104 ryan chaw

In this episode, I’m talking with a guy named Ryan Chaw. Ryan is an interesting guy who has been featured on BiggerPockets and a number of other podcasts over the past year because he’s got a cool thing going.

By most people’s standards, he’s a pretty normal guy, working a normal job and pursuing the American Dream like the rest of us. He’s got a lot in common with most of our listeners out there and over the past few years, he’s been able to build up a nice little rental property portfolio on a part-time basis that is bringing in well over $10K per month in rental income.

He did this using a rent-by-room model, which is kind of like house hacking on steroids because he's been able to earn double the amount he could normally make if he had used his properties as conventional rentals.

In this conversation, we’re going to talk about how he did this, some of the important lessons he’s learned along the way, and how you can follow a similar roadmap if you want to create something similar for yourself.

Episode 104 Transcription

Seth: Hi everybody, how’s it going? This is Seth, and you're listening to the REtipster podcast. In this episode, I'm talking with a guy named Ryan Chaw. Ryan is an interesting guy because he has been featured on BiggerPockets and a number of other podcasts over the years. He's got kind of a cool thing going. By most people's standards, Ryan's actually a pretty normal guy working a normal job, pursuing the American dream like the rest of us. He's got a lot in common with most of our listeners out there.

And over the past few years, he's been able to build up a nice rental property portfolio that's bringing in over $10,000 a month in rental income. And in this conversation, we're going to talk about how he managed to do this. And some of the important lessons he's learned along the way and how you can follow a similar roadmap if you want to create something similar for yourself. So, Ryan, welcome to the show. How are you doing?

Ryan Chaw: Thanks for having me on Seth. I appreciate it.

Seth: Yeah, absolutely. So maybe in like 60 seconds or so, who is Ryan Chaw? Why don't you give us your backstory?

Ryan Chaw: Yeah, that's a great question. So, I started out actually being inspired by my grandpa. He bought a couple of properties in the San Francisco Bay Area before Silicon Valley was even a thing. As we all know, the prices skyrocketed, rents went up, and Grandpa Chaw was able to basically retire early and not only that but helped cover his own living expenses and cover some of my college tuition and my brothers' as well.

So, I realized that real estate is one of the best ways to create generational wealth. So, I wanted to get started as soon as possible. I graduated with my pharmacy degree in 2015 and I worked two jobs, retail and hospital pharmacy, because I really wanted to save up a lot of capital to be able to invest in as many properties as possible.

So, I bought my first house in 2016, it was a three bed, two baths. I got it for $262,000. I actually lost a lot of money on that property because I didn't do my due diligence, which we can definitely go over later. But I kept going at it and I bought one property per year. Over the course of four years, I was able to create a portfolio that makes $10,755 in rental income. And I'm actually just recently purchasing a fifth property that will bring me to about $13,910 in rental income. And actually, the rooms are almost all rented out already from August 2021 to August 2022.

Seth: That is before expenses or after expenses?

Ryan Chaw: That's gross rental income, but after expenses, it ranges from $4,000 to $5,000 in cash flow.

Seth: Okay, cool. Depending on what market you live in and what your monthly personal expenses are, that could feasibly be a full-time income depending on who you are. So, I'm actually just curious about this whole thing you mentioned about Silicon Valley. When did that go nuts and become like a super expensive market? Did that start in the 80s or something? When did your grandpa buy the property?

Ryan Chaw: He actually bought it in the 50s. And then I would say around the dot-com era when the internet was really becoming a thing, that's when a lot of the companies grew and it created a lot of jobs, obviously. So, a lot of people wanted to move to that area. And the real estate market follows the job market. The house prices go up when you have a lot of jobs. And so that's what happened to him. He actually bought three properties in the Bay Area and he rented out a couple of them and then basically that rental income increased, and then the prices of the properties increased and he was able to retire early from that. 

Seth: And you might've already mentioned, and maybe I just missed it, but what year did you start officially buying income-producing properties?

Ryan Chaw: 2016.

Seth: 2016.

Ryan Chaw: And what I do is I do rent by the room system. So that's how I'm able to actually make so much cash flow on such a small portfolio. I only have five properties, or I’m purchasing my fifth one that will be making $13,910 because I rent each room out for about $600 to $700 to college students.

Seth: Are all of your properties handled this way? Or just one or two of them?

Ryan Chaw: They all are. And actually, one of my friends inspired me to do it. He basically bought a property when he was in college and he rented out the other bedrooms to his roommates and the roommates were able to cover all of his living expenses. So, he was able to live in the house for free. So, I was like, “Oh, I could totally do this.” 

So, once I graduated, I was like, “Okay, I'll give this method a try.” And lo and behold, now I'm four years later, I've scaled it to six-figure portfolios because I was able to reinvest that cash flow and then also take out some of the appreciation on the property to invest it as a down payment on the fourth and fifth property.

Seth: Gotcha. So, this is almost sort of like a form of house hacking, right?

Ryan Chaw: Yeah. It's kind of like house hacking on steroids basically because you're renting out each one of the bedrooms, you're trying to create as many bedrooms as possible to maximize your profits. So, I'll usually take like a three bed, two bath and convert it to at least four bed, two bath, sometimes a five bed, two bath. And sometimes I'll actually put a couple into one of the rooms, like the master bedroom, and I'll be able to charge about 30% more rent by doing that. So, I'll charge maybe something like $900 for the whole bedroom instead of the usual $620 or $650.

Seth: Are these all single-family houses? Is that the idea?

Ryan Chaw: Yeah. They're all single-family homes as well. So, it's very simple to get into this market. Just starting out I would say it's one of the best markets to get into because you're not going to be able to go and purchase like multi-families and apartments unless you have a whole team of investors or do a syndication or something like that before the mom-and-pop people who just want to get started on a single-family home. This is the best way to maximize your profits, essentially.

Seth: If you were to just take one of these houses as an example, it sounds pretty clearly, it's a lot more lucrative to rent out houses by the room instead of just renting the whole house to one tenant. What is the comparison? What is it under scenario A versus scenario B?

Ryan Chaw: Yeah. So, I'll tell you actually for the numbers on my fifth rental, I have them here. So, I'm going to be renting it out for $3,440 per month because I have a couple in the master bedroom and then I have four other tenants, plus the couple. So, six tenants total. So, it's going to be $3,440 and then I looked it up on rentometer.com and per Rentometer, I should be only getting $1,537 per purchase house. So, I'm essentially doubling my rental income on the property.

Seth: That's a huge difference. Is it like a prerequisite or does it only make sense to do this around a college town? Or could you just pick any random city or town and make this work?

Ryan Chaw: Yeah, I asked some people I teach this method too, and they've actually been able to diversify a little bit. So, we kind of target cities that have high job prospects, like high-paying jobs, like tech companies as an example. 

We also target places that have government workers because they have very stable jobs, they have a lot of benefits, so you're not going to worry about getting unpaid rent. And then of course targeting colleges, and then healthcare workers actually. So just being close to a lot of medical centers allows you to target healthcare workers. And we all know healthcare workers, even during COVID, they're in high demand and their income is quite high as well.

Seth: Does that mean they're like transient healthcare workers? Like they're in town for a few months and then they're leaving or they literally live there long term and just rent a bedroom?

Ryan Chaw: We target long-term but I do know some people who are trying to traveling nurse model where they just rent out. Traveling nurses for a couple of months at a time, so they can make a higher income, but then of course you have a higher potential for vacancy.

Seth: So, when I think about the type of tenant who would want to do this, are these people all sharing a kitchen and bathroom together with people that they don't previously know? And they're just kind of cool with that because they're saving a lot of money on rent? Is that the kind of person you're going after? Somebody who's flexible like that?

Ryan Chaw: Exactly. So, if you think about it, normal people, when they go into college first year or second year, they'll stay at the dormitories. And usually, they're staying with their bunkmate and maybe there's like a bunk bed. And then they all shared this communal bathroom.

So, staying at one of my houses is actually a huge upgrade because you have your own privacy, you have access to the rest of the house, the backyard, there's a lot more room essentially. Plus, you're paying half the price of what the dormitory is charged. 

Dormitory is usually charged $1,100, $1,300 per month. Plus, you have to pot by this meal plan, which basically forces you to purchase meals from the university. And obviously, the university does have a little bit of a premium to their meals. So, they're essentially paying half the price, getting a lot more privacy and they're just as close to their classes. My houses are within a five-minute walk to campus, five-minute walk to classes. So, it makes sense for a lot of people to save money on student housing, to save money on their student loans.

Seth: Your units specifically, are those all rented to college kids, or is it sort of a mix of college and then other types of people?

Ryan Chaw: They are, because of COVID I did branch out a little bit. So, I did rent out to some college alumni. So, recent grads who got a job and that was perfectly fine too. I was able to get my place fully occupied. Even during COVID, I gave out some discounts. So, I was making around $9,300 per month. Now it's back up to $10,700.

But again, I kind of had to pivot during COVID because we were worried the college was going online. They're all online classes, but I did retarget towards more alumni, young professionals type as well. And I was able to fully rent it out because I was pushing for it. I was reaching out there. I was also getting on calls with people as well, to see if they're comfortable, what they like to see at the property and what amenities can we provide, and that type of stuff.

Seth: Again, just going back to the type of tenant who would be looking for this kind of arrangement. Does it make a lot of sense to do this in cities where rent is just crazy expensive? Like New York City or San Diego or San Francisco, that kind of thing. I think about if I were to try to do this in Grand Rapids, Michigan, where I'm at, I'm sure I could find somebody to do it, but it seems there would be more people looking for this in areas where rent is just like nuts. Is that accurate or am I misguided on that?

Ryan Chaw: It depends on the price-to-rent ratio. So, if you have a city where the prices are very high, as long as you can put a 20% down payment on a house there, if the rents are very high and even the price of the house is very high. As long as the rents cover the mortgage plus give you additional cash flow, the deal will make sense. So, this can be done. Actually, I've seen this done in San Jose. One of my students is actually investing in San Jose. He's buying a house that's like a million dollars, but the rent for each room is $1,200 and he has eight bedrooms and he already has it fully rented out with eight tenants. So that's $9,600 in rental income, which totally covers the mortgage.

Seth: Yeah. Say if you have a mix of college students versus medical professionals or something like that. Is it more ideal to keep all the college students in one building and the other types of people in another building so you don't have a mix of college versus professional people?

Ryan Chaw: Yeah, definitely. So, what I'll do is collect all these rental applications. And I'll kind of group them up together. So, I'll have a house that's mainly pharmacy students, a house that's dental students, a house that's pre-pharmacy, a house of music students, or engineering students. And I kind of grouped them up based on interest. So, they kind of vibe together very well.

Seth: And is there some kind of rule about how many unrelated people you can have living together under one roof?

Ryan Chaw: Yes, definitely. So, this is where you have to check with your local city laws. So, what you want to do is give your city planning division a call. It's called the city planning division and basically asked them how many people of unrelated households can I have in one room and how can I do this, where I rent out by the bedroom or rent out to a couple and all that? 

So, for me in my city, as long as I have a city business license and pay the city tax on that, and I think the tax is very low. I think it was only like $100 or $200 for a six-figure rental portfolio. So, it was totally worth it. And I was able to do multiple leases per household, unrelated tenants—all of that is perfectly legal as long as I have that business license. But again, it depends on the city. If you don't have a business license for my city, you can do a maximum of only two leases per house.

Seth: Because I remember this issue coming up a lot when I was in college first thinking about doing exactly what you're doing. It’s this whole issue of, “Oh no, you can't do more than…” that kind of thing. And at the time I was just like, “Well, I guess I can't do it,” and I moved on.

Ryan Chaw: Well, sometimes you have to just talk to the right people because I've definitely talked with people who said, “No, you can't do it.” But then once I called the planning division, those are the guys in charge. So, if you talk to the guy in charge, when they say it's okay, get into writing if you can, obviously, if they say it's okay then yeah, it's perfectly legal.

Seth: And do each individual tenant per room, do they send you a separate check or make a separate payment to you each month or do they all pool their funds together and make one payment? How does the payment processing part work?

Ryan Chaw: You can definitely have either option, to be honest, but what I do is have individual payments. So basically, they will download the Zelle app and Zelle is a direct deposit app. They'll tell you exactly when they pay. So, I know if they paid late and everything and I can keep track very easily because it'll list or name next to their rental payment. So, I have them each on individual leases and individual payments.

For utilities, however, you can have utilities under one of the tenants’ names. And I've done this quite a few times where basically all the utilities are under one tenant’s name and then they'll split the bill among the other tenants. So, they'll pay me the utilities and then they'll charge back to other tenants.

Seth: Is there any advantage to using an app or some kind of software that's specifically designed for rent collection? Like Cozy or Avail or Tenant Cloud or something like that?

Ryan Chaw: No, I didn't see the need for it. I just use Excel sheets because I like keeping track of my finances myself, trying to see what comes in, what goes out. So, I know my expenses, my income, and my cash flow very well. So, I just use Excel to keep track, but for those who aren't so savvy, you can definitely hire a bookkeeper, or use one of those rental apps that keep track of it for you.

Seth: Are you getting I guess in cases where you're allowed to do more than two leases per household? So, you have each individual tenant sign their own individual lease? And is that like an annual list or month to month? How is that working? 

Ryan Chaw: That’s right. So, if you have a business license, you can actually have multiple leases per household and there's no limit. So, I do have them sign individually and if possible, try to get a parent co-signature as well to protect myself. 

Seth: If one of these tenants just decides to stop paying you or something, what does that eviction process look like? Is that weird because there's one tenant in one room, but the others are fine? You have to get in there and have some awkward confrontation or I don't know. Is there anything different about that than when you normally evict them?

Ryan Chaw: Yeah. So, the cool part about this model is actually that's probably one of the least of your worries. I've actually never run into that problem because the parents are paying the rent. So what parent is going to stop paying rent and have their child evicted from the place they're staying at in college, right? Parents are pretty responsible for their children. Also, the student has several ways to make the payment. They could either take out a student loan to cover their housing expenses. They can take out financial aid, they can, again, have their parents do that as well. So as long as I get proof of income from the parents, I'm comfortable with these people being able to pay the rent and not having to deal with eviction.

Seth: And is that some kind of requirement, then, where the parent has to be ready to make that payment before you'll sign a lease with somebody?

Ryan Chaw: Yeah, definitely. You always have to have proof of income no matter what. So, you have to show an income source that you feel is comfortable enough to cover the rent and then other expenses.

Seth: Yeah. I guess that is one differentiator about renting to students is that the financial is kind of different in terms of where they can get money. And it's not like they necessarily rely on a job because they have a student loan or a parent, like you're saying. Are there any other issues to watch out for when you're doing this type of rent buy a room model?

Ryan Chaw: Once in a while, I would say one time per year, I'll have like one of my houses where a tenant might not be happy with another tenant. So, they'll complain, of course. And there will be some drama. And what I'll say is, basically empower them saying you're an adult now, why don't you go ahead and talk with them one-on-one, face-to-face, have a discussion, come up with an actionable plan, implement that plan. And if it's still not working out between you two, you can come back and talk to me.

But every time I've done that, I haven't had issues afterward. The good thing about this market is if you still have problems after that, you can actually go to their authority figure, one of their parents, and say, “Hey, this is what's going on. Maybe the tenant is playing really loud music or something like that, disturbing other tenants, that's a violation of the lease.” So, you explained it to the parents. And then after that, you're not going to have any problems.

Seth: This is strictly a part-time thing for you, right? It's not like you're doing this as your full-time job as kind of a side source of income. Is that accurate?

Ryan Chaw: Oh yeah, definitely. I would say I would spend an average of less than an hour a week on this whole process because I have systems in place. So, having the right team in place, having the right processes in place, makes this whole thing easier. And nowadays it's not even hard for me to fill my bedrooms because I just rely on a referral system. I have 18 tenants, soon to have 28 tenants.

And so, each of those tenants knows another three or five friends that might potentially want to stay at the house. So, I have potentially 150 people interested in staying at my house. So, nowadays it's very simple to get referrals and very simple to get my rooms filled. In fact, my school has 5,000 students. And if you take 28 divided by 5,000, that's like less than 1% of the total market share.

So, this is a very good niche market and makes a lot of sense for the students because they're saving at least $600 in rent payments. And they don't have to pay for a meal plan and they're very close to school. So, I think it's what you call a blue ocean market, basically an untapped market on top potential. There are some people who get into it but I feel like there's a lot more to be had here.

Seth: Are there ever issues with vacancies in the summer when school's out and people are gone or is that not really an issue?

Ryan Chaw: It is, if you do a nine monthly. So, what I do is a minimum of a one-year, 12-month lease and what they can do is always sublease during the summer. And because I have this referral system going on and plus, I have targeted marketing, I'm able to help them sublease it, find someone to sublease it to. So, it's not an issue.

Seth: Gotcha. So, do you have to advertise these rooms for rent at all? Or it's just kind of handled from the word-of-mouth thing?

Ryan Chaw: Nowadays I don't as much, but like I said, I do actually have this, it's called the prime method for marketing for tenants and we can definitely go over it. It's basically my method to find high-quality tenants—consistent high-quality tenants. So, the P stands for placement of your ads. You want to place your ads where your target market hangs out. Putting up ads where your target tenants don't hang out is basically like fishing in an empty pond.

So, the first thing I did when I started out, I actually put a “for rent” sign on my lawn. I put my number there. That was a big mistake. I got calls from all sorts of people. None of them were students. A lot of them were asking for cheaper rent because they're like “What? I have to pay $2,500 for the whole house for my family. It's usually $1,500.” But I'm like, “No, it's rent by the room.” So, it was definitely not the right set of tenants.

So, you kind of have to figure out where your college students hang out. Maybe it's campus bulletin boards, maybe it's Facebook groups, Craigslist. Those are just some examples.

The R stands for reviewing social media. So, once they contact you, you do want to review their social media, look for things like what type of tenant are they like? Are they a partier or do you see a lot of drugs and smoking and alcohol in their pictures? Then I would say I'm less likely to invite them into the household because I don't want a house party going on obviously.

The I stands for identifying the type of tenants. So, is this a tenant who is constantly asking for cheaper rent? Do they get angry easily? Are they easy to communicate with, or is there a barrier to communication? That type of stuff.

And then M stands for measuring responsiveness. I find the more responsive the attendant is, the more responsible they are. So, if they're getting their paperwork back pretty quickly, then I can tell that this guy is pretty mature, he's pretty professional. And if I bring them into the household, he'll be able to help me out around the house.

So, what's really great about having the system is you have four or five tenants that you can rely on. Instead of seeing them as four or five problems, I see them as four or five helpers. Each one of them could help me get things done around the house, like changing a light bulb. I've actually had a tenant who installed a security camera on his own without even asking just to protect the property.

The final letter is E which is ensuring proof of income. I usually get the last two months' bank statements and a credit score to make sure that they can pay the rent.

Seth: So, it sounds like when you're starting off, this kind of advertising and stuff is pretty necessary. Do you have to do it at all anymore? Just kind of sporadically?

Ryan Chaw: I do put up ads because the more leads the better, right? Why reject a lead? And I try to keep my volume of applicants as wide as possible. It's kind of like a funnel, right? At the top of your funnel, your marketing funnel, you want a lot of people interested in contacting you, filling out the rental app, and all of that. And then you kind of narrow it down. You start asking, “Okay, what type of tenant are they? Are they going to be professional, mature, or are they going to potentially give me problems on the house?” And then I narrow it down even further and make sure that they can pay the rent. And at the very end, I only have a couple of tenants signing each lease.

Seth: Now I'm curious if somebody doesn't want to manage all this themselves, like they want to own properties like this because they can obviously make twice as much rent, but they don't want to be the hands-on property manager. Is there a type of property manager that does this kind of thing, or do you sort of have to be your own PM?

Ryan Chaw: I've been hearing a lot of property managers try to avoid it. I do know some property managers who do it, but then they charge a significant amount and they'll take out of your cash flow. But what you can do, and eventually I'll probably be doing this is outsource this all to a virtual assistant. So, someone who can do the bookkeeping, keep track of the finances, keep track of the rent and the utilities being paid. In Oregon, you could use something like Tenant Cloud.

And then once that's done and you just have to take care of if something breaks down on the house. So, if something breaks down, what happens is usually a tenant will text me like the toilets are broken. I'll forward that to one of my handymen or contractors. And the handyman knows to get in there quickly. They know my expectation is to get it done within a week or so and be responsive there. And I do hire them for quite a few jobs so they value our relationship. And so, if you have that network there, it allows you to basically lead this whole self-management thing with a hands-off approach.

Seth: So, if somebody doesn't want any part in self-management, is this sort of not for them would you say?

Ryan Chaw: No. I mean, like I said, you can definitely hire out if you want it to. For the people who it's not for, I would say if you're not willing to persevere, if you quit easily, if you let an obstacle get to your head, and you don't have the right mindset. Basically, if you encounter a huge loss and you don't have the right mindset, then this thing is going to be really difficult for you. I think in all real estate though, that's not just this market.

Because when COVID hit, I started getting into my own head like, “Oh, am I even going to get tenants?” But again, I persevered through it. I started reaching out. I started getting creative. How else can I advertise my rooms? How else can I leverage my network to fully occupy my property? And I was able to of course fully occupy the property throughout the whole COVID period.

Seth: Yeah, that was a pretty common thing. I remember thinking that. I think probably anybody was probably worrying about something like, “What is COVID going to do to me?” a year ago when this all started unraveling. And so, basically, it hasn't really had any negative impact on you?

Ryan Chaw: Again, I offered some discounts, so my rental income went from $10,700 to $9,300, but I was still covering all my mortgages and I have a couple thousand in cash flow still. So, it still worked out for me. And again, that was because I pushed for it. I had that drive. I reached out, I started getting on calls with people.

Seth: Coming on back to your first deal and your second deal and your third one, how did you find these? Were these just like on the MLS or did you find them off-market? It sounded like they were decent deals. It's not like you're offering an over-asking price or anything like that. So, what do you do to find these things?

Ryan Chaw: Yeah, so the first couple of deals were actually MLS and Zillow. So, when I want to pop up on Zillow, I basically forward that to my real estate agent and say, “Hey, can I look at this house?” But my real estate agent, he also has a network in the area. So, he does find an off-market listing.

So, the one that I purchased this year, the fifth property, I actually found off-market and below market price. So, I got it for $340,000 and it appraised for $360,000. And we know that when all these properties hit the market, especially in California, they go for $50,000 up to $100,000 over the asking price. And these people are paying cash. Yet I was still able to get this property off-market for below their appraisal price.

And the reason is because I established this connection with my real estate agent. I actually cut them checks after each property. Even though I'm not the seller, I cut him a check to thank him for his work. And he knows exactly what I'm looking for and he knows I can close on every deal that I put an offer on. So, he will of course do me a favor as well and find me properties that are off-market.

Because these real estate agents state, you have to realize they do their own advertising as well. They do reach out to potential sellers in the area and they say, “Hey, if you want to sell your home, you can sell it through us.”

And so, they do encounter a lot of off-market deals. And if they know what your criteria is, they can keep an eye out for it. And so, basically, this property popped up and he was like, “Oh, this is perfect for Ryan because he is looking for three beds, two baths with a potential to add bedrooms. And this one looks like it has the potential to add bedrooms. And it's also like a five-minute walk from campus, or three-minute walk actually for this one.” And he was like, “Okay, this is a perfect property for Ryan. So, I'm going to go ahead and give it to him.”

Seth: Yeah. In terms of the ability to add bedrooms, are you essentially just looking for like, is there enough space in the basement or could I take this bedroom and chop it? Is that basically what you're looking for? Or are you actually talking about adding onto the building?

Ryan Chaw: Yeah. The general rule is definitely don't add onto the building. That'll cost a lot more. The general rule is if you're 1,200 square feet or more, you can add a fourth bedroom. 1,500 or more, you can add a fifth bedroom. And so, that's why I look for, and usually I'll look for an extra family room or living room or office space. I can easily convert it into a bedroom just by repurposing it and putting in some furniture, maybe making it a little bit more private. Or I'll split the living room in half where half of it will become a bedroom, the other half will remain the living room. As long as it's a large enough living room.

Seth: What is the limit on how small a room can be to be a bedroom?

Ryan Chaw: In some of these, square feet, with a minimum width of seven feet. And the height I think it depends on the state. I think it's actually seven or eight feet. Right now, in California, you usually have a little bit less cash flow, but you have very, very good depreciation.

For example, my very first house I purchased over the course of five years went up to $130,000. So that's a pretty massive appreciation. I think that's $25,000 a year. And I like to do that because you can still use that equity on that property. You can take it out using HELOC or a cash-out refi, and that allows you to scale down much further.

So, California is actually a great market for me because I can maximize my profits by using this rent-by-the-room method. And I'm definitely covering the mortgage and getting at least $1,000 or $1,500 or more in cash flow per house.

Seth: How exactly did you finance each of these properties? Was this just a conventional mortgage or did you do some other creative way of financing them?

Ryan Chaw: Yeah. Conventional loans, because if you are an employee or W-2 worker, that's probably your best bet to get financing. It's the cheapest out there. I think interest rates are anywhere from 2.8% to maybe 4% on an investment property. So, this is honestly the best financing out there for those who are W-2 workers. Usually, once you get into the self-employed area, you have to get more creative and you have to use more things like portfolio lenders, private money, that type of stuff.

But for me, I conventionally finance them. But for one of them, I actually got creative and took out a HELOC. For the fourth property, I took out a HELOC from my first property because it went up $130,000. And I was able to use that toward a down payment on the fourth property. And I'm also going to use that same HELOC for the fifth property as well. So, I basically joked that when I bought the first house, I basically bought my fourth and fifth house as well.

Seth: And you were able to do that mainly because of the appreciation thing.

Ryan Chaw: Yes, exactly. And then I didn't have to use any of my own money. I just used the rental income equity paydown plus the appreciation on the property to do that. So, let me just give a quick example. If you were to do a HELOC on a $100,000 property, you can do up to 80% loan to value. So, what that means is you multiply 80% by the property price, the current price. So, 80% times $100,000, that's $80,000. And let's say you have $50,000 less left on your loan. What you do is subtract that $80,000 minus the $50,000, which leaves you with $30,000 that you can take out as a HELOC.

So that's the basic calculation. And if you do this on your property, you might be surprised actually, especially in this market right now, a lot of properties appreciated in price because it's a hot market. You can use that equity to basically purchase wherever you want.

And the good thing about the HELOC is if you keep it at zero balance, you don't have to pay anything on it. 4% or 5%, 6% interest on $0 is still $0. So, you can use it whenever you want, but it's just having the access, that ability to take out $30,000, $40,000, $80,000 and only being charged a 4%, 5%, 6% interest rate on it. And then using that money to make a return.

Because the number one purpose of money is to make more money or it should be to make more money. So, if you are taking a HELOC, let's say $80,000 out at a 5% interest, but you're able to put in a property that makes 13%, 15% cash on cash return. It just makes a whole lot of sense, because you're netting a 10% return still.

Seth: So, at some point when that HELOC is totally tapped out, do you want to then turn that out as a normal amortizing mortgage?

Ryan Chaw: There's a tenure draw period usually. And then after that, it becomes amortized, like you said.

Seth: Oh, so it just automatically amortizes.

Ryan Chaw: Yeah.

Seth: Okay. Gotcha. So, if property values weren't appreciating crazy like they have been, would you not have been able to do this?

Ryan Chaw: Well, California appreciates no matter what.

Seth: That’s true.

Ryan Chaw: To be honest, but I do recommend investing in emerging markets or near colleges that have high demand. So, colleges that are like Ivy League colleges that have a lot of professional schools like pharmacy, medical schools, dental schools, nursing schools. Those are always in high demand and they're constantly expanding as well. So, more people obviously means more need for housing. Meaning rents will go up and housing prices will go up.

And an emerging market is basically a market that has a lot of job growth and population growth. Colleges that are expanding or tech companies move. Like let's say, I don't know, Tesla moves to Texas. And the city that they moved to, it'll probably create a lot of jobs. So, you're going to see appreciation in the property prices and increases in rents.

Seth: Yeah. So, did you make any mistakes as you were starting to do this? What are some things looking back that you would do differently? Or what would you warn other people about if they're looking to get into this kind of business model?

Ryan Chaw: Yeah, definitely. I made a lot of mistakes on my very first property. I lost over $30,000 on it, just in preventable items. So, what happened is I got this call from a tenant. It was around 10:00 PM at night on the weekend. And he said, “Dude, there's sewage that's coming out of the kitchen sink. It's all over the kitchen floor. It’s flooding into the basement. Now, it's also coming out the showers too.” I was like, “Oh man, what do I do?”

So, I called up all these people who could sanitize it, obviously, it was hard to get someone out there. The cost to sanitize it, clean up the mess, put a sump pump in the basement, it was over a couple thousand dollars. And then we stuck a camera down the pipe and found that there were roots sticking into the sewage pipe. So, the whole line was broken, it had to be replaced with PVC pipe, which cost me $9,000. So just that there was over $10,000 total.

And then I realized that the HVAC unit was very old. It wasn't really working at all. So, I replaced that whole thing for $15,000. So, I had a lot of mistakes that I made in the first house. But if I did my due diligence, such as just getting a sewage line inspection during the escrow phase of the house, I would've been able to see the pipe was already broken and had the root sticking into it and had the seller pay for some of the costs or at least cut me a check at closing to cover future costs and potential breaks.

It's just about looking out for those red flags, doing your due diligence, doing all the necessary inspections. Like if the roof is old, do a roof inspection.

Ryan Chaw: Would you ever deal with a property that needs a full rehab? Like it's just a massive property, it needs to be completely overhauled. Is that what you do or not really that's not what you mess with?

Ryan Chaw: The first house was the closest to that, obviously, because I had to redo the bathrooms because they're all old. I put in a whole new HVAC unit. I had to put in a whole new sewage line. I put in an extra bedroom. So, that was a pretty big rehab project. But I've never had to do a complete fixer-upper where the roof is not working.

And plus, you run into lending problems when you have huge fixer-uppers because the banks are not really willing to land on the property that they see as a liability. If they see too many things wrong with the property, it's hard to get financing for it unless you do private equity, hard money, that type of stuff.

So, I mainly stick with properties that are mostly turnkey, most things are in good condition. I just have to add that fourth or fifth bedroom, maybe expand the bathroom a little bit. But that's pretty much the extent of the work that I will mainly do on a house.

Seth: Actually, I'm going back to the financing stuff a little bit. Do banks ever have issues with you using properties for this specific use? Like you're not an owner-occupant, you're renting them out by the room. Like just that alone, is that ever a problem or banks are like “Oh, yeah. We don't care. That's fine.”

Ryan Chaw: Yeah. So, they actually do like this thing where they take 75% of your rental income and they use that towards your debt-to-income ratio. So, I've actually never run into a debt-to-income ratio problem. They actually don't have issues with rent by the room as long as you're showing rental income coming in doing that, you're fine.

Seth: I don't even know if we talked about this, but what is your day job? What is your career outside of this?

Ryan Chaw: That's a great question. I'm a pharmacist. I was actually the first one in the healthcare field from my family. So, I'm very proud of that. And I learned as a pharmacist it's a great job, you're helping a lot of people. But I encountered this one elderly pharmacist. He kind of had this bad attitude obviously.

And I asked him, “What do you like about your job?” And he whispered in my ear, “To be honest, I would have quit a long time ago. I'm just here to collect the paycheck nowadays. But if I could have done it over again, I would have invested and I would have more choices and have that time freedom to basically choose how many hours I want to work here. Unfortunately, nowadays I'm just collecting a paycheck.”

So, I was like, “Okay, I don't want to be that pharmacist.” Maybe I'll work 10, 20 years. I don't know yet. But at least I have that choice once I have financial freedom, which I'll actually have by around 31, I'll be able to make that choice how many hours do I want to work as a pharmacist and how much do I want to put toward making another impact or maybe a larger impact on the world that I want to make.

Seth: I don’t know what it is about that. Maybe it's a function of which pharmacy you work at. But every time I go to the pharmacy, people I deal with, I can see it on their faces. Like they're just stressed, like they're not in a good place. And is that something you feel often in your job?

Ryan Chaw: It can be stressful. It depends on the workload. It depends on how many patients come into the hospital, obviously. I would say it's a very rewarding job because you're definitely helping people, but I would say at the same time, I don't see myself doing it for 20 years or more. Like I said, once I hit 31, I'll probably cut back my hours, maybe work at a pharmacy one or two or three days a week. And then from there, I'll probably just decide what kind of impact I want to have on this world. What else can I contribute to?

And one of the things I do of course is teach others my system for renting by the room, because honestly, I believe this is the best way to get started for someone new in real estate investing. And I want to expand that and lead more people toward that life of financial freedom if I can.

Seth: Yeah. I don't know exactly what a pharmacist makes, but I think it's pretty decent. It’s on that upper end.

Ryan Chaw: Yeah. And there's actually special pharmacist loans too. So, if you're a healthcare professional, there's like pharmacy loans, nursing loans, doctor loans. And what's really cool about that is you don't have to pay PMI if you put less than 20% down sometimes. So, that's something too for people to look into.

I've also heard of loans for first responders, for teachers. Just be resourceful. There's a lot of different lending institutions out there. And some specifically support a certain group or certain career.

Seth: I looked at your career as a pharmacist. What role does that play in your ability to get financing and buy these kinds of properties? Say, if you were working minimum wage at McDonald's or something, is it safe to assume that would severely limit your ability to do what you've done? Like if somebody is listening to this and they're not a pharmacist, are they not going to be able to do this kind of thing because they don't have the same kind of income?

Ryan Chaw: If you're just working on McDonald's minimum wage, I would say it's a little bit harder because you have to make sure the debt-to-income ratio is high enough for banks to lend to you. And the banks have to follow something called Fannie Mae - Freddie Mac requirements. And usually that’s a debt-to-income ratio of 50% or less. I think they go up to 50% for some programs. But you guys obviously have to do your research into that.

But if you're not making a certain income threshold to however much you're going to pay on the mortgage, like if you're basically not able to cover that mortgage, it's going to be hard for you to get lending on that. So, keep that in mind. Maybe work a second job, like I did. When I was starting out, I worked six or seven days a week. I would work these double shifts so that I can get the best lending out there.

Seth: And the banks, they don't really care about the rental income. What they care about is your personal income.

Ryan Chaw: Yes. They do take into account the potential rental income, but it's not going to be the full thing. Again, if you use this rent-by-the-room method, they're not going to say “Okay, we'll take that.” No, they're going to take whatever Rentometer tells them. And then use that to determine, “Okay, what's the potential for your rental income?” But if you're showing, of course, increased rental income from your properties on your tax returns and everything, yeah, they're going to take that into account.

Seth: Does this do a good thing for your taxes for each year? Does it severely minimize the amount of taxes you would otherwise have to pay because of the depreciation and that kind of thing? Is that a notable advantage?

Ryan Chaw: Definitely talk to your accountant about that because there is a bit of a balance. If you take too much deductions, too many expenses, claim too much expenses on your tax returns and you're showing basically zero returns, the lenders are going to look at that and wonder, are you actually making any money from these properties? So, it can affect how easy it is for you to get lending. So that's something definitely to talk with an accountant about because you don't want to take so much so that it looks like you're negative.

Seth: Was there anything else you wanted to cover about your latest deal, your fifth deal in escrow right now?

Ryan Chaw: It’s definitely one of my best deals. I got it for $340,000. We're going to put in another bathroom and then another bedroom. So, it'd be five bedrooms, total was six tenants. And so, it's going to make $3,440 in rental income, which is really great. And this is like during a time when it's a really hot market.

So again, just create that network, just start telling people that you're interested in investing in real estate, and get in touch with a real estate agent. That's always the first step. And then go from there. See a couple of houses, meet some of the neighbors around the area, grow your connections. And then eventually you'll be at a place where you kind of end up getting the best deals, getting really good rental income, and then you can scale it from there.

Seth: Are there any other questions I should be asking you about this that we haven't covered yet?

Ryan Chaw: I think we covered most of it. Yeah. Realize the best thing to do is just get started because real estate's a buy-and-then-wait game, not a wait, time the market,and buy-game. You can buy at any point in the market, as evidence for me, buying during this time, if you just know the right people.

And so, what I would do is buy as soon as possible so you can plant your seeds, and then they'll eventually grow into trees. Because you gain equity, you pay down, you gain appreciation on the property. You get a rental increase on the property.

Inflation works in your favor because you're paying back your fixed mortgage with cheaper dollars each year. So, it gets easier and easier to pay back your mortgage. Plus, you take all these deductions and taxes, you take depreciation, all of that type of stuff. So, rentals make money in multiple ways, not just the rental income, you have to realize that. But the best asset is your time. So, buying it as soon as possible and letting it grow over time will skyrocket your success essentially.

Seth: Awesome. I'm going to quick-transition to the final three questions that we ask a lot of the guests that come on the podcast here. The first question is what is your biggest fear?

Ryan Chaw: So, it used to be fear of heights. But then I went skydiving. So not so big anymore.

Seth: You took care of that one, right?

Ryan Chaw: But I would say a big one used to be a fear of judgment. I would have this need since childhood for validation from others, but then I realized I should be confident in what I've done. I started looking back at what I've accomplished and I celebrate that.

And so, I realized that I can validate myself. And I don't need to listen to how other people judge me and I don't have to worry, are they thinking that Ryan's going to buy all these properties because he's greedy, he's selfish. To me, it doesn't matter so much anymore because it's more about creating those connections with the people who do value you as a person, just as a human being, and value what you're doing and eventually what you're going to do for the world.

Seth: Yeah. There was a guy named Elbert Hubbard. He's got this quote where he says “To avoid criticism, say nothing, do nothing and be nothing.” I just thought that was kind of a good one.

Ryan Chaw: Exactly. Yeah. You can never avoid criticism. We will have some haters the more successful we become.

Seth: So, the next question is what are you most proud of?

Ryan Chaw: I would say just having a very close-knit group of friends. To me, it's all about friends and family at the end, who you connect with, and how you connect with them on a deep level. I would say that's very important to me. And that's what I'm proud of.

Seth: Yeah, it's worth being proud of for sure. So, what is the most important lesson you have ever learned?

Ryan Chaw: Treat your team members well. For me, right real estate agent, I would cut them a check just as a thank you. And then as a return gift, he got me this really awesome off-market deal.

Same thing for your contractors and your tenants; treat them well, and then they'll take care of you as well. If you're giving them some good work to do and then you're, of course, not pushing them too much, but you do make sure it's done in a timely manner and all that, you kind of create this nice business relationship where they respect you, you respect them. And then you guys create win-win situations for each other.

Because nowadays my contractors, they're willing to do things a little bit more of a discount versus charging me a premium price for a lot of the jobs because I have a lot of potential jobs for them, especially because I purchase a house each year.

Seth: That’s actually a huge lesson. I don't know that it's always necessary to do that with everyone. But there are certain key team members that you want them to think of you first. Like if they're trying to decide who to take care of, they're going to take care of you because you're that special to them.

Ryan Chaw: That's right.

Seth: Yeah. I hear you.

Ryan Chaw: Yeah. You'd want them on your side for sure and rooting for you.

Seth: And a lot of times, it sort of depends on what you need help with, but a lot of times good help is really hard to find. So, if you find somebody who's good at what they do, cling to them for dear life, because you can't just snap your fingers and find somebody amazing all the time.

Ryan Chaw: Oh yeah, exactly, exactly. That's why it's so important to develop that connection with your team members.

Seth: So, if people want to learn more about you, is there a website they should go to?

Ryan Chaw: Yeah, it's a newbierealestateinvesting.com. And I offer a free PDF for those who are interested in getting into the student housing market or using this strategy or just getting started in real estate. You can find that out again at newbierealestateinvesting.com.

Seth: I'll be sure to link to that as well as a lot of other stuff that we've talked about here in this conversation, in the show notes for this episode at retipster.com/104 because this is episode 104.

Ryan, I appreciate you coming on the podcast and talking to me about this. It has been really interesting. And, yeah, if you guys want to learn more, by all means, go check out his website, and keep me posted on how it's going, Ryan.

Ryan Chaw: Thanks again, Seth. And I hope you guys enjoyed the show.

Seth: Absolutely. Thanks, man.


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Seth Williams is the Founder of REtipster.com - an online community that offers real-world guidance for real estate investors.

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