Ryan Chaw (03:09):

So I realized that real estate investing is one of the best ways to create generational wealth, so I wanted to get started as soon as possible. I basically got started about eight months after I graduated. I bought my first property, basically a three bed, two bath, single-family home. But I bought it in a college town, and I did that because I wanted to rent it out by the bedroom because I would increase my rental income overall. So I would rent out each bedroom for, let’s say, $600, $700 per room. And so that would make me around $2,500, $3,100 for a four bed or five bedroom house. So I basically repeated that process once a year. Now I have six properties, and it’s making $17,510 per month in passive income.

Robert Leonard (03:55):

I want to dive into the numbers a bit, your strategy. But before we do, did you talk with your grandpa about his kind of background with real estate, or did you just see what he was doing and you’re like, “Okay, real, estate’s the answer. I’m going to kind of go figure this out”? Or did he kind of take you under his wing and be your mentor?

Ryan Chaw (04:12):

I wish he did, but I wasn’t in the right place at the time before he passed away. So unfortunately, we didn’t really have that discussion, but it was kind of an inspiration, because I saw with my very own eyes how it was working for him. So I knew it would work for me eventually, as long as I persist and I figure it out on my own. I did have a mentor, though. I did have my real estate agent. He was very kind to show me basically how the numbers work out, what are some things that you should look for in a house, make sure it’s in good condition, in a good location, that type of stuff.

Robert Leonard (04:48):

Did you see anything about the real estate changing hands from when your grandpa passed that kind of has had an impact on how you’re doing your succession planning with your real estate as you build? One of the biggest things real estate investors often think about once you kind of start to scale of it is: How can I pass this on to generations? A lot of real estate investors want to build generational wealth, so I’m curious if you saw anything happen to your grandpa’s portfolio, unfortunately after he passed, that taught you something that you kind of are able to apply to your own portfolio.

Ryan Chaw (05:18):

Yeah. So first off, what’s really cool is that the real estate gets passed on to your sons and daughters on a step-up basis. So basically, what happens is they inherit the property, and they don’t have to pay the capital gains taxes. Another strategy a lot of real estate investors use is the… Oh man, I’m forgetting the… 1031 exchange. So basically, what they do is they buy a more expensive property, and then they sell their current property at the same time to avoid paying taxes. And then you can basically do that over and over and over until basically pass away, and then again, your daughters and sons inherit it on a step-up basis, so they don’t have to pay taxes on those gains.

Robert Leonard (06:03):

Yeah. They call that the swap-till-you-drop method, where you basically just kind of keep upgrading every property. You swap one property for the other. You keep swapping and swapping until unfortunately you drop, and then… But you could buy, say, a $100,000 property, the first one, and then by the time you’re done, you could have a million dollar property. And all of those gains are tax-free for your children or whoever you end up passing those properties onto.

Ryan Chaw (06:25):

Yeah, exactly. It’s an amazing strategy, and there’s just a lot of benefits. There’s tax benefits and real estate investing that you mentioned. There’s something called depreciation, where you can have this phantom deduction basically to account for the wear and tear that the IRS considers could occur on the house. So you basically deduct certain amount of the property price every single year just from your income, even though there’s not much wear and tear on the property. There’s also appreciation. You make money through that. You make money through every month by the cashflow, and then you make money by equity pay down, because the tenants are paying down your mortgage.

Robert Leonard (07:05):

What has changed with your portfolio and or your strategy since we last talked? And what have you done that has allowed you to keep up your cashflow during COVID?

Ryan Chaw (07:15):

Yeah, that’s a great question, because when COVID hit, I was kind of panicking. All the colleges went to online, so I was like, “Oh man, what am I going to do when people want to cancel their lease?” And sure enough, I started getting emails saying, “Hey, can I cancel my lease? The colleges went online. Can we work this out?” So there’s a couple strategies I used. One, obviously I increased my marketing. So that’s the most important thing: increase my volume of interested tenants. So I started advertising more. I started calling, getting on calls one on one with my existing tenants who were on the lease, and I also got on call with tenants who were interested in staying at the house. I just expanded my marketing to campus bulletin boards, more Facebook groups, Facebook housing groups. And then that was number one.

Ryan Chaw (08:00):

Number two, I offered some discounts for some people who were wanting to basically end the lease. And I said, “Hey, if you’re willing to stay in it, I’ll give you a $100 discount, and basically you’ll stay for the end of the lease, or you can sublease it, or whatever. You have options.” So I basically kind of worked it out, and I was able to keep a majority of my tenants. And not only that, I was able to fill up all my bedrooms still. And I was making, I think, around $9,300 per month, instead of the usual $10,755 per month I was making at the time, so it was like a $1,000, $1,500 pay cut. But at the same time, I was making so much cash just by renting by the bedroom that I was still making a good profit on that. So I didn’t worry too much when COVID hit. I mean, I worried at the beginning, but then after I implemented the strategies and the solutions, everything kind of worked itself out.

Ryan Chaw (08:54):

And then after that, the year after that, I was able to… The classes came back to in person, so I was able to find people to rent at the full rent.

Robert Leonard (09:04):

Would you have been able to transition to younger professionals, people who are maybe a year or two, three years out of college that needed a place to stay?

Ryan Chaw (09:14):

Yeah, that’s a great question. I actually did take on some young professionals. So I took on some people who were working at the local medical center hospital. I also took on some alumni, some recent grads. And as long as they’re able to prove that they have a job, and making consistent income from that job, or if they have a job offer letter that states their salary, I was okay taking in those tenants. But yeah, that’s a very good point, so I did pivot a little bit. I usually target slowly college students, but then I pivoted my strategy a little bit to take on recent grads and medical workers as well.

Robert Leonard (09:48):

It’s interesting to hear you talk about the marketing piece because… Well, for a couple of reasons. One, I don’t really have to do that too much on my portfolio. Really, I just listed on Zillow or Realtor.com, and I have a lot of people that want to rent my places anyway. And then the second thing is just not a lot of real estate investors really talk about that. So I’m curious, do you think you have to do the marketing component because you’re using a little bit of a unique strategy where you’re renting by the bedroom?

Ryan Chaw (10:12):

Yeah, exactly. For sure. So there’s some property managers out there… There are some that’ll actually advertise for you for rent by the bedroom, but not all of them. A lot of them will want to rent out as a whole unit, and they won’t touch the rent by the bedroom kind of method. So I basically use the PRIME method for advertising, and I do my own marketing and advertising because I like to talk to the tenants, kind of get to know them, see what type of tenant they are. So the P stands for, P in PRIME, stands for placement of advertisements. So you need to make sure, of course, you place your ads where the target tenants hang out. If you place your ads where they don’t hang out, it’s basically like fishing in an empty pond. You want to basically put it right in front of wherever they’re hanging out, right in front of their faces.

Ryan Chaw (10:55):

So R stands for reviewing social media. So after they contact you from those listings, you’re going to want to look through their Facebook profile, Instagram profile, and kind of gauge what type of tenant they are from the pictures. So if they have any smoking alcohol, drugs, raves, a lot of partying, that type, then I usually try to stay away from that type of tenant. The I stands for identifying the type of tenant. So is this a tenant who’s constantly asking for a cheaper deal? Are they hard to communicate with? Are they very picky? Are they asking for things they shouldn’t be asking for, that type of deal? Because if they’re picky at the very beginning, they’re probably going to be picky throughout the lease agreement as well.

Ryan Chaw (11:34):

M stands for measure responsiveness. So I find that the more responsive a tenant is, the more responsible, professional they usually turn out to be. So somebody who gets back to me… Let’s say I have late rent, and I’m asking them to pay the late rent. Somebody who gets back to me right away will be a lot better than somebody who waits like two weeks, three weeks, and then finally gets back to me. I want somebody who’s very responsive. Then the E stands for ensuring proof of income. So though it’s not the students paying the rent, it’s actually the parents paying the rent, I need to make sure that the parents are making a good enough income. So I ask for bank statements, credit score, pay stubs, or sometimes the students… They have student loans or financial aid. Any of those documents will be fine, just to prove that they can afford the rent or to pay the rent.

Robert Leonard (12:18):

The social media component of your marketing strategy is interesting, and it’s actually one I implement myself. I do some Airbnb, and I just recently had a renter that applied to rent for my property on Airbnb, and he didn’t have any reviews. And that’s like the biggest thing when you’re screening a tenant on Airbnb, is you look at their reviews. And he didn’t have any reviews, and he was relatively new. His account was relatively new on Airbnb, and he was relatively young. So it was just like a couple yellow flags that I wasn’t really sure about, and so I just asked him. I said, “Hey, can you send me your social media profiles? Instagram, Twitter, LinkedIn, whatever?”

Robert Leonard (12:51):

And I checked them out, and that was kind of one of my ways I was able to do due diligence without really having any other way to do it, in a sense. So I think that social media component’s interesting, and I even think about it myself when I go to make a post social media. I think, “What is this going to be perceived as in market?” Not necessarily because I’m trying to rent from somebody, but if my renters see this, what would they think of it, or anything like that? If anybody sees this, what would think? And I’m very conscious of that, because people like you and I, and even our renters, are going to be looking up our social media, so people need to be a little bit cautious of what they’re posting on social.

Ryan Chaw (13:24):

Oh yeah, that’s for sure. Yeah, that’s an awesome strategy, for sure. So you just do that extra due diligence.

Robert Leonard (13:30):

You mentioned that your grandpa was buying in the San Francisco market, and obviously that’s really expensive. Where are you buying these days? Where are your six properties?

Ryan Chaw (13:40):

Yeah, so I have a couple in Stockton, and I have it in Sacramento, California as well. So I purchased near the pharmacy school that I went next to, and I also purchased near Sacramento State students. So those are the target markets for me.

Robert Leonard (13:55):

And I’m not super familiar with those markets, but are they relatively expensive compared to other parts of the country?

Ryan Chaw (14:00):

No, not too bad. I would say when I was first starting out for the first four properties I purchased, most of the ones in Stockton were around 300,000, and then the ones in Sacramento, they’re like 400, 500,000. Nowadays, obviously the market has gone a little bit crazier. I mean, it’s been that way across the nation, of course, but I would say houses in Sacramento are now like 500,000 or so, and then Stockton is around 400,000. But you can still make the numbers work with this strategy, which is really cool. If you find a house that has a very large square footage, and then you could put in a fourth, fifth, or even sixth bedroom, your upper limit for how much you can purchase the property for actually goes way up. If I can get a house for $500,000 to maybe $540,000 in Sacramento and make it a five bedroom house, then the numbers work out, and I’m making actually quite a bit of cashflow.

Ryan Chaw (14:57):

For instance, the house that I’m house hacking currently in Sacramento, the mortgage is about $2,300 or maybe $2,400 per month, and I had a 2.75% interest rate. And then the rental income from the four bedrooms, the four other bedrooms, I’m staying in the master and renting out the other four, is about $3,600 per month. So there’s still a very, very good spread between the mortgage and how much I’m getting in rents [inaudible 00:15:25].

Robert Leonard (15:26):

It’s such a good example of how you can get creative, because those properties probably wouldn’t make very good rentals if you just bought them as traditional rentals and just put one tenant in there. It probably wouldn’t make sense. And people will say, “Oh, there’s no deals out there. There’s no properties to buy,” but there are different ways that you can get creative. If you do a by-the-room strategy, like you said… I mean, your rental income is so much higher, and like you mentioned, you could buy a much more expensive property and the numbers still make sense.

Ryan Chaw (15:53):

Yeah. And plus, I’m living in it too, which is awesome.

Robert Leonard (15:57):

Did you live in all six of them? So have you been doing this for six years, and just moved from one to the next to the next? Or did you just live in a couple of them? What did that look like?

Ryan Chaw (16:06):

No, I just house hacked the latest one. Previous ones, I actually kind of basically stayed under my parents for while I purchased all these rental properties.

Robert Leonard (16:15):

And so were you required to put 20, 25% down on each of them?

Ryan Chaw (16:19):

Yes. That’s about right. Yeah, let’s see. 20, 25% down for all my investment properties, that’s true. What was really cool is my first property I bought for 262,000, and it went up to 430,000. Now, that’s about $168,000 in appreciation. So I was able to take out something called a HELOC, a home equity line of credit. I took out 100,000, and 50,000 of that I was able to use toward a down payment on the fourth property, because you can use HELOCs toward down payments. And then the other 50,000, I used that toward the fifth property. And so I kind of joked that when I bought that first property, I basically bought three properties at the same time. It’s the same amount of cash that I put in, but then I utilized that equity and drew that out further to scale my portfolio faster.

Robert Leonard (17:09):

Were you living in the property that you got the HELOC on?

Ryan Chaw (17:12):

No, I did not. The HELOC on the investment property, yeah. So my rates were a little bit higher. I think it was like 5.5%, or maybe even 6 when I took it out. No, I think it was 5.5. But yeah, especially with the Federal Reserve kind of lowering interest rates and everything, that actually dropped down quite a bit. What’s really cool about HELOC is you don’t have to pay interest on it until you take the money out, so it’s kind of like a credit card. If a credit card is zero balance, you pay no money on that zero balance. Versus when you do take it out… Let’s say I took out that 50,000. Well, I’m only paying a 5% interest on that 50,000.

Robert Leonard (17:48):

In theory, as long as your properties keep appreciating, you could essentially take another HELOC on another property, and then use that for the down payment on your seventh or eighth property, and then just continue to scale that way?

Ryan Chaw (18:00):

Exactly, yes. The only thing you might run into is the debt-to-income ratio. So that has to be below… I forget what the exact rules are, but usually it has to be at least below 50% or so. But what’s really cool about this method is they actually do count the income towards the debt-to-income ratio. And because we’re making double the normal amount of rental income, my debt-to-income ratio has been actually very, very low compared to, I would say, other real estate investors who rent out the whole house versus rent by the room. And I think last time they were able to run my debt-to-income ratio, they did… 75% of the total income counted.

Robert Leonard (18:40):

Yeah, that’s pretty similar to what I’m finding with lenders, is they’ll run usually 45 to 50% on your DTI, and then typically for the rentals, they’ll take 75 or maybe 80% of the income and count it towards your income for your loan applications.

Ryan Chaw (18:56):

Yeah, exactly.

Robert Leonard (18:58):

So when you’re considering using HELOC to purchase property… Let’s just say you took out that 50,000. You’re going to go buy the rental. Is your calculation basically saying, “Okay, my payment on this HELOC is going to be X dollars as long as my profit on this property that I’m going to purchase is more, and ideally significantly more, than what that loan payment is. Then I can use the profit from that property to cover the loan, and then I can take any extra for myself”? Is that kind of how you think about it?

Ryan Chaw (19:25):

Yeah, exactly. So let’s say I took out 50,000. 5% percent of that is probably 2,500 or something like that per year. And so if I’m purchasing a property that’s making 3,100 or $3,700 per year, I basically pay off that HELOC interest on the first month. Or sorry, I should say 3,000 to 3,700 per month. I apologize. I think I said per year. But yeah, you basically pay it off in the first month, plus you gather the appreciation on the property. You get the equity pay down and then the cashflow.

Robert Leonard (20:06):

College students are notoriously risky tenants, I guess you could say, with damage and partying, et cetera. So we talked about kind of looking at social media profiles, things like that, but what else do you do to manage the risk of college students partying and damaging the property, or just any other activities that college students take part in?

Ryan Chaw (20:28):

That’s a very good question. So the key is really the target college that you invest in. So I invest in colleges that are usually more… They’re tougher to get into. You usually need a 4.0 GPA in high school, so these are people who are very studious. They got really high SAT scores, ACT scores, or whatnot, and they also have some professional programs as well. So medicine, medical doctors, pharmacy, dentistry, nursing, those are the type of students that I typically target. So people who are a little bit more mature, older, they’re in graduate school if possible. And if I bring in those tenants, even if I just bring in two tenants from that pool, and then maybe two sophomores, usually the dynamic works out so that the house becomes mainly a study house.

Ryan Chaw (21:18):

There’s other things I do to kind of discourage partying as well. One of them is I don’t have any TVs at the house. So to me, TV encourages that “sit back, drink a beer” type of culture, so I discourage that. I try to, again, repurpose some of the rooms. So if there’s an extra family room or living room, what I’ll do is I’ll repurpose that as the fourth or the fifth bedroom. So there’s a little bit less common space to discourage kind of party-type culture and having a huge house party type of deal.

Robert Leonard (21:53):

Yeah, that seems like a good strategy to me. But on the flip side, I know Harvard has some pretty good parties sometimes, so I guess it’s not always a shoe in, right?

Ryan Chaw (22:03):

Yeah, so that’s the key. Always get a full security deposit still. I do one and a half times months for the security deposit, so if something were to break during a party or whatnot, then I could use that to replace it. I’ve actually personally never had to. Just for those thinking of getting into this space, I’ve never had to use the security deposit to replace something. There’s only one exception where the tenant leaned back in his chair a bit too far, and then he broke a window, so obviously the security deposit was used to repair that window. But other than that case, I’ve really never kept security deposits. I’ve never had to.

Robert Leonard (22:41):

Yeah. I think generally speaking, your strategy is really good. I think it’s probably one of the best ways that you can mitigate that risk of college students. I think of course there’s still the risk… College students, no matter how good the school is, there’s still a potential for it. But I think overall, you’re definitely minimizing your risk. Now, one of the other things with college students is they’re not really known for having the most money, especially during grad school or really just any time you’re in college, really. So how do you make sure that your tenants are not only able to afford rent, but actually pay you on time consistently? I know we talked about parents and things like that. Walk us through that process a little bit more.

Ryan Chaw (23:17):

So I think what’s key is to see that there’s some savings in either the parents’ bank or the student’s bank. Because even if you have a high-paying job, if you get fired from your job, you can’t pay the rent unless you have savings. So I usually look for a good… Somewhere between 7,000, 8,000, 10,000 in savings, if possible. If not, then I want to see them taking out student loans or financial aid, because a lot of students can use student loans toward room and board, and so they usually have a typical allowance toward paying the rent for that. The other thing is, like I said, financial aid. So some students basically get a full ride to college plus tuition through room and board. What’s actually interesting is I have a story about that. I have a tenant who actually, during COVID, he had financial aid that covered the rent, and he never moved into the house for the whole year, which was crazy.

Ryan Chaw (24:12):

And they’re totally fine with it, because they weren’t footing the bill. It was actually the financial aid allowance that the kid got. He never moved into the house, because he just wanted to stay with family during COVID, and he was paying the rent every single month for the whole year. And it was coming out of basically the financial aid that he was allowed.

Robert Leonard (24:31):

One of the other interesting things about your story is that you work not just one, but two jobs, and you’re self-managing your six properties with anywhere from three to five tenants at each one. So you’re managing, it sounds like, six properties, but then you’re really managing, say, 12 to 15 tenants, which is essentially as if you had 12 or 15 units for most normal people. So how are you able to do all of that while keeping your jobs?

Ryan Chaw (24:57):

Yeah, so I have like 28 tenants now, I believe, so quite a handful. What I did is… I’m working part-time now, but before, like you mentioned, I was working two jobs. I was working 14-hour shifts. And I basically had to create systems to make sure that when something happened on the house, it kind of worked itself out. There’s something I call tenant empowerment, which is really important. I see the tenant as kind of part of my team. I ask them for help in showing the rentals to incoming prospective tenants, so I don’t have to go over there and do the home walkthrough myself. It’s the existing tenants that can do that. So I empower them to kind of solve problems. I kind of walk them through the process, or I’ll send them an email with instructions on how to troubleshoot something.

Ryan Chaw (25:46):

And basically, they follow the instructions and the problem gets worked out. I also have a team of contractors I can count on. So if something breaks down, like the toilet, or if there’s a broken appliance, I can just text my contractor. Or, let’s say the tenant text me. I just forward it to the contractor, and then they basically let themselves in with the lockbox, do their job, themselves out, lock the door, give me the bill, and then I’ll write them a check. And it’s pretty much all automated at this point, because I took the time to really establish systems and establish protocols for when something occurs. And just to give you a quick example, actually, when I first got started in this, I had a lot of tenant-versus-tenant conflict. Or I wouldn’t say a lot, but I had it every once in a while.

Ryan Chaw (26:32):

And what I did originally was I would call up the other tenant that they complained about and say, “Hey, dude, the other guy’s complaining about you.” And then that would just escalate the situation, because now the tenant’s like, “I’m not going to do what he told me. He’s talking behind my back. He’s telling the landlord about me, telling on me essentially. He’s a fink,” whatever. So it kind of just escalated after that. What I do nowadays, which I find very, very effective, is I talk to the tenant who complained and said, “Hey, why don’t you have a face-to-face discussion with the guy you’re complaining about? Tell him why you’re upset. Talk it over. What are you going to do going forward? Come up with an actionable plan, and then implement that plan, and then see where it goes from there. And then after that, you can talk to me.”

Ryan Chaw (27:20):

Ever since I’ve done that, I’ve never have them come back and start complaining again, because they basically… I empowered them to work it out among themselves, versus behind the back type of deal. And ever since I’ve done that, it was a very effective way of managing the tenant-versus-tenant conflict.

Robert Leonard (27:41):

Do you take the same approach when it comes to common areas, bathrooms, kitchens, et cetera, or do you just kind of let them figure it out themselves? Or do you have set rules for the houses?

Ryan Chaw (27:52):

Yeah. I basically empower them to kind of create their own trash schedule. For example, I have suggestions for them, but they’re just recommendations. I’ll basically give them a list of move-in items. I’ll send them a welcome email, along with instructions to basically make sure the house is up kept well and all of that, but then it’s up to them to basically handle it from there. And I’m not too worried about maybe some dirty dishes and whatnot, as long as the place is clean by the end, by move out. I also have move out instructions, like “Remove all your food from the fridge, all that, before the next tenant comes in. Vacuum the place.” And as long as they kind of take care of it by then, I’m not too worried about what happens in between. The other thing I do is I have a maid come in once annually to basically do a deep cleaning of the whole house.

Robert Leonard (28:45):

You live local to your properties?

Ryan Chaw (28:47):

No. Actually, Stockton’s about an hour and 15 minutes from me, so I manage everything remotely. I hardly ever go down there. I would say maybe once a year, just to do the home walkthrough and to close on the house. But as far as managing it, I don’t have to do that, because again, I have systems in place. I have boots on the ground with my contractors. And I think anyone could do this. I have people that I teach that do these rentals, the student housing method, out of state, and it works just fine as long as they have boots on the ground, they have a team in place, and have systems in place.

Robert Leonard (29:20):

I mean, it sounds like you have the right systems and processes in place. Are you going to scale to other states outside of California eventually?

Ryan Chaw (29:29):

Probably, yeah. Actually, I’ll be going out of the state probably in two years or so. I plan to buy two more properties using other people’s money. This next year, I’m going to implement basically partnerships. What I’m going to do is have basically relatives or medical doctors that I know from my hospital invest with me. And they up the down payment for a house, and I’ll pay them like $1,300 per month for the first six months. And then they also get a percent of the equity, maybe one or 2% kind of royalty as well. And so I promise like an 8% return, no matter what. That’s a personal guarantee from me. Even if the house goes under, whatever, I still pay them the 8% for the full six years, plus the royalty. I mean, I’m just putting out the offer, and then I’ll probably be implementing it around May of next year.

Robert Leonard (30:20):

With a structure like that, how are you going to finance it?

Ryan Chaw (30:23):

Yeah, that’s a great question. So there’s kind of creative ways to do that. And if you keep the money in an account for two months or three months or so, then we call that the seasoning period, where basically any money that’s kind of in that account after those two months is kind of considered your money. Because what lenders do is they only look at the last two months, and that’s what we call the seasoning period. So as long as it’s in there before then, it’s usually valid to use that money towards a down payment.

Robert Leonard (30:56):

So what you’re going to do is have them give you the money 2, 3, 4 months before you know you’re going to want to acquire the property. So if you’re going to do this in May, maybe they give you the money in January, February. And then because that money has already seasoned in your account, you can still get traditional financing. Is that kind of what you’re thinking?

Ryan Chaw (31:11):

Yes, exactly. That’s correct. Of course, I’m going to talk it over with the CPA and everything, and the real estate attorney as well, but most likely that’s the route I’ll be going.

Robert Leonard (31:21):

Do you know yet how you’re going to handle the deed? Are you just going to quick claim it after you purchase it?

Ryan Chaw (31:26):

That’s a good question. I haven’t gotten to that point yet, but I’m open for suggestions.

Robert Leonard (31:32):

Yeah, it’s interesting. I’m kind of going through the same thing right now, a similar situation. So I think one of the best bets… The only issue when you do something like that is that due-on-sale clause. When you transfer the deed, it does become what they consider a sale. And so in theory, the bank could call your loan due in full, if they wanted to. I’ve talked to a couple attorneys, and according to the attorneys, that pretty much never happens as long as you don’t default on your loan. So it’s a little bit of a gray area, but it’s just one of those things to definitely keep in mind.

Ryan Chaw (32:02):

Yeah. There’s actually something called due-on-sale clause insurance as well, which might be something to look into. There was a guy who specialized in this, who went on the BiggerPockets Podcast, and he said, “Yeah, there’s due-on-sale clause insurance, which will basically reimburse you if the due-on-sale clause is evoked.”

Robert Leonard (32:21):

That’s really interesting. I’m going to have to look into that.

Ryan Chaw (32:23):

Yeah, yeah, something to look into, for sure.

Robert Leonard (32:26):

Since I haven’t been commuting to my W-2 job, which I don’t have a W-2 job anymore, I haven’t been listening to podcasts as much. I used to listen to the BiggerPockets Podcast every single episode. I haven’t in a while, so I’m going to have to go back and try and find that one.

Ryan Chaw (32:39):

Yeah, that was a very interesting one. I can shoot you the link after, and maybe put it in the notes for those who are interested in due-on-sale.

Robert Leonard (32:46):

Yeah, we’ll put it in the show notes for anybody that’s interested. You have a mistake or two that you say has cost you over $30,000. Talk to us a bit about what those mistakes were, and tell us a little bit about what you’ve learned from them.

Ryan Chaw (32:59):

Okay, so those are interesting stories. This was my first house that I purchased. It was over 100 years old, so I probably should have expected this, but I didn’t do my full due diligence. For instance, I didn’t do a sewage inspection. That would’ve caught what happened later. I didn’t really look at the HVAC in too much detail, how old it was, how effective it was. I didn’t test any of that. I didn’t have any contractors assess any of that. But what happened after I purchased the property about, I would say, six months after, I get this call from one of my tenants to say… He goes like, “Dude…” It’s like at 10:00 PM on a weekend, perfect timing. He says, “Dude, there’s sewage coming out of the sink, and it’s all over the kitchen floor. The shower’s also backed up with sewage. It’s really gross, and it smells like crap.”

Ryan Chaw (33:48):

So I was like, “What do I do?” so I had to call up some people to clean up the mess. Obviously, they charged a premium. Eventually, we stuck a camera down the sewage pipe and we found that the tree roots totally burst the pipe. The whole pipe was broken into, the roots sticking out in several areas. I even have pictures. It was really gross. So I had to replace the whole sewage line with PVC piping, which cost about $7,000, because it was a very long line. And then not only that, it was a couple thousand to do all the cleanup. I had to put in a sump pump to get some of the sewage out the basement, that leaked into the basement. So it was a mess.

Ryan Chaw (34:26):

And then not only that, during the summer, what happened is a tenant called me and said, “Hey, it’s like 10:00 PM tonight, and it’s 90-something degrees in the house. And the AC’s not getting it any lower than that.” So I was like, “Oh man, shoot.” So basically, the AC was nonexistent, so I had to replace the whole system. That was $15,000. Now, if I did my due diligence ahead of time, did those inspections, easily just stick camera down the pipe to find that sewage break, then I would’ve saved myself thousands of dollars, because the seller would’ve been able to either compensate me in closing costs or write me a check for it, or do it themselves, et cetera. But I was new at the time. I didn’t know.

Ryan Chaw (35:09):

Luckily, I kept the house. This is the house that went up from 262,000 to 430,000. So that $30,000 that I lost, it was just like a small blip in the vast ocean of appreciation, cashflow, whatever. What’s really interesting though is how I handled it too, because I owed $22,000, and I only had $7,000 in the bank. So I’m like, “What do I do?” I owe more than I have in the bank. So what I did is I partnered. I went to my dad and said, “Hey, if you’re willing to put up this $22,000 and an extra 1,500 to put in an extra bedroom in this house, I’ll give you the rent for that bedroom for the rest of your life.” So basically what ended up happening, we made the fixes. That extra bedroom was making $550 per month once we got a tenant in, and he gets paid back in about three years or so.

Ryan Chaw (36:02):

And then after that, he makes about 6,600 or something like this per year, which is about a 29% or 28.5% return on initial cash invested for him. And he gets that for the rest of his life, $550 per month. So it was a win-win situation for both of us, and it worked out.

Robert Leonard (36:21):

What happens if you want to sell that property, though?

Ryan Chaw (36:23):

In terms of pricing, or in terms of-

Robert Leonard (36:26):

No, in terms of your dad’s money. He’s thinking he’s going to get this for life. What if you want to sell it tomorrow?

Ryan Chaw (36:33):

Yeah. So if I sell it, again, we did have a contract, or we hashed out the details, so I would still be paying him $550 per month, even if it was sold. So I gave him that guarantee: guaranteed $550 per month, no strings attached, that type of thing.

Robert Leonard (36:50):

So why was it only $1,500 to add an extra bedroom? Were you just doing some renovations to a room that already existed, and made it a bedroom? Because you can’t do an addition for $1,500.

Ryan Chaw (37:00):

It was very cheap. The contractor that I used, he is a general contractor, but he kind of gives us discounts because we do a lot of projects with him. But he charged us 1,500 because it was basically drywall, I would say either 7 feet or 10 feet of drywall, and then it was just putting up that door. And that was it, to create the extra bedroom. It’s not like adding an addition to the outside of the house. It’s more of an interior wall addition type of deal. And so that didn’t cost too much, actually. And again, work with contractors that you trust. Get different bids. Get at least three bids, I would say, for any projects, any major projects. And then you can kind of talk with them and see their expertise, and then choose the one that is the best deal for you.

Robert Leonard (37:49):

That’s another example of how people can get creative. People always talk about that they can’t find deals, but if you go to buy a house that has a little bit of extra space, you could turn that into an extra bedroom for $1,500. And now you’re going to… So you said you’re collecting $550 a month from that. That’s a three-month payback period. I mean, that’s a great investment. And if people just look too surface level and say, “Oh, there’s no deals out there,” or, “Everybody’s buying deals too quickly,” maybe you just need to get a little creative and look for some ways to do things like that.

Ryan Chaw (38:20):

Yeah. And if you can buy a house that has a family room and a living room, usually students don’t need the extra family room, so you just make that a bedroom. That’s the easiest way to do it.

Robert Leonard (38:31):

What is your plan with these properties when you do want to exit? Do you plan on just selling to a traditional homeowner? I mean, the probability of somebody coming along that wants to buy this as a student rental is probably going to be pretty slim. I suppose it’s possible, but you’re probably going to sell to a traditional homeowner. Is that kind of what you’re thinking?

Ryan Chaw (38:47):

Yeah, pretty much. So what I would do is I might take out a wall addition if I added a bedroom. That only costs a thousand, a couple thousand or so. And then if they want it, if they want to keep it, that’s fine. If they don’t want it, then we could take it out. Then I would just sell it to a single family, basically, just keep it how I basically bought it, as a single-family home.

Robert Leonard (39:10):

A common concern of investors, or even those looking to get started in real estate, is having so much debt. How do you mentally deal with having the debt that is associated with rental portfolio? I mean, you’re using HELOCs, so you’re even more arguably levered than some other investors. So talk to us a little bit how you deal with that mentally.

Ryan Chaw (39:30):

Yeah, that’s a great question. I think I owe 600, 700,000, so I’m technically $700,000 in debt. But it’s your friend as a real estate investor, because that’s debt that’s being paid off by somebody else, so it’s good debt. And what’s really cool is you’re using leverage. You put up the 20%, but the bank is putting up the other 80%. Your returns are much greater for the cash you invest. I’m just going to take a quick scenario, and hopefully this is simple enough. But let’s say we bought a $100,000 house, and we put a 20% down payment on it. That means you’re in for $20,000. That’s your cash invested in the property. The bank pays the other 80,000. Now, let’s say that a $100,000 property goes up 3% in appreciation in the first year, which is actually a pretty normal appreciation rate. That means you get $3,000 return. That $3,000 in appreciation is yours when you sell the property, or cash out re-fi, or whatever you do.

Ryan Chaw (40:30):

And so you divide the 3,000, your initial 20,000 investment, that’s a 15% return. So if you just plug in the calculator, 3,000 divided by 20,000, it should be about 15% return on the cash you invested. Now, the property went up 3%, but you’re making a fivefold return, a 15% return, so that’s the power of leverage in real estate. When the property goes up a little bit, your actual return on cash invested goes up a lot more.

Robert Leonard (40:58):

How do you think about your strategy when you consider a potential recession that comes?

Ryan Chaw (41:05):

Oh yeah, that’s a great question. Real estate tends to be a lot more stable compared to the stock market. So if you invest in stocks, honestly, you should be comfortable investing in real estate. Real estate does require a little bit more skills, obviously, but it’s a little bit more steady. There might be a crash, or kind of a recession, but then it’s kind of an upgoing line like this. So there might be some hills and valleys or whatnot, but overall in the long run, if you hold on to your real estate, it’ll go up. And if it does crash, that’s actually a great time to buy more. If you purchased in 2008, there’s people who would two times, three times, four times their investments by now. I know somebody who bought a house in… I think it was Roseville, California, and they bought it for… I think it was around 200,000 back in 2008, and now it’s worth over $900,000. So 700,000 over… What was that, 14 years, 13 years? I mean, that’s a ton of money per year.

Robert Leonard (42:13):

What’s interesting about your strategy too is that you’re focusing on students, and studies have shown that the enrollment rate at colleges actually goes up during recession. People are like, “Okay, I’m either out of the job market,” or, “If I want to keep my job or whatever, I need to further my education,” and so a lot of people actually go back to school. And so if you look at some studies, it seems like enrollment rates actually increase. So for you, in theory, your properties might even do better in a recession.

Ryan Chaw (42:40):

Yeah, exactly. What’s really important is as long as you make the cash flow, if you’re positive cash flowing a good amount of money, you just wait through that recession. You wait out the recession, because you’re still going to get money every single month. It’s not like colleges are all going to shut down and all the students are going to leave, or anything like that. I mean, my college has been around since 1859 or something like that. So what was that, 170 years or something like that? So it’s not going to shut down anytime soon or anything like that. So during a recession, just hold on to it and buy more.

Robert Leonard (43:16):

I suppose you may have some more people that commute to college rather than paying to live there. I think generally speaking, I think during a recession, I think student rentals should be a better performing asset than maybe some others like Airbnb or something like that. But what has been the most influential book in your life? And I don’t think it necessarily has to be your favorite, because I think I have a favorite book, and then I have a most influential book. So tell me, what has been your most influential book?

Ryan Chaw (43:43):

Wow. Man, I know people say this all the time, but it has to be either Rich Dad Poor Dad or the Real Estate Millionaire by Gary Keller, something along those lines.

Robert Leonard (43:53):

Millionaire Real Estate Investor.

Ryan Chaw (43:53):

The Millionaire Real Estate Investor by Gary Keller. Those have been the most impactful, because they talk about… Especially Gary Keller’s, he talks about creating teams and systems, because that’s what real estate investing is all about. It’s a business. So if you create the teams, the systems, the processes, and put those in place, it basically is a self-running machine for you. It’s on autopilot, and it’s making this passive income that you get every single month that you spend… For me, I spend less than an hour a week on this stuff, because I might do my marketing during April or whatever.

Ryan Chaw (44:27):

But after that, it’s pretty much all hands off, for the most part. I just forward some text messages to my contractor, I write some checks, and that’s about it.

Robert Leonard (44:37):

Yeah, my personal favorite real estate book is the Millionaire Real Estate Investor from Gary Keller too. I think-

Ryan Chaw (44:41):

Oh, really?

Robert Leonard (44:42):

Yeah. I think that’s the best real estate book. Anytime somebody asks me, “Hey, I want to get into real estate. What’s the first book I should read,” I usually recommend that book.

Ryan Chaw (44:50):

Oh yeah, for sure. Definitely. It’s a little bit more practical, too. Rich Dad Poor Dad is a lot of theory. It’s not as practical. It’s good for mindset, but I think Gary Keller… He really lays it out for you. And there’s actually charts in there that shows you the power of the numbers, the actual numbers. If you bought a house for this much, and it went up this much, and your rent increases this much, this is what it’s going to look like in 10, 20, 15 years or whatever. I think those charts are really awesome.

Robert Leonard (45:14):

Yeah, exactly. You hit the nail on the head. For me, I like Rich Dad Poor Dad. It’s a good book. But I don’t love it as much as some other people, because it is just theory. And for me, as a person, I like the tactical stuff. Tell me this is what I should do. This is how to do it. Show me some numbers, et cetera. And Rich Dad Poor Dad doesn’t do that at all. It’s not a how to. It doesn’t give any numbers, really. It’s just all theory. And for some people, that’s a mindset shift that they really need, but for me, the tactical piece of the Millionaire Real Estate Investor was more beneficial for me, at least.

Ryan Chaw (45:45):

Yeah, for sure, for sure. I agree.

Robert Leonard (45:48):

Ryan, before we give a handoff to where people can find you, I like to wrap up the show by turning the tables and letting the guest ask me a question. So what question do you have for me?

Ryan Chaw (45:59):

Oh yeah, definitely. So we’re recording this right before the new year. I’m curious, what are your plans for 2022 for expanding your portfolio, maybe selling some off? Or what are your plans?

Robert Leonard (46:11):

Yeah, so this is-

Ryan Chaw (46:11):

New year plans.

Robert Leonard (46:12):

… interesting. It’s probably going to be a little bit of a surprise to you, honestly. My focus is actually to build an RV rental portfolio. So I have-

Ryan Chaw (46:20):

Oh, wow. All right.

Robert Leonard (46:21):

… one RV rental right now, and it’s doing really, really well, and I think that I’m going to focus a lot on that. I don’t know exactly. I got to still kind of build my goals around what exactly I want that to look like. I don’t know if I want to buy 2, 3, 4, 5 more RVs myself. I don’t know if I want to partner with some people and let them purchase the RV, and I kind of do the property management piece for them. Or I’m teaching a course on how to invest in RV rentals, so I’ll focus on that a bit. And then of course, I will still be buying rentals as well. I’ll continue to do my long distance. But from a real estate perspective, outside of RVs, you’ll probably see me focus mostly on either buying a small apartment building, something between, say, 7 and 25 units, or a Airbnb. Those are kind of my two focuses on the real estate side.

Ryan Chaw (47:10):

Awesome. Yeah, they say the riches are in the niches, right? Common phrase.

Robert Leonard (47:16):

Yeah, that’s what I’m hoping with the RV stuff. Ryan, where do the audience who have enjoyed this conversation go to connect with you and find you on the internet?

Ryan Chaw (47:26):

Yeah, so you can reach out to me. I have a free PDF guide for those interested in student housing, the student housing strategy, or just getting started in general with real estate investing, some mindset things. It’s at www.newbierealestateinvesting.com/guide. Newbie is spelt N-E-W-B-I-E. Again, that’s www.newbierealestateinvesting.com/guide.

Robert Leonard (47:55):

I’ll be sure to put a link to that in the show notes below for anybody that’s interested in checking it out. Ryan, thanks so much for joining me.

Ryan Chaw (48:01):

Awesome. This was an awesome episode. Thanks again, Robert.

Robert Leonard (48:05):

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 (48:11):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.