JF1334: From Commercial Pilot To Syndicator & Property Manager with Ratan Khatri
Ratan has quite an extensive real estate background. From managing other investor’s deals to buying a portfolio of 50 homes with partners and syndication. Hear what it takes to buy 50 houses in one deal, what to look out for, and how to negotiate the deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Ratan Khatri Real Estate Background:
- Own and run a property management company in Muskegon, own over 30 rentals,
- Bought my first house at 21, ran a mushroom distribution business and mortgage broker for 20 years
- Immigrated to USA in 1970
- Owns over 30 rentals, did his first syndication in 2017 of 50 sfh
- Finishing up new book on immigrant success in America
- Based in Muskegon, Michigan
- Say hi to him at 231.206.1181
- Best Ever Book: Real Estate Money Machine
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Ratan Khatri. How are you doing, Ratan?
Ratan Khatri: I am fabulous, Joe. How are you doing today?
Joe Fairless: I am fabulous as well, nice to have you on the show. A little bit about Ratan… I actually got to meet him in Denver – at the Best Ever conference I met him for the first time, and I really enjoyed talking to him… And I enjoyed talking to him so much that I thought we would get a lot of value from interviewing him as well on the show, and here is why – he immigrated to the U.S. in 1970 and he owns 30 rentals; he did his first syndication in 2017, when he syndicated 50 single-family homes. He owns and runs his own property management company in Muskegon, Michigan. With that being said, Ratan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Ratan Khatri: Well, as you said, we immigrated here – I moved to a small town not too far outside of Detroit, in Clawson, Michigan, and I understand you grew up in Flint, Michigan, so we were practically neighbors, up the road [unintelligible [00:02:03].16] on I-75.
Joe Fairless: Yup.
Ratan Khatri: I went to Western Michigan University, I went to a flight school there, and was going to be a commercial pilot; I am still a licensed commercial pilot, but I don’t do it professionally. That’s where I met my wife, and we’ve been married for 36 years, and together 40 since college. I always loved real estate, and I bought my first house shortly after graduating from college, and we lived in that for about six and a half years, and then we moved to the West Coast of Michigan, over to Grand Haven, Michigan… I bought a house across the street from Lake Michigan there. My wife and I, we fixed that up and then we flipped that in ten months, and then I bought another house there.
Then down the road I got into the mortgage business, I was a mortgage broker for many years until the crash, and I started buying a lot more property during the crash, because it was cheaper; then it got cheaper again, and I bought some more. Then it got cheaper again and I bought some more, and then I decided to start a property management company. We manage just under 200 units at this time, and as you mentioned earlier, we bought a portfolio of 50 single-family homes/syndication/joint venture. I met two of my good friends that I have in Muskegon, I asked them if they wanted to go in on it with me, and we put the 10% down and seller-financed the difference, and we turned it over to a third-party management company, even though I owned a management company, so there was no conflict of interest.
We’re looking forward to doing more, and this is why I came to your conference, to meet people that are doing apartment buildings and mobile home parks and self-storage units. It was a home run.
Joe Fairless: I love to hear that about the conference, and even more so I’d love to hear your story in how you’ve gotten to where you’re at, so let’s dig in… Let’s see – you said you bought a portfolio of 50 homes, and it was a joint venture/syndication. Can you elaborate on that?
Ratan Khatri: Yes.I didn’t have to go too far and too wide some partners that wanted to make the investment. The offer was actually made — I went to a local Landlord Association meeting… A retiring landlord who was in his seventies – he had his son and daughter manage the portfolio for a while, but that apparently wasn’t working out, so he actually put it on the table, he set the price, and he set the down payment terms and the interest rate. He was gonna hold the note for the difference, and it was kind of a no-brainer.
The last 7-8 months we’ve been improving the portfolio, taking care of any deferred maintenance, improving the properties, and also a little bit of tenant changeover to improve the rent roll and collection rate. It’s very possible that we already have a potential buyer for it. It’s gonna be a surprising — I don’t even wanna call it a home run, I’m gonna say it’s gonna be a grand slam if it happens the way I think it’s gonna happen.
Joe Fairless: Well, let’s talk about the price and the down payment terms. You said 10%, so we got that. What was the price for the 50-unit?
Ratan Khatri: He was asking 1.1 million dollars, and we agreed to that. Then we did our due diligence, where we inspected a handful of properties, made sure they all had the certificates of occupancy. We physically inspected maybe only about 15-20 of the properties. Based on that, we were able to get a small reduction on the price of about 50k. So he financed the difference, and he had set the terms up at 6% on a 15 year note, because he wanted the cashflow for the rest of his life.
The gentleman was a very well respected landlord; he had always taken good care of his properties and had a great reputation, so like I said, it was a no-brainer to jump into it. Since then, I might have actually found another 70-unit portfolio to buy in Jackson, Michigan.
Joe Fairless: Okay, before we get into that 70-unit that you might have found – I’d love to learn more about that; I’m writing it down, so we come back to it… The price originally was 1.1, and then it got lowered about 50k, so $1,050,000(ish)?
Ratan Khatri: Exactly.
Joe Fairless: Okay, so that’s about 22k/door.
Ratan Khatri: A little over 20k, yes.
Joe Fairless: Okay, a little over 20k/door. You only inspected 15-20, so less than 50% of the homes that you purchased, but it’s a million-dollar purchase, so what is your thought process there?
Ratan Khatri: Well, we could have inspected every single property. We inspected what we thought would have been the worst ones after doing an exterior drive-by. We did drive by all of them, and then even though it’s 50 units, it’s actually 55 total occupiable units, because some of them are duplexes.
So we went into the ones that on the exterior drive-by’s appeared to need the most maintenance, and so forth. All the rest of them looked really sharp, and they had longer-term tenants in them, and we only had a two-week window to do our due diligence… And we were satisfied.
We’ve not had too many surprises. We planned on having to replace a few furnaces and we planned on having to do a few roofs just from the exterior… So so far there haven’t been any surprises, and the management company that we took on to manage them for us is doing an exceptional job. The portfolio just continues to improve in value, in quality of tenants and in quality of the properties.
Joe Fairless: The down payment, (10%) is 105k. Did you three split that equally and get equal ownership?
Ratan Khatri: Yes, we set up an LLC and we had one of our local attorneys who was also a friend of all of us drop an operating agreement. We set up a bank account, and we all three put in one third each, basically. My one third is actually me and my wife, and we did that through our retirement account. That’s one of the reasons we couldn’t touch the property, so we had to have a third-party management also for that reason.
Joe Fairless: Okay. I was gonna get to that question that you mentioned about it, but you just answered… Okay, cool. So you each have 33.33% ownership in the deal, and you have equal say in what takes place, right?
Ratan Khatri: Yeah, we have a meeting about once a month. We get a report from the management company, we review the maintenance costs, the evictions and so forth. Right now I believe of all the occupiable units we only have two that are vacant. The demand is very strong in our market, as it is in most markets, so we’re able to keep them more or less full. It didn’t start out that way, of course, but our cashflow the first month might have been like $15,000 or $17,000 and in the last couple of months it was in the mid-twenties, and at full capacity it should be about 30k/month.
Joe Fairless: Is that income, or the net?
Ratan Khatri: Top-line.
Joe Fairless: Gross income, got it. Cool. It’s basically a partnership, so you did a joint venture with a couple friends, and you each put 33% in… As far as the business plan goes, you said early on it wasn’t as smooth as it is now; how much did you allocate to invest into these properties?
Ratan Khatri: We have put everything that has come in back into the properties. All of us decided that we weren’t gonna take anything out until the portfolio was running satisfactorily and cash-flowing properly. We’ve only had it like seven months and we’ve all put in another 5k-10k/piece in since then for all the maintenance that was unfortunately deferred, and we have taken care of all of that stuff. This spring we’re gonna be putting on half a dozen or so roofs. Our estimation was it would take six months to a year to get the portfolio performing at the projected expectations.
Joe Fairless: Okay. So you’ve put in 105k initially plus up to about 30k, so that’s 135k or so. For these new roofs are you out of pocket, or is that from the cashflow from the property?
Ratan Khatri: Most of it should be from the cashflow from the properties. We don’t anticipate having another cash call, but sometimes you don’t know. Overall, each month the rents roll has increased and the collections have increased, and the quality of the tenants has increased, so the pay performance is getting better each month.
Joe Fairless: Did you anticipate having the first cash call?
Ratan Khatri: Yeah, we kind of expected it and we planned for it. We had a meeting and we said, “Hey, at the end of the month we’re gonna need 10k”, and we were able to take care of it… So it was not a surprise.
Joe Fairless: With three people who have equal ownership and have put in the same amount, how do you determine who has the additional responsibilities, like overseeing the management company? You got seller financing, that’s pretty easy… But insurance is in place, and property taxes are paid – who deals with all that stuff?
Ratan Khatri: Right. Initially, we found the insurance company, and the management company pays the insurance. The tax bills go to the management company and they actually pay them almost a month early. So the taxes are all current, and they handle the day-to-day issues. Then one of our partners – Steven, who I think you’re actually gonna be interviewing in the future, because he does the sheriff’s sales… He has taken the lead on communicating with the maintenance person at the management company, and when they have issues over — I think it’s either $500 or $1,000, they give Steven a call and Steven approves it.
Joe Fairless: You said you might have not a home run, but a grand slam… What information can you share about that?
Ratan Khatri: We had a broker from Grand Rapids, Michigan that we contacted, that had sold a similar portfolio in Lansing, Michigan, 60 properties for only 3.3 million. We contacted that broker to see if they had any buyers that missed out on that portfolio or maybe couldn’t afford that portfolio and are looking for something similar to that, and they indicated to us that yes, they did. We haven’t listed it yet, but we’ve been communicating with them and they have put a value of about 1.79 on this portfolio if we were to list it today.
Joe Fairless: I’ll round up 1.8 million, and you’re all in about less than 1.2, I guess?
Ratan Khatri: Yes.
Joe Fairless: Yeah, so it’s like $600,000, and then you’ve got miscellaneous fees, and things…
Ratan Khatri: Cash-on-cash it’s like five or six times. I haven’t done the math, because it’s not in our bank account yet.
Joe Fairless: Not a real thing yet, yeah. It’s nice to have those projections, but then whenever it becomes reality — that’s great though, that’s a great sign.
Ratan Khatri: It is, and the funny thing about having the three of us — myself, I was more optimistic about the value; I kind of thought that they were worth 40k/piece, and Steven was more pessimistic; he thought they were about 30k/piece. Then Gary, our third partner – he was in the middle, at 35k, and the real estate broker from Grand Rapids came in at a value of 36.5k average per unit… So Gary was closer, and I was too optimistic.
Joe Fairless: Well, anytime you can take $35,000 and then multiply that by four or five in a span of 24 months, assuming everything pans out – bravo! Right? You take that.
Ratan Khatri: Exactly, exactly. Again, having the three of us – it was kind of a unique situation. We’ve all done joint ventures before, we’ve all had partnerships before, and I kind of took the lead on this one. Steven initially didn’t wanna do it, but I twisted his arm a little bit. Gary was on board in two minutes, and it was a pretty simple deal.
All of us have a lot of experience and we knew what we were getting into, so there’s no surprises in that sense, because we know the marketplace well, they’re all in our own backyard and we all own properties in our backyard.
Joe Fairless: Would you cash out and pay the taxes, or would you do 1031?
Ratan Khatri: Mine is gonna go back into my retirement account, so I won’t be affected. Steven is gonna probably do a 1031 exchange on his share, and Gary I think is gonna end up paying capital gains.
Joe Fairless: How can Steven do a 1031 and you two not do it?
Ratan Khatri: Well, we have the LLC, so we’re selling the LLC, and the proceeds that go back into the LLC should revert back to the entities that own the shares in the LLC. In my case, my Roth IRA owns it, so the funds will go back to my Roth IRA, because my share is owned by the Roth IRA.
Joe Fairless: The entity that you currently have would need to be on title for the next deal, right?
Ratan Khatri: Exactly.
Joe Fairless: Got it. So you two would exit… One person would take the money and pay taxes, you would put it back in your account, and then the third individual who would 1031 would need to factor in you two exiting, because when he eventually sells, he’s gonna have to pay the taxes on the gains that would have been paid out for the whole entity right now, correct?
Ratan Khatri: I don’t know all those details, Joe, but my best guess is that I know that I won’t be paying any taxes on it because my Roth IRA owns it, and the 1031 exchange part — because if we had made a profit on the first four months, which we didn’t, at the end of the year we would have received a K-1 for whatever proceeds that our each individual entity received from one third, and we would pay tax on our own one third.
Joe Fairless: I’m guessing that’s what’s gonna happen, but have that person talk to a 1031 person, because basically the entity is gonna have to pay taxes on the whole gain eventually, whenever they stop 1031-ing… So people who exit out in between point A and point Z – there’s gonna have to be some sort of calculation of what those taxes would have been… Otherwise, when the music stops and there’s only one chair, the person with the property at the very end – 20 or 50 years down the road – has got a huge tax bill if they’re not preparing in advance.
Ratan Khatri: I understand and I agree with you. They will have to look at that carefully.
Joe Fairless: The 70-unit deal – how did you come across that?
Ratan Khatri: Well, I was at the Grand Rapids Rental Property Owners Association conference last weekend, and they have what they call a deal room where people enter and talk about deals they want to sell, and deals they want to buy. All three of us were actually there at the conference, and then during two different deal room sessions, I had mentioned that we have this portfolio for sale and that I’m looking for more, and it was a realtor from Jackson, Michigan that said that there had been a landlord that owned 70-something units, and he had passed, and his son was having difficulty managing the properties… So she is going to get me the information, and once I have the information, I’ll evaluate the deal and do the due diligence and see if it makes sense to pursue further.
Joe Fairless: Is this the same meetup that you got the first deal from?
Ratan Khatri: No, the first deal was from the Landlord Association that meets in Muskegon, Michigan; I’m a member of that and I do frequently the seminars that teach [unintelligible [00:17:31].26] different landlords, different things, and as I have a management company, I’m exposed to more experiences and more situations that occur… So I share those monthly at the Muskegon meeting. The Grand Rapids association is a much larger association, and they put on a convention once a year [unintelligible [00:17:51].14] Grand Rapids, Michigan; that’s a very nice conference, and they have national speakers come in… During the breakout sessions, one of them is the deal room session (breakout session) [unintelligible [00:18:02].04] from Grand Rapids.
Joe Fairless: Do you remember how much the ticket was to the Grand Rapids conference?
Ratan Khatri: It’s free.
Joe Fairless: Free. So you went to this Grand Rapids Conference and you might get a deal from it, and then you attended the local landlord association meetup in Muskegon, Michigan, and you did get a deal from that…
Ratan Khatri: Yes…
Joe Fairless: There’s a theme here, clearly… We should all attend our local meetups, first off. But secondly, when the individual – the gentleman who had the portfolio of the 50 homes – stood up and said “Here’s what I’ve got, here are the terms”, how many people went up and talked to him?
Ratan Khatri: Well, he was in Florida actually, and one of his friends had handwritten copies stapled together of the portfolio; it was nothing formal, and the gentleman just put the five or six copies on the table. I grabbed one, Gary (one of my partners) grabbed one, Steven had already heard about it during the day earlier and I already had spoken to the gentleman while he was on the golf course in Florida, and was asking if he could split up to two different cities that the portfolio was in… Both cities are adjacent to each other, but Steven didn’t want 15 of the properties, and the gentleman said “No, it’s all or nothing.” So Steven had originally passed on it, but I twisted his arm in the next day and we ended up doing the deal.
Joe Fairless: So what I heard is someone put five or six copies on the table and you and your crew took all those six copies so no one else could bid on the deal?
Ratan Khatri: No, no…
Joe Fairless: [laughs] I’m kidding, I’m kidding…
Ratan Khatri: [laughter] But the answer to your bigger question is many other people were not interested. We’re in a smaller town, and unfortunately many of those landlords still wanna self-manage, which I’ve always tried to educate people on where that’s not a good idea and why they’re just creating a job for themselves. My management company — the reason I was at the Grand Rapids conference is I had actually a booth there to promote my management company and promote the city of Muskegon as where the deals are, because Grand Rapids (like many other markets) has grown substantially, and price points are higher than ever, rents are higher than ever, and the cap rates are in the fives and the sixes now, and just the deals just aren’t there.
So Muskegon is 30-45 minutes down the road and you can still find exceptional values and exceptional cap rates, and sometimes even you can find terms. Not a lot of people jumped at that portfolio, and for us and for our experience that all three of us partners have, it was kind of a no-brainer.
Joe Fairless: Would someone without the experience in your market be able to pull that off? Because you hired a different third-party management company, so it’s not like you were the one on the ground in this case… So could a New York City investor – if they heard about this deal, could they have pulled it off, too?
Ratan Khatri: Absolutely. I manage for many people from California, and I have a group out of California that I manage 67 of their properties for them inside my management company… So yes, we have a lot of out of state investors that find fabulous value in the city of Muskegon; I think sometimes when you’re too close to the market you kind of have a negative view of it. Cashflow is fabulous, and I saw no reason not to do it. If these two guys hadn’t wanted to do it, I would have found three other guys that would have wanted to do it.
Joe Fairless: Next time give me a call, please. [laughter]
Ratan Khatri: I certainly will, I’ll take you up on that.
Joe Fairless: What is your best real estate investing advice ever?
Ratan Khatri: I think I have a couple different points, if I may. Number one – if you’re a beginning landlord, do not do it yourself; hire the management company. My company – we have a flat fee… We charge $60/month, and it’s well worth every penny, so that the beginning landlord doesn’t have to go and do everything themselves. If the property is a turnkey property, you shouldn’t have to do anything. So that’s one piece of advice – don’t do it yourself, hire a management company.
The overall advice really would be to just jump in and do it. Too many people sit there and analyze things to death, and they miss out on so much opportunity. That’s one of the things we talked about, how immigrants succeed here, and how they think a little bit differently and how they see opportunity, whereas other people just wanna analyze it, analyze it, and have other things that they wanna do with their investments.
Joe Fairless: And you’ve got a book – did you finish your book? I know you were writing a book about what you just talked about – immigrating here and having success.
Ratan Khatri: Yes, the book is written. I’m in the process of editing it and making it more readable and more saleable. I won’t give it a title right now, but I will give it a subtitle: to succeed in America, you have to think and act like an immigrant. The basic things are being frugal, saving, and then turning those savings into investments and assets, and then having those assets produce cash for you to live off of. The more you do of that, the more you’re going to have coming in passively.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Ratan Khatri: Absolutely, let’s go for it.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever deal you’ve done?
Ratan Khatri: The best deal would be this 50-unit portfolio. The back-end return on that is just gonna be awesome, and I’m gonna parlay that into hopefully more and larger deals.
Joe Fairless: Best ever book you’ve read?
Ratan Khatri: I’ve read many books, I’m an avid reader. One of the first ones that I read about real estate was written by a gentleman named Wade Cook, it was called Real Estate Money Machine. And of course, Rich Dad, Poor Dad, and Lowry’s books… All the old gurus that originally started this business – I’ve read all of their books and I apply many of their principles to this day.
Joe Fairless: What’s a mistake you’ve made in business or on a transaction?
Ratan Khatri: The commercial building that I’m presently in – I bought that and had it built at the peak of the real estate business (before the crash), and unfortunately it’s still mostly vacant, and I’m carrying the load… That was probably my biggest mistake in real estate.
Joe Fairless: If you were presented a similar opportunity again, how would you approach it?
Ratan Khatri: I would have either wanted to pass on it completely, or I would have to have it pre-leased before I committed to buy it and have it built.
Joe Fairless: Best ever way you like to give back?
Ratan Khatri: I have a friend of mine in Muskegon – her and I, we put together this house… It’s a 7-bedroom 3-bath house, and it’s called The Patriot House, if anybody wants to do a search on it. I went to a breakfast meeting one day and they said there’s a major homeless veteran’s problem in Muskegon County… So when this house came up, I decided I was [unintelligible [00:25:58].23] for housing some of the homeless veterans. We provide all of the utilities, and laundry, and internet, and cable, and beddings, and furnishings, and they pay a minor amount of rent, because they can’t afford a house on their own or apartment on their own. We provide housekeeping services, laundry on site… I love this country, and my way of giving back is to help some of the veterans that need help.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Ratan Khatri: We have our website for our management company, it’s rkpmgt.com. Also, they can call me directly on my cell, which is 231-206-1181. I’m also on LinkedIn.
Joe Fairless: Ratan, thank you so much for being on the show and talking to us about this case study, the 50-home portfolio, which is actually more units than 50 – what did you say, 56?
Ratan Khatri: 55 total.
Joe Fairless: 55 total livable units; 50 homes. The business plan, how you found out about it at the local Landlord Association, the partnership structure that you ended up doing, and how much you’ve put into it, where that’s gone, and the projected value right now, along with those returns, based on selling it at that value… So thank so much for being on the show and talking about that, as well as your overall approach. I’m looking forward to reading the book myself whenever your book comes out.
I hope you have a best ever day, and we’ll talk to you soon.
Ratan Khatri: Thank you very much, Joe. I really appreciate it, and best wishes and success to you.