Mastering Creative Finance with Underwriting | Episode 13

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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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Episode Transcript

Joseph Marohn (00:12):
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-knowtopic if you're investing in
real estate.
I'm talking the only real wayto know if it's a deal or no
deal one of the most valuableskills to learn in your real
estate business.

(00:32):
Today we're going to becovering the importance of
underwriting.
Underwriting is the processthat investors, lenders or other
financial stakeholders evaluateto help determine the financial
risks involved in purchasing aproperty.
This process includes analyzingthe property's value, market

(00:53):
conditions, potential rentalincome and total expenses.
Effective underwriting helps inmaking informed decisions,
mitigating risks and ensuringthat the investment aligns with
the financial goals and risktolerance of that investor.
Now, if underwriting and dealanalysis is something you still

(01:14):
need a better understanding of,then stay tuned, because we're
going to show you exactly whatto look for in a deal, how to
mitigate your risk and help youbetter understand what your exit
strategy is, so you canmaximize your cash flow.
Now you know how we do it onthe Real Estate Unlocked podcast
.
If we're going to do it, we gotto do it right.

(01:37):
We can't just bring on anyoneto speak about underwriting.
We got to bring on the creativeengineer of underwriting.
Underwriting we got to bring onthe creative engineer of
underwriting.
Today, our special guest on thepodcast is Mr Michael
Manatsakanian.
Michael's an army veteranengineer and accomplished real
estate investor who achievedfinancial independence at the

(02:00):
age of 27.
Michael, alongside his wife,sierra, have built an impressive
portfolio of over 40 rentalsvalued at over $10 million,
largely through mastering theart of house hacking small
multifamily properties anddiving headfirst into creative
finance.
In less than four years,they've rapidly scaled their

(02:24):
operations, retiring Sierra fromour W-2 and becoming a leader
in a multitude of real estateinvestment communities,
including Sub2 with Pace Morbyand Creative Camp with Rob Alva
Solo.
Knowledge in deal structuring,underwriting and personal

(02:47):
finance.
Michael is here to guide usthrough the powerful strategies
of creative financing and dealanalysis that have significantly
enriched their investmentjourney.
So, without further ado I'vebeen talking long enough
Everyone if you will, pleaseallow me to formally introduce
to you Michael Manatsikanian.
Michael, what up, brother?

(03:07):
How's your day going?

Michael Mnatsakanian (03:11):
Hey, joseph, I appreciate it.
Thanks for having me on.

Joseph Marohn (03:13):
Absolutely, absolutely, man.
Well, I really appreciate you,bro.
Everything good with you today.

Michael Mnatsakani (03:18):
Everything's going great.
It's just another busy day, asalways, which I like hey busy is
good man Awesome.

Joseph Marohn (03:24):
Well, michael is good man Awesome.
Well, michael.
Thank you for your service,brother, and welcome to the
podcast.
I want to personally thank youfor taking time out of your busy
schedule.
I know you could be in amillion other places right now,
but you chose to be here instead.
Bring value to others byeducating on such an important
skill to have in real estate.
So thank you, bro.

Michael Mnatsakanian (03:44):
By educating on such an important
skill to have in real estate.
So thank you, bro.
Yeah, well, I want to thank youbecause people don't know.
I don't think a lot of peopleknow our story and this is why I
took the time out to reallycome on this podcast, because I
appreciate the work ethic thatyou put in Joseph when he was
working on his first evercreative deal, a multifamily at
that, with a VA loan in place.
So he took, he took, he addedall the challenges to it.

(04:06):
He came and asked me for alittle 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 alwayslove people who are doing that
kind of stuff, so I will alwayssupport that.
So thank you.

Joseph Marohn (04:19):
Yeah, man, and you know that was very pivotal
in that moment for me, when Iwas, you know, structuring my
very first deal, and I reachedout to Michael, and Michael was
nothing but supportive, helpedme out.
I was going through a sellerobjection and you know he gave
me everything I needed to takeaction and close that deal, and
for that I'm forever grateful,brother.
So thank you Me too.

(04:43):
Thank you, Joseph.
Awesome, so cool, Michael.
Well, walk us through yourjourney, man.
You joined the army, become anengineer, then decide nope, I
still got more in me, I'm justgoing to go crush it in real
estate.
Is that kind of how the storygoes?

Michael Mnatsakania (04:54):
Essentially .
Actually, it starts, funnyenough.
I wanted to be a doctor.
I was at UC San Diego studyingbiology and all that good stuff,
ready to be a doctor.
After a year I realized I keepjust taking tests.
I don't feel like I'm learninga lot, I'm taking tests, I'm
doing well, but I just feel likeI'm memorizing and taking a
test and forgetting.
So I decided at that moment Iwanted to do something that
aligns with my passion withnumbers, analysis, problem

(05:16):
solving, science.
So that's why I pivoted tochemical engineering at the time
and then specialized inenvironmental engineering.
I, after graduation, I wasworking a little bit in
sustainability and at the time Ihad the opportunity to work for
an oil and gas company or be anenvironmental engineer for the
U S army, um.
So I definitely went the armyroute in my.
For me it made a lot more senseand it was the adventure that I

(05:38):
was looking for.
So it was a perfect opportunityfor me to do so.
So I did that, worked in thefield of environmental health.
That's when I started my realestate journey.
I had a lot of free time.
I spent a lot of time learningas much as I could about real
estate.
I was doing everything I couldin the right way for personal
finance, investing in retirementaccounts, 401ks, iras, all that

(06:00):
good stuff.
But I knew I could do more toachieve financial independence
sooner.
Little did I know how quicklyI'd be able to do it by just
really going all in on realestate.
So that's kind of my quicksummary journey to doctor, to
engineer, to military, to realestate investor.

Joseph Marohn (06:17):
Hey, man, that's an impressive story, man.
I really love it.
Man, appreciate that you'resharing that with us All, right.
So, michael, we hear this termunderwriting used so often in
real estate.
Right, and I think majority ofthe people watching here today
have a broad understanding ofwhat it is, but maybe don't
fully understand how to properlyunderwrite a creative finance
deal or how to do a proper dealbreakdown analysis to make sure

(06:40):
it's a good offer.
So I brought my good friendMichael here today to really
educate us all on how all thisworks.
So when we're structuringcreative finance deals or making
offers, we're not justsubmitting contracts on anything
because a seller's open tosubject too, but instead really
understanding the facts andputting ourselves in the best
position as possible to make agreat return on our investment

(07:02):
while still solving problems forthe seller.
That's what you call a win-winsituation.
So, michael, let's start fromthe very beginning.
What is underwriting and why isit so important for investors
in real estate to reallyunderstand and master this skill
?

Michael Mnatsakanian (07:17):
Right.
So I will, at a high level, sayit's a little distinct for
someone who's wholesaling as anend buyer or as a lender on a
deal, but the concept is stillthe same.
The idea is is this propertyright?
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 verysimple and straightforward

(07:38):
analysis.
Does this property make me moremoney each month than it costs
me, right?
That's the first thing andthat's cash flow.
We'll break that down furtherin a little bit and then,
secondarily, the amount of moneyI need to put into the deal.
Does that justify the moneythat I make each month?
So, and we'll get real deepinto that, but that's really the
analysis If it's a great dealfor a buyer, they're getting the

(08:00):
cash flow and the cash on cashreturn, the return on that
investment back.
If it's a wholesaler, they'retrying to make sure that their
end buyer is getting thosereturns, because the better the
deal is, the more likely theyare to sell it, instead of
wasting their time locking upnot deals, locking up contracts
on properties that will neverwork out for the majority of

(08:20):
buyers.
People buy for a multitude ofreasons, but the majority is
cash flow and cash on cashreturn if it's a real investment
for them.
And then lenders it's reallygood for lenders who are lending
on these deals to reallyunderstand underwriting.
So they know is the personwho's buying this property, do
they have a viable plan in placeto pay me back the returns that
they're offering, or are theyjust selling me a narrative that

(08:43):
they cannot fulfill?
So it's really important forall three parties to understand
is this an actual deal or isthis a property that I can buy?

Joseph Marohn (08:52):
Yeah, I think a lot of people are locking up bad
deals out here, and that's whyI really want to share all this
knowledge with everybody heretoday, because we're seeing too
many of them and people are justexcited to lock up a deal
period and don't reallyunderstand the whole
underwriting process.
So you know you touched on somegood points right there,
michael.
Can you successfully do a dealwithout underwriting it first?

Michael Mnatsakanian (09:16):
I couldn't because I wouldn't know how to.
I wouldn't know how, likewhat's the barometer for a good
deal?
You can get lucky and do it, ofcourse, and when interest rates
were really low it was veryeasy to do so it was easier.
But even then, when I wastraining on underwriting back
then I would still start everysingle training off with.
95% of properties available onthe market are not good

(09:39):
investments.
They're a house for someone tolive in, which is great.
We need lots of houses forpeople 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 invalue over time.
But if you're putting insignificant money or any money,
to acquire property, renovate it, furnish it, whatever you're
doing with it, and then tryingto rent it out, it would be so

(10:03):
challenging to have it be asuccessful investment without
first understandingunderstanding all the numbers of
an advance, and that's why wesee so many people buy
properties that end up costingthem tons of money over time and
they end up selling it at aloss or returning it back to the
seller If it's creative, orlosing it to the bank, like
that's why this occurs, becausepeople go into it without proper

(10:26):
underwriting or if they areunderwriting, 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 toget $2,000.
And when that doesn't work out,then they're screwed because
now they're losing money eachmonth.
So it is super imperative to doit, and then to do it the right
way for sure.

Joseph Marohn (10:44):
So it is super imperative to do it and then to
do it the right way for sure.
Yeah, man, I could never do adeal without underwriting it
first.
I just I won't even touch it.
Right, because I got to makesure that I had that security
blanket.
Right, because, like you justsaid, let's say I plan I'm going
to get two thousand dollars forthe rent and it doesn't work
out.
Then I have to drop it down.
Eighteen hundred seventeenhundred sixteen, 1600.
Before you know it, I'mnegative cashflow.

(11:05):
Or even if I break even on it,what happens if there's a major
expense?
That happens, you know, theHVAC goes out or there's a
problem with the roof.
So definitely good points onthat.
You definitely have to do yourdue diligence on underwriting.
Now, what information do youneed when you're about to
underwrite a single familyversus a multifamily unit?

Michael Mnatsakanian (11:25):
Yeah, to write a single family versus a
multifamily unit, yeah, so I'mgoing 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 oftimes with multifamily and I own
several small multifamily allof the utilities are not
necessarily split up the sameway they're on a single family
home.
So, for example, typically ifI'm buying a single family home
to rent out my tenants, if it'sjust the long-term rental, my

(11:47):
tenants are going to be payingtheir own gas, electric, water,
heating, sewer, trash.
They're going to pay their ownutilities.
They want internet?
They pay for it, right.
But if it's a multifamily,sometimes you have electric
meters for each of theindividual tenants and they can
pay their own electric, butwater is typically not split.
Gas isn't split.

(12:08):
Sometimes trash is for thebuilding.
So you as the owner have tocover those costs or charge them
back to your tenants.
But that's that's something youhave to understand.
You can't just assume that isthe same exact thing as a single
family.
The advantage of multifamily,especially when they're attached
, is typically, if you have toreplace a roof, you're only
replacing one roof for multipletenants.

(12:29):
Typically you can get muchbetter returns.
But when people are buyingmultifamily properties, they're
buying it as an investment inthe first place.
Rarely does someoneaccidentally buy it as a house
to live in, unless it'sintentional right.
They're intentionally living inone unit, renting out the other
, so you're buying it fromanother investor typically and

(12:49):
you're competing with otherinvestors 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 thembecause they want to live in it.
Multifamily, it's very muchmore likely that it's an
investment for people.

Joseph Marohn (13:05):
Yeah, and I think a lot of people when they do
the comps right Becausemultifamily, it's very much more
likely that it's an investmentfor people.
Yeah, and I think a lot ofpeople when they do the comps
right because there'smultifamily is a lot different
than comping a comp that right.
So as far as when you'recomping, are you comping as far

(13:28):
as what the property produces orare you going off other comps
in the area as far asmultifamily?

Michael Mnatsakanian (13:34):
It depends Some places that I own
properties.
They have a multitude ofsimilar style multifamilies.
So you're both looking atcomping the after repair value
or the value of the propertybased on what the other ones are
being sold for.
But you're also looking at itfrom the perspective of how does
this work as an investmentright?
The bigger the multifamily youget into, the less it matters

(13:57):
about comps.
It's all about how does thisperform as an investment, and
that's where terminology likenet operating income, cap rates,
things like that, come moreinto play than the actual value
of the property, because it'sjust a different.
It's a different investmentclass.
At that point, so it justdepends.
if there's comps, awesome.
But you're really going to lookat it as an investment almost

(14:18):
always, because who cares whatthe property value is if it's
losing a bunch of money anyway,like for the most part.
I guess that's reallygeneralized, but yeah.

Joseph Marohn (14:28):
Yeah, it makes a lot of sense.
Now give us some of the keythings you're really focusing on
when you're getting ready tounderwrite a creative finance
deal, like what are theindicators you're looking at to
determine if it's a good deal ornot?

Michael Mnatsakanian (14:40):
So the funny part is it's the exact
same as traditional financing,Although you just need to
understand the different loanstructures.
When you're buying itcreatively versus traditionally,
it's the same concept.
Cash flow Am I making moremoney each month?
Is my income minus my expenses,minus my reserves, positive?

(15:00):
And is the amount of money Iput into the deal to acquire it
justify the amount of cash flowI make each month?
And that's cash on cash return.
It's the exact same conceptwhere they're buying it
traditionally, honestly cash aswell cash traditional or
creatively.
You want to understand are youmaking more money each month
than your expenses and does theamount of money you put into it?

(15:24):
Is that justified by the amountof money you make each month?
And that's where cashflow andcash on cash return are the two
key metrics for single familyhomes and small multifamily.

Joseph Marohn (15:35):
Right, Absolutely .
Now what is your process forcomping properties and what are
some adjustments you might makewhen comping properties for a
creative finance deal?

Michael Mnatsakanian (15:46):
So that's a good question.
So my process for compingproperties is I always look at
every single property that I buyas a long-term rental first.
So I'm going to look atmultiple platforms like
Rentometer BiggerPockets.
Those are like data aggregators.
They'll give me an estimate forwhat rents have historically
looked like for similarproperties in that area.
Then I will go on a Zillow, aRedfin, and actually look at

(16:10):
what are properties that aresimilar in style.
What are they currently rentingfor in that market right now?
So that's me determining whatis my long-term rental income.
And then and remember I'mtalking buy and hold, investing,
so I'm more focused on incomethan I am the property value.
And then what else are wecomping?
I mean, that's a big oneUnderstanding your income is
valuable and then understandingwhat are your property taxes

(16:32):
going to be when it's reassessed.
What are your insurance costsas an investor, All of those
things that focus around incomeand expenses.
And then tracking are there anybig repairs that are going to
come up for capital expenditures?
Are there any maintenanceissues that need to be addressed
before tenants can move in?
And then for me, even though Ido underwrite everything as a
long-term rental initially, Idon't just own long-term rentals

(16:54):
.
I own properties that areshort-term rentals.
So if that's the route, does itmake financial sense as a
short-term rental?
Isn't it a great market that'snot overly saturated, overly
regulated?
Can I make the income that Ineed on it?
I do midterm rentals, we dosober living homes and we do pad
split or rent by the room.
So, depending on the managementstyle you're going to implement,
you need to understand theincome and the expenses that it

(17:17):
will cost each month, as well ashow much money are you going to
further have to inject to getthe 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 tohave less income and I don't
really have to do as much of theproperty.
So, short-term rental I'mprobably going to have to
renovate it a little bit paintsome walls, make it look nice,
furnish it really nice.

(17:38):
There's going to be moreexpenses but more income.
And then there's more money Ihave to put into the deal to get
it to that, get it in likeshort-term rental condition.
So it's really justunderstanding what your strategy
is for the property and does itmake sense?

Joseph Marohn (17:51):
Right, and I know you were talking about
long-term rental, but how areyou estimating, like traditional
versus non-traditional rentalstreams, like for short-term
rentals and pad splits and so on?

Michael Mnatsakanian (18:01):
They're all distinct, right.
So pad split or the rent by theroom model they actually we
have a representative that worksthere and we say, hey, we have
this property this size.
We're trying to figure out whatthe estimates are for the
rental income.
What data do you guys have inyour system currently?
What is the weekly rate,because they're billed weekly?
What is the weekly rate for abedroom with a private bathroom

(18:25):
and with a shared bathroom inthat area?
How quickly are they beingoccupied?
That's a very big one.
For short-term rental.
You use tools like DataRabu orAirDNA to get short-term rental
estimates for the income sideand then you just look at okay,
is the property that I'm goingto have similar, better than or
worse than these comps?

(18:46):
So that I know roughly how muchincome I can be generating a
year because of the data that'sthere.
And then midterm rentals, whichis similar to long-term rentals
.
You just have to look at itfrom different platforms, like a
Furnish Finder or a Zillow doesFurnish Rental, so you can look
at it from that perspective.
To get comps.
You just have to understandwhere to find that data and I

(19:10):
pretty much broke through realquickly, like where to get the
rental income projections forthe different strategies right
there.

Joseph Marohn (19:15):
Right.
And then you also got to factorin those furnished costs as
well, right, with all thefurniture and stuff.
So good, good point there.
Now I know we live in the dayand age where everything's kind
of becoming automated, right.
Are there any tools or softwarethat help in underwriting and
analyzing real estate deals?

Michael Mnatsakanian (19:32):
So, yes, like I said, like comping is a
big part of it.
So all those tools I justmentioned are very valuable to
be able to estimate your rentalincome especially quickly.
But then you have to do yourdue diligence and then you don't
just take a rentometer at facevalue.
You go into Zillow and you lookat properties and make sure
that, because a data aggregatetool like that does not

(19:53):
understand the condition of yourproperty versus one of the
other ones being rented right,it doesn't know if you've
upgraded appliances and the oneit's comparing to has white
appliances versus stainlesssteel.
They don't know when yours wasremodeled versus theirs.
So you're looking for in-kind,very similar properties to
estimate your rental incomebased on the success of similar
properties in that similar areaas yours.
Same with like data and allthat stuff.

(20:17):
Don't take it at face value.
You have to do your duediligence, but it's a great
resource to get you started inunderwriting the income.
I don't use many other toolsoutside of the ones I've
mentioned, except for mycreative finance real estate
investing calculator, as well asconventional finance real
estate investing calculator.
So once I get the data that Ineed, I plug it into my
investing calculator and ittells me very quickly is this a

(20:40):
deal that hits my ideal metricsfor cashflow cash on cash return
, and is it going to work when Iuse?
I purchased all my propertiesnow the last 10 million
approximately all using partnersthat are my lenders on the
deals and then I need to makesure once again I mentioned,
like the lender needs tounderstand are they going to be
able to get paid back?

(21:01):
Well, and that's anotherfeature of the calculator it
tells you, are you going toactually be able to pay back
this lender the amount of moneythat you say you are based on
the income that we're seeing onthis, on this property?

Joseph Marohn (21:12):
Yeah, that's a good point, man Cause you know
rental meter is basically just abaseline, right, you know it's
a good resource to use, but youshouldn't be, you know, counting
on relying a hundred percent onthat.
You should still do your duediligence.
So good points on that.
We often hear this term ARVthrown around.
What does ARV mean and how isit calculated?

Michael Mnatsakanian (21:32):
Right.
So ARV is your after repairvalue.
That is the most importantthing when you're looking at
cash transactions, becausetypically the goal with a cash
transaction is that you're goingto buy the property under
market value, renovate it andthen flip it and sell it to
someone else or you're going torefinance it.
You're going to refinance itit's the BRRRR strategy.

(21:55):
You're going to refinance itand keep it in your portfolio.
But all that is very contingenton what the property is going
to be worth after it's renovated.
So ARV is if this property wasfully renovated all the way,
what dollar amount would it sellfor, based on similar
properties of similar size andcondition in the local area?
So that is how you calculate itis.

(22:16):
You are looking at propertiesin that market that have
recently sold, typicallytraditionally, that have sold on
the MLS that you have access to.
You can see the photos, you cansee the condition, the size,
you can see how recently it soldfor for how much, and then you
compare that typically thedollar per square foot of a

(22:36):
property like that to the dollarper square foot or the square
foot of your property, toestimate what will be the
property value, your propertyvalue, at the sale.
So it's really just determiningif this property was fully
renovated, what price can Iestimate it would be sold for?
And that's very important forcash transactions.
It's not as important forcreative transactions.
You do want to understand whatyour property is worth and if

(22:57):
you're walking into maybe equity, you're buying it, let's say,
at a discount of what it wouldbe worth, but you're really
looking to see once againcashflow and cash on cash return
if you're holding anything inyour portfolio.

Joseph Marohn (23:08):
Right, apples for apples, you know, because
there's a lot of times that mepersonally I don't know if
you've experienced this, michael, but I've talked to agents and
agents man, they'll give youcomps from you know properties,
and not even in the samesubdivision.
They're crossing major roads,they're not even the same square
footage.
I generally like to be around200, give or take square footage

(23:29):
when I'm comping properties.
But yeah, a lot of times I'mtalking to agents and they're
giving me some bogus comps andI'm like, nah, man, that's not
how you comp properties.
But, yeah, good stuff there.
So I know there's a lot ofpeople here like myself that
listen to all this and think,man, this is great information.
But for me personally, I'm moreof a kinesthetic learner.
You know what I mean.
I got to get hands on, I got tosee it, I got to touch it, I

(23:51):
got to feel it.

Michael Mnatsakanian (24:08):
Michael, would it be possible to share
your screen and maybe walk usthrough an example on a live
deal analysis or how todetermine what's a good deal or
whatever?
You would think that would bevaluable for everyone watching
today.
I just really want to set thefoundation here, right?
Yeah, definitely.
So what I'm going to do is I'mgoing to share my screen.
We're going to go over thefundamentals of underwriting
real estate investmentproperties traditionally, show
you a little bit about creativefinancing and creative finance
acquisition strategies, how tounderwrite those and, if time
allows, I have one of theproperties that we recently
bought to run through just kindof what the terms look like.
Cool acquisition strategies,how to underwrite those and, if
time allows, I have one of theproperties that we recently
bought to run through just kindof what the terms look like.

Joseph Marohn (24:29):
Cool, Awesome man .
You came prepared, man.
I love it Always All right, solet's screen share.

Michael Mnatsakanian (24:51):
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 ofthis is the way you say it is.
Manatsakanyan, right?
Manatsakanyan, that's my lastname, nice and easy for you all.
Manat Sakanian right, manatSakanian, that's my last name,
nice and easy for you all.
So let's get right into it.
Just real quickly.
Joseph went over it, butself-made real estate investor

(25:12):
with 42 rentals worth over $10million I'm not getting into my
whole journey, but I used towholesale a lot done, over a
hundred transactions.
I'm primarily a buy and holdinvestor now.
I was able to achieve financialindependence early on, all
through real estate.
I'm a chemical engineer bytrade.
I'm very passionate abouthelping others achieve their
path to financial independence.
That's why I think underwritingis so important.

(25:32):
The thing that stresses me outliterally is people saving money
for one, 10, 20 years,investing it, finally investing
it, and then investing into abad asset that ends up not
producing the results that theywanted.
So it literally works againstthem, not for them, and the
thing is, you can literallylearn and understand how you can

(25:52):
prepare yourself to not dealwith those scenarios.
That's why it stresses me out,because people can learn the
skills needed to not end up inthat situation.
And then my goal this year isto help over a hundred informed
investors achieve financialindependence by understanding
where they currently financiallystand, what their financial
goals are, and then what is theideal path for them to achieve
that.

(26:12):
So let's get into it.
We're going to go into the keycomponents of investment
analysis, key components ofunderwriting and the creative
underwriting principles.
So the first thing weunderstand is the different ways
that you make money in realestate.
And then what's the mostimportant when it comes to
underwriting, one that we allknow about is appreciation,
which is properties tend toincrease in value over time.
Obviously, if a major industrylike Detroit you know, like in

(26:35):
Detroit leaves or something likethat happens, obviously
population goes down orsomething occurs in that area.
Property prices will notcontinue to go up.
But historically, propertyprices go up in value over time
and that's one of the benefitscalled depreciation Debt pay
down.
So every single month, you asthe landlord are renting out a
property to someone and there'sa mortgage in place.

(26:57):
Your tenant is paying you rentand you're using that to pay the
mortgage down, and a componentof that is some of his interest,
but then the other amount ispaying down the actual loan
itself.
So your tenant is then payingdown the loan on that property
for you and that has a tangiblevalue that literally increases
your net worth every singlemonth.
So there's a lot of tax benefitsfor real estate, especially if

(27:19):
you become a real estateprofessional.
But the main one isdepreciation, where the IRS sees
your property as losing valueover and says it will lose the
majority of its value over 27and a half years, and you can
use that to write off a lot ofpotential income so that you can
save on your taxes.
Right, I guess that's thehighest level.

(27:40):
There's a lot of tax benefits,the main one being depreciation.
And the most important way tomake money in real estate is
cashflow, especially when you'restarting out, because none of
these other features of realestate really matter if you're
not able to financially supportpaying for this property.
So that's where we're going tofocus very much on cashflow, but
then also put it intoperspective, which I'll

(28:01):
highlight.
And so cash flow is your profitthat's left over each month
from your income after payingdown your loan, your expenses
and setting aside your reserves.
So you see the full way, andwe're going to focus on the cash
flow deal.

(28:21):
There's really two key metricsfor analyzing investment
properties that are singlefamily homes or smaller
multifamily Cashflow, which iswhat we've talked about and
we'll continue to talk about,which is your income minus your
fixed expenses, minus yourreserves we're going to break
all this down further and thenyour cash on cash return, which
is basically taking yourcashflow and understanding is it
justified for the amount ofmoney you have to put into the
deal?
So you just take your annualcashflow, your cashflow times 12

(28:42):
, divided by all the money youhad to invest to generate that
cashflow on that property.
So let's go a little bitfurther.
Your income is your rent andany fees you have, so sometimes
we have pet fees, sometimesthere's a laundry on site,
whatever it is, there's parking,storage, whatever.
All of your income is put intothere.
Then you have your fixedexpenses, which, for the

(29:03):
majority of properties, aregoing to be your mortgage and
loan, taxes, insurance andutilities that you're
responsible for covering, andthen your property management,
if you are managing, if you arepaying a property manager.
However, even when Iself-manage, I still account for
that because I want to knowthat if I decided to stop
managing, I want to make surethere's still money to pay the

(29:24):
property manager without mecoming at a loss for doing so.
And then, secondarily, are yourreserves you need to save.
Approximately depends on yourmarket 8% a year of your income,
of your monthly income forvacancy, which translate to
approximately one year of themonth your property is sitting
vacant.
That's what that 8% calculatesto.

(29:47):
And then you're saving 5% ofyour monthly rent for
maintenance when you know yougot to send a plumber out
because there's a littleplumbing issue or a light bulb
needs to be replaced or whatever.
And then another 5% of yourtotal monthly rent for capital
expenditures.
These are where you'rebasically saving and setting
money aside for big repairs whenyour roof needs to get replaced

(30:08):
, update your appliances, changeout your flooring, that kind of
stuff.
You want to have that moneyreadily available.
So when that expense comes,it's not coming out of your
pocket and you thought you weremaking all this money and then
you inject $20,000 for a bigcapital expenditure.
So that's really the foundationof cashflow, but cashflow only,
yeah.

(30:28):
Questions.

Joseph Marohn (30:29):
Yeah, I was going to say so.
We always hear the termcashflow, cashflow, cashflow.
Everybody wants cashflow, right?
How much should we be shootingfor on each property that we're
looking to add to our portfolio?

Michael Mnatsakanian (30:40):
Great question.
It looks like you looked at myslide deck.
No, I'm just kidding.
So cashflow only takes you sofar and let me expand on that
right now.
So you want and I'll get intowhat I look for, but you want
your properties, at minimum, tobe paying for themselves at
minimum.
But if they're not generatingpositive cashflow, you don't
know.
You can never say that themoney I put into it is really

(31:02):
worthwhile from a cashflow andcash on cash return perspective.
And that's where we're going toget to cash on cash return.
This is how you tether.
How much cashflow do you reallyneed to make this a good deal?
So if you cashflow a hundreddollars a month, that could be
great or that could not be great.
If it only costs you $12,000 togenerate, to buy the property

(31:23):
and get it ready to generate ahundred 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 togenerate a hundred dollars a
month, you see how it totallyshifts.
Is that a good return or not?

(31:44):
And we'll further dive intothat concept.
Right, and that's why it's soimportant to understand cash on
cash return, not just the cashflow.
So what is cash on cash return?
Right?
It's your annual cash flowdivided by the initial money you
had to invest to generate thatcash flow.
Your annual cashflow is just 12times your monthly cashflow,
and your initial money investedare all of your entry costs to

(32:06):
acquire the deal, which includesthe down payment, any agent
commissions, any closing costsand I call it upfront ready
repair costs.
So if you need to fix theflooring, paint the walls, clean
the house, whatever, it is, allthat needs to be accounted for,
as well as your initial moneyinvested, so that you can truly
understand is that cashflow?
Does it make sense for theamount of all the money I have

(32:27):
to put in to acquire thatproperty?
And in that I'd also accountany expenses that you're paying,
your carrying costs, anyexpenses you have to pay until
that property is rented out aswell, because someone still has
to pay that money.
So it's really important tounderstand that.
So what return should you lookfor as the investor?
That's ultimately up to you andwhat your regular, what your

(32:49):
criteria is, and it's verydependent on the market that
you're investing in.
Some people will never investoutside of the local market.
They don't feel comfortabledoing so and that's fine, but
they need to understand thatthat limits their potential
returns because they're theywant it local and that's fine.
Like I said, I'm not here totell you how to get there or
whatever.
You didn't understand it.
Like you mentioned, withunderwriting it's not just the

(33:10):
returns, but what is your risktolerance?
You're not comfortable owning aproperty in Alabama or on the
other side of the country orAlaska, like I do.
Right, it doesn't really.
You can't force yourself to dosomething.
You're not going to be able tosleep well at night for right.
And one thing to understand isthat some are typically the
markets that appreciate more invalue.

(33:32):
They increase in value more,like my market in San Diego,
where I live and I ownproperties in, as well as
multiple other states.
They don't have the best cashflow, but you get long-term
wealth appreciation because yourproperty is increasing so much
in value.
However, if I'm buying myAlaska properties, they have a
ton of cash flow, but they don'treally appreciate much in value

(33:54):
.
They only really appreciatesimilar to what inflation
increases.
So it's basically breaking evenwith inflation, but they
generate a lot of cashflow andthey have a lot higher cash on
cash return.
So it depends on where you'relooking to invest, which is
based on the goals and like whatyour risk tolerance is.
So this is what I look for.
At a minimum, I'm always lookingfor at least $100 of cashflow a

(34:16):
month per unit.
So if I'm buying a four unit, Iwant $400 a month, right, so a
hundred dollars per unit, um,and that is because, like
anything underneath that it'syou know, that's after all, my
reserves and everythingaccounted for.
But at that point I don't wantit 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, eachmonth.

(34:36):
So I don't like to have it betoo close to zero.
And also, it's sometimes notworth your time.
It's really hard to get a greatreturn if you're making $10 a
month, right, it's like, is itworth all that work to make $10
a month in cashflow?
I don't think so, and most ofmy deals now, because of the way
we manage them, are 500, athousand dollars plus a month.
But my minimum for a long-termrental is $100 per unit a month.

(34:58):
But more importantly for me iscash on cash return.
So, like I said, if I'mgenerating $100 a month, that
could be great.
If it only cost me $12,000 tobuy the property.
That'd be 10% cash on cashreturn.
It'd be terrible if it cost me$120,000 to buy that property.
So this is kind of what I lookfor as a general rule of thumb
when I am looking at propertiesto analyze is this something I
want to buy as a long-termrental?

(35:20):
If I'm doing something that'slike a short-term rental or
mid-term rental where it's goingto cost more money to enter the
deal, I typically expect higherreturns because it's going to
require more management andoversight than just renting
something out long-term and justlooking at the lease once a
year.

Joseph Marohn (35:35):
Yeah, I think a lot of people are worried about
owning properties in othermarkets because they're like
well, how am I going to takecare of this property?
Guys, there's property managersthat you can utilize If you
find a good one.
You know they're going to takecare of your property.
They're going to make sure yougot you know all the right
contractors there.
Do you use property managers,michael, or do you kind of take
everything yourself?

Michael Mnatsakanian (35:56):
I do a combination.
I have a few properties I stillself-manage, especially like in
San Diego.
I'm going to self-manage mylong-term rentals because it's
too easy, especially locally andin a market like San Diego I
don't have to worry about.
I guess this year was weird.
We had like a flood and allthis crazy stuff, but I don't
have to worry about like snowand you know, freezing and all
this crazy stuff.
But my prop some properties inAlaska the midterm rentals my,

(36:19):
but some properties in Alaskathe midterm rentals my wife and
I manage she really manages thatpiece of it Plus short-term
rentals.
I have a bunch of rental cabinsup there.
I have property managers forthat, and then we also my
business partner and I, for someof our other properties we have
in-house property management.
So we have a propertymanagement company that manage
some of our properties,especially, depending on the
management strategy, they manageit throughout the country for

(36:41):
us.
So it's a combination of localproperty management, our
in-house property managementteam and then self-managing.
So everything that's awesome,yeah, so let's get into it.
I will say, with interest ratesover 7% and for investors it's
8, 9, 10 plus percent it's veryhard to have good cashflow or
any cashflow at all.
And if you're putting 20, 25%down traditionally, you're going

(37:04):
to have very, you're going tohave very bad cash on cash
return.
If you're not cashflow, it'sgoing to be negative or
virtually non-existent, and thatis where creative financing
saves the day.
So just a caveat I bought 27.
Well, that's not true.
I bought nine properties oftraditional way.
I've bought another 18 creativefinancing before joining

(37:25):
mentorships and learning a lotmore about it.
And then, since then, I'vebought in 2023, another almost
$10 million of real estate, allusing creative financing,
because interest rates went upso high there was no way for me
to make any financial senseacquiring properties of
traditional way.
So I just got really great atspecializing in creative
financing.
I had proof of concept becauseI did it even before joining

(37:46):
these mentorships, and now Ijust go all in on creative
financing because it's so muchmore convenient and the returns
are so much better.
It is more customizable andwe'll break down what that means
.
So there are a variety ofdifferent ways to acquire
properties using creativefinancing.
Here are some of the commonways, and we're just going to
focus on the top three, whichare seller slash, owner

(38:08):
financing, purchasing a propertysubject to its existing
mortgage or hybrid, where it's acombination of there's a
subject, there's a loan in placethat you're going to take over,
and then there are still someequity that you need to pay the
seller back on if you're notgoing to cash them out.
We'll get into what that meansin the next couple of slides.
Boom.
We're going to focus just onthose three as the high level.

(38:29):
Everything else is kind of avariation or just further
analysis of those three.
So, seller or owner financingthis is a type of financing
where, instead of going to thebank, there's no mortgage in
place.
The seller his or herself ownsthe property outright.
So instead of going to a bankto buy the property, the seller

(38:50):
of the property can actually bethe one to finance the deal to
you.
So let's say you have aproperty that's $100,000.
The seller owns it outright.
Or in this scenario down here Ihave $240,000 purchase price.
You come to terms with theseller and you say, hey, are you
open to me paying you 10% ofthat upfront 24,000 and the rest
financing it to me?
And in this scenario I showthat it's $216,000.

(39:13):
Is the remainder amount?
That's the loan.
So now you're just creating the.
The seller is the bank.
So you're basically paying theseller every single month like
you would a bank.
But because you're working witha 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 toneed to give us 25% down payment
.
You're going to need to pay us10% interest.
Here's the number of years thatthe loan is amortized over.

(39:36):
They tell you the terms.
With a seller, everything isnegotiable and that's why it's
amazing.
But the caveat for a straightseller financing deal is they
need to own the propertyoutright and have no mortgage in
place, or their mortgage needsto be so small that whatever
money you give them up frontpays off the existing mortgage.
And the cool thing aboutstructuring it with the seller
is it's not just purchase pricethat you can negotiate, it's the

(39:58):
down payment, the dollar amountor the percent, every single
aspect of your monthly payments,interest rate amortization
schedule, which basically howmany months would it take for
you to pay off that loan?
And a typical is 360 months or30 years.
If I did that math right, Idon't know, I think it's 360
months or 30 years.
Um, it's typically what itwould take to pay off most

(40:23):
mortgages.
And if there's a balloon and aballoon is basically even though
it would take 30 years to payoff that loan let's say they
want a balloon at 10 years.
That means even at the 10-yearmark, you have to pay off their
loan and one of the ways to doso is to sell the property to
pay off their loan.
You can refinance the propertyto a new loan to pay off their

(40:44):
existing loan.
You can get, you can pay it offfrom other income sources, but
you have to exit the seller outof that loan.
Any questions about sellerfinancing?

Joseph Marohn (40:53):
What's your thoughts on balloon payments?
A lot of people get worriedabout that when structuring a
deal.
Soon as the seller brings up aballoon, they're ready to walk
away from it.
What's your thoughts on it?

Michael Mnatsakanian (41:03):
So I prefer, especially my low
interest subject to loans, thatI'm buying a property subject to
his existing low interest rateloan.
I really am buying it a lot oftimes for the debt itself, but
it's one of many variables thatI'm willing to allow if it ends
up like making the deal work forthe seller.
So it depends.

(41:24):
What I don't do is two, three,four five-year balloons.
I need enough time to know thatthe property is going to
increase in value.
I've paid off the debt and ifI'm giving them one of these
right.
So that's the cool thing aboutseller financing there's so many
levers the price, the downpayment, the monthly payment,
the interest rates, the balloon,the terms all of that is
negotiable.
So if I'm giving them certainelements, they also need to

(41:45):
understand.
They need to give me certainelements.
As long as the deal makes sense,I'll consider it, and what
we've incorporated in all of ourballoons is two clauses the
balloon will extend if I do nothave at least 30% equity in the
property right, so I don't ownat least 30%.
30% of the debt has been paidoff.
So if that doesn't occur, orthe interest rate that I can
refinance at is not lower thanthe interest rate that I

(42:07):
currently have with them theballoon, that the loan continues
to extend one year at a timeuntil one of those is met.
Once one of those is met then Iwill have to execute the
balloon.
So I'm okay with balloons ifit's not too short and if they
are open to my clauses in thereto allow extensions if it

(42:27):
doesn't pan out the way Ithought it would over that short
enough time period.
So the minimum I look for islike seven.
I prefer 10.
On average they're between 12to 25 years.
For me so it's really almostinsignificant because the amount
of wealth you can generate overthat time period almost always
justifies getting the deal done,even if it means giving them a
balloon a decade from now.

Joseph Marohn (42:48):
Yeah, my thoughts are exactly like yours, so good
point Awesome.

Michael Mnatsakanian (42:53):
So it's going to subject to financing
and it's kind of uh, it's like amisnomer.
So all you're doing with asubject to transaction is you
are a seller, has a loan intheir name Still, all you're
doing is you are buying theproperty subject to that
existing loan, so you areleaving the loan in place, but
you are the buyer.
The seller is still responsiblefor the loan.

(43:14):
Technically it's underneaththeir name still, but you are
going to be the one to make thepayments on that loan.
As the owner of the property,you get all of the benefits.
You get all the tax benefitsand all that as well of paying
the mortgage, but the mortgagestays in place.
So why that typically makessense, for example, is I'm
buying properties with loansstill in place and I don't have

(43:36):
to give them as much money downpotentially as a seller finance
deal and I'm taking over really,really low interest rates to.
I think the lowest we have islike 2.25% interest rate, three,
four, even four and a halfpercent interest rates.
If the deal makes sense, thisis a good strategy to do so.
But we need to understand isit's not very negotiable.
There's not a bunch tonegotiate in this scenario.

(43:58):
It's not like seller financing,because there's still a loan in
place.
The monthly payments on theloan are going to be the monthly
payments on the loan.
If anything, they're going togo up a bit because your taxes
might go up or your insurancemight go up, but the loan
payments principal and intereston the loan payment.
There's no getting rid of that.
That is what it is until youchange out that loan, you
refinance it or Whatever you do.

(44:18):
There's no way to change that.
So you can't really juice upyour cash flow in that scenario.
And the loan amount that you'retaking over you have to at
minimum take over the loanamount that the seller has in
place.
You can't really change thatvery much.
This is more so common when theseller is in some form of
distress.
There is enough motivation forthem to be willing to leave the

(44:42):
loan in their name and stillsell the house to you.
This happens commonly whensomeone has little to no equity.
For example, they bought theproperty somewhat recently and
they haven't had enough time topay down the debt.
Or they use like a low downpayment option.
They had a job transfer, orthey could no longer afford the
payments, or now they have twomortgages because they thought

(45:04):
this one was going to sell andit didn't, and they need to get
out of the payments.
They're in pre-foreclosure?
Maybe they're mismanaging theproperty.
There are some of themotivations that would cause a
seller to be open and motivatedto this kind of transaction.
I always tell every seller ifit's possible, if I were you, I
would sell it on the market theconventional way.

(45:25):
If you can't, then this mightbe a solution for you.
Obviously, it's in my bestinterest to buy it this way
because the interest rate is low, but there's inherently more
risk for the seller and I'm verytransparent with sellers that
if it's possible to do itanother way, they should.
If it's not, then this might bea solution for them where
nothing else could be.
That solution and, as Imentioned, the hard part about

(45:47):
making these types of deals workis what I mentioned earlier.
Even when I was training in2020, 2021, even early 2022 on
buying properties when interestrates were low.
Still, the majority ofproperties are not good
investments.
They're just properties forsale.
So even if the interest rate islow, it still may not be a
great investment, depending onhow you manage the property and

(46:07):
what terms you're buying it atAnything on subject two before I
move on to hybrid, which ismore so common.

Joseph Marohn (46:15):
This is all.
Great info, man, Great info man.

Michael Mnatsakanian (46:19):
So hybrid is the most common.
Once again, hybrid financing iskind 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 outall of their equity, all of it,

(46:40):
whatever.
The difference is 240 minus,let's say, 180, $60,000, or you
can pay them some of it and thenfinance the rest on seller
financing terms, right?
So just the combination ofseller purchasing the property
subject to its existing loan andthen seller financing the
seller's equity right.
Once again, equity is if thehouse is 240,000 and there's
$180,000 loan, their equity isthe difference of those two, the

(47:02):
$60,000.
So if you give them $20,000 asan upfront payment, the
remaining $40,000 of equity youpay them overtime on it.
And that's a very commonsituation set up for buying real
estate deals, because usuallypeople have some equity and it
may not make sense for you topay out all of it up front, but
it really depends on the seller.
And then your monthly paymenton these are going to be your

(47:25):
subject to loan payment and thenwhatever payments you're making
to the seller on the sellerfinancing terms which is
outlined in the little tableover there.
Any questions on this?
This is just a combination ofthe two that we discussed.

Joseph Marohn (47:38):
Yeah, Now one thing I want to point out is
when you guys are doing hybriddeals and you're structuring the
seller finance part, you reallygot to do your due diligence on
what you can perform on thatproperty as far as rental income
.
So that way it will kind ofhelp you with your structuring
of the seller finance terms.
Is that kind of something youdo, Michael, when you're doing
your deal structuring?

Michael Mnatsakanian (47:59):
Right, 100%.
What I do is, if I know it'sgoing to be hybrid, I'm going to
underwrite it first as astraight subject to deal.
I'm going to assume we'repaying them out all of their
equity to see if there's evencashflow in that scenario.
But isn't cashflow in thatscenario, paying them more
monthly is not going to.
It's going to make it evenworse.
You're going to lose even moremoney each month.
Then I say, okay, if I pay themoff that 60,000, in addition to

(48:22):
the other entry costs, is thatgetting 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 thiswhole 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 backendand just put together a terrible
deal that it's like, well, youcan't even can't even do

(48:43):
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 haveskin in the game, that you know
I'm putting my own money in thisdeal as well.
It's not just the bank loan andtheir money that is allowing me
to acquire it.
I'm also putting some moneydown.
I'll run it at 0% and then I'llgo all the way up to see how

(49:05):
high of interest could I paythem to still get the returns
that I want.
Ideally I'm still alwaysstructuring my seller finance
component at 0% or very close toit.
Almost always am I only payingprincipal only, not paying
interest.
But I need to understand whatis my range when I go and
negotiate with the seller backand forth Once I do my
underwriting.
How much can I actually offerthem?

(49:26):
Like up to what can I actuallyoffer 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 anyfinancial sense above that line.
You should give yourself somewiggle room.
If it works at 5%, tell them 2%or whatever, and then you're
going to negotiate, probablysomewhere in the middle or
they'll come back to youeventually.
If they still are motivated tosell and they have not been able

(49:46):
to and those are some of mybest deals where it's kind of
that hardball hey, here's myline 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.
It's not a one-way street.
You're not just trying to buyevery property.
That is, joseph, you mentionedthis.
You're not just trying to buy aproperty creatively just

(50:07):
because you can.
You also need to only buyproperties that make sense for
you and what you're looking for.
So it's really important tounderstand it's a two-way street
.
It has to work for both of youfor a deal to work successfully.
That's that win-win.
And even better, if you canalso pay a private money lender
or partner as well and they getthe returns they need and you
don't have to bring the money tothe table now.
It's really a win-win-win.

Joseph Marohn (50:29):
Yep, and I'll even jump on a Zoom with my
seller if they're like real.
You know, like hey, these termsthey don't work for me.
You know, and I'll actuallyshow them like, why those terms
don't work for me, you know, andI'll lay it out for them on the
on a zoom and show them thenumber so they can physically
see it.

Michael Mnatsakanian (50:44):
So, yep, live in it.
I think you might be able tomake more money if you want
someone to live in it.
But understand the cons of thatscenario too, with all the
agent commissions and they'regoing to nickel and dime for

(51:05):
every inspection finding and allthat.
That's what you want, likethat's totally a viable option.
What I'm doing is I'm buyingthe property, I'm renting it out
, ideally as a long-term rental,and I need it to make financial
sense for me.

Joseph Marohn (51:15):
This is the way it makes financial sense for me.

Michael Mnatsakanian (51:17):
Look, you can see it, this doesn't work.
I get it Like no worries, I getit.
Here's the terms that I canoffer based on this as an
investment for me.
I lay all the cards on thetable 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, andI'll still show the terms and
they understand like, yeah, ofcourse I'm not doing all this to

(51:37):
make the bare minimum amount ofmoney.
I'm doing this to make a goodreturn on the investment and my
time not just the money, but thetime that I have to invest in
this.

Joseph Marohn (51:45):
Michael, you sound like you've closed some
deals before.

Michael Mnatsakanian (51:48):
Yeah, all right, let's get into it I'm
going to.
This is going to be so brief,because the difference between
creative and conventional isvery similar.
You're still looking atcashflow and cash on cash return
, so let's quickly get into it.
There's going to break it down.
The big difference is that theentry costs for creative deals
have a little bit more variables.

(52:09):
It's not just a down payment oragent commissions or seller
commissions.
There's a yeah, there's a fewother things right, so once
again, it's the cash to seller.
So that's equivalent of a downpayment on a loan.
Your arrears A lot of timessellers that we're talking to.
They're behind on payments orthey have a lien on the property
.
Someone needs to make thatpayment and that's going to be

(52:30):
you as the buyer Cause if theycould have, they probably would
have made the payment and not beselling 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 theagent commissions.
You can negotiate that, buttypically, depending on the deal
, the seller doesn't have thefunds to pay the agent, nor do
they have the equity to pay them.
They're trying to subject todeal, so you're going to be the

(52:52):
one primarily to pay that.
There's rehab or renovationcosts, cleanup, furnishing,
whatever your rent-ready costsare, that's still the same
Closing costs.
There might be more closingcosts in the scenario.
There might be less.
It depends on the state thatyou're operating in, what you're
trying to do and how manypeople are involved.
There's admin, marketing, exitcosts.
For me I lump this into admincosts and for me when I'm buying

(53:13):
a property it's under a new LLC, so that costs money.
You're going to account forthat.
You're going to inspect theproperty.
That costs money.
It's going to take some maybemarketing costs to take some
updated photos to list theproperty on a platform.
There's an assignment fee.
Typically, if you're doing acreative deal, if you're not
generating your own deals,you're going to pay a wholesaler
an assignment fee for buyingthat deal from them.

(53:35):
You have to account for that.
That doesn't really work in thetransact.
The traditional world thatthere's there aren't really.
You can maybe have thatscenario, maybe more of like a
finder's fee, a couple hundredbucks, but you're typically
paying a good chunk of change.
You know five to 15, sometimesplus thousand dollars to buy
that deal from the wholesaler ifthe deal justifies it.

(53:56):
So just understand that's oneof your costs, any carrying
costs you're going to need toget your property ready.
I almost always underwrite withat least three months of
reserves to ensure that myproperties have the first three
months of expenses fullyaccounted for.
So your entry costs are alittle different and you have to
account for all these parts.
I know people have seven, piece, seven, part entry, eight, nine

(54:17):
, whatever.
This is kind of where I lumpmine into eight, nine, whatever.
This is kind of where I lumpmine into um, into these eight.
So there we go, Like that's.
The biggest difference is thecashflow is basically the same,
your income minus your expensesand the only real difference is
your loan payment.
Right, In a subject to deal,you're still paying just the

(54:40):
mortgage.
You're just paying on someoneelse's mortgage.
Right, You're the owner of,you're paying someone else's
mortgage.
If it's seller finance, themortgage or the loan payment
you're paying is to the sellerdirectly instead of a bank.
And if it's hybrid, you'repaying the seller finance
payment and you're paying the um, the existing mortgage.
That's really the majordifference.
Everything else from cashflowis similar and your entry costs.
You just need to account forthe updated entry costs.

(55:02):
Otherwise the analysis isbasically the Cool.
I have a deal that I can goover, that my business partner
and I purchased, that I can goover or we can do questions or
whatever you want, Joseph.

Joseph Marohn (55:14):
Yeah, no, this is all great.
Was that the end of your slides?

Michael Mnatsakanian (55:18):
That's the end of the training itself,
because I don't want to go toofar into the weeds because it
gets redundant.
It's a similar concept, I thinkwith this, people have enough
tools to get into the weeds ofunderwriting real estate to then
start seeing what are thereturns they can expect.

Joseph Marohn (55:33):
Awesome.
Yeah, what I'm thinking righthere is I don't know if you're
open to it, michael, but I'dlove to do a part two of this
and then we really dissect whata live deal breakdown would look
like.
If you're willing to do that,yeah, let's do that.

Michael Mnatsakanian (55:46):
We'll do actual.
We'll pull comps, We'll getrental income, We'll put it into
the calculator.
We'll show how it's done.
Let me briefly it'll take liketwo minutes Let me just show you
one of my deals.
It's just, the numbers arethere so you can kind of
understand.
Put this all together foryourself and for the audience.
So this was.
This is not a live deal case.
This is a deal that we'veclosed on.

(56:07):
In the situation here was thisproperty was worth $423,000.
That's what this property wasworth.
And they had an existing loanin place of $279,000 at 2.8%
interest rate, and it was a VAloan.
There was no balloon on this.
It just that was the thing.
The property was worth $423,000and the purchase price was

(56:29):
$279,000.
The seller at this point waslike $30,000, $40,000 behind on
mortgage payments, so they weregoing to lose the home in
foreclosure.
We were able to catch them inwhat we call pre-foreclosure
status, where they still havethe opportunity to sell the
property, but they did not haveenough time to sell the property
the traditional way because bythe time everything was set up,

(56:51):
listed and there needed to besome renovations on the property
by the time that was all saidand done.
The seller didn't have themoney to do it and they didn't
have the time to do it, so theyjust had to kind of sell it,
which is why we were able to buyit creatively, because we
caught them before they lost it,but in kind of a position where
they didn't have as manyoptions anymore.
So it costs us $55,000 entry,with a majority of that being

(57:12):
paying back the arrears or themissing 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 orprincipal interest taxes and
insurance.
My mortgage payment is 1850 amonth.
We had no other expensesbecause we actually rented this

(57:33):
out to a tenant who's coveringall the expenses.
Our reserves on that propertywas $600 a month that we were
saving and we were going to paya private money lender 10%
interest to get the money fromthem to cover all of our entry
costs.
So we're paying someone else tobring, they're bringing the
money to buy the property on ourbehalf.

(57:53):
They're paying the money forthat and then we're paying them
all their money back at somepoint, plus 10% interest on the
money that they lent us.
Of that, 55,000.
We're paying them 10% interestand then paying them back the
55,000 at some point in thefuture to be one, two or three
years down the future and theyget 10% interest every single
month until that payment is made.
There are a variety of optionsfor this property.

(58:14):
I'm not going to get into theweeds of it.
We ended up doing instead wasbringing on a private money
partner into the deal, and whatthat means is, instead of paying
someone interest on their money, we actually brought someone on
to actually jointly own theproperty with us.
They bring all the money, webring the deal and we manage it.

(58:35):
They jointly own the propertywith us.
They will get their 55,000 backwhenever we sell or refinance
the property and every singlemonth they get a percentage of
the cashflow.
In this scenario of 50%, theyget a 50% cashflow 50% of the
cashflow and 50% of theownership every single month
that we own the property.
And the reason for that is wewere able.
We had a great interest rate.
We did not want to refinancethat at some point in the future

(58:56):
.
The private money partner wassomeone we wanted to work with
in general and work with them onfuture deals and for us, if
someone else is bringing themoney into the deal.
As long as we're positivecashflow, our returns are always
infinite, because we don't haveany money in the property, we
just have our time and skillsthat went into the property.
So because of that we were ableto take the primary partner,

(59:16):
raise a little bit more capitalfrom him and then build out a
few more walls and rented outmore of like a rent by the room
model to a sober living homecompany, which ended up paying
massive dividends for us in thatscenario.
So that's the strategy that wewent with this property Just
kind of show you real quicklykind of what is out there and
what are some of the optionsavailable.

Joseph Marohn (59:36):
Yeah, man, that's great info.
Man, I'm almost mad I wasn'tincluded in this deal, Michael.
Yeah, sorry about that, manNext one For sure, for sure, All
right man.
So what are some of the mostcommon mistakes you see people
making during the underwritingprocess and how do we avoid them
?

Michael Mnatsakanian (59:54):
Not really underwriting and taking someone
else's analysis at face valueinstead of gathering their own
information.
Someone it's in a wholesaler oragent or whoever's best
incentive to tell you that thisproperty is going to work
perfectly here is going to getthe highest amount of rent, it's
ready to go, there's nothingyou know.
And if you take that at facevalue, the numbers might look

(01:00:15):
good until you start doing yourown analysis and you realize, oh
dang, this is not.
The rent is lower than theysaid.
It's going to cost me moremoney to renovate the property.
It's going to cost all thesethings that it's not in their
best incentive to tell you thesekinds of those kinds of things.
It's contradictory to theiroverall goal.
So so that's one of them notdoing your own analysis.

(01:00:36):
Second is being kind of toodesperate to make a deal work
that you are falsifyinginformation for yourself.
You're you're saying, oh, Idon't need to account the rent.
I think I can get 200 more thanwhat the other properties are
renting for.
Or, oh, I don't need to accountfor these expenses.
Or I don't need to account forreserves or whatever, just to
make the deal work, even thoughit's not.

Joseph Marohn (01:00:57):
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'relike, 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, showedup with all the slides like dude
that was.
That was extremely valuable andI know a lot of people are

(01:01:18):
going to find a ton of valuefrom that.
So thank you for that.
Obviously, it's a hard.
It's so hard to cram everythingthere is to know about
underwriting and deal analysisand one podcast.
But if someone's looking totake it to another level or
really dissect this topic, wherecan they go to learn more?

Michael Mnatsakanian (01:01:34):
Yeah, do you mind if I screenshot for
half a second?

Joseph Marohn (01:01:37):
Let's do it.

Michael Mnatsakanian (01:01:38):
So the best way and I'll give all this
information to Joseph Instagramis definitely a great way to
connect with me.
I have a lot of tools and goodstuff in my link tree.
So if you want my calculators,you want to learn more, you want
to be a partner on deals, it'sall here, right?
I have my YouTube that you cancheck out.
I have my free investing tools.

(01:01:59):
That's all linked in the linktree.
So if you want free creativefinance or free conventional
finance calculator, if you wantthe paid ones depending on where
you're at you can go for thepaid ones.
I don't, you know, you don'thave to start learning how to
underwrite first.
And then I have a new schoolcommunity that I've created,
just about really startlaunching and we've got
approximately 50 members wehaven't even really done
anything in there yet tobasically go over how you can be

(01:02:23):
an intentional investor, reallyanalyze where you're at in your
personal finances, where youwant to get to, and then what is
going to be your path to getthere.
And a lot of it focuses onbeing really intentional with
acquiring deals and analyzingthem the right way.

Joseph Marohn (01:02:38):
So those are all the tools you can definitely
leverage.
Yeah, make sure you guys go andget all that information, man,
because that's extremelyvaluable stuff right there, and
we'll make sure that we plug inall your tags on the video here.

Michael Mnatsakanian (01:02:51):
So thank, you, yeah, basically at Michael
M, as in Mike N-A-T.
Michael M Nat is basically howyou can find me on most places.

Joseph Marohn (01:03:00):
Awesome.
Well, michael, this was greatman.
I really appreciate everythingyou're doing.
Absolute pleasure to have youon the podcast.
I'm sure everyone here ismotivated to go underwrite some
deals right now.
You're crushing it in realestate.
You're crushing it in thecommunity.
You're always giving andproviding so much value to
people and I'm glad I can callyou a friend man.

(01:03:21):
So thank you.

Michael Mnatsakanian (01:03:23):
Thank you, I appreciate it, man.
I appreciate everything.
I appreciate your work, ethicand all that you do, and you're
my favorite type of person tohelp out, because there's 95% of
the people that I do help outunfortunately don't take the
action that they need to toachieve the financial success
that they're looking for, butthey have all the tools in front
of them.
I love people like you who justtake a little bit of info and
just run with it and just keepcausing problems to then be able

(01:03:46):
to solve them and result inlike what they're looking for.
So I appreciate everything thatyou do too, my man.

Joseph Marohn (01:03:52):
No, I appreciate you, man.
I know a lot of people, youknow they go out and they're
asking, they want to knoweverything before they start,
and I'm more of a person that'slike, hey, man, let's go mess
some stuff up and let's let'sfigure out how to solve these
problems.
Like let's fail forward, right?
So absolutely that's alwaysbeen my motto.
But cool, man.
Now, if you guys are findingvalue from this podcast, don't

(01:04:13):
forget to show your boys somelove.
Subscribe to the channel andhit that bell icon so you can
stay updated on all futureepisodes.
Smash that like button and dropa comment down below on one
thing you learned aboutunderwriting today.
Appreciate all the continuedsupport and and guys, stay tuned
, because we're pumping theseepisodes out every two weeks.

(01:04:33):
I got a ton of value and topicscoming up next.
You don't want to miss out.
Best believe, I'm going to keepbringing you that fire.
Thank you for watching.