REIA 384 Christopher Salerno: Diversifying Our Passive Investment Portfolio through Alternative RE

This is the Real Estate Investing Abundance Podcast. I'm your host, Dr. Allen. I know you're excited to get into today's show, but I have a very exciting announcement to share with you before moving to the show. We've just launched a complimentary and comprehensive webinar that, among other things, shows you how to legally use passive real estate investing to reduce your taxes, recession-proof your nest egg, and take the sting out of inflation. If you are curious to learn more, go to stevetucker.com/webinar. It is complimentary and only takes a couple of minutes of your time. Once again, that is stevetucker.com/webinar. I'll see you in the webinar. Enjoy today's show.

Hello, enlightened investors.

Welcome back to Real Estate Investing Abundance.

I'm your host, Dr. Allen. And I'm excited to be with you today as we're going to take a look at diversifying our passive investment portfolios through alternative real estate investing sectors. And with us today is Chris Salerno, and he is the founder of QC Capital. He started out in the single-family real estate space by brokering and operating the number one team in the Carolinas and ranking 4th in the world by unit count with Keller Williams. However, he wanted something better and ended up creating QC Capital, a multifamily real estate investment company specializing in multifamily real estate investing. Uh, QC Capital focuses on acquiring large multifamily real estate assets and partners with accredited investors. But Chris has something else to share with us today, and we're going to get into that as well. So Chris, start us off and share with us an experience that helped you to be who you are today.

Yes.

You know, an experience that helped me to be where I'm at today, I would say growing up, I'm an old soul. So I grew up very, very quickly. And father passed away when I was younger. So I had to grow up. And when growing up, I think what really shaped me into who I am today was my ability and drive to want to understand business and how to understand it. And I was at a very young age exposed to the business industry more hands-on, not, you know, sitting behind a desk in college and listening to a professor teach you business who've never ran a business before or have operated or managed people before. I did it the old school way, the hard knocks way where I learned at a very young age hands-on. And if I did not go that route, I don't think I'd be who I am today with understanding business, how to operate. Thankfully, I have a unique gift where I can go into any type of business very quickly, analyze the business and give you an estimated gross revenue of the company. I've done it to restaurants, all different types of businesses. And thankfully, I just, I've been able to do that and I truly I have a passion for operating and growing businesses and I enjoy it substantially.

Fascinating background. So how young were you when you actually got into the hands-on operation of your first business?

My first business, I was at 12, it was actually 12 years old, was the first business. And what I would do is during school, school lunches were terrible. Everyone knows that. So what I would do is I would early in the mornings, I would make this honey glazed chicken on a Hawaiian roll. I would then take that and I got a loan from my mother at the time. Thank you, Mom. I would then take that and go to the school lunches and I would sell that in the locker room to all the athletes because I was a football player. They, you know, they wanted something with high protein that tasted good. So I would sell it to all the athletes. And before you know it, I had a waiting list of people that are wanting these sandwiches and they were paying $4 to $5 for these sandwiches and it would cost me, I would, to make around 10 sandwiches, it cost me about $8 to make. And so I was, you know, profit margins were very high. And I, that was my first entrepreneurial under-the-table type of business where I would create these honey-glazed sandwiches on a Hawaiian roll and then sell those at school lunches to all the sports athletes. And before you know it, I had a waiting list and the school very quickly shut me down once they found out. And then I couldn't sell sandwiches outside the locker room. So from there, I then started gifting as a gift the sandwiches away, and they happened to still pay me, you know, in return for the sandwiches. However, I just said, now I'm giving them away. I'm not, I'm not making any money. I'm just giving them away. And they happened to tip me for it. So that was my first entrepreneurial business to get an understanding of, okay, what are my expenses? What's the time involved into cooking and preparation? How much can I sell them for? How to create that high-level demand where now you have a waiting list to sell these little tiny chicken sandwiches.

Wow. I like how you figured out a way to deal with the regulation there. I was going to say a way to get around the regulation, but better wording is to deal with it that way.

Oh, yeah.

Oh, yeah. So, well, let's get into what you are doing these days. Chris, in particular with the car wash industry. We had had a brief conversation about that a few weeks ago and it just really piqued my interest. So, so let's get into that. If you can just give us an overview of what's going on there and then we can get into some of the details of that.

Very much so. So we are a multifamily investment firm based out of Charlotte, North Carolina. We love multifamily. That is our passion. That's our bread and butter. And we are still looking for multifamily assets to bring to our investing partners. However, given these times, The Feds meet currently today. Today's Wednesday, July 26th. So the Feds meet today. We anticipate— myself, I anticipate 2 increases this year. The second half, I anticipate 2 more increases no matter what the current market is doing. I think that's what the Feds want, and I think they're going to do that. Will they start tapering them down next year? I believe so, because there is a presidential election coming up. So I think they're going to start slowly tapering them down. However, right now in this given moment, I anticipate 2 more increases. Those 2 more increases will impact the multifamily housing sector in the aspect of basically a freeze when it comes to buying and selling. Right now, 79% is the number that we are down year over year on multifamily transactions being traded hands. And so I anticipate that number to increase. I anticipate it to be a freeze. Now, a freeze doesn't mean a bad thing. A freeze means that not that many people are buying and selling. You're selling because you have to. You're being forced to. You're buying because you want to buy, and you should want to buy in this market with higher interest rates. And so we are heavily pursuing multifamily assets at the moment. However, a lot are not penciling in, and we do quarterly surveys. So if you go to our website, qccapitalgroup.com, join our newsletter where you'll get educational information in your inbox. We do quarterly surveys. To all of our investors, and we have over 10,000 individuals that are on our newsletter. And we like to gather all that information that we do on our quarterly surveys to find out what do they want, what are they looking for, what are they seeing, what is going to be interested to their appetite when it comes to investing in real estate or investing into investing in general. So we found that cash flow is very important right now. Investors want high cash flow. So I then sat down and started using my brain and thinking, what can we do to pivot, still focus on multifamily, still pursue multifamily, but what can we bring in addition to multifamily that has higher cash flow for our investing partners? And after doing a ton of research in the space— and ironically, actually, I, I used to work at a car wash when I was in college— after doing a tremendous amount of research in the space, I came across the car washes again. Um, and this is about third or fourth time I have recirculated these in my emails with research. And I decided, okay, this is the asset class we are going to present to our investing partners, which are offering— it is a 506, so it's only open to accredited investors. It's offering a 12% annual return with an 8% on the back end with any investment over $200,000. Anything below $200,000, it's a 10% annual return with 5% on the back end. And that 5%, when I mean on the back end, I mean on a liquidity or a refinance event. Plus, the great thing is, is that these, these car washes are on a 15-year depreciation schedule. Multifamily is on a 27.5-year. Car washes are on a 15-year. So the depreciation schedule's a lot sooner. So you tend to have a higher depreciation when it also comes to car washes. So it's a great tax benefit as well. But yeah, that's how we came across them. A tremendous amount of research, years of looking at them. Like I said, I worked at them while I was in college, a local car wash here in Charlotte, and we are building ground-up development. And buying existing if it makes sense. However, we're building ground-up development here in Charlotte, North Carolina, in our backyard where we can easily visit the properties. Our team can take a look at them. Our manufacturer is right here within 45 minutes of Charlotte. So if anything were to go wrong, they're here the same day, and within 24 hours, our machines are right up, back running and washing cars. And also from there, we're going to then expand. So we'd like to get around 30 to 40 in the Charlotte and Charlotte's MSA. And once we have that, we'll start to expand to other cities throughout the Carolinas.

Well, fascinating. You were talking about the 15-year depreciation rate. Can you also do cost segregation? I assume you can. It's real estate, so you can do cost segregation on top of that.

That is correct.

Yes.

Okay. That should really make a difference in people's tax returns.

Very much so.

For sure. Well, let's get into some of the nitty-gritty here. Thanks for that overview on that. Tell us how you are operating these from the asset management perspective of car wash industry.

Very much so. So all businesses are very similar into operating businesses. If it's a multifamily business, it's a restaurant, you just have different product. But the overall fundamentals of operating a business is very similar. That's why any CEO CEO you have seen in the tech industry or any of your large Fortune 500 companies will bounce around to different types of companies because at the end of the day, running and operating a business is very similar. So when it comes to these multi— or the car washes, what's very unique about our car washes is that most car washes are express car washes with around 3 to 4 employees on site. Now, your full-service car washes have the employees that wipe down your inside. You get out of the car. Who wants to do that when it's 100 degrees outside? Not me, but those are your most expensive to operate is your full service with employees. When it comes to your express with a couple employees on site, it's not your most expensive. However, what I have found with research and actually working in the car wash industry is that with those type of operations, you have very high turnover with your on-site people. It's a very high turnover rate. With the models that we are creating, we are creating an express automatic model where they look exactly Exactly like it has a, it has a bay, they call it, which is the bay where all the machinery is. It looks exactly like that, very professional, high-end finishes. However, there's no employees directly on site, and so that helps with the high turnover. On top of that, what is unique about ours is that we offer 2 different types of options. We offer a touchless option where, for individuals that I know that don't want the brushes smacking up against their car because they scratch it, it can damage it. We offer power washing. So it's called touchless and it's a power washing option where you are cleaning your car or the car is being cleaned by a machine, but it's pressure wash. Or if you want the soft touch with the bristles, you can do that as well. Those are 2 preferences. There's no one at a mass scale that offers those 2 different type of options, especially here in Charlotte. For those who don't want the brushes smacking their car because of any damages, and for those who just want, you know, the high pressure water cleaning their their car, they can have both. And the biggest thing is the memberships. Just like a gym, just like Netflix, Spotify, the biggest thing is subscription and memberships. So we push that very heavily, subscription and memberships. And that's what private equity companies are acquiring these type of deals is when it comes to the subscription and memberships. They are basing all of their EBITDA percentage that they're acquiring these opportunities at based off of their subscription and memberships.

Oh, really? So they're not basing their fundamentals on just drop-ins? I mean, I'm sure that's part of the equation, isn't it?

It's part of it. Yeah, don't get me wrong. They're not erasing that off the line item. It's part of the equation. However, their main— the main thing that they are looking for is the subscriptions and how many members do you have, because that's recurring revenue that is coming in on a monthly basis. So they're wanting to know, okay, do you have 1,000 or 1,500 or 2,000 members for this Star Wars. And then let's— how can we grow that to 3,000? Just like Netflix. Netflix wants that steady membership. Netflix cut off other people that's not using their IP address. And then they then went back to the people and said, hey, for about half price or a little less than what you're paying now, you can add people that are not in your household. Okay, cool. So now everyone's doing that and that just increased their subscription model, which then increased their evaluation of their company because people are paying more money.

Enlightened Investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Well, fascinating. Well, what percentage of your users are subscribers or members?

Yeah, so we have our first location under contract right now, and that's currently in the environmental surveying permitting phase right now. So can't really speak from that direct site, but I can speak from operators that I know. And normally the percentage you'll see is anywhere from 45% to 60% of your members that are— or of the car wash users that are actually members and they're recurring because you have unlimited washes for around $34.95 a month. And that's our top, top package. And you get unlimited washes, free vacuuming. It's a no-brainer. A car represents the individual, and everyone wants a nice clean car. They feel good when they have a nice clean car. If you're a real estate agent, you don't want to pull up to a property with a dirty car. You want to pull up with a nice car, a nice clean car. And that's for anybody, really. Everyone wants a nice clean car. It makes you feel better, and it also shows representation of yourself.

Wow, that, uh, $34 a month for limitless car washes, that is a huge bargain. Uh, just one car wash can cost you up to $10. So, uh, wow, that's quite a discount.

And that is our top-tier package too, and that comes in with the heated soap. Something unique that we are also doing is we're working with our manufacturer to, uh, strengthen our chemical scent. And at the kiosk, when you go ahead and before you drive through, you can pick the scent you want. New car smell, uh, cherry, strawberry, um, you know, uh, air breeze, ocean breeze. And when you are parked, the chemical scent filters in through your air and it scents the inside of your car.

Wow, new technology. Uh, amazing. Well, the returns are just phenomenal from a passive investor perspective.

Yes.

So let's, let's talk about this from the passive investor perspective.

Yeah.

How do they get into this? And other than the phenomenal returns on this, what are some other advantages for passive investors?

Very much so. Very, very much so. So how you can get involved, if you go directly to our website, qccapitalgroup.com, and you can hit on the top right, become an investing partner, join us. Once you fill out that information, our senior director, Nick Abraham, will be in touch with you, and that's how you get onto our opportunities, our newsletters, educational information, any opportunities that we may have. That's how you get— you can get up and be a part and get advantage and see it first. When it comes to the advantages, obviously the cash flow is higher with these type of opportunities. On top of that, the tax benefits. Like I said earlier, multifamily— love multifamily. I'm still a huge advocate of the multifamily space, especially in this current market environment, if a deal makes sense. However, right now that's at a 7.5-year depreciation schedule, where car washes are at a 15-year depreciation schedule. And this is 100% passive, 100% passive. You can invest your self-directed IRA, your 401 into these opportunities, and we are anticipating a 4 to 5-year hold, a refinance in that 4 to 5-year hold to go ahead and pay back that back-end percentage. And then you can then take those funds and turn those over into our new fund that we will have at that time. for car washes and just keep multiplying it. But we, we listen to our investor base. We like to make sure that we are tailoring our company to their needs. Obviously, we can't please everybody, but we'd like to go ahead and get an understanding of what they're looking for in this current market environment. And these type of returns at a 10% or 12%, um, uh, annual return schedule is, is, you know, very difficult to find in this current market environment as interest rates rise, That may fluctuate the current stock market environment as well. So that's all something that should be taken into account. Our distributions are monthly distributions, so that's also a benefit as well. They are monthly distributions, and we also provide monthly updates. The great thing is too, if you are in Charlotte or in the Carolinas, as we will start to expand around the Carolinas, you'll be able to physically use these car washes. You can go and physically use the car washes that that are on site. You can physically see them, and if you ever come to. the Charlotte area, please, I'm a huge advocate of being hands-on with investments. Don't hesitate to reach out to any one of our team members. We can walk the site, take my car through. If you have a rental car, we'll take your car through. But you can actually physically see, touch, and get an understanding of the full development of car washes that we're doing.

Well, terrific here. Well, let's go back to the operational side of this. And what are the major challenges for investors who are interested in getting into this on an active side of this? What are some of the major challenges that they're going to face from the operational perspective.

Yeah.

And you said, um, when you said active, you mean getting in and trying to do it themselves, right?

Right.

Yeah, there's, there's a lot that comes in when it comes to development. Uh, you're having— you're gonna have to deal with the city, you're gonna have to deal with the DOT before even you start development. You have to understand how to underwrite a car wash, what to look for when it comes to a location. Is that location permitted or already zoned for car washes? If it is, great. If it's not, what does a rezoning look like? One thing that we do is we do not acquire property that at the moment that are not zoned car washes. Because right now in the city, in Mecklenburg County, City of Charlotte, rezoning will take you 8 to 12 months just to rezone a property. Permitting with the DOT and with the city will take you another 3 to 4 months. So you're already at a year and a half, basically. And you haven't even broken ground. You haven't even gotten approval on your site that you want to develop. And then once you develop, you're— I mean, you're talking almost maybe 2 years possibly. So there's a lot that goes on when it comes to trying to do it yourself. We've built extensive amount of relationships with the contractor, with the manufacturers, with the architect, the manufacturers of the equipment. On top of that, Coming in as an individual and wanting to work with these manufacturers, they're going to charge you top dollar. I've seen it before with one-off type of car washes. This space is around 90 to 92% mom-and-pop ran. The rest are institutional, and institutions are getting into this even more due to the cash flow that these car washes provide. However, with a group like ours, I sat down with the president and the CGO of the manufacturing company, and I tore them apart when it came to their quote they gave us, and I knocked them down on price substantially. And they also know the reason why they want to work with us, and they're going to give us a huge discount, is because we're going to do multiple deals with them. We're not going to do 1 or 2. We plan to do 5 deals this year, land under contract and development, and 30 next year. So with that, that's a high volume, They want to do business with us because we're coming from an institutional standpoint, and that's the benefit of investing with operators like ours or with like us is because you're going to be able to piggyback on our negotiation, our our success that we've already had in the multifamily industry, and we're bringing that over to car wash industry, and our ability to negotiate to get a lower pricing when it comes to contractors, material, timelines. All of that plays into a factor, and having that type of experience is super important, especially with, you know, the car washes being less than 2 minutes from our headquarters, less than 15 minutes from my physical home, and it's right here in our backyard. That gives us the ability to negotiate at a very high level on behalf of all of our investing partners, where they can now just become an LP and not worry about the active On top of that, when you are active in the space or even in multifamily, you're going to have to take phone calls. You're going to have to take phone calls late at night, early in the mornings. Yes, you may have systems set up very similar to ours. However, you're going to have to operate those systems. And then it comes down to your goals. What are your goals? Are your goals to slowly retire and spend more time with family? Is it to just slowly have an additional other side of income to spend more time with your family and create that financial freedom? So it all comes down to each individual partner's goals, if they want to be active or if they want to be an LP. However, being an active, there's a lot more work that goes into it than most people think.

Well, I mean, I would think there would be a whole lot of work in going into a car wash business. Well, I mean, there's a whole lot of work going into the active side of multifamily as well, but going into anything new is always going to definitely be a challenge. So you mentioned the DOT. You have to get approval from the DOT to do car washes?

You don't have to get approval to do car washes. However, you do have to get permitting from the DOT because the DOT, for most roadways, especially here in Charlotte, are operated and managed by the DOT. So they need their money. So you have to go ahead and get a permit from the DOT with your site plans. Because they need to see, do you have 2 entries and 2 exits?

What do you—

how far are you backed off of the road? Is there going to be any expansion in the near future of the road where they're going to say, okay, you're going to now have— we need 10 more feet from the road frontage? Well, that doesn't work for us. We got to walk away. That's a no-go, you know. So things like that take— is huge when it comes to submitting the correct plans to the DOT because you have to get their approval because you're on such a large road, you're high traffic. Traffic road? Do you have the right ingress egress when it comes to your site? Does it make sense? And also stormwater, that's huge. A lot of people don't understand that you have to pay for the water that runs off your property.

And if—

and you have to make sure that it's running off your property correctly. If not, you then have to go ahead and do underground storage tanks, which can cost you anywhere from $300,000 to $800,000 just for underground storage tanks. So a lot of that plays into a factor. Whereas, you know, someone just getting in the industry may not have that type of expertise. And before you know it, they closed on the land, they're in construction, and, you know, the city knocks on your door and says, hey, you guys forgot about this. And then you're like, what are you talking about? Well, you have to make sure you retain the water. It's your land may be too small and your water runs off, you have to retain it and have it slowly drip into the main sewer line, you know. So all of that plays into the factor. So it's very important to make sure you have the right team in place. Thankfully, we do, who— right contractor in place that we have from Charlotte, built multiple of these car washes, built multiple buildings for large franchises, franchises like Dunkin' Donuts, Starbucks, Circle K. Having that individual who knows the city, knows all of those individuals in the politician world up in the city of Charlotte, that plays a huge factor into making sure permits get approved. And also when they stamp, because the GC, your architect, are going to have to stamp the plans and then submit that to the city and DOT. If they have a well-renowned reputation and is very knowledgeable and well-connected, those individuals are going to see, oh, that's so-and-so.

Okay. Yep.

Approved. We know how they operate. We know how they work. And, you know, at the end of the day, it's politics when it comes to development. It's all politics in there. Getting your plans approved, getting everything looked at in a timely manner. It all comes down to politics and who you know.

Yeah, so often that's what the case is in many, many different things. Well, Chris, we've come to the end of our time here. What is your last word?

Yeah, last word is definitely during these times, don't be afraid to invest. Don't get caught up in all of the news and everything like that. Evaluate the deal, evaluate the operator, and make a smart decision. In my opinion, now is the best time to invest. Interest rates will start to taper down, and once they start tapering down, that's going to be the best time to sell. But interview the operator, feel comfortable with the operator before you invest, but don't sit on the sidelines right now. You got to think back in '08 to 2012, you had Airbnb, you had Uber, you had Lyft. All of those companies were created during that recession. So companies and opportunities are created during times like this. They are very rarely created during the peak of the market. Uh, they're always created during the low of the markets, and then the ramp up helps their growth as a company or as a business. So invest now, be strategic on your investments now, don't sit on the sidelines. Um, and I hope everyone has a great, great and wonderful time this year.

Bruce, it was just wonderful being back with you again today.

Likewise.

Uh, thanks for being on the show.

Yes, thanks so much.

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