Cash flow in rental homes is typically hampered by high turnover costs. But instead of simply finding property tenants to fill your available spaces, why not invite them to invest? This is exactly what Daniel Dorfman is doing through Invest With Roots. Joining Matt Fore, he explains how they bridge the gap between renting and owning by making tenants invest side by side with them, essentially turning them into business partners. Daniel also explains how they utilize their own IT program to help residents with preventative maintenance. Find out how this unique rental/investment approach greatly reduced their turnover costs, tenant complaints, and business calls.

Traction: Get a Grip on Your Business – https://www.amazon.com/Traction-Get-Grip-Your-Business/dp/1936661837

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Why You Should Turn Your Property Tenants Into Investors With Daniel Dorfman

Daniel, welcome to the show.

Matt, thanks much for having me. I’m excited about talking to you.

We like to start with the difficult questions here. What’s your favorite ice cream?

I am pretty basic. I like chocolate chip cookie dough. Ben & Jerry’s is my preferred method and brand.

You’re in Atlanta and closer to downtown Atlanta. If we’re in the Atlanta area, selfishly speaking, where’s the best place we can go get some ice cream?

You got to go check out Morelli’s. To my knowledge, it’s only in Atlanta and there are two locations.

What do they do special?

Off-the-wall flavors like sweet corn, potato chip and those types of things. They dive into that type of flavor and create these unique experiences. It’s worth taking a look at.

Potato chips sound delicious. It’s salty and sweet but does it have a crunch to it as well? Have you had it?

I have had it. It does have the crunch. It’s hard to explain because it’s not overly sweet but it’s delicious. Check it out.

Tell our readers what’s the scoop. What do you do?

We are Invest with Roots. We are a privately held Reg A REIT on a mission to give everyone the access and ability to invest in real estate for as little as $100.

We were chatting before the show started here that you started in software sales and got into real estate. Where did your real estate journey begin there?

Out of college, I started wholesaling video and email software. My wife and I were in flux in terms of where we were as earners but we knew that the real estate market was something that we always thought would be a great opportunity to build our wealth and some passive income down the line. We saved every year that we could and we bought a property. This was in 2009 in Atlanta. We kept trying to build that portfolio for ourselves. As we did that and continued to add properties, my wife got excited about it and she ended up getting her real estate license.

After about 4 years, we had our 1st kid and I decided that I didn’t want to be on the road all the time. I didn’t want to be gone and away from the family. We started our residential team in 2017 and have grown that team. We have 11 agents. We sell about 150 homes here in Atlanta. Through that experience, we kept investing and understanding what that market looked like.

What became very obvious to us and I’m sure to the readers out there is it’s challenging to go from renting to owning your first home but to go from owning your first home to owning your first investment property is significantly more challenging in ways. You got to have that 20% down and pick the right one. There are a lot of things that go into it. One common theme we kept running into was, “I want to invest in real estate but I don’t know how.” In 2020, we came together and thought about what that would look like if we had a product for everybody to be able to invest in real estate and that’s how we came up with the Roots Fund.

Property Tenants: It is challenging to go from renting to owning your first home. But to go from owning your first home to owning your first investment property is significantly more challenging.

I’m inspired to dig into the Roots Fund but before we do, I whipped off my shoes and started doing some counting. Years ago, you were selling video software. Did you ever think we’d get to this place where we’re naturally on video cameras and doing so much business on video?

No. It was hilarious to think about because when I was doing it originally, I would walk into offices. I was doing a lot in the country club space. I had to bring them a camera. All of these devices we use have cameras on them. Back then, they didn’t. I would have to bring in the camera for them to record their videos on and put them on the computer.

You were such a pioneer. Even in 2020, people weren’t using cameras that often.

You can text videos. I hope that the company’s still doing well.

The Roots Fund, give us the pitch. You mentioned that it’s an opportunity for people to bridge the gap between renting and owning but what’s the pitch here?

The pitch is essentially we are a real estate fund and portfolio that gives everyone the access and opportunity to invest and be in the real estate space. Not only for themselves but the unique part about our fund is all of our residents who live with us are investors as well. They’re partners and not tenants. We came up with this model after years of property management experience and looking at it and understanding that the people who live in your homes, if you have investment properties or you’re invested in real estate, those tenants carry the load.

They are the reason that you have great cashflow and your asset performs well. When we looked at, “What properties did well? What properties did it,” a lot of times, it was based on the resident who lived in them, not based on the location. Our whole concept was why not make that person who’s living in our homes feel like a partner, bring them into the equation and give them the opportunity to participate and so far, it’s worked phenomenally.

I have my opinion on why the resident, the tenant or the person in that property makes a huge difference in the performance of that single-family home. What was your experience? Why do you think that mattered? Why were they the crux point of a good property or a bad property?

It boils down to communication and the way in which they exit the property more than anything. We all know that sometimes people get into bonds and they can’t pay and that’s one thing but I believe the turnover costs are what hampered this asset class. When you move somebody out after four years and there’s mold growing or there are other elements that you didn’t see because you haven’t been back to the property in four years, that’s where we saw the biggest drivers for negative cashflow.

Turnover costs hamper growth in rental homes, particularly when somebody moves out and your property deteriorates for years due to lack of tenants.CLICK TO TWEET

You go to the property. You’re not expecting the mold or to replace every carpet. When you do, the security deposits that are traditionally taken are not enough to cover costs. Let’s be real. We were trying to understand a way to make this asset class efficient. To do that, we created the Live In It Like You Own It program for our residents. It’s worked out well. The program itself has three different criteria. The first criterion is, “No late payments.” Pay your rent on time as you would in any situation, hopefully.

The second one is, “Be a good neighbor,” with no police activity or noise complaints. We have a lot of duplex-style asset classes or assets. The third one is important, which is we have them do a quick 30 to 45-second video of the outside and inside of their unit in each quarter. It gives us the eyes on the asset. It lets us do preventative maintenance and understand where we are with that property every quarter, which is important.

Let’s dig into the video piece because that’s where I thought you were going to go with this. A tenant doesn’t necessarily have the same wherewithal around their property as a faucet leaking. I tell the story all the time. I had a tenant leave a property and left a faucet dripping but it was enough to flood the kitchen, which cost me $5,000 damage on the property. I’ve run across property managers that do things like quarterly inspections or bi-week, bi-yearly inspections and that feels invasive.

At the end of the day, what we are doing is offering somebody a home. Nobody wants somebody else coming through their home, looking around and poking around. Whether you rent it or buy it, it feels weird. How did you come to this idea of having a tenant video, the inside and the outside of their property? What has been your experience through the process of them videoing that property?

It’s what you just said. Nobody wants you to come to their home. That’s their place. That’s where they live. Forced walkthroughs create hostile environments. For us, it was very simple. As a group, we understood, “We’re willing to give a little bit of rebate for this partnership to work out well.” Instead of having one of our maintenance crews or one of them pay them to go out to check the units, let’s have the resident do it.

Not only that. Returns are amazing. It’s great to have eyes on the asset but how about the thought of helping that resident be more in tune with what it means to own a property? Some of the educational pieces like, “This is how you drip a faucet. This is what you’re looking for. Are your gutters overflowing?” This is a good touchpoint that residents and tenants who have never owned properties don’t know what to look for. Everybody can probably attest to that. They’ve been to that final walkthrough.

You ask a question that’s simple like, “Didn’t you notice this?” They’re like, “It wasn’t bothering us. That settling crack, who cares?” The thing is they don’t know what to look for. A big piece of this is also helping that person who’s living in the building learn what to look for and educating them on how home maintenance might look or what that might look and feel like when they do own their first home or another property.

Landlords must educate their tenants on how home maintenance might look or feel like when they own their first home.CLICK TO TWEET

I don’t want to breeze over the fact that you brought up something that I didn’t bring up as the scale factor of it as well. As you scale your portfolio, you can’t have technicians running all over the city doing a simple walkthrough. If you can give incentive or rebate back to your tenants to do this, then that automatically helps them. You mentioned, “Educating them through this process.” Do you all have a video content library? How do you educate them on what to look for in the property to know if something’s off and that they should stick their hand up for proactive maintenance?

What we do is their first walkthrough video for them at move-in. We do our best. If we are not there for move-in physically, we stop by to say hey within the first 72 hours after their move-in. We do all our showings digitally. Everything else is digital. We feel like this is a touchpoint that makes a big difference for us. It’s worth it to go there.

We show how to do the video. We do our walkthrough and make sure as anybody who owns a bunch of properties understands that there’s a work order usually that comes at every point of a move-in. There’s always something that needs to be fixed or addressed the day they move in. We help create this communication.

We knock down that wall that’s usually there. It helps them understand, “We’re not here to dock you or necessarily always be the bad guy. We want you guys to partner with us.” This is different. You own while you rent with us. You own a piece of this property while you rent. It’s not rent to own. It’s own while you rent. You’re a partner. It’s important for us to go there and talk you through the video. Also, help you understand any maintenance requests, where those go and everything like that. The front-end work and front-end communication led to a successful resident program.

How have you all seen this affect your books? Specifically, with your ongoing OPEX or large CapEx purchases, do you have any quantifiable numbers on how this has helped improve your balance sheet?

Yes. As a fund, we’re young. We started several years ago. Since then, we’ve brought 31 properties into the fund. We’ve raised a bit over $9.6 million into the total REIT. What I’ll say is our turn costs are averaging $700. It’s insane compared to our other portfolios that are not in this specific asset grouping. What we’re seeing is renewals at a very high rate, less turnover and less turn cost because people are taking care of the property to be able to take advantage of our wealth-building program and the investment. Those are two of the biggest factors we’re seeing.

We haven’t quantified this but we are seeing fewer small business calls, fewer headache calls, false calls, things about running toilets and that stuff. A lot of our residents are texting us and saying, “The toilet was running. I went and fixed it. I got the chain. Cheers to us. We’re partners.” I’m sure there are a lot of landlords reading.

The number of holiday texts that we received from residents is crazy. Twenty residents at a time hit us up and said, “Happy holidays. We’re super excited about this.” It’s a different attitude and mentality around this landlord-tenant relationship. Honestly, it’s been tarnished since the beginning of time.

Your turn cost is around $700 per turn. I want to contextualize that. I am turning the unit. It is a 1,300-square-foot unit. The tenant has lived there for 4 or 5 years at this point. There’s some wear and tear. It’s going to be a $4,500 turn. Plus, I have to pay a leasing fee to put somebody in there of anywhere between $700 and $1,500. That’s going to end up costing me $6,000 to turn that unit. $700 seems like peanuts. I’ll swap you and trade you a call sometime.

No, thanks. It’s different. It’s the level at which people are taking pride in living in our units. It’s a different feeling from any other real estate investment I’ve been involved in.

You’re mentioning that they’re getting rebates from the Live In It Like You Own It program. How is that rebate distributed to them? Is that a cash rebate? Are they invested in the fund? What does that look like?

They’re invested in the fund. Our model says we take what would be their security deposit. We do not have security deposits here. The capital gets invested into the fund for them. We take that $1,200, let’s call it. On day one, they’re invested in the fund. They own a piece of the property they live in and a piece of the entire portfolio and get to experience that growth as we all do side by side.

Every quarter that they live in it as if they own it, let’s call it $50 a month or $150 at the quarter, we’re going to take that $150 and put it in their wealth-building account for them as an additional investment. The idea is that this account grows with them without them having to pay extra dollars into it. That’s a big piece. The average renter doesn’t necessarily have $150 extra to go save somewhere.

The idea of giving them an opportunity to build wealth by doing the things that they would probably do anyway and taking care of the home helps. It’s not asking them to pay extra dollars towards a down payment that may or might not happen. I have nothing against rent to own but the conversion of owning that property is low. The average is still under 15% conversion on those programs. The idea with us is, “You’re already living there. Let’s make you an owner and a partner.” From a capitalistic standpoint, as an investor, I love it.

I love the fact that the property’s getting better-taken care of and my residents are staying there and they’re bought in. Needless to say, we have a very large list of people that are wanting to actively be in our buildings built by our residents. I have a cousin who needs to be in this program. We want him to be in here. We have this unit coming up.

We are pre-selling a lot of our units to our internal network and they’re filling up. That’s a part that we’re excited about as well. Let’s continue to grow it organically. The more we fill these properties, the better all our residents and investors do. In the fund in 2022, it’s up 16%. We had a bit slower buying season the year before but that’s because the market was a bit funny.

I’m at risk of doing public math on the internet. Essentially, every property that I rent out in my single-family portfolio has a reserve in there for CapEx expenditures and OPEX expenditures that will come up. For me, that’s roughly around 10%. On a $2,000 property, I’m saving $200 a month for a rainy day when something goes wrong, not if something goes wrong.

What I’m hearing is you are shaving off $150 of that for your residents and saying, “As long as you live in it as you own it, have no major disturbances pay on time, are a good tenant and have no major issues that were caused by you because of damage, then we will allow that to go into this fund and be invested.” The net of it is you’re still arbitrating that $50 because I told you I’m paying $4,000 to turn the unit. I’m paying that cost anyways and you can save some of that cost on the front end.

From a partnership standpoint, when they do go to move out of the unit, we usually have $1,200 to look at. One thing we saw and you’re going to attest to this is they know moving into it, if you have $1,200, the second that one thing gets spilled on the carpet, it’s gone. From that moment on, we don’t care. It is the unit. All of a sudden, that’s game on. It’s free money. Deposit’s out of here. We wanted to turn that script a little bit. You spilled a bit, that’s fine. Let’s get it cleaned up. Let’s work together.

The other piece is after 5 years, in your wealth-building account based on the investment, you might have $5,000. The entire account is leaned against the condition of the property. From an investor standpoint, 5 years out, we are making a difference in this person’s life if they can move with $5,000. The other aspect is if it is trashed, there is a bigger piece to lean against versus only the $1,200. It works as a win-win partnership. If one of the partners doesn’t hold up the deal, then that is what it is and it’s very clear in our leases and everything else.

I’m going to put on my Mr. Burns suit from the Simpsons and think about it from the investor side standpoint. If I’m an investor in your fund, talk me through what that looks like for me as the investor. Are you distributing quarterly or monthly? Is that 506(b)? You mentioned Reg A REIT. Let me start with this question. What is a Reg A REIT?

Usually, when you have a private REIT, it’s done through a Reg D offering, which is accredited by investors only. I’m not sure about the demographic breakdown for the readers but that’s anybody who’s made $250,000 or more in the last 2 years or has $1 million in net worth. I would love to include all those people. I would say 95% of our investors are accredited.

A Reg A REIT is an SEC-approved REIT and fund that gives anybody the ability to invest. It takes away that guardrail of having to be accredited because the SECs already vetted our documentation. We get audited and compliant with that SEC regulation so that’s what that is. It was important for us to have the residents be investors but also have anybody who wants to be in real estate be able to partake.

Property Tenants: A REIT is an SEC approved fund that offers the ability to invest without the guardrail of having to be accredited.

Is it capped on how many people can be in it?

No. It’s a $75 million fund. There’s a cap on the amount that’s able to be raised.

How am I making money as an investor?

When you invest in the fund, you are issued a unit, which is a percentage of the entire company and you participate in two ways. One is the appreciation of that unit. Each quarter, we’re going to reevaluate the net asset value and then reassign a unit price. When we began, it was $108 a unit and in 2023, we’re at $118 hopefully. In one quarter, we’ll be increasing again but in each quarter, you’re going to see your investment grow as the net asset value grows. Along with that, what we do each quarter, we distribute the profit from revenue collected as a whole and so far, that’s been about a 6% cash-on-cash disbursement for each semester.

Any part of this conversation we missed that we want to make sure I should have asked?

We covered everything. Anybody who wants to check us out, we’re at InvestWithRoots.com. We’d love to answer any questions. We love to talk to people regardless of whether it’s about investing or maybe this model’s something you want to try and plug in and maybe get your residents more involved. We’re excited to talk and learn from other people too.

I want to switch us to our last round. We’re calling this the Five Toppings. Our first one is, what is your favorite book or what is a book you’ve read that’s given you a paradigm shift?

The book that I would like to recommend is called Traction by Gino Wickman. We run our entire business off of it. It’s a little bit dry but from a model standpoint, it helped us stay on track and keep everything aligned. It’s worth checking out.

I would agree it’s dry but if you have no experience in project management or how to run a business with business cadences and KPIs and things like that, it’s a fantastic book.

We enjoy the process.

Our second one is, I believe the person you become ten years from 2023 is directly correlated to the habits that you have and the things you do every day. What is something that you do every day?

We have two young kids in the house and what I have to do every day is I have to wake up about an hour and a half earlier than they do to get some quiet time. The first thing I do is go work out. I’m only a twenty-minute workout guy and I write in my journal, which includes making my time blocks and daily task list. Without that, I’d probably be pretty lost.

Traction: Get a Grip on Your Business

Our third one is, what is the best piece of advice you’ve ever received?

This is from my father and I’m sure he stole it from somewhere. “You can’t expect more out of the relationship than you’ve put in.” Adam Grant has a good book, Give and Take. A lot of people go into relationships looking to get something out of them. If you don’t give anything to that relationship, how can you expect someone to give you anything back?

Give and Take: A Revolutionary Approach to Success

I’ve never heard that but I love that. Kudos to your dad for inventing that. Our fourth one is, what are you most proud of in your life?

The kids. This will be the third business that we’re building together. Though business is tough, kids are on a whole other level. It’s so hard. To see them develop themselves, create their worlds and help them and guide them through it, that’s probably what I’m most proud of, for sure.

Our last one is if you could sit down and eat a bowl of ice cream with anyone dead or alive, whom would it be and why?

Richard Branson for sure. Anybody who’s done what he’s done from a customer experience standpoint and a success standpoint in all of the different verticals that he is been in, that guy’s got to be super interesting. I would love to pick his brain for an hour.

I thought you were going to say to listen to him and talk for his accent.

That too.

Daniel, this was a fantastic conversation. I appreciate you coming on. If our readers wanted to reach out to you or learn more about Roots, where’s the best place we could point them?

InvestWithRoots.com. Check us out. We’d love to have you guys as part of our investment community.

Daniel, thanks for coming on.

Thanks, Matt. We appreciate it.

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About Daniel Dorfman

As the co-founder of Roots Investment Community, a privately held Reg A REIT (Real Estate Investment Trust), Daniel is focused on how residential income can produce real estate, delivering excellent investment returns while making a significantly positive impact on the community.