The Real Estate UNLOCKED Podcast
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The Real Estate UNLOCKED Podcast
Mastering Creative Finance with Underwriting | Episode 13
Join me, Joseph Marohn, in uncovering the secrets of real estate underwriting with our special guest, Michael Mnatsakanian. An army veteran turned real estate investor, Michael's journey from engineering to financial independence is a testament to the power of strategic investing. You'll hear about the critical role of underwriting in evaluating financial risks, property value, and market conditions, featuring Michael's personal experiences, including the time he helped me navigate my first creative deal which resulted in a cash flowing 4-plex!
Together, we unpack the complexities of multifamily real estate investments, emphasizing crucial metrics like net operating income and cap rates, and the nuanced art of comping properties. From short-term rentals to sober living homes, we discuss diverse management strategies and their unique income potentials. Michael also shines a light on the importance of aligning investment strategies with personal goals and market realities, especially in challenging high-interest-rate environments.
Our conversation dives deep into creative financing strategies, such as seller financing and subject-to transactions, providing valuable insights on structuring deals and managing entry costs. With practical demonstrations and real-life case studies, we explore the nuances of creative versus conventional financing, empowering you to refine your underwriting skills and maximize your investment potential. Michael also shares his toolkit, including free calculators and his newly launched community, to help you take intentional steps forward in your real estate journey.
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What up everyone and welcome back to the Real Estate Unlocked podcast. I am your host, Joseph Marohn, and today we're going to be covering an absolute must-know topic if you're investing in real estate. I'm talking the only real way to know if it's a deal or no deal one of the most valuable skills to learn in your real estate business. Today we're going to be covering the importance of underwriting. Underwriting is the process that investors, lenders or other financial stakeholders evaluate to help determine the financial risks involved in purchasing a property. This process includes analyzing the property's value, market conditions, potential rental income and total expenses. Effective underwriting helps in making informed decisions, mitigating risks and ensuring that the investment aligns with the financial goals and risk tolerance of that investor. Now, if underwriting and deal analysis is something you still need a better understanding of, then stay tuned, because we're going to show you exactly what to look for in a deal, how to mitigate your risk and help you better understand what your exit strategy is, so you can maximize your cash flow. Now you know how we do it on the Real Estate Unlocked podcast. If we're going to do it, we got to do it right. We can't just bring on anyone to speak about underwriting. We got to bring on the creative engineer of underwriting. Underwriting we got to bring on the creative engineer of underwriting.
Joseph Marohn:Today, our special guest on the podcast is Mr Michael Manatsakanian. Michael's an army veteran engineer and accomplished real estate investor who achieved financial independence at the age of 27. Michael, alongside his wife, sierra, have built an impressive portfolio of over 40 rentals valued at over $10 million, largely through mastering the art of house hacking small multifamily properties and diving headfirst into creative finance. In less than four years, they've rapidly scaled their operations, retiring Sierra from our W-2 and becoming a leader in a multitude of real estate investment communities, including Sub2 with Pace Morby and Creative Camp with Rob Alva Solo. Knowledge in deal structuring, underwriting and personal finance. Michael is here to guide us through the powerful strategies of creative financing and deal analysis that have significantly enriched their investment journey. So, without further ado I've been talking long enough Everyone if you will, please allow me to formally introduce to you Michael Manatsikanian. Michael, what up, brother? How's your day going?
Michael Mnatsakanian:Hey, joseph, I appreciate it. Thanks for having me on.
Joseph Marohn:Absolutely, absolutely, man. Well, I really appreciate you, bro. Everything good with you today.
Michael Mnatsakanian:Everything's going great. It's just another busy day, as always, which I like hey busy is good man Awesome.
Joseph Marohn:Well, michael is good man Awesome. Well, michael. Thank you for your service, brother, and welcome to the podcast. I want to personally thank you for taking time out of your busy schedule. I know you could be in a million other places right now, but you chose to be here instead. Bring value to others by educating on such an important skill to have in real estate. So thank you, bro.
Michael Mnatsakanian:By educating on such an important skill to have in real estate. So thank you, bro. Yeah, well, I want to thank you because people don't know. I don't think a lot of people know our story and this is why I took the time out to really come on this podcast, because I appreciate the work ethic that you put in Joseph when he was working on his first ever creative deal, a multifamily at that, with a VA loan in place. So he took, he took, he added all the challenges to it. He came and asked me for a little bit of help. I provided him a few resources, he took it, ran with it and close an amazing deal. And that you know I I always love people who are doing that kind of stuff, so I will always support that. So thank you.
Joseph Marohn:Yeah, man, and you know that was very pivotal in that moment for me, when I was, you know, structuring my very first deal, and I reached out to Michael, and Michael was nothing but supportive, helped me out. I was going through a seller objection and you know he gave me everything I needed to take action and close that deal, and for that I'm forever grateful, brother. So thank you Me too. Thank you, Joseph. Awesome, so cool, Michael. Well, walk us through your journey, man. You joined the army, become an engineer, then decide nope, I still got more in me, I'm just going to go crush it in real estate. Is that kind of how the story goes?
Michael Mnatsakanian:Essentially. Actually, it starts, funny enough. I wanted to be a doctor. I was at UC San Diego studying biology and all that good stuff, ready to be a doctor. After a year I realized I keep just taking tests. I don't feel like I'm learning a lot, I'm taking tests, I'm doing well, but I just feel like I'm memorizing and taking a test and forgetting. So I decided at that moment I wanted to do something that aligns with my passion with numbers, analysis, problem solving, science. So that's why I pivoted to chemical engineering at the time and then specialized in environmental engineering.
Michael Mnatsakanian:I, after graduation, I was working a little bit in sustainability and at the time I had the opportunity to work for an oil and gas company or be an environmental engineer for the U S army, um. So I definitely went the army route in my. For me it made a lot more sense and it was the adventure that I was looking for. So it was a perfect opportunity for me to do so. So I did that, worked in the field of environmental health. That's when I started my real estate journey. I had a lot of free time. I spent a lot of time learning as much as I could about real estate. I was doing everything I could in the right way for personal finance, investing in retirement accounts, 401ks, iras, all that good stuff. But I knew I could do more to achieve financial independence sooner. Little did I know how quickly I'd be able to do it by just really going all in on real estate. So that's kind of my quick summary journey to doctor, to engineer, to military, to real estate investor.
Joseph Marohn:Hey, man, that's an impressive story, man. I really love it. Man, appreciate that you're sharing that with us All, right. So, michael, we hear this term underwriting used so often in real estate. Right, and I think majority of the people watching here today have a broad understanding of what it is, but maybe don't fully understand how to properly underwrite a creative finance deal or how to do a proper deal breakdown analysis to make sure it's a good offer. So I brought my good friend Michael here today to really educate us all on how all this works. So when we're structuring creative finance deals or making offers, we're not just submitting contracts on anything because a seller's open to subject too, but instead really understanding the facts and putting ourselves in the best position as possible to make a great return on our investment while still solving problems for the seller. That's what you call a win-win situation. So, michael, let's start from the very beginning. What is underwriting and why is it so important for investors in real estate to really understand and master this skill?
Michael Mnatsakanian:Right. So I will, at a high level, say it's a little distinct for someone who's wholesaling as an end buyer or as a lender on a deal, but the concept is still the same. The idea is is this property right? They're not investments, they're not deals Is this property a worthwhile investment? And that's a very simple. For most people, it's a very simple and straightforward analysis. Does this property make me more money each month than it costs me, right? That's the first thing and that's cash flow. We'll break that down further in a little bit and then, secondarily, the amount of money I need to put into the deal. Does that justify the money that I make each month? So, and we'll get real deep into that, but that's really the analysis If it's a great deal for a buyer, they're getting the cash flow and the cash on cash return, the return on that investment back.
Michael Mnatsakanian:If it's a wholesaler, they're trying to make sure that their end buyer is getting those returns, because the better the deal is, the more likely they are to sell it, instead of wasting their time locking up not deals, locking up contracts on properties that will never work out for the majority of buyers. People buy for a multitude of reasons, but the majority is cash flow and cash on cash return if it's a real investment for them. And then lenders it's really good for lenders who are lending on these deals to really understand underwriting. So they know is the person who's buying this property, do they have a viable plan in place to pay me back the returns that they're offering, or are they just selling me a narrative that they cannot fulfill? So it's really important for all three parties to understand is this an actual deal or is this a property that I can buy?
Joseph Marohn:Yeah, I think a lot of people are locking up bad deals out here, and that's why I really want to share all this knowledge with everybody here today, because we're seeing too many of them and people are just excited to lock up a deal period and don't really understand the whole underwriting process. So you know you touched on some good points right there, michael. Can you successfully do a deal without underwriting it first?
Michael Mnatsakanian:I couldn't because I wouldn't know how to. I wouldn't know how, like what's the barometer for a good deal? You can get lucky and do it, of course, and when interest rates were really low it was very easy to do so it was easier. But even then, when I was training on underwriting back then I would still start every single training off with.
Michael Mnatsakanian:95% of properties available on the market are not good investments. They're a house for someone to live in, which is great. We need lots of houses for people to live in. If you're living in a house, you don't need to worry about it as an investment. You just hope it goes up in value over time.
Michael Mnatsakanian:But if you're putting in significant money or any money, to acquire property, renovate it, furnish it, whatever you're doing with it, and then trying to rent it out, it would be so challenging to have it be a successful investment without first understanding understanding all the numbers of an advance, and that's why we see so many people buy properties that end up costing them tons of money over time and they end up selling it at a loss or returning it back to the seller If it's creative, or losing it to the bank, like that's why this occurs, because people go into it without proper underwriting or if they are underwriting, they're not doing it correctly. They're saying, hey, my rent, even though the numbers say 1500 a month, I think I'm going to get $2,000. And when that doesn't work out, then they're screwed because now they're losing money each month. So it is super imperative to do it, and then to do it the right way for sure.
Joseph Marohn:So it is super imperative to do it and then to do it the right way for sure. Yeah, man, I could never do a deal without underwriting it first. I just I won't even touch it. Right, because I got to make sure that I had that security blanket. Right, because, like you just said, let's say I plan I'm going to get two thousand dollars for the rent and it doesn't work out. Then I have to drop it down. Eighteen hundred seventeen hundred sixteen, 1600. Before you know it, I'm negative cashflow. Or even if I break even on it, what happens if there's a major expense? That happens, you know, the HVAC goes out or there's a problem with the roof. So definitely good points on that. You definitely have to do your due diligence on underwriting. Now, what information do you need when you're about to underwrite a single family versus a multifamily unit?
Michael Mnatsakanian:Yeah, to write a single family versus a multifamily unit, yeah, so I'm going to stick to smaller multifamily in this scenario, not larger, because then we're talking very different analysis. But the main idea is a lot of times with multifamily and I own several small multifamily all of the utilities are not necessarily split up the same way they're on a single family home. So, for example, typically if I'm buying a single family home to rent out my tenants, if it's just the long-term rental, my tenants are going to be paying their own gas, electric, water, heating, sewer, trash. They're going to pay their own utilities. They want internet? They pay for it, right. But if it's a multifamily, sometimes you have electric meters for each of the individual tenants and they can pay their own electric, but water is typically not split. Gas isn't split. Sometimes trash is for the building. So you as the owner have to cover those costs or charge them back to your tenants. But that's that's something you have to understand. You can't just assume that is the same exact thing as a single family.
Michael Mnatsakanian:The advantage of multifamily, especially when they're attached, is typically, if you have to replace a roof, you're only replacing one roof for multiple tenants. Typically you can get much better returns. But when people are buying multifamily properties, they're buying it as an investment in the first place. Rarely does someone accidentally buy it as a house to live in, unless it's intentional right. They're intentionally living in one unit, renting out the other, so you're buying it from another investor typically and you're competing with other investors to buy those properties. So that's another thing. Where a single family home, anyone can buy it at any price if it justifies it for them because they want to live in it. Multifamily, it's very much more likely that it's an investment for people.
Joseph Marohn:Yeah, and I think a lot of people when they do the comps right Because multifamily, it's very much more likely that it's an investment for people. Yeah, and I think a lot of people when they do the comps right because there's multifamily is a lot different than comping a comp that right. So as far as when you're comping, are you comping as far as what the property produces or are you going off other comps in the area as far as multifamily?
Michael Mnatsakanian:It depends Some places that I own properties. They have a multitude of similar style multifamilies. So you're both looking at comping the after repair value or the value of the property based on what the other ones are being sold for. But you're also looking at it from the perspective of how does this work as an investment right? The bigger the multifamily you get into, the less it matters about comps. It's all about how does this perform as an investment, and that's where terminology like net operating income, cap rates, things like that, come more into play than the actual value of the property, because it's just a different. It's a different investment class. At that point, so it just depends.
Michael Mnatsakanian:if there's comps, awesome. But you're really going to look at it as an investment almost always, because who cares what the property value is if it's losing a bunch of money anyway, like for the most part. I guess that's really generalized, but yeah.
Joseph Marohn:Yeah, it makes a lot of sense. Now give us some of the key things you're really focusing on when you're getting ready to underwrite a creative finance deal, like what are the indicators you're looking at to determine if it's a good deal or not?
Michael Mnatsakanian:So the funny part is it's the exact same as traditional financing, Although you just need to understand the different loan structures. When you're buying it creatively versus traditionally, it's the same concept. Cash flow Am I making more money each month? Is my income minus my expenses, minus my reserves, positive? And is the amount of money I put into the deal to acquire it justify the amount of cash flow I make each month? And that's cash on cash return. It's the exact same concept where they're buying it traditionally, honestly cash as well cash traditional or creatively. You want to understand are you making more money each month than your expenses and does the amount of money you put into it? Is that justified by the amount of money you make each month? And that's where cashflow and cash on cash return are the two key metrics for single family homes and small multifamily.
Joseph Marohn:Right, Absolutely. Now what is your process for comping properties and what are some adjustments you might make when comping properties for a creative finance deal?
Michael Mnatsakanian:So that's a good question. So my process for comping properties is I always look at every single property that I buy as a long-term rental first. So I'm going to look at multiple platforms like Rentometer BiggerPockets. Those are like data aggregators. They'll give me an estimate for what rents have historically looked like for similar properties in that area. Then I will go on a Zillow, a Redfin, and actually look at what are properties that are similar in style. What are they currently renting for in that market right now? So that's me determining what is my long-term rental income.
Michael Mnatsakanian:And then and remember I'm talking buy and hold, investing, so I'm more focused on income than I am the property value. And then what else are we comping? I mean, that's a big one Understanding your income is valuable and then understanding what are your property taxes going to be when it's reassessed. What are your insurance costs as an investor, All of those things that focus around income and expenses. And then tracking are there any big repairs that are going to come up for capital expenditures? Are there any maintenance issues that need to be addressed before tenants can move in?
Michael Mnatsakanian:And then for me, even though I do underwrite everything as a long-term rental initially, I don't just own long-term rentals. I own properties that are short-term rentals. So if that's the route, does it make financial sense as a short-term rental? Isn't it a great market that's not overly saturated, overly regulated? Can I make the income that I need on it? I do midterm rentals, we do sober living homes and we do pad split or rent by the room.
Michael Mnatsakanian:So, depending on the management style you're going to implement, you need to understand the income and the expenses that it will cost each month, as well as how much money are you going to further have to inject to get the property to the condition for that strategy right? So if I have a long-term rental, I'm going to have much less expenses, although I'm going to have less income and I don't really have to do as much of the property. So, short-term rental I'm probably going to have to renovate it a little bit paint some walls, make it look nice, furnish it really nice. There's going to be more expenses but more income. And then there's more money I have to put into the deal to get it to that, get it in like short-term rental condition. So it's really just understanding what your strategy is for the property and does it make sense?
Joseph Marohn:Right, and I know you were talking about long-term rental, but how are you estimating, like traditional versus non-traditional rental streams, like for short-term rentals and pad splits and so on?
Michael Mnatsakanian:They're all distinct, right. So pad split or the rent by the room model they actually we have a representative that works there and we say, hey, we have this property this size. We're trying to figure out what the estimates are for the rental income. What data do you guys have in your system currently? What is the weekly rate, because they're billed weekly? What is the weekly rate for a bedroom with a private bathroom and with a shared bathroom in that area? How quickly are they being occupied? That's a very big one.
Michael Mnatsakanian:For short-term rental. You use tools like DataRabu or AirDNA to get short-term rental estimates for the income side and then you just look at okay, is the property that I'm going to have similar, better than or worse than these comps? So that I know roughly how much income I can be generating a year because of the data that's there. And then midterm rentals, which is similar to long-term rentals. You just have to look at it from different platforms, like a Furnish Finder or a Zillow does Furnish Rental, so you can look at it from that perspective. To get comps. You just have to understand where to find that data and I pretty much broke through real quickly, like where to get the rental income projections for the different strategies right there.
Joseph Marohn:Right. And then you also got to factor in those furnished costs as well, right, with all the furniture and stuff. So good, good point there. Now I know we live in the day and age where everything's kind of becoming automated, right. Are there any tools or software that help in underwriting and analyzing real estate deals?
Michael Mnatsakanian:So, yes, like I said, like comping is a big part of it. So all those tools I just mentioned are very valuable to be able to estimate your rental income especially quickly. But then you have to do your due diligence and then you don't just take a rentometer at face value. You go into Zillow and you look at properties and make sure that, because a data aggregate tool like that does not understand the condition of your property versus one of the other ones being rented right, it doesn't know if you've upgraded appliances and the one it's comparing to has white appliances versus stainless steel. They don't know when yours was remodeled versus theirs. So you're looking for in-kind, very similar properties to estimate your rental income based on the success of similar properties in that similar area as yours. Same with like data and all that stuff. Don't take it at face value. You have to do your due diligence, but it's a great resource to get you started in underwriting the income.
Michael Mnatsakanian:I don't use many other tools outside of the ones I've mentioned, except for my creative finance real estate investing calculator, as well as conventional finance real estate investing calculator. So once I get the data that I need, I plug it into my investing calculator and it tells me very quickly is this a deal that hits my ideal metrics for cashflow cash on cash return, and is it going to work when I use? I purchased all my properties now the last 10 million approximately all using partners that are my lenders on the deals and then I need to make sure once again I mentioned, like the lender needs to understand are they going to be able to get paid back? Well, and that's another feature of the calculator it tells you, are you going to actually be able to pay back this lender the amount of money that you say you are based on the income that we're seeing on this, on this property?
Joseph Marohn:Yeah, that's a good point, man Cause you know rental meter is basically just a baseline, right, you know it's a good resource to use, but you shouldn't be, you know, counting on relying a hundred percent on that. You should still do your due diligence. So good points on that. We often hear this term ARV thrown around. What does ARV mean and how is it calculated?
Michael Mnatsakanian:Right. So ARV is your after repair value. That is the most important thing when you're looking at cash transactions, because typically the goal with a cash transaction is that you're going to buy the property under market value, renovate it and then flip it and sell it to someone else or you're going to refinance it. You're going to refinance it it's the BRRRR strategy. You're going to refinance it and keep it in your portfolio. But all that is very contingent on what the property is going to be worth after it's renovated.
Michael Mnatsakanian:So ARV is if this property was fully renovated all the way, what dollar amount would it sell for, based on similar properties of similar size and condition in the local area?
Michael Mnatsakanian:So that is how you calculate it is. You are looking at properties in that market that have recently sold, typically traditionally, that have sold on the MLS that you have access to. You can see the photos, you can see the condition, the size, you can see how recently it sold for for how much, and then you compare that typically the dollar per square foot of a property like that to the dollar per square foot or the square foot of your property, to estimate what will be the property value, your property value, at the sale. So it's really just determining if this property was fully renovated, what price can I estimate it would be sold for? And that's very important for cash transactions. It's not as important for creative transactions. You do want to understand what your property is worth and if you're walking into maybe equity, you're buying it, let's say, at a discount of what it would be worth, but you're really looking to see once again cashflow and cash on cash return if you're holding anything in your portfolio.
Joseph Marohn:Right, apples for apples, you know, because there's a lot of times that me personally I don't know if you've experienced this, michael, but I've talked to agents and agents man, they'll give you comps from you know properties, and not even in the same subdivision. They're crossing major roads, they're not even the same square footage. I generally like to be around 200, give or take square footage when I'm comping properties. But yeah, a lot of times I'm talking to agents and they're giving me some bogus comps and I'm like, nah, man, that's not how you comp properties. But, yeah, good stuff there. So I know there's a lot of people here like myself that listen to all this and think, man, this is great information. But for me personally, I'm more of a kinesthetic learner. You know what I mean. I got to get hands on, I got to see it, I got to touch it, I got to feel it.
Michael Mnatsakanian:Michael, would it be possible to share your screen and maybe walk us through an example on a live deal analysis or how to determine what's a good deal or whatever? You would think that would be valuable for everyone watching today. I just really want to set the foundation here, right? Yeah, definitely. So what I'm going to do is I'm going to share my screen. We're going to go over the fundamentals of underwriting real estate investment properties traditionally, show you a little bit about creative financing and creative finance acquisition strategies, how to underwrite those and, if time allows, I have one of the properties that we recently bought to run through just kind of what the terms look like. Cool acquisition strategies, how to underwrite those and, if time allows, I have one of the properties that we recently bought to run through just kind of what the terms look like.
Joseph Marohn:Cool, Awesome man. You came prepared, man. I love it Always All right, so let's screen share.
Michael Mnatsakanian:Awesome. So, hey everyone. Michael Manatsakanyan again, right, this is a Creative Finance Deal Analysis 101. Let's get right into it. The most important piece of this is the way you say it is. Manatsakanyan, right? Manatsakanyan, that's my last name, nice and easy for you all. Manat Sakanian right, manat Sakanian, that's my last name, nice and easy for you all. So let's get right into it. Just real quickly.
Michael Mnatsakanian:Joseph went over it, but self-made real estate investor with 42 rentals worth over $10 million I'm not getting into my whole journey, but I used to wholesale a lot done, over a hundred transactions. I'm primarily a buy and hold investor now. I was able to achieve financial independence early on, all through real estate. I'm a chemical engineer by trade. I'm very passionate about helping others achieve their path to financial independence. That's why I think underwriting is so important. The thing that stresses me out literally is people saving money for one, 10, 20 years, investing it, finally investing it, and then investing into a bad asset that ends up not producing the results that they wanted. So it literally works against them, not for them, and the thing is, you can literally learn and understand how you can prepare yourself to not deal with those scenarios. That's why it stresses me out, because people can learn the skills needed to not end up in that situation. And then my goal this year is to help over a hundred informed investors achieve financial independence by understanding where they currently financially stand, what their financial goals are, and then what is the ideal path for them to achieve that.
Michael Mnatsakanian:So let's get into it. We're going to go into the key components of investment analysis, key components of underwriting and the creative underwriting principles. So the first thing we understand is the different ways that you make money in real estate. And then what's the most important when it comes to underwriting, one that we all know about is appreciation, which is properties tend to increase in value over time. Obviously, if a major industry like Detroit you know, like in Detroit leaves or something like that happens, obviously population goes down or something occurs in that area. Property prices will not continue to go up. But historically, property prices go up in value over time and that's one of the benefits called depreciation Debt pay down. So every single month, you as the landlord are renting out a property to someone and there's a mortgage in place. Your tenant is paying you rent and you're using that to pay the mortgage down, and a component of that is some of his interest, but then the other amount is paying down the actual loan itself. So your tenant is then paying down the loan on that property for you and that has a tangible value that literally increases your net worth every single month.
Michael Mnatsakanian:So there's a lot of tax benefits for real estate, especially if you become a real estate professional. But the main one is depreciation, where the IRS sees your property as losing value over and says it will lose the majority of its value over 27 and a half years, and you can use that to write off a lot of potential income so that you can save on your taxes. Right, I guess that's the highest level. There's a lot of tax benefits, the main one being depreciation. And the most important way to make money in real estate is cashflow, especially when you're starting out, because none of these other features of real estate really matter if you're not able to financially support paying for this property. So that's where we're going to focus very much on cashflow, but then also put it into perspective, which I'll highlight. And so cash flow is your profit that's left over each month from your income after paying down your loan, your expenses and setting aside your reserves. So you see the full way, and we're going to focus on the cash flow deal.
Michael Mnatsakanian:There's really two key metrics for analyzing investment properties that are single family homes or smaller multifamily Cashflow, which is what we've talked about and we'll continue to talk about, which is your income minus your fixed expenses, minus your reserves we're going to break all this down further and then your cash on cash return, which is basically taking your cashflow and understanding is it justified for the amount of money you have to put into the deal? So you just take your annual cashflow, your cashflow times 12, divided by all the money you had to invest to generate that cashflow on that property. So let's go a little bit further. Your income is your rent and any fees you have, so sometimes we have pet fees, sometimes there's a laundry on site, whatever it is, there's parking, storage, whatever. All of your income is put into there. Then you have your fixed expenses, which, for the majority of properties, are going to be your mortgage and loan, taxes, insurance and utilities that you're responsible for covering, and then your property management, if you are managing, if you are paying a property manager. However, even when I self-manage, I still account for that because I want to know that if I decided to stop managing, I want to make sure there's still money to pay the property manager without me coming at a loss for doing so.
Michael Mnatsakanian:And then, secondarily, are your reserves you need to save. Approximately depends on your market 8% a year of your income, of your monthly income for vacancy, which translate to approximately one year of the month your property is sitting vacant. That's what that 8% calculates to. And then you're saving 5% of your monthly rent for maintenance when you know you got to send a plumber out because there's a little plumbing issue or a light bulb needs to be replaced or whatever. And then another 5% of your total monthly rent for capital expenditures. These are where you're basically saving and setting money aside for big repairs when your roof needs to get replaced, update your appliances, change out your flooring, that kind of stuff. You want to have that money readily available. So when that expense comes, it's not coming out of your pocket and you thought you were making all this money and then you inject $20,000 for a big capital expenditure. So that's really the foundation of cashflow, but cashflow only, yeah. Questions.
Joseph Marohn:Yeah, I was going to say so. We always hear the term cashflow, cashflow, cashflow. Everybody wants cashflow, right? How much should we be shooting for on each property that we're looking to add to our portfolio?
Michael Mnatsakanian:Great question. It looks like you looked at my slide deck. No, I'm just kidding. So cashflow only takes you so far and let me expand on that right now. So you want and I'll get into what I look for, but you want your properties, at minimum, to be paying for themselves at minimum. But if they're not generating positive cashflow, you don't know. You can never say that the money I put into it is really worthwhile from a cashflow and cash on cash return perspective. And that's where we're going to get to cash on cash return. This is how you tether. How much cashflow do you really need to make this a good deal? So if you cashflow a hundred dollars a month, that could be great or that could not be great. If it only costs you $12,000 to generate, to buy the property and get it ready to generate a hundred dollars a month, that's pretty solid cash on cash return, because it's $100 times 12. So $1,200 divided by $12,000, those two divided is 10% cash on cash return. But if it costs you $120,000 to generate a hundred dollars a month, you see how it totally shifts. Is that a good return or not? And we'll further dive into that concept.
Michael Mnatsakanian:Right, and that's why it's so important to understand cash on cash return, not just the cash flow. So what is cash on cash return? Right? It's your annual cash flow divided by the initial money you had to invest to generate that cash flow. Your annual cashflow is just 12 times your monthly cashflow, and your initial money invested are all of your entry costs to acquire the deal, which includes the down payment, any agent commissions, any closing costs and I call it upfront ready repair costs. So if you need to fix the flooring, paint the walls, clean the house, whatever, it is, all that needs to be accounted for, as well as your initial money invested, so that you can truly understand is that cashflow? Does it make sense for the amount of all the money I have to put in to acquire that property? And in that I'd also account any expenses that you're paying, your carrying costs, any expenses you have to pay until that property is rented out as well, because someone still has to pay that money. So it's really important to understand that. So what return should you look for as the investor? That's ultimately up to you and what your regular, what your criteria is, and it's very dependent on the market that you're investing in.
Michael Mnatsakanian:Some people will never invest outside of the local market. They don't feel comfortable doing so and that's fine, but they need to understand that that limits their potential returns because they're they want it local and that's fine. Like I said, I'm not here to tell you how to get there or whatever. You didn't understand it. Like you mentioned, with underwriting it's not just the returns, but what is your risk tolerance? You're not comfortable owning a property in Alabama or on the other side of the country or Alaska, like I do. Right, it doesn't really. You can't force yourself to do something. You're not going to be able to sleep well at night for right.
Michael Mnatsakanian:And one thing to understand is that some are typically the markets that appreciate more in value. They increase in value more, like my market in San Diego, where I live and I own properties in, as well as multiple other states. They don't have the best cash flow, but you get long-term wealth appreciation because your property is increasing so much in value. However, if I'm buying my Alaska properties, they have a ton of cash flow, but they don't really appreciate much in value. They only really appreciate similar to what inflation increases. So it's basically breaking even with inflation, but they generate a lot of cashflow and they have a lot higher cash on cash return. So it depends on where you're looking to invest, which is based on the goals and like what your risk tolerance is. So this is what I look for.
Michael Mnatsakanian:At a minimum, I'm always looking for at least $100 of cashflow a month per unit. So if I'm buying a four unit, I want $400 a month, right, so a hundred dollars per unit, um, and that is because, like anything underneath that it's you know, that's after all, my reserves and everything accounted for. But at that point I don't want it to be so thin that I'm not. You know that it's like, oh, any little bump caused me to be negative each, you know, each month. So I don't like to have it be too close to zero. And also, it's sometimes not worth your time. It's really hard to get a great return if you're making $10 a month, right, it's like, is it worth all that work to make $10 a month in cashflow? I don't think so, and most of my deals now, because of the way we manage them, are 500, a thousand dollars plus a month.
Michael Mnatsakanian:But my minimum for a long-term rental is $100 per unit a month. But more importantly for me is cash on cash return. So, like I said, if I'm generating $100 a month, that could be great. If it only cost me $12,000 to buy the property. That'd be 10% cash on cash return. It'd be terrible if it cost me $120,000 to buy that property. So this is kind of what I look for as a general rule of thumb when I am looking at properties to analyze is this something I want to buy as a long-term rental? If I'm doing something that's like a short-term rental or mid-term rental where it's going to cost more money to enter the deal, I typically expect higher returns because it's going to require more management and oversight than just renting something out long-term and just looking at the lease once a year.
Joseph Marohn:Yeah, I think a lot of people are worried about owning properties in other markets because they're like well, how am I going to take care of this property? Guys, there's property managers that you can utilize If you find a good one. You know they're going to take care of your property. They're going to make sure you got you know all the right contractors there. Do you use property managers, michael, or do you kind of take everything yourself?
Michael Mnatsakanian:I do a combination. I have a few properties I still self-manage, especially like in San Diego. I'm going to self-manage my long-term rentals because it's too easy, especially locally and in a market like San Diego I don't have to worry about. I guess this year was weird. We had like a flood and all this crazy stuff, but I don't have to worry about like snow and you know, freezing and all this crazy stuff.
Michael Mnatsakanian:But my prop some properties in Alaska the midterm rentals my, but some properties in Alaska the midterm rentals my wife and I manage she really manages that piece of it Plus short-term rentals. I have a bunch of rental cabins up there. I have property managers for that, and then we also my business partner and I, for some of our other properties we have in-house property management. So we have a property management company that manage some of our properties, especially, depending on the management strategy, they manage it throughout the country for us. So it's a combination of local property management, our in-house property management team and then self-managing. So everything that's awesome, yeah, so let's get into it. I will say, with interest rates over 7% and for investors it's 8, 9, 10 plus percent it's very hard to have good cashflow or any cashflow at all. And if you're putting 20, 25% down traditionally, you're going to have very, you're going to have very bad cash on cash return. If you're not cashflow, it's going to be negative or virtually non-existent, and that is where creative financing saves the day. So just a caveat I bought 27. Well, that's not true. I bought nine properties of traditional way. I've bought another 18 creative financing before joining mentorships and learning a lot more about it. And then, since then, I've bought in 2023, another almost $10 million of real estate, all using creative financing, because interest rates went up so high there was no way for me to make any financial sense acquiring properties of traditional way. So I just got really great at specializing in creative financing. I had proof of concept because I did it even before joining these mentorships, and now I just go all in on creative financing because it's so much more convenient and the returns are so much better. It is more customizable and we'll break down what that means. So there are a variety of different ways to acquire properties using creative financing. Here are some of the common ways, and we're just going to focus on the top three, which are seller slash, owner financing, purchasing a property subject to its existing mortgage or hybrid, where it's a combination of there's a subject, there's a loan in place that you're going to take over, and then there are still some equity that you need to pay the seller back on if you're not going to cash them out. We'll get into what that means in the next couple of slides. Boom. We're going to focus just on those three as the high level. Everything else is kind of a variation or just further analysis of those three.
Michael Mnatsakanian:So, seller or owner financing this is a type of financing where, instead of going to the bank, there's no mortgage in place. The seller his or herself owns the property outright. So instead of going to a bank to buy the property, the seller of the property can actually be the one to finance the deal to you. So let's say you have a property that's $100,000. The seller owns it outright. Or in this scenario down here I have $240,000 purchase price. You come to terms with the seller and you say, hey, are you open to me paying you 10% of that upfront 24,000 and the rest financing it to me? And in this scenario I show that it's $216,000. Is the remainder amount? That's the loan. So now you're just creating the.
Michael Mnatsakanian:The seller is the bank. So you're basically paying the seller every single month like you would a bank. But because you're working with a seller, you don't have to like a bank. You go to the bank and you say, hey, I want to buy this house. They say, hey, you're going to need to give us 25% down payment. You're going to need to pay us 10% interest. Here's the number of years that the loan is amortized over. They tell you the terms. With a seller, everything is negotiable and that's why it's amazing.
Michael Mnatsakanian:But the caveat for a straight seller financing deal is they need to own the property outright and have no mortgage in place, or their mortgage needs to be so small that whatever money you give them up front pays off the existing mortgage. And the cool thing about structuring it with the seller is it's not just purchase price that you can negotiate, it's the down payment, the dollar amount or the percent, every single aspect of your monthly payments, interest rate amortization schedule, which basically how many months would it take for you to pay off that loan? And a typical is 360 months or 30 years. If I did that math right, I don't know, I think it's 360 months or 30 years. Um, it's typically what it would take to pay off most mortgages.
Michael Mnatsakanian:And if there's a balloon and a balloon is basically even though it would take 30 years to pay off that loan let's say they want a balloon at 10 years. That means even at the 10-year mark, you have to pay off their loan and one of the ways to do so is to sell the property to pay off their loan. You can refinance the property to a new loan to pay off their existing loan. You can get, you can pay it off from other income sources, but you have to exit the seller out of that loan. Any questions about seller financing?
Joseph Marohn:What's your thoughts on balloon payments? A lot of people get worried about that when structuring a deal. Soon as the seller brings up a balloon, they're ready to walk away from it. What's your thoughts on it?
Michael Mnatsakanian:So I prefer, especially my low interest subject to loans, that I'm buying a property subject to his existing low interest rate loan. I really am buying it a lot of times for the debt itself, but it's one of many variables that I'm willing to allow if it ends up like making the deal work for the seller. So it depends. What I don't do is two, three, four five-year balloons. I need enough time to know that the property is going to increase in value. I've paid off the debt and if I'm giving them one of these right. So that's the cool thing about seller financing there's so many levers the price, the down payment, the monthly payment, the interest rates, the balloon, the terms all of that is negotiable. So if I'm giving them certain elements, they also need to understand. They need to give me certain elements.
Michael Mnatsakanian:As long as the deal makes sense, I'll consider it, and what we've incorporated in all of our balloons is two clauses the balloon will extend if I do not have at least 30% equity in the property right, so I don't own at least 30%.
Michael Mnatsakanian:30% of the debt has been paid off. So if that doesn't occur, or the interest rate that I can refinance at is not lower than the interest rate that I currently have with them the balloon, that the loan continues to extend one year at a time until one of those is met. Once one of those is met then I will have to execute the balloon. So I'm okay with balloons if it's not too short and if they are open to my clauses in there to allow extensions if it doesn't pan out the way I thought it would over that short enough time period. So the minimum I look for is like seven. I prefer 10. On average they're between 12 to 25 years. For me so it's really almost insignificant because the amount of wealth you can generate over that time period almost always justifies getting the deal done, even if it means giving them a balloon a decade from now.
Joseph Marohn:Yeah, my thoughts are exactly like yours, so good point Awesome.
Michael Mnatsakanian:So it's going to subject to financing and it's kind of uh, it's like a misnomer. So all you're doing with a subject to transaction is you are a seller, has a loan in their name Still, all you're doing is you are buying the property subject to that existing loan, so you are leaving the loan in place, but you are the buyer. The seller is still responsible for the loan. Technically it's underneath their name still, but you are going to be the one to make the payments on that loan. As the owner of the property, you get all of the benefits. You get all the tax benefits and all that as well of paying the mortgage, but the mortgage stays in place. So why that typically makes sense, for example, is I'm buying properties with loans still in place and I don't have to give them as much money down potentially as a seller finance deal and I'm taking over really, really low interest rates to. I think the lowest we have is like 2.25% interest rate, three, four, even four and a half percent interest rates. If the deal makes sense, this is a good strategy to do so. But we need to understand is it's not very negotiable. There's not a bunch to negotiate in this scenario. It's not like seller financing, because there's still a loan in place. The monthly payments on the loan are going to be the monthly payments on the loan. If anything, they're going to go up a bit because your taxes might go up or your insurance might go up, but the loan payments principal and interest on the loan payment. There's no getting rid of that. That is what it is until you change out that loan, you refinance it or Whatever you do. There's no way to change that. So you can't really juice up your cash flow in that scenario. And the loan amount that you're taking over you have to at minimum take over the loan amount that the seller has in place. You can't really change that very much.
Michael Mnatsakanian:This is more so common when the seller is in some form of distress. There is enough motivation for them to be willing to leave the loan in their name and still sell the house to you. This happens commonly when someone has little to no equity. For example, they bought the property somewhat recently and they haven't had enough time to pay down the debt. Or they use like a low down payment option. They had a job transfer, or they could no longer afford the payments, or now they have two mortgages because they thought this one was going to sell and it didn't, and they need to get out of the payments. They're in pre-foreclosure? Maybe they're mismanaging the property. There are some of the motivations that would cause a seller to be open and motivated to this kind of transaction.
Michael Mnatsakanian:I always tell every seller if it's possible, if I were you, I would sell it on the market the conventional way. If you can't, then this might be a solution for you. Obviously, it's in my best interest to buy it this way because the interest rate is low, but there's inherently more risk for the seller and I'm very transparent with sellers that if it's possible to do it another way, they should. If it's not, then this might be a solution for them where nothing else could be. That solution and, as I mentioned, the hard part about making these types of deals work is what I mentioned earlier. Even when I was training in 2020, 2021, even early 2022 on buying properties when interest rates were low. Still, the majority of properties are not good investments. They're just properties for sale. So even if the interest rate is low, it still may not be a great investment, depending on how you manage the property and what terms you're buying it at Anything on subject two before I move on to hybrid, which is more so common.
Joseph Marohn:This is all. Great info, man, Great info man.
Michael Mnatsakanian:So hybrid is the most common. Once again, hybrid financing is kind of a misnomer. All it means is that there is, let's say, someone owns a property that's $240,000. They have a loan in place for $188,000. Well, either you can pay out all of their equity, all of it, whatever. The difference is 240 minus, let's say, 180, $60,000, or you can pay them some of it and then finance the rest on seller financing terms, right?
Michael Mnatsakanian:So just the combination of seller purchasing the property subject to its existing loan and then seller financing the seller's equity right. Once again, equity is if the house is 240,000 and there's $180,000 loan, their equity is the difference of those two, the $60,000. So if you give them $20,000 as an upfront payment, the remaining $40,000 of equity you pay them overtime on it. And that's a very common situation set up for buying real estate deals, because usually people have some equity and it may not make sense for you to pay out all of it up front, but it really depends on the seller. And then your monthly payment on these are going to be your subject to loan payment and then whatever payments you're making to the seller on the seller financing terms which is outlined in the little table over there. Any questions on this? This is just a combination of the two that we discussed.
Joseph Marohn:Yeah, Now one thing I want to point out is when you guys are doing hybrid deals and you're structuring the seller finance part, you really got to do your due diligence on what you can perform on that property as far as rental income. So that way it will kind of help you with your structuring of the seller finance terms. Is that kind of something you do, Michael, when you're doing your deal structuring?
Michael Mnatsakanian:Right, 100%. What I do is, if I know it's going to be hybrid, I'm going to underwrite it first as a straight subject to deal. I'm going to assume we're paying them out all of their equity to see if there's even cashflow in that scenario. But isn't cashflow in that scenario, paying them more monthly is not going to. It's going to make it even worse. You're going to lose even more money each month.
Michael Mnatsakanian:Then I say, okay, if I pay them off that 60,000, in addition to the other entry costs, is that getting me the cash on cash return that I want? Then I'll start saying, okay, if I on this other finance line, like it's running through this whole scenario, you got to work hard. Literally, people understand, don't take the shortcut. Do the right thing, work hard, do it the right way so you don't screw yourself on the backend and just put together a terrible deal that it's like, well, you can't even can't even do anything with that financially. Then I'll underwrite it at 0% interest rate on the seller finance loan, approximately 10% down. Um, so the sellers know I have skin in the game, that you know I'm putting my own money in this deal as well. It's not just the bank loan and their money that is allowing me to acquire it. I'm also putting some money down. I'll run it at 0% and then I'll go all the way up to see how high of interest could I pay them to still get the returns that I want.
Michael Mnatsakanian:Ideally I'm still always structuring my seller finance component at 0% or very close to it. Almost always am I only paying principal only, not paying interest. But I need to understand what is my range when I go and negotiate with the seller back and forth Once I do my underwriting. How much can I actually offer them? Like up to what can I actually offer them? And if it doesn't work, oh well, tell the seller hey, it doesn't work. This is my cutoff. I cannot make it make any financial sense above that line. You should give yourself some wiggle room. If it works at 5%, tell them 2% or whatever, and then you're going to negotiate, probably somewhere in the middle or they'll come back to you eventually. If they still are motivated to sell and they have not been able to and those are some of my best deals where it's kind of that hardball hey, here's my line in the sand I can't make it work outside of these terms. Does that work for you or not. They need to accept your terms, but you also need to accept their terms. There you go. Let's skip all the BS.
Michael Mnatsakanian:It's not a one-way street. You're not just trying to buy every property. That is, joseph, you mentioned this. You're not just trying to buy a property creatively just because you can. You also need to only buy properties that make sense for you and what you're looking for. So it's really important to understand it's a two-way street. It has to work for both of you for a deal to work successfully. That's that win-win. And even better, if you can also pay a private money lender or partner as well and they get the returns they need and you don't have to bring the money to the table now. It's really a win-win-win.
Joseph Marohn:Yep, and I'll even jump on a Zoom with my seller if they're like real. You know, like hey, these terms they don't work for me. You know, and I'll actually show them like, why those terms don't work for me, you know, and I'll lay it out for them on the on a zoom and show them the number so they can physically see it.
Michael Mnatsakanian:So, yep, live in it. I think you might be able to make more money if you want someone to live in it. But understand the cons of that scenario too, with all the agent commissions and they're going to nickel and dime for every inspection finding and all that. That's what you want, like that's totally a viable option. What I'm doing is I'm buying the property, I'm renting it out, ideally as a long-term rental, and I need it to make financial sense for me.
Joseph Marohn:This is the way it makes financial sense for me.
Michael Mnatsakanian:Look, you can see it, this doesn't work. I get it Like no worries, I get it. Here's the terms that I can offer based on this as an investment for me. I lay all the cards on the table and that actually works massively to my advantage. What I do is I also anchor, like I said, if it's 5%, maybe I'll say 2% or whatever, and I'll still show the terms and they understand like, yeah, of course I'm not doing all this to make the bare minimum amount of money. I'm doing this to make a good return on the investment and my time not just the money, but the time that I have to invest in this.
Joseph Marohn:Michael, you sound like you've closed some deals before.
Michael Mnatsakanian:Yeah, all right, let's get into it I'm going to.
Michael Mnatsakanian:This is going to be so brief, because the difference between creative and conventional is very similar. You're still looking at cashflow and cash on cash return, so let's quickly get into it. There's going to break it down. The big difference is that the entry costs for creative deals have a little bit more variables. It's not just a down payment or agent commissions or seller commissions. There's a yeah, there's a few other things right, so once again, it's the cash to seller. So that's equivalent of a down payment on a loan.
Michael Mnatsakanian:Your arrears A lot of times sellers that we're talking to. They're behind on payments or they have a lien on the property. Someone needs to make that payment and that's going to be you as the buyer Cause if they could have, they probably would have made the payment and not be selling it in the first place. There's agent commissions. Typically, as a creative buyer, you're going to end up paying a portion, if not all, of the agent commissions. You can negotiate that, but typically, depending on the deal, the seller doesn't have the funds to pay the agent, nor do they have the equity to pay them. They're trying to subject to deal, so you're going to be the one primarily to pay that.
Michael Mnatsakanian:There's rehab or renovation costs, cleanup, furnishing, whatever your rent-ready costs are, that's still the same Closing costs. There might be more closing costs in the scenario. There might be less. It depends on the state that you're operating in, what you're trying to do and how many people are involved. There's admin, marketing, exit costs. For me I lump this into admin costs and for me when I'm buying a property it's under a new LLC, so that costs money. You're going to account for that. You're going to inspect the property. That costs money. It's going to take some maybe marketing costs to take some updated photos to list the property on a platform.
Michael Mnatsakanian:There's an assignment fee. Typically, if you're doing a creative deal, if you're not generating your own deals, you're going to pay a wholesaler an assignment fee for buying that deal from them. You have to account for that. That doesn't really work in the transact. The traditional world that there's there aren't really. You can maybe have that scenario, maybe more of like a finder's fee, a couple hundred bucks, but you're typically paying a good chunk of change. You know five to 15, sometimes plus thousand dollars to buy that deal from the wholesaler if the deal justifies it. So just understand that's one of your costs, any carrying costs you're going to need to get your property ready.
Michael Mnatsakanian:I almost always underwrite with at least three months of reserves to ensure that my properties have the first three months of expenses fully accounted for. So your entry costs are a little different and you have to account for all these parts. I know people have seven, piece, seven, part entry, eight, nine, whatever. This is kind of where I lump mine into eight, nine, whatever. This is kind of where I lump mine into um, into these eight. So there we go, Like that's.
Michael Mnatsakanian:The biggest difference is the cashflow is basically the same, your income minus your expenses and the only real difference is your loan payment. Right, In a subject to deal, you're still paying just the mortgage. You're just paying on someone else's mortgage. Right, You're the owner of, you're paying someone else's mortgage. If it's seller finance, the mortgage or the loan payment you're paying is to the seller directly instead of a bank. And if it's hybrid, you're paying the seller finance payment and you're paying the um, the existing mortgage. That's really the major difference. Everything else from cashflow is similar and your entry costs. You just need to account for the updated entry costs. Otherwise the analysis is basically the Cool. I have a deal that I can go over, that my business partner and I purchased, that I can go over or we can do questions or whatever you want, Joseph.
Joseph Marohn:Yeah, no, this is all great. Was that the end of your slides?
Michael Mnatsakanian:That's the end of the training itself, because I don't want to go too far into the weeds because it gets redundant. It's a similar concept, I think with this, people have enough tools to get into the weeds of underwriting real estate to then start seeing what are the returns they can expect.
Joseph Marohn:Awesome. Yeah, what I'm thinking right here is I don't know if you're open to it, michael, but I'd love to do a part two of this and then we really dissect what a live deal breakdown would look like. If you're willing to do that, yeah, let's do that.
Michael Mnatsakanian:We'll do actual. We'll pull comps, We'll get rental income, We'll put it into the calculator. We'll show how it's done. Let me briefly it'll take like two minutes Let me just show you one of my deals. It's just, the numbers are there so you can kind of understand. Put this all together for yourself and for the audience. So this was. This is not a live deal case. This is a deal that we've closed on.
Michael Mnatsakanian:In the situation here was this property was worth $423,000. That's what this property was worth. And they had an existing loan in place of $279,000 at 2.8% interest rate, and it was a VA loan. There was no balloon on this. It just that was the thing. The property was worth $423,000 and the purchase price was $279,000.
Michael Mnatsakanian:The seller at this point was like $30,000, $40,000 behind on mortgage payments, so they were going to lose the home in foreclosure. We were able to catch them in what we call pre-foreclosure status, where they still have the opportunity to sell the property, but they did not have enough time to sell the property the traditional way because by the time everything was set up, listed and there needed to be some renovations on the property by the time that was all said and done. The seller didn't have the money to do it and they didn't have the time to do it, so they just had to kind of sell it, which is why we were able to buy it creatively, because we caught them before they lost it, but in kind of a position where they didn't have as many options anymore. So it costs us $55,000 entry, with a majority of that being paying back the arrears or the missing or the missed debt payments and so, at a high level, our rental income that we had on this property was $3,000. The principal insurance or principal interest taxes and insurance. My mortgage payment is 1850 a month. We had no other expenses because we actually rented this out to a tenant who's covering all the expenses. Our reserves on that property was $600 a month that we were saving and we were going to pay a private money lender 10% interest to get the money from them to cover all of our entry costs.
Michael Mnatsakanian:So we're paying someone else to bring, they're bringing the money to buy the property on our behalf. They're paying the money for that and then we're paying them all their money back at some point, plus 10% interest on the money that they lent us. Of that, 55,000. We're paying them 10% interest and then paying them back the 55,000 at some point in the future to be one, two or three years down the future and they get 10% interest every single month until that payment is made. There are a variety of options for this property. I'm not going to get into the weeds of it.
Michael Mnatsakanian:We ended up doing instead was bringing on a private money partner into the deal, and what that means is, instead of paying someone interest on their money, we actually brought someone on to actually jointly own the property with us. They bring all the money, we bring the deal and we manage it. They jointly own the property with us. They will get their 55,000 back whenever we sell or refinance the property and every single month they get a percentage of the cashflow. In this scenario of 50%, they get a 50% cashflow 50% of the cashflow and 50% of the ownership every single month that we own the property.
Michael Mnatsakanian:And the reason for that is we were able. We had a great interest rate. We did not want to refinance that at some point in the future. The private money partner was someone we wanted to work with in general and work with them on future deals and for us, if someone else is bringing the money into the deal. As long as we're positive cashflow, our returns are always infinite, because we don't have any money in the property, we just have our time and skills that went into the property. So because of that we were able to take the primary partner, raise a little bit more capital from him and then build out a few more walls and rented out more of like a rent by the room model to a sober living home company, which ended up paying massive dividends for us in that scenario. So that's the strategy that we went with this property Just kind of show you real quickly kind of what is out there and what are some of the options available.
Joseph Marohn:Yeah, man, that's great info. Man, I'm almost mad I wasn't included in this deal, Michael. Yeah, sorry about that, man Next one For sure, for sure, All right man. So what are some of the most common mistakes you see people making during the underwriting process and how do we avoid them?
Michael Mnatsakanian:Not really underwriting and taking someone else's analysis at face value instead of gathering their own information. Someone it's in a wholesaler or agent or whoever's best incentive to tell you that this property is going to work perfectly here is going to get the highest amount of rent, it's ready to go, there's nothing you know. And if you take that at face value, the numbers might look good until you start doing your own analysis and you realize, oh dang, this is not. The rent is lower than they said. It's going to cost me more money to renovate the property. It's going to cost all these things that it's not in their best incentive to tell you these kinds of those kinds of things. It's contradictory to their overall goal.
Michael Mnatsakanian:So so that's one of them not doing your own analysis. Second is being kind of too desperate to make a deal work that you are falsifying information for yourself. You're you're saying, oh, I don't need to account the rent. I think I can get 200 more than what the other properties are renting for. Or, oh, I don't need to account for these expenses. Or I don't need to account for reserves or whatever, just to make the deal work, even though it's not.
Joseph Marohn:Um, it's not actually going to work, right, we're using bad comps, right, you know, and and trying to force it to work because you're like, oh, this comp makes more sense. No, that comp doesn't work. So good points, man. Yeah, Michael man, you, you, I'm really impressed by the way you, you know, you came, showed up with all the slides like dude that was. That was extremely valuable and I know a lot of people are going to find a ton of value from that. So thank you for that. Obviously, it's a hard. It's so hard to cram everything there is to know about underwriting and deal analysis and one podcast. But if someone's looking to take it to another level or really dissect this topic, where can they go to learn more?
Michael Mnatsakanian:Yeah, do you mind if I screenshot for half a second?
Joseph Marohn:Let's do it.
Michael Mnatsakanian:So the best way and I'll give all this information to Joseph Instagram is definitely a great way to connect with me. I have a lot of tools and good stuff in my link tree. So if you want my calculators, you want to learn more, you want to be a partner on deals, it's all here, right? I have my YouTube that you can check out. I have my free investing tools. That's all linked in the link tree. So if you want free creative finance or free conventional finance calculator, if you want the paid ones depending on where you're at you can go for the paid ones.
Michael Mnatsakanian:I don't, you know, you don't have to start learning how to underwrite first. And then I have a new school community that I've created, just about really start launching and we've got approximately 50 members we haven't even really done anything in there yet to basically go over how you can be an intentional investor, really analyze where you're at in your personal finances, where you want to get to, and then what is going to be your path to get there. And a lot of it focuses on being really intentional with acquiring deals and analyzing them the right way.
Joseph Marohn:So those are all the tools you can definitely leverage. Yeah, make sure you guys go and get all that information, man, because that's extremely valuable stuff right there, and we'll make sure that we plug in all your tags on the video here.
Michael Mnatsakanian:So thank, you, yeah, basically at Michael M, as in Mike N-A-T. Michael M Nat is basically how you can find me on most places.
Joseph Marohn:Awesome. Well, michael, this was great man. I really appreciate everything you're doing. Absolute pleasure to have you on the podcast. I'm sure everyone here is motivated to go underwrite some deals right now. You're crushing it in real estate. You're crushing it in the community. You're always giving and providing so much value to people and I'm glad I can call you a friend man. So thank you.
Michael Mnatsakanian:Thank you, I appreciate it, man. I appreciate everything. I appreciate your work, ethic and all that you do, and you're my favorite type of person to help out, because there's 95% of the people that I do help out unfortunately don't take the action that they need to to achieve the financial success that they're looking for, but they have all the tools in front of them. I love people like you who just take a little bit of info and just run with it and just keep causing problems to then be able to solve them and result in like what they're looking for. So I appreciate everything that you do too, my man.
Joseph Marohn:No, I appreciate you, man. I know a lot of people, you know they go out and they're asking, they want to know everything before they start, and I'm more of a person that's like, hey, man, let's go mess some stuff up and let's let's figure out how to solve these problems. Like let's fail forward, right? So absolutely that's always been my motto. But cool, man. Now, if you guys are finding value from this podcast, don't forget to show your boys some love. Subscribe to the channel and hit that bell icon so you can stay updated on all future episodes. Smash that like button and drop a comment down below on one thing you learned about underwriting today. Appreciate all the continued support and and guys, stay tuned, because we're pumping these episodes out every two weeks. I got a ton of value and topics coming up next. You don't want to miss out. Best believe, I'm going to keep bringing you that fire. Thank you for watching.