How Detroit Rental Properties Can Produce Strong Cash Flow With Section 8

Michael Evans (00:00)
Here’s the thing that we learned through COVID is that it was the first time really in US history that as a landlord, you could have a valid lease and your tenant could not pay you and you could not legally evict them. No one had managed for that risk. And so, here’s the thing, though. If you were a Section 8 landlord, you didn’t miss a payment. And so— and so, we— we specifically said, “We are going to target Section— creating turnkey Section 8 rentals.”

Issa Hanna (02:13)
Welcome back to another episode of the Real Estate Pros Show. I’m Issa Hanna, and today I have Michael Evans, a Detroit investor who’s using Section 8 and retail investors to scale his business to a whole ‘nother level. Michael, welcome.

Michael Evans (02:28)
Thanks for having me.

Issa Hanna (02:30)
I’m glad to have you, man. And I’m glad to pick your brain. Detroit is definitely a city that— that people kinda miss. Like, that, you know, it’s not on their radar. So, I’m— I’m glad that you’re here to kinda give people the— the rundown on Detroit. But for people that are at home and— and don’t know what you do, can you kinda give us a rundown of what you’re doing?

Michael Evans (02:52)
Sure. So, I’m the president of The BNIC, and we operate a real estate investment management company where we manage real estate deals on behalf of investors, but only for properties in the city of Detroit. So, we effectively become the investor’s business manager, managing all aspects of the real estate deal from acquisition to rehab to tenant placement, to property management, all the way to disposition.

Issa Hanna (03:23)
Wow, so basically, you guys— the investor gives you this money, you run with his money, you get the property bought, rehabbed, rented out, and then cash flowing for them, and all they gotta do is just hand you the money. What a genius, genius, genius idea. I mean, you’re making real estate investing easy, and— and people that got money, they— they want things to come easy. So, I definitely commend you on— on a great idea. I wanna ask, how did the idea get started?

Michael Evans (03:50)
Well, so I’ve been in real estate investment since ninety-seven when I got paid fifteen thousand dollars to buy my first house. And in the early two thousands, I actually bought a house— it was a pre-construction, and it was a four hundred thousand dollar property.

Issa Hanna (04:00)
Okay.

Michael Evans (04:17)
And I put $3,000 down. And it took them 18 months to build my house. So, this was in 2003. And if everybody remembers, in 2003, property values in California were going sky high. And so, 18 months later, the— the property value was 600,000 when I actually closed on the property. And I closed with a total of seven thousand dollars out of pocket. And so, turned seven thousand dollar investment into a hundred and eighty thousand dollar equity position. And so, I was like, “Hmm, I wonder, can I do this again?” So, I told two friends, “If you’ve got ten thousand dollars and a FICO score of six forty, I’ll double your money in six months.” And so, I proceeded to do this same type of thing where I managed the real estate deal on behalf of two of my friends. And for one friend, I turned 10,000 into 25,000 in four months. And the other friend, I turned 15,000 into 50,000 in six months. And so, I— I have a knack for building systems. I call myself a financial engineer. And so, I build infrastructure, financial infrastructure, financial systems. And so, this is one of the systems that I’ve built and managing on behalf of investors.

Issa Hanna (06:28)
Wow, what a— what a great story, origin story. The light bulb goes off, and you’re like, “Man, I can— I can make some serious money here.” And then your knowledge in the game, you’re able to speculate so well. Like you said, you put together a system where you know you can speculate, “Okay, I’m gonna cash flow this much.” And another thing that stuck out too is that you subsidize a lot of these properties through government programs like Section 8. Can you, A, explain why you do that, and then, B, explain the benefits of— of renting to Section 8?

Michael Evans (07:01)
Sure. So, I consider myself first and foremost a— a risk manager. And so, the systems that I build, I build from a worst-case scenario. And that’s actually one of the reasons why we chose Detroit. Is we said, “Where can we invest in real estate that currently cash flows, has great appreciation potential, and how do we manage the— the downside risk?” And so, Detroit fit the criteria because it had been downbeaten as a city for so long, right? It had the largest municipal bankruptcy back in twenty thirteen, twenty fourteen, but it came back out like gangbusters in twenty eighteen, rebuilding its entire downtown and then its entire waterfront. And— and then the developers kind of skipped over the inner city and went and played in the suburbs, left a huge potential in a city that’s— whose economics were reversing. And so, I did my analysis. I looked at every zip code in the United States. And we looking for the best cash-flowing zip codes based on the rent-to-price ratio. This is the monthly rent divided by the average sales price. You’ve heard of the 1% rule. Well, in— in Detroit, they generally do two percent. So, in twenty twenty, when we first started looking at Detroit, in the inner city, the typical properties were three bedrooms, one bath, one thousand square feet, and you could purchase and rehab for twenty-five thousand dollars, and then you could rent them for five hundred dollars a month, right? That’s a two percent rent-to-price ratio. Well, come 2023, that same property is now selling for fifty thousand dollars and rents for a thousand dollars a month, so double in price and double in rent, still has a two percent rent-to-price ratio. But here’s the thing that we learned through COVID is that it was the first time really in US history that as a landlord, you could have a valid lease and your tenant could not pay you and you could not legally evict them. No one had managed for that risk. And so, here’s the thing, though. If you were a Section 8 landlord, you didn’t miss a payment. And so— and so, we— we specifically said, “We are going to target Section— creating turnkey Section 8 rentals.” And in Detroit, they have two thousand more issued vouchers than they have of available properties. So, simple supply, demand— there’s more demand than supply. And so, from a risk management perspective, it was another way to manage the risk. And the other beautiful thing about Section 8 housing is in a recession, section— the demand for Section 8 housing increases.

Issa Hanna (11:19)
Right. Definitely. Yeah, no, man. Section 8 is definitely a way to go. As somebody who’s participated in the voucher program for some of my properties, yeah, they pay you— they pay you fair market rent. And— and one thing that a lot of people don’t like about— about government subsidies in Section 8, the yearly inspection. But I feel like that yearly inspection is great because it keeps you honest. Do you agree?

Michael Evans (11:46)
Definitely. Definitely. And it— and it stops you from becoming a slumlord. And— and— and— and that is the bad rap that Section 8 housing and Section 8 landlords have gotten over the decades, is that it’s a cash cow because the landlords don’t maintain the properties. And— and so Section 8 housing has changed over the years, and the annual inspection keeps you honest. And, you know, we’re also doing this, in all honesty, to— to help stop gentrification. Because I’m from Los Angeles, and I saw what happened after the ’92 riots in which, you know, central Los Angeles, in those areas, got gentrified, and where people got priced out of being able to live where they traditionally live. And so, our entire mindset is to bring out-of-state money into Detroit to where out-of-state investors can earn a higher cap rate than what they typically would in their home markets. So, I’m in Southern California where the residential investor is happy with a three to five percent cap rate. And we’re able to get them, you know, at least a double-digit cap rate while stabilizing rents. So, we’re not going in and making luxury houses and, you know, increasing the rent three or four times and pricing people out. We are stabilizing rents. And so, I use the term that there’s enough meat on the bone for everybody to eat.

Issa Hanna (13:41)
And, you know, in Detroit, these communities, they’ve been there forever. Just like in California, when— when it gets gentrified and you price these people out, this is generations’ worth of people in the same neighborhood. So, I definitely commend you guys on doing that. You’re fighting something that a lot of people have a huge problem with, and you’re fighting it smart because you’re bringing that money in, you’re saying, “Hey, we can make just as much money— the best cap rates in the country. You don’t have to price these people out. Here you go. Come make this money, I’ll show you how to make it.” So, I— I love that. I definitely love that. Now, I want to ask you a question, just because you’re a very seasoned investor. Detroit houses are old. Give me one time where you walked into a house and, you know, these houses are almost a hundred years old, and there was something that you didn’t expect that you had to— that you had to fix.

Michael Evans (15:19)
Yeah, well, so again, I’m a risk manager, and— and so I’ve not— not only have I developed a software system for managing risk, it’s our underwriting system. It’s the real estate deal management system. And so, that’s our— our— our first line of defense. And it basically— we put in our— our assumptions, and then it comes back “deal” or “no deal.” Very easy, very simple to follow. And if it’s no deal, then we either adjust the assumptions and make them reasonable, or we walk away from the deal. And so, we’re able to, you know, evaluate hundreds of properties per day using this system. And then if it— if it does say deal, then we validate the assumptions. So, before we even make an offer on a property, we go through and do our pre-offer due diligence. So, we send somebody there, we do a walkthrough, we take pictures, we take videos, and then we come back, discuss it with my partner on the ground, Great Lakes Property Management. They’ve been doing this for over 20 years, have more— have rehabbed more than 300 properties and has more than 300 properties under management for out-of-state investors. So, they have their turnkey system for creating these turnkey properties. And so, we’ve— I— I review it with them, we update the— the assumptions. And then if it still says deal, then we move forward with making the offer. It’s, you know, we do a refundable earnest money deposit that’s contingent upon it passing our inspection, and then we pay to have a certified inspector go in and do the inspection. And as part of the inspector’s report, they do a recommended repair report, which estimates the— the cost of doing the repairs. And then I get with my partner, and then we scope out the actual rehab, and then we update our numbers. And then if it comes back still green, then we close on the property. If it comes back that the rehab is more than what we thought, because through the inspection we found an issue, then we either renegotiate the terms with the seller or we say it didn’t pass our inspection, and then we fall out of escrow. And the only thing that— the only money that the investor is out of is the $500 inspection. And so, we have had a couple of properties where we were in escrow and then we did the inspection and then we found issues and then we had to fall out of escrow. So, we do everything to minimize risk. And so, not only do we have our computer system, we also have our policies and our procedures.

Issa Hanna (18:29)
Wow. Man, you’re— you’re a very analytical guy. The systems, everything you just explained to me— the risk management level is— I mean, the quality’s up here. And— and when people trust you to invest for them and and find them deals, and and are giving you money to invest, that’s the kind of stuff you want to hear right there. You know, “I’m a risk manager, I’m gonna make you money, not gonna lose your money.” So, I— I love that about you, Michael. So, five years down the line, I know you guys are— are pretty big right now. Five years down the line, where are you gonna— where are you gonna be?

Michael Evans (19:06)
Well, so our goal is to buy and to rehab blocks and entire neighborhoods. So, we’re going through a phase now where we’re acquiring distressed properties and then rehabbing them. But the ultimate goal is to become a developer and to negotiate directly with the City of Detroit and the Detroit Land Bank Authority to purchase vacant lots. Another some— one thing that people don’t really know is that— that the City of Detroit has set up a quasi-public agency called the Detroit Land Bank Authority. And it is the largest owner of property in the city of Detroit. At one time, it— at its height, it owned over 100,000 vacant lots and boarded-up homes. You can go onto their website right now and you can buy a distressed house for $1,000 with your credit card, right? And another thing most people don’t know is that if you own a property in Detroit, and next to this property is a vacant lot that’s owned by the Detroit Land Bank Authority, you can buy that lot for a hundred dollars.

Issa Hanna (20:07)
Wow.

Michael Evans (20:26)
Yes, it’s called their Side Lot Program. And if there’s a vacant lot that they own that’s within 500 feet of your property, you can buy that lot for $250. And— and so, our ultimate goal is to go in, acquire vacant lots, and to put manufactured homes on them, whether they’re 3D-printed, whether they’re modular built, or whether they’re container homes, and to re— revitalize and rebuild entire communities.

Issa Hanna (21:19)
What a future plan, man. I mean, that— I— I’m— you’re telling it to me, it’s unfolding in my mind, and I’m like, he’s gonna— they’re gonna have the whole— the whole of Detroit, you know, and you’re gonna keep people— the same people there. You’re not gentrifying it. I— I love that. There is another question I wanted to ask you. This closed private capital club that you told me about, where people can invest in it, you’re cooking it up. Can you shed a little bit more light on that?

Michael Evans (21:47)
Sure. So, The BNIC also operates the Closed Private Investment Network, CPIN. That is a members-only network of like-minded people who practice cooperative group economics, to where it’s not about maximizing individuals’ profit, but it’s about maximizing the benefit of the community that they belong to. And so, through this organization, we provide a lot of education, and so there’s over 40 online educational courses in personal finance, because a well-educated investor makes better informed financial decisions, and we stress managing risk. And by becoming a member of this organization and going through some classes, you can become what’s called a sophisticated investor. Once you are a sophisticated investor, then you can legally under SEC rules participate in our private placement opportunities. And so, for example, a— investing into one of the properties in Detroit maybe fifty thousand dollars, and you don’t have fifty thousand dollars, but what we do is we create a legal entity called a Special Purpose Vehicle, SPV. And what we do is we allow people to pool their money together in lots of five hundred dollars until we accumulate fifty thousand dollars, and then the SPV becomes the investor for that property. And so, you’re able to invest with as little as $500 into one of these properties. We also make it to where after an investor has invested their money, has created this performing asset, they’ll sell off part of their equity into limited, non-voting members of their real estate business. And so again, you’re able to buy part of this business in $500 increments, receive quarterly distributions of the net operating income based on your proportionate share of the equity.

Issa Hanna (24:11)
Wow. So you’re not just stopping the gentrification. You’re helping people empower themselves. As little as five hundred dollars you could get into a real estate investment, if you mess with Mike. That is first time I’ve heard something like that, man. I— I really, really want to applaud you. You’re a true genius in the game. And with that, for people that are just getting in and they’re watching us and they’re like, “Man, I— you know, I— I’m inspired,” what advice do you have because you’ve been able to build these networks, and you know, get in— you’re all the way in Southern California, and then you’re doing business in— in Detroit, Michigan. What advice do you have on our— for— for our viewers on building their business relationships, cultivating and growing their networks?

Michael Evans (24:53)
Yeah, so your— your net worth is— or your network is your net worth. And so, I encourage people to get involved with their local REIA, Real Estate Investment Associations, to go online. There’s lots of resources where you can learn about real estate investing; you don’t have to pay a whole bunch of money to get these coaches that charge $10,000 for a three-day session. You know, you can join— BiggerPockets is one of the places where I started building my network. And now there’s other free organizations where you can go and you can learn, and you can— and you can network. And you can always come to the Closed Private Investment Network. Membership is free to join; it’s free to take our beginner-level courses. And one important thing I want to note with The BNIC as a real estate investment management company, we never, ever, ever touch your money. So, that’s an important thing. We never have control over your money. We become the accountants of your bank account. We review payment requests, we review invoices, we make suggestions, but it’s always the investor who has 100% total control over the spending and investing of the money.

Issa Hanna (26:38)
Wow. I mean, you— you’ve thought of everything to make it super easy for people to just make some money. I mean, that— that is unbelievable. So if people are at home and they’re like, “I want to get involved with Michael right now,” where can they reach you?

Michael Evans (26:53)
Sure. So they can go to our website, thebnic.com.

Issa Hanna (27:01)
Nice, nice. Make sure you guys check it out. I mean, as a— as a fellow real estate investor who’s been in the game a long time, the things Michael’s telling me, you know, this is a one-of-a-kind type of opportunity thing. So make sure you check him out, you guys. If— if any of this stuff rung bells and— and you’re interested, check him out. One hundred percent. Michael, I’d like to thank you for coming on the show. You’re a true genius in the game, man, and it was an honor.

Michael Evans (27:28)
Man, it’s been my pleasure.

Issa Hanna (27:29)
Thank you so much. I enjoy talking to you, and to the viewers at home, if you enjoyed my conversation with Michael and want to see more just like this, make sure to like and subscribe. I talk to people every day that can bring us different knowledge on every aspect of the real estate industry. Until next time, the real estate pros are out.