Robert Leonard  2:21  

I recently had Todd Baldwin on the show back on episode 37. We also talked about the rent-by-the-room strategy. I wanted to have you on the show today for a few reasons. One, because selfishly, this is a strategy that I’ve become very interested in since hearing Todd’s story back on the BiggerPockets Podcast, and two, because your approach to rent-by-the-room is a bit different than Todd’s. 

You’re focused on student rentals. Whereas Todd was focused on more of a working professional profile. You’re also operating in a state where a lot of people try to avoid investing in real estate due to recent laws being passed and different regulations that they have. 

Needless to say, we have a lot of different things that I think we could talk about today. When you first started getting into real estate, you made some mistakes that cost you over $30,000, which you say were avoidable. What were those mistakes and how can other newer investors avoid them?

Ryan Chaw  3:10  

The first property I bought was in 2016. It was about a year after I started my first job as a pharmacist. I actually worked a lot of overtime. I put in six or seven days a week at my job to be able to buy my first rental as quickly as possible because I knew it required a lot of capital to get started or a good amount of capital to get started.  

I bought that property for $262,000 in my local college town. It was a three-bed, two baths, and I was able to add an extra bedroom, which made an extra $620 per month. 

Before that, just to back up a little bit, the very first year of when I purchased the property, I had a lot of issues. The first one was I got a call from one of my tenants around 11 pm at night on a weekend. He said, “Dude, there’s just a huge problem here. We got sewage coming out of the kitchen sink and it’s overflowed. It’s all over the kitchen floor right now and so it smells.” 

Then, I had to call a bunch of people up to see if I could get someone over there to sanitize the whole place. I had to get a plumber to check out what’s going on with the pipes. He found out after he stuck a camera down the pipe that it was a cast-iron pipe that rusted over and had roots sticking into it. The whole pipe had to be replaced. It ended up costing me $9,000 to do that. 

Not only that, I had a vacancy for that first year because I didn’t know how to advertise my place. I actually just put a for rent sign on the lawn and thought that should be good, right? But no, I ended up with a vacancy that cost me about $5,200 because I had eight months of just not having a tenant in that room. 

Not only that, I had these problems with the AC. Actually I didn’t have an AC unit so I had to install a new one which cost me $18,000. All in all, adding up all the expenses, it cost me over $30,000.

There are a couple of ways to, of course, avoid these mistakes. First off, don’t buy a house that’s 100 years old like I did. Older houses just tend to have so many more problems as you can tell. Then you could do a sewage line inspection during the inspection phase of the house, or during the escrow phase of the house and use that as a negotiation point at the point of sale, if you find any breaks in the pipe or something like that.

Robert Leonard  5:29  

What made you want to focus specifically on student rentals? How were you able to use student rentals to avoid many of the downsides of investing in California?

Ryan Chaw  5:39  

Actually, California is a very tenant-friendly state for sure. I learned this actually from my grandpa. He bought a couple of properties in the Bay Area in the 50s. These were super cheap back then, obviously before Silicon Valley even existed yet. Then they appreciated it and priced like crazy. We’re able to help them retire early. Not only that, he was able to help pay for part of our college education. That’s kind of my inspiration for this. 

He also had to deal with a lot of strict tenant laws, especially in San Francisco with the multifamily property that he bought. 

I realized that a lot of the laws out there, especially in California, are directed toward multi families rather than single-family homes. Because I purchased single-family homes, I don’t have to keep a lot of the laws like the rental increases and all that or the caps on multi families.

Single-family homes and renting out per bedroom, it’s actually okay to have multiple leases, as long as you check with the city that you’re investing in, you’re able to really maximize your profits by using this method. In fact, I’m able to double my profits. If I check Zillow, or Rentometer, how much rent I should be making, it’s about $1500 per month. However, I’m actually making around $2,700 to $3,100 per month per house. It’s a really powerful method, rent-by-the-room, and it can double your cash flow.

Robert Leonard  7:02  

Why students? You could rent the room to anybody you could do working professionals like Todd Baldwin does. You could have no specific profile, you could just rent it to anybody. So why did you pick students?

Ryan Chaw  7:12  

That’s a great question. Because for me, actually, I saw my friend doing this in college, he lived in one of the rooms he house-hacked, right? He basically lived for free because his roommates were paying for the mortgage. I thought, “Hey, I can do this.” 

I have connections to the school. I actually rented at the college that I went to pharmacy school at. I have those existing connections. I kind of knew a little bit about how to kind of advertise initially. Although, I, of course, had problems that first year. 

Then I perfected the system. I call it the prime system for getting and finding high-quality college students. These are usually like third or fourth-year college students, ones who are more mature. They got their party life out of the way. They’re usually the ones who are also professional students. 

I target specifically pharmacy students, dental students, medical students, people who are into graduate school, so they have to do well on their midterms and finals, or else they’re not going to get their doctorate degree. There are a lot more serious about their studies and a completely different tenant profile than some freshman who kind of gets started in college and wants to have a party life or party house, right?

Robert Leonard  8:22  

How do you ensure that college students are going to be able to afford the rent and pay you consistently on time?

Ryan Chaw  8:29  

So I have the prime method. So P, stands for let’s just kind of run it down because it will definitely answer this question… P stands for placement advertisements. First, you have to figure out where your target tenants hang out. If you advertise in a place where they’re not even hanging out, it’s like fishing in an empty pond. For me, I kind of go for Facebook groups. Craigslist is good, too.

I also have where do they hang up flyers on campus? I contact the student government, I contact the school and kind of see where I can place my ads.

The second part is “R” or reviewing their social media. So this is very important to determine. Are they a party type tenant? Or are they more studious type tenants who’re going to focus on their studies? I look for drugs, alcohol, raves, smoking, usually on their Facebook profile. I kind of vet the tenant that way. 

“I” stands for identifying the type of tenant so when you interact with them, are they constantly someone who asks for a cheaper deal? Are they difficult to communicate with? Do they get angry easily? Those are the kind of questions I asked myself, like what type of tenant is this.

“M” stands for measuring responsiveness. Typically, the more responsive a tenant is, the more responsible they will be. If you have a tenant that pays late rent, you want to ask them for the late rent. You don’t want someone who’s going to wait like two weeks to get back to you. You want someone who’s going to get back to you right away. So obviously the more responsive attendant is, when I’m communicating with them, when I’m vetting them, the more responsible they’ll be down the line. 

Then the final part is “E” of course, which stands for ensuring proof of income. Usually, for me, I get the bank statements and the FICO score from the parents to make sure that the parents can afford the rent. 

Not only that, sometimes students take out student loans to pay for housing. So you can get the student loan documents if they decide to use that to pay for rent.

Robert Leonard  10:23  

With the COVID-9 pandemic present in the US right now, this is an interesting time to be talking about this strategy, not necessarily rent-by-the-room, but because of college. A lot of schools have sent students home and or they’ve gone virtual for the next few semesters at least, how has this impacted your student rental business?

Ryan Chaw  10:42  

This actually did throw me through the wringer. I was careful, of course, when my college closed down. I thought, “How am I going to get tenants?” What I had to do was, of course, beef up my advertising. I contacted the student government and said, “Hey, can you maybe put up some flyers for my rentals around the area? I feel like it’s a great choice for a lot of students, because I’m actually very, very close to the school.” They said, “Yeah, sure, I’ll actually email out to the whole pharmacy school email list.”

They did that. They place their flyers. Also, when I got in contact with a tenant or prospective tenants, I would go on a one-on-one call with them and ask them, “What are their concerns? What objections do they have?” 

So I did a lot more marketing and having that call one-on-one with them adds that personal touch, and that personal connection, so they’re more likely to say, “Hey, this Ryan guy seems like a nice guy. He’s going to probably make a good landlord for me. I might as well stay at his place.” 

I’m proud to say, even though I did offer some discounts, and all that to fit people’s budgets, I’ll still be able to rent out all my bedrooms. My revenue for the fall semester per month is $9,230 per month, last time I checked. So yes, I was able to make it work. 

Robert Leonard  12:04  

Is that with your school being shut down? 

Ryan Chaw  12:07  

Yes, that is what the school being shut down primarily online. For spring semester, though, they’re looking at this hybrid system that they’re going to use, where half of it is online instruction, and half of it is on campus.

Robert Leonard  12:20  

Why are students even renting a place from you if the school is shut down right now?

Ryan Chaw  12:25  

That’s a great question. I asked this question to a lot of the tenants, they said, it ranged from just like, “I just want to hang out with my friends. Be closer to the school, hang out with my friends, and study together. Also, I wanted to get out of the house. I couldn’t focus at home with my parents. It was a very chaotic environment.” 

So there were a lot of reasons why. Some of them actually do have to do… like I had graduate research students that had to be on campus to do their research. I also had some students who did actually have some classes they had to take that were on campus.

Robert Leonard  13:00  

Outside of just the pandemic itself, there seems to be a broad trend of less high school graduates choosing to go to college, and more colleges realizing that they can offer successful programs completely online. How do you see this long-term trend impacting your real estate investing model?

Ryan Chaw  13:15  

Great question. This has to go do with mindset, honestly, in my opinion. If you let that fear that the market is trending this way, dictate what your actions are going to be, then in the end, you’re going to just be stuck in this place of analysis paralysis, where you’re not really making a decision, or you make a decision out of fear, which is even worse. 

Usually, whenever I make a decision out of fear, I end up losing money. So for me, I’m not worried about it because this college campus, they have all this land they have to utilize. They’re not going to go completely remote or online. 

Also, the colleges have on-campus housing, which is a huge cash cow for them. They’re not going to just close those dormitories that are on campus. They’re not going to just say, “Hey, guys, we’re just going to go completely online and forget the college dorms,” because they’re going to lose a lot of money. 

The college that I invested in also has been around since 1858, or some crazy long amount of time. Of course, you have to be prepared for the worst and you have to be flexible. There’s a quote by Bruce Lee out there that’s like, “Be like water, be flexible. Water takes the shape of the container it is in.” 

Therefore, you have to be flexible and be ready to change tactics. 

At the same time, don’t let that fear stop you. A lot of people make these excuses for never getting into real estate because they’re afraid of this. They’re afraid of the economy. They’re afraid of Coronavirus. They’re afraid of not getting renters. They’re afraid of not being able to evict a tenant. All these fears, but if you can’t get past that fear, you’re never going to be successful. I think that’s the key here.

Robert Leonard  14:52  

I completely agree with that. But what are you doing to prepare for this if it does happen?

Ryan Chaw  14:57  

Obviously I can retarget for usually other high-quality tenants. Thinking of like medical professionals, I’m also near a hospital so I could retarget toward new grads, people who just started getting into their pharmacy or medicine. 

They just got out and they need a place to rent because they have a high burden of student loans, especially like pharmacy loans and medical loans. They’re usually into the $100,000 or $200,000 range. They’re paying $2000  to $3,000 payment toward those loans every month. They’re not going to be able to purchase a property right away. Most of them will be renting and those are the types of tenants I would retarget towards.

Robert Leonard  15:37  

When I think about the rent-by-the-room strategy, the cash flow numbers seem to always outperform traditional rental strategies. Though one of the few downsides that I could think of is the increased effort it must take to manage tenants individually. 

I think you mentioned across four properties, you have 18 tenants. So rather than just buy the unit, it reminds me a bit of Airbnb. The returns tend to be better, but it takes a lot more work. 

Of course, it’s not the same as Airbnb because Airbnb is short-term with tenants turning over frequently, whereas rent-by-the-room is generally longer term, but I draw a few parallels in terms of the effort required as the property owner. 

How are you able to manage the level of work required to manage for single-family rent-by-the-room properties while working a demanding full-time job as a pharmacist?

Ryan Chaw  16:20  

I do self-manage my properties. The answer to your question is twofold. One, you have to make sure you find high-quality tenants. That’s what the point of the PRIME method is. That’s why I teach my clients as well as the PRIME method to find high-quality tenants. 

The second thing is tenant empowerment. Tenant empowerment means basically assigning specific responsibilities to tenants to help take care of the house. I want you guys to reframe this, instead of saying, “Oh, I have 18 problems, problems I might have to solve.” Reframe it to saying, “I have 18 little helpers that might be able to help around the house, help manage the property and take care of things.” Because it’s really about connecting with those tenants and having them take on those roles and help you out when things come up on the house. 

It’s also having systems in place. I have a team in place. I have a team of contractors that I can go to or if the toilet breaks down, and there’s a more major repair that needs to be made, I just board any problems to them. Then they take care of it. They have the code to enter into the house. They can do their work. They could go and then send me a bill and then I’ll send them a check. That’s completely hands-off automated. 

The last time I was actually down at one of my properties was in August of last year of 2019. So yes, you can tell the importance of systems in this whole process. It really changes the whole real estate investing for people.

Robert Leonard  17:47  

It sounds like really having good quality tenants is the staple to this strategy. Also, specifically your process. I mean, everybody wants to have good tenants, right? I want to have good tenants in my properties and they’re not student rentals. They’re just traditional rentals. However, I still want to have good quality tenants. It sounds like with how much empowerment you give your tenants, which I do myself as well. It sounds like you really need to have those high quality tenants.

Ryan Chaw  18:08  

Exactly. Like I said, it’s two parts. Finding the high-quality tenants and then managing them using empowerment.

Robert Leonard  18:15  

When you’re actually looking for properties, what are some of the major characteristics of a property that you’re looking for when searching for properties that might suit the rent-by-the-room strategy? How are these types of properties different than traditional rental properties?

Ryan Chaw  18:28  

I actually look for cookie-cutter properties like three beds and two baths. Most properties are around three beds and two baths. I also look for that value add. Is there an extra bedroom, like an extra family room or living room that I can turn into a bedroom? Or can I split the large living room in half using some drywall and turn part of that into an extra bedroom? Because every bedroom I can add is an extra $620 per month I’ll be getting rent. 

I look for properties that are very close to campus, usually a five-minute walk distance from campus, if possible, because the closer it is, the higher rates I could charge. On-campus housing, they charge $1200 per month and the student has to pay for a meal plan. I’m only charging $620 per month on average and they have more privacy compared to college dormitories. They have a lot more space. Some of them are actually even closer to their classes than the on-campus houses. So it’s really a great market. 

You can see this is what I call a blue ocean market where it’s like untapped potential. I have 18 tenants out of the total 5,200 tenants that have rolled into the college campus and that’s only like point 3% of the total number of tenants I could be having.

Robert Leonard  19:45  

When you’re talking about adding extra bedrooms, it sounds like you know that if you add a bedroom, you could get about $620 for that bedroom. Are you doing a calculation to say, “Okay, if I spend $20,000 to add an addition onto this property and get an extra bedroom at $620 a month and it cost me $20,000, tat’s a 37% return for the year,” are you doing that type of calculation to see if it’s worthwhile?

Ryan Chaw  20:07  

So you want to know your breakeven point when you do that exactly like that. I actually rather than adding additions to the property, I rather either repurpose an existing room, or I would like to divide a room in half and make half of it a new bedroom. Because those are a lot cheaper additions than adding point foundation and adding a new addition to the property. It’s a lot simpler.

Robert Leonard  20:33  

We talked about those issues at the beginning of the show that you had with your first property cost over 30,000 bucks. That clearly didn’t stop you, because you’ve gone on to do three more deals after that. Why didn’t those issues stop you? Why didn’t losing almost $30,000 or over $30,000 scare you away from real estate? How did you overcome that?

Ryan Chaw  20:49  

This comes back to the mindset having a big “Why” is very important. So why are you guys doing this? For me, the moment was when I had my first job as a hospital pharmacist, I came in… I think the first week or so I was asking one of the senior pharmacists next to me, I was like, “What do you like about your job? What do you like about working here?” 

He was in his 60s, he said, “To be honest, I quit a long time ago. I’m just here to make my paycheck and get my benefits.” It struck a chord with me, right? This could be me, if I continue down the line. 

I do love my job but I don’t want to be working until I’m 60 or 65 years old. Real estate provides that freedom to be able to live life on your own terms, be able to do what you want, when you want, where you want with whoever you want to do it with because once that passive income pays, and covers all of your expenses, you have achieved financial freedom. 

Having that big why and that strong goal is what kept me going even though I was like, “I’m not after that first property. I’m not sure if I’m good at this. I’m not sure if I’ll be a successful real estate investor, because I lost a ton of money on this first deal.” But it’s that big “why” that really keeps you going, especially for me, my grandpa did it. He was able to make it work, I can make it work too if I just keep at it. 

So I just kept at it. I focused on it. I did one model. I copied it. I repeated that same process and then I scaled it. That’s why I’m where I am today, having a six figure rental income just coming from my properties as passive income.

Robert Leonard  22:27  

Before you even did that first deal, what were some of the limiting beliefs that you had and how did you overcome those?

Ryan Chaw  22:33  

This really goes deep into mindset. I would say one of the big things was identity. I didn’t identify as a successful real estate investor. When I started, obviously, I identified as a struggling real estate investor as the underdog. However, there’s something a concept out there called “be, do, have.”

A lot of us, we start from the have, we want to have this and so we do things to become that person. Instead, it’s the opposite, you should become that person first. Act as if you were that successful real estate investor. What would a successful real estate investor do if they were in my position? Oh, they probably wouldn’t be scared off by losing $30,000 on their first deal, right? They would probably still keep that property, hold it, let it appreciate over time, figure out how to make profits, cut expenses, and then they would go from there. 

That was a major shift for me in stepping into that role and stepping into that identity of a successful real estate investor. That’s really part of what led to me being able to create this system and be able to scale so quickly.

Robert Leonard  23:39  

Tell us a little bit more about your journey from that one property to where you’re at now with the four properties. What were the other types of properties? Like how similar were they to your first one and how did you go about all of them?

Ryan Chaw  23:52  

Actually, I do pretty much look for a very similar type property: a three bed, two baths, and I convert them all into either four-bed or five bed, two baths. Then they’re all pretty close to campus. As I purchase each property each year, I was able to kind of tweak things a little bit. I figured out how I can do this in a more cost-efficient manner. How can I cut expenses? 

There’s something I call preventative maintenance that I started doing. Preventative maintenance is kind of putting down some renovations to prevent larger, more expensive repairs down the line. The easiest example you can see from this conversation is the sewage line inspection. So just doing that inspection on the early phases, I could kind of negotiate the deal and get that line replaced before it becomes an emergency.

Robert Leonard  24:40  

One thing that I think is super important, whether it be real estate, whether it be mindset, I also host another podcast, that’s all about stock investing and personal finance. Whether it’s any of those topics, even entrepreneurship, I think setting expectations is huge. I think if you have the wrong expectations going into anything, and it turns out to be different than what you expected, I think you’re going to be disappointed. You’re going to be unhappy no matter how good the outcome is, if you expected it to be better. 

How has real estate investing been different than what you expected before you became an investor? What has been better about it than you expected? Maybe what’s been worse about it?

Ryan Chaw  25:12  

I would say the biggest expectation was I thought it was going to be pretty simple. I thought I was just going to buy a property, rent it out to college students, do what my friend did, and it would be just that simple. I didn’t realize that there are so many problems that could come up with houses in terms of maintenance, especially like older houses.

I learned throughout the years how to get better deals where this is in a much better shape, better condition. These are the things that I can do to prevent major repairs down the line. Things like even taking out grass, putting a bark to save on the water bill, putting in LED lights to save on the energy bill. 

I really created this system in place so I could make a profit, like guaranteed profit on each rental because I knew how to run my numbers. I practiced at it. I even created a deal analysis calculator for this. Now I know, as an experienced investor, what exactly it takes to create that profit.

Robert Leonard  26:12  

Where do you see yourself going from here as a real estate investor? Do you plan on continuing to scale the student rental rent by the room strategy? Do you plan on going into traditional rentals maybe out of state or some syndications or just bigger deals, in general? Where do you think you’re going to go with your portfolio?

Ryan Chaw  26:28  

That’s always a great question because there’s this debate whether you should just leverage like crazy, or you should pay off the rentals and have that peace of mind and be able to have that maximum cash flow. 

For me, I kind of have this choice where I either pay off my rentals right now and I could actually do that in the next three years or so by reinvesting the huge amount of cash flow that I’m getting.Of course, reinvesting like W2 income and all of that. I could be able to pay that off within three years. I would be around 31 at the time and I would retire with that six-figure income just coming in. So that’s one choice. 

The other choice is, of course, to leverage like crazy. I could use the equity on my existing property, take out something called a HELOC. I actually have a HELOC already. It’s called a home equity line of credit. Basically, it’s like a credit card. You take out the equity on the property to put a down payment on another property, like a fifth, sixth or seventh property. I’m kind of in-between at this stage.

If the market does crash, of course, I’ll be leveraging like crazy, taking out the equity, putting on fourth, fifth, sixth property, but I could also… I’m at the stage where, “Hey, I can pay it off in three years. No biggie,” and just retire. It’s nice having that choice.

Robert Leonard  27:43  

Ryan, thanks so much for coming on the show today. For those listening who want to connect with you, where’s the best place for them to go?

Ryan Chaw  27:50  

I have a free PDF for people just trying to get started in real estate investing. I actually go through my specific method of rent-by-the-room student housing and provide a lot of great strategic information for you guys. You can get that on my homepage at www.newbierealestateinvesting.com 

Robert Leonard  28:19  

Awesome. I’ll be sure to put a link to that in the show notes so anybody listening today that wants to check it out can click the link below in your favorite podcast player and go get that free PDF. Then check out Ryan’s website. 

Ryan, thanks so much.

Ryan Chaw  28:30  

Thanks for having me on the show, Robert.

Robert Leonard  28:33  

All right, guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro  28:38  

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