JF2338: Laid Off to 200 Single Family Homes With Sakar Kawle

Sakar Kawle Real Estate Background:

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“You will find the scalability plays in the investors favor the more you study multifamily ” – Sakar Kawle

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever. We don’t get into any of that fluffy stuff. With us today, Sakar Kawle. How are you doing Sakar?

Sakar Kawle: I am good, Joe, thank you. I appreciate you inviting me on the show.

Joe Fairless: Well, of course. And I’m grateful that you’re on the show. A little bit about Sakar. He’s got 20 years of investing experience. Portfolio consists of 200 single-family rentals. That’s 200 single-family rentals. He’s based in… Oh man, I forgot the pronunciation. How do we pronounce this city in Maryland?

Sakar Kawle: Ellicott City, Columbia area.

Joe Fairless: Ellicott City, Columbia area. Thank you for that. Sakar gave me the pronunciation before. I even spelled it phonetically in my notes, but I butchered it either way. Ellicott City, Maryland. And with that being said, Sakar, do you want to give first the Best Ever listeners a little bit more about your background and your focus, and we’ll get into it a little bit?

Sakar Kawle: My story is a typical immigrant student who comes to US in 1997. I did my [unintelligible [00:03:55].20] in Clemson University, and after a brief working stint for a couple of years, I got laid off. I shifted my focus to cash flowing rentals, and basically, since I got my full-time job here in Maryland just outside the Baltimore area, I discovered that Baltimore was a cash-flowing state. Very good city to invest. So I pretty much started investing in Baltimore back in 2001 or so… And slowly but surely been accumulating houses – one, two, sometimes a lot more; in the post-2008, 2009 crash we were accumulating probably 12 to 14 houses a month at that time. So collectively, we are at about close to 200 houses and some midsize apartments and things like that as we stand right now. So that’s in short, you can say, my snapshot.

Joe Fairless: All in and around Baltimore?

Sakar Kawle: Correct. So it’s majorly concentrated in probably four or five zip codes here in Baltimore, which gives us a decent scale from a management perspective and things like that. So it just helps out in terms of lots of things, as you can imagine.

Joe Fairless: What’s the average house value worth?

Sakar Kawle: Sure. So average values worth here are depending on the area, Joe – anywhere between 160k to 225k, and things like that. So if you want me to clarify some acquisitions, and things like that…?

Joe Fairless: Sure. Please.

Sakar Kawle: So back then, you know, we bought houses anywhere between let’s say, 50,000, 55,000 to 70,000, 75,000. There were some houses I bought for close to 100,000 as well. But that’s just the acquisition. But then in every single house, we would spend anywhere between 20,000 to 30,000 just from a renovation standpoint. So we would have completely new kitchens, bathrooms, refinish basements, and things like that.

So that gives us a good position that you kind of harden all the surfaces and stuff. And once you do the house right, as you know, tenants stay longer, their satisfaction level is great, your maintenance also is much less. So that helps out in a lot of respects, basically.

Joe Fairless: Let’s talk about the model. What is your business model with the direction of the portfolio? Is it what you just described, where you’re buying at 55k to 75k,  you put in 25k or so and then you just hold on to it long term? Or is there something else that you’ve been doing?

Sakar Kawle: Sure. So typically, Joe, my mindset always had been buy and hold for the longest time. And then as I was collecting houses and the cash flow numbers were going up, there were many years I would see that I would have lots of cash in my bank. So back in 2018, we ended up purchasing about 15 units, two apartment buildings right next to each other, right at the heart, right next to the university, and things like that. Then again, turned around in three, four months, bought another 66-unit portfolio, all by myself. And during that time is when I saw that, yes, you can place a large amount of capital as well in multi-family buildings… As you can imagine, like someone who’s been sort of rehabbing and renting houses for a number of years.

But when I came to multi-family, you’re dealing with smaller units, of anywhere between 600 to 900 square feet and things like that, you’ve got one-level apartments. So here you’ve got a house guy who’s been doing renovations, and when you throw me into a small box of apartment, if I may call it, I got really excited. I said, “You know what? I mean, such a small place – we can turn it around.” And just the whole dynamic about commercial valuation versus house valuation comps, and things like that… That really resonated with me. And the more you study multi-family, you find, yes, the scalability, the management and things like that, the best days, as I said, the commercial cap rate evaluations and stuff like that – that really sort of plays into investors’ favor.

So as far as the direction of the portfolio goes, Joe, since I have held on to the houses for a much longer time, my LTV is quite less right now. So eventually, we might sell it and maybe completely transition into multifamily as well. But since I have such a larger portfolio, I recognize that it may not be as easy as boom, you shift gears and sell off two, three houses, or 10 houses, and off you go, in six months you will transition off completely. It may not be like that. There may be a transition of two, three years where we are slowly unloading and perhaps, you know, moving forward.

So that’s what I would say. But the nice thing also, Joe, is that we own and manage everything ourselves, right? So we can always say that, yes, there is a bit of overhead involved as well. But the cash flow, the type of renovations that we have done, and stuff like that – we have no qualms or misgivings about the portfolio that we currently have. It’s just that, yes, multi-family will probably give you more bang moving forward; that may be the direction. But again, as we know, we are in such a low cap rate environment. Even if let’s say the multi-family ramp up takes a little longer, I still have my good bit of all this portfolio by myself, that we can still bank upon and move forward. So those would be the general points, I would say, for all of this.

Joe Fairless: Boy, we have so much to talk about. I love this. Let’s first talk about the loans that you have on the single-family homes. Is it one, or do you have one per property? How do you structure it?

Sakar Kawle: Sure. That’s a good question. So, Joe, typically when folks are newbies, they wouldn’t recognize the power of your credit unions or nearby banks, and things like that. But the more you start in this business, you realize that you don’t have to go to your typical big banks, Bank of America and Wells Fargo, and things like that. In fact, it’s quite the opposite, that the bigger the banks you go, they do not know how to do the investment portfolio financing.

So coming back to the portfolio that I have, my loans are mostly commercial loans. They are probably portfolio loans, as you can call it. So they are pretty much held on by credit unions or smaller banks, and things like that. And they’re all mostly loans comprising of, let’s say, 10, houses, 12, houses, eight houses, things like that. So that’s how it is.

When I initially started, I did smaller loans, maybe three properties, one loan, four properties, one loan, and things like that. But as things started to ramp up, I would pretty much discover that I’ve got to scale big, and then I would present a much larger loan package. So for example, just to give you a brief snapshot, you would bundle let’s say, 12 houses for, let’s say 800k, 900k. And as you can tell, on a per-house basis, you’re mostly less than 100k of sorts. So from a cash flow perspective, even from a debt balance perspective as well, it’s very conservative. So it really is a win-win for everyone, honestly.

Joe Fairless: Let’s say you have a lender and they say, “Okay, Sakar, I’d like to lend to you. But we need at least 10 properties.” Well, you’re looking at property number one, and number two, but you don’t have properties three through 10. So in that case, are you just getting a one-off loan and then transitioning it into a portfolio loan later?

Sakar Kawle: Sure, that’s a good detail there. So what happens, typically, Joe, is that you would acquire them first. And you have to have the properties. There’s no such thing as you’re starting a loan package of 10 and you don’t even have the properties ready. So just to give you an idea how it played out on the street for us is that I would buy properties from my own cash, or perhaps through hard money loans, and things like that. And as we were renting them out, and things like that, we would go approach the bank, saying that we are looking at eight to 10 properties loan. And how that would play out is that typically, we play a lot into Section 8 and [unintelligible [00:12:18].06] base programs.

And the reason I bring that up is that the inspections and by the time you rent the house, typically you’re talking sometimes maybe two months by the time someone submits their paperwork, and you’re going through inspections, and you sign a lease. Typically, it can take one and a half to two months easily. And in that case, what would happen is that in that hypothetical example of 10 properties that we were discussing, you would have eight properties ready, but looking forward, you would submit the package to say that, “Yes, we have these other two properties that are coming on the books in the next 60 days or so.” And you would present that.

So the answer to your question is that you definitely need properties upfront. You cannot have a fictitious case where you are doing a 10 properties loan, but you don’t even have tangible assets to present or show to the bank, and things like that.

Joe Fairless: Cash flow. When listeners hear about 200 properties they’re thinking, “Wow, what does that bring in a month?” So what does 200 properties bring in a month in cash flow?

Sakar Kawle: It’s crazy, Joe. I honestly haven’t even counted, because one of the biggest things that I’ll tell you – maybe you can understand this in this manner… Just the property management alone, I probably make $15,000 to $17,000 just on the property management fees. I’m not even talking net cash flow or anything.

Joe Fairless: Those fees are coming from who?

Sakar Kawle: From our own portfolio. So we own and manage ours, right? But at the same time, I want to make sure that… Sometimes you know how numbers get all sort of commingled and you don’t realize what’s happening, and all of that… Although I have these eight to 10 entities between all this portfolio, right? So sometimes you don’t know how numbers are playing out. So it’s very important to sometimes just make sure that not only you’re doing it right, but at the same time from an accounting perspective, that management fees and some of the utilities and all of that that come with all of this, you’re accounting it correctly.

So maybe three, four years ago, I wasn’t doing this, thinking that, “Hey, this is my own portfolio. Why do I need to do it?” But then suddenly, you start to realize that when it comes to the time of taxes and things like that, you realize that, “Geez, there are all these details that are asked”, and you’ve got to account for them properly.

So I started to do all of that, and then suddenly I realized that hey, you know what – we were doing management the whole time ourselves, but we were not really paying ourselves, because we were constantly renovating and pulling the cash out and putting it back into businesses, and things like that, right? So we were not doing that. Bust to answer your question, just property management alone is upwards of 15k to 17k just on the fees itself.

Joe Fairless: That’s awesome.

Sakar Kawle: And then probably over well over 50k or so in pure cash flow, and stuff like that. And my story is a slightly different, Joe, wherein I am very debt-averse. So what I also do is just the power of compounding and writing the debt down really. On every single loan that I have, I typically pay a minimum of $1,000 every month extra principal. That’s just automatically that goes to the bank. And those are the things that I don’t even see. So sometimes I’m okay with not having that much cash flow. But to me, as we all know, that all the banks review their loans quarterly and on a semi-annual basis, and things like that… And once they see the performance of some of the investor portfolio – boy, really good things happen when they start to see that, hey, not only their portfolio is performing well, but look at the amount of writedown that they’re doing on their loans, and things like that.

So that puts you in a lot of good position in front of lenders, because all this game of cash flow, in general, all of this, it’s a kind of a close-knit entity where you’re not running too far from the known players. It slowly pretty much starts to become a close-knit circle where bankers, the VPs, and all these folks know each other, and they’re talking about, “Hey, I know this investor, he’s great” or “He’s not so great.” “I love him”, and things like that. And the more you mature, you start to realize that these are the aspects that you really have to look forward to, you know… You know, how you communicate, how you behave, how you’re servicing the loans, or communicating, even with the back office people at the bank, and things like that. And that goes a long way, and you suddenly start to open doors or get things done, which otherwise would be quite difficult.

Joe Fairless: Oh, absolutely. And thanks for going into those details. It’s good for the listeners and myself to just learn from someone who’s got this size of portfolio with single-family rentals. Let’s talk about – you and your team do your own management, so God bless you for that. Let’s talk about some bad deals. What deal have you lost the most amount of money on?

Sakar Kawle: Sure. So we have had tough times, many times. Typically, our pain has always been is that, gosh, it’s taking so much time to renovate. We would sit on renovations for like four months sometimes. And it sounds crazy, but the right thing that I have learned is that you’ve got to do the right thing in terms of renovations, and stuff like that. And in that aspect, Joe, as far as losing the money and stuff like that, I clearly remember there was one time where we were very close to getting the house done, and then we found out that the mechanical inspector had changed upon us. Some new inspector came along, and he had us change a lot of plumbing and HVAC as well. We ended up losing about almost 35,000, 40,000 on that deal because  we  were redoing all of that. And we were big enough at the time, meaning we had lots of things going on…

So in those cases, your run rate goes down; you don’t suddenly collapse to the ground. But it’s just a headache sometimes. And like you have people who’ve been doing the business for 30 to 40 years, who are doing the plumbing, HVAC, electric, and then as you know, a lot of municipalities, you’ll notice that all these young inspectors who show up with the rulebook, and they think they know better than the 30-year veterans who are doing the job. So it’s one of those classic cases that we had gotten into, and we were like, “Fine, let’s just do what is told, and let’s just move on.” So that ended up costing us a lot of cost overruns, and things like that. That’s kind of what you call the tip of the mountain, so to speak. That’s the most we have seen. But otherwise, as you can relate, in real estate, in renovations, and things like that, if your cost overruns are not happening – boy, you’re really doing something wrong… Because cost overruns are like always the everyday norm, you know…

Joe Fairless: Yup. And as far as management goes, did you always manage your own properties?

Sakar Kawle: For the large part. And when I say that Joe – I started full time doing this, I was doing pretty much double duty with my W2 almost until 2014 and 2015. That’s when I quit. But during the interim years, I think around 2009 or so, we took a brief detour where we hired a property management company for a year, a year and a half. But then we quickly realized that not that we were out of the woods at the time; we were still present. But since we were already doing the renovations and managing the tenants to some extent all the time, we discovered that whatever properties we have given to the property manager, we would do the management or even the maintenance and things like that much better. So we took that property management from the other company also in-house at that time.

So you can say that, yes, we’ve been managing mostly in-house. If you want to maybe say the staff, in general, we have about four maintenance people and about two back-office people right now. And that’s good enough. Not everybody’s so busy, because the properties are fixed up very well, so we don’t tend to always have folks running around and doing different things, and things like that. So it’s been a blessing for sure.

Joe Fairless: Let’s pretend you’re still buying single-family homes. When you first started buying them, to what you know now, if you were to go back and tell yourself, “Hey, keep in mind these things. Because I’ve learned these things over the last 20 years”, how would your buying criteria have evolved?

Sakar Kawle: Sure. So over time, what I have matured into, Joe, is that… And these were tough learnings, quite honestly. These were natural intuitions that I got, and I gravitated towards that… And now they have become my strong beliefs. And it goes by saying that anybody lives in a neighborhood first, and then a house.

For example, you can get a cheaper house in a not so great neighborhood – you wouldn’t be successful. So for someone listening or watching the show, I would say that, it’s always better to pay more to be in a good and better neighborhood, rather than just looking for a deal. That deal can sometimes really crash and burn you and you would probably lose your shirt, and things like that. So sometimes stability and having that occupancy sort of ride you out; that behooves you and works in your favor for the long term… Rather than just looking for the highest cash flow and ending up in a not so great of a neighborhood. That’s what I would say. And that’s what I kept on doing.

Initially, I was buying properties for 40,000, 50,000, then slowly, I discovered that I’m buying for 60k, 70k. And until the time I was actively buying the properties, those select properties, I still bought for about almost 90,000 a door, and things like that. And as long as the cash flow works conservatively, that’s the good matrix.

And then of course, in your career  sometimes you can say that “Hey, I’m looking for slightly greater cash flow”, so you’re buying not that great of a neighbor, but still safe neighborhood type of property. That also works. Where you don’t want to swing the pendulum is that it goes completely the other way and just buy really bad properties in really bad neighborhoods.

Joe Fairless: So if you have to choose between a better neighborhood with less cash flow, or a worse neighborhood with better cash flow, you’re going to go with a better neighborhood with a little worse cash flow?

Sakar Kawle: Sure. And close second also comes, Joe – real quick I’ll say also that you have to do the renovations correctly… Because maintenance, vacancies, turnovers, as everyone can relate – that kills this business. So once you acquire, if you can renovate it in a great shape, and keep that maintenance down, that itself is extremely powerful for you. Because the cost of not only the maintenance, but the opportunity cost of if you’re doing something X and then you have to move your maintenance folks to all over the place, that has a lot more premium as well; you don’t want to be running [unintelligible [00:23:18].01] fixing just maintenance problems. And that quite frankly becomes one of the bigger points why people don’t scale, or people hate single-family rentals as well… Because people would have done the business in the wrong way, and they would have probably done very sub-standard work, and things like that, to begin with.

Joe Fairless: Based on your experience. What is your best real estate investing advice ever?

Sakar Kawle: I like to always say, Joe, that it’s a people business. Keep on learning all the time, networking, and podcasts like this, or mentors, and things like that. Those are actually the pillars of your success. Sure, you have the real estate side of it, but the whole mindset about how you can improve yourself, have great people around you… Sometimes it’s not the resources, it’s really your resourcefulness to gain information or gain an edge into learning and things like that. So I always say that you have to keep learning different things and learn from the experiences of different people. That to me stands out the best and greatest above all.

Joe Fairless: We’re going to do a lightning round. Are you ready for the best ever lightning round?

Sakar Kawle: Sure.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:24:33] – [00:25:22]

Joe Fairless: Okay, we talked about the deal you lost the most amount of money on. Now let’s talk about some fun stuff. What’s the Best Ever deal you’ve made the most money on?

Sakar Kawle: Back in the days I bought a single-family home, typical foreclosure and stuff like that, for around $62,000 that had been rented for a long time. And then I decided to sell it. And recently, I sold it for about $210,000. So I guess I made some money along the way. I had my own share of headaches as well, so… It goes. But that’s what I would say. And then recently, when I bought the portfolio of 66 houses, the average price on that was about 78k a door. And now when I’m selectively selling some of those houses, those are also I’m selling for around 200k a door. So it’s been great. I lucked out in some cases, for sure.

Joe Fairless: Best Ever way you like to give back to the community.

Sakar Kawle: I love to network and share advice. Here in Baltimore, where I’m based, I started our own community organization way back in 2008, and 2009. So we celebrate festivals, do all the giving back activities as well. So we do that. I donate a lot as well. So there are a lot of different ways how I give back to the community as well.

Joe Fairless: How can the Best Ever listeners learn more about you and what you’re doing?

Sakar Kawle: My website is premiumcashflow.com. Folks can learn all the information there. I’m readily available on Facebook, LinkedIn, Instagram, and things like that. So if viewers want to reach me, drop me an email at info@premiumcashflow.com. There I host a podcast as well, focusing on commercial real estate, premiumcashflow.com. That’s where a lot of experts come on share their advice as well. So that would be another great place to learn some information as well.

Joe Fairless: Sakar, thank you for being on the show, talking about how you’ve built your portfolio, how you approach the cash flow, the debt, the business model for how you’ve evolved your approach to buying properties, put a premium on the better neighborhood over cash flow… Thanks for being on the show. I hope you have a Best Ever day and talk to you again soon.

Sakar Kawle: Great. Awesome. Thank you Joe. I appreciate it. Thanks a lot.

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