Stock Broker Turns to Real Estate Investing: Jonny Cattani!

Hi there. Ginny Bowling here with Pivot to Prosperity and we have with us today, Johnny Catani. Johnny, it's great to have you here. I. I know we've been trying to get this thing scheduled for some time. We are both members of the same mastermind and we had the pleasure of meeting at Churchill Downs for the first time. Well, that wasn't the first time in person, actually. I guess that might have been our second or third, but. Yeah, yeah, yeah, that was good, wasn't it?

Absolutely, yeah. That was, it was pretty incredible to go, obviously. Very historic place and venue. And we got to eat dinner at a steakhouse right on the top at the. At the finish line. So that was pretty incredible, for sure.

It was, it was. Well, let me re. Let me introduce you properly here. Johnny is the founder of Katani Capital Group. He's a former stockbroker turned real estate investor and has been in commercial real Estate for three years and an investor for six years. He currently manages $650,000 short term rental fund and specializes in helping busy professionals build wealth through passive income. He's the host of the investing podcast the Cash Flow Chronicles, where he interviews top experts in real estate and business. And you cover a lot of territory. Boy, oh boy. You. You do a lot of podcasts, Johnny. I commend you on that. I know it's. It takes some effort and so I totally understand. That's flood work. So what, what would you add today? Is there something you're working on right now that you would like to talk about right off the bat here?

Well, I changed a little bit of the podcast. It was a daily for the first year up until this month, actually. Well, we're recording this in May, so up until May, and I've now changed it to three episodes a week, so Monday, Wednesday, Friday. By the way, it is definitely. But relative to five days a week, it does feel. For me at least it feels less, which is nice. So, yeah, so Monday is an interview. Excuse me, Where I still interview an expert. And then Wednesday and Friday are solo episodes. So bit of a change, but it's been received very well. And I just hit a hundred thousand organic downloads, so I saw that.

Congratulations. That's fantastic. Yes, yes. So, and what do you have going on right now? You have an investment that I think you said before we came online. Here you are having experts review it, which is phenomenal. Not everybody does that. I really want to be sure that people catch that because it's going to be interesting to hear actually what they have to say. I want to stay in touch and know this. Go ahead, tell us about it.

Yeah, so it's a newer asset. Well, new asset class to me. You know, some, some listeners may be familiar with. It's oil and gas. Right. So it's not, it's not an asset nobody's heard of, of course. Right. We've all heard of the energy sector, specifically oil and gas. But you know, the reason that it's very appealing to real estate investors is. Well, a couple of reasons. One, it's more or less a syndication. So basically, you know, just like for, you know, an apartment building multifamily, you know, you would syndicate and pull all your money together and go buy a big, huge apartment building. Well, in this case, you know, you're pulling a bunch of money together and the company is going out and going to be drilling a bunch of wells, anywhere from 18 to 21 wells over the next three to five years. The goal is to only have to drill about 10 to 15% of the wells. And then ultimately what you do is more or less a value add. If you're familiar with real estate value add, where you basically go in, find the oil, find the natural gas, prove that it's there, and then sell off basically the rights and everything to another company to come in and drill it. So it'd be just like a developer coming in, you know, doing the entitlement process and, you know, building, you know, a 200 unit apartment complex, right. Getting it stabilized, getting it to its 90% occupancy and then, you know, and having some concessions in there. Right. You kind of get it, just do enough to get it stabilized and then you sell it as a stabilized asset to someone who's going to come in and, and, you know, bring it up to market and get it to its max capacity. So it's very comparable, which is why it's very appealing to investors. And you know, the reason that I'm having it, you know, reviewed by independent experts is because, you know, for me, if I were to look at multifamily underwriting, I could easily go in, look at the assumptions and make sure that they had been conservative in their underwriting and that, you know, the pro forma that they produced was legitimate and that, you know, they weren't just making numbers up or thinking they were going to get, you know, 12% rent growth year over year, you know, whatever various assumptions, you know, there are. But in this case, I, unfortunately it's a, it's new to me, so I wouldn't know what I was looking at. So I have brought in two independent experts. They're friend to friend. So, you know, they're, they're doing me a very solid favor. But essentially they're, they've been in the industry combined for, you know, over 30 years. So, so yeah, we'll see what they say in terms of, you know, green light, red light. I'm sure they'll have some questions for me to take to the, to the group that's doing it. But what's really nice is the group that, you know, the operations group is everything's in house. So, you know, they've been doing this for 25 years. They've been doing this specific structure for almost 10 years, eight years now. And you know, they have a proven track record in this, in this structure, which is nice. So, you know, they're checking a lot of the boxes. But of course, you know, me being the scrutinist mind that I am, I want to make sure that they check every single box before I bring investors in, you know, because my main focus when it comes to investing is, is capital preservation. Right? We, we want to preserve our wealth and certainly want it to grow. But you know, by no means you ever want to lose an investment. And with this one being a hundred thousand dollar minimum, it's not, it's not a small amount of money, right? So we want to be extra, extra cautious. But in return, there are some very, very nice return projections, 18 to 21% cash on cash, annual return, and a 3 1/2x equity multiple at the end. So it's, it's very appealing, right? You can, you can see why when you hear those numbers, people are very, very interested. But one thing I tell people is be very cautious of big numbers like that. So not to say it can't happen and that it's not real. In fact, this group has already done this structure and exited and they 3x investors money. So it can be done, but, you know, we just want to make sure.

Well, that sounds very exciting. And I firmly believe in oil and gas. I know we're transitioning. I also believe in energy alternatives, but I'm, I'm playing it both ways. Just like this is. That's my, my approach. Over 40 years in real estate, I've been through the eight. I was an appraiser in the 80s and so, and I totally guessed wrong. I bet my dad what interest rates were going to do and I failed. So it's like, all right, you just got to be ready for both scenarios, up or down, right? And, and you know, oil and gas is going to be needed for generations.

To come still, it's not going anywhere anytime soon. Now certainly, you know, I hear people who, you know, want alternative energy resources and I absolutely want that as well. But the fact is that's not going to be the case for probably another 10, 20 years. Right. In terms of really, you know, eliminating the need for, for oil and natural gas. So at this point, you know, you look at Warren Buffett, he's still very, very bullish on it. I think he's got a 20 year outlook still on it. So when you look at, you know, where the top investors are looking and, and what they're doing, you know, this, this asset class is there and, and this opportunity presents itself, you know, very comparable, like I said, to a real estate syndication, you know, and you're even seeing these groups at real estate conferences, which is where I first saw them. So, you know, and with real estate being in, it's, I'm still very bullish on real estate, but, you know, it's in a somewhat stagnant market right now. Right. We're not really sure if interest rates are going to keep going up, if they're going to stay where they're at, if they're going to come down, you know, the debt piece. Right. There's a lot of debt that's coming due. Sellers have not capitulated quite yet to, you know, bring their prices down. So because of that and transaction volume being down, you know, investors are looking for yield somewhere. And with the government doubling down on domestic production of oil and natural gas, it presents a very, very intriguing investment opportunity.

Agreed. It sure is. And I think that the more you look into world affairs and whatnot, the more you're going to see that it's, it's a good play for a lot, lot, lot of people. I think you'll do real well with that. Assuming that this particular organization structure proves out with your experts looking at it. I want you to keep me posted on that. So, and we were talking offline about other asset types, self storage being one that we both like as well. Have you, have you narrowed into, are you in certain markets or what are you, what are you doing as far as that goes for the most part with regular real estate.

Yeah. So for me it's really about identifying, you know, first market. Right. Where the top markets are very macro or microeconomic focused. So dig in, do my own kind of independent research in terms of identifying the top markets and then from there it will be, you know, a couple things One, obviously, you know, for, for most people it would be okay, identify the top market and then find the top operator in that market. And that's certainly an option. And I'm not against that there. But when you get into a lot of these good markets, there are a lot of good operators. So really the biggest key is just my due diligence. Right. So identify the market and then, you know, find a few operators and then do my research. You know, for me, I prefer to, I prefer to only work off referrals. So really for me, I really will only look at groups that have been referred to me. Hey, check this group out. You know, a lot of groups will reach out to me. I'm on a lot of lists. A lot of people will call me to raise for their deals. And a lot of them are good groups and they're good deals. But I really prefer when it's been referred to me or I know someone else, another capital raiser specifically, who either wants to combine forces and raise for a deal like we did for the short term rental portfolio, or you know, they're going to raise money for the same group. So if they've raised money for a group and they really liked it and they're confident that it's a good group, then to me that goes to the top of the list.

Right, right. And with the economic times we're into, like you say, capital preservation being a key part of it. What do you do to make sure that that's the front and center aspect of the business model?

Yeah, so the biggest thing for me is going to be the debt. Right. So that is where pretty much everybody's in hot water right now is with the debt. Right. The last couple years, a lot of floating rate bridge debt. Obviously, you know, not everybody was buying rate caps. And so you're seeing a lot of groups in trouble. Tom, we saw what happened in Houston with that big 3200 unit portfolio, you know, com the t the keys being completely turned over back to the bank. You know, you're seeing, you're seeing some other acquisitions, you know, some groups having to sell off their top performing assets at a discount in order to re capitalize another asset that's on their books, you know, to basically save another asset on their books from going under and, you know, losing money. And so that's not necessarily a bad thing, right.

To have to do cleans up the market.

Yeah, it cleans it up. And you know, certainly their main focus when this is happening is obviously our investors. Right. This means like, hey, we're going to go sell this one off at a discount, Tom. We're still going to be able to give a return to our investors, you know, to some degree. And that's going to allow us to ensure that worst case scenario, on this other asset, we at least break even and can return everyone's capital. Because to me, if you can at least return my initial investment, you're not necessarily going to have a black mark on your record. And I'm not going to tell everyone, never go invest with that group again. Right. Because a lot of things are happening that we couldn't really foresee. Right. Interest rates going up the fastest they've ever been raised in 40 years. Nobody could have seen that coming even, you know, 18 months ago. Right. Let alone two, three years ago.

Right.

So to me, right now, the biggest focus is debt. Obviously, a lot of assumptions are happening. You're seeing a lot of assumptions from good debt. So a lot of very low interest rates being assumed with, you know, five and seven years so left on the term. That's good. But, you know, certainly there's a risk there, you know, there's a refinance risk. Right. We don't know where interest rates are going to be in three years. So, you know, if you have five or seven years left, you know, if you have seven years left, we know that, you know, you're definitely not going to be able to refinance in the next year, possibly two years. Right. Which means the clock's going to be ticking at that two year mark. You're only going to have five years left. You're going to have to determine whether or not you're going to be able to sell it. You know, if interest rates are starting to come back down, maybe you can refinance. So really, to me, it's the debt piece. And if you're going out and you're getting new debt, then what are your terms, you know, and you know, where, where are you sourcing your debt? So that's the biggest thing that I'm looking at and the biggest conversation that I'm having with investors to help them understand, you know, what separates a good deal from a great deal. Right. Some of these numbers can be inflated and you have to be careful when you're looking at some of these overinflated deals. Whereas right now it's okay to go to that 16% IRR, 6% preferred return. Is it a big sexy number? No, it's not. And you know, it may be a 1.6, 1.8 multiple, but you Know that when you see that that group's focus, that operation and sponsored groups focus is you and capital Preservation because they're going to be very conservative and they're going to ensure that they implement the business strategy correctly. And you know, they're, they're able to preserve your capital and oh, by the way, you're still going to get a return. It's not, you know, the two and a half X that, you know, we've, we've, we've all been spoiled by in the last couple of years, but it's, you can at least sleep at night knowing that your, your money is safe.

Right, right. That's key. It definitely is. I totally agree with you and I'm trying to meet with as many bankers as I can and tell them, look, you know, you don't have to foreclose necessarily. There are business plans that can be put in place to, you know, save some properties. So I'm really being aggressive about that and you know, same with my partners. So I commend you on that. That value, that's, that's a, got to be a core value. So your, your typical investors are passive investors. You probably have gotten to know quite a few from being a stock market broker. And so do you find that they want you to tune in that part of your brain and go, go someplace special with your discussion on them or is it very different from how we talk in real estate?

That's a great question. You know, stockbrokers think very, very differently. The thing with the stock market compared to commercial real estate, which is, you know, one of my favorite comparisons is the stock market is very volatile, right. You look over the last 20 years and you look at the ebbs and flow of the stock market compared to, let's just say commercial real estate, specifically, let's just say multi family. Right? Let's take office out of it because obviously office right now is going through its own thing. And a lot of people think that commercial real estate is office and it's not the case. Right. That's just one asset class in commercial real estate. So taking that out of it over the last 20 years, the volatility index. So the average volatility of the stock market is 6.6%. So an ebb and up and down of 6.6. Commercial real estate is about 1.8%. So it's a far more predictable investment. Right. And what happens in the stock market is people confuse liquidity with control. They think because they can go and liquidate their, their stock portfolio and have the Cash in two days, that that gives them control. And certainly there is some element to that for sure, but actual control is actually in predictability. And there's so much more predictability in real estate, specifically commercial real estate. And because of that, what happens with stockbrokers is as soon as a red flag goes up and some of their warnings, right, they do a lot of charting. As soon as some of their charts start to go off, especially when you see 1, 2, 3 red flags to them, they're out, right? So when you start to talk to a broker, stockbroker, or a stock investor who's getting into real estate or who's in real estate, they've been out of the game starting last summer when interest rates were going up and all of these red flags started to come up. Now you look, you know, now we're almost a year from that and you realize, like, okay, it's not nearly as bad as we thought. Certainly there have been some bad things, but not nearly as bad as we thought. And, and if you were, if you were buying real estate and being conservative and doing it correctly over the last year, you're really okay, right? You know, assuming you got good debt, of course, and some of these other pieces, but you're really okay. Whereas a stockbroker, they're out like they, they didn't get back in. Now, that's not to say that, you know, once things have settled, they've got back in. But you have to be careful sitting on the sidelines too long, because if you sit on the sidelines too long, you take yourself out of the game with brokers, right? Because brokers aren't going to keep calling you if you're not going to explore and, and look at their, even look at their deals. So then you've got to re engage brokers, you know, you've got to re engage your boots on the ground, re engage property management. So, you know, when you shut down the engines on specifically commercial real estate, it's not, you know, just going back out and, you know, jump behind the driver's seat and you're off, off on the road. It's, it's a process, right? There's a lot of variables at play. And so they're very different headspaces to be in between the two of them. Which is why I don't typically, you know, target investment bankers and stockbrokers because they just think very differently. However, you know, if they're open and want to explore it, then of course I will, you know, discuss it with them. But for me it's really about newer investors and really trying to get them to understand why real estate is, is more predictable. While it's not liquid, it's more predictable and therefore, you know, subjectively a much safer investment. Right. Not. I'm not a CPA or, or a financial advisor, so of course, you know, you have to take that with a grain of salt. But from my perspective of having been in both the variables and the data that I like to look at, it certainly points more favorable towards, towards real estate.

Well, and I'm a, I'm a huge one to, to get on a soapbox about that actually because I been in the industry so long, I, it drives me nuts when you get these, these questionnaires about what's your industry and they don't even include real estate. It just burns me up because everything is sitting on real estate. Mother Earth. If we didn't have the dirt, we wouldn't have Earth.

Right.

You know, and we stand on it. Gravity helps us with buildings are all on it. But so it's the most durable asset in many respects. And over time, as you know, then too, you've got the stats on the 1.8%. Did you say volatility in real estate?

Yeah, I believe so. It's been a second since I've looked at the. No specifically. But yes, I do believe it's 6.6 and 1.8 respectively between the two of them.

And I've always been raised with the whatever long term periods you look at take 20 years, way back when or at any point in time. And the average appreciation of real estate is typically 5. Often you can see over 5% and you don't have to deduct fees and all that. That's net. Whereas I don't know if you can say the same in the stock market. So I, I've done well in the stock market overall. But yeah, I much rather real estate definitely.

And like, you know, you look at. So I just confirmed, yeah, 6.6 for the S&P 500 and Commercial Real Estate 1.8. So.

Right.

You know, you look at for instance, someone who's getting ready to retire right now and if they're all their retirement accounts are in the stock market, well, they're down, you know, potentially 20, 25, 30% right now. And if that's what you're relying on to get you through, you know, retirement to live on for the rest of your life, well, you're sweating right now. Right? Because we're not really sure where we're going. Certainly it's not going up anytime soon. And so, you know, when you look at the opportunities that real estate presents, you know, there haven't been, aside from obviously these outlying deals, you know, certainly there are groups who are withholding distributions and, you know, there's been some precautionary things. But, you know, if, if you do the right things in terms of your due diligence and, you know, you do due diligence and, and you make sure you're investing with the right people for the right reasons, then it's really, it's really in terms of how much longer it takes to recover. Real estate recovers so much faster.

Right. We all need it for sure. Like I say, especially multifamily. There's a true housing shortage. Yes, that's. And with inflation, the value of your property goes up, your debt doesn't go up, it's fixed. So it's still a great play. Yeah, yeah, yeah. Well, so I know we're getting short on time. Why don't you share how people can get in touch with you?

Yeah, absolutely. So if you're new to the passive investing game, I've got a video series that you can go and watch and learn the video series and there's some other, you know, kind of checklists and, and different things that go in there. So I'll have a, a due diligence checklist and then also a webinar checklist. Basically things to look for in a webinar to kind of learn how to get good at watching webinars, understand what's happening, use them as a tool for your due diligence, you know, kind of trigger things to look for. So that has the same name as my podcast, TheCashflowChronicles.com you can go there, sign up that video series. Well, basically it's short. It's basically five videos, very high level. Right. But help you get started on your journey to becoming a passive investor. And then we'll put you on my list as well, which will obviously bring you, you know, the other value and obviously the deals as well. So that's the best way. The other best way is social media. You can follow me. All of my social media is at Johnny Kahtani. JO NY C A T T A N I. Yeah.

You have a unique spelling on your name. JO N Y. What's that from?

Is well, so my name is Jonathan and it's Jon. So there's no H. So I didn't see a reason to put H and Johnny either. So that's really it. That's all it. Yeah, yeah. Gotcha.

Well, it's nice. It's different, but great. Well, thank you again. Appreciate you coming on. And I really am going to stay tuned on that oil and gas, too. I really want to hear about that, Johnny.

Absolutely. Jenny, thank you so much for having me. It was my pleasure.

Take care.