Section 8 & where to buy investment rental property

Real Estate Investing Podcast

Investor Tom Durhan discusses his approach to real estate investing and shares how much it typically costs to get rent ready, inflation, and Tom tells us what percentage he’s achieved over the last 10 years.

Brett Bernard: So I’ve got Tom Durhan with me. Tom Durhan’s, a friend, He’s also an investor. I just recently sold 21 of his houses and just sold another seven?

Tom Durhan: Eight.

Brett Bernard: Eight. And then you’re buying another.

Tom Durhan: You helped me facilitate buying seven. Yeah, You’re seven are definitely busy.

Brett Bernard: So, anyway, Tom’s a, a local guy, He’s an investor here in Memphis. He, he’s also a contractor. He’s, he’s buying, he’s selling, he’s rehabbing. So he. He’s doing a little bit of everything. So I wanted to bring to, in, first of all, I wanna understand your philosophy cuz you know, five years ago if I mentioned Frayser to anybody, their hair would stand up. Like, nah, I’m not interested in buying a house in Frayser, and rightfully so. There’s certain areas of Frayser, just like any other part of Memphis, that they’re just kind of hairy and you know, can get kind, kind. Kind of rough.

Tom Durhan: That’s true.

Brett Bernard: But a lot of what you purchased in the last four or five years has been around the Frayser market. So what was your reasoning behind that?

Tom Durhan: Well, honestly, Brett, the biggest issue is finding a house that has good value to it. You can buy at a decent price that will cash flow well, and Frayser’s been very good in that aspect. There’s really good areas of Frayser that you can buy at still decent prices and as long as you fix your house up nice, you can get some quality tenants.

Brett Bernard: Okay.

Tom Durhan: I’ve had very, very good long term tenants.

Brett Bernard: You’ve got lot of Section 8 tenants.

Tom Durhan: I have, I’ve had a lot Section 8 but I’ve also had some, regular tenants as well and they’ve all been good except for one, which I won’t speak of.

Brett Bernard: Well , yeah, well we talked about that one. we, well, yeah, I met all the tenants, especially in that 19 house inspection, and they were all phenomenal, in my opinion. You’ve had some, some women that have been there 10 years.

Tom Durhan: Yeah.

Brett Bernard: And the houses are in great shape and well taken care of. But you know, Section 8 has its drawbacks.

Tom Durhan: It does, It does. But they do the inspections every six months. So it really helps because if they do the inspections, you’ve gotta keep the house up and if the tenant’s a problem, you can usually figure it out pretty quick.

Brett Bernard: Right, and I wanna get into Section 8 with you in a minute, because I know 10 years ago investors got away from it.

Tom Durhan: They did.

Brett Bernard: And for, for obvious reasons. But I wanna know what’s changed about it in recent. So, let’s talk about the Frayser market since you’ve seem to be there a lot. Your typical house in Frayser, you’re gonna buy at what?

Tom Durhan: I would say depending on the state of it, anywhere from 30 to 70,000.

Brett Bernard: And how much do you typically put into that property to get it rent ready?

How much do you typically put into a property to get it rent ready?

Tom Durhan: Again, it varies, but I would say on average, probably about 20,000.

Brett Bernard: Okay.

Tom Durhan: And right now the rents there are between 800 to a thousand a month for a three one.

Brett Bernard: So you pick yourself up $60,000 house, drop 20 rent into it, and get 850 a month. Your ROIs looking pretty decent and

Tom Durhan: 895. 995, yeah.

Brett Bernard: And the rent values continue or continue to go up in Frayser, and you know what I noticed the last time I was in Frayser, which was actually yesterday, is that most of the streets I go down, there’s a construction dumpster in the front yard of at least one or two houses on that street.

Tom Durhan: That’s correct.

Brett Bernard: Which tells me that Frayser’s at the beginning of what happened to Raleigh three, five years ago where you could pick up a house for 70, which is now worth 110,000. Yes. So when you go in and you buy, say you buy a house for $50,000, you put your 20 in it, what’s your, what’s your projected all, What do you, what do you want out of it? Are you looking for the 1%? Is that what you shoot for?

Tom Durhan: Yes, I, I want to basically, whatever. Whatever I pay, I want at least 10% back after rehab. So 10 percent’s a minimum. So if I put 70 in, I want at least 700, which is easy. In Frayser, you’re gonna get eight, 900. So that’s a really good return on investment.

Brett Bernard: Now are you concerned about the inflation issue with with tenants and rent at this point?

Are you concerned about the inflation issue with tenants and rent at this point?

Tom Durhan: Well, what I found is the rental business is pretty much inflation proof because people always need houses, and if the economy’s not doing as well, I had rental houses in ’08 to ’09, and you know, the values went down, which I didn’t sell, I wasn’t worried. But no one really got behind. Everybody paid because people need places to live, right. So I haven’t had any issue with that at all.

Brett Bernard: So I, I, I listened to an expert, I won’t mention a news channel, but they were discussing the impact of inflation, gas prices and food prices on, people who rent. Or just middle lower income people.

Tom Durhan: Yes.

Brett Bernard: Basically saying that they could afford a thousand dollars a month, six months ago, but because of the current issue and the, the financials, their personal financials, they’re, they’re struggling to pay that thousand dollars so that you find them now pulling out of their current leases and going somewhere else and getting the house of 800. Are you seeing anything like that in your, in your market, in your. Rentals.

Tom Durhan: I haven’t yet, personally, but

Brett Bernard: Unless your tenants are getting, well, you’re using using Section 8 so, and a lot of ’em. So that helps.

Tom Durhan: I have a lot of section 8 Probably about half of my tenants are section 8 but I haven’t had really had that issue because again, if you take care of your tenants and your houses, you have a lot of long term. So my tenants incrementally have been increased over the years, but, Several of them that are good are still below market value, and they’re not struggling.

Brett Bernard: Okay. So far, let’s talk about section 8. 10 years ago, you mentioned section 8 to an investor. They’d turn white and just walk away like. Nope!

Tom Durhan: That was me 10 years ago.

Brett Bernard: My understanding is that the government was so hard on the landlords, but. Really just let the tenants do whatever they wanna do. If they destroyed a house, they destroyed a house. If they broke a window, it is their fault, but you’re responsible for fixing it. If you don’t, they could revoke your, your MHA status.

Tom Durhan: Yes. Right? Yes, that’s correct.

Brett Bernard: Did you have a lot of that?

Tom Durhan: I didn’t. And. I started out slow with MHA and I’ve built up where it may be more than half my portfolio now at this point, but I’ve had really good success with it because they’ve, it’s been, some of my better tenants have been MHA I mean, I can think of one on ones I met were She’s great.

Brett Bernard: Yeah. The ones I met were, I, yeah, when I did the inspections at the bottom, I, I put a little note about, About the tenant to myself. So I remember, and you know what’s funny is that 9 outta 10 of those I put at the end of it excellent tenant. Like, cuz I enjoy like, I can’t remember the lady, there’s no lady in the brown brick house. I think it’s on Dun, maybe.

Tom Durhan: Miss, Washington.

Brett Bernard: Yeah, yeah, yeah, yeah, yeah. She sat in her literal room like 45 minutes and just talked. Yeah. I mean she was just the sweetest lady.

Tom Durhan: She’s a hoot.

Brett Bernard: So. So section 8 for those of you who don’t know what Section 8 I can’t imagine, if you’re an investment, you don’t. Section 8 is where the government pays all or a portion of disqualified tenant’s rent. And so the, the positive side is it’s guaranteed cash flow. You’re getting paid.

Tom Durhan: Well, and keep in mind, you can still screen them. You can still screen the tenant credit to make sure their credit’s good, their criminal record, their background, you know, have they been, you know, forcibly evicted three times so you can.

Brett Bernard: The government doesn’t do that?

Tom Durhan: I don’t know

Brett Bernard: Before they enter the MHA program?

Tom Durhan: I have no idea. I’m just being honest. I don’t know how they qualify people Okay. Or what they do, but I know that the magic companies do qualify them, and so the ones that I use, I, I haven’t had a problem.

Brett Bernard: Okay. So compared to 10 years ago, what, how. How is the MHA section 8 program changed? I’ve noticed that, and this is just my observation, is that MHA is paying more than, I mean, they’re paying top market rent. If top market is 1200, bottom is a 1,000 I tell my investors Plan on 1,050 because that’s what you’re gonna get. But on MHA they’re popping $1,200 all day long and they approve it. So you’re getting top rent.

Tom Durhan: And I’ll give you an example. I just bought a house on Cleford, it’s a two one and it’s a nice house. we got a voucher for 927.

Brett Bernard: Wow.

Tom Durhan: Two one. I mean, it’s a nice house, but. $927 that’s really nice, and it’s in Frayser.

Brett Bernard: What’s caused MHA to bump the rents the way they have to be more competitive with other investors?

Tom Durhan: More competitive. Yeah. So they could get the decent houses for their tenants.

Brett Bernard: Before you put in, you know, garbage shacks and

Tom Durhan: Right. And they’re having all kinds of problems with landlords being able to keep up the house cuz MHA does care about their tenants, you know. So they do want to get a quality house.

Brett Bernard: So they’re so MHA is now competing with investors.

Tom Durhan: Right. So because investor rents have gone up, MHA rents have gone. Which is really beneficial for us, the owners.

Brett Bernard: Right? So MHA is a housing authority, national housing. It’s a government agency and there’s funds that are allotted every year for them to assist low income people in rental properties. Just for those of you who don’t know who they are. I have more and more investors that are getting into the MHA or the Section 8 now, because of the rent they can get, the guaranteed payments, and the type of tenants they’re actually ending up with. So if you’re considering MHA out there, I would, I would seriously look into it because I find it to be a little more stable than just getting a, an average tenant off the street.

Tom Durhan: I agree. And I’ve heard a lot of horror stories, but I haven’t had ’em, and I’ve, I’ve had a lot of MHA tenants over the years.

Brett Bernard: Well, let me ask you, from an investor’s perspective. What’s the one thing in all your rental properties that is a constant, something you’ve always, you, you just have to, to deal with? Is it plumbing?

What’s the one thing in all your rental properties that is something you always have to deal with?

Tom Durhan: Plumbing. Plumbing, heat and air. Heat and air are the two big ones, because you, and when it’s super hot, if you have an older system, you’re gonna have problems. Same thing. Plumbing, stopped up, drains. Toilets that are running. Those are the kind of things.

Brett Bernard: Do you find that most stopped up drains and stuff like that, are the tenants?

Tom Durhan: A lot of it is.

Brett Bernard: Do you require them to to pay for that or do you just take care?

Tom Durhan: A lot of times the first time I’ll let ’em get off with just the like, Hey, there’s a toothpaste cap down here, this drain. We’re gonna take care of this time. Next time you’re gonna have pay $80 for us to come out and remove this. Please be more careful and they’re usually respectful of that.

Brett Bernard: Okay. Cool. Let’s move on to to, to more of your, your portfolio. How many properties do you have now? I know you had, We sold 21 of ’em, but.

How many properties do you have now?

Tom Durhan: We’ve actually sold 29.

Brett Bernard: 29. Wow.

Tom Durhan: So when all the dust settles, I’ll have about 40.

Brett Bernard: Yes, cuz we’re, we’re picking up seven now. Actually nine more.

Tom Durhan: Nine more from you. And I’ve got two more from a wholesaler I buying, so that’s 11.

Brett Bernard: Okay. And then so you’ll add that to what, what do you have left from your old stack?

Tom Durhan: Not much. I’ve really bought a lot of property this year. I bought a lot of property.

Brett Bernard: And what are you buying? I mean, where are you buying ’em at?

Tom Durhan: If you can find ’em? Whitehaven’s a great area for rentals, obviously. East Memphis. Believe it or not, because I needed more appreciation, I’ve actually bought a house in Bartlett, a house in Lakeland, a nice house in Raleigh that’s right on the edge of Bartlett. But I bought a lot in Frayser and a lot in Whitehaven. If I can find deals there I have, They don’t scare me at all.

Brett Bernard: So we get a lot of investors out of California, Utah, all around the country that are, that are b uying, and they, they, they talk to other people that invest here and they’re told, Stay outta Frayser, they’re told, Don’t go here. What would be your advice to those investors who are just nervous about going into a market where they’ve been told that sh they shouldn’t be?

Tom Durhan: Well, I think the biggest thing is they have to have a realtor they can trust like your Brett. Like, I trust you and I, you bring me a house and you’re like, Hey Tom, this is a decent house. I know I’m gonna check it out, but I know I can count on that. And I’m not gonna be, you know, surprised. Oh, well Brett was wrong. That’s the key. You need a good realtor that’s gonna steer you to good areas, because like you said earlier, Frayser, can be great, also can be scary. There’s parts of Frayser that haven’t rebuilt yet that I would not invest in. So the key to that is if you’re out of state, out of town outta the country, you call a guy like Brett, I strongly recommend Brett and then you have him scout out and find the properties for you. There’s still deals here, especially in those areas.

Brett Bernard: Yeah, and yeah, you can call me at (901) 692-7401 and my, my phone’s on twenty four seven. Just cuz you call me doesn’t mean you have to use me. But if you’ve got questions about the Memphis market, I’ve been in real estate a long time. I’ve been in the Memphis market for a while and I understand it. I’ve met guys like Tom, I have other investors that, that have different philosophies. You know, my goal as an agent is always to guide my investors who aren’t from here down the path of reeducation when it comes to investing, because let’s, let’s face it, a lot of people still use an old, old method of investments. You know, market value doesn’t matter. It shouldn’t matter if you’re, if you’re buying and holding long term, why does it matter? Because all it matters to you. If you go and invest a million dollars on a Taco Bell, all you care about is how much money it’s gonna make you, and you need to view your rental properties that way. If you’re all in , you wanna have a basis for buying and fixing up and renting. You don’t wanna just go out there and, and, and blow the doors off and buy a 300,000 house or rents for 1500 a month.

Tom Durhan: Yeah.

Brett Bernard: But at the same time, value should not be the key factor. Income should be the key factor.

Tom Durhan: That’s exactly right. You really, cuz you look at Zillow in Frayser, some of these houses they’ll say are worth 60,000. But they’ll rent for 800, 900. So I may pay 60,000 for it, which according to Zillow’s market, but I’m coming out way ahead and that’s gonna appreciate, believe it or not, that’s gonna keep on appreciating through the years. Not that I care much cuz I’m a buy and hold, but I’m gonna make decent money on that house.

Brett Bernard: And there I just gave away one of my tips, cause in our previous episode we were talking about getting an agent that knows how to negotiate on your behalf, knows how to be aggressive against cash offers, and let me tell you one of the tactics that I use: use escalation clauses.

Tom Durhan: Those are good.

Brett Bernard: It’s very simple and let’s say the Zillow or CMA says the house is worth $60,000, but it rents for 850. You know what I’m gonna tell you? We’re gonna, we’re gonna offer 60 when an escalation clause up to 70.

Tom Durhan: Smart.

Brett Bernard: Because if you get it at 70, you’re still in. You’re still in for 850. Guess what? You still exceeded the 10% rule that most investors are hunting for. So be created with your offers and get you a good agent that knows how to be.

Tom Durhan: Right, And don’t use Zillow as the gospel for your investing. You cannot just look at Zillow, but oh no, I’m overpriced. I’m overpaying. You gotta look at the dollars and cents.

Brett Bernard: Well, to be a good savvy investor in today’s market and in today’s times, you’ve gotta get away from the value.

Tom Durhan: That’s right.

Brett Bernard: Because values, and I don’t, You can, you can take the oldest real estate expert in the country and put ’em in front of me and I will argue with him that values are immaterial when you’re investing in real estate. They’re just immaterial. They’re not as important, because what’s gonna happen is if you look at the history of real estate market, it’s a stair. It goes up. Flat lines goes up, flat lines, drops, then exceeds it’s previous number, and then flat lining. It just continues to go up. So long term, you’re gonna be fine.

Tom Durhan: You are and the values are going to go up. Just like those Frayser properties I’ve sold, I was buying ’em $20,000. Selling at 80.

Brett Bernard: Yeah, no, I know. 10 years ago. What is your overall, what do you think your overall, percentage of return on those properties in 10 years was?

What do you think your overall percentage of return is on those properties in 10 years?

Tom Durhan: 300%.

Brett Bernard: 300%? Get that in the stock market. Never gonna happen. All right, Tom. Well, look man, I appreciate you coming on and, and talking to me about your, your business. I, I was always wanted to ask you the question about Frayser, but I, you and I don’t ever talk about

Tom Durhan: That’s true.

Brett Bernard: We don’t have time to talk about it if we’re always doing, doing business together but I appreciate you coming on man.

Tom Durhan: Thanks for having me, Brett. Then I love working. You appreciate all your hard work.

Brett Bernard: Thank you man. This will wrap up our episode. If you want to talk further to me, you can call me at (901) 692-7401. It’s on 24/7 I am going to my boat this weekend, so if you can’t reach me tomorrow, it’s cuz I’m out on the water sleeping.