call it quits. And I said, hold on, let’s think of another way to do this. And so I kind of just went the traditional property management route and I said, well, what if I give you a cut of what we bring in every month and in return you help me run it, you help me screen and manage the women and kind of act like a property manager, but I really feel like they do so much more than that. And so that’s how we ended up doing it. And so they get 10%, which is how much you typically pay a property manager, but again, they go above and beyond that and in return they get money that comes into help fund their organization.

Tony :
It’s interesting because they say that they couldn’t afford it, but yet the numbers very clearly show that had they done this themselves, they could have afforded it potentially even more. So I guess where was the disconnect on their end to believe that maybe they couldn’t figure that piece out on their own?

Kayley:
It was the initial risk of paying and not having the women in. And so they couldn’t take that leap of I’m going to pay five, $6,000 and just hope we get it filled. They couldn’t take on that financial risk. And so yes, they would’ve paid less and maybe got a better deal out of it, but they can’t afford that. And so ultimately I’m taking the risk. We’ve had fluctuations in tenants and vacancies, so there is that risk there and we’re going to talk about expenses. Everything’s just more expensive when you’re doing this type of model, but that’s where the disconnect was, is they couldn’t just make that leap when we didn’t have it full yet.

Tony :
And I think that brings up another really important point, Kaylee, I appreciate you bringing this up, is that you can get as creative as you want when you are negotiating leases both as the landlord and the person who’s renting. I’ll give you an example from the other perspective. So again, we mostly focus on short-term rentals is what the majority of our portfolio is and most of our properties we own, but we do a little bit of rental arbitrage. And for those that aren’t familiar, rental arbitrage is when you approach a landlord and you sign a lease with that landlord, but then you sublet that unit on Airbnb, you’re making the difference between your rent payment and what it’s generating and revenue on Airbnb. Now, we had never done arbitrage before, and it was actually a friend of mine who reached out to me offering me three units in his 12 unit apartment complex.
And I told him, I was like, Hey, I don’t really know the area. It was in Texas and I’m in California. I don’t really know Texas too well. And we had never done arbitrage before. So what I negotiated with him was the base rent was I think like 1500 bucks a unit, and what we agreed to was a base rent of $1,000, but then they would get the first $500 of profit on that unit. Anything above that I kept for myself. So it gave me a little bit of security to sign up for this 12 month lease because I know, hey, worst case scenario, it’s only a thousand bucks per unit versus 1500, so I’m saving across all three units, almost 2000 bucks. But on the upside, they still get their full rent if it’s there. So for all of our rookies that are listening, be creative like try and problem solve because Kayla, you could have just thrown your hands up in the air and said, oh man, they don’t want to do it. I guess this is the end of the road, but you found a solution and given what you shared, 10% does seem pretty reasonable, right?

Kayley:
Yeah, they are doing the work. I mean, I’m still putting in work all the time, but Jen is her name. She runs it, man. I probably see a scratch on the surface of what she deals with at that house, so I’m so grateful to her.

Tony :
So Kaylee, I know for Devon and Reed, they had a slightly different model where I don’t believe they had a true property manager overseeing their homes that just promoted someone who was already living in the property to be the house manager. I guess. Is that the same, or I guess how does that compare to the strategy you’re doing? Do you have the PM and the house manager or just the pm,

Kayley:
Right? Yeah, so there’s a lot of different ways you can do it. And like I said, this is the wild wild at West. There’s so many ways you can make your house run. And so the way we have it is we actually don’t have an in-house manager. It’s actually pretty common. You have one, but we don’t just because we actually ask for a minimum of six to nine months sobriety before coming into our house, and that’s because we want them to be more stable. We want them to have a job, we want them to be able to pay rent. A lot of people think there’s some kind of government city subsidies that help pay for rent. There’s nothing These women pay all on their own, and so we want them to be a little bit more on their feet. So we’re not taking people straight from rehab, straight from jail, straight off the streets.
There are sober living homes that do that, and that’s when you’d probably need an in-house manager if you’re going to take people who are really, really early in their recovery. For us, we were able to do it where we don’t have to have someone in-house. So those are the different ways. You can have a manager. You can either have someone who comes from an organization that is running a sober home. You can have an external manager that kind of runs it without being there day to day. Or you can have someone who’s an in-house manager, which is typically someone who’s actually been living in one of these homes and they’ve graduated and they know the dynamics of how it works.

Tony :
Kaylee, I want to get into how you are screening these sentences and what that process looks like. But before I do, just one last question, and I don’t know if it’s different from state to state or county to county, but do you need any kind of licensing to label yourself as a sober living facility?

Kayley:
No, that’s the crazy thing. It is so new. There is no, at least in my city, in my state, there’s no regulations. There are no federal regulations either. Anything you want to do would be optional. So there are associations that you can join and they have standards of what a sober living home should meet, but those are all optional, and I am not part of those. You do not have to opt into those. They really just give you good guidelines, but it’s really a free for all I’ve been saying. You technically do not have to follow any certain rules.

Tony :
Okay, let’s get into the actual tenant screening. I think the first question is where are you going to find potential tenants?

Kayley:
Your biggest source of tenants is obviously going to be rehabs, people coming out of recovery. So you want to network with all the local rehabs and any other sober living organizations because if they’re full, they’re going to turn to you if you have availability. The sober living world you’ll learn is a very tight-knit community, and so everyone knows each other and everyone knows what homes are out there, what’s available. And so that’s why, again, I recommend getting plugged in with someone in this space because they’re going to have the network and connections. And so that’s where we’ve got the majority of our women. I also connected with the city and they have a rehabilitation program. So instead of say someone gets charged with something instead of going to jail, they put ’em in a rehabilitation program. And so we’ve got two tenants who have come from the city, and that’s been a great partnership with them. And so they can really come from all different places. I also market online on marketplace, on Craigslist. You just never know where you’re going to find people who are in need of a place. And so I would expand your reach really, really far, but your best source is probably going to be first and foremost, all of your local rehabs.

Tony :
Now, are you the one that’s reaching out to these rehab facilities in the city, Kaylee, or is that the nonprofit, the property manager that you have in place?

Kayley:
We kind of tag team it. So she already is really connected with all those, just having her own home already. And so she gets phone calls, she gets leads on her own, and then I do my part just kind of networking in the city. I email, I again, posts on social media. I recently reached out to all the different property management companies in the city and said, Hey, if you have someone who’s a single woman looking for a place to land and meets these criteria, please send them my way. So I do my part, she does her part. We really tag team and try to spread our net really wide

Tony :
Now because my mind’s thinking this, so I’m assuming that maybe someone else’s mind might be thinking this as well. So like you said that you emailed folks in the city. What is the basic content of that email look like? If a Ricky wanted to replicate what you did, reach out to their local city to try and find some potential leads for sober living, what should we be saying and how do we position ourselves?

Kayley:
I mean, there’s nothing fancy to it. I just find emails. I have a flyer, I say, Hey, this is our house. Here’s pictures and our rental rates and stuff like that. And I just say, Hey, if there’s anyone that you come across who would be a good fit, please call us. Please send them in our direction. So there’s no specific rhyme or reason. I’m just, again, throwing things out and hoping someone finds us who really needs the help.

Tony :
So let’s get into the actual screening portion. So you have all these different ways as you’re bringing in potential leads when someone actually reaches out and says, Hey, I’m interested, what does that screening process look like for you?

Kayley:
So it’s completely different than your typical rental screening. We’re not doing any of those traditional applications, background checks, credit checks. If you do that, you’re never going to have a tenant in a sober living home. And so almost everyone has a background. Everyone has bad credit, everyone has bad rental history. I’m not trying to stereotype, I’m just telling you what’s common in that demographic. And so we don’t do any of that. We’re not trying to look for that all we look for. Our main thing that we’re looking for, and again, this is why it’s helpful to have someone who has worked with these type of people in recovery, is we just want to know that they’re serious to their recovery, serious about their recovery. They’re committed to staying sober, they’re willing to live with other people, and they’re just serious about making a change in their life.
And so that’s where you just have to read the person and be able to pick up on those red flags and really just get a sense for the person. We do have a really basic application, obviously getting their history of where they’ve lived and where they work and anyone who can vouch for them. But it’s a very simple application and we only do a hundred dollars security deposit because again, you’re not going to get someone who’s able to pay $900 plus $900 in rent. It’s just not going to happen. So our bar is pretty low, but we do have a lot of standards and criteria once they’re in there. And that’s all in the lease too. We do have leases, so we expect a lot from them, but our screening is really just to see are they committed and we’re going to give them a chance, but we give you a chance and if you screw up, we are going to have to kick you out. That’s our process. Everyone of course is going to look different, but that’s ours.

Tony :
What are some of the red flags that maybe someone should be looking out for?

Kayley:
Yeah, that’s a good question. I would say just instability with their sobriety. We will check in with, for example, their parole officer. A lot of ’em are on parole, probation. We’ll check in with them, we’ll check in with references. There’s all kinds of red flags with people in recovery. And honestly, a lot of the girls, they hold each other accountable. And so if someone’s showing some signs that they might be slipping back or having some relapse, they all keep each in line. And so it’s hard to say just because I don’t come from that world, and that’s why it’s kind of nuanced and you really have to know, kind of see through what people are saying on the surface. But I would just say people who don’t have a stable job and don’t have people that can vouch for them, those are some big red flags.

Tony :
Now is this a face-to-face interview that you’re doing with folks or is it over the phone or Zoom? How are you actually conducting or trying to pick up on someone’s commitment to their sobriety?

Kayley:
So we kind of do it in a roundabout way. So they’ll fill out the application and from there we’ll invite them to the house to do kind of like a showing. And so we’ll show them the space and at that time, that’s when we ask them some questions, kind of dig in a little bit more, kind of inadvertently try to ask those questions that might give us a clue as to what’s really going on with their situation. And so that’s our steps. And then they pay their security deposit, they sign a lease. Again, we’re not normal in that we ask for a lease, but that is something I wanted to do just to get them used to how a typical rental works. I wanted to help ’em get on their feet and teach them, okay, you have to stick to your rent and you have to pay it the first of the month and you have to pay. I wanted them to help reintegrate them to those things that they’re going to have to do eventually down the road.

Tony :
A lot of good information here, Kaylee, and I’m excited to keep going down this rabbit hole with you here, but I know you’ve got some mistakes that you want to share as well, and I think there’s always a tremendous amount of value that folks can pick up from here and other people’s mistakes. So we can hopefully avoid those. But first we’re going to take a quick break to hear a word from our show sponsor. Alright, so back with Kaylin, she just went over her tenant screening process with how she screens the tenants and how she finds them. I want to get into maybe some mistakes that you’ve made along the way, Kayla, but before we do, I’ve got one last question. You mentioned this briefly before the last break, but you talked about having expectations for your tenants once they’re actually inside and that you put that into the lease. So what are some of those expectations and why do you feel that those are important?

Kayley:
They’re so important. I don’t think we can really understand what it’s like for nine women to live together in a home, but it is a lot. And I alluded to this at the beginning, but the manager, Jen, yes, she deals with the screening and that process, but I would say the majority of her time is actually just managing drama. And so when you have that many personalities, when you have that many people who again, are kind of a tough stage in their life, there is drama, there is fights over fridge space, there is fights over trash cans. We actually had to have the police called recently because there was a fight over a trash. There is just so much that happens when you put all these women together, and I love them all to death, but it’s just a lot when you put it all together.
So we have a very strict rules. We have kitchens. Everything is labeled, kitchens are labeled, bathrooms are labeled, trash cans are labeled. Everything is labeled. You get assigned per your room, you get assigned a certain fridge, fridge, space, certain trash can. You have different laundry days that you’re assigned to. You have different days that you’re assigned to do lawn work. They have pretty strict schedules, and I think that’s also good for them, again, because it’s important for them to have a routine and learn how to cooperate with other women, how to communicate. And again, just kind of get back into the real world. So we do have really strict standards. And then of course on the recovery side, we’re doing random drug tests. Anyone who is showing any suspicious signs of relapse, automatic drug tests, and we’re holding them accountable on the recovery too. And so all of that is laid out in the lease that they sign. And so we just want to set the expectations from the beginning to minimize as much drama and conflict as we can. But of course, it’s still going to come up.

Tony :
So Kaylee, I am pretty sure that Devon and Reed, and again, we’ve mentioned them a few times, guys, but if you go back and listen to episode two, six five, two hundred and sixty five, we have Devon and Reed on and they talk about their sober living experience. But if I recall correctly, I think they say that all of their homes are for men. And I think part of the reason why was because they had a lot of challenges with, and again, not like you said, not trying to stereotype, but factually speaking, they just had some more challenges having a house full of women as opposed to a house full of men. So I totally understand that. And as always, I think putting the expectation in the lease helps reduce friction. So even if it needs to be a little bit beefier, hopefully it helps solve some of those issues. So let’s get into maybe some of the mistakes, Kayla, that you feel like you’ve made going on this journey because how long has the house actually been operational as a sober living home,

Kayley:
We brought in our first tenants October of last year. So what is that, 7, 8, 9 months?

Tony :
Yeah, about nine months or so. Yeah. Okay, cool. So you’re getting close to a year. So eight, nine months into this thing. What are some mistakes you feel like you’ve made along the way?

Kayley:
I’ve made so many mistakes, and if I could go back and do it again, I would do so many things different. But I think the first thing when I opened up, I was so focused. We were so focused on the renovation that when it came time to open, I didn’t even think about all of that networking stuff I talked about. I didn’t do that until afterwards. And my biggest mistake was not doing that beforehand because I opened up and it was crickets. And so I wish I had started a wait list and talking to other owners of sober living homes, that is what they did, and I didn’t know to do that. Just a side note, again, I networked with a lot of sober living owners in Dallas and Houston and Austin. It’s a very great community and they’re all willing to help. And I took tours of their places and learned what they did and learned their tips and tricks.
But I would say start a wait list. Get the word out long before you are even close to being done with your renovation if you’re renovating it. So wait, list maintenance, again, this is an older home, but we’ve had so much maintenance just because it’s an old home, there’s a lot of women in there, and you’re just going to get more wear and tear than a normal house. And so we were getting maintenance all the time, like texts and messages and all these things, and we just learned to consolidate that. And so what we did is we made a whiteboard, we put it in there and they put their request on there, and every Friday our handyman, he goes and just checks the board on Fridays and takes care of everything. And so that eliminated a lot of pressure on Jen because she wasn’t getting blown up with the things they would put on. There is a light bulb is out, a screw is sounding squeaky. And so we had to really teach them here is what is an emergency, here is what is not, please put it on the board, we’ll come on Fridays and we’ll take care of it. And also just teaching them to learn how to do some things on their own too. So yeah, maintenance. And then I think we should dive into the financing and appraisal part because that’s been the biggest obstacle that I’ve ran into.

Tony :
Right. You said you’re still in the hard money right now. Walk through that challenge. What’s been holding you back from being able to refinance out of the hard money?

Kayley:
And so I was going to say, I think that’s honestly a big testament to the fact that this is such a great cashflow models because I’m cashflowing even at 15% interest rate, which is insane. But the biggest thing that I really didn’t understand going into this is that appraisers and banks do not understand sober living at all, and they don’t want to touch it because it’s foreign to them. It’s unconventional. They like to put their money in things that they understand. And so that’s been the biggest challenge. I just saw dollar signs. I saw cashflow. I thought this is going to have no problem appraising as some kind of multifamily situation, and they did not understand how to do that. So I’d got a commercial appraisal done. They didn’t really understand it, it came back low. Then I said, okay, well maybe I’ll do a single family appraisal.
Maybe it’ll work that way. That didn’t work out either. So I’ve spent almost three grand on appraisals. They didn’t come back where I needed, but it’s really just because they don’t understand the model, they don’t understand the cashflow, and they see it as really risky still because they don’t understand it. And so I’m currently just waiting it out. There’s a lot of local banks who I reached out to, but they want to see one year of rental income. And so I’m kind of just waiting to get to that one year mark and revisit it when I have more stability to show them. I think they just want to see stability. They want to see consistency, which I understand, but that’s been the biggest thing. So going back, if I were to do this again, I would have it refinanced, appraised, get all of that done as a single family home before moving into having it rented out to a sober living model. I even was told that by different investors, banks, they were like, you really should have just done this a normal way. And then kind of behind the scenes, add another kitchen if you need to and add another bedroom here if you need to. But don’t do that and expect the appraisers to understand what you’re doing. They don’t.

Tony :
Let me ask Kelly, you said the square footage is like 4,000 square feet or something to that effect, right?

Kayley:
Yeah. We ended up building out four kitchens, nine bedrooms, and they didn’t even know what it was. They’re like, is this single family? Is this multifamily? Is this commercial? We don’t even know what it is and we don’t know how to value it.

Tony :
Interesting. So that’s where the issue is at. Because again, you said initially you were trying to make it into a fourplex, right? So you have all these different spaces. So that’s where the challenge is at. Gotcha. How many banks would you say you’ve spoken with?

Kayley:
I always try to hit up local banks. Again, they’re going to be the most supportive and understanding of what you’re doing. So I’ve reached out to every big bank here in Waco, and again, just kind of buying a little time right now. Again, it’s not losing money. I’m just not making as much as it could be. So I’m just trying to have my books look really good. And that was another point I wanted to bring up is you need a really, really good bookkeeper, but I’m just really getting my books in line so I can come back to a bank a little bit further down the road and say, Hey, look at what this is doing. Here’s all my leases. Here’s the proof. And give them a little bit more to go off of when I am ready to refinance again.

Tony :
Well, Kaylee, I learned a ton from this conversation. I’m sure a lot of our rookie audience did as well. And in the same way that you and your car heard Devon and Reed’s story, our hope is that someone is listening to Kaylee George right now. Then they’re going to be on the podcast a year from now saying It was Kaylee’s episode that got me into this. So really appreciate you coming on and sharing all your insights. We talked about why the cashflow is so much better for sober living. We talked about how to source and screen tenants, the beauty of partnerships within this space, and like you said, some of those common mistakes that folks should maybe look out for us or going on this journey. So Kelly, appreciate you coming on today. If you guys want to get in touch with Kaylee, we’ll have her contact info in the show notes of today’s episode.
So if you’re on your Apple Podcast player, check there. If you’re on YouTube, check the description of the video, whatever podcast player you’re on, check the notes somewhere. You’ll find her contact info. But that is it for today, guys. My name is Tony Robinson. I appreciate you hanging out with us, and I’m going to see you guys on the next episode of Real Estate Rookie. So guys, if you want to listen to the episode that inspired Kaylee, go over to episode 265 of Real Estate Rookie was Devon and Reed, where they break down how they built their sober living business portfolio. If you want to hear great guests just like Kaylee, go to your podcast app, search real estate rookie, and hit that follow button as it helps us grow and find better guests. If you want to get your own copy of The Richest Man in Babylon, head over to biggerpockets.com/classic books. This BiggerPockets podcast is produced by Daniel Zarate, edited by Exodus Media Copywriting by Calico content.

Ashley:
I’m Ashley. He’s Tony, and you have been listening to Real Estate Rookie.

Tony :
And if you want to be a guest on a BiggerPockets show, apply biggerpockets.com/guest.