deals Archives - J Darrin Gross Podcasts

Invest Buy Sell Land Flipping Deals with Mason McDonald – CRE PN #423

Mason McDonald 0:00

If you’re sending five to 10,000 pieces of mail a month, you’re gonna have a seven figure business flipping land, depending on where you’re sending the mail to. So I tried to my goal is right around there about 7500 to 10,000 pieces of mail a month, my mail cost me 57 cents a letter, I anticipate a one to 4% response rate dependent on the market. And then a deal close rate, you know, varying from there of, you know, one out of every 15 leads, we’re closing deals on, you know, and that math might not sound great for some people, but if you can spend, you know, four or $5,000 on marketing and get, you know, four or five deals that net you anywhere from 10 grand to up to you know, we had one that just hit the market we paid 350 For it’s going on the market for 675. And that came from a 57 cent postcard saying Are you tired of paying your property taxes?

Announcer 0:56

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:16

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

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Today, my guest is Mason McDonald. Mason is a former hospital CEO turned full time land flipper that utilizes his profits to invest in commercial real estate. And in just a minute, we’re going to speak with Mason about how you can profit from land flips.

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With that I want to welcome my guest, Mason McDonald. Welcome to CRE PN Radio.

Mason McDonald 2:57

Darrin Great to be here. And you know if you don’t want to check it out the video version we both have it the face for radio and the voice to match. So

J Darrin Gross 3:08

Gotta put the teaser out there you never know.

Mason McDonald 3:10

Oh, yeah. Oh, yeah.

J Darrin Gross 3:12

But anyway, hey, Mason, thanks for doing this. I am looking forward to our conversation. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Mason McDonald 3:24

Yeah, absolutely. Um, so I grew up in a house where the expectation was get as many letters behind your name as you can and go get a corporate job and work at that corporate job. So you turn 65 and enjoy retirement. So that’s what I did when got a undergraduate degree in neuroscience with the intent to become a physician decided that was not the route for me and went into healthcare administration got my master’s degree in that and jumped right into corporate America worked my way up to the top very rapidly. You know, year after year got a promotion became the CEO of a hospital out here in Colorado Springs when I was 26 years old and hated my life. I love my employees loved my patients but I was working constantly. I was hypertensive Stage Two at a 2627 years old and just couldn’t do it anymore. And we’re despite the title and the recognition and the community and the pay and everything associated with it. I wasn’t happy. So that’s what led me to real estate investing had always been interested in it read all the books, listen to the podcast and everything and stumbled across land flipping and, you know, got started in November of 2021 quit my job soon after getting started and on my first deal made 114 grand and never looked back since. So here I am now a year and a half or so in and doing better than ever.

J Darrin Gross 4:53

Well, a win like that on your first deal that’ll make anybody a believer that’s that’s awesome. That’s congratulations on that.

Mason McDonald 5:00

Appreciate it. And I don’t recommend people quit their jobs before they even sell the deal. So I quit my job. Before I before I sold it. I just knew the value, but it was just time for me to get out. That’s great.

J Darrin Gross 5:12

Well, I appreciate you sharing the background story. Let’s talk a little bit about land flips. I guess the first thing I would like to hear from you is, what what kind of land are we talking? When we say land flips? We’re talking forest farm pasture desert, what are you dealing with? When you do? What are you looking for? When you do your raw land flips?

Mason McDonald 5:40

Yeah, I look for land that makes me money. You know, I, I don’t overly specify the criteria, I cast a wide net. And that’s not how I started. But you know, the deals so far this week, you know, in May of 2023, that we’re recording this one is zoned for multifamily. One is zoned mixed use commercial, and one is a vacant infill residential lot. So kind of all of the above, you’re gonna get different returns, depending on the type of land and a different disposition or exit strategy. So I do everything. But for the most part, my business is vacant infill lots in, you know, either suburban or kind of rural subdivisions. And then commercial land, love commercial land, because there’s only so much of that. And if you can purchase it at a discount, sell it at a discount. Builders are building like crazy right now. So, you know, it’s a valuable product to put on the market.

J Darrin Gross 6:39

So you said you’ve been doing this since 21. So that not not quite two years, it’s like a year and a half is is the?

Mason McDonald 6:49

Yeah, buy my first deal November of 2021. So right up the years, so I’m about about a year and a half and give or take.

J Darrin Gross 6:57

Okay. And so, tell me a little bit about the I guess, you’ve kind of mentioned in anything that will make you money. I think that’s that’s, you know, it’s a good rule to play by Are there specific areas you look for? Or what are some of the the, you know, the tells are you what are you looking for? Are you looking for land that people have? Are behind on their taxes? Or how is it your, your identify in a province?

Mason McDonald 7:31

Yeah, absolutely. So from from a macro perspective, what I look at is transaction volume in the area, is there land for sale, and are people buying it more than it’s coming up. So and there are certain ratios you can utilize to determine the competitiveness of a market. So first and foremost, I look at transaction volume. Second, I look at more nationwide trends, you know, get on the Census website and see what the net migration is, and target counties where people are moving aggressively towards, as well as the county surrounding that area and cities and neighborhoods surrounding that area is kind of the the larger lit level that I look at. And then to get more granular of the specific ownership criteria. So all my marketing is direct mail. You know, it sounds like I’m selling snake oil when I talk about land flipping, because it’s so the strategy is so simple, but I mean, we direct mail market, and I target people that have usually about 10 plus years of ownership on on the property they own. As I do more marketing campaigns, my ownership criteria changes, because there’s so many inherited lots and stuff like that, that have happened over the past few years. But minimum of 10 years of ownership. And typically I talked to target out of county out of state owners. So you know, you can vary your marketing strategy by years of ownership and location and proximity to the property, that’s going to get you a greater response rate. But where I’m at in the business is I tried to cast a wide net. So I, I have motivated sellers that are happy and willing to get rid of it. And I have unmotivated, sophisticated investors that are willing to part ways that their property to claim a loss. So it’s, it’s kind of anyone and everyone. And, you know, for people getting started, I recommend, you know, picking an area that you understand where, you know, I’ve got my markets that I know if I invest in on this street in this neighborhood. It’s a great deal if I invest one street over so you know, as the crow flies, it’s 1000 yards away. It’s a horrible deal. So, you know, intimacy and knowledge of the individual market is helpful, but there’s over 157 million parcels of land in the United States you can find deals everywhere.

J Darrin Gross 9:39

So speaking to that? The the intimate knowledge. Are you? Is there a specific area that you focus on or it sounds like you’re kind of far and wide? How do you get that intimate knowledge if you are going for and wide?

Mason McDonald 9:53

Yeah, I think it’s just after, you know, doing a certain number of deals in a particular area for me You know not not to like, give away my honeypot. But I’m, I’m an abundance guy, I invest heavily in Pagosa Springs, Colorado, to small mountain town just outside of Wolf Creek ski resort, that’s where I got my first deal. I own a commercial building there, my parents just moved there, I want to move there. So I know it, I understand it, I love it, I’m going there tomorrow to go visit and have fun down there. So I know that market really well. And I’ve developed great relationships with my realtor down there, because I don’t sell the properties myself, I pass them off to a realtor, you know, the title reps, I’m gonna bring a breakfast on Friday, you know, you get to know a market like that, and you start getting more deals, just developing community, you know, community relationships in general. So just, once again, it’s transaction volume, the more I do in the market, the better I get to know it. You know, I’m at a stage now where I have an Acquisition Manager that manages all acquisitions for me, and I kind of target the market. So we’re able to share that knowledge. And you know, he has his own markets, he knows too, so able to grow that way.

J Darrin Gross 11:03

Got it. So, you mentioned that everything you’re doing is direct mail. And sounds like you’ve you’ve zeroed in on a market. Are you are you did I hear you then are you looking for other markets as well based on kind of the demographics? And then is it?

Mason McDonald 11:18

Yeah, so I invest in Colorado and Arizona right now. People are moving to Colorado and Arizona, you know, eventually will expand to where where everyone is moving, which is you look at the data, and people are moving to Nevada, and Texas and the Carolinas and Florida, you know, to name a few of them, Bozeman, Montana, and you know, some other places, you know, Boise, Idaho had a great run for a couple years there and everything. So you look where people are moving. So when I say I’m in a market, I’m in probably, you know, four does and within Colorado and Arizona, depending on your definition of a market. But that’s kind of where I’m at and where I focus right now.

J Darrin Gross 11:56

Got it. So I’m always fascinated about marketing. And, you know, strategies in doing it direct mail, is there a, a, a number of mailers that you find you need to get out to create a pipeline of opportunities? Or is it more of in the qualifying that you’re able to, you know, create more of a I don’t know, a response piece that you know, people are responding to our he told me to tell me about how many numbers are you are you feeling like that you need in order to be to get some responses.

Mason McDonald 12:38

Yeah, so if you can scrub your data to a certain extent, using some of that ownership criteria that I was talking about, if you’re sending five to 10,000 pieces of mail a month, you’re gonna have a seven figure business flipping land, depending on where you’re sending the mail to. So I tried to my goal is right around there about 7500 to 10,000 pieces of mail a month, my email cost me 57 cents a letter, I anticipate a one to 4% response rate dependent on the market. And then a deal close rate, you know, varying from there of, you know, one out of every 15 leads, we’re closing deals on, you know, and that math might not sound great for some people, but if you can spend, you know, four or $5,000 on marketing and get, you know, four or five deals that net you anywhere from 10 grand to up to you know, we had one that just hit the market, we paid 350 for it, it’s gone on the market for 675. And that came from a 57 cent postcard saying Are you tired of paying your property taxes, give me a call. And it’s it’s it’s insane. And you know, the guy that sold that, to me was former hedge fund manager out in New England, and he just wanted to get what he put into it. And you know, the markets changed. But you know, why people sell to me is I offer quick cash and convenience. And I think a lot of people try to glorify what they do, whether it’s in real estate or anything in life. And for me, I’m a pawn shop, you know, I buy land for cheap and I sell it for more. You know, I never tried to screw anyone over. I tell him if you want top dollar, go to a realtor. But if you want quick cash and convenient and you want to get rid of that headache, I’m here, I’m here.

J Darrin Gross 14:23

I love the kind of the simplification of of your model from the standpoint of the way you position yourself. You know, I think there is a lot of people and we all fall victim to it at some point about trying to elevate our status in the world by you know, whatever it is title or training or have, you know, however you do it, but the reality is and this one thing is one of the things that’s always been an appeal of mine in real estate is just how simple it is. It’s where a buyer and seller meet.

Mason McDonald 14:56

You’re in you’re right on and it’s saying men agreed where self certainty is one of the most off putting things for me, you know, in a person in general where, you know, I have a strategy, and it works. And it works great for me and it works great for my life doesn’t make me better than anyone or makes me smarter than anyone. It’s just and I’m not certain that it works. I’m, you know, I tried to change my mind all the time. But I think that’s something that at the beginning of this business actually caused a lot of slowdown is I saw what everyone else was doing. And you know, I, you know, sold that first deal made, made a ton of money. And you know, my wife said, sit on the couch and get your blood pressure back to normal after you left your job. And so I did that. And I got overly creative, I started texting, I started calling, I started doing direct voicemail, and email and all this other stuff, and I didn’t get a deal for four months. Then I sent 1000 mailers, and I got five deals that made me another 100 grand, and some are still paying me because, you know, offered seller financing on it. And they’re still paying me today. So it’s, it’s funny, you know, you got to stick to what works when you see it, but don’t necessarily think it’s the right strategy, you know, get creative, like from a split testing perspective, but, you know, stay consistent.

J Darrin Gross 16:09

Yeah, well, I just, again, the simplicity of it. And I think that what I find is one of the common things that I find when I speak with investors, most can remember their first deal. And most can remember where they were, like in that stage of life, or whatever it was, when they they committed to it, and whether there was an amount of fear, or they didn’t know if they’re going to be able to do the deal, or just the, you know, they were stretching or whatever, whatever it was, there’s something there’s an emotional tie to that. And it’s a very base level thing. It’s not about some high level, you know, debt swap, or, you know, suddenly, you know, things like that, it’s more about just like getting in the deal and getting the deal done. Kind of thing. And I think there’s that common thread there. And I would think that a lot of your approach would appeal to a lot of people, just from the fact that it is simple, and it’s it’s very clean. And you know, it’s not an anticipation of a big number we’re or maybe somebody encourage you to, to list for something for a bigger number. And then then all the while they’re beating you up on you got to take the number down, because the markets changed. And, you know, all that good stuff. So

Mason McDonald 17:21

Oh, yeah, I mean, you’re right on, I remember exactly where I was, whenever I bought that first deal. It was my 27th birthday, actually, and my wife and I flew, flew out to St. Croix that next day. So I remember every emotion that went through my head, especially with the idea of leaving an executive position, which couldn’t have done it without my wife, she’s the stable software engineer that pays the bills and allows me to go be the, the risky entrepreneur out there. And I, I think whenever you’re you’re looking at things, and you can take emotion out of the decision making and just look at numbers, then it becomes a lot easier, where I look at some of the numbers of more properties that have maybe been sitting on the market for like 30 or 60 days, which is normal. Now, we might have been spoiled a little bit in 2020, and 2021. But I look in it’s like, Hey, dude, if you sell it at market price, you’re gonna get a 276% cash on cash return. And six months, you annualize that you start seeing what the APR is? And it’s like, Well, okay, I could reduce it and get, you know, because we all think about that disaster case scenario of like, okay, well, if I had to liquidate, I could still make all my money back plus 20 30%, which is you get spoiled in this business with the returns, but 20 to 30% is fantastic. Still, you know, assuming of supporting your operating costs and everything, you can factor that in?

J Darrin Gross 18:42

Yeah, absolutely. I mean, in any market, if you could hit 20% people, you know, dodge hit a homerun. So Oh, yeah, that’s great. So, you talked a little bit about your approach in finding the properties? Can you talk a little bit about how you structure your offers? Or is there any kind of is it basically just a conversation, what they’re looking for? Or do you have some sort of a, you know, kind of a, how do you view that, you know, going in, is each one individually different? Or do you have some sort of a baseline formula that you work with?

Mason McDonald 19:20

Yeah, so So both, each one is different. I do have a formula that we kind of, you know, work off of, and basically I attempt to acquire the purchase price. I never sell clothes, I go through a title company for everything, which a lot of people in land flipping say self clothes, I disagree. One wrong signature on a warranty deed ends up in more problems and I care to deal with but I tried to target that acquisition price for 50% of what the median value of sales over the last 90 days in that particular neighborhood, or particular market is, you know, where I’ve actually made the good Fiesta returns, because I can’t think of a better word for it has actually been where it’s a little harder to price of, okay, there’s not a lot of transaction volume. But I know it’s a very desirable area where people have these beautiful homes. And you know, it’s a great community, but there’s just no data. Because, you know, one lot comes on the market every two years. So, you know, there’s a little bit of nuance there. But in general, I tried to target about 50% of what I expect it to sell for. And I can go up and down from there, depending on the amount of transactions in an area where some places I can get for 20%. And then I can sell it at 60%, you know, in the margins end up kind of being the same and everything. So there’s various formulas that I use, depending on the competitiveness of the market, because I’ve got the big deals that will make me you know, 100 200 300 grand per deal that might take six to nine months. And then I’ve got the transaction business where it’s, you know, and that’s what I’m kind of working on building up more of, you know, the more active of the active business of, hey, I know, if I buy this property, it’s essentially liquid cash, because I could put it on the market in the middle sell in 12 seconds, type of thing. And, you know, I’ve got friends that are doing this, and, you know, markets in Florida, that I mean, it’s liquid cash for them have, you know, from initial conversation, to under contract to buy to bought to under contract to sell to sell is sometimes a 10 day timeline. So it’s, that’s like cash out there.

J Darrin Gross 21:24

Ten days, it’s fast.

Mason McDonald 21:27

Oh, yeah.

J Darrin Gross 21:28

So so let’s talk about how you are the sale of the property. We’ve talked a little bit about the acquisition, when you go to sell a property, is it a cash sale? Or do you do any kind of land contracts? Or do you? Or do you offer any kind of financing? Or how are you setting that up?

Mason McDonald 21:52

Yeah, it varies, once again, on the individual property, where a lot of times I don’t know who the end buyer is, just because I give it to a realtor to sell, I’ve got a handful that I will offer seller financing on just because you know, a 20% down payment, will give me most of my cash back in the deal and pay off the realtor. And then it gives me monthly cash flow to support the operating expense of the business. But I don’t, I don’t do contract for deed I do, you know, note and deed of trust, where you know, I have come close to having to foreclose on on people. But, you know, one of the big beautiful things about it, you know, is there’s so many people that just want the American dream of owning a piece of land that they can build their own house on, but maybe they have bad credit or anything like that. So I don’t do credit checks, I just do, you know, provide a proof of income, you know, ever everyone goes through hard times. And I had one person that I did a seller finance deal with, and he just stopped paying, I tried to personally get in contact with him, my escrow company, no servicing company tried to get in contact with them. And found out he had family members passed away, and he’d been scrambling. So what we did is, finally, when he communicated with me, I was able to reduce his payments to about one one quarter of what they were because he wanted to keep paying he wanted, he didn’t want to lose the land and never missed a payment sent. So it’s fun being able to help people that wouldn’t be able to get help. And, you know, I’m making money. And you know, cash flow is nice in a business that is, you know, a purchase and sale business. And so it’s it depends on the necessary steps that you need to take to get the desired return. But, you know, I’ve got, you know, a piece of land that we closed on this morning, that is the only multifamily piece of land that’s going to be on the market in Garfield County, Colorado. And I could develop it and turn my six figure profit into a seven figure profit should we decide to so so many disposition exit strategies make land a really attractive place to be.

J Darrin Gross 23:53

And so you strictly do the through the realtor. I mean, you list all the properties you sell, and then realtor brings you a deal.

Mason McDonald 24:05

For the most part, I’ve sold a few, you know, off market, Facebook marketplace or Craigslist, you know, when I was driving out to take pictures of myself whenever I first got started, and there was a contractor working on it, and you know, he said the neighbors would be interested in so I paid him a referral fee and the neighbors bought it and I didn’t even have to put it on the market. So it varies. But as as I’ve grown and scaled and you know, I look less at the, you know, 510 20k profit deals and look more at the 50 to 500k profit deals. I’m not sophisticated enough and I left my job to not have a real job so I don’t like sales. I give it to people that like sales that understand it better than I do.

J Darrin Gross 24:46

Got it. So where do you get your your capital to buy the properties or is this all self funded? Are you raising any money or how are you doing that?

Mason McDonald 24:57

Yeah, absolutely. So I started by using all my on money until I recognized that I would limit growth and I was tired of the entrepreneurial life cycle of, I’d buy a bunch and I feel really bored, and then I couldn’t mark it anymore. And then I’d sell a bunch, and I’d feel really rich, and then I go buy a bunch and over and over and over again. So I learned the value of other people’s money pretty, pretty quickly. So I have a few opportunities where you know, you know, within my network, I’ve got a pretty high net worth network just being at the executive level for a while. So I’ve got people that give business loans where I, you know, just pay them interest only payments and everything. And then I do a lot of joint ventures where, you know, I had an investor JV with me on a deal, they kept, they provided all the cash, they and I gave them 35% of the profit of the deal. And their cash on cash return after 73 days was I think, if I remember, right, 62% for, you know, pretty minimal investment. So they were stoked with that and ended up investing, you know, 10 times as much actually 15 times as much with me on the next deal. You know, so we do profit split joint ventures, and there’s some some companies out there that offer financing to, you know, people flipping land, but the rates, and they’re all JV deals because the rates would be considered usury. And banks won’t lend to people like me doing this kind of stuff. So that’s one of the pros and cons of this businesses, there’s minimal competition, because there’s lack of access to institutional capital. But that’s also a pro a bit of if you can find the capital, there’s more deals than people know what to do with. So that’s something I’m working on, kind of on the side is creating a company that will be able to fund everyone’s land deals that’s doing this, you know, I’ve got some big time investors that are willing to invest with me on a venture like that. And so that’s something I’m excited about whenever, whenever I’m able to actually speak more about it.

J Darrin Gross 26:51

Now, it sounds exciting. That’s cool. So, you know, there’s a lot of talk, and I mean, we’re, we’re we are recording this in May of 2023. And, and the economy is been chugging along, there’s certainly lots of inflation and interest rates have gone up quite a bit. Does any of this affect your ability to find or sell raw land deals?

Mason McDonald 27:27

So So yes, and no. The answer yes, is because, you know, from like a slowing down, there’s this typical slowing down at the market a little bit right now, depending on where you’re at some markets have remained consistent. So we’re getting back into like the correction phase within real estate. But luckily for land, from a sales side, you know, the last date I looked at, it was March, and I probably should have been better prepared. And I think April data is out. March, you know, we were down 6.5 million single family homes in the United States from an inventory perspective of what needs to get built. For point are, we’re up 4.5%, historically, over building permits, and we’re doing construction at a more rapid rate than historically. So there’s buyers out there, from the the higher level, the commercial level of builders are building like crazy right now, because there’s still an inventory crisis, specifically in markets where people are moving to so you know, from a buyer perspective, it’s slowed down a little bit, but there’s still tons of buyers out there. From a seller perspective, people are hurting, you know, my wife and I will go to Chick fil A, and maybe we eat a lot, but cost $30 For us to go to Chick fil A. And for the average American that maybe they inherited a piece of land or they owned a piece of land that they planned on developing 1020 3040 50 years ago, they’re happy to get the cash for it because then they don’t have to keep making property tax payments whenever cost of living and inflation is so high so and then once again from the retail seller side. You know, Mark Twain said buy land, they’re not making more of it. So in a recession, people are typically going to flock to safer investment strategy. So you know, it’s the idea of a land bank of typically most land unless something weird happens will appreciate in value over time of I’d rather park my land or my money with land and you know, you hear stuff in the news, you know, Silicon Valley Bank, and all the other stuff that happens and they’re scared of bank so, you know, what do we invest in, we invest in dirt and stuff that comes out of dirt, you know, minerals and stuff like that. So it varies, you know, I’m not I don’t have a crystal ball or anything like that. I can tell it slowed down a little bit, but you know, still getting interested in stuff it’s still selling.

J Darrin Gross 29:37

Got it. Do you find there are more people looking to sell? Or have you seen like your your response rate increased to your marketing is the you know, the economy slowing down a little bit or is that not necessarily..

Mason McDonald 29:55

Not not overly you know, it all it all depends because the past you know, I I can see the past few months as we’ve moved into newer markets, you know, we’re getting a significant response rate. So I think it depends kind of where it’s at. And what’s happening. It’s so market dependent. So some of them like some counties in Arizona and cities in Arizona, that we’re marketing to there, our response rate is insane, like 10% response rate for a silly little postcard that we sent, and we’re getting a certain amount of deals out of it, but a lot of people are looking at retail prices. So to us, it’s just, you know, it’s math. So we haven’t seen from an acquisition side, any sort of slowdown, but not necessarily seen too much of a pickup. So depending on the market, that is

J Darrin Gross 30:47

Got it. So looking forward, do you have any sense of is there anything that would affect the market, you know, increase or decrease? Or is it basically there’s just unlimited demand and plenty of opportunities? And as long as you find one, and the numbers work, they’re going to work?

Mason McDonald 31:08

Yeah, I, it’s so hard to say, I think in general, you know, it’s location, location, location, where, you know, I, I have one piece of land that I paid, I don’t know, 15 102 grand for that’s been on the market at 15,000 for seven months now. And I don’t really care because I forgot about it. You know, and that one, right, there is one that I’m gonna end up selling, and I’ll have to do like 5% down, you know, a percent interest for 10 years type of thing, which is fine. But that was a more speculative market for me, where I kind of wanted to test it out a little bit. And whenever the dollar amount, you know, I mean, you look at that return if it sells at 15 grand on a $2,000 investment, you know, minus realtor fees, I, you know, whatever that math is I allotted. There’s a lot of return there. So, I think it depends, you know, on the location specifically, but if you buy a vacant infill lot and a beautiful neighborhood in Oro Valley, in Arizona, you’re gonna be able to find a buyer, even if you have to do a price reduction, or you just hold it for a while. And let them the scariness of the market, you know, go away, which it will. It always does.

J Darrin Gross 32:21

Yeah, no, I think the one thing I’ve learned about real estate is time. I makes it all work. long as you get time. That’s, that’s good. So Mason, you’re making the money in the land flips. Tell us how you’re going about investing in commercial real estate with your winnings?

Mason McDonald 32:39

Yeah, absolutely. So one of the benefits of investing in raw land. And the way that I do it is there’s no capital gains taxes that’s paid, I’m taxed as this as if the land is inventory, which it is. So currently, you know, working on building my commercial portfolio, I own own one building right now, that’s getting renovated into workforce housing. It’s in a small mountain town. So there’s an affordability crisis in so many of these mountain towns in Colorado and along the all of the Rocky Mountains. So you’re able to do kind of a rent by the room rent by the door model that’s going to give, you know, you know, far breaks the 1% rule. But what’s more attractive to me is depreciation, you know, this year, you can take advantage of, you know, front loading the depreciation at 80%, you know, after doing a cost segregation study, so, that’s kind of where I want to park my money is just commercial assets that both cashflow appreciate, and you can depreciate. So right now I’m looking at, you know, after the pains and struggles of going through a renovation on a property in a mountain town, I’m looking for more simple passive, investing, like single tenant triple net lease, put something on a 15 year lease type of thing and take advantage of that, that true depreciation to offset all my other income.

J Darrin Gross 33:54

Hey, Mason, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with them to assess risk and determine what to do with the risk. And there are three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize and we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, could be interest rates, the Fed inflation, you know, whatever you identify as what you consider to be the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you Mason McDonald, what is the BIGGEST RISK?

Mason McDonald 34:58

Yeah, um, I expect my answer to be a little different than what people might expect. I mean, I was the CEO of a psychiatric hospital. So in terms of a risk management perspective, there’s, you know, in terms of over regulation and high risk, there’s about, that’s about as high risk of an environment as you could ever imagine. But for me, the greatest risk that I have is, I fail at this entirely and have to go get a job again. So, you know, me being my own boss, and, you know, getting to live life on my own terms. And having financial and geographical freedom, the biggest risk for me is I fail, and I have to go get a job again, which is what 99% of the population already does, because the margins in this business where if I set my Buy Box criteria based on market data, which is what’s available to everyone at 50% or less, I could liquidate and get all of my money back all of my investors money back and be able to walk away, but that’s not going to happen, you know, or should it happen, it’s not the end of the world. But yeah, the riskiest thing to me is ever having to get a job again. So maybe not not exactly the answer, you know, that that’s expected or wanted, but that’s what it is for me.

J Darrin Gross 36:17

I love it. I love the, again, kind of the grounded answer in that, you know, hey, look, this is working. But the the risk is that, you know, there’s a chance that couldn’t work, you know, or might not work. But you’ve got a plan B. And that’s, that’s kind of part of managing risk is, you know, what, if something happens, so,

Mason McDonald 36:37

Yeah, so we’ve got the liquidation plans should that ever happen or anything like that, you know, so I don’t over leverage myself, you know, I have good relationships with my investors. And, you know, if I have to, you know, my wife and I talked about it of, you know, if we have to sell everything, excuse me, and start over, you know, the amount of lessons that I’ve learned over the past year and a half, should, you know, crap hit the fan. There’s no way we’re going to start over and it’ll take as long to get back to where we are. So yeah.

J Darrin Gross 37:11

That’s all good. And Mason, where can listeners go? If they’d like to learn more connect with you?

Mason McDonald 37:18

Yeah, I’m most active on LinkedIn. So if you you know, I’m sure it’ll be in the show notes. If you look me up on LinkedIn, Mason McDonald, you’ll find me there happy to engage with anyone there that wants to talk about land investing, or, you know, investing in commercial real estate, or subdivides, or any of the bigger deals we have going on on the side, you know, happy to chat with anyone, and everyone talks about my story and see if I can help you. I also do coaching and consulting within the land space. So if you don’t reach out to me on LinkedIn, I have a website Coaching with Mason.com, where I take on people that have a successful track record, either in their own business or in corporate America and teach them exactly what I do. So I’m having fun doing that. I went from, you know, two dozen direct reports and 500 employees to one employee now. So I’ve got a, you know, an extroverted personality, and I love teaching people how to do it, because getting to see the coaching students have success and realizing they can leave their corporate job. You know, it’s fun and really, really, you know, inspiring to me.

J Darrin Gross 38:21

No, I love it. Well, Mason McDonald, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Mason McDonald 38:31

Darrin, thank you so much for having me.

J Darrin Gross 38:33

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks, CRE PN Radio.

Announcer 38:52

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2023 Multifamily Deals and Cap Rates with Victor Bell – CRE PN #409

Victor Bell 0:00

It feels like a standoff right now. So sellers aren’t really dropping their prices and buyers aren’t really raising their offers. So I think there’s a middle ground of that’s going to change. You know, I think we have probably about a 12 to 18 month window, opportunity that something is going to shake out somebody, like I said, you know, if you have a bigger group, you know, you have some of the larger apartment building groups that own stuff and or, you know, the Blackstone’s and KKR is and things like that, that do have assets that they’ve held on to that have a horizon so they promised their investors above them five years we’re going to turn them burn this thing out and you know, they have to sell those are going to be the deals but to my point, if you’re a smaller person, you’re like I got money in an IRA I’m accredited but you know, I have a business to run and I don’t have time to learn this game. You’re you know, those are the deals that you will miss because you can’t grab those deals by themselves.

Announcer 0:51

J Darrin Gross 1:10

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to BuildingInsuranceRisk.com.

Today, my guest is Victor Bell, Victor is transacted over $59 million in real estate transactions in seven states, including Hawaii, Arizona, Texas, North Carolina, Ohio, and Michigan. And in just a minute, we’re going to speak with Victor about how to succeed in real estate in 2023.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Victor Bell. Welcome to CRE PN Radio.

Victor Bell 3:01

Hey, thanks so much for having me today. I really appreciate it.

J Darrin Gross 3:05

I’m looking forward to our conversation today. But before we get started, if you could take just a minute and share with listeners a little bit about your background. Sure,

Victor Bell 3:15

sure, definitely. Um, you know, I got started in real estate in the late mid to late 90s. I like to tell people, I didn’t really know exactly what I was doing. I left home pretty young, got kicked out of high school, went back to high school joined the military left there. dropped out of college that first semester, when they said if I came back, I was going to owe them money off of the Free Army money and then, you know, got in trouble was on probation, I had to get a job. And then I while at that job, though, you know, I started recognizing that people who had been there for a really long time hated their job. And the people who are new like me also hated working there. Not that it was a bad job, but it was just the trap. Right? It’s the nine to five trap which a lot of people you know, have, you know, that experience. So I was driving home one night I worked nights fell asleep while I was driving and ended up on the side of the road. And I was like, okay, there has to be more to you know what’s going on than this. So I know next day I drove into Austin, I was in Killeen, Texas, I drove in Austin, got a book from the store. And that first year I did 1,000,002 and real estate deals. I didn’t know what I was doing, you know, so it wasn’t like I was brilliant. You know, but you know, I knew that that was the route that I was going to take from then on. You know, I’ve had a few sparse jobs. I had to kind of keep things going during that timeframe, but primarily, I’ve done real estate full time the whole time. You know, so that’s the background on me. And again, I got started from a book, I hurt my way through it. I met a lot of good people who pointed me in the right direction, you know, so so that’s my background. That’s how I’ve done this over the years. But I’m a regular guy like everyone else, you know, pushing through the experience of Investing.

J Darrin Gross 5:00

I love it. I got to ask you what was the book,

Victor Bell 5:05

I was actually fast cash with real estate by Rama grant, that was the first book. And again, it’s a dated book from the 90s. But I literally, you know, I’m a guy that if you told me what to do, I’ll just go do it. So I just as is that book, meaning the book says, do this, I do that. So I pretty much cold called numbers out of the phonebook, reading the script that was exactly in that book. And I ended up getting a deal. And then the book said, also cold call mortgage companies and lenders and things like that and find money. I didn’t know what that meant. But I was cold calling out of the phonebook. And I eventually got somebody, Bob and Jamie, they owned a mortgage company at the time. And to be to even take my phone call. They’re like, How’d you even get this number? I was like, I, you know, I’ve been cold calling, like the book says, you know, they invited me into the office, and they’re like, Hey, let me let me you don’t even know what you’re doing. Let me show you. So they kind of walked me through, you know, finance and how to get certain things done, baby actually became my first partner. And actually Jamie’s my Investor Relations Manager in our real estate fund. So just around who worked out that way. But, uh, yeah, but that’s that was how it started. And it’s crazy, because it’s been a wild ride, you know, and at the time, real estate cycles, market cycles, all that stuff. I didn’t know, you know, something bad was happening. I just thought it was happening to me personally. Now, now, looking back, I was like, oh, that’s that was happened, everybody. But um, but you know, but that’s the start.

J Darrin Gross 6:30

I love it. I love it. So where are you? As far as the start? Was it primarily calling on distressed? Single family stuff? Was that kind of the focus? Or what was that?

Victor Bell 6:41

Well, what happened was the number in the phone book now they were I mean, the number in the in on the property, it was a single family house in the newspaper. And then, you know, I was talking to Bob, he’s like, Hey, call them back, find out if they have more properties that they’re interested in selling. So I did because they were like, Yeah, we’re interested in selling come down to the Exxon, we, you know, they owned a bunch of stuff. I didn’t know that. And turns out, they’re like, Yeah, we have more properties. How much can you how much can you handle? And that’s how I got that portfolio deal. So ironically, though, in that portfolio of properties that we got, they were the rest of those deals, were all multifamily. They’re duplexes, triplexes fourplexes. It was like a 16 unit, a 12. You know, the one house that was in there and be honest with you, which, you know, forged. My investment thesis for the future was like, we don’t do fixer uppers. Because that one house out of all those properties was the nightmare. Everything else was rented. They had tenants, you know, and I had to learn a lot about you know, now being a landlord and maintaining and being a manager and things like that. But by the time we got rid of that house very quickly, so I learned a lesson I have a huge appreciation for people who go in and fix stuff, even the single family investments that we do do they’re typically creative financing subject twos outside of the fund. They’re pretty houses you know, I tend to focus primarily on really nice houses really great locations. Don’t need a lot of renovations no more than maybe paint and flooring. Worst case scenario if that. So but the same with our multifamily selection there, too. I like nicer apartment buildings, better locations fully occupied, very little to do with them other than invest, you know, and raise the rents here and there. But, but but that’s it. No, no, have you fixer uppers. But to your question? Yeah. That was how that worked. Very little single family. But I have done quite a few single family but they’re de risked.

J Darrin Gross 8:37

I love it. I love it. Everybody’s got their start in like your, you know, relaying here. There’s a lot of lessons that you’ve learned as you go. And hopefully none of them are big enough to sink your your dreams. But, you know, there’s a lot a lot of battle stories and war stories that everybody can tell. And, and it’s all part of the education. That’s That’s great. It is. So, so you started off. You said the mid 90s. Mid to late 90s. You were this is when you got started. Yes. And so it was it in that first year, then you ran into this portfolio opportunity?

Victor Bell 9:16

Yes. Yeah.

J Darrin Gross 9:18

And of that portfolio, you mentioned you sold the house right away. Did you retain any of the other properties? Or have you since Yes.

Victor Bell 9:25

So we kept all the other properties for a while I had a partner in those deals, and we eventually sold those off.

J Darrin Gross 9:32

Got it? And today what is your your? The asset class of choice and what’s your what’s your model?

Victor Bell 9:41

Right now with the real we have a real estate fund is a $50 million fund credited it’s a 506 C, that’s for multifamily B class properties, B locations here in San Diego County. That’s the target. We’re still pushing up that capital raise phase because of what’s going on in the market. So we’ve been highly focused You know, and on that piece right now, and we do do small, small properties, like, you know, residential stuff, small multifamily, we picked up a couple of properties in Hawaii since we’ve been here and turned around and resold those. But again, that was just like, hey, this is not fun related, we’re building the fund here. And, you know, again, because I do this full time and above, I pick up a deal here, too, from a side business for myself, those deals still happen. But the strategy remains the same. It’s like pretty houses subject to creative financing, you know, take the risk out for me, my investors, if we can get those, while we build capital on this side to go after the 80 120 to 200 unit deals, now we’re looking at those for the portfolio for the fund that that way, our investors have a better size of deal based on the scale, because it kind of takes the risk away for them looking at something smaller. Hey, Vic, let’s partner on this 2030 unit deal over here versus something that we can all take a part of, you know, and I’m sure you probably get that to being in the business that you’re in. It does limit the risk, there’s always risk. But it minimizes the risk when you kind of go bigger, and you’re collectively doing it with other people with somebody who has some experience.

J Darrin Gross 11:09

Yeah, amen to that. Definitely more doors and, you know, spread the risk around that. That’s a good strategy. So you’ve been doing this for a while now. And, you know, I was talking to somebody the other day. And basically, he was saying, Man, if you couldn’t make money in real estate in the last 10 years, the same for you, just based on how easy it’s been, you know, as far as with low interest rates, and in demand and and just, you know, capital chasing return. So, you started the mid 90s. We’re in 2023. Right now, last 10 years have been pretty, pretty outstanding. In fact, I know I started this podcast back in 2015. And I can remember, one of the first interviews I did, the guy was going yeah, we’re probably it’s a question, are we in the ninth inning? Or is this a doubleheader kind of thing as far as the cycle goes? So obviously, the interest rates have changed quite a bit here in the last year. Yes. What, what are your thoughts? How are you approaching the the marketplace, given the change in interest rates?

Victor Bell 12:31

very selectively, so, you know, because again, in multifamily, I’m sure, you know, from a commercial perspective, you know, I don’t know from the listeners to what magnitude but it’s all based on its income from one perspective, but that the market capital, you know, the capital changes, interest rates have risen, things like that as math, like I think from December till now, at some point, last December to this year, they’ve almost tripled, you know, because they’re like, 2.75. And, you know, they’re 6.7, like they’ve ranged across the gambit. Well, what that does is it, it forces people to look at the revenue of the property, the debt service ratio, and all that other stuff. That’s the 1.25 that banks want to see your 1.27 and multifamily, you can’t hit that your asking price has to come down or, which is the other alternative that people hate to hear is you got to put down more money. So you know, some of the deals we looked at, we underwrote them, we were under, oh, putting 40% down, you know, California, Hawaii, their higher price market. So I mean, the downpayment needs to be more to hit those numbers, we looked at a deal to and when we got the the underwriting back from the potential lender on the debt side, they were sizing up the loan, it was like a 65% down to make that deal work. And we were like, Whoa, who’s going to do that? So not that it was a bad deal, because not the whole part about it was to your point, nothing changed. The market changed around it, there’s a huge correction with that with the with the cost of capital. That makes guys like me go, You know what, let’s pull back, let’s put the pencils down for what we’re underwriting. And let’s just focus on the capital part. So we get an opportunity for someone who may be there a fund manager, and they have portfolios that they need to kind of look in, and I’m sure they would write down the portfolio and say, let’s get rid of these assets that would have normally come to market, because they’ve had to write down the values based on current, or syndicator, who got in two years ago executed their value add plan, they promised our investors they’re going to give them you know, some huge press return as well as, you know, some massive upside and they go to refinance, and they didn’t pressure test, what it will look like, had their rate not went past 5.75. Now it’s 6.75. Whatever it is that they have to exit on or refinance on, they can’t. So that’s been something that we’ve looked at one, put the pencils down, raise the capital, and then if an opportunity presents itself because someone has to exit based on a timeline, maybe not because they want to Sell because they have to, we can take advantage of that. So that’s what we’re doing different. That’s what we see in the market. You know, and I have a theory, I’ve been saying it because I’ve saw it happen in Hawaii quite a bit. If people don’t start investing with a syndicator, and or fund manager who understands what they’re doing, and start collectively investing with other people, they won’t have opportunity to get some of the better deals that they saw, to your point, because they’ve been played over the last 10 years, primarily, really over the last five. So that said, you know, somebody who’s just sitting on that old strategy of you know, find it, fix it, sell it as multifamily commercial deals, you know, things like that, they’re gonna have to change strategy, and within the changing of their strategy is going to come through collaboration with other investors.

J Darrin Gross 15:46

Ya know, it’s interesting, you mentioned that, you know, obviously, commercial debt is structured differently than, you know, single family residential, where you can get 30 year terms, most of it has some sort of a sunset, somewhere between five and 10 years is what I think most, most have, I think there are some programs, I know, they go out further, but but there is a natural date, an end, or a, you know, a reset date. And, you know, it’s going to present some opportunities, based on just whether whether the investors are done with it, because they have made it unable to return to the capital that the investors were expecting. Or they’re just, you know, they’re ready to let go of it or, or just they want to sell and, and, you know, but the price is a little different than what they had planned for an exit. And are you seeing prices? Are they are they? I mean, are the sellers reflecting? Are they have they adjusted to the market yet? Or are you still seeing that everybody’s still trying to get the higher, higher price?

Victor Bell 17:09

It feels like a standoff right now. So sellers aren’t really dropping their prices, and buyers aren’t really raising their offers. So I think there’s a middle ground of that’s going to change. And I think we have probably about a 12 to 18 month window, opportunity that something is going to shake out somebody, like I said, you know, if you have a bigger group, you know, you have some of the larger apartment building groups that own stuff and or, you know, the Blackstone’s and KKR is, and things like that, that do have assets that they’ve held on to that have a horizon. So they promised their investors above them, five years, we’re going to turn and Brian this thing out, and you know, they have to sell, those are going to be the deals. But to my point, if you’re a smaller person, you’re like, I got money in an IRA, I’m accredited, but you know, I have a business to run, and I don’t have time to learn this game, you know, those are the deals that you will miss, because you can’t grab those deals by themselves. And I’m sure you’ve probably seen in your area, too, like you have these bigger deals that are trading, and they’re still trading at four and a half caps. You know, fours, you know, some point 3.75, but they’re better quality assets, they’re institutional. And I think, now is the time for the everyday investors to actually get access to those type of deals when we would have never been able to, because their timeline, you know, the debt is forcing those people to come out of those deals, and not, the seller doesn’t want to sell them. So you know, the owner, the owner groups don’t want to. So I think that’s really going to be the opportunity. So that’s what I’m seeing in my market, the prices aren’t changing, but the level of person that still will buy those properties, even at that current, you know, what does use cap rates, because everyone talks cap rates, even somebody who can who’s looking at a four cap deal, that’s a great location, great asset, it is cash flowing, has the wherewithal to take down a four cap deal and it not hurt their returns, because they’re like it, if we get forward fine. We just want this asset, we want this location, we’re not going to lose our capital here, because we have responsibility for all of the capital that we’re investing for our investors. So that’s why I also made the move to I was like, What is everyone been doing? I saw this happen in Hawaii, California is 10 years behind the Hawaii market from what I saw, and I wish I would have, I would have bought more property than I even tried to buy some of my old apartment buildings back since I’ve been here. And I couldn’t get it, you know, even at today’s price within you know, almost five or $600,000 More than I sold them for, you know, I don’t like I wish I can get them it’s still a good price, because rents have gone up. So that’s what’s happening, you know, that made people still say, you know, what, how does that even make sense? will rent still make sense because we’re really buying the housing, we’re not buying real estate. So you know, He who controls the housing in the market wins and that’s that’s kind of what it’s turned into. Be.

J Darrin Gross 19:55

You know, it’s interesting. I I’m sure there’s the math makes sense. I haven’t to sit down and kind of work through the numbers, but if if, you know, with lower interest rates, more affordable debt, even with lower cap rates for a long time, you could still get into a deal with 20 or 25%. Down. Are you seen the returns? What are the returns that you’re able to? You know, figure out? If you’re coming in with 60 or 65%? Down? Are the returns muted from where they were? Are you? Are you are you able to continue to get comparable returns?

Victor Bell 20:39

Well, we won’t do that, that 65% down, you know, we’re sticking to the, you know, a 40 45%, which still makes our offers where they would have normally been at the better debt rate, right. So whether that’ll be accepted or not remains to be seen, which is why I said we’d waited out for the right property. But would do to do the returns pencil for the investors. Yeah, because we’re not over promising our investors. So I’m ridic. You know, that’s the problem, people, we’re gonna give you guys a US eight pref, you know, plus, you know, 20% 40%, or 70% of the deal. So we have an 8020 split with our investors, we don’t have a preference turn, because I understand, hey, we have a target return of 55% per year, you know, our 15% internal rate of return. Because of the type of deals we’re looking at, we’re like, hey, we can double our equity on the resale or refinance, or whatever it is that we’re going to do, we know we’re going to hit that based on our target income per year. So it’s a little different, you know, but I stick to that model, it just makes sense. It’s already proven for me, it’s been an investment thesis that we’ve worked on for a while long as we can put a down payment down, we know we’re going to get get to 5% per year on that hold on a seven year old, usually shorter, I tend to refinance between three to five years, and pay my investors or capital back and then we stay in the deal. And then we resell it after that last term, or know what I know. Now it just refinanced again, and kept those deals, pulled out more money, still been a non taxable event, and just kept them floating. But to your point, yes, that’s how those guys are getting returns. And then even the people who get in, let’s say, you get into you buy a four and a half cap deal. You know, you got to go in with the intentions of, hey, this deals a good deal, we can do the minimal here, raise rent, stabilize it. And we’re going to turn around and refinance based on that cap rate. Right. So you know, five cap like it, and I will run the numbers on burn time on the show. But you figure out a four and a half to a five cap deal. You know, my target is always can we bought rents 600 bucks in this property over a seven year period, you know, and that’s happened a lot faster for a lot of different people, depending on the market you’re in. But that’s a realistic thing. Like if I think this location will warn another $600 More in rent over the next seven years. At this cap rate 5% cap rate, I know we’re going to make our downpayment back, we’ll probably double our downpayment, right? Well, we have in it, we’ll make that on the back end, and we’ll get paid to wait. You know, while we continue to push rents to that level, and if we can do it fast, we’ll do it fast. If it takes a longer time to do that, we have the time to do it. Because I’m in multifamily. You know, I’m sure your listeners know, and you’ve seen it too. It isn’t like a house where you know, you paint it, you do whatever to it, and then you stick somebody in there. And you know, in 12 months, you may sell, you know, sometimes with multifamily it costs you to get out early if your plan is not in place. So a lot of your returns are built on this middle ground, long term investment that makes sense for your investors. Yeah,

J Darrin Gross 23:43

you know, yeah, and again, kind of to the comparison of the market air of the last 10 years versus the last year and kind of on the near near future. Are you seeing that? Are you underwriting for longer hold times than what you were previously?

Victor Bell 24:05

Ah, no, I think the horizon of seven years is about right because that’s been my experience you know, the lender is going to be like you know, your debts probably going to be three years minimum, you might have like three years interest only then I’ll switch over to you know, principal and interest for the next two or something but but there’s still a horizon that we have to target. You know, a lot of guys who are like, Hey, I got multifamily, they’re typically doing like short term debt, and then no refinancing into long term debt. So there’s still like you said, you know, the understanding when you when people understand that the debt really controls to optionality to sell or not. So when you get your financing some like, if you go I’m gonna get a three year interest only on this apartment building. Well, you know, you may have prepayment penalties or you know, defeasance or your maintenance or something in there. If you try to get anything and sell out early, it may cost you more to sell me to watch our profit and depending on which state you’re in your taxes may do that as well. So all of these things have to be brought into account when when I look at a deal, my Alright, can we stay in this deal for seven years? And let’s say seven years hit, and we’re in another market correction? Can we maintain and keep these deals? Can we say, Look, you know what, we’ll just hold on to it. We’ll wait. That’s the long game. I think that’s missed a lot. Everyone’s you know, it’s like fast money. The days of Fast Money is over. Yeah, there’s still money available. But that doesn’t mean that you know, that that game is going to always be able to be accessible.

J Darrin Gross 25:36

It’s kind of weird. I I recognize there’s a lot of capital looking for deployment. But it’s kind of cautious capital. It’s not, you know, the easy capital debt. That’s been pretty easy up till now or last six months or so. Yeah. So, you know, the fundamentals of the housing market? Do you see any changes as far as like demand? I mean, or, you know, affordability as far as like, you know, the the alternative is, you know, people instead of renting they buy, I don’t see that changing it at least in most of the markets that, you know, are, are in demand where there’s, there’s jobs, and there’s, you know, people are moving to the States are the areas that you’ve you’ve mentioned, I would characterize as kind of high demand. How do you see any of the, the, you know, the indicators, or any of the characteristics changing that that? You know, make it less of a bright future for for real estate, especially multifamily?

Victor Bell 26:53

No, I think the multifamily is always going to be the belle of the ball. I think people have caught on to the fact that, hey, look, this is fine, even institutional investors and foreign capital and stuff like that is kind of pushing into the United States, or access to multifamily. As it relates to, you know, the base homeowners like, this is something that’s, you know, there’s what 80 million baby boomers and you know, 76 million millennials, and they’re all rushing into rentals, like the rent the rent by choice, you know, you have people with money renting now, as opposed to, you know, our my parents, and probably your parents, too, it was like, that wasn’t the way it was like, Hey, you own your home, you buy a home, it’s a little piece of your own thing. And now that’s people want flexibility. You know, and do you want to cut your own grass? Do you want to, you know, fix your own roof, you want a swimming pool, you want a gym, you want the amenities that you would normally get in a resort, and people are willing to pay for that. You know, I see that a lot. I mean, we moved here we rent. I’ve always rented beachfront homes, oceanfront properties, you know, and then we were, you know, we lived there for years, and we’re like, you know, what, I think we’re ready to move on to a bigger place or a nicer place or a different place, you know, what allow somebody who has capital, the flexibility, so, you know, and you couple that up with people trying to buy a home, depending on the scenario 20% down on houses that used to be 600,000 other 800,000 $1,000,000.02 100 grand that has to go into that. And, you know, now your rate, 6%, six and a half, seven, you know, on that 800,000, you know, let’s just say 5600 to 6000 a month, or you can rent in the same zip code, really nice apartment, two bedroom, you know, swimming pool Jacuzzi Fitness Center for 4000 or 3000, or whatever, wherever people are, you know, that those are people’s new choices that weren’t available. And as people you know, especially after COVID People work remote, so that became this new thing like, Hey, I don’t want to deal with this. I think real estate investors are scared people enough talking about the crash of Oh, eight and oh nine towards the younger people heard that online, you know, social media stuff like that to where they’re like, Yeah, I’m not gonna go through that. I remember the frustration of that they didn’t know what it was like me. But they remember the time that people were struggling through stuff, and they’ve seen it and they’re like, Yeah, I’m just gonna make a lot of money live where I want travel, do what makes sense. So I think that’s really what’s driving everyone. And, you know, we are going to become a renter nation, it’s already happening, you know, Lyft, Uber, GrubHub. You know, it’s no different from where we live. So that’s, that’s a part of it. And people who take advantage of that opportunity to, you know, take on with that renter wave that’s going to continue to happen for my kids, grandkids, things like that, you know, they’ll be fine in the real estate industry. So I think that’s really where things are.

J Darrin Gross 29:52

So what are your thoughts with the the the recession talk? You know, we’re Definitely we’ve got higher interest rates. You’ve already commented, you know, there’s a gap between the buyers and sellers. And you’re kind of a if I’m reading the right that you’re kind of in a wait, you’re raising capital, but you’re kind of waiting for the opportunities. What are your thoughts on on looking forward? And with respect to any kind of recession? Do you think we’ll be able to avoid a recession? Or do you think that that’s just a foregone conclusion?

Victor Bell 30:31

I think we’re in one now. I really do. I think, I think that’s already happening. I think it’s hit everybody. But I think because there’s so much information out there, you know, it’s like, you know, when you’re inside of the mayonnaise jar, you can’t can’t see the label. So I think there’s so much information about it coming, you know, on all the social medias by people who are kind of pushing that idea that people are missing the fact that prices are already up, people are already not spinning jobs are already cutting back, people already, you know, aren’t making the money that they thought it’s already here. So you might, my thing is always like, hey, look, if you have a business, you need to focus on making more money, you have real estate, you need to focus on acquiring more assets. If you have a capital company to acquire assets, you need to focus on raising more capital, you need to go ahead and stay active in the world, towards those things don’t hit you, we call it create your own economy. So that way, it doesn’t matter what the outside economy is doing for you. But for you and your family, you can continue on, you know, by building your own, you know, building your own audience, having your own people and servicing that community. So you make your community better, you know, within your own business and investments, you know, while taking care of those things. So yeah, we’re already in that recession. But I think the smart people have already saw that and was like, Hey, we’re gonna do something about it. And the other people are kind of looking at it, like, how do we prepare ourselves and pack enough food away? So when it hits, we’ll be okay. But that wave has already crashed on them. And that’s usually how this works. And I’m sure you know, back facing, we look back and go, Man, I wish I would have done more stuff. I didn’t know that was happening. And then later when you come out of it, and everyone else is winning, and then that starts the next level of chasing, yield chasing deals like dude, you missed it,

J Darrin Gross 32:15

Yeah. Yeah, there’s definitely a like, like, the mayonnaise jar thing. You know, when you’re when you’re in it, it’s hard to see it. It’s more of a hindsight, kind of a thing. You know, I’m kind of curious. I mean, you know, the, the last, the only thing was kind of a debt crisis, it was capital just went away. While interest rates have have crept up, I’m still hearing about deals getting done. But they’re, they’re not as not as many being done. And clearly, there’s a standoff between the buyers and the sellers. But you’re not hearing about like, I mean, he argued about some tech layoffs kind of thing. But prices, you know, the groceries are up, the gas is up, the energy is up, interest rates are up. I’m just kind of curious, you know, if you look back past 20 years, go back 30 years. And when interest rates were higher, and you know, that was kind of the standard. Do you have any sense of that this could be the new normal. I’m

Victor Bell 33:35

not uncommercial maybe like some of the residential I look at it, like the gas prices, there’s no reason to lower the gas prices, everyone’s already used to paying four or five bucks for gas. So you know, no, people stop complaining, we know it exists. So I think it’s that I remember doing deals back in the 90s and stuff like that early 2000s. And if I had to pay a 12%, or 11% 10%, I was happy to get it, you know, we have a mindset that, you know, the money I can get you is the cheapest money on the planet. So, you know, it’s you know, and I think, people, if you weren’t doing deals back then you didn’t get it. That’s why people I call it seven and a half, like, Good, let’s go. So those deals are still happening when you have someone who has the experience enough to say, look, the rate is only a part of this business. So if the rates a little bit higher, you know, like we said, for multifamily smaller multifamily, that makes it a little bit tougher, because you know, that rate affects how much cash flow you’re getting and how much cash flow you get is indicative to whether the lender is going to give you that money. But let’s say some value add deal, like we, you know, for, for example, we did a hard money loan, which was you know, I can’t remember the rate was like 15% It was ridiculous. We rolled in the first year we had to go and release the property because we had a tenant move out, and it was a nightmare. But we turned around and you know, we had to get out of that property, do some negotiation back with the financing, you know, negotiate away a second debt. That was also a high rate, but we still may Money on the deal because I knew what I was doing. So to your point, yeah, you do have that you have that high cost, you have the rates and stuff like that, will it become a normal environment, it actually has always been the same environment, what we just experienced was actually not a normal environment. Rates were never been that low. And, you know, but to that point, though, to your point, a lot of money got made during that time, so they can forego, you know, the tech guys went in and borrowed a bunch of money, or they raise funds for those things. So they’ve already prepared for these moments that they have a war, chest off to the side to say, look, we’re going to lay off non essentials, we’re going to keep it moving with the development of what we’re doing, because we have a multibillion dollar horizon on this evaluation on this company. So it seems like to the outside of the middle class, the you know, people were like, man, like, it’s tough out there, you know, but everyone else has already built that war chest through the low cost of capital and the people who know what they’re doing, or like, look, I can play in both markets. I can, you know, so so, you know, so to answer that it’s a, it’s a loaded answer, you know, but But it kind of trying to hit all points of that. So that way people listening are like, Oh, that makes sense. I know what I’m doing when the in the high in the high interest rate, I know it were, we made a lot of money in the lowest interest rate. So this is the new, the new adjustment, but that game is still being played. You know, so this will give everybody the opportunity to kind of learn that one as well that they didn’t experience it in the past.

J Darrin Gross 36:27

Yeah. It’s, it is interesting with a little little look of history. Yeah, kind of look back. What would you recommend the listeners be looking for right now, given the current environment?

Victor Bell 36:47

A higher quality of asset, if you’re going to invest look for I mean, it’s already hard enough to get it doesn’t make the sale, usually what happens is, as the cost of capital goes up, people look at lower level properties and say, Oh, I’m gonna buy this, you know, D property in the worst area, because this is the one I think I can fix and make the most money on and it directs me will actually address more risk. So right now, I think people should go to a better class of asset, maybe a little bit higher price, and look for partners and say, hey, look, let’s go ahead and let’s collaborate on these assets, get a better class of assets, we can ride the wave out in a better ship. And then that way, when it’s time to sell, we sell someone who still wanted rather than get an asset or invest in a deal, that’s not in the best area, you think you’re gonna get a high return, it’s a management nightmare. And when it comes time to get rid of it, you actually lose, versus actually sell because you have less people interested in that when the money comes back, and it’s cheaper. So that’s what I would tell people is just like, go after better stuff.

J Darrin Gross 37:48

And your Amen to that. Victor is preaching the truth there. I mean, that is I’ve I’ve had both ends of that, where I’ve had a lesser quality and a higher quality. And, you know, the lesson I’ve learned is always high tech, high quality is always going to be in demand, and any market and that that kind of speaks Stephen, like, you know, cap rates, if you look in like some of your major metro, areas where you’ve got these eight A class properties, and they trade at these ridiculously low cap rates. The reason is, is because there’s always you know, that you can always sell that property. Whereas if you go out and to lease and buy something that’s, you know, kind of rough shape, but it’s, you know, it trades at a 10 cap or something like that, I always tell people, well, I hope you love that. Because you may be that may be yours forever, man to be able to find someone to buy it. So. Hey, Victor, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider, we first look to see if we can avoid the risk. And if we can’t avoid it, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, we look to transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. Yes. And as such, I like to ask my guests if they can look at their own situation and frame it however you would like could be your clients investors, interest rates, the market, the political environment, no pending war, however, however you would like to identify and and declare what you consider to be the biggest risk. And, again, for clarification, while I am an insurance broker, I am not necessarily looking for a an insurance related answer. And so if you’re willing, I’d like to ask you, Victor Bell. What is the Biggest Risk?

Victor Bell 40:05

Well, if I can give an honest answer, it’s short is not taking risk at all. Because it’s real. I’m a real estate guy. So I take a look at all risks and try to assess it as like, Hey, how can we minimize risk and get the match return, even if to other people that return is not a very big. So a prime example like when I look at an apartment building deal, and I really like it, we start sizing the deal up, first thing we do is we look at the debt, we find a debt person, and then I try to get an insurance person on the team to say, hey, what do you think the insurance needs to be here? Could you give me an idea to quote and arrange? Because I recognize like, hey, there’s two things that are gonna happen. And the most important thing to me is to make sure that I de risk my opportunities by saying, hey, there’s a nicer thing. But we have insurance, we have somebody that can take a look at this and say, Vic, this is risky, or this is, you know, there’s the cost is what you’re looking at. And here’s why. So I think the quality of asset going up, like we said, is the best way to de risk because it removes some of the question long term and short term and have somebody on your team that is in like, for guys like yourself, and it isn’t an insurance thing. It’s just real for me. I want to know, like, I don’t gamble, when I go to Vegas, I go for conferences, I don’t step one foot and play a slot machine, I don’t do any of that stuff. So it isn’t that I’m not aware of risk. But if you don’t take any risk whatsoever, that’s a loss. And then you also need to mitigate that risk by having people on your team who understand risk assessment, guys like yourself. But that’s an honest answer. Even when I call the bank, I’m like, hey, what can go wrong here, guys, and then they’ll tell me, or someone on my team or our broker, like like, I’m all about having people around me that can point out my flaws, because I have them like any other investor, I, you know, bright eyed, bushy tailed my want. So I hope that answers the question. And it’s not, you know, may not be what everyone else looks at. But I’m always asking that same question like, like, if I don’t take a risk, there’s a major risk in itself. But if I do take this risk, what does that mean for me and my investors? And who could I get to point out the things that specialize in that, that I may not even consider? You know, even if it’s cost, I gave it the insurance product on this things, arrange the roof about $800, you know, as opposed to, as opposed to you underwrote it, and budgeted around about four 450 That matters. And I’m like, Oh, why? Well, you know, paneled boxes need to be changed out, this needs to be done, like, like, all the things that most people just take a look at things that don’t think about. But that’s how I see risk, you know, take it, but understand the risk you’re taking and why.

J Darrin Gross 42:41

No, wise words. To your point, if you don’t take take risk, and you’re you played safe, you’ll never have any growth or you’d be losing money. So you got to kind of do something to get in the game and, and grow your grow your equity and grow your money there. So, yes. Hey, Victor, where can listeners go? If they’d like to learn more connect with you?

Victor Bell 43:06

Google, they can Google Victor Bell. They can go to Bell-Capital.com. That’s our website. You got to be accredited to invest with us. But we would love to answer any questions that you have about what we’re doing, how you can be involved. You can go to Facebook, Victorville, that’s our fan my fan page, you can go to Victor but Jr’s personal. Instagram, at the real Victor bell.com, Twitter, Victor bell 365. So LinkedIn as well, Victor Bell, or bell capital. So I’m YouTube. I’m everywhere. So you know, and thanks for having me on shows like this, this show is very important. People need this. I wish I had this. When I started. It was information that you’re taking the time to bring people on to have their conversation started, ask questions, share how they got into the business, it would have shaved probably 10 years off of a lot of learning curves that I probably didn’t need to experience. So you know, that’s how to get in contact with me and also wanted to kind of say, Thank you for having me and doing what you’re doing. It does matter. So I appreciate it.

J Darrin Gross 44:08

Yeah. Well, I appreciate that. Victor, thank you very much, for sure. Well, again, thanks for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Victor Bell 44:21

Me too. Thanks so much for having me. I really had a great time.

J Darrin Gross 44:24

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 44:44

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Commercial Real Estate Market Investors Sellers and Deals with Doug McKnight – CRE PN #398

Doug McKnight 0:00

If you couldn’t make money in real estate over the past decade, then you’re in the wrong business. It’s been easy. You know, from a standpoint of cost of capital and margins, obviously, we are entering it to have debt for the latter part of 22 starting to go into the 23 more challenging environment that we can certainly discuss in more detail but, but up until this point, the areas of the market that we specialize that and I will say that we as a company, we focus on what I like to call build America. So, we are, you know, for the most part, each of our platforms that we can get into, you know, we’re focusing on really your, your working families at rebuild America fordable housing and affordable vacations. And we believe that that area of our economy not only is that the largest demographic in our economy, but it’s the most resilient

Announcer 1:17

J Darrin Gross 1:37

Today’s program is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk focus on real estate and investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Doug McKnight. Doug has over 30 years experience in capital markets. He specializes in maximizing portfolio performance while maintaining balanced risk versus yield relationships. And then just a minute, we’re gonna speak with Doug about the future of commercial real estate market in 2023.

And, but first, a couple of reminders. If you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that I want to welcome my guest, Doug McKnight. Welcome to CRE PN Radio.

Doug McKnight 3:29

Thank you, Darrin, thank you for having me.

J Darrin Gross 3:32

I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background. Sure.

Doug McKnight 3:43

Ignite, I am the president and partner at Rreaf Holdings. We’re based in Dallas, Texas. My background specifically really is on the institutional capital market side. In fact, Black Monday was my first day on the bottom floor so so I’m dating myself but we formed our company reef holdings coming out of the financial crisis back in 2010. We felt that we would have RTC to for those of your listeners that that remember the 80s we went through the painful experience with the RTC we thought we would just you know have a repeat. Fortunately, that did not take place. But out of that grew a thesis here at reef that I could then I’m happy to get into with you about the reef story. But But that’s really about background and you know what’s unique about it is for myself and my three partners, we all have unique backgrounds that we brought into this company, which I think has contributed to our success thus far.

J Darrin Gross 5:14

So, if we could maybe just back up for a second, the the marketplace up to this point, money has been pretty free flowing. You know, there’s been a lot of stimulus money that that always kind of is, you know, bastardized as the market based on you know, it’s not necessarily you know, just capital chasing deals, there’s, there’s another element there. If you were to to characterize the where we’ve been, how would you best describe the the market up to this point?

Doug McKnight 5:53

Well, Darrin we’ve, if you couldn’t make money in real estate over the past decade, then you’re in the wrong business. It’s been easy. You know, from a standpoint of cost of capital, and margins, obviously, we are entering into have debt for the latter part of 22, starting to go into the 23 more challenging environment that we can certainly discuss in more detail, but But up until this point, the areas of the market that we specialize that, and I will say that we as a company, we focus on what I like to call build America. So we are, you know, for the most part, each of our platforms that we can get into, you know, we’re focusing on really, your, your working families in your build America, fordable housing and affordable vacations. And we believe that that area of our economy, not only is it the largest demographic in our economy, but it’s the most resilient. Now, up until this point, resiliency hasn’t been as big of a worry. Because all types of real estate had been quite resilient. Of course, going through COVID We had some areas of commercial real estate that weren’t as resilient as others. What would those be? That would be the hospitality industry with hotels, that would be here, more of your luxury, residential, you know, luxury, high rise multifamily. You know, some of those really, you know, took a date. But other parts of commercial real estate, whether it be industrial, or whether it be more affordable housing or more affordable vacations really did quite well, you know, during the pandemic. And as we move forward, resiliency, to recessionary pressures, higher interest rates, etc. That’s going to be more of a challenge. And that’s certainly going to separate those that are more experienced and have gone through market cycles before it sort of understand the landscape better before we even get to that point. Those are the ones that are probably going to perform better.

J Darrin Gross 8:47

As far as asset classes that you guys focus on. I heard you mentioned a couple there. Are you do you have a couple lanes you Stan, are you? Are you agnostic to asset class? Or how do you guys are you set up?

Doug McKnight 9:04

No, no, we’re not agnostic. We we are coming back to that thesis I just mentioned that Bill America we we own today approximately 15 60,000 multifamily units across the south southeast Sunbelt areas of the country. These are mostly your secondary and tertiary markets. We were in this space back in 14 1516. What institutional capital just you know, just wasn’t there. So we enjoy very wide margins. And we really, you know, sort of hung out in that space when there really wasn’t a lot of capital chasing. And that’s one part of our company. One of our platforms, I like to call it that we’re still very much involved with today. I think we got up to about 2020 21,000 units at one point. But over the last 18 months or so, given market conditions, we have had some reversions where we have exited some deals that we’ve done quite well, like I said earlier, if if you haven’t been able to, you know, hit or exceed your, your projections in this market that we’ve been that we’ve been in with the with the interest rate environment, you’re probably in the wrong business. Another platform is beachfront hospitality resorts. And what do I mean by that Abby? Older outside corridor, hotels, motels, in iconic locations on beaches, whether it be the Gulf Coast, the west coast of center of central southern Florida, or the Eastern southern Atlantic coastal areas, we own hotels, motels in those markets. During COVID, those markets were what became known as drive to destinations. And those particular assets did did quite well. We also own a they resort, St. Simons Island called Sea palms, that was also given its location as being a drive to destination. But what is in common with all of those assets is, is the affordability but yet similar experience as something maybe down the road that’s going to cost seven or 800. And I wear 202 50, maybe 300, the highest season on night, same beach, same experience. And so, you know, again, speaking to Middle America, another platform that we have is what we call reef communities that we’re that is more master plan development, where we will be delivering single family homes for sale, single family homes for rent, which is known as PTR, build to rent, and also multifamily, highly amenitized, town centers, schools, parks, walking trails, lazy rivers, pickleball, all the things that are really, you know, desired in today’s world. From a lifestyle sets standpoint, when you get home, from your day at work, you want to be able to have all those experiences really within walking distance. So it’s basically building small towns. We own a little over 3000 acres to south of Dallas Fort Worth, that we’re going to be doing this. And we’re going through the entitlement stages. Right now we have another 3000 plus acres between Austin and San Antonio. So we’re very excited about that. And again, COVID really put a spotlight on the urban versus Suburban. I guess you would call it desirability, if you will. And so that is going to be a very, very large part of our company’s future going forward. The fourth platform is extended stay hospitality, where again, serving Middle America workforce, for the most part, whether it’s traveling nurse nurses, whether it’s construction workers, or whether it’s people that are going to be that are going to need to be somewhere for two or three weeks or a month or more in a particular city for their work. Those hotels were not as geographically level limited scope, we’re building those all over the country. You know, but again, very resilient, very much centered towards America. The fifth platform, which is the platform that I was just late to because of meetings all morning, it is we’re going to be rolling out RV communities. The RV space here in the United States, absolutely exploded during COVID That it was really a very much a growing market even before COVID. You know, but again, the the overriding thesis throughout all of that is really serving North America and being in very resilient times. Types of real estate. You know, we don’t own luxury high rise apartments in downtown Dallas, which is looking at behind me, we don’t know, four seasons at Ritz Carlton’s. So, you know, we try to keep our focus and our mission allied in order to be able to have that resiliency as it relates to the yield versus risk relationship.

J Darrin Gross 15:29

So if a if I understand correctly, basically, the the client tell you serve is, is the focus and in the different properties, whether it be the multifamily or the resort or the, the other properties, the common thread is that class of middle America, kind of just to the middle class kind of thing, the people something that’s affordable, whether it be a place to live or a place to vacation, kind of thing, is that my hearing?

Doug McKnight 16:05

Yes, that is that’s a fair assessment of our of our thesis here, at Reafevery

J Darrin Gross 16:11

I like it. Think there’s definitely a benefit and focusing on something I mean, you get to know that, you know, that client that prospect, you know, what their, what their wants, or what their needs are, and be able to cater to them. And I’m certain that would put you in a better position than then, you know, you’re a little bit in this little bit in that kind of this kind of that kind of thing. And, and definitely probably some some leverage too. I’m curious on on the you mentioned the the hotels, the older motels, hotels kind of properties that you guys have? Do you have a particular brand that you operate those under? Or are they boutique based on the area? Or how do you set those up?

Doug McKnight 17:01

Yes, they are boutique. In fact, we have our own brand. It’s called beachside resorts. You know, what we have found that in the locations that we’re in the approach, the approach to being unique and boutique is actually a benefit. You know, we do from a technology standpoint. And from a back office support platform standpoint, it’s very much of an institutional approach. Because your management, your operations is obviously part of the secret sauce. But in terms of the experience for the guests at those properties, they are experiencing something unique. You know, as I said, I’ll give you an example. We have two beachfront properties in Panama City Beach, okay, we are on 30 today. But when I say 30 day, most most of your listeners are probably thinking seaside or rosemary beach or Palace Beach, because it is the same highway, it’s on a different part of the highway. But it’s the same beach. So you know, our residents are going to come in, they’re going to have intercourse, they’re probably going to drive right, given the the given the geographical hole that the Panhandle has from the southern areas of the country. But they’re going to have the same beach experience. And they’re going to pay a fraction of what they’re going to pay on the other side of 30. I’ll use that as an example. And that’s the type of demographic that we serve. Gotcha,

J Darrin Gross 18:59

gotcha. So, we have a, we’ve covered kind of the, you know how easy it was to make money in real estate. We’ve got a picture of the the types of properties that you operate in. Let’s talk about going forward here and in 2023. What do you see? First of all, if you have a crystal ball, or I mean, I hear projections from this to that. And it seems like there’s a pretty wide spectrum of what people are expecting. What are what are you what’s your sense of? You know how this is going to play out in 2023? That’s fair. What are you What are you preparing for?

Doug McKnight 19:53

First of all, I wish I could find what, but you know, given my mics variance in business every time you do that you’re always wrong. Or you’re oftentimes wrong, I believe instead, what you have to do. And what we strive to do every day is that we try to weigh and measure our risks and measure that against our mission and our purpose. And if those are aligned, then it should not matter to any great extent, the economic environment that you’re in. So if you’re in if you’re in affordability, for example, and you know, that, that your residents or your guests dependent upon the type product is going to be the place to live or want a place to go to a vacation, then it all boils down to affordability from that standpoint, from the guests or resident experience standpoint, from the capitalization standpoint, which is really at the core of your question is going into a, a rising interest rate environment, coupled uniquely in the market, we’re at now, if you couple, a rising interest rate environment, with not as much of a commensurate increase in caps in cap rates, that it creates an interesting dynamic commercial real estate. Typically, if you’ve got a rising interest rate environment, prices, that just cap rates increase, and you’re able to maintain some spread, maybe it’s not as much spread, what we’ve been experiencing. And what I believe we will experience if I did have that crystal ball is that compression. And, you know, you’re getting to a point now, where you are going to have to be dealing with negative leverage. And what I mean by that is, if your borrowing rates are higher than your cap rates, then you’re going into a transaction negative with arbitrage. So, that is a very, very interesting dynamic that we have in the current market environment. And you have to not only be very strategic in the location, in the product type, but you have to be very, very key and lasered in on the operational side. The operational side, within commercial real estate, regardless of the product type, really, is what separates the successes from the failures. And like I said over the last many, many years, you know, if you weren’t as efficient on the operating side of an asset given the interest rate environment and given the overall market economy, you’ve done, okay. But now going into this that we’re faced with, it’s going to be a challenge. And us here at reef, just speaking for our company, we continue to be buyers of commercial real estate, we continue to be buyers multifamily. And like I said, over the last 1518 months, we’ve had some very successful exits, out of assets that basically reached their, their holding period, it was time to, to have an exit event for us for our investors. But going forward, we’re going to be very, very keen on making sure as I mentioned, that the mission and the purpose is aligned with the risk and if you if you keep those factors alive, then you should be okay. It the most powerful thing in real estate is being able to sit down and you know, when you’re able to say no, and you’re able to say you know what, that’s not a fit. That’s, that’s what you know, separates a lot of the successes from failures. The markets are gonna adjust they always do. You know, you see it right now in multifamily rents, for example, you’re finally starting to see a little bit of a breakdown in terms of the rent growth. So that’s a good example of if you if you are having If you’re starting to see some cracks in rent growth, and that’s going to be evident in your cap rates, you got to get back to more of a normal or positive arbitrage. That’s going to allow more deals to get done. So we’re going through a, a transitional period right now. Do I know how many times the finish is going to evolve? I have no idea. My gut tells me that we are a that we could possibly be lower reading environment at the end of 23, that we are at the start at 23. But with that said, if you were to say, okay, Doug, are you? Are you betting your company’s capital stacks in all of your assets on that assumption? No, I’m still looking at fixed rate debt on my leverage. Because I am not wanting to make that bad or that gamble, as it relates to where we’ll begin a year or two. Because it’s very hard to tell, we are coming out of an environment that that really we’ve never state as it relates to a booming economy. A very structured, safe, and fiscally sound housing market, unlike what happened back in the crisis, and then being slammed with a pandemic, that was a true black swan event, if you will. Not to mention the geopolitical climate, everything else that we’re involved in right now. That’s, that’s making it hard to get vapes into a normal type of environment. So it’s, it is unique, but at the end of the day, you’re still dealing with deflationary pressures, you’re still paying interest rates, you’re still dealing with labor, housing, all the variables that go into a market cycle, whether that market is good, or whether that markets, you’re still going through that maybe we got here for different reasons, or maybe we got here from unique reasons. But we’re still here. So you got to manage through it. And that’s what we plan to do here.

J Darrin Gross 27:23

Yeah, no, I think the transition is always kind of the the challenge. And it’s I believe, there’s opportunities in every, every market, it’s whether or not they’re recognizable based on, you know, what you’re used to what you’re expecting, versus, you know, where it develops. And, and, you know, I believe that a lot of times with these financial crisis, the powers that be try and plug the hole, so that doesn’t happen again. You know, so, but there’s an expectation, I think, a lot of times that people think, Well, it happened like this last time. So that’s what we’re looking for this time, when the reality is it comes from some other direction, because that whole has been plugged in. And so but but I think it’s human nature, that there’s this expectation of it’s going to replay itself. And I think more more than anything, is that it’s that the dynamics in play the, you know, the marketplace is just not settled, right now. And that’s, that’s the kind of as we work through, like you were saying that, you know, how long will it be? Or who knows what it exactly it’ll be? It sounds like you’re you’re committed to being conservative with your, your estimates and and and also the ability to say, No, that can’t underscore that enough, as is, you know, the power of that, as opposed to having to do something that’s that’s not as favorable. I want to ask you, you mentioned, you know, exiting a couple of multifamily deals sound like at one point, you’re up to like $2,100. Now you’re down run like 16 1600, if I understood correctly. Are you are you doing those through syndication? Or how is your what’s your investment structure model there?

Doug McKnight 29:11

You’re? Sure? Yes, yes. I’m happy to walk through that. We. As I said, we we had one point back meeting months ago, we owned as many as 22,000 multifamily units. We have had a number of successful exits, I believe we’ve probably exited a little over a billion dollars in in AUM during that timeframe, just in the multifamily sector or platform. I believe we’ve averaged in the mid 20s. In terms of IRR, we’ve averaged around a 2x Multiple on equity on those exits. Most most all of them had really gone through their whole cycle three to four years. So it was really in the normal course of business. However, it was in a very good market, right there. You know, we’re coming out of a market before COVID. And to a certain extent during the COVID, where there was what I like to call stupid capital out there overpaying for assets. But to answer your other part of your question about from a capital structure standpoint, we probably owe today 80, or 90 different assets, each of those assets are in their own LLC, each of their each of those have got unique debt partners, sometimes those assets are combined into portfolios in order to be acquired. And occasionally, it’ll be a one off or a two off, if you will. But from a capital structure standpoint, here at brief, we do not have a fund, an equity fund or a debt fund in house, we don’t have capital that we have to deploy, I sort of look at that as a card pulling a horse. You know, you tend to, at times, make mistakes when you have to keep your capital out. There’s nothing wrong with that model, from the institutional world, needing to find sponsors at GPS library. That’s their model, that model works for them. Because they’re looking for the opportunities that the sponsors like REITs go out and buy, and then they team up their capital. For us, we want to be a whole lot more opportunistic and nimble in our decision making, to just to make sure that we’re not being forced to do something. So with that said, our capital structures really typically look like the following, you’ll have a debt partner or a third party debt partner, whether that’s Fannie Mae and Freddie Mac, on the multifamily side, whether that is a commercial bank, whether that is a REIT, or whatever type of lender fits that particular asset or portfolio, then you will layer in your equity. That equity for us, typically, we will have a preferred equity partner, that will be a third party institutional partner, whether indicated whether that is a find or re or, or private equity. And then we also layer in our own equity. So, we have here at reef a very robust, what I like to call a retail equity platform where we have well over 2000 accredited investors that invest directly with reefs, in reef sponsored deals. That allows us to get, as I said earlier, it allows us to be very nimble, very opportunistic. And it also aligns everyone’s interest, because we’re investing along with our other capital capital partners. And ultimately, we do well after they are when they and we don’t have any institutional capital partners at the corporate level. Basically, our company is for families, myself, and three other partners, their families were privately held. We like to keep that simple.

J Darrin Gross 34:06

Gotcha. With the changing environment, how do you see investors in their expectations? Are they receptive to the story? Are they resistant? Are they saying I’m gonna I’m gonna wait this one out or what’s been the, the, how they perceive

Doug McKnight 34:29

you, I think that the smart investor today, in today’s environment, they’re going to be cautious, and they’re going to be a little bit more hesitant to venture into a new type of asset or to a new type of structure or maybe even into a new sponsor that they don’t have experience with. And I think that is the proven because like I said, it’s we are in a for challenging real estate environment that we had, and I think that understanding the mission and the purpose for why that asset is being acquired, and why me as an investor are considering putting my money into it does all that lineup? And does the projections and the business plan the business thesis for that particular investment? Does it make sense? And then where can you make mistakes? Where can you maybe not do it exactly the way you think you can do it and still be successful. That is where a company like our US, that’s why we live to be in that build America space, because there’s still some room there for markets to move. And for some dynamics, to get a little bit out of whack, whether it’s, you know, debt rates and cap rates, or whatever the dynamic is, but as investors in today’s market, or I’ll speak for our investors, our investors, for the most part, continue to programmatically that’s with us. But I think one reason for that is they are not seeing us trying to venture into new spaces and new territories to go get yield, just for the purpose of going to get yield, you know, we are staying within our lanes, we’re staying in the types of assets that fit our thesis. And so far, our investors are continuing to invest alongside us. But I think the environment we’re in and the environment, we’re probably headed into whether it’s near term, or whether it make it longer than what my gut tells me. I think the prudent thing to do is for any investor is to do their homework, understand the sponsor, understand the asset, understand what the business plan is, and, and diversify. And I think diversity, whether it’s asset type, or whether it’s a geographics, that’s going to be very important because real estate, when you get into a tight environment, and you get into a more constrictive environment, then real estate becomes less commoditized. It’s very easy for real estate to be more commoditized in a very favorable market. But in today’s market, it just is not the case, if that makes sense.

J Darrin Gross 38:00

Yeah, no. And that’s a perfect little segue, I was going to ask you, how do you see sellers expectations? You know, as as we kind of transition into this marketplace for more where we’ve been?

Doug McKnight 38:15

Well, obviously, we’re buyers and sellers. And we, we prefer to be in a position obviously, where we don’t have to sell. And that is the position that we’re in with our assets that we owned advantage, I believe today, we’re a little bit over 5 billion in aum. And we enjoy the flexibility of being able to since we are a vertically integrated company, everything’s under one roof, whether it’s acquisitions, underwriting, due diligence, dispositions, capital markets, property management, asset management, legal accounting, all the different components of a real estate transaction from the start to finish is under one roof here. So you, you really don’t have opposing forces that are making you make a decision that maybe you otherwise wouldn’t have. And, and our our investor base has the same thesis, it may understand that that’s the way we operate out just I’m just able to speak for us. So as a potential seller, we are going to do from a fiduciary standpoint, what is best for our investors. And one of the ways to be able to do that is to as you said, Be conservative in the way that you put together your capital stack. You know, I like to say for example, that debt is a asset that sounds weird sounds backwards. But from a standpoint of a capital structure, your debt component, instead of it being a means to an end, it actually is an asset as part of that structure, because your debt is going to be worth more or less, depending upon your interest rate environment, when it comes time to exit that asset. So, when you’re selling an asset, if you have a very attractive capital structure, and debt structure, oftentimes that asset could be worth more money. And sometimes when you go back to the car pulling the horse analogy, sometimes you have sellers, especially in the environment we’re in now that are essentially being forced to sell, whether it’s because of constraints within their capital stack, whether it is a mandate with their fund that they have to exit in a certain period of time. So we are seeing that, but those that can be nimble, those those that can be flexible, those that are in good quality assets, that are opting to not sell, I believe that would be the better situation. But, but with that said, there’s still very good opportunities in the marketplace, from a buyer and a seller standpoint, you know, like I said, we, we’ve exited over a billion dollars over the last 18 months, we’ve acquired over $2 billion in the last eight to 24 months. So we still remain net buyers, as a, as a company, even though we have taken opportunities to exit.

J Darrin Gross 41:54

Now, I think that’s all been a great perspective and kind of again, speaks to your, your philosophy and in the power of the ability to say no, you know, the sellers, they can’t say no, or, you know, gonna have to take what they can get to get out of their situation. Whereas if you do have some, some debt with some runway, you’ve got a good operating property. You don’t necessarily have to get out right now. So why would you unless you had some silly offer, which I’m guessing a lot of the silly offers are not happening right now. But, hey, Doug, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker, and work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be clients, investors, interest rates, the political environment, however you choose to identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Doug McKnight. What is the biggest Risk?

Doug McKnight 43:41

Well, you know, when I think of risks, just in general, I think of what I said earlier, I think of what is my mission? What is my purpose? what’s the end game, and then I try to measure the risk that’s involved can achieving that. And I’m really, you know, at the core, that’s what risk is right? risk reward. It’s another way to say it. We are quite risk averse. Now. Let’s face it, real estate is a risky investment. Now, that dirt is going to be worth something, right? It’s not like it goes to zero. But a real estate course over the years, it’s been considered an alternative asset. It’s really become more of a mainstream asset over the last seven or eight years, but it’s still a risky investment. And it’s an illiquid investment if you are an investor in the real estate itself, versus maybe a REIT stock. And you’re investing in something that actually has risks but as don’t quit, right So, you know, those are variables that you have to weigh as an investor. As an owner operator, there is potential risk in every single element of the lifespan of owning that asset. From the day that you can begin your underwriting and your due diligence, if you’re not conservative enough, if you’re not realistic enough, if you’re not understanding the market, or the data that you’re being provided by the seller, whatever the case may be, if you’re not doing that properly, that is a big risk. If you underwrite the asset, incorrectly, you know, there’s an expression that you always want to make money on the buy, right? And then when you’re after you’ve acquired Well, during the acquisition process, you have the risk of not putting the capital stack together properly, which is what we’ve already talked about, what kind of debt do I want to buy? What variable debt? Do I want fixed rate debt? If I’m going to do floating rate, debt, variable debt? Am I going to go buy red caps in order to protect that exposure to interest rates? Certainly, with the rise in interest rates, you know, that is sort of, you know, and then, and then during the lifespan of ownership of that asset? Have you managed it properly? What’s the risk of mismanagement, and that is a huge risk. It’s also add, it’s not a risk that can really be measured. Now I like to call the operational side is that is the secret sauce, because you can buy an asset, right, you can have phenomenal capital structure, which you can manage you right into the ground. So that’s a big that that is a big element of risk. From an asset management standpoint. That is where insurance comes into play. We often joke that we’re probably over insured in every asset we have. But I will tell you an interesting story. So we own a hotel in Pensacola Beach down in Florida. And it was one of those 70s 80s Vintage outside of corridor hotel that we basically took off why we just did it, we revitalized it, we put in a lazy river, we put in all these different, really cool features. We put a restaurant tiki bar out of the beach, we did all these things to this property, and it was performing amazingly well until the hurricane came along, okay, well, the hurricane hit the property, but really, visually didn’t do any damage. Now, it messed up the pool, Lazy River, brought all the sand and brought all the rain and wind knocked a little bit off the roof, but really no big deal, we thought. But given the quality of the insurance that we had on the property, you know, our inspectors and adjusters come ahead and add to their credit, they found moisture within the walls. And they deemed it that it needed to be much more extensively repaired. Well, given that is back in the 70s and 80s, prior to current building code. The bottom part of that hotel was below sea level. Well, you can rebuild below sea level, right. So the the short part of the long story is that we completely tore down that entire property. And we’re now in the process of finalizing the high rise, it’s going to be an amazing property. We’ve already returned our equity to our masters, we’re still going to own it, it’s going to be newer, fresher, and it’s going to be a whole lot more bad. And the good news is is not only did to no one can hurt, which is that’s the best part. But our investors, us you know we have a new a new asset. And if we did not have the proper type of insurance. In that situation, everybody would have failed. And that speaks I believe to the focus that has to be put on insurance because often times you And of course, it depends on your lender depends on what you’re required to go out and do but, but sometimes you’ll see situations where assets are not properly insured, whether it’s a fire at an apartment community, or whether it’s a hurricane at a hotel or etc. So we are a big believer in being properly, properly insured. So, you know, I’m a big fan of insurance.

J Darrin Gross 50:33

One of the few, but for the right reasons, you know, I appreciate that example there. Because that’s, that’s what that’s what insurance is. It’s meant to get you back and and be a capital source to, you know, keep your business going. And so teltik worked well for him.

Doug McKnight 50:51

Well, what needs insurance? Until they do.

J Darrin Gross 50:56

Yeah, nobody wants it until they do they don’t have? Yeah. Hey, Doug, where can listeners go? If they’d like to learn more connect with you?

Doug McKnight 51:08

Well, they could certainly visit our website@rreaf.com. By the way that spelled R R, E, A, F. So a little bit of an unusual spelling. The way we spell it goes back to some of the predecessor companies, or the roots of the company. But it’s R r e a f.com. You can contact me through the website, you certainly email me at specific doug@rreaf.com. Feel free to call us at Dallas at Town. Feel free to come by and visit us. We love it when people just show up and want to learn more about our company. So I’m not hard to get.

J Darrin Gross 51:46

Awesome. Well, Doug, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Doug McKnight 51:58

All right, Darrin, it’s been my pleasure. Thank you. And thank you to all your listeners.

J Darrin Gross 52:03

Announcer 52:29

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Owner Financing and Lease Options with Zachary Beach – CRE PN #376

Zachary Beach 0:00

So that’s a prime example that people we work with self employed business people, we have a very targeted end buyer and that end buyer is what helps us create, you know, this three Payday system which we created cash now monthly cash flow and in build wealth and these deals, because we exit with them because we know the end buyer in mind, we then are able to target specific properties and, and really we target stellar that have challenges that the traditional market could not solve. Those challenges could be on one end of the spectrum could be Hey, they’re in, they’re in arrears to me, and they need debt relief tomorrow, which is becoming a primary targeted audience. I’m going to say target a primary people that we work with, especially as its market shifting, and then we have the opposite side of the spectrum as well and that is debt free homes.

Announcer 0:54

J Darrin Gross 1:12

Welcome to commercial real estate pro networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. today

Today’s program is sponsored by Building Insurance and Risk. Don’t put your real estate investment in peril, work with building insurance and risk and receive multiple coverage offers with a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Zachary Beach. Zachary is the an Amazon Best Selling Author of The New Rules of the Real Estate Investing. And co host of the Smart Real Estate Coach Podcast is a partner, COO and coach at Smart Real Estate Coach. In September 2020, they released a revised edition of Real Estate On Your Terms, which Zach co authored. And just a minute, we’re going to speak with Zach, about real estate on your terms, how to create continuous cash flow now without using your cash or credit. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave common we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube and commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome back my guest, Zack Beach. Welcome back to CRE PN Radio.

Zachary Beach 3:12

Darrin, happy to be back here. And yes, I encourage you to go the YouTube channel so you can see handsome we are.

J Darrin Gross 3:18

That’s right. Little teaser, you gotta make sure they know you’re wearing your favorite shirt or whatever they got going on. But no, I’m delighted to have you back man. And looking forward to our talk. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Zachary Beach 3:41

Yeah, I’d love to. So Darrin, it’s certainly been a little bit of time since I’ve been on. So thank you again, I’m super grateful for being back on here. So that was a fantastic show. Those of you that didn’t listen to the first one I am. I was a bartender and personal trainer coming out of college. And I didn’t really know what I want to do in life. As I really didn’t have a big set goal dream I just knew I loved to be successful one day. And when I was about 24 years old, I approached one of the smartest people I know, my father in law Chris at the time, and I said, Hey, I know you’re reinventing your business because he just got out of the 2008 crash. And I said no, you’re reinventing your business and real estate is hey, I don’t know if I’m gonna like real estate at all. But I know it’s gonna be a heck of a lot better than staying up late at night to have a drink and waking up super early in the morning training people who didn’t want to be trained. Because that’s primarily my personal training is your training people who don’t necessarily want it the results they just want to pay you to wake up in the morning with them. So I reached out to him and I and we had that conversation so I added another thing onto my plate. So now instead of staying up late we waking up early in the morning and then sleeping during the day. I now was making cold calls to expired listings throughout the day, or reaching out to people that were on the market at one point in Time with the realtor. And for whatever reason it didn’t sell. I did that for about from December to April. And then April, I started to get the hang of it. So I decided to do what every smart person would do. And I burned all my bridges, I went ahead and I quit my bartending job and stopped taking training people in personal training, and jumped into real estate full time. So there’s a bit of a risk that too, because all of us that work together, me, my father in law, my brother in law at the time, and my wife actually end up doing this as well, we all more or less, eight will be killed. So it wasn’t like I was walking into that seventh cushy salary position, I was walking in the sale. And once I jumped into that, it took me about six months to do my first deal on my own. But we ended up doing some deals in between the partnership. And from that standpoint, moving forward, I haven’t looked back, you know, it’s been going on eight years now. And real estate investing primarily in the creative financing space, both in single family commercial and in Maltese. And then and then also now been partner in our coaching where we teach people exactly what we do with our family business, on a day to day basis in our helping, you know, hundreds of people going on 1000s of people around the country be able to build and scale their business this exact way. So they could be similar to me, which is you know, escape from their W two and now to be able to build a fantastic business to create the life that they choose.

J Darrin Gross 6:33

I love the the background there and and, you know, like said burning all of your your bridges or burning the boats or however you want to say that and and committing and I mean, that’s, that’s a that’s a big risky, scary step to be able to do that. And and then to be able to, you know, go and like said he would you kill and be successful in it. That’s, that’s awesome. So let’s talk a little bit about what the model was he you mentioned, you know, you’re doing cold calling on expired listings. And then what was the the target the prospect that you were seeking most? What did they have that you were looking for?

Zachary Beach 7:19

Yeah, so as a as a family business, and really what we the model, which we teach our associates, now the people we buy into real estate with Is it primarily approaching approaching residential homes, where we can go ahead and acquire those residential properties through one of our three methods, which we kind of umbrella that is creative financing or buying on terms. Because we’re able to go ahead and acquire these residential properties, we’re then able to exit the deal the very specific way because we have a very specific target buyer. Now, these are the buyers that are outside of finance ability today. And they need time either for credit repair and credit enhancement, or seasoning. I was one of those perfect fit. To give you an example, when I was about a year into my real estate career, my wife and I were trying to move two years, we’re trying to move out of Newport, Rhode Island, which is very city driven Taurus driven area into one of the strapping towns that we could start raising at the time, it was about our one year old son. So we ended up acquiring a piece of real estate on a lease option, too. So that’s one of the methods in which we use and we will combined and move into this home be treated like homeowners, even though we didn’t have our own loan yet. So that way we could work towards becoming financial and becoming bankable so that we can eventually go ahead and buy that home and put it in our own name. So that’s a prime example that people we work with self employed business people, we have a very targeted end buyer. And that end buyer is what helps us create, you know, this three paydays system in which we created cash now, what’s the cash flow and in build wealth and these deals, because we exit with them, because we know the end buyer in mind, we then are able to target specific properties and and really we target stellar that have challenges that the traditional market could not solve. Those challenges could be on one end of the spectrum could be Hey, they’re in they’re in arrears me, and they be debt relief tomorrow, which is becoming a primary targeted audience, I’m gonna say targeted primary people that we work with, especially as its market shifting. And then we have the opposite side of the spectrum as well. And that is debt free homes, free and clear property sellers that are in a great financial situation. And we wouldn’t be looking for more of residual income or to get a maximization of profits from that property, a property that they know like and trust so once we have this targeted seller and the targeted buyers in between as the real estate investors we see All that challenge breaks that gap. And that’s how we’re able to create these these lucrative real estate deals. Without like you said at the beginning without using large amounts of cash raising capital, go into bank personally guaranteeing debt or signing personally on any loans.

J Darrin Gross 10:18

I think what’s interesting to me is that you first, you know, it’s fair to talk about your buyer. And certainly the the person you’re buying from, you’ve got a pool, if I understood, right, you have a pool of people that you know, that you have wouldn’t be marketed to. And you’ve you’ve identified that for whatever reason aren’t, aren’t able to buy a home just yet. But they’re, they need a place. And, you know, you tell me a little bit about that. I guess that’s kind of what I’m curious cuz I was thinking more on the front end of identifying the property that you’re trying to acquire. But tell me a little bit more about the potential buyers that you have

Zachary Beach 11:02

is to roughly 60 to 80% of the nation cannot walk into a bank and qualify for loan, even though they want to become homeowners. So it’s a massive pool of buyers. And it’s actually growing as interest rates rise, the amount of buyers in our pool, the people we work with gross, it’s so relevant in the fact over the last six months, buyers that could qualify for loans at a 3% interest rate can no longer qualify for loans at a five or 6% interest rate, because their debt to income ratio. Now, it doesn’t mean that they’re not good buyer, though, a lot of the people that were set up to become homeowners, and now the market had pushed them out, have downpayment or cash in their bank account, they are ready to become they want to become homeowners. So we just helped bridge that gap throughout that process. And then there’s that large pool by very similar to myself, that are self employed. And it’s just banks require what we would call seasoning. So 24 months, you have to show that you make a certain amount of money so that they can then qualify for a loan. Now, what most of us are taught as being self employed is show the least amount of income if you don’t want to buy anything, right, so you have to pay less taxes. But then as soon as you need capital, or do you want to become a homeowner, because you want a loan, you now have to switch that which means that you and your CPA or your team now have to start showing that you’re making more income. And that takes a transitional period. And we know like and understand that. So what we then do is we work with these buyers, we placed them in homes in which we have acquired or owner control, they then come in with a non refundable deposit that locks their space in, but it does get credited off the purchase price, they then are paying monthly rent on the property. And then in the future, they will then go qualify for a loan and at that point in time, they will then pay us off and they’re willing to pay off the seller or we just get paid out because we have ownership depending on the structure we did on the front end. So this is a massive pool of buyers that continues to grow as the market shifts. We’ve had many conversations to plant the seed and and toss it back here. Many conversations that as real estate investors, when there’s a down market, traditionally, it’s an up market for investors, because the investment didn’t capitalize on the down market, which means that buying so want to find things abroad, we then have the ability to have more available inventory to not serve it the buyer that were kicked out of the traditional market or continue to be kicked out of traditional market or just No, never thought that could even be a part of the traditional market. And we show them that pathway to homeownership.

J Darrin Gross 13:50

Got it. So we talked about your buyers. And you mentioned kind of the sellers. I guess is there a an ideal situation? Is there a minister anything? Because like a lot of times, like you mentioned like there’s people that you identified that they they either own their property outright, or they need need to exit something right away kind of thing. Do you find these to be unique to a particular market or particular segment of the market? Or is this just universal? Across the board? There are opportunities up and down every block?

Zachary Beach 14:32

Yeah, it’s universal across not only across the country, but I mean, we primarily work in North America across North America. The debt free houses other statistics on that roughly 1/3 of the properties in the United States are debt free. So that’s universal across the entire country. And then I’ve even heard again, don’t quote me on this, but I’ve even heard that in Canada. It’s even higher. Almost 40% of the properties are debt Free. So that pool one alone is is a massive pool of sellers that you could work with. And then the other standpoint is, look, there are always people that are going to be going through transitions in life that are always going to have fine certain things with finances that may, you know, bring upon a downturn for them with their family, death, divorce, unforeseen circumstances, and those are the people that we’re looking to help. It’s not the traditional sale, that you know, they want all their cats today at a certain price. And it’s like, you know, beautiful property that’s gonna get swallowed up on a traditional market, you know, tomorrow, it’s the houses in the people that just need that need a little bit of massaging or, or have a little bit of a challenge that we know that we can solve that the traditional market can’t. And then they’re starting to become right now a lot of sellers that are turning towards should create a financing as well, because there’s no reason why they have to pay you know, Commission’s if they don’t need their money today, there’s no reason why they have to go through the traditional, the traditional means of selling a property where they have to go through 3060 90 180 days of kind of going through this, you know, traditional cycle of dealing with banks, there’s no need to especially if, again, they don’t need their capital today. But on the extreme side, and again, the focus, I believe, and we believe is going to be in this segment where there’s not a ton of equity in the deal, they may be in arrears, because the shifting of the market, and because a lot of people have still not been able to climb out of this COVID reading area or this last two or three years. And they’re barely trying to make it out. And they’re looking for a way to exit and to relieve themselves. And I believe that that’s that’s only going to continue. And we have a fantastic solution for that. And maybe you’ve heard of it before, but it’s subject to deals are buying property subject to the existing loan, which really gives us the ability to go in, pay down the arrears or buy a property for what the seller owes, have the seller be able to walk away, not have their credit damaged for the next many years. And actually, in some circumstances we have built to increase their credit because we’re now making the payments on their behalf, and they can walk away and then we’re able to now service that that buyer that we originally talked about, because our buyers are willing to pay a premium on the house because we’re giving them an on ramp. So now as investors, we can almost create equity in the deal, because we can add a premium on to it and now create profits where they weren’t originally profits. And where many real estate investors wouldn’t pass it on. Because the wholesale fix and flip world, if there’s no profit margin, they can’t buy it, you know, 40 to 60 cents on the dollar, then they passed it. And so we’re able to really fill that void and out create a really great stream of income not only for us, but then provide a solution for both sides of the party.

J Darrin Gross 18:00

So if you were to guess, the number percentage of deals that you guys acquire, you mentioned the the ones with no mortgage versus the ones where you know, people have either there’s some arrears or, or they need to need to sell. How many of those if you had to guess on a percentage wise, how large is percentage of people that are in arrears, versus the the paint off mortgages.

Zachary Beach 18:32

Yeah, some estimates that come to mind based on our three strategies. And this was previous because we’re actually making some strategic shifts right now, because of the way the market is shifting. If I look at 10 deals, I’d say out of those 10 deals, it’s going to be about one to two are going to be owner five to deal. So the debt free house is another two to three will be the subject to deals with the houses that don’t have a lot of equity. And the remaining balance of probably five, four or five are going to be lease options, which really fall in between there, which is you know, the house has a mortgage on it. And the seller is looking for some an alternative option or to sell. But they also have equity in the house as well. So that tends to fall there. And the lease option is a really simple way to get involved in creative financing and really a pathway in which we bring a lot of our brand new real estate investors through. Because the difference on a lease option versus those other two options are that the title does not transfer, it’s a way to control an asset way to control real estate, they’ll be able to build an equity way to control an asset but the title doesn’t transfer. It’s a lot simpler, have a conversation and transaction with a seller because you’re really just drawn up a lease purchase agreement or lease option agreement, structuring the terms of the deal, you then can literally move into that property or buy that property the next day if you chose to, even though we always build in contingencies to get Have our our investors time in order to locate buyers. But that’s a real simple transaction or to get involved with. So I wouldn’t say that about half our deals. And then the other ones, the other, if I looked at 10, do get tend to block.

J Darrin Gross 20:13

So let me ask you this. So the the numbers are you describe the event, a couple out of 10, that are owner financing. And then you’ve got the other options where there’s either no equity, or they’ve got equity kind of lease option going in, if you had to guess how, how often does a buyer of one of your deals not perform? And if that does happen, what what’s the solution for the the seller? Or how do you mean you just release it resell it? What’s the what’s the percentage of a fail versus and then also, what’s the solution go forward?

Zachary Beach 20:58

There, I’m glad you asked, because this is the major separator because of the systems and processes that we’ve created to actually have buyers execute on the deal. Because if you’ve listened to any other podcast before with somebody, say like myself, you you’d have, you’d probably get the opposite stats. And that is we qualify our buyers about 95% of time they actually execute their agreements, versus if you look at the rest of the industry. And that’s why they rent to own people kind of like that actually work better because probably about one out of 10 actually survived. And the reason why this happens is because we have a very specific process in which we walked them through where we not only us, but we utilize third parties that have that used to underwrite and also can measure the credit score or if they need credit enhancement or seasoning Well, we can create a mortgage readiness plan surrounding a couple of pieces. One could be what’s their downpayment or their non refundable deposit. Now that non refundable deposit is extremely important because it gives them skin in the game one. But it also is going to help them qualify for better loans when they go get a loan because that non refundable deposit is credited towards the purchase price. And it’s going to be shown when they go buy the house. So that’s number one and age throughout their lease term, because they have a specific timeframe based upon what we get back on their mortgage readiness date will then create a customized agreement around that we will help them increase by having them put down more downpayment money throughout their term, which that again increases their downpayment, which helps with their loan. But what it also does is it puts their feet to the firing always keeps it top of mind that they are investing in buying this property to become a homeowner versus you put a down payment now and then three years from now, we hope you perform more than likely not going to happen too much time. It happens in between those. So that’s that’s the first piece and also based upon that downpayment wall to look at their credit score, right? Where are they today? And where do they need to be in order to qualify for that loan? Or are they self employed and they need to be they need 24 months to show how much money do they need to show in order to qualify for that loan, and then throw that term, we will have them be a part of one of the third parties that we work with that will maintain and check and help them increase their credit or show and increase their season. So now they really have not only us as the investors, but we’re also bringing in specialists that help people get to that point. So we walked them through a very specific program. That is very important not because when we entered into this industry, and now we have over 50 years of experience in real estate, between myself and my team, I follow along my brother in law. When we walked into this, we noticed that there were too many people in our space shouting from the rooftops that, hey, you can place buyers in the property, click non refundable deposits, let them go there. And if they default, they default whatever, it doesn’t matter, you just do it again. You do it again. Do it again. You know, maybe legally that’s okay. But morally and ethically that’s not something that we stand by. So we want to really create a system that would generate buyers in order to get them to the finish line. Now into the second part of question, which is what happens if they actually do default? Well, if they default, then unfortunately they are going to lose that non refundable deposit and they would have to move out of the property. And then depending upon what type of structure we bought the property with will determine our next exit. If we bought the property we have plenty of time left over being before we have to either exercise our option or pay off a balloon payment that we may stick another buyer in the property or work with the next buyer to help them qualify for loan. If we have a short timeframe, then we may look at some alternative options like selling it traditionally, or, or maybe renegotiate with the seller in order to get a better terms. So there’s many different ways in which you can pivot. And I’ll be honest with you, any time in which we needed to pivot in any of our deals, whether it’s us or us partnering with people and doing their deals in their neck of the woods, there always ends up being a better solution and at the increased profits, because it allows you to reevaluate that deal and kind of pull on some different levels in order to create a better exit.

J Darrin Gross 25:29

I appreciate you going through that, because I think that like you, you indicated, I think the the notion amongst most investors is like it’s a great deal. And if they fail and good for you, you get to do it again and again, and again. And again, as opposed to like creating actual success stories. There. I’m curious, so let’s talk about the investor, you guys as the deal makers, and your students describe, where’s the cash flow in the spread? How are you guys making your money? We’ve talked about buying the properties from the sellers on a couple of different ways. We’ve talked about the buyers in how you put them in and get them to be actual buyers. How many? How are you guys making your money? And how do your students make their money?

Zachary Beach 26:19

Yeah, let’s talk about what the people actually want to hear about on the podcast. And that’s exactly cash flow, the beginning to solve all these problems. So I trademark three paydays sit them work like this. So when you go ahead and you acquire a piece of real estate, you’re buying the property from a seller, you’re gonna agree upon typically three different terms. One is going to be the purchase price, or the locked in amount of equity, we tend to operate in equity. That way we can create principal pay down in the deal, even if we don’t own it, so you’re locked in equity, then secondly, you’re going to have your monthly payment, which could consist of if it’s owner financing, it’s what you create with the seller, a large portion of the time, we have to create principal only payments, so 0% interest monthly payments, if there’s an existing mortgage, then you’re going to be paying the principal interest taxes insurance on that mortgage, you’re gonna be paying the P idea, then you’re gonna be then the last term tends to be the, the term or when the property needs to be kept out. On some of our deals with no end date, like on the subject to deals where there’s no equity, we just go ahead and we acquire this property. And at some point in the future, we’ll pay it off, there’s no be no end date. If it’s an owner financing deal with some of those could range from a 30 year mortgage to to a five year biller. Lease Option, same thing could be a 10 year deal to a three year deal or a five year deal and anything in between. So then there’s that end date that things need to be kept out on. So once you agree upon those terms with your seller, you’re then going to sell the property. So you’re going to take ownership from a purchase and sale agreement, or you’re going to buy it on a lease purchase agreement. Now we’ll give you equitable interest in the property, and now allow you to sell it. So now you go ahead and sell it and we exit our deal one of two ways. You either exit on a rent to own or a lease purchase. Or we exit on owner financing, where we now become the bank. And there’s techniques and tools that we use along with our attorneys in order to now structure where we now become the bank. And where you’re going to now sell that property for a higher purchase price who’s our buyers need time in order to qualify for a loan, so they’re willing to pay a premium, we’re also going to sell it at a higher monthly payment. And then typically, we’re going to sell it at a shorter term. So that way, we have the ability to make any pivots. If for some reason this buyer is unable to qualify for a loan, or one of those could be there’ll be give them extra time others could be that we take back the property. Now that we’ve constructed both the seller and the buyer, we now what we’re going to do is we’re now going to collect a non refundable deposit from our buyer, which is our pay day one, which tends to be anywhere from three to 10%, down and sometimes up to 20% over time. Then our payday two is our cash flow or residual income. Remember, you’re not a landlord, you’re just simply collecting a payment and then paying what the seller or the mortgage company. So it’s just residual income coming in. That’s your payday two. And then your payday three is going to be the equity that you built into the property which simply consists of two different things. One is if there’s any premium leftover, and too is the principle that has been built into the deal over time. Give you one example. Let’s say you buy a property and you’re making a monthly payment of $1,500. In 500 of that is coming directly off the mortgage or as the principal portion of it every single year that you’re in that deal $6,000 coming off the mortgage, because you locked in the equity with the seller and not a purchase price, you are the beneficiary of the principle payment. That is how you can even create equity in the deal without ownership. That’s why those lease options are really easy for people to get involved in at the beginning. And then as the real estate investors start to do more and more deals, we continue to help them up level their game by getting an owning real estate through owner financing and subject to deals.

J Darrin Gross 30:40

I like the multi prong approach there with multiple revenue streams or the gives a deposit you got the cash flow and then the equity on the on the backs. And that’s, that’s awesome. We’ve been primarily talking about or at least the the conversations been focused primarily on like residential properties. Can you tell me a little bit about some of the commercial properties? You found that that work or some of your students have found, as they were, you know, as it doesn’t work with commercial properties?

Zachary Beach 31:13

Yeah, absolutely. So we bought we purchased a couple multifamily. It was a six unit and I remember specifically it was when I first got involved in real estate I was sitting there and my father in law, Chris is actually purchasing it with his IRA, a six unit, we acquired it from a seller who inherited the property, we would just do direct mailings to these very specifically targeted mailings to commercial real estate, Maltese or commercial in a very targeted areas because we knew and liked the management company that was there. We went ahead and we acquire that piece of real estate. And I remember at the closing, because we purchased it the very first or second day of the month, the seller had to hand over all of the security deposits and paying the rent. So we had to get paid $7,100 At that time of closing. And we ended up buying it on owner financing. And it was principal only payments, I believe it was like 1500, all of the above principal only payments, we went in course tighten things up, add some additional revenue streams to it. And went ahead and we ended up exiting that deal. Instead of refinancing and keeping it we ended up exiting that deal and selling it to another company that was coming in and buying units and ended up being over six figures in about 24 months on that turnaround on that six year. So that’s the power of owner financing and principal pay down of 0% interest is you can create massive amount of equity in a deal really quick, especially as you’re increasing rents over a short period of time. So I ended up doing that. So that that’s a great example of multifamily is that we work and we tend to work in 10 units or less. Specifically, because they’re the mom and pops usually owned them, it’s a lot easier to count on work with mom and pops and structure these types of transactions, even though we’ve been presented recently, to the market, our 1818 units 21 unit and mixed use buildings that were open to these creative terms. I’ll give you one more example. The commercial building, it’s a mixed use building that we bought is actually our home base. And our housing is all of our companies. It’s right outside of Newport, Rhode Island, which is a very prominent area. And we ended up purchasing that property from a seller who ended up passing away recently for estate planning purposes. He had a building he knew he might have known he was getting older, he still had his son, his wife are still around. He is a big landowner and commercial real estate owner. And we ended up structuring owner financing on that deal over a 20 year term. And, you know, once he passed away, we just continue to pay as a date. And I remember getting a we got a phone call from his wife and she just thanked us for you know, continued to make the payments, even though he went through this transition. And you know, because she lives off from all the real estate investments that they created. So now they’re fantastic group of people to work with are people that are doing this strictly for estate planning purposes and don’t want a lump sum, but they want to create this residual income, especially as their they may be leaving family members behind and they want them to benefit from that piece of real estate that they created. Now we we of course fix this thing up and we did a lot of work to it. But it’s raised an equity almost $400,000 Over the last couple of years because of the improvements and that we made to the commercial building but fantastic deal for both parties.

J Darrin Gross 34:45

That’s That’s awesome. Awesome for both you and then appreciate you kind of sharing the commercial aspect of that. Trying to think the there’s something else I was talking about commercial It seemed like there was something else I meant to ask in. Last thought there. But anyway, let’s shift gears here for a second of what could I do, I’m an insurance broker. And I try and work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk, when that’s not an option, we’ll see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation, could be their clients, investors, tenants, the market interest rates, whatever you consider to be the biggest risk. And for clarification, again, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Zachary Beach. What is the biggest risk?

Zachary Beach 36:11

Yeah, it’s a fantastic question. Because it’s something that we talk about quite often. And it’s something that we talked about a lot with our, our students, and that’s because we help a lot of students leave their corporate jobs, and become real estate investors or become business owners, because it’s our big belief that the W two is the biggest threat. Who is the biggest risk because you have zero control over the outcome of whether or not you have a job or not, there’s too many other parties involved. There’s too many other people that that can control your destiny. It’s not until you put the risk or you go outside your comfort zone and start building the life that you choose through either real estate investing or business. That way you can start taking control of your life. No, all the predictions are right now that we’re about to go into a downturn. I mean, nobody can really predict me in the billionaires can predict, but the feeling is that we’re shifting. And when there’s a shift, there tends to be layoffs, there tends to be businesses out there cutting back on their labor, and they start really consolidating. So you just never know, if you’re the one that’s going to get cut back on as as being you know, instead of w two. So that is why there’s a large group of people that are consistently and we’re starting to see it are consistently applying to be you know, in our programs that have corporate jobs, and they’re looking to first and foremost, offset expenses by building a real estate portfolio. And then secondly, once they go ahead and build that portfolio, create a transition plan to now be in control of their business, and be in control of their lives. And you the amazing thing is once you see people transition and escape that that job, the new life that’s built into them in the acceleration process of their life, personal development, their wealth, how it dramatically starts increasing, once they have full control of it and can consistently day in and day out work on building that better life. So the W two in my eyes is always the biggest risk when it comes to you know, say real estate investment when it comes to you personally inside you live.

J Darrin Gross 38:36

Very, very, very well said. I think the you know, taking control of your your situation. And also recognizing opportunities and and, you know, what’s that old adage, you know, you give a guy a fish you can eat for a day and teach them how to fish you can eat for a lifetime kind of thing. You learn something and you can apply that skill and, and grow your assets and have a more secure future for you and your family. And it’s definitely a good way to go. So, Zach, where can listeners go if they’d like to learn more connect with you?

Zachary Beach 39:13

Yeah, let’s ensure that each and every one of your listeners actually get our Amazon best selling book real estate on your term as I think that that can be a fantastic first step for you to you know, avoid the upcoming risk of your W two and really thinking involved in real estate investing. So the way you can find it and go grab it, we’re gonna we’re gonna ship it to you for absolutely free to be a hardcover book. You just got to wicked smart books.com/c r e p n, what gets my books.com Plus CRE PN. Go ahead and grab your book and we’ll ship it out to you soon as you go ahead and fill out a quick form.

J Darrin Gross 39:54

Awesome. Zachary beech. I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it learned a lot, and I look forward to doing it again soon.

Zachary Beach 40:06

Awesome. Thanks, Darrin. Appreciate your time.

J Darrin Gross 40:08

All right, for our listeners. If you like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 40:29

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Hotel Investor Syndication Deals with Kyle Tushaus – CRE PN #363

Kyle Tushaus 0:00

The current vehicle that my business partner and I are just now launching where the approach is taking the sort of institutional approach the, you know, commercial, commercial type deal or thesis that we might use for any of those product types, but putting it through a syndication model, which is more akin to what’s being offered for your individual accredited investor and so we’re keeping it below an $8 million or there abouts deal size and using a syndication structure to actually put the deals together. With the with the idea being we’re gonna offer the institutional type returns and see structure which is better than what the syndication landscape is offering investors in offered in that portion of the market.

Announcer 0:46

Welcome to see our adn radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:06

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Kyle Tushaus. Kyle is a partner with Pine Ridge capital. He has a background working for family offices under a sponsorship model focused on acquisition. And in a minute, we’re going to speak with Kyle about syndication and the current macro environment, and how that influences your micro investment decisions. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest. Kyle, welcome to CRE PN Radio.

Kyle Tushaus 1:26

Yeah, thanks for having me to be here. This is actually the first first podcast ever I’ve ever done. So this is a interesting experience.

J Darrin Gross 1:26

Well, we’ll go easy with you then. But no, Kyle, I’m glad you’re here. And looking forward to our conversation. Before we get started, if you could take just a minute and share with listeners a little bit about your background.

Kyle Tushaus 2:02

Yeah, my my background, prior to commercial real estate actually got started as an engineer in the oil and gas industry, which is was interesting and highly technical and exciting. But it’s definitely something that’s more enjoyable when you’re in your early 20s. I’ll say I moved around a lot and eventually got to a point where that was either going to send me overseas, or I was going to need a change of change of scenery, so to speak. And I just gotten married. So I took option B and I had some opportunities sitting on my plate at the time. When I was given that option to try out some commercial real estate deals. They were kind of centered around the energy industry, kind of without going into too many details. A friend of a colleague had bought some properties that they wanted to redevelop and there’s some hidden oil wells on him that he didn’t know about. And so I got started by helping him mediate that issue. And that was kind of the impetus for getting into commercial real estate. And within the commercial real estate industry prior to this, I’ve worked for two family offices across all product types, heavily focused on hospitality, office and mixed use across both of those that was probably the bulk of the dollar amount that we were focusing on were those three. But like I said they both were opportunistic.

So just about every single product type we got into I think the only thing I can say I’ve never really touched is self storage or mobile home parks. Those are the two asset classes where we kind of steered clear, but following those two sponsored a few deals on my own. That was in 2020 which was a great time to go out as a GP. And, you know, got a few deals done. Despite everything that was going on in 2020 I was really excited because I thought I would get some some screaming deals, but you can even keep it pretty good poker face going when you don’t have to pay the mortgage and whatever and had their death pause. I think that was probably the toughest negotiation landscape. I Experience, just because nobody actually had to do anything. So you kept getting 2019 pricing on, you know, zero cash flow in some cases. And in that approach, most of the LP focus was on institutional firms. And so I was kind of mimicking what I was doing at the family offices where we build out the LP tranche with one, maybe three, at most capital groups. So I was rinsing and repeating that model, because that’s what I knew. But it came with a couple of issues, because when you only have say, one LP, they know they have a lot of leverage against you. And so I got retreated 100% of the time on all those deals. And that led me to the current vehicle that my business partner and I are just now launching where the approach is taking the sort of institutional approach the, you know, commercial, commercial type of deal or thesis that we might use for any of those product types of putting it through a syndication model, which is more akin to what’s being offered to your individual accredited investor. And so we’re keeping it below an $8 million or there abouts deal size. And using a syndication structure to actually put the deals together with the with the idea being we’re going to offer the institutional type returns and see structure which is better than what the syndication landscape is offering investors in offered in that that portion of the market.

J Darrin Gross 2:56

Got it? So one of the go back here to so you mentioned your experience in the institution, institutional investment world, and kind of a limited number of LPs that you dealt with and and how they treated you differently when you went out and tried to do some of the smaller deals. And then the retreat. I wonder if you can just expand on that a little bit. Because I you know, it’s funny, I hear I’ve talked to a number of syndicators. And I don’t know that anybody’s ever, you know, kind of shared the backside or, you know, what goes on behind the curtain kind of thing in those situations. But it was kind of fascinating when I heard you say that. Wow, that’s, that’s a that’s a surprise when those lessons you only learned by going through it, I suppose.

Kyle Tushaus 3:02

Yeah, I think we touched about it. We touched on this a little bit when we were face to face several weeks back anyway, when I was kind of talking about the hardware and I went through Yeah, so on those. Yeah, the, and again, I’ll caveat this by saying this is during 2020. So it was an interesting time where I feel like people were more keen to burn a bridge, maybe than they would have been in normal times, because they thought to hell with it, like, who knows what’s gonna happen. And maybe I’m just being too nice. I don’t know. But you know, the, I won’t, I won’t throw out any names, because that can come back to bite me. It’s a very small industry, despite the, you know, the dollar size of the industry that we, we operate in. But a good example is, you know, one we had a really clear thesis on, you know, what the returns are gonna look like, we were going to convert a hotel into apartments, which is now a thesis, I think, just about everybody has seen. But one of the last things I did in the family office direction was help launch a fund for that thesis and said, Okay, well, I learn how to implement this, I’m gonna go do one on my own, and had found one where there was several characteristics about it that led to, you know, you had to mess it up a lot to not make a good amount of money because it was by right zoning, the city already had tried to get this to happen in the past. So they rolled out the red carpet. For me, when I said, this is what I want to do with the property, they said, We’re going to fast track the approval on this, the property was 18 separate buildings. So I could actually renovate and convert them piecemeal, and not disrupt the operation. So it wasn’t even a hey, let’s take our cash flow down to zero and renovate this as fast as we can, I could still operate the hotel and turn over one building at a time on my way to the conversion. So there were all these things that were stacking up where it’s like, you know, despite it being 2020 Look at all these ways that we can protect our downside. And that’s not even just you know, speaking of the difference between the price we were paying for the hotel and what the rents were in that market and they were all extended stay too so it’s not even like I had to convince people to live in a shoebox they were already 520 square feet or above. So it almost looks like the stars were aligned and during 2020 My thought was oh, this is a this is a no brainer. This is going to be great and LPs are gonna love it. And so we got through DD is last week. And you know, this happened several times, but this one was particularly, you know, stung particularly bad because I had lined up all these contingencies. Closing on not closing but going hard on Friday. They call me on Monday and say, You think you can get a couple extra 100 Off $100,000 Off the park. Just price, we would feel better if this was at least $500,000 off, we’re already like at a good price. And so you guys are just kind of, you know, being mean, like, we should just do the deal the returns with great, why risk it. And they, they said, well see if you can make it happen. So pulled some strings, you know, kind of probably pissed off the seller a little bit, got the 500 within 24 hours went back said, Alright, let’s do this deal. Well, you think you can get another 750 off. And so what was actually happening is they just kept coming back with requests that we’re going to get harder and harder, and we’re not going to get fulfilled by Friday. So on the second request, I called them out on it, I said, you guys realize that any another dollar off on this deal doesn’t get it over the like, that’s not the crux of why this should or should not be done, we are far beyond the level of, you know, suitable risk adjusted returns. And they pretty much just blatantly said, Well, here’s the thing, you’re going to be 10% of this deal is the GP which is standard, we have your 10%. And we kind of just want to do the deal without having to pay you either any management fees, or promote or anything like that. So what we’re going to do is, either you take our terms, or we’re let’s get in unless you fall out of contract, because you only have three or four days before your money goes hard. And we know that’s not long enough to get another LP on board. So it’s either going to be this or we’ll let you fall out of contract. And we have the sellers number now we’ll just circle back with them. And we’ll buy it. So that was that was kind of the standard operating procedure, just about every single time towards the end of the deal. And when you’re in that position, you kind of just, you know, I used to have a kind of a mentor that said, look, at the end of the day, you should drop your ego and who gets paid wins in this game. And I agree with that. But then also, if something keeps occurring like that over and over and over again, you have to go reevaluate if you reevaluate your business model, and that’s, that was one of the experiences that kind of kind of highlights the the games that were being played maybe in 2020. Or maybe that’s just luck of the draw, maybe for me, but I’ll say that it, it was still a kind of a standard procedure or standard move. Even when I was at the family offices. The Retrade, when the clock was almost run out was was kind of the kind of everybody did it. Just because they knew they could it’s almost like, hey, once I tie up the property, I’m gonna ask for money off, because the worst thing the seller is going to do is say no, and then I’ll just say, Okay, well, I’ll still do it anyway. But you might as well ask. So that’s, that’s what pushed me in this direction.

J Darrin Gross 3:26

It’s fascinating to hear kind of the inside baseball talk there a little bit about, you know, some of the more the details and the nuances of the negotiation there. Do you find that to be or was it a case particular to one or two LPs? Or was it more just the time? Or do you think it was just kind of the way the big boys were? Were prepared to play?

Kyle Tushaus 5:20

Yeah, I want to say a lot of it had to do with the time in the market environment. I mean, everybody thought the world was gonna end, right. And I was kind of approaching this with I had just gone out in January of that year saying, Alright, I’m gonna do my own deals. I had no, you know, I, I was not in any capital stacks, I was pretty much all cash. So when COVID hit, you know, from an outside perspective, looking in, you can either think that was lucky or brilliant, because I had the liquidity and I thought, This is gonna be great, I’ve got flexibility, and I can go out and, you know, pick up, you know, bargains. And that’s not what panned out, because, like I said, No, you know, nobody had to pay their debt during that time. So they could kind of dig their heels in and say, Nope, you’re gonna pay me on 2019 numbers, no matter what’s happening. And I think some of that trickled over to the actual cash stack negotiations, where the LP said, you know, look, we don’t know, you know, what’s going to happen here. And even if you’re talking to us about something like multifamily, that should be safe. We’re, you know, the, the downside of doing nothing, in that time was zero. And so I think they probably thought, like, why not? Like, let’s see if this guy will say yes to just an egregious deal, because we can, you know, it’s certainly a benefit. And potentially, if you’re sitting in that position, trying to get a deal done, maybe a downfall of our industry, but there’s no called strikes here, right? So I can, I can look at deals all day, doesn’t really matter. I might have opportunity costs, but you know, the human brain being what it is we don’t really gauge opportunity cost correctly, and so the do nothing. The motivation was pretty high at that time. So I think that was probably the bulk of why that panned out that way, but I will say that, you know, was negotiating with LPS from Midwest or west coast, a couple on the East Coast. The These deals were all, you know, Detroit or westward. So this is not, you know, I didn’t look at anything on the east coast. But I would say that I had a similar experience with LP groups regardless of geography.

J Darrin Gross 5:21

Gotcha. And did you end up doing the deal?

Kyle Tushaus 5:56

Yeah, once you’re in that position, you kind of have to just take it on the chin. And so yeah, I ended up doing I mean, basically, for every situation where that occurred, I kind of had to just say, Well, you know, another thing you have to consider, it’s kind of sunk cost mentality, which, you know, I kind of just alluded to the human brain that gauging opportunity costs correctly, and then I fall victim to sunk cost mentality, or the sunk cost fallacy. And when you’re the sponsor, or you’re trying to occupy the GP tranche in a deal, you know, you’re paying for the due diligence. So in all these situations, I’m looking at, you know, 10s of 1000s of dollars of due diligence efforts that could either just evaporate, or you could just say yes, and do the deal. So, you know, 100% of time you say yes, and you do the deal. And like I said, you don’t necessarily get bent out of shape, when that happens, because the who gets paid wins, or who gets the deal done wins. You just change your business model, right? You say, Okay, well, you know, Stefan, the bear trap over there, I’m still alive. I just won’t stop there anymore. Right. So you got to find a different path. So yeah, did did every single deal and kind of dip my lap and just move forward. But, you know, going for future deals, looking to avoid similar situations. And saying, you know, it’s, it’s a lot safer. If you say, have the, say you got 20 people or entities making up your LP investment tranche, and you get one person that pulls that kind of move. And you can just look at the other 19 and say, Hey, does everybody want to increase their capital allocation by X percent, and just replace the person that’s saying that, and you have that flexibility? You don’t have that flexibility when you’ve gone to a single shop? To fill out your cap stack? So

J Darrin Gross 6:04

Yeah, no, he has the money makes the rules kind of thing, right?

Kyle Tushaus 6:04

Yeah. Yeah. So Elon Musk, just skirting every SEC Rule that you were I would be? Yeah.

J Darrin Gross 6:04

So you mentioned the the Pine Ridge Capital model, you guys are working with you? Were you were trying to get returns for your investors, similar to what they might expect on the institutional side? Can you kind of give us a comparison as to what you see in the the syndication model that that you see on the marketplace, as opposed to what you are experiencing? On the institutional? Side?

Kyle Tushaus 6:54

Yeah, and they so prior to this, I could not get anything past the underwriting phase, if I didn’t feel like we had a shot at getting above a 20% internal rate of return for a reasonable amount of risk. So that was kind of our benchmark, where we had to say, look, we can’t hit 20, at a deal level, there’s not going to be enough flexibility for what actually trickles down to the investors after you know, fees, and, and all of that, for it to be worthwhile. And obviously, you don’t go reaching for yield just to try to get over 20. Right, the 20 has to be, you know, with a stabilization plan that makes sense. It is, you know, somewhat expected, given the environment. Now, I would say the main difference. And again, I’ll say that I don’t have a massive amount of experience. In the syndication world, it’s more of having friends and family and colleagues, show me and tell me what kind of things they’re getting pitched. On the institutional side, there’s always some kind of give and take the deal might have. So if I have a really high IRR, first thing I’m gonna ask, is this predicated on the exit, right? Or am I getting a good cash on cash return and a kind of a light pop on the refinance or the exit price? Like, where am I on that spectrum? And where, what aspect of the cash flows in my giving up on to get the thing that you’re advertising to me, and it was very sort of cut and dry on that when we said, like, you know, we have to do XY and Z, like, let’s say it was a hotel renovation, and we knew that this property was trailing market rates, and here was the growth year over year, and it was in a market that was desirable, and you know, not subject to high seasonality, whatever the case might be, we’d say, Okay, we’re gonna spend x amount of dollars to renovate it, you know, I’m going to place it at this point in the market. And then if we can run it at this margin, right, because that’s going to flow through is very, you know, cut and dry. And you would say in that situation, well, what’s my biggest risk factor? How are you going to control the renovation? And so we had a particular firm, that I’m actually You know, speaking to we might have said, well, we bought a GC firm. So now we control construction costs. So there, okay, you’ve, you’ve solved for the biggest risk factor. So great, now I see what’s going on. But you couldn’t really, you know, I said, look, it’s going to be 6% cash on cash return until we can actually start popping the rates. And then after we pop the rates, right, it’s going to take some time to work through the market. And then we got to actually have things trickle down to the net operating income line. So this is what the timeline is going to look like. And then I compare that to the experience and say, This syndication world where I’m seeing deals that say, like in the hospitality example, come with an operating business. But then it’s an operating business that none of the sponsors have experience with. And it’s very new, what not very way very much might be people just reaching for yield, which is a very natural human behavior, especially when we’re at this point in the business cycle. But as the sponsors say, we’re going to take on a business model that we’ve never done before. And that’s how we’re going to get you to X percent cash on cash returns. And I question these models where it’s like, you know, I think I would take a lower cash on cash return, or maybe not such high octane returns in an investment where I’m not banking on you figuring out this business model for the first time. And then beyond that, you might be buying five properties that require this business model. You know, I’m speaking to some things that I’ve seen in the market.

And a lot of these returns are kind of predicated on you trusting that they’re going to just figure it out. And, of course, I’m the man with the hammer. So I’m looking at this through the lens of the you know, if I was on the other side of the table, pitching a 500 plus million dollar, Aum, institutional firm, they would laugh me out of the room. And so, you know, now when I talk to friends and family, if somebody says, Hey, I invested in Kryptos, a big one recently, right? They say invest in some kind of crypto fund, I would I always ask now, how often have they been distributing cash on that thing? Because I hear people talking about, you know, double digit cash on cash returns, and then oh, when we sell this thing, it’s going to be even more. And then I just say, when was the last check. And you know, of course, this is not a scientific approach, but it kind of seems like the marketing, my marketing beforehand, I had to sort of downplay the returns and over deliver, it almost seems like the tables are flipped in the syndication realm, at least what I’ve been exposed to where it’s like, you got to promise a lot and get people’s eyeballs on it. And then afterwards, like, if you don’t distribute, tell them why you didn’t supply issues or something like that, which, you know, from my standpoint, I’d be like, Alright, I’m not investing in you, again, if you if you tell me that kind of stuff. So but that’s, I might be too jaded from where I’m coming from. But that’s, that kind of seems like the difference where, yeah, pitching institutional money, I would have to like, I would just have to handicap the deal so much, and then say, we’re still at 16% IRR. Right. And I have just thrown everything I can at this thing. Like, you know, short of, you know, meteor hitting this building, right? Well, we’re not going to lose money. Where that doesn’t seem to kind of be the like the bar that I have to get over if I were to put together a syndication thing. And I’m sure there’s some syndicators out there that are listening to this saying, screw you, like we’re very diligent, but you know, there’s always outliers. And I’m saying that’s kind of what was pitched to me initially. And why I said, Well, why don’t we just take institutional model, pull it down market where I’m not competing with institutional capital, you have the same structure, right? Well, syndicate it, but Right, these crazy promotes where you got sponsors taken 50% of the cash flow. Like, I wasn’t, I would never be able to get that to pan out at the institutional level. So I’m not going to pitch that to any investor. So you know, we’ll, we’ll stick to reasonable rates of fees, and promote and then look for deals where I said earlier, heads, I win tails, we don’t lose.

J Darrin Gross 7:58

No, that’s, that’s, you know, enlightening to hear kind of the, you know, how you you were required to act on the institutional side versus kind of maybe what, you know, the less sophisticated or experienced syndicator may be promoting. So, talk a little bit about the Pine Ridge capital, what is your, your, your model, your thesis? What are you guys looking to do and go after?

Kyle Tushaus 8:03

So, outside of just saying lower deal size, trying to eliminate competition in that regard. And, you know, we consider they there’s enough tech tools nowadays to where you can manage a pretty disparate portfolio of smaller assets without getting bogged down. Now if I threw something like a hotel in there, obviously something like that if you’re if you’re in the portfolio building world, you hand that management off to somebody else. But for the most part, right, try an asset manage that much you don’t need, you know, if he told me buy one $50 million asset versus 10 $5 million assets, yeah, those are much more moving pieces. But I can systematize a lot of things, and I can solve for a lot of the friction. In the terms of the management, keeping up with the paperwork, that doesn’t necessarily mean I need to charge a crazy management fee to do that. But then outside of saying, we’re going to bring it down to a lower price point in the market to try to get rid of some of that larger competition, we don’t really have a product type that we’re focusing on, right, if we’re agnostic, and we’re really just looking for the right opportunities in the right sub markets, at the right price. With with the right stabilization thesis, I will say we’re only looking at the Pacific Northwest, because that’s where my business partner I live. And so I don’t need any more southwest rewards, points at this, at this juncture, the previous deals that I was doing, despite living in the Pacific Northwest, where none of them are in the Pacific Northwest. And so I was flying around a lot. These are all you know, our focus will be hyperlocal, you know, we gotta be able to drive to them same day if need be. But then, the way we enter any of these is looking for opportunities where we’ll have a thesis, usually we try to find one or two, maybe three avenues, just beyond the base thesis that we could go after. So things like, I think most people are probably familiar with a covered land play. So you know, one, we’re kicking the tires on right now, it’s got a building on site, where I could quickly lease it out to somebody for say, three years, get my ducks in a row, get my ducks in a row and go vertical plan for multifamily, while we’re getting cash flow, but the idea being, let’s ink that lease for three years with a clause that says, hey, we’re going to develop this thing, and we’ll go find you another property. So you get the tenant working hand in hand with you. And for the effort, right, they get a slightly below market rental rate. But that rate still covers your debt service and everything you need to do with the property, maybe distributed a little bit a little bit at the same time. But during those three years, right, we’re actively putting together, you know, a, a vertical multifamily development. And then when you’re ready, right, you go place that tenant and another property, so you actually turn the first deal into two deals, because you might actually go acquire the property that they’re gonna go be placed into. And then you can scrape the original building and go vertical there. So that’s a good example of one where we say, okay, day one, let’s say we just get in day one, we don’t do anything, right? Well, that lease was still cash flowing positively for us, right, and that development potential isn’t going away. And this particular case, I’m talking about sub market that has land use restrictions, where it’s making it a very, very tight market. So it’s very hard to find any dirt that you can build on. And it’s also in a market where we have contacts and colleagues existing that can do the construction. But even if we don’t decide to go that route, right, let’s say we just lock it up, we could turn around, maybe contribute that as 1015 20%, whatever the numbers come out to be as contribution into a go vertical plan. And we let a developer or some other group actually do that part, and move on to the next one. Or you could do it yourself. So it’s, it’s, it’s an approach where you say, look, day one, we’re covered. And then we’ve got, say, three different avenues we could go. And the macro environment, or particularly the market level details, given that sub market are screaming at us that, you know, it might make sense to go vertical, in this case today. But it’s certainly going to make sense three years from now, five years from now. And if you’re locked in with something that’s going to cash flow, right now, you can kind of pick which date you want, obviously, tomorrow would be the best day, you’re going to look at it from an IRR perspective and the time value of money. But if you got to year two, or three, and prices are still soaring, you might say we’re gonna wait for four or five, and it really doesn’t change your returns all that much to have to wait for that, but you haven’t yet pulled on construction financing, right? You’re not now making payments you have that optionality of when you want to move forward. So that’s kind of, I’d say, that’s a good, good example of how we’re looking at the deals we’re going into.

J Darrin Gross 8:49

Gotcha. And I think you might have said about I’m Are you will you be doing syndication, like one building at a time or will you be doing more of a fun approach?

Kyle Tushaus 10:08

So for the time being, we’re going property by property, and that is, I mean, primarily in phase one, we’re kind of testing out this thesis. You know, I might be able to pull up a notepad and say, you know, Why doing, you know, a light industrial play at 4 million makes just as much sense as 40 million. But we want to actually go through the machinations of doing that first. And then Phase two would be, let’s say, you put your head down and you get this, you start chipping away at these and you’ve got a portfolio of 10 or 12 would first go back and probably do a blanket debt refinance over the whole thing. Because obviously, you get better that in and of itself is kind of a strategy for return of capital is get a blanket term across, say, a dozen different portfolios. And at each property level, right, you get better, better debt terms for that reduce risks as far as a lender is concerned. And I think at that juncture, we would probably look at more of a fund approach, how we would incorporate that into still the syndication market, we’re not quite sure. Like I said, right now, we’re, we’re just testing out the property by property thesis. But the Holy Grail of this would almost be to say, kind of be like a crowd street or a Fundrise. Where, you know, I guess in fundraises case, you don’t really get to pick the properties, crowd streets, you do, maybe somewhere in between that, except we don’t want to necessarily be an online platform, I think it would be preferable to operate more like, like an old school Buffett partnership, where it’s kind of like, look, you can chuck your money into this bucket. And we’re doing X, Y, and Z with it. But, you know, scaling up to, you know, a billion assets under management is not necessarily the play here. It’s like taking this laser focused, like picking off the things that make sense and have this optionality. But in a manner that, you know, obviously, you’d want to scale it up to a point where you can move faster than say that one broke one property at a time, but not scale it up so much that you dilute the core approach and the core thesis. So yeah, I guess sort of, like, somewhere between a crowd Street and Fundrise. But obviously, on a much smaller scale, and, and not marketing on sort of like a yeah, just submit your information here. And then wire is 25. You know, okay, not not exactly that model, either.

J Darrin Gross 10:10

Gotcha. Do you have a minimum investment requirement?

Kyle Tushaus 10:10

Yeah, so right now we’re at $25,000. And we arrived at that one, because 25, kind of a typical minimum, anything below that, and you’re kind of just doing a lot, you know, too much movement for not enough contribution into a deal. But primarily, because the size of the deals we’re looking at, it’s pretty easy, just take a if I want to do a $5 million deal, and I have this minimum, divide the deal, but that minimum, and if it gets to be too high of a number of investors to juggle, then you might want to increase your minimum. And so 25 is a comfortable number, where we feel at that at that number will, will not have to be juggling the 99 Investor limit that, you know, we’ll have for that type of deal structure.

J Darrin Gross 10:10

Well, it sounds sounds exciting. I mean, the opportunities and the fact you’ve got a, you know, a model for you know, the funding and then the distribution and raising capital and, and kind of your thesis you’d like said you’re agnostic, but, you know, experience with the hotel conversion and, and kind of multiple exit points. I guess that’s kind of what I what I heard you I mean, it sounds to me, like more of a, you know, safety kind of a thing as opposed to the the one that you gotta hit. And yeah, if not, everything happens, like it’s supposed to, then, you know, what do you do? Yeah.

Kyle Tushaus 11:24

I mean, yeah, another thing that I feel like it’s kind of, it’s probably not completely lacking. But I haven’t heard in, you know, too many people pitch me on it so far in a syndication world, is this idea of sending it up the ladder in terms of investor risk appetites. And I think the closest thing that I’ve seen get in touch on this is, hey, let’s buy called 100 units of multifamily for easy numbers, and we’re going to renovate ATM and leave 20. So the next guy sees that there’s meat on the bone, there’s meat on the bone concept. I mean, I get that and that was something that entered the conversations in my experience previously, but I always thought of it more as like where certain capital resides in the lifecycle or the type of cash flow an investment might throw off and you could say the same thing not just about commercial real estate but just about any private investment. But you know, we did a couple of rows and columns and a couple were certain investors like the more risky like go renovated, get a bridge loan right to yours and pop the rates kind of thing, especially in the hotel world, right? You go do a PIP or what’s called a Property improvement plan. And you can now say, you know, they’re doing $99 A night, now we’re gonna do $160 A night. And once you get to that point, the investors that came along with you for that renovation period of that 99, to your, whatever your market rates were, they don’t necessarily want to keep that capital in something that’s now shelved, and you’re just sending out your distributions, they want to take that out and go find the next hotel, or the next, you know, property, whatever the thesis is, that’s gonna get renovated and mark to market. And so rather than worry about who’s going to pay me 100 bits less than my cap rate to sell this thing outright, we were thinking more in terms of how do we recap this project. So in that scenario, right, we renovate the property rates are going up, you know, property value was, you know, for easy numbers, let’s call it a $10 million property, it’s now $15 million, we’ve created $5 million worth of value, but it’s still cash flowing at X percent, that is still attractive to a passive investor, to say, Great, our investors that only want that renovation phase, you’re out, we’re gonna bring in new dollars at this new valuation, the new dollars don’t feel like they’re getting the short end of the stick, because we’ve already renovated and we already took the risk. And we can tell them, Look, you’re gonna get X percent distribution on a stabilized asset. And they would say, Great, that’s what we’re looking for. We don’t want to trust that you can swing hammers, and not screw it up. And so it was never really, I mean, obviously, if you can get somebody, you can buy something at like seven, do a little bit of work and sell it at a five. Everyone wants to do that all day. But we always talked about more in terms of recapping and it was less about, you know, what’s the new valuation, but what does the capital that’s in the deal actually want out of the deal. And so there’s always this preferred route and saying, like, well, it’s Nick, open market and pay 6%, to the broker to go list it and all this, let’s call the group so we already know that wants stabilized cash flow on this particular asset type, and just pull that tranche out, that was the opportunistic tranche and replace it with, right, the new stable cash flow investors. So that’s, that’s something where, obviously, we’re talking, you know, pretty early on out of the gate for this platform that we’re doing. But that’s another another avenue where, you know, if we can get sort of the more like cookie cutter bread and butter type investors that say, Don’t give me massive valuation increases, if you can tell me, I’m gonna make six to 10% a year on my money, and it’s going to be stable. But I’m okay with that. I don’t need a massive exit and a 20 plus percent IRR pop. So that’s another angle where I feel like it probably definitely exists. But from my understanding, it’s probably probably less focused on than, say, the institutional world where there’s always an option of just recapping your project with a different investment type.

J Darrin Gross 12:31

Got it. Hey, Kyle, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to try and assess risk and determine what to do with the risk. And there’s a couple different strategies we typically employ, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, then we look to see if there’s a way we could transfer the risk. And that’s what an insurance policy is that a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. Could be clients, it could be investors could be the market could be politics, interest rates, however you however you would like to frame the question as to what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Kyle Tushaus, what is the biggest risk?

Kyle Tushaus 12:56

I think, right now everybody’s kind of afraid of inflation, which is an interesting business environment to be in for real estate, because everybody kind of gravitates towards this industry is a safe haven. I think you can kind of take that a step further and think if I’m going to de risk myself from inflation, and I’ll say inflation, I don’t think is actually the risk of getting at its eventually I think there’s a risk that I think a lot of people are not thinking about some are but I haven’t seen any media headlines about it. But within real estate, right, you might say okay, well what’s my what’s my best inflation hedge within an inflation hedge? Right. And that would be a property that I can mark to market more often, right? So the reason why consumer durables doesn’t do well, and inflation is because I can wait 10 years to buy my next car or washing machine. But bread and butter, I’m gonna buy that more often. And so that price can keep going up every time I transact. So how can I mimic that in real estate and well, the properties that get marked to market more often would be better and inflation environment. So hotels get marked to market every single morning. So it should be the best inflation hedge, but you’ve got the dual side of that sword, it says it’s also discretionary spending. So be very careful on that front. But then, so maybe I’m okay with every year, say in multifamily. You know, the, the triple net 25 year lease would probably be the worst, depending on how that lease got written. So there’s obviously a spectrum even within the inflation hedge that is our industry of commercial real estate. But the thing I haven’t heard enough people talking about, and the thing that scares me the most and influences a lot of how we’re going into these, these, this first phase of deals is that the labor risk that is kind of bubbling under the surface where you see a lot of these value add deals, I mean, people have been ever since 2008, value add has been kinda like the everybody, everybody and their cousin is getting into this idea of renovating a property and popping the value of it. But I think there’s going to be a massive moving target into how well you control those costs. And so for like an interesting data points since about the early 70s. Productivity, or I’m sorry, compensation has gone up 115%, since the early 70s, which sounds great hiring 10 or 15% increase in compensation. And that’s for non supervising roles. So the roles, the jobs that are actually doing the thing.

While productivity of the same jobs has gone up almost 250% During that same time, so there’s this massive difference in the throughput that’s being provided by somebody in our job versus what they’re getting out of it. And I look at the landscape of people now for the first time in four years even know what inflation is. Our socio socio economic landscape is not great, there’s a lot of political strife. And I feel like that gap is probably going to get closed to some degree. And so I see a big risk factor in those business models that are going to be very reliant upon labor as an input, because I think we’re about to see a compression of that gap. And I think rightfully so, I mean, you look at some of the numbers, and it’s just, I might be a little jaded, I came out of, I came out of school, after the Oh, eight collapse. And so I don’t, I don’t really have the, I don’t have that much of an experience through that run up. But, you know, you look at what was accomplishable with, say, your bass degree, or even no degree 3040 years ago versus now and how much you know, someone’s having to work to get the same throughput in terms of quality of life. I don’t see it continuing status quo for much, much longer, maybe, you know, we kick the can a little bit longer, but I don’t see people being willing to do it. And the great resignation might be sorted a first little cue of it. But yeah, I think I think what’s about to follow inflation is and we talked about energy prices going up housing prices going up, when labor prices keep going up. And right now it’s the remote workers that are driving, you know, the leverage in those negotiations, it’ll eventually get to all labor. And if your investment thesis is heavily dependent upon labor, I would think of some ways to lock that in ways that we mitigate that, right? If I if I see a value add deal. It’s got to be in a market where I’ve already got a pretty good relationship with the GC. And I can go to them and say, Do you want to be part of the GDP tranche? And so with that, I can say, you’re now going to have equity incentive, not just, you know, hourly rate, or markup incentive. So, you know, let’s put together a budget of do not to exceed and you control that cost, but you’re also in our cap stack. Now, you know, outside of that, I would be very worried about taking that GC risk, because I hear horror stories of colleagues having guys walked off the job for $2 more an hour. And, you know, it kind of sucks when you’ve already pulled the debt on the deal. And you got, you know, this bridge loan kind of clock ticking away at you, but then you look at the data and you’re kind of like, well, I don’t necessarily disagree with it. I mean, someone offered me more you probably do the same thing. And so I think it’s something that needs to be taken into consideration when you’re when you’re underwriting because I do think that’s the next big wave to follow in this. disinflation run up.

J Darrin Gross 14:33

No, that’s enlightening. They’re just the, you know, wage, wage growth and how it’s likely to affect A lot of things so I got it. Kyle, where can the listeners go if they’d like to learn more or connect with you?

Kyle Tushaus 45:12

So they can either submit something through the website, which is Pine Ridge cap.com at P I N E R IDG E CA p. So it’s cap instead of capital for the website. Or you could email me directly, just Kyle Kyl e at Pine Ridge cap.com. That’ll probably the quickest way to direct to the horse’s mouth so to speak. Yes, and we’re not on any. Not on any social, unfortunately. So I can’t tell you to follow our I’m not even on social personally. So I’m kind of behind the times in that regard.

J Darrin Gross 15:08

Gotcha. Kind of, I can’t say thanks enough for taking the time to talk today. I’ve learned a lot and enjoyed it. And I look forward to doing it again soon.

Kyle Tushaus 15:08

Likewise, yeah, well, I’ll definitely keep you in the loop on everything we’re saying.

J Darrin Gross 15:08

All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 46:25

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Multifamily Senior Living with Vinney Chopra – CRE PN #347

Vinney Chopra 0:00

And my senior livings are also going very well. Because what we do is we do all land development things, the ordinance changes and everything. And that gets us the land very cheap. We buy them. But by the time we have done through all the permitting, it’s increased in value by three times already, because we have gotten the permits now to build a senior assisted living. And then the good part is, by the time we are done building it, we start getting residents said, we have 29 residents already given deposits, to move into our apartment complex, brand new. It’s being built right now. So it’s a 2022 construction with everything brand new. And then we have very less deferred maintenance. And there is zero delinquency in this apartment complex because it’s a need driven and, you know, we have to look at the residence they have to show us three years of rent, because usually people stay three years in our facilities.

Announcer 1:11

J Darrin Gross 1:30

Today, my guest is Vinney Chopra. Vinney is a multifamily syndicator, Senior Living care facility developer, an author, a podcast host, a mentor, family man, he’s a lot of good things. And in just a minute we’re going to speak with any about the opportunities in multifamily and senior living.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And while you’re there, we appreciate you leaving a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. Without on Welcome back returning guests popular Yes, my friend, Vinnie. Welcome back to CRE PN Radio.

Vinney Chopra 2:52

Thank you. Thank you, Darrin, it’s such a pleasure to be back there with you, brother, I maybe during COVID We didn’t get together did.

J Darrin Gross 3:00

We did once or twice. But it’s I mean, it’s I know we’ve talked at least once a year, but I know that it’s been a long time. And it’s time to catch up and see what you’re doing. I know you’ve been I know you’ve been busy, busy, busy. I’ve met some of your your students here locally. Yes. And I know that you’ve been busy selling and buying so it’s a good time to good time to catch up.

Vinney Chopra 3:31

You know, it really is I mean, you know, many times we feel what the market is doing a market is doing but she got to take action and you know, sell some assets at the peak and buy some in good markets and develop some and you know, I’d love to share what’s happening with me. Yeah.

J Darrin Gross 3:50

Yeah. Why don’t you start to you know, tell us what’s what’s been going on here last year. So

Vinney Chopra 3:58

When COVID hit 2020 We always have managed through the zoom and through remotely and everything, meeting with our investors and so on. So that’s when I got more even heavily into senior assisted living developments and I did five syndications one after the other and raised almost $27 million to get this ground up. structions projects and started them in Florida and Virginia. And they are being built in everything. So that’s something that I also bought a hotel with my another partner Hilton Garden Inn, which happened before COVID. Actually, oh my gosh, turn, we closed the deal on December 31 2019. What a perfect timing is it? And then in 2020 to 2020, about April, we said, oh, my gosh, our occupancy has gone down to 22%. And we were ready to pay a mortgage of 15,000. Each partner, you know, because it’s a pretty big deal. Anyway, but then the office staff of the hospitals, three hospitals, nurses and doctors chose our hotel to live in, what, what is the probability of that happening? Look at that. And then our peanuts became millions, because we went from a 6 million we purchased in an auction this hotel, and we are selling it in just three months back, this is 2022. For 11,000,008 50, we are selling, doubling the money doubling the money in that one year, which is very good. And my senior livings are also going very well. Because what we do is we do all land development things, the ordinance changes and everything. And that gets us the land very cheap, we buy them. But by the time we have done to all the permitting, it’s increased in value by three times already. Because we have gotten the permits now to build a senior assisted living, we could sell that land, but we build ourselves with our own GC CINAHL. And my partner has been doing it for over 10 years. So that’s exciting. And then we build it in nine to 12 months, the whole thing. 66,000 square feet to 77,000 square feet of one story with 88 units, add ADA to 93 units, but we are not using any elevators or anything. Because these are 80 years, 200 years, you know, after age group of our residents, seniors who are living in our communities, right? It’s Hampton manor.co is our brand Hampton Manor. And that’s what is exciting. So we are building in Florida, in Virginia, in Michigan, and in in St. Louis. Right, Missouri. And then the good part is, by the time we are done building it, we start getting residents in like the Punta Gorda deal. I’m opening up like April 1, let’s say right, it’s February. So April 1, oh, April Fool’s Day. But we have 29 residents already given deposits, to move into our apartment complex, brand new, it’s being built right now. So it’s a 2022 construction, with everything brand new. And then we have very less deferred maintenance. And there is zero delinquency in this apartment complex, because it’s a need driven. And, you know, we have to look at the residents, they have to show us three years of rent, because usually people stay three years in our facilities. You know, they go to memory care, dementia, you know, which is also part of our division, or they get very sick, then they go to hospice, and they go to rehab centers and all that. So, so this is a new market for me, but it’s very, very satisfying bear market because it’s apartment at its core, but it’s got the, the that feeling of helping and giving the dignity of living for our seniors, you know,

J Darrin Gross 9:02

That’s awesome. So you mentioned the three years of rent up front, is that do they give it to you up front? No. Show you they have that?

Vinney Chopra 9:12

Sure. Just the proof just to prove it. Yeah, yeah. But they only pay month by month by month, you know? Yeah, yeah. No, we don’t take any money upfront, and they don’t have to pay us any money to live in the community either. I know there are other 55 Plus and independent living, you know, places like in California where I live, where you have to pay 300,000 tries to get in to even get in exactly yeah. But in our case states not. Right.

J Darrin Gross 9:41

No, I know that model has changed quite a bit. And I’m guessing it’s kind of territorial where some places are still away and others are more of that but I would I would guess that the the model you’ve got there where it’s more of just like a rent is probably a more agreeable to If people unless the community is something that, that just got a reputation everybody wants in and that’s some sort of historical model kind of thing like that. So, okay, so you, you you’ve built, how many of the senior care facilities do you have is it’s a five, or how many?

Vinney Chopra 10:15

Oh, no, actually, my partner has built over 30. But together five. Okay, I’ve got nine more on the books. So I’ve got 14 coming up here.

J Darrin Gross 10:27

And are the five up and in running now?

Vinney Chopra 10:30

I’ve been in the construction phase.

J Darrin Gross 10:33

Okay. Gotcha, gotcha. So your April one is your opening of the

Vinney Chopra 10:37

first one in Punta, Florida. Right. Right.

J Darrin Gross 10:41

That’s exciting stuff. I mean, that’s, that’s been a couple of years in the works here with Yes, yes. And a little different timeframe with the construction timeline, as opposed to closing on an asset you

Vinney Chopra 10:53

Already built already built? Right? You know, I’ve been chasing C B, B minus B plus A minus all this time, right? You know, but the exciting part is that, you know, I’m not going after working class, I’m still buying multifamily buy. I just bought in Tennessee. I’m buying some more in Florida. But those are 70 million 80 million daily dollar deals. But these ones are brand new, constructed within 17 million. What? 17 million 18 million, I’m able to build these apartment complexes brand new for seniors.

J Darrin Gross 11:31

Yeah, no, that’s, that’s exciting. And I just like the multiple as you’re saying, like, from the time you guys buy the land to when you get the permits, you’ve tripled the value of the land. I mean, and that’s just that’s it land. That’s, that’s impressive. And, you know, it’s funny, because I’ve talked with other developers and stuff have come to recognize that, you know, the original value add. Strategy was developing, right? And when you start a piece of land, and you add value to it, and you totally know more valuable. Well, your hotel sounds like you really, that that one sounds like the one that you really got away with. I mean, not not got away with what really, from I mean, you bought it, I’m assuming it was a fully operational hotel and COVID Yes. And yes, and was occupancy down, like almost nothing, then

Vinney Chopra 12:22

20 22% I think 22% Still, the weekend traffic was there in that town, some big, big business traffic, you’re right. But then we also had a pip in they call it capital improvements in hotels as Pip. And then we were able to change the roof and put some little bit money into it, then we doubled our price, you know, so we are selling it. And we are buying some more actually, I was over there in Gatlinburg, where dolly wood is there. And that’s the number two spot in the whole USA. We had a lot of people come there, you know, for vacation and everything. After Disney World. That’s number two spot and people drive up there. So lots of hotels have 97% occupancy is what they’re looking at different different locations, you know, and then storage units, what when he is getting into storage.

J Darrin Gross 13:16

Storage too? Oh my gosh,

Vinney Chopra 13:19

You know, Vinney is always looking for different ways, right? So I do have my main heart is with multifamily, which I’ll be keep on buying a minus, or, you know, B plus assets, of course, but the compression of the cap rate has really got me thinking, you know, in the year and a half or so, because the C Class B class and a class, the compression of all these cap rates, it comes so close together, that, you know, people are asking a lot more money for their assets. Let’s call a spade a spade, you know, I mean, the deal I borrowed I’m included in that, by the way. The 2020. I bought a deal in Austin, Texas, turn 308 units, right, because my Melbourne property was I’m collecting 98% rents from the engineers. So my engineering mind says Vinnie, where are the other engineers going? Austin, Texas. So I go there, and I come into bested final on a deal with 15 other bidders. And the listing broker knows me what he says Vinnie, I know you. I said, Hi, Michael. How are you? He know, he says I sold you that Country Club property. Nine years back. You were the easiest guy to work with. I said, Michael, I’m so appreciative what you’re saying. When he’s back with more money. Literally, he told the sellers and we had meetings and all they awarded us the deal. My partner and I had Because 34,000,000,007 50 We paid for 308 units in near to the domain in Austin, unheard of totally got a loan from Freddie Mac at 2.69%. What $22 million loan at 2.69. And the broker friend of mine just called me few months back in December, he says, and he’s the president of a brokerage house, very big one. He says, Vinnie, your property’s worth 58 million today.

J Darrin Gross 15:33

Oh, my God,

Vinney Chopra 15:34

Oh my gosh, from 35 million from September of 2020. And this is now January of 2022. So he told me in December in about a year or so, the property went so high. So it’s just mind blowing. Mind blowing?

J Darrin Gross 15:53

You You are definitely the hits, man. I mean, you’ve got the hits. You’ve got, I mean, everything you’ve everything you’ve done. I mean, you know, I think it’s interesting, you know, the the post crash? I mean, you know, everything’s been going up. And there have been plenty of conversations I’ve had with people talking about, you know, are we in the late ending, or whatever. And, yeah, and I keep talking with people that talk about just the data supports the demand for housing, you know, and like you said, if you’re, you found your Melbourne property and the engineers and the demand, and you recommend where and where are the other engineers going? As long as you’re in that? You’re in the the demand? Yes, yes, he gets the key to it. And, you know, the other question, I’m curious, how do you how do you view the cap compression? I mean, you you mentioned the fact that you’re, it makes you question, you know, what is it should do, you know, should stay in should get out, I think but I’ve come to recognize a compressed cap means that there’s Demand. And demand means that there’s somebody behind you waiting, there’s somebody wants that property, there’s somebody wants to be in that market, as opposed to if you get out and it’s a higher cap rate, he may not have so much demand behind you trying to get what you’ve got. Tell me a little bit about your How do you view it,

Vinney Chopra 17:17

I would love to love to mention it, you know, what you’re seeing is so right bit compression of the cap rate, the value of the property has gone up, even the C Class C plus a b minus people are getting so high price, the demand is there, supplies limited, right? Supplies limited demand is there and people can get cheap money. See, that’s the other part in the whole equation, the mod gauge, you could get afford a bigger board gauge with bridge loans and other stuff. So the money is so cheap. But the thing is, it’s the syndicators are in trouble. Because if your cap rate is, let’s say 3.10, and your mod gauge is that 3.5, then where is the, you know, cash flow for the for the for the for the investors. So a lot of syndicators are raising money from what I see in the packets from the investors and then making it as a heat play, and give the same money back as cash flow. I don’t know if it’s a Ponzi scheme or what it is, you know.

J Darrin Gross 18:26

So you’re saying they’re raising more capital than they need to get the deal. But that gives them reserves so they could maintain the yield that they promised?

Vinney Chopra 18:35

Yeah, exactly. And then put value add, and then maybe in a year or two years, the property operations will start giving the kind of returns, you know, so I saw that coming in the last two years. It’s been tough for me to purchase anything, by the way. I only bought one deal last year in 2021. In the multifamily space, right. Then I tended towards senior living more, because I can build everything in 1314 15 million. And it’s a brand new building. And for senior side of the operation, the rents are much higher than the regular rent because we take care of the hotel, I mean restaurant, right? It’s a cook to order three meals and snacks. It’s got, you know, the movie theater, it’s got Spa Salon, it’s got caregiving, prescription medicine, all that stuff. But we charge 4300 Starting as compared to 1300 in a regular apartment. So my $17 million deal brand new is giving us 4 million revenue. So that’s where the differences so can get much high cap rate for building brand new apartments in assisted living. So that’s something engineering mind. I’ve been trying to put this all in equation together. Now my goal is $2 billion in this decade to construct 2 million. 2 billion Yeah, 2 billion. Yeah,

J Darrin Gross 20:10

you’re on a good pace. That’s for sure. So So tell me, you know, we you you started in multifamily actually go way back, you started single family then you went to multifamily syndication, Senior Living hotel. And now storage, what was the appeal of the storage,

Vinney Chopra 20:30

storage, I mean space, I’ve looked into it quite a bit, it’s very, very good. Multi, it’s a multi unit two, if you look at it without tenants tenants up there, but they just come they put their own lock on the storage unit, you know, it says shutter and four walls that solid is very little different maintenance. And it’s totally automated through cameras and everything. And through the software, they get the lock, log in, you know, to go into the gate. And then once they are inside the storage unit, they are able to go to their storage and do this stuff and everything. So the cost of operating the Self Storage Unit is so low. And not only that, more and more I’m doing the research, every zip code has many storage units, you could just say self storage and put the zip code, you will not even believe there are so many because within three miles, everybody, I think how many, four out of 610 families maybe need storage units. And we like abundance, we were to buy stuff and stuff and stuff. And you know, then, you know, move people move and things like storage has been especially very big market and very high good cap rates and everything good returns, you can increase noi i, you know, one of my students actually he’s doing so well. He left his IT job. For storage units, he learned the business in multifamily and raising money. And now he’s big time into storage units. So you know, and that’s where I’m also, you know, I’ll be buying everything. Again, my diversified Fund, which is right now $50 million fund, it’s got four prongs to it. What that means is I buy already built apartments, I do the Senior Living ground ups, I also buy already built senior living by us into fully operational, we buy those also by hotels and storage units. So anybody who gives me quarter million dollars, same money is buying all these things. So they love it because it mitigates the risk, because all these asset classes are there, and also different locations.

J Darrin Gross 22:58

So you’ve definitely kind of muted the risk there by doing that. So So let’s looking forward here many I know when we first talked or talked about almost two years ago, and COVID, we just started and kind of the crystal ball was, you know, ever nobody knew specifically but it was always a question of, you know, vacancy rates at proved not to be an issue with multifamily. With all the money that’s been printed and all of the the demand and just the you know, the capital out there the seeking return be do you see any kind of a softening? Concern? I mean, is there I am, you’re an engineer data man.

Vinney Chopra 23:52

The thing is, we are losing, you know, dollars losing power by putting so much pumping of the money in 2020. By the way, we put I think there was one statistic we put what 60% of the the, you know, meant produce so many trillions of dollars in just 2020 and 2021. To give out to all these people, right? Inflation is at 6.5%. Right now, government is trying to, I think there will be some upward pressure to the interest rate. It is going to be up we’ll be probably in April, I hear point two, five, maybe another one in October. So that is going to put downward pressure on to the valuation because as the interest rate rises, you can afford less of the product. Mortgage is going to go up. Some people were into breach lending, and a lot of people have gone that route in the last couple of years because they can get 80% rather than 70% which the other Fannie Freddie Mac’s were giving a lot of people have gone into bridge lending but then the bridge people will be also looking into How the whole equation is going to work, you know, with these people who are bought to 80%, if the occupancy goes down, we are very close to defaults, you know, as compared to as compared to 60%. You know, LTV, right, so I see a downward pressure coming, you know, but the thing is, you got to be very, very articulate and do assumptions very conservatively, because the rents may not increase that much either. Because if the inflation is high, people have less money, because they’re buying, you know, stuff and eating and gas and everything more money is going there. So they won’t be able to give the higher rents. So, the rent increase will be also very, it may be only 1% increase, or 2% increase, unless you are buying with a big, big gap in the rent differential, you know, already with the value add. So, I think in the crystal ball, nobody’s got a crystal ball. I don’t either, but I really see that the millennials have been taught but three Millennials big time. One is millennial. Yeah, tsunamis, 3d tsunamis, I should have said, one is millennial 74 million of us, you know, Z that may or may senior, you know, but they are the ones who like portability. And they don’t like to buy homes. So the renter, we will becoming a renter nation again, there are so many articles in globe Street in Fortune Magazine, in Forbes magazine, where there is a pent up demand for rents. Immigration tsunami is another one. Because you know, our birth rate is so low in USA, the immigration kind of helps a lot, you know, it’s going to be 441 million population in the next 3040 years. But where is that going to come from, is from immigration, birth, and then seniors, which is 10,000 Baby Boomers turning 65 Every day, until 2020 31 or 2033 10,000, every day getting into senior writers. So that’s 100 million will be seniors in America, never ever before that has happened. So there is a pent up demand for housing for senior living see. So those three tsunamis are going to continue boosting our pressure into rentals. And of course, you know, downsizing by the baby boomers, that’s going to affect also because more single family will be available of course. And then I don’t know about industrial also will be on a good spur up because we have warehouses and all opening up, you know, industrial strip shopping centers are downsizing. We know that very much. Office space is downsizing, but storage units and you know, our I just I have gone. Oh, can you hear me? Okay, from there? Okay, okay. Okay. I usually I do through my microphone. Yes. I had another meeting before this one. So

J Darrin Gross 28:22

Are you have you looked at any industrial? Is anything you’ve looked at?

Vinney Chopra 28:25

No, no, no, I will not be in that. Yeah, I wouldn’t be I think I like to stay the course in multifamily. I love the hotels because it’s multifamily. And you can, you know, look at people have to pay at the counter to stay in the room, you know, and so forth. Storage Unit is also multi family kind of thing, because each one resident owns that space storage unit. And that way, so I’ll stay in the conventional job workers, you know, our multifamily, but I’m loving the retirement communities now. So in other words, I don’t have to change jobs, jobs, jobs where Amazon is gonna open up. Now I can look for demographical numbers, where people want to retire in serene locations with lakes and golf courses and everything. So I’m looking for a piece of land in the neighborhoods where there are no jobs. i That’s why I’m in Florida, and I’ll be in Arizona, all the states because people really need to retire near to their grandchildren. That’s what we are finding. Even from the north cold country. They are moving to their, you know, children and grandchildren so that they could come and celebrate birthdays and, you know, meet with them at the assisted living. That’s the frame. I mean, I’m not into the 55 plus communities or golf courses or condominiums. I’m not in the rehab centers or nursing homes. That’s a business in itself, you know, very big medical equipments and all. I’m only in the safe environment, right in the middle, independent assisted living and memory care. We need no doctors, and only one nurse. And then one chef one, you know, helper, Chef, Deputy chef, we call it and then activities director and all that stuff.

J Darrin Gross 30:26

No. Well, I love the the mix and you know all the success you’ve had and just thank you to be able to take things full cycle I’ll be interested to next time we speak more about how your your senior living, you know, actually to have residents and see what you’ve learned there. Although I’m guessing you’re probably pretty, pretty attuned to that based on your partner having been there so long.

Vinney Chopra 30:54

We are we are and very vertically integrated. In our senior living side also, like ours in the multifamily. We have color in a soul, so many assets. So we have dwindled down in our manpower there in multifamily. We had 135 people full time working in my company, you know, but now, what we are doing is before even the Senior Living opens, during we hired the executive director and leasing agents. So my Punta Gorda, I have 29 deposits already, what 29 seniors who have given me deposit, as soon as I open the door in two months from today, they’ll be coming inside. And I’m going to breakeven, within four months or so I’ll breakeven because, yeah,

J Darrin Gross 31:48

That’s fabulous. Any new construction, the capital improvements, I mean, you’re, there’s no deferred maintenance or anything

Vinney Chopra 31:56

Zero deferred and all brand new appliances, all brand new flooring, brand new roof brand new parking lot. So that saves a lot of money. And then it’s a plus plus luxury living, which I built it from scratch 2022 model. So if I were to buy an asset to give me $4 million revenue, in multifamily, right 4 million to 5 million, let’s say, I may have to pay 40 to 50 million, for a plus plus, I may have to pay 100 million, by the way, you know, 100 million for that asset, which is built brand new, which will give me 5 million revenues. But in this one, I can build it for 17 million to 18 million, and have that revenue of 5 million. big it’s a big equation change.

J Darrin Gross 32:50

Yeah.

Vinney Chopra 32:54

And it saved for for my, my investors, you know, and now the investors are coming Ultra Rich into my fault. We have 430 investors right now. But then the ultra rich are putting 1 million, 1 million, 1 million, 1 million. So in other words, they don’t need cash flow at all. Generally, that’s the beauty of it. So they’re saying we don’t keep the ordinary income, cash flow, you know, which a lot of people pay monthly, and quarterly say I don’t need it, because I’m at 50% bracket, if they give me seven and a half percent, half is gone in the taxes. So just give me capital gain. In three years, when you have done, you know, stay semi stabilized your ground up construction, it’s dirt first year, second year, we build it, and third year we stabilize it, right. So they say just give us the lump sum, or even give us a 1031 option. So I love it, I that’s the key is to just get the money right here. After we have all the permits, and we have a construction loan. And then we gave it two and a half, three years 60% return, let’s say and they can take 60% on that million that 600,000 You know, or they could say Vinnie, put my 1.6 million into your next project 1031 Then they never have to pay tax and we can take it over and over and over again. So it’s a very beautiful model that I have, you know, device now, you know, I’ve been designed it so that people can make 2x Even 2.5x quickly within six years investing in brand new buildings see?

J Darrin Gross 34:42

Yeah, yeah. What is a million your minimum investment in that or is it No,

Vinney Chopra 34:47

no, no, no, no Ultra Rich, we are giving 2.5 250,500 or 1 million. So those are my three levels now. In the ground constructions

J Darrin Gross 34:59

Gottcha. And isn’t that your is that your way of doing those in more returning capital games? Or is it just on the the million plus people, they’re saying I would I don’t want anything just, I mean, okay,

Vinney Chopra 35:11

Even 500,000 people to they say, really, I don’t need to 20,000 you know, each quarter or whatever, right? They say if we can just give you the money, and you show us the progress of everything, you know, that what we have done so far and everything, then in 2.5 to three years, we’ll be able to cash them out, we call them, it’s cashing out, right? You get your full money back, plus the return because we’ll be getting a new loan. See, construction loan is paid out V five,

J Darrin Gross 35:42

Okay. That’s that’s the event that’s giving you that opportunity. Yeah, that’s construction loan, then you’ve got a completed, completed building with occupancy, too. So you’ve got now your occupancy. So you can show revenue. Noi, and you can you can do like just a conventional.

Vinney Chopra 36:00

Exactly, exactly. Yeah, it’s like, building 17 million, it’s worth 24 million. So this is 7 million increase, as I start putting, you know, my tenants in there, and residents, you know, yeah, yeah,

J Darrin Gross 36:14

Right. Now, and in the like said the monthly rents, I mean, the the cap rate, that’s pretty impressive compared to, like you said, how big of a property you’d have to buy in order to get that same kind of level of rents. So totally, totally, definitely impressive stuff. Hey, Vinnie, if we could, I like to ask everybody about risk? And you’ve answered this question multiple times? Yes, I’m kind of curious if if given just your recent experience, in kind of how you’ve changed from, you know, asset classes, or you’ve expanded, I don’t know, you haven’t changed, you’ve just, you’ve added additional asset classes. But I’m wondering if there’s not something that you can, you can look at across the spectrum of what you’ve, you know, what you’ve invested in and just identify what you consider to be the biggest risk, you know, of just the current marketplace? Or, or let me ask you this, what do you see, is the BIGGEST RISK that you face in this marketplace? And just kind of the near future, as you, you know, work with your your investors and trying to totally coach steward for their money?

Vinney Chopra 37:29

Totally, you know, I’m so glad you’re asking that. I’ve raised like, close to 200 million or so. But you’re right, investors want to save money? What if when you die, you know, or something happens to you, right? What what’s the risk involved in that, and then when I took the key man’s insurance, and then our daughter is in it, now, she’ll step up as President, my wife is also injured, our legal, you know, team and everybody, our accounting department itself, the other parties, you know, during the properties we buy, so there is insurance to be gotten at every point of the property, the loss of income insurance, those are the risks also, if some burning, you know, something fire comes, are like that. So, that is other risk. The other risk, which I got hacked, you know, I think I’d like to mention, is the cybersecurity risk. And that’s a big one nowadays, you know, with everything going through, through the computers and everything. So, you know, there are so many different directors, insurance risk is another one. You know, the big thing is contractors who work with us to do capex jobs and everything, we try to save money, but it’s not worth saving money, unless we want to make sure contractors are well bonded in also have, like, you know, millions of dollars of insurance, right, you know, when they come to work at our assets? I don’t know if that’s the question, you were really posing, the biggest risk I find is that you want to do legal way to raise money, and then take care of the investment of the investors. They know, fiduciary responsibilities the right. So as a CEO, I definitely have always felt each asset I bought, I bought 37 Now or something, you know, and I’m on the loan on all 37 Not too many GPS, you know, cold GPS or anything, I don’t believe in that. Maybe just three I have done it, you know, and then with my partner integration now, you know, like that, but other 27 or eight, I was the only person but, you know, the key thing is, you got to mitigate the risk for investors and mitigate the risk for the well being of your company. So you are in the right business. You are there, you know, Because insurance, it’s an investment, I always look at it as an investment. It’s not an expense, because I had lawsuits of $3 million $4 million lawsuits, which I, because of insurance, I walked away with giving zero money, zero money, and they settle the mediated and all that stuff. You know, so when you are in a business entrepreneur, like me and anybody, there are risks involved in people suing you and other stuff like that. So I always feel insurance is an investment, you know, yeah.

J Darrin Gross 40:41

No, I appreciate you sharing that. And I think that, you know, oftentimes the the focus is how to make money on the, you know, the buy and the sell and, and all that and, and the insurance gets looked at is, is more of a just an expense. I mean, one thing as opposed to the protection, you know, it messes up your noi if you have too much or you know, too much insurance expense. So, but the flip side, like you said, is it there’s, you know, the protection you get, and, and when you are facing a claim, that’s when you know, you’ve got some good insurance, so appreciate it, too. So true. So Vinnie, where can listeners go if they’d like to learn more connect with you?

Vinney Chopra 41:23

Oh, my gosh, you know, I’ve got a really great promotion going on right now. I’m so glad you know, I wrote that book, apartment syndication Made Easy, which really helped me a lot to raise money. And I’m giving this book free, by the way to everybody listening or watching as you could go to Vinnie chopra.com That’s my website www. Vinny just like the word v i n e, why not smile, don’t put smile in there but Vinnie chopra.com and slash free book slash free book and I also have Academy I’m also have a $50,000,000.05 or six C fund where I can talk about it and everything it say, you know, for accredited investors only. You know, if you’d like to invest with me, you could come there also, you know, invest with me yes, go to Vinnie Chopra slash invest. Or if you would like to, to learn from me, which I mastermind actually at four o’clock, I have a very good guest speaker, real estate attorney or no CPA coming to my mastermind. I’ve hundreds of students who are doing millions of dollars, I’m so happy, you know, who have taken my teachings. And now they’re doing 200 $300 million portfolios within two years, within two years and three years. It’s amazing. It’s amazing. And it’s not me. It’s them. It’s totally them. I tell them. I say I knew you when you join my academy. You were a mover and shaker. And you know, they’re doing very well.

J Darrin Gross 42:59

It’s great. They were very, I can’t say thanks enough for taking the time to get to connect and talk. It’s always great to hear from you and talk with you. Thank you. Looking forward to it again soon.

Vinney Chopra 43:13

Totally Darrin and if you’re in Florida, love to invite you, brother. You come to Punta Gorda, or Cape Coral on purchasing that one Palm Bay, Sebastian or Carla? I mean, Venice coming you name it. We are all over here.

J Darrin Gross 43:30

We will talk because I got some travels coming up some pesky.

Vinney Chopra 43:36

Thank you. Thanks. All right.

J Darrin Gross 43:38

For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 43:55

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Commercial Real Estate Entitlement Deals with Adam Gilbert – CRE PN #310

Adam Gilbert 0:00

Entitlements can mean a number of things. But specifically, it’s getting approvals from a city or a county or some municipality to do some form of real estate deal or development. And so that can be taking raw land and saying, hey, I want to build eight homes on it, that can be doing, you know, buying a building and then changing the zoning to allow for a different use that increases the value of the building. That can be you know, one product I’m getting a drive thru approved on a vacant piece of land that’s already in a shopping center surrounded by other businesses. So you know, if the land is worth, you know, we’ll make it easy 500,000 and then I can get these plans approved to the city to do a drive thru. Well, now I can maybe sell that piece of land for a million dollars, even though I’ve only invested some time at about $100,000 and architectural fees. So you really have the capacity if you can figure it out. To do these 5x and 10x type deals with minimal, you know, capital, but it is a bit on the riskier side.

Announcer 1:07

J Darrin Gross 1:26

Welcome to Commercial Real Estate Pro Network’s, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Today, my guest is Adam Gilbert. Adam is the president of the firm commercial, where he leads a team of agents specializing in commercial real estate sales, leasing, land acquisition, development, government relations and value add entitlement deals. And in just a minute, we’re gonna speak with Adam about value add entitlement deals. But first, a quick reminder, if you like our show, CR e pn radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome our guests are, and be sure to check out our YouTube channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Adam, welcome to CRE PN Radio.

Adam Gilbert 2:46

Thank you. I’m happy to be here and excited to have a chat today.

J Darrin Gross 2:50

Well, I’m looking forward to it. That makes two of us I guess now, the before we get started here if you could take just a minute and share with the listeners a little bit about your background.

Adam Gilbert 3:02

Yeah, definitely. So most of the deals that I do are in Palm Springs, California area, big hospitality area, Midwest endeavor hospitality, hotels and vacations. So I was born and raised here and went to school, I actually became an attorney. And I moved back to Palm Springs to practice law and found this little thing called real estate and real estate investing, which kept driving me away from the law office and out onto the streets looking at buildings and doing deals. So about I guess it’s about six years ago now I left practicing law full time, I started a real estate brokerage. I started a vacation rental management company doing Airbnb, which I sold and now I both run the brokerage helping people find commercial deals and do a lot of investments myself.

J Darrin Gross 3:51

Awesome. Awesome. So you were on the as far as the attorney work, were you doing courtroom stuff or corporate document or what what kind of?

Adam Gilbert 4:01

Yeah, mostly, I mostly did civil litigation. So I would get the file and then go to the courtroom and you know, do my argument or be negotiating on the phone. So paperwork and stuff was never my forte, but getting down in the details and doing transactional stuff. I’m much more of a talker and get things done that way.

J Darrin Gross 4:21

Gotcha. Gotcha. Well, the attorney thing, it’s kind of the you got to have them but it’s always kind of how the sausage is made kind of thing. And I always say I’m a recovering attorney. So there you go. So real estate, sounds like you were doing some investing in some air b&b. And he had the brokerage and and tell me a little bit about how you got started in real estate.

Adam Gilbert 4:48

Yeah, definitely. So I have, you know, ADHD to the nth degree in terms of starting businesses and getting involved in different endeavors, which I think was why Real Estate Investment is so great for me because I can do a few different projects at any given time and move on. But I was practicing law, I sat down for my broker’s license, and I did a deal is like 2012, the market was, you know, just coming out of the pits of 2008. And my uncle wanted to, he wanted to do a flip property. And so he’s like, hey, Adam, like, write it up, you know, you just got your broker’s license. And so I did, it took like, 10 hours, we found the property, I wrote it up, and I get this commission check. That’s like, 25% of my yearly pay as an attorney. And I’m just like, Whoa, there’s like something to this like, thing if I could figure it out. And so that’s kind of where the spark was born. And, you know, I can’t rely on my family to buy all the properties that to keep a career guy. So I had to, you know, hang a shingle create a company. And you know, I’ve been doing this now for about 10 years. And so I’ve been able to kind of mark my way on the brokerage side. And then as I learned from other people getting paid to do brokerage, what type of deals they were looking at, and where they can make money. I got a great education marketing paid, and it gave me the opportunity to start doing deals myself.

J Darrin Gross 6:19

Awesome. And, and so you started off though, kind of like in real estate doing the the brokerage side of things? Yeah. And then started investing yourself.

Adam Gilbert 6:28

Yeah, I mean, I started off, you know, at the beginning, you start off kind of where everyone does, you know, you’ll take any, any, any client that will work with you. So it started off in single family, residential, you know, kind of entry level homes, condos, things like that. And then, quickly, you know, I was able to kind of move into larger scale luxury vacation homes, and then moved into commercial where there’s just very few people, especially in our market, you know, if there’s 5000, residential realtors, there’s like 20, commercial realtors who are doing things, so I’m like, okay, like, if I’m going to do something, I should go into that space. And, you know, just kind of really fell in love with the deal making aspect and kind of all of the, you know, seller carry notes, and, you know, all these different ways to really make commercial deals work. And then I really found value out of title mints, which I know we want to we want to talk about, and that’s where I’ve really carved my niche as one of the very few people who are, you know, kind of doing these types of deals.

J Darrin Gross 7:29

Gotcha. So, let’s talk about the value add entitlement deals. Can you give us some sort of a definition or give us an example of what a value add entitlement is?

Adam Gilbert 7:45

Yeah, so you know, entitlements can mean a number of things. But specifically, it’s getting approvals from a city or a county or some municipality to do some form of real estate deal or development. And so that can be taking raw land and saying, hey, I want to build eight homes on it, that can be doing, you know, buying a building and then changing the zoning to allow for a different use, that increases the value of the building. That can be you know, one product, I’m getting a drive thru approved on a vacant piece of land that’s already in a shopping center surrounded by other businesses. So you know, if the land is worth, you know, we’ll make it easy 500,000. And then I can get these plans approved to the city to do a drive thru. Well, now I can maybe sell that piece of land for a million dollars, even though I’ve only invested some time at about $100,000 and architectural fees. So you really have the capacity, if you can figure it out, to do these 5x and 10x type deals with minimal, you know, capital, but it is a bit on the riskier side.

J Darrin Gross 8:55

Got it. So the the raw land and its use, and the drive thru as a as a, an option. Do you find that most of the the value add entitlement work you do is with raw land? Or is it common to have an existing built out structure? And the the use just be changed from you know, a to b?

Adam Gilbert 9:22

Yeah, I would say when, when talking about entitlement. I think most people default to raw land on that’s how most people think about it. I’ve really got I’ve now in the process of doing my third zone change. And so that’s kind of a little niche, even with the entitlements that I’ve kind of carved out to be able to try to achieve. And you know, every person, whatever town you’re in, you’ve got that piece of land or that building and you’re just like, why hasn’t anyone done anything with that? Or what why is it sitting vacant, right? And so for me that sparks some creativity is like okay, well probably doesn’t work how it is. But if we can change the use and allow something else there, maybe there could be some value that’s created. And so, you know, if you can buy it when it’s not approved for that, and then sell it what it is, there’s the opportunity to create the value add of the entitlement, you know?

J Darrin Gross 10:19

Yeah. So if there is that property that you identify, and and it’s just been sitting there, and the question comes up, why has nobody done something? Where that property? Is you and your own creative mindset that kind of thinks of what the alternatives are? Or do you go to the city and find out what, you know, what the limitations are? And is like, based on what neighboring properties are zoned, or their use? Or how do you how do you approach assuming you can’t go to the middle of a suburban block and in change it to a, you know, some sort of a, you know, way outside of the zoning news, but more of like a corner lot, or something’s on like a busy street or something like that is more of a target for something like this?

Adam Gilbert 11:10

Definitely. And so the answer is all of the above, it really hot, you have to one know what the community needs to you have to make sure that the use you’re changing it to is not going to be a nuisance to the area, it should actually be an improvement, you should be able to get your you know, if you’re trying to change to do his own change that people I mean, people complain about all sorts of things, but is a negative impact on the community to make money, you’re not going to be successful, because they’re going to go to their city council, and they’re going to go to all the levels, and they’re going to complain, and your projects going to get shut down. And then three, you know, yeah, you got to go to the city, you got to make sure it complies with different parts of the of the specific or general plan, you have to make sure that there’s no environmental impacts. I mean, I’m in California, and it’s, you know, we have a very high barrier, you know, in terms of making sure that we don’t have environmental impacts. So you got to be very careful. But you really have to check all of those boxes, and make sure that it’s a project that fits the community and the area.

J Darrin Gross 12:15

So in each one of these scenarios, where you you know, you have a piece of property that’s zoned in a historical way that’s kind of limited its use, nobody’s using it or doesn’t recognize the opportunities, because it’s not available right now. Is there like one, you know, governing body that you have to approach? Or is it a series of bodies that you have to get the checkoff approval and, and go through a sequence? Or is it every property is different? Can you talk a little bit about that?

Adam Gilbert 12:50

Yeah, so each city is going to have their own process. And you’d be surprised if you go to the planning desk of your city, they’re going to be very knowledgeable about this process and what it takes in that very city. Typically, what you would do is, you know, there’s applications to do different things. And if you find out what you’re going to need from your architect and engineer to do this, but most cities have, you know, like an architectural Review Board, which is the first step. And then secondly, a planning commission, which is volunteer people who, you know, review planning projects. And then finally, for like a zone change, you’re going to have to go in front of your city council and Mayor. And, and get those approvals. Now, sometimes, like in my particular jurisdiction, we have tribal lands, here, Native American tribal lands. And so we actually have to get our projects signed off and approved by the statewide tribal authority before we can do them. And sometimes they’ll, you know, ask for certain things. I have one project right now, that’s very close to the airport. And so I had to go through the airport land use commission. So every project is different, every city is unique. But those are the typical steps that you’ll have to go through for most entitlement deals. And sometimes, you know, Planning Commission is the end all you don’t have to go to city council. So it really just depends on the project and the municipality.

J Darrin Gross 14:16

Got it. Now, and you mentioned, you know, the public you know, always has, I guess the opportunity to voice their opinion for usage. Jeannette, do you find that if you are working within the system and and approach to kind of moving through the system into a, and you’re getting greenlights from everybody that public usually goes along, or do you find it that it is or is there something you found that’s like, you know, good luck with that the public?

Adam Gilbert 14:52

Yeah, the public is always the public. So I mean, I mean, you can find the best projects in the world and you’ll find people who will complain about it. You know, and that’s across the board. You know what I tried to do on all my projects, especially, you know, in Palm Springs, it’s very community driven. And we have a large neighborhood, active neighborhood organization groups. And so I, before I did my project, my most recent project, I went to the neighborhood during their, their annual meeting, and I said, Hey, this is the project that I’m proposing, I want to get your guys’s feedback, what are some issues that you’re having? Are you having negative impacts that I can address through my project? And they’re like, Yeah, actually, we have all these trucks coming from ups that blow through our neighborhood early in the morning, every day. And I’m like, Okay, well, maybe I can propose some speed bumps, or some speed humps, or you know, something along those line lines in my project that will alleviate that. And so you know, as a developer, you have the opportunity to solve problems, you can create a lot of problems, too. And so, you know, you have to be aware that, you know, you have an impact in the community, and you’re coming into someone’s existing home or business or, you know, commercial area, and having an impact. So, you know, you can try to kind of sneak through, and a lot of people do that. But it really depends on the community that you’re in. And that’s going to be in the developers discretion as to how they want to pursue it.

J Darrin Gross 16:20

Yeah, I had a little bit of experience with that. And you get a angry mob, and it’s tough to tough to beat on me. Oh, yeah. Yeah. So you identify a property, you kind of you get your creative thinking hat on you, you approach the different bodies that kind of regulate the decision making you get some direction. What What have you found kind of a timeframe. I mean, this is, this is not like, you go down on a, you know, a Thursday and Monday, you’ve got a permit and you’re ready to, to pray or you can sell the property, you kind of say, What, is there any kind of a rule of thumb, do you just kind of like in your head, kind of assume that it’s going to take X amount of time to get something done?

Adam Gilbert 17:13

Definitely. And you know, the old real estate agit adage, it always takes twice as long and costs cost twice as much as you originally expect. It’s kind of the same here. So I mean, if you’re not doing his own change, and you really just want to like get some you say, Hey, this is a great piece of residential land, residential, Real Estate’s going through the roof right now, let’s get some new homes approved. And again, this is California, I’ve heard that there’s other states that are way easier on this. So this is probably the hardest, except for maybe like Hawaii, which I know has their own process. It’s usually about six to nine months, if you’re on top of it to get products like that approved, if you’re trying to do something a little extra, like a zone change, anticipate about 12 to 18 months. But the way that I structure my deals to give me the most flexibility and hold by cash and not get too tied down to a deal is that I structure my purchase to have very long escrows to allow me to do these entitlements, or do an option that gives you a long enough amount of time to be able to exercise that option once you get those entitlements approved.

J Darrin Gross 18:22

Got it? No, I was going to ask you about that as far as the time goes, and how you structure the deal, because I’m assuming that when you identify a property, and you need to gain control of it, so that somebody else doesn’t figure it out, or you know, figure out that you’re doing all this work and jump ahead of you and tie up the property. So step one to be gained control of the property is that

Adam Gilbert 18:48

is that kind of the definitely and making sure that you, you have options to extend as much as you can? You know, because the last thing that you want to do is to all these entitlements to a project, your time runs out, and you can’t sell it or you can’t do anything with it, and you can’t close on it. And now all these entitlements go to the property holder and the owner, right? So timing is always, you know, people talk about location, location, location. My business is timing, timing, timing, and making sure you have enough time. And one of my first deal we actually had, I’d say the fair market value was probably around 3 million, but we sold it at 2.6. Because we needed to close it within 30 days. And so that was a timing issue because we didn’t want to do all this work, spend all this money and get no return. So flexibility is key.

J Darrin Gross 19:44

And is that pretty common with land deals as far as just kind of the understanding of the way the deal works is that you’ve got somebody and the seller I’m assuming there’s some sort of compensation money he goes hard and or whatever, as far as When you write up a deal that there’s a fee that you’re putting down, and then the option fees, and do those options then apply to the purchase if you execute, or can you talk a little bit, then

Adam Gilbert 20:13

Yeah, 100%. So typically, I’ll have a 60 to 90 day initial due diligence period, at which point, depending on the size of the deal, you know, 20, or $30,000, will go hard. From there, I’ll have maybe another six months after that, to kind of do some more due diligence, at which point, I would have to put in another 20 or 30,000, to get another three months. So that there gets you your year, essentially. And but all of those become non refundable, but applicable to the purchase price. So that if you do close that, you know, the those count towards it. But you know, most of the time, with land, it’s just sitting there anyway, so the owner has really not many expenses. And if you give them their price, they’re willing to give you terms if you’re, you know, if you’re trying to come in and lowball them, they’re gonna want you to close really quick. Same thing with a building, you know, when I did the zone change on on that the building that was referring to the 15,000 square foot warehouse, he had it on the market, it was overpriced. And so it wasn’t doing anything, but I gave him his price, but I got my terms, and I got my time to be able to do it, so that I was able to create that additional value.

J Darrin Gross 21:24

Now, this whole kind of entitlement deal thing just makes me think about how many times and I’ve seen something, you know, and that God that, like you see a property, there’s a structure, and there’s a big lot that’s vacant, you know, I’m thinking like God, if you cut that off and sell that, and do this and do that, and and i’m assuming there’s some entitlements, most the time that haven’t been figured out, that’s why there’s no movement, or there’s, I don’t know, maybe there’s just not enough demand or whatever. But it seems to me like a lot of fun, but also probably kind of test your patience just on the on the time it takes to make a deal as opposed to like your first deal with 10 hours of work and a big paycheck kind of thing in it.

Adam Gilbert 22:09

Yeah, it’s, it’s, I describe it as Hurry up and slow down, right. So you’ll have like something and you know, you’ll have this hearing coming up, and you’re working 10 to 20 hours, you know, on that week, getting everything ready. And then you don’t do anything for three months, right as it’s like going through the process. And so it’s a lot like that. And these deals allow me to do them on the side of my, you know, regular business, which is the the brokerage that pays the bills and keeps it going and funds, essentially some of these investment deals. And so, but yeah, exactly to your point, you know, people, there’s always things that can be done, but people either don’t have the imagination, the time, the money or the patience to do it. So if you see that raw piece of land with a defunct building on it, but you’re like, man, I could put a drive thru on that corner and then build a strip center around it, you don’t have to actually build it, if you just get it approved, you know, and you get that like drive thru pad approved, you sell that to a developer who does Carl’s juniors, or Wiener schnitzels, or Starbucks or whatever it is. And if you think about it, and you know, it’s like, Okay, well I paid a million for this land. Well, now I just sold that pad to Starbucks for a million dollars. And though everything else that I’m going to do on it is now gravy. And so that’s how I think about it and not every deal works that way. But you can really create a lot of value if you can think outside the box and then do the work that you know the guy who’s developing Starbucks he’s doesn’t want to learn every city council and what they want and to go through all the meetings he wants to develop Starbucks so if you could become an expert in your jurisdiction of what you’re doing there’s going to be a lot of opportunity for you to create those relationships over time

J Darrin Gross 23:57

No, that’s that’s a good good insight there do you with a knowledge and local knowledge does it help you then kind of look out in the in the community to see where like a path of progress is or identify you know, if there’s a one a new expressway or the one to create a certain zone or whatever it’s give you kind of insight as to you know, if you hunt down that area you find something that’s good this could work or or is it more in your real estate? Business a your you’re familiar with the area and then as you hear these ideas from the I guess the knows a planning commission or whatever, they want to change some zoning stuff that or I guess I don’t know, it makes sense but he is or his or one that leaves the other or like, Is it the the the planning commission that leads or is it just your basic knowledge of the real estate that leads or is it kind of a combination of the both, you know,

Adam Gilbert 24:56

it really is a combination of the of the both, you know, you have to think Long Term about things and not where things are today. But where will they be three to five years from now. And so if you find out that, you know, we’re having an arena built in our in our jurisdiction for a minor league ice hockey team, right, so Okay, well, they’re building an arena. Well, now that’s underserved for fast food in that area, right. And so when, if you pay attention to things that are coming in, you know, once they build they’re in, it’s too late, you know, but if you can keep your eye to the local newspaper, you’d be amazed how many people don’t follow the local city council meetings, you know, I’m not saying that you have to, you know, sit there and watch them because they’re exceedingly long and, you know, boring unless your particular project is on there. But getting a quick update about what the decisions are, or even just looking at the agenda, Oh, wow. Like, you know, this developer is trying to get a chick fil a approved, they’re like, Okay, then I’m going to take a look what’s going on around there are there any lots that I can identify that, you know, I can now try to tie up and, you know, so doing a lot of that work, and just thinking ahead, and being proactive, instead of reactionary, is gonna lead to, you know, in my experience, a lot of success.

J Darrin Gross 26:12

I love it, the just kind of really thinking outside of the box. And I think also, there’s got to be a discipline of time, and just kind of, I don’t think that most people have that sense of time. Yet, or the willingness to wait for something like that, for the payoff, it seems more like I mean, you know, if you’re, if you’re talking, you know, flipping, they’re looking for a payout, you know, right away, or even just as a real estate broker or list sell, you know, get paid kind of thing. But more of kind of that, that long term, in, you know, what we’ve talked about, so far, as you’re not even doing the work, you’re just getting it all, you know, greenlighted so that the work can be done and making the sale. And then there’s the whole nother level of, of getting the permits and doing the work and all that. So I mean, if you had an idea for a party, you know, you tie up a property, you go through your year long process to get it to the point where it can be approved, then whoever buys that property has another permitting process. So you could be an in construction process, you could be literally two to three years from your idea to the actual product that’s, you know, the public is able to see and use and go visit is that pretty terrible,

Adam Gilbert 27:31

Very easily. And that’s why if you can do that first step of getting that pad approved, it makes the, you know, the tension for whoever wants to develop that pad in the future. So much easier. So it’s not a three year process. for them. It’s now a one year process, like Oh, the pad is approved, we’ve got it, now I just need to build my, you know, Etch A Sketch model of it looks the same, and I pop it here in each different place. And you can even get to the point, you know, I can’t even screw in a light bulb, but you can be that you can develop it yourself, you know, be a contractor or team up with a contractor and build it out and lease it out. There’s lots of developers who go the Full Monty, but I really tried to specialize on the, on the first part of the equation. That’s that’s what I like to do.

J Darrin Gross 28:19

Yeah, that’s interesting, as you mentioned, that being the first part, or being you know, near the first part kind of thing is really where the opportunity lies. I know, years ago in college, I remember I was working for a landscaping crew and we were out in these new developments. And I remember that, at every exit ramp off the freeway, the first thing that would go in was like a quick trip or some sort of a, you know, convenience store with Yeah, that was that was the landmark that said there was you know, progress was coming. And, you know, I guess if you would have you know, bought on the other side of the street or you know, put another gas station in or I guess this is you know, it fills in there but just kind of one of those cues, I guess for you know, progress and, and how to recognize them and be you know, something to learn and recognize them and find so

Adam Gilbert 29:13

That’s definitely any and each city or each jurisdiction is going to have their own cues. You know, I know as soon as a chick fil a comes into certain place, you know, like everything blows up around it or in and out is what we have it’s like you get an in and out like boom, your property values all around it up because didn’t know is going to drive the traffic. So if you follow it say hey, look, you know, they’re proposing this or this is coming. You know, you can you can predict the future.

J Darrin Gross 29:43

Yeah, well, it is, you know, it’s a different lens to look through. I think that you know, most people are, you know, when I think of investing in more of a ready, built property, not something that’s ground up for construction or With it, it’s more of kind of a the the surrounding area, kind of the demographics, the ability for people to pay, you know, what, what’s there that’s going to attract somebody to the property and make it make it valuable? And then if you have the opportunity increase rents, or, I mean, typically, when I think of, or when I talk with people about value add, it’s more about how can you reposition the property, from a physical standpoint, or even operational management standpoint, you know, if the sellers kind of tired, and it hasn’t really been keeping up with, you know, the market, or if the property is tired, and it needs to refresh, those are typically the things that I hear from people that are doing, quote, value add, you know, investment strategies, but what I love about yours is it’s, it’s, it’s basically just how, you know, how far can you think outside the box. Now, it does sound like there’s a fair amount of capital you have to have available to, you know, tie up the property. And then exit exercise a number of extensions, if needed, in order to get it. And, like, I’m assuming, you know, either know, somebody like you or be willing to walk through all the steps to get it to the finish line, so that you then can, you know, have that potential sale or so many in that, there’s also the need to have some further conversation with potential investors, buyers, developers that would want to develop a property like that. So it sounds like it’s I mean, there’s, there’s a lot of hats you’re wearing there. And but it’s kind of cool, I like the kind of the way your, your, you know, what you what you go through to get the property to the next stage.

Adam Gilbert 31:47

Definitely, and I know, you always discuss the factor of risk, you know, on your show, and in any given deal. And just to point out like, this is an ancillary part of my business, because the amount of capital that you have to put in, as you mentioned, with the non refundable deposits, with the architect, with the engineers with the city fees, if you are unsuccessful, and getting your entitlement or your zone change, that all goes away, and you have no tangible asset left, because all you had was an escrow or an option. And so this type of work is on the riskier side.

J Darrin Gross 32:25

Right, right. So let me ask you, the question that I do ask people is, what is the BIGGEST RISK? Is that what you? Would you? You would, you know, your BIGGEST RISK would be just that?

Adam Gilbert 32:40

Yeah, I mean, yeah, this is probably on the riskier side of the type of investment deals that I do. So I mean, I have a shopping center that I’m doing a value add facade enhancement on, you know, that’s a tangible asset, these entitlement deals, I would say they’re on the risk there, they are probably the biggest risk in terms of deals that I do. Because again, if I’m unsuccessful in getting the entitlements, I’ve now just pissed away all my money for something that I was able to create no value on. But the if I am successful, then the returns are high enough, you know, 5x 10x, to justify that risk. And, you know, what I equated to is off playing poker, you know, I try to do as much due diligence as I can. And if I’m holding two kings, if I’m holding a great hand, I can still lose, you know, but I’m taking a calculated risk. And knowing that I’m willing to make a bet, because I’ve, I think that this is where this particular property and this project needs to go.

J Darrin Gross 33:45

No, that’s cool. That’s cool. I like that. In your line of work, when you mentioned, like, there’s 5000, residential, real estate agents in the area, and like 20, you know, commercial, or some sort of ratio like that. Yeah. Do you find that there’s even fewer that work in the entitlement place? I mean, I’m assuming not all of those commercial brokers work in the entitlement

Adam Gilbert 34:15

era. Yeah, very few. I’m always surprised how few commercial brokers actually even own commercial real estate. I’m like, come on, man. Like, this is your business like you should be you should be picking up all the best deals, right. But yeah, they’re, I would say even fewer, you know, there are like consulting companies that do this, you know, large usually for larger developers or big corporations. And you know, they’ve got engineers, architects on staff are typically very expensive to be able to, and that’s why projects cost so much, but if you’re building like a Walmart, like me, you know, like hire a big company with like all of the staff and the relationships to do that. What I do is, again, I say I’m not looking for homeruns I’m looking for singles and doubles. I’m looking for small projects that are probably too small for the big guys. But fit right into my little niche of where I mean if I can create $500,000, or you know, to a million dollars on a project and value and that’s usually where I’m going for, I can do a couple of those every year I’m set. You know, that’s, that’s, that’s great. I do one of those in a year that you know, you’re having a great year, but that’s kind of the small niche area that I look into. And there are opportunities there because they’re too small for the big guys. And most people don’t have the knowledge to be able to take it to the next level and do what I do.

J Darrin Gross 35:35

So, well, Adam, where can listeners go if they’d like to learn more connect with you?

Adam Gilbert 35:41

I’m on all the social media platforms Instagram, Twitter, Facebook, I’m either at Adam Gilbert 13 or Adam Gilbert ESQ as an Esquire and feel free to follow me, chat with me. Go to my website, Adam Gilbert, Esquire, ESQ dot com or the firm commercial.com.

J Darrin Gross 36:04

Adam, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I hope we can do it again soon.

Adam Gilbert 36:12

Awesome. I’d be happy to be back any time.

J Darrin Gross 36:15

Announcer 36:34

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House Flipping Investor Deals with Viktor Jiracek – CRE PN #309

Viktor Jiracek 0:00

What’s really cool about flipping is like you’re in, you’re out, you get a big check and then you can move on. So typically, on average, my flips about 30k net profit, give or take some deals are better. Some deals are worse. But that’s typically the average. And what’s really cool about is like you now get this big check to walk away with, with the rental side of things like I would have this big check. With the rentals like I would be on the hook for ongoing maintenance tenants, like I still have to like the property was in the back of my mind forever to take care of with the flipping like you’re in and out, and you don’t have to worry about anymore.

Announcer 0:34

J Darrin Gross 0:53

Today my guest is Viktor Jiracek. is a real estate fix and flipper based in Gainesville, Florida. He completed 40 excuse me 20 flips last year and is on pace to do an additional 30 flips for this year 2021. Ironically, his best flip was a $64,000 net profit deal that almost that he almost backed out up. And in just a minute, we’re going to speak with about what makes a successful flip, and how to get started to do your own flips.

To learn more about insurance for flipping properties, go to:

https://www.buildinginsurancerisk.com/insurance-for-flipping-properties.html

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Viktor. Welcome to CRE PN Radio.

Viktor Jiracek 2:24

Thanks for having me. I’m excited.

J Darrin Gross 2:26

Well, I’m looking forward to our talk today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Viktor Jiracek 2:35

Yeah, for sure. So I’m a fixin flipper. So just to give a clear definition I buy property fix it up sell it so I should take ownership of it. Primarily fix and flip I live in Gainesville do most of my deals locally for Alachua County went full time about two and a half years ago I used to work kind of corporate as healthcare full time realize it wasn’t for me for a number of reasons that went into flipping real estate really enjoyed it as to where I plan to stay forever. So that’s a quick introduction on me, but I really fell in love with the flipping process. That’s why I’ve really been focusing on recently.

J Darrin Gross 3:09

Awesome. So you’re down there in Gator Ville or Gator land. Is that right? Go Gators? Yeah, University of Florida. Yeah, exactly. So well let’s talk a little bit about that. So you You said you you were in medical industry and decided that wasn’t for you? How did how did you decide the real estate was more attractive vehicle for you?

Viktor Jiracek 3:33

Yeah, so I don’t know if you can relate to this but I always had like in the back of my mind like a real estate real estate real estate. So it’s almost always like hey, I want to do this thing and then the next thing is once I get some money that I can go into real estate so it’s always like this thing that followed me around for years and years and just you know finally decided to take a leap I it didn’t make sense to me to like okay, let me do this thing so I can do this other thing I figured out like what if I just do a straight shot to what I actually want to do and the rest is history

J Darrin Gross 4:03

So flipping houses, I mean there’s there’s multiple opportunities in real estate, different asset classes and different ways to make money what is it that appealed to you about flipping houses?

Viktor Jiracek 4:18

I really liked so there’s a couple things so the first thing I really like about flipping houses is like you get to see the transformation so you’d buy a house and it’s kind of crummy beat up outdated you paint a you fix it up you make it all nice then suddenly it’s it’s nice modern cool thing everyone wants to live there. Before people saw it before pictures they run away like I don’t even want to be near this place. And then suddenly afterwards like everyone’s running towards like I man I want to buy it. So it’s really cool to see that transformation just to see like it really improve as a property improve the neighborhood to a lot of times we do a flip and then we’re suddenly the house nicest house in the neighborhood from worst to best. So it’s cool to see that. That’s the first thing I really enjoy about the second thing I’d say what’s really cool about flipping a Like you’re in, you’re out, you get a big check, and then you can move on. So typically, on average, my flips about 30k. net profit, give or take some deals are better, some deals are worse. But that’s typically the average. And what’s really cool about is like you now get this big check to walk away with, with the rental side of things like I would have this big check. With the rentals, like I would be on the hook for ongoing maintenance tenants, like I still have to like the property was in the back of my mind forever, to take care of with the flipping like you’re in and out, and you don’t have to worry about anymore. So I really liked that that quick nature of it, where you can move on to the big paydays is really exciting to that, I’ve seen that, especially with a lot of beginners, you know, getting a plus 300 bucks a month from you know, good rental, that’s exciting. But what’s really life changing, as you know, plus $30,000 in your bank account, you start to think differently, start to act differently in a good way, you start to have more options open if there’s a sort of emergency like you can handle it. So that’s what I’ve seen. That’s what I really enjoyed about the flipping.

J Darrin Gross 6:01

Gotcha. And it as far as the the, the actual the the work, the the changes the property from the the worst to the best on the block there. Do you do the work yourself? Do you have subcontractors? How do you go about doing that.

Viktor Jiracek 6:18

So when when I started, I actually did the work myself, like the painting and the flooring, there was a couple things wrong with that. The first was like I didn’t have that much time. So once you start to do more and more volume, like your time becomes an issue. Second thing I’m not very good at those things is when I found out, it’s much better to get professionals in there. So where I’m at now have a project manager and then she hires the people like hires the painter pays the painter hires the flooring person, you know, pays the flooring person. So it makes a lot easier that way. We don’t have to worry about that sort of thing. So especially as you do more and more like if I wanted to do 30 this year, I’d be killing myself working 24 seven trying to fix all these places up. So that’s why I recommend, there’s a lot of different ways to do the renovations. There’s like the Do It Yourself model. There’s the GC model. And it really just depends on the person and their their preference. But it was realized that there was going to be a trade off like time and money. So if you do it yourself, it’s going to cost you time save you money. If you hire it out fully from GC, it’s going to save you time costing money. So it was always that balance to play with as you’re getting into the renovations.

J Darrin Gross 7:21

And speaking of the time aspect, what do you What’s an average time for you from acquire to sale?

Viktor Jiracek 7:32

Yeah, so from closing table, the closing table, I think we’re on average about four months, one month to 45 days is like the actual renovation. Then we spend your we listed it’s a luckily a hot market now. So typically within a week, it’s under contract. And there’s the inspection and appraisal, you know, all that stuff to work through in the closing that typically takes 30 days, 45 days, so typically a four months on average. And then some of them take less someone take more, but that’s what we’ve been seeing recently,

J Darrin Gross 8:01

Got it. And, are most of yours more of a cosmetic flip, or are you getting into roof lines and bumping out walls and changing the floor plan or doing anything behind the wall kind of stuff.

Viktor Jiracek 8:17

I try to keep them as simple as possible. Like we’ve done the full gut jobs. And then we’ve done the cosmetic lipstick on a pig. Sometimes people call it. So we’ve done both. we’ve really done both there. I really liked the quick simple ones were like you’re and you’re out, you can move on. Just because like once you start opening up walls, changing the layout, you know, doing all that stuff, you start to open a can of worms where you open a wall, it’s like, oh, we didn’t realize we have to do this. And now to fix this. And now like you keep adding to your budget for the renovation. So I just really liked the quick in and out paint flooring as much as possible. But you know, I’ll do anything where the numbers make sense.

J Darrin Gross 8:55

So how do you find your deals? What’s the, the source or how do you source your deals?

Viktor Jiracek 9:02

Yeah, I know for sure. So about half my deals I source on my own through like cold calling through, just like Facebook groups, a lot of referrals. And about about half are wholesalers and for your audience. Maybe they know what a wholesaler is. But just to give a good definition. So wholesalers, basically someone who goes out and finds deals, they put it under contract and they can sell you that contract. So I’ve had a lot of luck with them trying to build relationships with them and they send you on they send deals and there’s a whole wholesaler movement taking place where it used to be that here in Gainesville when I started there’s like maybe one, maybe two wholesalers and now I have like 1520 wholesalers on my list. So suddenly it’s like a brand new movement. And that’s great for me. For the most part where they bring me deals I don’t have to do anything. It’s like oh, here’s a deal on a silver platter and it makes my life a lot easier.

J Darrin Gross 9:55

No and that that makes a lot of sense. The you know more bird dogs out there. Finding the opportunities. That’s great. So, funding you mentioned in the beginning, or when we were first talking about, you know that that hurdle of, you know, the way to get a big pile of money together, how do you? How do you do that first one kind of kind of thing? Can you? Can you share a little bit about how you go about funding? Your flips?

Viktor Jiracek 10:26

Yeah, no, for sure. So there’s a couple ways to do it. I’ll talk about the one my first flip where that was, like I was, I had a low 500 credit score. And then I had maybe a couple 1000 in the bank, and I was still able to get the flip down. So basically, what happened. So I found this great deal was a lady as a nurse who was living at a state, and she was tired of the property and got hit by Hurricane Irma. And she was just tired of dealing with it. And her, her mom passed away. So is inherited properties, there’s a couple layers of motivation there, and she just choose one to be done with it. She’s like, Hey, I’m out, I don’t want to, you know, I just want to sell it. So I got the property under contract. What I did Max, it was a great deal. So we’re gonna buy it at 105, we’re going to put in about 25 ish, and then sell for 170 to 200. So that was a plan. So there was there’s room there, there’s a good potential profit there. So it was a it was a good deal. So we got a good deal got under contract, what I did next I reached out to my network, I found what’s called what I call like a money partner. So I found the deal, I would help with the renovations, I would help sell the property, I’d be like the boots on the ground sweat equity, like I would be the one who putting it all together. And they would be more like a money partner. So they would put in all the funds to buy it to fix it up to sell it. And then we would split the profit after that. That’s how I got my first one done. And you’d be surprised like how many people in your network have the funds for these types of deals. It was like plenty of different ways to structure but it gets you started got me started. So I was able to turn that deal into into multiple deals, start doing deals on my own, which is what I’m doing now. So makes it really exciting. But that’s how I got my first deal just using that money partner model and we split the profits. And it just it’s a hell of a start. It’s a great start. Because my first year I did like two then I did eight the last year 20 then this year 30. So like it just gets you going. And that’s exponential from there, which is really exciting.

J Darrin Gross 12:18

Yeah, and that money partner, do you find? The first one is pretty challenging together? How did you go about conveying to your your money partner that you were, you know, able to pull this off.

Viktor Jiracek 12:37

So how I did that, I just basically share the numbers like, Hey, this is what we’re buying. And out, here are some pictures of what it looks like, how much work it needs, and this how much we can sell it for. And then once you share that number, like hey, we can make on that one we made. I think 28k. net, we wanted more. But we always want more, but 28 is what we ended up with. So we split that. So just sharing that like, hey, if you put money into this deal, we can potentially share this, this profit, so you kind of sharing the benefit with them. And then also at the same time, it’s you can mention, a lot of people especially have money just sitting in the bank, and it’s earning, you know, point a 1% interest. So might as well put it to work. There’s a lot of people who want to get started real estate, and they just don’t know how to get started. And when you give them a sort of opportunity, you know, they’ve been sitting on their money for a while, hey, I’ve been watching HGTV I want to get into real estate. So we’re just lines up. And it makes a lot of sense. Not to say typically, your first deal is going to be the hardest, it does get easier over time. So just just to answer your point. So yes, it is going to be a little bit harder the first time but it does get easier once you build a track record and know what you’re doing and all that good stuff.

J Darrin Gross 13:47

And as far as the cost of money for something like that. I know, as an insurance agent, I’ve worked with a lot of flippers over the years and and I think there’s definitely the difference between the person that’s got some sort of a clock in their head that understands they need to get this project done. Versus the person that doesn’t have that clock and it lingers and lingers and lingers. kind of thing. You mentioned your your average time is about four months. Your first one can you tell how long that one took?

Viktor Jiracek 14:22

Yeah, so the renovation took about eight weeks. So about two months. It was listed for about two weeks, then got then got under contract. And then I think to close that one was about 30 days. So that was two plus half. So like in that same timeframe, roughly so three to five months, roughly.

J Darrin Gross 14:39

That’s great. So you were able to keep that that kind of timeline gone. That’s great. And luckily Yes, in when you when you’ve run your budget, you know you’ve got your acquisition costs and your renovation cost. In view, you’ve got your four months Thailand, is there a I mean a carrying cost kind of market rate. What kind of range? Are you seeing for that kind of stuff? You mentioned? Like, you know, if you leave your money in the bank and get around 1%, what what kind of range? Are our money partners? What, what kind of rate? Do they charge for that?

Viktor Jiracek 15:13

It’s going to depend on the money partner. So for some people,

J Darrin Gross 15:17

I guess if you’re splitting the deal to that,

Viktor Jiracek 15:19

yeah, that’s, that’s where they get their benefit. So it’s one of those things, it just depends. For that first money partner, it was, I think it was 70 3070 them 30. me. And again, I was just happy to get that first deal done, which is awesome. So that was the first one. Other ones I’ve done 5050 some of them, it’s been like 5050. And they want like a 6%, like, payment and kind type of thing. where like, they charge 6%. But you don’t necessarily get a bill for 6%. You just at the end, they will get that. So I’ve seen all different ways. It just it’s really person to person. So there’s no correct answer, like whatever both parties are, are open to, again, I’d highly recommend like, hey, just get your first deal done, you’re going to build so much momentum out of that. And you just you’ll be surprised where you’re at. And, you know, a year, three years, five years,

J Darrin Gross 16:12

right? No, I and I totally agree. I mean that the experiences kind of like your down payment, to really kind of, you know, start your business and get really going. So that’s, that’s great. So I think before we started recording, you and I talked a little bit and you’d mentioned kind of a philosophy of do a flip, buy a rental, do a flip, buy a rental kind of thing. Can you talk a little bit about how you see that? And how you encourage people or what what’s your philosophy on on, you know, flip rental flip rental kind of thing?

Viktor Jiracek 16:48

Yeah, no, for sure. So it’s one of those things, I see a lot of beginners make the mistake, like, okay, want to get into real estate. So the first deal is a rental. And the problem with that, at least as how I see it is like you’ll put some money aside, you’ll put that as a downpayment into rental, and they’ll start cash flowing, that’s awesome. Nothing wrong with that. But it’ll take you for you to do your next deal, it’s gonna take quite a long time, you have to save for years and years, save the cash flow, save your income, until you can finally do another nother deal. And that’s gonna be the same story like it’s going to take a couple years to do that next deal. So that’s why I recommend flip rental flip rental, because then like you do a flip, let’s say you’ll make 2030 40,000 awesome. Put that as a downpayment into a rental, and then do another flip. You know, put that as a down payment into another rental. But that way that speeds up that process like now you’re acquiring or like generating capital that you can then put into rentals. So it’s just really exciting that way, where you just basically buy as fast as you can flip houses, you can buy rentals. So then it becomes like, how many properties Do you want to buy? How many flips Do you want to do, then you’re not stuck waiting for long periods of time. So that’s the philosophy behind that. And it doesn’t have to be that specific ratio, it can be like two flips one rental or, you know, three flips, one rental, and I’ve seen people make permutations of that to where it’s like a flip a number or like a flip in a multifamily. But they kind of play around with that formula, but then you can accelerate your real estate, you know, so I’ve taken 10 years to build a decent portfolio. I’ll take you, you know, three.

J Darrin Gross 18:21

What’s an ideal opportunity look like for you?

Viktor Jiracek 18:26

Yeah, so we typically buy so we buy houses, condos, townhomes, mobile homes, so we’re pretty open. If someone’s living in there, well, you know, someone can live in there, we’ll flip it up. And luckily flipping is as simple as buy low, sell high. So even like a mobile home, sometimes you buy it in the like for 50 and put in 10 and sell for 100. And that’s still a deal. We’re just buying low and selling high. Typically how we look at deals is like what’s called 70% rule. So for your listeners here 70% rule 70% ARV minus repairs is your max offer. And your RV being after repaired value is like when you listed retail. Once it’s all fixed up, what can sell for is what the ARV means. So 70%. So just a quick example. Let’s say you can sell a place for 100,000 you to put in about 10,000 into it in terms of repairs. So that means your max offer is 60,000. So that’s the max you can play for pay for a place. So if someone says, Hey, I want to sell you this property for 50,000 Yes, that’s a deal I’m in. If they say hey, I want to sell you this place for 80,000 as an example, it’s like oh, I don’t know those numbers are too tight. That’s not a deal. So it makes it really, really clear. Like what’s the deal? What’s not a deal? Because there’s a million other factors that can go into you know, what’s the deal and what’s not versus just the numbers. So like, what about the neighborhood? What about the school? This is a two bedroom, one bath on a three bedroom two bath, which is what everyone wants? Or, oh, the square footage is a little bit smaller. Oh, you know, like anything Kadima. There’s million variables, but I like just this still up to the numbers, that it becomes super clear like okay, this is a deal. This isn’t a deal. That just makes it much easier to analyze these properties. JOHN.

J Darrin Gross 20:05

So based on the number of properties you’ve done, we’ve talked about some of your your home rounds or your better one. So there was one Nagesh made 64,000. Can you talk about one that didn’t go? Well? Is there any, any that you were happy to get out of? Or have you made money on all of them.

Viktor Jiracek 20:25

So luckily, we’ve made money on all of them, sometimes not as much as we want were set out to make 30,000, we made 10,000 In the end, so that that happens, too. It’s tough to bat 1000 at you know, 30 cage. So one of the less less fortunate deals. And again, I see all these as like a learning experience. So it’s like, okay, cool, I made a mistake, I won’t make that mistake again, after going through that painful process, and then you just grow and improve. So your highs get higher, and the lows get less, less low. So you kind of spiral upwards positively. So there’s a deal we bought here in Gainesville, I was just a normal concrete block house. Standard. The guy was initially what we thought is he said he had some tenants and they were bad tenants. So I need to get them out. So like, okay, ended up he was late on his taxes. And if we didn’t pay his tax bill, like, while in the negotiation process, then he was he was out, like, I mean, he, they were gonna auction it off and, and sell it. So we would pay the tax bill. Great, went through all the closing, he’s kind of a hassle to deal with, to say the least, but eventually closed. And then this is the mistake we made, we didn’t give what’s typically called like a post closing occupancy agreement. He said, like, Oh, I have some stuff in that place. Some tools, give me 30 days, and I’ll get them out. So typically, what we’ve done in that case, like there’s a post coast closing occupancy agreement, like if you’re not out, within this timeframe, there’s some sort of penalty, when you close, there’s like a hold back, you don’t give them all the money, because you want there to be some sort of penalty if they don’t, they don’t comply. For that’s the only property we’ve never done an on. And that’s the one we needed, unfortunately, so he didn’t move out in 30 days, it took us I think, like two or three months to finally get him out. He was on some sort of drugs or something. And then he was even resentful and bitter, like, Hey, I know you guys are gonna make a ton of money on this property I should have, I could have been able to fix it myself and could have made the money myself. And I mean, we saved him from losing the house. So not to say he had to be grateful, but to be negative towards us, was a slap in the face. So eventually got him out, got his stuff out and to keep following up. At one point, he went to jail for about a month and has a lot of stuff there. So we’re kind of waiting for that. And that entire process of venture went through. So we ended up renovating it, fixing up selling that one pretty smoothly. And then we you know, we were done with the deal. I think on that one, we made maybe 12,000 net profit. So not a homerun but still made money. And just a good learning lesson post closing occupancy agreement. If they stay in the property, if they’re moving out, you’re not a big deal, but they’re gonna stick around.

J Darrin Gross 23:06

Yeah, know that, especially with all the landlord tenant laws. I don’t know how they’re in Florida. But I know out here that’s that’s definitely a touchy situation. So , let me ask you. So I know that you’ve been doing this now on your own for a couple years. Yeah. And now you’re also working with new investors that are looking to get into flips? Can you talk a little bit about how you work with your students? Or how you mentor? People?

Viktor Jiracek 23:37

Yeah, no, for sure. So how I do it. So I flipped myself full time. But I also mentor people nationwide on how to flip. So students all over like Michigan and Texas, New York, like any state, I have students there. It’s a pretty, like, pretty involved process. Like they get direct access to me anytime you have a question they ever want to send me a deal to analyze, we can, you know, review the deal together? You know, so it’s pretty involved. It’s not necessarily just like a course, you know, here, good luck. It’s pretty involved with the entire process and trying to help them out throughout that entire thing. Yeah, so it’s exciting stuff. And I just help people. I’ve helped a lot of people get deals, one of my students actually beat my record. So on one flip, I made about 64k. I thought that was really good. And then on her first one, I think she made like 85,000 plus. And it’s, it’s exciting. It’s also humbling, where it’s like, well, wait a second, maybe I’m not as good at this is I thought, but she’s gone on to do other deals. And that’s, that’s great. But that’s pretty much it. I just mentor people throughout the entire flipping process, like how do you get the money? How do you get the deals? How do you run your numbers? How do you hire contractors, like any good thing you could think of a to z. So when I help folks Out With Dad,

J Darrin Gross 24:49

Hey, , if we could like to shift gears here for a second, yep. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. There’s there’s three strategies we typically turn to, we look to see if first we can avoid the risk. If that’s not an option, then we look to see if we can minimize the risk. And when we can no on cannot avoid or minimize the risk. And we look to see if we can transfer the risk. And that’s what an insurance policy is. I like to ask my guests, if they can look at their own situation, could be their clients, investors, tenants, the market, you know, however they want to identify, risk, but take a look at their own situation and identify what they consider to be the biggest risk. And for clarity, I’m not looking for an insurance related answer per se. But if you’re willing, I’d like to ask you, Jiracek, what is the BIGGEST RISK?

Viktor Jiracek 25:54

Yeah, no, I think that’s that’s great question, happy to answer it. I’d say it’s all about the numbers. So I always teach and preach. It’s like profit margin, like margin of error, like how much you know, profit, do you have potential in the deal, because if anything goes wrong, like a takes longer than you want, or doesn’t sell for as much as you want, you have to go over repairs, like that’s all going to eat into your profit margin. So the more profit buffer or profit margin you have, the better. So again, it’s all about the numbers. And there’s been a lot of deals where like we set out to make 30 40,000. That’s, that’s great. And then one issue came up, and then another issue came up and another issue came up. And then we walked away with 10,000. But luckily, we had that initial, you know, profit buffer to work with, or else we would have been in the red. So with that same example, like if we initially wanted to make, we said, like, Hey, I just want to make 15,000. Like, if I can make 15,000 on this, I’d be happy. And then the issue comes up in that issue, another issue another issue, and then suddenly, you’re in the red. So that happens a ton. So that’s why I recommend in terms of risk, like just protect yourself, like if you buy any, any property for the right price, like every single thing can go wrong, and you can still be profitable. But again, it’s you make money when you buy is, is the segue from that. But it’s really like profit margin buffer, just in case anything goes wrong, and it will go wrong. That’s the other thing. It always takes longer than you want. And it always costs more than you want. So

J Darrin Gross 27:22

The truth! Yeah, now I’ve had many projects where the budget was x and, or where we built a place. And on day one, the builder was calling me telling me like, I didn’t know there’s so much dirt on this, you know, he’s gonna burn through my whole contingency on day one. Like so. Yeah, you’re absolutely right. So that’s great. So , where can listeners go if they’d like to learn more or connect with you?

Viktor Jiracek 27:52

Yeah, so for sure. I’m very active on Facebook. And I have a free Facebook group called six figure house flippers. So folks want to get you know, get hold of me there. join the group again, it’s free. I go live on there and do deal breakdowns that I’m working on. Like give free tips you know, there’s there’s a ton of great stuff and it’s all free in there. So if you look me up on Facebook , your check, I’m a unique name Luckily, so you’ll he’ll find me pretty quick. And then I also have that free Facebook group. And yeah, this community if you want help on mentorship, great, you know, I’m happy to help we can have that discussion. If you just want the free work resources. There’s nothing wrong with that. But that’s that’s accessible to everyone. https://www.sellyourgainesvillehometoday.com/

J Darrin Gross 28:28

Awesome. , I can’t say thanks enough for taking the time to talk today. I’ve enjoyed our talk, learned a lot, and I look forward to doing it again soon.

Viktor Jiracek 28:39

Awesome. I appreciate it. Thanks for having me.

J Darrin Gross 28:41

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Commercial Real Estate Deals Partners and Markets with John Stoeber – CRE PN #304

John Stoeber 0:00

Well, I have been looking at Arkansas for apartments before. I really like Northwest Arkansas, where you have Bentonville and the university up in Fayetteville. I mean, like that area is booming. Little Rock is actually never on my radar. I mean, like it’s a pretty stable market. It’s a little higher and crime, but I wouldn’t say it’s like, you know, one of these high growth markets, I just had a great opportunity come my way from someone I trusted, she had a deal under contract, and she needed money and partners to put the deal together. And it’s kind of like your first job to or at least for me, like I didn’t have a ton of options coming out of school, I’d take a job so I can get experience. It’s the same thing with this portfolio where it’s like not my ideal criteria, but it makes sense and it’s just a way for me to get experience and start racking up some wins. Welcome to

Announcer 0:50

CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 1:08

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is John Stoeber. John uses his background in finance to build financial models and analyze multifamily properties from a number of different perspectives. He currently owns and operates 34 apartments in Little Rock, Arkansas, and is looking for deals in growing markets. And in just a minute we’re going to speak with john about partners deals in the skill set you need to do your first deal.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we’d love to hear from you please leave a comment. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, John, welcome to CRE PN Radio.

John Stoeber 2:33

Hey, Darren, thanks so much for having me excited to be here today.

J Darrin Gross 2:37

I’m looking forward to our talk. Before we get started, if you could share with listeners a little bit about your background.

John Stoeber 2:45

Yeah, um, you know, the short story is I’m just a spreadsheet jockey. But I went to college for you know, accounting and finance, I got a double major and I was on that w two path pretty much since the day I was born. The entire last semester in college, you know, I’m looking for a job and I finally get an offer. And at the time, there was no remote work. So I look at the like the number of vacation days, I’m going to get a look at the salary and I’m just kind of like, this isn’t gonna work. Like this isn’t gonna work for the lifestyle I’m trying to build, which led me on the search for passive income. And on that search, meaning Google, you know, I kind of fell down the real estate rabbit hole. I heard about other investment options like bonds, CDs, dividend stocks, but I was gonna need like a million dollars invested at least just to make like 50 grand a year of passive income. Whereas in real estate, you know, you get tons of other ways to accumulate wealth. Besides the cash flow, you get principal pay down appreciation, tax advantages. And I mean, I’ve always kind of been interested in real estate before getting this job offer. But I’m incredibly not handy. Like I shouldn’t be allowed to touch a hammer so that it always scared me away from it. But as I climbed down the rabbit hole, I started to realize like, okay, I can develop systems, I can hire a lot of this stuff out. So I can do that. So fast forward like nine months, I you know, I graduated college, I’m working my first job. And I had this really long commute from Washington DC to Baltimore, Maryland, and I wanted to get rid of it. So I ended up buying a two unit, you know, duplex to do what’s called house hacking, which is where I had two apartments, I rented one of them, I lived in the other and then my apartment also had a basement. So I rented out the basement so I was living for free and my downpayment on this like owner occupied duplex was like less than five grand and that included like all the closing costs, like everything like I bought a property for less than five grand which is like four or five months rent and in Baltimore like in these coastal markets. So that was awesome. And like yeah, I had to evict my first tenant. Which was kind of nerve racking, because she knew right where I slept. But you know, I evicted her, I put a new tenant in there, I put a tenant in my basement and all of a sudden, I’m living for free. And I kind of caught the bug at that point. So then I’m like, okay, I wanted to graduate and do what’s called the bar method, which is stands for buy, renovate, rent, refinance, and repeat. It’s kind of like, instead of fix and flip, it’s fixing rent, and then you just refinance, all the money you put into the deal back out. So that man, I had to, like tackle this inability of mine to like manage contractors and construction, because like I said, like, I shouldn’t even be allowed to touch a hammer. So I team up with a couple partners. And we go, and we take like the biggest, baddest flip down in Baltimore City, where you’d have 100 plus year old homes, then they’re just absolute shells. So we had one of those where it’s like, all new mechanical systems, new roofs, had to dig out the basement. And then everything else that comes along with that, now is a huge, huge learning curve for me. Like, honestly, was not ready for that big of a project at the time. But while I’m doing that project, you know, one of my partners, he had a four Plex, I had this duplex. And he ran into some issues with his four Plex where like he had to do this really long eviction. No, I had to do an eviction, and I was dealing with like a couple tenant headaches. But like, the light bulb just kind of went off in our head, we’re like, you know, whenever we make a mistake with a four Plex, or the duplex, like, really, our tenants pay for it. So like, as he’ll tell you, he’s like my tenants paid for my eviction. Whereas when we miss something in our rehab budget, like that came out of our pockets, and our bottom line. So like, while we’re doing this, we’re just kind of like, you know, like, let’s just go buy apartments and like bigger multifamily. It’s what we want to do anyways, and like, we really don’t want to work our way out through like, fix and flip and single family. And, and that kind of started this entire journey.

J Darrin Gross 7:01

Got it? Got it? Well, that’s the you’ve got quite the library there of experience here with, you know, being a landlord with the tenant next door to doing a major flip. I mean, I’m curious on that big flip, you talked about? How long did that take you to do that? From from acquisition to?

John Stoeber 7:22

I’m assuming you sold that? Yeah, we sold that over a year ago. I mean, we, we thought it was gonna take like three months to do the entire thing. And it took over a year to go from start to finish on that thing.

J Darrin Gross 7:34

All right. But did you come out ahead. And in the end there, do you make a

John Stoeber 7:38

No we we didn’t we did not come out ahead, unfortunately.

J Darrin Gross 7:42

So is that more of like a he didn’t buy it right? Or what was just over cost overruns? Or your budget? or What was your what it was?

John Stoeber 7:49

I mean, it was kind of everything? I mean, I don’t think we necessarily bought it wrong. But yeah, like we definitely came in low on the rehab budget, and then the amount of time that we held it just like those holding costs, and especially because we bought it with a hard money loan, like they really into your profit margins. So when you’re thinking that it’s gonna be like a four to a six month, month hold, and ends up being over 12. I mean, those holding costs will crush you.

J Darrin Gross 8:14

Right, right. Well, you survived, right? Yeah, I’ve always kind of looked at some of the opportunities I’ve jumped into is, it won’t kill me. Right? If it goes wrong, but lessons, I’ll never forget. But Alright, so you, you kind of had the the taste of the flipped in like that, like the landlord, but realize being in something larger than a duplex or a four Plex was really kind of the way to go. You mentioned your partners on there. Did you end up partnering with with your flip partners to get into larger multifamily?

John Stoeber 8:55

So I still work with one of them, the guy who owns the four Plex, but on the 34 unit portfolio, we’re doing a reposition right now. He’s not part of that deal. But we’re still looking for deals together.

J Darrin Gross 9:07

Okay. You mentioned your spreadsheet junkie and jockey, and I don’t just say jockey,

John Stoeber 9:15

Yeah, jockey. Same, same thing. I might as well be a spreadsheet junkie because I’m always on them.

J Darrin Gross 9:21

Right, right. Right. Um, so let’s, let’s talk a little bit about the, you know, what you saw on the 34 and what you’re doing with a 34 unit property?

John Stoeber 9:33

Yeah, um, you know, from like, a financial perspective. Yeah, no, yeah.

J Darrin Gross 9:38

Tell me what, what was it? Tell us about the property and what you saw? And are you doing a value add position or what tell tell us all the juicy detail?

John Stoeber 9:48

Yeah, we’re, we’re doing actually a really big value add. I mean, this was a distressed property. The person who previously owned this was just completely miss managing it. I mean, no record. or anything, didn’t screen the tenants. But if you look at like these larger commercial properties, like as a flip, you know, like, it’s really not that much different from a single family flip or you know, a bar, it’s just the way you calculate some of the numbers are different. So like, if you’re flipping or you’re doing a bur on a single family house, you’re gonna have your acquisition costs, your renovation costs. And then your ARV, which stands for your after repair value. And like the general rule of thumb is, you know, you want your acquisition costs and your renovations to be 70%, of what you’re gonna sell it for. And then that leaves some room for like, you know, realtor Commission’s holding costs, soft costs, as well as your profit margin. It’s really not that much different when you’re looking at a multifamily property. The key thing, though, is the way you calculate your sales price. So like with a single family house, you’re going to go off of sales comps. And you don’t really have a ton of control over like stretching the market, you know, if similar homes are selling for 200k, like your home is going to sell for 200k. in multifamily and commercial real estate though, the value is based off of the net operating income, and sales, comps do come into play. But like on a basic level, you’re gonna take the net operating income of that property, which is all of the expenses except the mortgage, and then you’re going to divide that by the cap rate in the market. So let’s say you’re making $100,000 of net operating income, which again, is cash flow before your mortgage. And that market cap rate is a 6%, you’re going to take 100k divided by 6%. And that’s you should know this number, it’s like I think it’s less than $2 million, it’s probably like $1.8 million. But so that’s your ARV. And then you’re going to take your your acquisition costs your renovation budget, as well as the other costs. And you’re going to see if you have a spread. So the thing with the little rock portfolio is when a buying 34 units for $800,000, which comes out to 23 and a half k a door, we’re putting five to 10k of rehab into each unit. They’re renting for 650 to 700. Right now it’s all one and two bedrooms. And based off the cap rate, and the other sales comps in the market, we should be able to sell them for 45 to 55k a door. So it’s like you’re all in for probably like 35k a door. And you’re selling them for 45 to 55. It’s like there’s a huge spread on that. And then you’re just calculating your other numbers to to make sure that it’s going to cash flow if you refinance it.

J Darrin Gross 12:41

Got it, got it. What in Little Rock, what was the Was there an attraction to the market? Or was it more of like a property you found or?

John Stoeber 12:51

Well, I had been looking at Arkansas for apartments before I really like Northwest Arkansas, where you have Bentonville and the university up in Fayetteville. I mean, like that area is booming. Little Rock is actually never on my radar. I mean, like it’s a pretty stable market. It’s a little higher in crime, but I wouldn’t say it’s like, you know, one of these high growth markets, I just had a great opportunity come my way from someone I trusted, she had a deal under contract. And she needed money and partners to put the deal together. And it’s kind of like your first job to or at least for me, like I didn’t have a ton of options coming out of school, I’d take a job so I can get experience. It’s the same thing with this portfolio where it’s like not my ideal criteria. But it makes sense. And it’s just a way for me to get experience and start racking up some wins.

J Darrin Gross 13:41

Makes complete sense. So So tell us about you mentioned that you have a partner on this one then did you mentioned somebody had a deal and needed help?

John Stoeber 13:50

Yeah, so I have a few partners, but she had a deal. I mean, she had this deal locked up. Back in March of 2020. It fell out of contract because COVID hit and you know the partner she was going to buy the deal with ended up bailing, just put it back under contract. And then she had to raise money. And she just said to me, she had to put a team together because she didn’t have all the money to just buy it herself. And she lives in Salt Lake City. So it’s not like she’s in the market. And you know, I can I can run the numbers, I can kind of act as like, I guess like a financial analyst or a CFO on the project to add value and like I had some money to put into the deal.

J Darrin Gross 14:29

Okay, and so are you did you come in as a as a joint venture? ditch? syndicator. How

John Stoeber 14:36

did you guys put together? So this is just a joint venture, it’s not a syndication.

J Darrin Gross 14:41

And so does everybody have different skill sets? Or is or are you guys missing anything? Have you been able to

John Stoeber 14:52

No, I mean, so I’d say the skill sets are are pretty well rounded. I mean, one of our partners Well, they’re married But they’re like one group, you know, they have a lot of experience managing contractors and renovations, and they also live closest to the property. So they’re like the boots on the ground and the construction managers, my partner who found the deal. I mean, that was basically her role. Like she found the deal. And she also has the most experience managing large commercial real estate. She’s a couple other apartment complexes. I’m kind of like the numbers guy. And then our other partner, Ryan, you know, he’s out there raising money and dealing with the property manager on a daily basis.

J Darrin Gross 15:36

So when did you close on this? You said it was under contract in March? What When did you guys I’m closing on it?

John Stoeber 15:44

The end of June.

J Darrin Gross 15:46

Okay. And where are you in the actually it’s back up here. What was the renovation plan the value add plan.

John Stoeber 15:55

So the renovation plan was mean, we need to put about, you know, we’re averaging anywhere from four to 6k per unit and renovations. And that’s to put all new, you know, lvp, glue down, flooring down, if appliances need to be replaced, that’s in the budget, new paint, and then some new light fixtures and like handles for you. It’s called like, nickel. You’re not the renovation guy here. But it’s like the stuff you put on your cabinets. Satan nickel, I think. So it’s like five, five grand on average for the interior renovations. And then on one of the properties, like we completely repainted it fixed up a lot of the wood rot on the outside. And we’re installing a lot of new doors on that property too. And we had to repair a gas leak as well.

J Darrin Gross 16:44

Gas leak needs to be repaired, that’s for sure. Yeah. So how do the rents are you would you serve as a distressed property? Did you? Where were the rents before the renovation? What do you expect the rents to be post renovation?

John Stoeber 17:02

Great question. So it’s, it’s all one in two beds, and they were renting anywhere from $400 to, you know, 550, but definitely gearing toward like the lower end the four to 450 range. So right now on the renovated units, we’re getting 695 on the two bedrooms that we’re renovating, and 650 on the one bedroom. So on average, it’s like a $200. You know, rent bump per unit.

J Darrin Gross 17:33

That’s, that’s strong, were there any expenses, you were able to, you know, either eliminate or pass on to the tenant.

John Stoeber 17:43

So we’re passing on some of our utility bills to the tenants. There haven’t been any expenses we’ve been able to eliminate. Because the seller just I mean, he ran the property into the ground, like he was running it like a 25% expense ratio. And that’s why the property was like in such disrepair and mismanaged because he wasn’t putting any money back into it. So our expenses have gone up. But so has our income. And when you take you know, our current income and our projected income over our stabilized expenses, like our net operating income is going way up over what it was.

J Darrin Gross 18:19

Good. Well, that’s the that’s the plan. Right? Yeah. So name of the game. And so what is your your? Where are you in the timeframe here? You said, You started June, you’re seeing a rent bump, 34 units? Are you going to be renovating all of the units? Are you a part of the units? What’s the plan?

John Stoeber 18:40

So we kind of have it broken out in phases. And right now, I’d say we’re still in phase one. Because this previous owner didn’t do any sort of tenant screening, we had really low economic occupancy when we took over what I mean by economic is, you know, people may have been living in the units, but they weren’t paying. So our occupancy was like in the 30% range 30 35% when we took over, we’ve just gotten that into like, the 60 to 70% range, and we cover all of our bills plus the debt service now. So we have a few more units that were were already renovated, and we’re leasing them up. Once those are leased up, I’d say that begins phase two. Phase Two is really just a decision we have to make, do we flip the property and make a whole bunch of money on the sale right now? Or do we go to a bank refinance out because we’re on a we’re on seller financing right now and get a construction loan, and finish off the rest of the units that need to be renovated and they just cash flow for five years. So that’s a decision that our team still estimate but both of those options are on the table.

J Darrin Gross 19:52

Let me ask you, you mentioned the economic occupancy being low and then we’ve got COVID going on. What what’s been your? How have you been? You know, how have you dealt with a situation with people not pain? And COVID? Have you been able to evict or correct that? Or what’s the whole? How have you dealt with him?

John Stoeber 20:18

Yeah, that’s a that’s a great question. Fortunately for us, most of the evictions we’ve done haven’t gone through, the tenants haven’t even shown up to court. So they’re cases just thrown out, and we win. And we’ve been able to evict them. For some of them. And we’ve had a couple, I think we’ve had two, who actually like turned in the CDC paperwork, meaning they’re protected by the moratorium, but they’re on month to month leases. And they’re not like very good residents to begin with. And they’re, like loud, obnoxious, we don’t really want them to be part of the community anyways. So we can, what we’re trying to do is getting is get them out on tenant holdover, like we’re just not renewing their lease. And then if they don’t leave the property, you know, we can get them out for tenant holdover, or breach of lease, which is kind of the avenue we’re going. And there’s all sorts of like rental assistance programs out there. So we came up with like a flyer that said, like, Hey, you know, here’s the numbers, here’s the emails, like you guys need to call them, and they can potentially help you pay the rent. And we actually just had our first tenant who applied for, or she like, filled out the CDC paperwork. She just got a big rental assistance check last week.

J Darrin Gross 21:33

Did she pay you the rent showed?

John Stoeber 21:35

Yeah, you know, no, like, it came to us. Oh, rental assistance. Yeah, they mail it directly to the landlord. Okay.

J Darrin Gross 21:44

Like that was one of the challenges a lot of landlords have felt was the tenant get the money, but the landlord didn’t get the money?

John Stoeber 21:51

Yeah. Like, it wasn’t like she got stimulus. This was just like some local nonprofit.

J Darrin Gross 21:57

Gotcha, gotcha. So So basically, it sounds like you guys are coming up on, you know, completing phase one, you got it economically viable? It’s, it’s covering the debt, you’re kind of facing that question here. Do you continue or flip this thing and, and go on to another property? Is there a timeline for that decision?

John Stoeber 22:24

Probably probably by summer, we’ll have to make that decision. Because we closed on it in June. And we don’t want to sell it within a year, because then we’ll get taxed at an ordinary rate. Or as if we wait for a year, it’ll get taxed at the long term capital gains rate.

J Darrin Gross 22:40

Right, right. So let’s, let’s dive into this a little bit. See, we talked a little bit about your partner’s everybody. Good fit? I mean, you you guys talking about going and doing additional deals after this? Or is this kind of like a one and done everybody go their separate way?

John Stoeber 22:58

That’s a good question. I like Firstly, we’re I think we’re all just going to wait and see, like, what happens with this deal. I mean, so far, I think it’s been a good experience for all of us. But none of us have, like 1000s of units and decades of experience. For most of us, except for the partner who found it like this is our first multifamily deal. And for the other partners who have like the renovation and construction experience, I mean, they’ve owned like a pretty large rental portfolio before, but it was in their backyard where they self managed it. So like, this is completely brand new to all of them. And there’s definitely been a learning curve. So it’s kind of like this joint venture was put together pretty quickly to get the deal close. So I guess we’re just gonna see what happens when it’s all said and done.

J Darrin Gross 23:49

Got it. So with that, is there anything that you would look for going forward when you’re looking for partners?

John Stoeber 23:59

Well, I think I mean, you should be looking for people who have similar values to you and then have, you know, skill sets that complement yours. So like for me, it’d be great to connect with someone who like is great at managing construction contractors and renovations because I don’t like doing that. And then capital is just a huge part of this business because if you go out and you’re buying one 200 unit properties, which is where I’d like to go, I mean, you’re talking about you’re gonna need to raise millions of dollars.

J Darrin Gross 24:31

Right, all right. What about looking forward for deals here? We talked about you know, you’d been a couple and and realize that multiples were the, the, you know, had a much better advantage as opposed to the singles and or flipping. And you mentioned that Arkansas was kind of on your radar but but not necessarily literal rock. Is there there anything that you can point As far as lessons you’ve learned, or things you’d look for going forward and when you’re looking for a deal.

John Stoeber 25:09

So when I’m looking for a deal, or like when I’m looking at a market?

J Darrin Gross 25:12

Well deal and market, I guess.

John Stoeber 25:15

I mean, when I’m looking for a deal, and there’s a lot more due diligence, I would do going in next time, especially physical do really all due diligence, physical due diligence, and financial due diligence. And you just, you can’t know what you don’t know until you’ve actually done it. I mean, I knew a bit more about like construction and renovations now. So I mean, I’d be going there with like, multiple contractors, my property management company, and ideally an inspector and just getting all their perspectives, and really questioning the contractor like, how is how are you coming up with, with your bid, because you’re just gonna throw out a number, like, I need to know what that encompasses. So I can make my own decision, whether it’s enough to get the work done. As far as like identifying the market. It’s interesting, because like this deal, it’s not in a hot market. But I would do another one like it again, even if it’s not in like a high growth market. Just because the spread on it is so great. I mean, we’re talking about being all in for $35,000, a unit, which includes all the holding and the soft costs, and selling for 45 to 55, or refinancing at that value. Like if it works out, you know, all of our networks are going to grow a lot. So I would definitely consider something like that in a more stable market. But really like Florida, too, and I have a partner who lives there. He’s boots on the ground. And that’s just got, like all the demographics you could want in a market.

J Darrin Gross 26:50

No, it’s that’s definitely both of those the, you know, find the deal in the markets. I mean, you know, I’m kind of curious to hear any thoughts on the market? Based on, you know, the COVID experience? Is there any as COVID changed your, your thoughts on where you might look for a property?

John Stoeber 27:15

Yeah, it actually has, um, I was kind of really hell bent on being in these big primary markets before COVID. Because that’s where all the jobs were, and people weren’t working remotely as much. Now, though, I mean, it seems like the trend is people are moving away from these big, major cities, especially the high cost of living ones like New York City, and you know, pretty much everywhere in California. And they’re moving to places like Florida, and Texas, the southeast, where it’s more affordable to live, taxes tend to be lower. And now you have all this remote work, so you can kind of live wherever you want. And act like I moved to Denver earlier this year, because I still have a W two and like, I can work remotely now. So I’m just like, I want to live here, I’m going to move. So I think finding markets to where there’s just like things to do, and people want to live. So in the southeast, you have warm weather and beaches. In places like Colorado, you have the mountains, so like looking for attractions like that, like that, with still a strong employment base and a strong economy. I think that’s gonna be pretty key to identifying markets. And you could probably pick some great small tertiary markets that way.

J Darrin Gross 28:35

The the skill sets, you know, what do you see as the skill sets you have to have, whether it be you personally or on your team in order to get into your first deal and be competent.

John Stoeber 28:52

So I think there’s like three legs to be buying big commercial real estate, you have to be able to find the deal if people manage the deal, and you have to be able to raise money. So if you if your team has all those legs filled out, you’re probably a rockstar team. With the guys I work with right now at Cronos. That’s our company. I think we do a great job at identifying the deals because I think we’re really strong at analyzing the deals. And we’re definitely picking up our on our ability to raise capital. And through this experience and Little Rock, you know, now we have real asset management experience. But if you’re just starting out, at least like what I would do is I would focus on one of those legs, and then pick like a skill set within that leg. So like for me, it was finding deals. And then I’m a spreadsheet jockey. So part of finding deals is being able to analyze them and identify them. So like I focused on that. If you’re really good at developing relationships with people and networking. Maybe You know, you’re the one who’s talking with the brokers and developing those relationships, or you’re the one talking with ambassadors and raising money.

J Darrin Gross 30:08

Yeah, no, it makes sense. Yeah, I mean, definitely three critical pieces there. And and having people that are strong in each of those would definitely propel your, the chance of your success. That makes sense. JOHN, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker, and work with my clients to assess risk and determine what to do with the risk. And there are three strategies we typically consider. The first is we look to see if we can avoid the risk. If we can’t avoid it, then we look to see if we can minimize the risk. And when neither of those are options, we look to see if we could transfer the risk. And that’s what an insurance policy is as a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation, their investments, their clients, the investors in their deals, tenants, the market interest rates, however, you want to identify, you know, then the question for the answer. But I’d like to ask you about biggest risk. And for clarity, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, john Stober, what is the biggest risk?

John Stoeber 31:40

Right now, I still think COVID. And just the environment we’re in is the biggest risk, especially if you’re dealing with C class properties, you tend to deal with residents who are on the lower end of the socio economic scale. So these are the people that you know, their servers, waitresses, receptionist, they actually have to go into work. So if there’s a shutdown, like, they’re not going into work, or if they get COVID, like, and they may not have a job anymore. So I think that is a huge risk, like from a property perspective, but also with this, like the home market right now. And it you know, it’s February 2021. Like the whole market just seems crazy. If you’re, if you and your listeners have been, like paying attention. I mean, just look at gamestop, AMC Dogecoin. It’s just like it seems very unstable right now. Kind of bubbly and frothy. And like, I don’t know if the lending market is going to be the same 12 months from now where people are able to get loans so freely. And if you can’t get loans, that really drives down the number of buyers who can buy a property, which in turn is going to drive down values.

J Darrin Gross 33:00

Yeah, that’s definitely some some things to pay attention to. And hopefully, they don’t come to fruition as far as a negative effect there, but always arrest. That’s good. JOHN, Where can the listeners go if they would like to learn more connect with you?

John Stoeber 33:21

Yeah, I’m pretty active on Facebook and social media. So just reach out to me at john Stover or on Instagram at john underscore Stover. You can check us out at our website Kronosinvestmentpartners.com. We have our own podcast called the millennials and multifamily podcast so you can check that out. And we have a free book called How to analyze big apartment buildings and make them feel small.

J Darrin Gross 33:49

Cool. Tell me how to spell the the coronas or the

John Stoeber 33:54

K r o n as a Nancy Oh, S.

J Darrin Gross 33:59

Got it. Got it.

All right. Well, john, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. learned a lot and I look forward to doing it again soon.

John Stoeber 34:12

Thank you so much, Darrin.

J Darrin Gross 34:13

Announcer 34:33

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Lease Purchase Real Estate Deals with Zachary Beach – CREPN #262

Zachary Beach 0:00

As in real estate in general, it’s all comes down to the motivation. Or really it comes down to if you can provide that seller with the right solution like meaning, if. So, selling their property on a lease purchase or selling an owner financing is going to solve their problem then they have a deal. Most sellers are going to say we have a script, it says 99% of the people that we buy for one a traditional sale. So, of course, most people you talk to are going to want to sell traditionally, they’re going to want to sell traditionally, they’re gonna want to close fast, you’re gonna want all cash and make it as easy as possible. But the truth is, it’s it’s not always possible. So that’s when our solutions come into play, or our types of options that we buy from.

Intro 0:44

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast. Whether you’re an investor broker, lender, property manager, attorney or accountant, we’re here to learn from the experts.

J Darrin Gross 1:04

Welcome to Commercial Real Estate Pro Networks, CREPN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Today, my guest is Zachary Beach. Zachary is an Amazon best selling author and of the book The New Rules of Real Estate Investing. And he’s also the co host of the Smart Real Estate Coach Podcast. And he’s also a partner and COO and coach at Smart Real Estate Coach. And in just a minute, we’re going to talk with Zachary about working in real estate during these chaotic times and also buying and selling real estate on terms But first a quick reminder, if you like our show CREPN Radio, there are a couple things you can do. You can like, share and subscribe. And leave, please consider leaving a comment we’d love to hear from our listeners. Also, if you want to check out how handsome our guests are, be sure to check out our YouTube channel. And that’s at Commercial Real Estate Pro Network. And also if you go there, please consider subscribing. I’d love to drive that count up as much as we can. And with that, I want to welcome my guest, Zack, welcome to CREPN Radio.

Zachary Beach 2:40

Darrin, thanks for having me on. I’m excited tp bring your audience some value and have a good conversation.

J Darrin Gross 2:46

I’m looking forward to our conversation and I’m certain the audience will enjoy this as well. But before we get started, if you could take just a minute and share with the listeners a little bit about your background

Zachary Beach 2:59

So about five years ago, I left being a bartender and personal trainer. I was about 24 or 25. At the time at that, at that exact time, I had zero real estate experience. Clearly I was a bartender and personal trainer. And what I did was I right reached out to my father in law who’s been in real estate for over 25 years, and actually partnered up with him and my brother in law, Nick, who also was a real estate agent for about eight years. So they’re the ones that provided some good guidance for me into the real estate world. And at that time, hopped in about two and a half to three years later, had roughly 100 deals underneath my belt buying and selling real estate. And now fast forward another two years, so I’m about to turn 30. I’ve been 5 years in the business and we have an amazing investment portfolio because we’re definitely still in the trenches doing deals for ourself. And then we’ve created basically a guinea pig version, we’re the guinea pig and then we teach students around the country or we call associates real estate investors that are looking to be able to buy and sell in terms and and grow out a real estate business like like we did.

J Darrin Gross 4:19

Got it, and I didn’t catch it Where are you based?

Zachary Beach 4:23

Newport Rhode Island

J Darrin Gross 4:24

Okay. And as far as the your activity, so, you do both your own inventory your own portfolio and then are you also acting as a broker or are you then doing the the coaching or or do you do I know you do the coaching in the inventory? Do you do any brokering yourself?

Zachary Beach 4:49

So good questions. So we have our own portfolio which we buy and sell exactly the way we teach people how to do it. But then we also have separate we have our own coaching program. We’re not brokers, we just teach you have a very specific model. And what we do is provide real estate investors or want to be real estate investors, we have plenty of people that are doing their first deal with us. And then we have plenty of people that are doing their 100th or 200th deals with us. We basically lock arms with them and help them through every aspect of the business. So that could be working with sellers and getting properties under contract to selling the property and working with buyers or very specific buyer pool and then managing those properties and getting them to the finish line.

J Darrin Gross 5:38

So given the the turn of events here, let’s see today we’re recording and it’s May 6. So by my calendar, we’re a little over two months into this depending on you know, when you were affected when it was Rhode Island did they are you guys in a shutdown mode are great,

Zachary Beach 6:01

Yeah, we’re in shutdown. But we’re in a release mode. Basically, starting May 8, we have steps going towards letting us at least go back out into public Rhode Island, you know, handled everything actually rather well. But we’re actually, although I’m based in Rhode Island, we buy property in Massachusetts and Connecticut for our own portfolio. But then we have students around the country and 90 plus markets. So everybody, we’ve been able to kind of coordinate this Mass Effect, depending on whatever market they’re in.

J Darrin Gross 6:35

Let’s just talk about that a little bit. So the, the, if you can give us kind of an idea of what what, you know, your your model look like as far as how you guys were operating pre COVID-19. And then tell us a little bit about how things have changed, given what you’re what we’re dealing with right now.

Zachary Beach 6:54

Yeah, so the only major change that has happened which I’m sure it makes a lot of sense is we’re doing more buying and selling things virtually than face to face meetings. I can tell you our original mindset and thought process was, if somebody is going to sell you a property with little to no money down, not signing personally, and not going to get a bank loan, then and for a long period of time, we’re talking 3, 5, 10 plus years, they’re gonna want to meet you in person. And what we’ve come to discover is that’s not necessarily the case. You could actually do these types of deals virtually from your house. The only time that we typically will go see a property is for two reasons. One is If, for some reason that seller definitely needs a face to face meeting, which some people still do, of course, we do it from a social distance. Or we’re go or we already have the property signed and we either have one of our teammates or an inspector or somebody goes to the property and do a full evaluation of it just to make sure because all of our contract At this time would be contingent upon that.

J Darrin Gross 8:04

So previously though like I think I understand is that you were you were physically going out and seeing the properties doing the inspections meeting everybody face to face. Was that the

Zachary Beach 8:14

Yeah. So let me walk you through like a typical process. So we have multiple calls in which we, we access or require our acquire our properties, or leads through through phone, phone or internet. And then typically after the first call or two, we would set an appointment and go to the house. What has changed now is now we’ve gone from that process to now we’re in we’re buying virtually so instead of going to see the house will either do like a zoom walkthrough where you can have a seller, have a phone either do FaceTime video walkthrough via internet, if we want to just get our eyes on it or instead of even doing that what we’re doing is we’re putting together different offers, or what we consider options, which are different based upon the length of time. So when we talk about buying and selling on terms, there’s three main terms, it’s typically; length of time which the contract needs to be fulfilled, the purchase price or the equity locked in. And if the property is free and clear how much you’re going to establish as a monthly payment. When I say free and clear me no mortgage. So we’ve actually now decided to put together options or offers ahead of time. And then once somebody selected an offer, and we put together the correct contract, we’re doing the contract signing before we see the property and we’re just making it contingent upon seeing the house or doing a proper walkthrough. That way, the only people we’re actually meeting and coming in contact with are those that we already have a contract on. You know, there could be slight variances based on the seller Yeah, based on how much rapport that needs to be built, but if you’re looking at a strict change in our sequencing process, it’s, you know, we’re we’re putting contracts first for for appointments now.

J Darrin Gross 10:11

Gotcha. It is kind of a funny thing they assuming that you probably thought it had to work in the order that you were doing it before. I realized I’m like, you know, everybody, it I’ve run into that myself as like the assumption of this is the way we do it and in realizing that didn’t need to be. So given that, that more of the virtual or you have you opened up your territory beyond the the footprint, you said, Massachusetts and Connecticut are kind of your, your territory, is that right?

Zachary Beach 10:50

It’s Connecticut and Rhode Island, so primarily southern New England. Okay. Us personally, we haven’t really opened up our footprint that much further. That’s plenty of territory to be able to do the amount of deals that we want to accomplish. Plus, we already have our attorney established and our dream team established each one of those states. But some of our associates, as I said, live in bigger states, we’ve, we’ve had them open up their territory, because now buying a property three hours away is just the same as buying a property, you know, within 45 minutes. And, of course, there comes some research and things associated with if you want to enter in a certain market. But you know, a lot of our associates now are expanding their market because it doesn’t necessarily matter as much. Even if you have to see the property once. It’s one hour, you know, one trip compared to five others and we typically only see our properties once or twice because of the way we sell, which the buyer would have full responsibility of the property.

J Darrin Gross 11:51

Got it? Have you seen any increase or decrease in the flow of opportunities since the onset of of COVID-19

Zachary Beach 12:02

Yeah, actually, we’ve seen a huge influx in activity for an opportunities for us to be able to help out both the buyers and sellers that we work with. And in particular, so right now, obviously, there’s a couple, there’s a couple pockets up in the commercial space or your audience knowing a lot more about commercial space. jumbo loans are few and far between right now. So any single family home that needs a jumbo loan is extremely hard for a buyer to be able to purchase right now. Now, it doesn’t mean that you can’t find them. It just means that the criteria from the banks are significantly harder. I’ve seen chase presented that you had to have a 750 credit score, like six to 12 months in reserves. You know, so it’s it’s extreme and plus 20 to 25% down so you’re just taking a significant amount of buyers that originally could qualify for a loan, not able to. So huge opportunities in the jumbo loan space right now for single family homes buying and selling on terms. Because the way we’re buying it, we’re either going to buy it on owner financing, meaning the seller is going to finance the property to us, which means we don’t have to go to a bank, or buying it on a lease purchase, which again, is a contract between the buyer, the seller and our company. And we don’t have to go to a bank or the end buyer, the tenant buyers, which we call them. So that’s somebody who’s just outside of finance ability and just needs a rent to own program in order to buy a house. They’re not going to call, they’re not going to have to go get their mortgage until, you know 24 months from now, which I’m sure the banks will be a completely different state. Nobody knows what’s gonna happen next. But that’s just one example of the huge opportunity that’s happening right now.

J Darrin Gross 13:51

So you’re seeing a big increase in the the jumbo loans?

Zachary Beach 13:55

Meaning like, yeah, so sellers that originally could sell their properties that depends on the state that you’re in. But anyway, anything from like you know, 600,000 to a million plus are now just sitting on the market because there’s very few buyers that can actually purchase the properties at this time. The other thing that we see as well as far as opportunity because this once you kind of affect what you affect a traditional buyer, so somebody that’s gonna go get a loan effect basically the seller market because now the sellers there’s gonna be overabundance of inventory and no buyers to be able to qualify for them. And right now there’s an extreme tightening of qualifications. Thanks. So now, the now all the sellers are sitting on the market and are expiring from their traditional listings. So now sellers are looking for new opportunities in order to sell their property. So as that buyer pool continues to build, meaning the ones that we work in the ones that are outside of finance ability right now. We’re going to be able to make a see significant, we are able to provide a significant solution to sellers that are now expiring for the market. And those who are, you know, selling their property on their own that can no longer find these buyers to sell the property to.

J Darrin Gross 15:13

Got it, and are you as far as your marketing efforts? Do you you market to the seller or do you market to the buyer or to both?

Zachary Beach 15:24

So the way our typical process is, it’s the opposite of like a wholesale method which is wholesale. It’s like build your buyers list and then go get houses to sell to. What we do is we work with and we have a small team, typically, virtual assistants and a CRM that has some automation set up with it and we market directly to sellers once we acquire properties, or buy properties from the seller, we would then present it in market to our pool of buyers. I mean across the country, this is even before is pre COVID. It’s roughly 70 80% of buyers could not qualify for traditional loan in general. So now that COVID is hitting that that number is growing. So finding buyers typically is never the issue it right now with the need for additional solutions and additional options as the seller opportunity is significant as well. I mean, that’s why we’ve seen a giant uptick in the amount of properties that our associates are taking under contract. And buying.

J Darrin Gross 16:29

You mentioned that 70 to 80%. were not able to qualify, is that for the jumbo? Or is that for just buying in general?

Zachary Beach 16:38

That was just for a traditional loan, like when I haven’t talked to jumbo?

J Darrin Gross 16:43

Wow,

Zachary Beach 16:44

It’s gonna depend on your market. But if you’re looking at the criteria based upon somebody that had a credit ding, which we’re just starting to see some of our buyers come out of 2008, I mean I know it’s 12 years later, but some people were affected that much Now what we’re going to see, at least my expectation, what we’re going to see, I mean, I don’t have a crystal ball is that this is that COVID is going to affect people for the next 12, 18, 24 plus months. So although a lot of things are continue to stay, as is two months in, people that have been lost their jobs and things like that are now going to need, especially from a buying standpoint, I tape a program that we offer, like our red zone in order to qualify for a loan, especially if they plan on buying in the next couple years.

J Darrin Gross 17:35

Right, right. It’s interesting, I hadn’t realized the percentage to be so high. I mean, I knew there’s always a marketplace for the non conventional. But you know, based on what you see on TV and stuff, I wouldn’t, you know, I’d say I guess I didn’t really think through it that much as as far as the the buyers here.

Zachary Beach 17:55

Let’s look at just to give you a little more context, self employed Right, there’s a large group of people that need roughly 24 months of seasoning, what banks called seasoning to be able to show, they make that type of money. That’s actually I bought, I’m sitting in my guest room, but I actually bought my house through a lease purchase as well or through a rent to own program. Because I’m self employed myself, and in order to acquire the property that I wanted to at the price I wanted to, I was able to buy it through a lease purchase. So even if you take these types of techniques and and go buy your own house, I’d have to go to a bank for 36 months, I was able to build up some great equity in the property.

J Darrin Gross 18:37

Got it? And tell me about the the sellers mindset. You know, if they had you said you’re calling on these expired listings or or, you know, they were trying, I’m assuming they tried a conventional sale before. Can you talk a little bit about their mindset and how they, how receptive they are to this.

Zachary Beach 19:01

Yes, it’s all as in real estate in general, it’s all comes down to the motivation. Or really it comes down to if you can provide that seller with the right solution like meeting, if. So, selling their property on a lease purchase or selling an owner financing is going to solve their problem, then they have a deal. Most sellers are going to say we have a script, it says 99% of the people that we buy for one a traditional sale. So, of course, most people you talk to are going to want to sell traditionally, they’re going to want to sell traditionally, they’re going to want to close fast, they’re going to want all cash and make it as easy as possible. But the truth is, it’s it’s, it’s not always possible. So that’s when our solutions come into play, or our types of options that we buy from. So it’s all about meeting a seller where they are and if you’re able to provide the solution to that motivation, or to their actual need. We went over what wants are but what is their actual need? Is there need that they have two mortgages and they just moved out of state now, you know, is there need that they need some mortgage relief? Is there need that, you know, they want to push off some of their capital gains. So it’s all about discovering what their actual need is, and can you provide that solution? So it takes a little bit of time in order to say, hone in on your skills in order to figure out if you could actually help somebody. But where, right now across the country, we purchased over 20 properties last month, with a small group of people. So the need is there.

J Darrin Gross 20:37

No, that’s, that’s interesting. Do you have any kind of sense? Or how did that 20 last month compared to a month prior? or?

Zachary Beach 20:48

Yeah, good question. So we’ve seen a steady increase. It’s the last last three months so it was like 10, 15, 20ish, I’ll just given you round numbers, but it is moving in, in that S curve, because we started to see a slight effect from it, meaning are a lot of our harvesting comes from and when I say harvesting, I mean like we buy a lot of properties in like September, October. Because the truth is, we tend to be a large group of people’s Plan B, right? If they can’t sell their property, then then they’re open to doing something on terms. So we did we typically do really well and fall. And then what happened was over the winter, we continue to take on more properties. But then as soon as COVID hit the traditional seller, mindset had to change because this was not a typical spring, like a typical spring as a seller has been waiting to list their property with the real estate agent that they chose back in January. And right now, there was there was no sense of that, because they needed an alternative route. So those that were motivated became extremely motivated and those who are semi motivated became a little bit higher motivated. So that’s why we’ve seen that steady increase. And the surprising thing was because we weren’t sure about what it was going to do for our buyers because we weren’t sure if people are going to hoard money instead of going to buy a new house, you know, kind of come out of the renters mind saying go buy a home, but because of the clamp down of the banks and requirements, they actually opened up our pool of buyers that originally were going to buy anyways to now move into our program in order to buy through a rent to own because they couldn’t no longer qualify for a loan. So by the tightening of the banks actually opened up a pool of buyers, which we would have thought would have been hoarding money. So pretty interesting results. We couldn’t have predicted that.

J Darrin Gross 22:56

No, that’s that’s interesting. The you know, We’re just being positioned properly can can, you know you’re positioned to take advantage of and obviously take advantage of, but to be the solution that was not available to people through traditional means. So that’s interesting, great. I hadn’t thought of that.

Zachary Beach 23:18

The great thing was or take the great thing. But we, we Luckily, as a family, learn from our lessons, my father in law, Chris back in 2008, got crushed. So that’s why we built the business. So that’s why he originally started the business to buy and sell on terms because you’re not using your own cash, you’re not signing things personally, you know, you’re not going to banks for these. So we actually positioned ourselves outside of the traditional means of the traditional way of buying and selling and once COVID came, people could no longer do traditional so they had to start looking for alternative solutions. So we just, we just happened. But I just say we got lucky in a way but you just we positioned ourselves. In a place that we could provide solutions with alternative or creative financing, and just the need for that is now increased. And I would expect it to increase for the next three to five years.

J Darrin Gross 24:13

So you mentioned you, you you, first you position yourself where you guys do you do you purchase the property and then lease it to the buyer. So are you the are you cut in the middle there? And, you know, from the seller to the buyer? How’s that?

Zachary Beach 24:32

Yeah, so let’s just walk through one of our options. So a sandwich lease, it’s called so you’re actually talking perfect right in the middle. Sandwich lease means that you’re going to agree upon a price with a seller, you’re gonna agree upon a definitive end date with the seller or what we call like a length of time or a term. And you’re also going to be taking over let’s just use this example. They have a mortgage, they’re going to be taking over any responsibilities of the property, including the mortgage Taxes insurance. And you know, future repairs ain’t no responsibilities. The really cool nugget that I just want to throw in here is you’re actually not necessarily agreeing upon a purchase price. But you’re actually agreeing upon a locked in amount of equity in the house. So actually every month that you are collecting from your buyer and making a payment, you’re benefiting from the principal pay down, which is a fantastic way to build equity and build wealth in this business. And then once you have all that tied up with your seller, you’re then going to set you have control an equity interest in the home, you’re going to sell the property for an increased price, a shorter term and a higher monthly payment. And you’re going to be positioned in the middle to be collecting from your tenant buyer, and then paying off paying the expenses on the other property. So easy way to kind of look at it is like almost like Uber it with a lease purchase. You control everything But you don’t necessarily own it.

J Darrin Gross 25:58

No, it’s entertaining. You know, a little bit familiar with the concept. You know, it’s it’s something that is clearly an option and it’s I think the again the the percentage thing you mentioned 70 to 80% and even recognizing the self employed, how much of the self employed are affected by that number it’s you know, you can’t necessarily go and qualify for a traditional financing I know some of my wealthiest clients have conveyed me that Yeah, they don’t qualify for conventional financing based on just the way their source of income it’s, you know, they’re not getting a W two from a recognizable name, you know, household name that the underwriter can feel comfortable with, you know, expecting

Zachary Beach 26:45

it’s pretty crazy. Well, plus being self employed, right? When you’re not trying to qualify for something you pay, you always want to make as much money and pay at least my taxes. I mean, it’s just, that’s why you’re a business owner. But once that You have to like change your entire way of operating once you go try to qualify for a loan, which means you’re going to show as much money as possible that way, then the bank can recognize and qualify you for that traditional loan. So and that takes roughly 24 months to be able to prove that and show that. So what we’re doing is we’re giving something people the opportunity to agree upon a price lock in the price today live in the house that they want to buy, while they’re going through that process.

J Darrin Gross 27:27

Gotcha and, you in the middle, you negotiate the the purchase price, and then you’re building equity. And do you also get a little bit on the the differences between the mortgage and the right here collecting? Is that

Zachary Beach 27:40

correct? Yeah. So that’s a good introduction to so we get paid three ways on each one of these deals. You get paid from the non refundable deposit that we collect from our buyer. Because our buyers are locking in a price. We’re typically going to raise the price for a premium because we’re selling it to them and then say 24 36 months down the road, we collect a non refundable deposit that typically sits between five and 10% upfront. And then over time, what we’ll do is we’ll help them increase that deposit as well. So when they go to a bank, they won’t, they’ll be able to qualify for the best loans, not just any loan. So that’s one way we get paid. The second way we get paid is called paid number two, which is a spread, which is the difference between what you have to pay either the homeowner or the mortgage company and what you’re collecting from your buyer. And then payday number three would be the increased equity in the property because as I mentioned earlier, you get you’re benefiting from the principal pay down. So 500 bucks, a principal coming off your mortgage every single month, that’s six grand a year. I mean, that’s some significant over 36, you know, 18 grand that you’re building up, plus, if there’s any additional premium left on the back end, you’ll get That as well. So that’s our three paydays. If you’re, if you’re mine, I would include one of our YouTube links, just go to our SmartRealEstateCoach.com/youtube, our youtube.com/smartrealestatecoach and we have over 100 plus deals on there that we’ve structured with either ourselves are with students, so you’ll be able to see the nuances and kind of see how we’ve created these deals in order to create those three paydays.

J Darrin Gross 29:26

Got it. Hey question for you doing the least since you guys are you’re taking possession. Are you getting any depreciation on the property?

Zachary Beach 29:36

No, not on those. Because the depreciation well of course follow the title. So

J Darrin Gross 29:41

Okay,

Zachary Beach 29:41

We’re not what we’re doing is we’re going to be paying everything for the seller. We’re contractually obligated to make their mortgage payments, make the taxes, make those tax payments and all that as well. Seller actually still benefits from depreciation. That’s why of course buying on our other two options with I don’t know if we have time for today, but the other two options which are owner financing, and by subject to the existing loan, you’re getting depreciation because you’re gonna hold title.

J Darrin Gross 30:09

If you don’t mind, if we do have just a minute if you want to go through just kind of give us the, the, the distinguishable difference between the what we’ve been talking about and those two other two options.

Zachary Beach 30:22

Yeah, so with a easy way to think about with a lease purchase title transfers before the end of the term, owner financing the title transfer at the beginning of the term. So what you’re going to be doing is you’re going to be agreeing upon a price with a seller, you’re then going to be closing on the property. And I’m just going to assume in this example, that the property is free and clear, debt free. So then the seller is actually going to finance and hold the mortgage and you’re going to be paying the seller. Typically the way we structure those, if it’s like five years or less, it’s usually principal only payments. Of course if we can structure out means zero percent interest of anything typically longer than that we continue to try to get zero percent interest but if we’re doing 10 2030 years typically a seller wants interest on the property. So that’s why we structure it so you hold title seller holds the mortgage. On the subject two option that I was alluding to what you’re doing is you’re actually closing on the property subject to the existing loan. So you’re acknowledging that there’s already a mortgage on the property you’re taking title your contracts the obligated to continue to make that mortgage payment, which stays in the seller’s name.

J Darrin Gross 31:42

But it actually records your you’re on the title then. So you can I mean, if there’s a buyer,

Zachary Beach 31:49

Yeah, so our company, because we don’t ever tell you to personally sign anything but your company will, the company will hold or you know, if you hold an a trust there, wherever else you and your attorney to say That you should structure it best.

J Darrin Gross 32:03

Gotcha. Gotcha.

Zach, if we could, like I mentioned to you a little before we started recording by day, I’m an insurance broker. And I work with clients to assess risk and determine what to do with the risk. We typically consider one of three different strategies. The first is can we avoid the risk? If we can’t avoid it, then we look to see if there’s a way we can minimize the risk. And if those two are not options, then we look to see as a way we could transfer the risk. And that’s what an insurance policy is. I like to ask my guests if they can identify what they consider to be the BIGGEST RISK. And just to be clear, I’m not necessarily looking for an insurance related answer. If that’s if that is what you believe to be the BIGGEST RISK so be it but If you’re willing, I’d like to ask you, Zachary Beach. What is the BIGGEST RISK?

Zachary Beach 33:09

Yeah, it’s a fantastic question. The truth is we’ve we’ve transferred a lot based on your description, we’ve actually transferred or deferred a lot of the risk based on how we actually buy and sell real estate because the sellers still typically on title, and we have the ability to renegotiate based on our contracts. You know, we’re collecting a non refundable deposit from our buyer. So that’s limiting the risk. But if I’m just looking at it from like, purely what’s going on right now, today’s because we actually just came off one of our offsites that’s our BIGGEST RISK would be if like there’s a fear crisis that happens, meaning that people decide to no longer buy real estate, hoard money and stay where they are right? Or no longer want to sell property because there’s so fear driven that they want to stay where they are. Yeah, I don’t of course, I don’t see that happening. But I don’t have a crystal ball. But as I was alluding to earlier, it was we originally thought that people are going to start hoarding money. But then because of the tightening of the banks, it actually released some buyers that were ready to buy. So that kind of continues the cycle. So I would say that’d be the BIGGEST RISK other than, of course, if there’s a complete market crash. Now, I want to say it’s a risk to our current business model. It’s not risk to being in real estate, because the truth is right now if you have the ability to buy on terms, but also continue to take your profits and put them away, because if the market crashes, then you’re going to be able to buy property at a significant discount. So I would, I would say it’s just the risk to our current business model. But we’ve kind of evaluated some of these things and we’re working our best to set up for if the market prices again or crashes so it’s just important to look at it from all the Different standpoints. But any real estate market in general, does matter if it’s up or down, there’s always opportunities available.

J Darrin Gross 35:07

Yeah, no, that’s that’s definitely something to remember. I was talking with a commercial broker the other day and, and he was saying, you know, we can make money when the markets going up or the markets coming down. It’s when it’s at the top or the bottom, we have a bro. So I mean, that’s kind of an interesting take on it. But

Zachary Beach 35:28

Well most millionaires were especially real estate where they made their millions during the recession. So you see, like the new new age people that are coming out, they made their money when it was back, like you know, further away because they’re buying property a significant discount, and now the appreciation is significant. So if you can create long enough terms, meaning like a long enough timeframe, like a lot of our deals now like 10 plus years, we were going to go through a cycle or two before at least one One more cycle before our contracts would be up. So that’s how we mitigate a lot of our risk.

J Darrin Gross 36:06

Gotcha. Zach, where can listeners go if they would like to learn more and or connect with you?

Zachary Beach 36:15

So it’d be two things I would do. To learn more about how we operate in like a very efficient period of time, I would just go to smartrealestatecoach.com/webinar. My father in law, he does a 45 minute webinar that breaks down like, where we acquire leads, how we do deals, you know, gives you the basics that we can kind of wrap your head around it and start diving in. If you want a call with one of us, we’d be happy to chat with you just go to smartrealestatecoach.com/action. There’s just a quick six steps, which are just a couple questions in order to set up what we call a strategy call, which we can, you know, answer evaluate what you’re looking to do and pointing the right direction give you a nugget or two

J Darrin Gross 36:58

Got it. Zach, I can’t say thanks enough for taking the time. I’ve enjoyed our talk today. learned a lot and I hope we can do it again soon.

Zachary Beach 37:10

Darrin pleasures all mine.

J Darrin Gross 37:12

Intro 37:31

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