Operating a Clean and Sober House

Hello and Happy Thanksgiving!
I may be the worst blog updater in history… Lately, I’ve had a lot of questions about the clean and sober house that I own. I talk about it in depth on this podcast episode, but for those of you who don’t want to listen/want a quick idea of what the heck I’m talking about, here it is!

Long story short, my dad and I formed an LLC to purchase a single family residence a bit north of Seattle, WA. It was already operating as a clean and sober/transitional/halfway house, but was run rather poorly (violating lots of building codes and occupancy laws). We bought it knowing that we would need to finish the basement, getting proper permits and bringing everything to code. In fact, there was actually a cloud on the title when we purchased- the basement had been condemned, and the owner fined enough times that it was pretty clear he had no intention of fixing anything. We were able to get the cloud removed so that we could purchase the property free and clear. This required us to have a notarized letter agreeing that we were going to apply for permits and get everything fixed up within 6 months of purchasing (more about this and my contractor horror story later!)

At that time, the bid we had to get the basement livable was $14,000 and 2.5 weeks- not too much for a high priced area and some significant renovation work. Our total cost, after getting totally screwed (our fault! Valuable lessons learned…), getting fined twice, and having multiple contractors work on the project is about $42,000. Luckily, the rest of the house (8 tenants) were able to more than cover the costs of maintaining the house for the year the basement has been under remodel.

Now, for the FAQ!

1. What the heck is a clean and sober house?
b. Our tenants are pretty much the bottom of the barrel. They have no credit, oftentimes they have criminal histories, a drug-laden past, homelessness, have been a victim of domestic violence, you name it. However, many of them are great people who completely deserve a second (or third…) chance.How do you get paid? Seems like you would never be able to collect rent from these people.

2. How do you get paid? It seems like you would never be able to collect rent from these people.
b. Totally valid! Many of my tenants are on vouchers. Snohomish County (where the house is located) has a lot of great programs for people in recovery, with bad backgrounds, disabilities, limited or fixed income, etc. Generally, about half my tenants pay me in cash, and the other half is on some sort of voucher or program that mails me a check. I have only had one issue with non-payment. It was right after I bought it, and I kept letting the woman in question pull one over on me. Months went by, and I realized she a) was not going to pay, and b) owed me about $4,000 in rent and late fees. Since then, I have had a very strict policy- rent is technically due on the first, but I collect on the 5th. If it is not paid in full (with a couple minor exceptions for those who have a good history), they get a 3-day pay or quit notice (Washington’s official beginning to the eviction process). The vouchers generally take 2-3 weeks, so I do make exceptions for those, since I know the rent will be coming.

3. Do you accept criminals?

b. I do! Within reason. Anyone who is convicted of a violent offense or is a Level 2 or 3 sex offender is not someone who I will accept. Petty theft, drug use, etc generally is ok. I always ask people about their histories, and they have generally been pretty honest with me (I also look up their record on the database to cross-reference).

4. How many evictions have you had?
b. Officially, none. I have had to kick people out, but no one has ever refused to leave for more than a week at most. The thing is, when one person is acting out, it causes disharmony among the rest of the tenants, and they do not make it a fun living environment for the offender. They also know that they don’t need to have any reservations about calling the cops if they strongly suspect drug use or illegal activity in the house.

5. The big question… Is this profitable?
b. Very. We financed the deal with a commercial, 30% down loan. The seller financed a small portion of our down payment. For the last year, with 2 double rooms ($450 each) and 5 singles ($600 each), our monthly income has been $4,800. Our mortgage is $1,360 and utilities+ insurance generally run about $650, and management is 9% ( I self-managed the first 10 months, but recently hired someone to manage, as I’m having a baby). Oddly, the city required us to operate as a non-profit, so we don’t pay property taxes. Once the basement is finished (I’ve been saying in two weeks for the last 2 months, I think! But for real, it’s almost done.) it will add another $1,800. With a $99,000 downpayment and $42,000 in rehab, that ends up being a 45% annual cash on cash return. We purchased the house for $375,000, and based on the way the original appraisal evaluated it, it will be worth about $600,000 when completed, which is nearly an 11 cap… Completely unheard of in this area. (Note that I did not account for maintenance, cap ex, vacancy, or other expenses here, simply because our actual additional expenses have been nearly non-existent thus far. I always recommend setting aside 3+ months of reserves for maintenance and capital expenditures.)

Well, I think that about sums it up! Don’t hesitate to reach out with any questions.