Beat Inflation: 4 Inflation-Proof Investing Strategies Millionaires Are Using Right Now | EP#170

You're getting, you're getting the sweetest deal possible because you're getting to come in towards the end of the project and you're getting to place this money in there that's already capital's approved, common equity is raised, construction is started. A lot of times leasing has already started. It's just, it's a gap they need to fill.

My greatest mistakes or not getting into real estate sooner and.

Not doing smart deals with smart people like you. I often say I'm a delusional optimist who invested in people who are delusional optimists. And that's the problem with VC deals.

We do the hokey pokey all day with new investors. You know, I guarantee you we put our right hand in, we put our left hand in, our right foot, our left foot. And then finally, whether it's five years, 10 years, 15, we go, wait, I haven't put my whole body in yet. You know, I need to like go.

Hey, this is Mike Koenigs. Welcome to another episode of Capability Amplifier. I'm here today with my friend Darren Davis and we're talking about alternative investments in 2024. And just give you a little backstory. I have really given up on VC investments, frankly, because I've been burned so much. I focus all my attention on alternative investments and real estate. And Darren's been my go to guy. He's also been really, really helpful in coaching Vivian and me on some of the things that we've been doing, even internationally. So Darren, what's hot and what have you been up to right now?

Well, first of all, good morning, Michael. Good to see you again.

Good to see you.

Hey, no, I got to tell you, the market is, is obviously interesting for most people and there's a lot of negative news out there. But I look at that and I guess this is being 20 plus years experience in this, but I kind of look at its opportunities and there is a clear, clear opportunity out there that is so simple. But most investors, if they've only been investing in the last maybe 10 years, aren't aware of it. And it's referred to in our industry as preferred equity. And preferred equity is, it's a tool that developers use really. They kind of call it rescue capital. Meaning like I've got a project and I need a little bit more time, a little bit more money just to get this thing over the goal line. And we'll go into a little more detail, but we've been really successful at introducing this pref equity back into the market with Our investors, because it has so many characteristics that our investors like, and we'll. We'll kind of follow through some of those. But the pref equity is just the one that we're really focusing on today.

Okay, so maybe for someone. We did a prior podcast that went into your backstory. You've got an amazing backstory. You've been through multiple cycles, so you've seen the ups and downs, especially when it comes to real estate. And you've not only weathered the storm, but you've done it with plenty of money left over that's taking care of you and your family. In addition, just overcoming some incredible challenges personally. But let's just get into a little bit of why this, why now? And then I'd say just dive into the what. How pref equity works and this notion of rescue capital and why it's such a hot topic.

Yeah, I sure will. So, and I think everybody will understand this because everybody kind of grew up this last decade where money was really cheap. So pref equity was not in demand because developers and sponsors could borrow money at three and a half, four, four and a half percent. And that's not really a good return for an equity investor. But the way these deals were set up for the last decade plus is that you had the senior lender, which was the bank, the construction loan would put the money up and usually around 70, 75% of the cost. And then the common equity would come in and get a, what, a preferred return, anywhere from 6 to 10%, which is accruing. But then they would participate in the upside. Okay, and there were some, I mean, home runs and grand slams hit, no doubt about it. And people did really well, Tom. And if you talk to people that have been in the industry more than, you know, five years, they'll tell you, hey, those are the heydays. You know, don't expect that going forward. Well, what's happened now is that. And everybody knows this leverage has come down. Okay? So banks, instead of loaning 70 and 75%, are down in that 65 and 60. So who's going to fill the gap? Okay, well, now not only is the leverage down, but interest rates are up, gaps getting bigger. All right, so you're sitting there going like, man, this is. This is not good if I'm the developer of the sponsor. So you've got lower leverage, higher interest rates, and then you've got one more kick to the kick to the gut. Valuations have started coming down, so that drops the value down even more on your leverage. So You've got this tsunami of these three things that have hit. Well, let's talk about today. Well, three years ago, two years ago, when interest was really cheap for the general contractors and the developers, they were getting loans, construction loans, three and a half, four percent on a floating rate. Well, that thing is floated up to about 8, 8 and a half, 9% now. And so that cost of capital that they did not prepare for, they've had to utilize their interest reserves and several other things, put capital calls in to their common equity to fill that gap. Well, what we've done is we've said, hey, we understand common equity, we understand this capital stack. We have now said we will come in and we will fill that gap with that money that is needed to finish that project through the final end of construction and to stabilize. So what you have is what you call a capital stack. If you're seeing your debt, and then you have our piece, which is the pref equity, and then you have the common equity on top of that. And the nice thing about the pref equity is that we are senior to the common equity. So we get fully paid interest, penalties, capital, everything before the common equity or the sponsor receive anything. So we're right, we're right after the, the senior debt, which is the loan, construction loan, then the pref equity, which is us, and then the common equities after us. So we have this big safety net behind us. And typical returns for a private equity investor, just somebody that would work with us, are anywhere between 10, 11, 12% annualized and quarterly payments are being made immediately. So you start seeing immediate cash flow. And these are short term too. Typically they're usually not more than three to four years. Most of them are two to three years because that money is expensive. And these guys are wanting to either refi it, sell it, have some capital then so that they can pay us off and continue to do another deal.

That's great. So that's, that really answers some of the questions. But I'm going to do the short one for I always look at this and say, okay, let's answer the questions for the quick starts first. If they're, if they know their Colby quick start score and then their fact finder score, which is how much, how long, how safe. And you basically answered that, which is it's just a few years, you start getting paid right away. It's about as safe as you can get unless you're, you know, the bank. Right. Meaning they're going to be the first out. And like how much typically does Someone need to invest because the benefit to an investor gets involved in this because they're not doing all the deal work. You're the guy on the street sourcing these, finding them, structuring them, which is an enormous amount of work. It takes a long time to build the experience, plus to even know how to structure these things in the first place and do it right. But like, let's say someone wants to either dip their toe in and say this will be their first time, or if they're an experienced investor, what do they need in terms of.

Yeah, yeah, well, and we. Our, our DNA comes from educating investors. And we really want people to take that first step and that whole. You know, there's so many people that are just not sure what to do because they don't have all the data, they don't have all the knowledge. And at some point, you just got to go. Now, I will tell you this. It is, it's far more, I guess, challenging for a new investor to go into a common equity deal where the underwriting and the deal is really big and complex. All right? Under this deal, under the preferred equity, the deal is already set, okay? The construction is already started. The leasing has already started. So a lot of that kind of perceived risk on the development side, it's way behind us. All right? You're getting, you're getting the sweetest deal possible because you're getting to come in towards the end of the project, and you're getting to place this money in there that's already capital's approved, common equity is raised, construction is started. A lot of times, leasing has already started. It's just, It's a gap they need to fill. So when I, when people say, wow, this sounds too good to be true, I said, well, it's. It's not too good to be true. I mean, it is true. But if you want to learn how to get into private equity through alternative investments, you want to learn how deals are structured, you want to understand how we do asset management, how we do underwriting. This is probably the safest way you can get in and see all of that. That, and still make a fixed return short term and do quite well. In fact, craft equity deals today are making about 10 to 20% more than common equity, but they're in front of the common equity. So when I tell people, hey, is now the time to get in? I'm going, yes, I'm going. You know, this isn't 2008, 2009, where you hockey stick in 2011 and 12, but we're going to have a nice ramp up, come around 25, 26, 27.

Okay. And what you and I were talking about before we started recording is the fact that because these are shorter term, they're probably harder to find. And again, you got to have someone doing the due diligence, which is what you're really, really good at, is really go out there and collect the data. That's the, the safest bet for me as an investor is I got to find a partner that I want to dance with not once, but multiple times and sourcing these things. And you said something.

Well, go ahead and comment on that. But you also said this is a bit of a Trojan horse. So explain that because you're implying it there, but I really like the mindset and why that's an important thing to think about.

Yeah, and this is, there's, there's the way we underwrite this and I'll talk about the Trojan horse, but the way we underwrite it. We underwrite it just like we were going to do a common equity deal like we did two or three years ago. So our underwriting is very extensive. And here's why. Because in the event that something doesn't materialize as it's contracted to do, we could end up taking that asset over. So when we underwrite the deal, we want that asset. So we're not going to go do prep equity into some deal that in, you know, California or New York that we may not ever have any interest in doing. We're doing those right in our backyard, just like we've been doing for the last 15 years. So really in Texas and a little bit in Florida, those are two states that we like. But we are underwriting those just like we were common equity. But you're getting the preferred equity position. Now let's talk about the Trojan horse and the reason why we underwrite them like that. In the unlikely event that we get this asset back, let's say it's not performing as well, the sponsor is undercapitalized still, and no more capital could come into the deal unless the common equity wants to bring it. We could end up taking over that asset. And if that happens, that's why I said we want to underwrite us just like ours because we don't mind taking the asset over. Do I think that's going to happen? Probably not. We may get one or two deals, but you know, it's, it's not going to be a. I, I tell people this. Texas is not a distressed market today. Texas is a discounted Market. So if you think you're going to come in and pick something up at 50 cents on the dollar, probably not. Could you pick it up at 75, 80 cents on the dollar? Probably. So I think we'll see a couple of those. Now let's go to the Trojan horse. If I'm able to get in to this deal as a pref equity and I'm in that really sweet spot with safety, I get access to all the construction numbers, all the rent numbers, all the expenses, property management, I get everything. And that's going to give me a look into the asset where we can say, hey, this is an asset we really want. Let's not take it to market and go through that six month sales process and pay all those fees and that carry costs. Why don't we come in and pay you a fair price and take that over right now? So I get, I get a, I mean I get a front row view of everything on that asset for the next year or two and that's what I think is more probable. We'll pick up two, three, four of those over the next couple of years. And that, that's, that's the home run. Okay. For us. Picking up an asset that we already know, understand, invested in, know the market and we're getting to come in and look at everything and then we get to pick that up at a 10% discount, 15% discount lower than replacement cost and that's where we're, and then we start managing it and then we do start our own little mini hockey stick. Got it.

So that ends up being these are safe, smart singles and doubles. Right. And then how about think about it from the seller's point of view. Why do they like working with you?

Because we do what we say we're going to do from a seller's perspective. Yeah. We have never not performed with any of our partners on providing our, our, when we, we make a commitment to somebody, we figure it out and get it done. We've had some challenges, no doubt about it. We've been slow a couple times, but it was market conditions and our partners knew that and they knew that we're good for what we're doing. But sellers know who we are. We've been in the market for 15 years here in the Central Texas market. So we just have a, we have a really good reputation and I got a great team and, and I, you know, we have a little over, well, a little over 300 investors. Some of them have been with us 15 years. Most of them have been with us the last 10 years. So we just, and we're small, but you know, we're able to execute and we know that we know the local market really well. Local market meaning Texas. We don't really go outside of Texas except we have a, a couple really good partners in Florida that we really trust and like. And we would, we would follow those guys because we've done business with them here in Texas as well. Got it.

So the, the, the net net is first of all, there's two markets you know really well. There's good deals there.

They let you in because you fulfill. And it also means.

You pick the right kind of money, meaning talk a little bit about choosing the right investors and letting the right ones in so they're a right fit. Like what's your selection process? Or even more specific, like who's a perfect fit investor for these kind of deals and working with an organization like yours, if we were just going to be hyper selective.

Yeah. And I'll tell you, really, one of the drivers. Well, first of all, the market presented this opportunity and we understand it, but one of the drivers that really made us say we need to pivot now and take and capitalize on this is most of our investors are right in that 45 to 65 range. A lot of them are saying, hey, you know, I want, I want cash flow. That's first. Capital preservation cash flow. Well, prep equity takes care of those two for sure. And then the third thing they said, I want is I sure would like some upside. How do I get that? And I said, well, in a prep equity, you really are not designed to get that. But however, what we just went through with that Trojan horse example, if we're in there, we will be able to pick up an asset or two, and you will be able to get one, your safety and security. Two, you'll get your cash flow all right. Three, you're going to pick up an asset at or below replacement costs and then we start managing it. So that, that little trifecta there is very comforting to me and allows me and every other investor to sleep very well. Our market in Texas, you can't say this about all markets, but we're very fortunate. We still have huge migration coming here. We still have jobs being created. That's just not slowing down anytime soon. So, you know, I think this Texas Margu, even though it's, it's not what it was four years ago, it's slow, but we're not down. And Mike, here's, here's the thing that's, I think Powerful that people need to understand and just basic supply, demand. Okay, we have virtually not stopped. We have well over a 50% and in, some people are saying closer to 70%. Some, some people that track the markets reduction in new construction starts here in Central Texas. Okay, now what does that mean if our, if our supply is a little high right now and our rents are, you know, they're not 8, 9% like they were. They were, they have a 1 and 2% increase, but we still have a really solid migration. But we're not starting new supply. There has been no significant new supply started in the last 18 months. That impact is not going to hurt in 24, but in the back half of 25 when all that supply is picking up and we don't have the supply that we need to maintain the demand that we're going to have, you're going to see the end of 25, 26, 27. That's where you're going to see your big uptick in performance. You know, rents will start going up at that 3, 4, 5, 6% and you'll see some significant upside. And we were fairly confident that rates will probably come down over the next two, two and a half years, you know, to a more normal level. Not the two and a half and three and a half that we saw, you know, five, six years ago, but somewhere in that, you know, four, four and a half, five range. So you, you start, you start seeing all of the drivers start shifting to go in our favor at about a year and a half to two and a half years from now.

All right, so let's move on into. So we know the location, the structure, what to expect, the returns. Let's talk a little bit about the mindsets of.

We'Ll say the right kind, like what are the fears that you'd run into all the time. So I'll call these like the investor objections and also the mindsets of the successful person who's playing in this particular category. Because someone who's doing a VC deal has a very different mindset. Someone who's doing a high tech investment. But when you're looking at PE.

Real estate specifically.

What'S the right approach and the wrong approach to walk into these.

With for an investor to come in and how to look at this. Well, I mean the, the things that never change are just the sponsor. Ok, okay, you, you've got to, you've got to vet the sponsor, you've got to look at their track record, you've got to check the references. That's just anything you do, okay. And we've all done it, and then we've all made poor investments. I mean, you know, happened to all of us. But the, the, the thing that I will say that I think is a huge opportunity for people that are sitting kind of like, man, do I, do I put my foot in the water. It is challenging. I said a little bit earlier, but when you've got a common equity investment, there are so many things that could happen, okay, that could impact the investment. And when you look at a preferred equity investment, what we have today, if you're looking for something that's driving income, that's in a very safe position, that's real estate backed in a market that's growing, that's very economically friendly, business friendly, you're starting to line up everything that goes check plus, check plus, check plus. And I would say for, I must say, newbies, okay.

This would be an excellent time to be in a very safe position and learn. Right now, you're not going to learn if you don't invest. I mean, you can, but I mean, really putting your money in the deal, you know, and looking at the reports and asking questions and understanding what's going on and what's the exit strategy and how does it all work? I mean, what a, what a, what a layup. I mean, I, I never had a chance to do prep equity when I started. I didn't learn what it was until probably 12 or 13 years ago. So the first 10 years I was doing this, I didn't know, you know, I was just a common equity guy. Right. But this, this is a really, really good opportunity for, I think, new investors that are wanting to get into commercial real estate passively and learn so that they can make better decisions next year, the next year, in the next. This is good. Now for your, your more advanced investors, your more sophisticated accredited investors.

What they see is, wow, okay, yeah, that's good. My money's safe, I'm getting some cash flow. But they love the Trojan horse opportunity. They're going like, you know what? I can wait two years because I would rather get a 12% return for two years annualized and then go in and capture that asset below replacement cost and hold it for five or seven years and generate more cash flow and appreciation. So it's, it's, it's such a fantastic opportunity. And I'll tell you this, it's not going to be ongoing for four or five, six years. I think our window is about three. And I throw some numbers out at you real quick that I.

Want to make sure I say this right, so in 2024 we have 650 billion with a B loans maturing, commercial loans. All right, those guys in that this year right now, they, if they can't meet the obligations that they have, they're going to have to find alternative financing. Pref equity is one of those alternative financing. Now out of that, you know, 50 billion is multi family where we'll focus. But there's some other, there's some industrial we may look at, but we're not focusing there. But some of these deals may be really strong data centers, industrials type stuff. Going into 2025, it's 520 billion. All right, so 650 this year, 520 next year, 380 billion in 26. Now that's why I think you can see the loans that are maturing are starting to decline. So that's why I think 24, 25 and 26 are going to be our years to really capitalize on not only making a profit in a very safe way, but again I go to you kind of asked about new people, kind of how you would vet this. This is a fantastic opportunity to get into a, a commercial real estate deal with private equity alternative investments and have surety of execution than you would in most any other type of investment as a, as a first time or second time investor.

How about tax benefits? Are there any tax benefits to this type of investing strategy and what do they look like?

Well, that's, that's a really good question because our investors who do common equity for, you know, last 15 years with us there were tax advantages. Okay. But prep equity is, is treated like income. So you're not going to be getting any of the depreciation or anything like that you're getting. And that's the trade off, you know. Yeah, yeah.

So this is basically you're getting paid off so you have more certainty of you getting your capital back and having multiple benefits along the way. And I guess if I, if I were a picking man, I'd rather say, I'd rather protect my cash then you know, I'd probably find a different vehicle for taxes.

But okay, this one is just income. So I, I, and here's something that I want to, I should have said this a little bit earlier. I want to give people a real example. This is a live deal we're doing right now. All right. So in the capital stack, a hundred percent of the Money, we are 5% of the total capital and we're sitting right between the senior debt and the common Equity. Now, why is this important? All right, first of all, it's obvious it's in a really safe place. All right? But let's hypothetically say this asset.

Was to not perform well. The cost of that asset with the entire capital stack is $250,000 a door, okay. All in construction. Let's say that for some reason, we take the keys from the developer, okay? Says, guys, we can't perform. We're not putting any more money in. Well, we end up having the ability to cure, to take over the asset, and we could take that common equity and could wipe all of that away. Now, here's why I'm saying that that cost at 250 a door still underwrites and performs a really nice return. If the common equity is gone, that cost goes down to $175,000 a door. So you can see the deep discount and the safety mechanism that we have there. So when you're talking about experienced investors, they're going, guys, you know, they're crossing their fingers. That happens, you know.

Yeah, yeah, the new. Yeah, 35, almost 35%.

Like, boom. Yeah, yeah. You know, below replacement cost. And then the new investors, you know, they're going like, wow, I just, I, I just got a huge discount, a safety net behind me, you know, that my, my, my capital and my returns and any penalties will all be paid before one person, that common equity receives anything.

Yeah. So again, if I had to pick.

Tax benefit or the safety, with that added upside, it seems to be a pretty clear decision. So I'm going to go into one more mindset question here, which is action taker Mike Koenig's here, and I just wanted to interrupt for a second and let you know that if you're ready to reinvent yourself and your business, go to connecttomike.com to learn more and book a conversation with me right now. All right, back to the episode. If you look at your driving principles now, we've known each other for a while. I've been able to really deconstruct your mind. We spent a good chunk of time together, and you have gone through multiple cycles. Okay, this is ups and downs, where you've watched the boom and bust in real estate especially, and traditional investing as well. So if you were going to look back, you could cast yourself backwards in time or if you were starting out now, knowing what you know, what do you think the biggest mistakes that you made that you don't make any more? When you're finding and putting together deals that also bring us to this Moment in time. You know, it's like when you look at the combination of high interest rates at this moment, deals like you see them, but also experience. Speaking like, what are your.

If you had three wisdom takeaways as an investor, what would they be? And I, I took a long time to ask that question because I want to give you enough time to think. Because we didn't prep this. It was more like I've been thinking about everything we've talked about in the past. I'm like, what do I really want to walk away with and know today?

Yeah, I, I mean, you could have made that a 10 second question. I, I had the answer because it's, it's, it's etched the brain, the, you know, the. Everything's there. So what, I'll tell you this. When I started, you know, it was books on tape, okay? There was no Internet, there was no nothing. So there was a lot of, I mean, just, I had to teach anything and everything. No, no real mentors, no mastermind, no Nothing. Okay. Late 90s. I think the thing that I've learned the most is. And I don't regret it at all. I just wish it had happened a little different. But I got to the same point, I was probably a little too trusting in the, the people and the deals because I didn't quite have the knowledge at the time. All right? And so my, if I were to go back in time and, and fast forward today, what, what I completely do now is I vet the sponsor team. I, I want their track record, I want their references, I want to know what they've done, how they've done it. I want to know more about the person who's managing, you know, tech, managing my money. Right? Because every deal on a pro forma looks beautiful, right? It's when you exit and when you perform during that time, you own that. That's what I want to know. And I, and I, I get why people do it. They feel like they don't know the right questions to ask or they, they don't feel like they're educated enough. I can tell you right now, you, you've heard it, Everybody's heard. You can't ask a dumb question, whatever. You got to ask questions. And that's why I say this Prep Equity deal, it's handing you a playbook on how these deals are put together, from the operating agreement to the PPM to the underwriting to the pro forma to how we work with the bank, near all of that. I mean, it's just there and it's if, if I had a had prep equity deal in front of me back in 23, 4, 5, 6, you know, when I was starting off really trying to learn, I think things would have accelerated much faster for me. So that would be my, my thing that I would say I learned a lot that, you know, because I did make. I mean, and I don't regret making mistakes or taking risk at all because my gosh, that's the only way we're going to learn. But I tell you.

That would be the one thing I would tell people today. They shorten that learning curve. You're. If somebody really wants to be your partner and somebody wants to be, you know, involved with you as a sponsor and, and being a steward of your money, you can't ask them a stupid question or enough questions if you're not comfortable.

Right. That, that makes a lot of sense. And one of the.

You have a bunch of notes here.

About risk and.

Let'S talk about risk because ultimately, what would make someone who's listening to this or watching it right now is okay. I just want to understand risk. And there's a mindset risk and a practical risk, which is okay. If I hand over 50 or 250,000 or half million or million dollars over to or more to, to Darren and his team, what are my chances of seeing something and.

Then what's also the risk of doing nothing?

Yeah, well, you know, I look at risk and I will tell you this. I am not as much as, you know, in the last five years, but back in my late 30s and 40s, I was a, you know what? I'm going to fire first and aim later. And that's the only way I'm going to figure this out. Because everything's moving too slow for me. I want to. I mean, I want to. When I get my mind set on something, I want to figure it out as fast as I can. If I back up and see what is my personality and what are my characteristics to evaluating things that I want to do or not do, I literally jump in with both feet and then I figure it out. So, okay, that didn't work. But what did I learn from that? All right? And then that's just my personality. With my money, okay? My money, I. With investors money, I do a 180, I'm like, holy, you know, holy, holy. I back this, back up and really think through this because I can't afford to have a bad deal. I can't afford to have a bad relationship with investor, you know, like I do. You do One thing and it spreads like wildfire with this Internet, you know. So, you know, it's just, it's just one of those where I, you know, that's, that's me on that. But part two of that question, what was it, Mike? Because I was getting excited about both of them.

Yeah, yeah. Well, it's the risk of doing nothing. And, and you have some specific notes you sent me ahead of time that I was looking at going, all right, this is legit.

And yeah, yeah, I, I, and this is just 20 years of talking to people and I, I love talking to first time investors, new investors. You know, they've only been in a year or two and, and I, and I don't know if you know, if this resonates, but if you think about this, I have, I have some numbers here that I, I love to look at because it's so impactful. You know, I'll just talk about inflation for a second. You know, if you, if you have, and I've got an example here, like if you have a million dollars, sit in a bank account, okay, and you just are super risk adverse and with inflation and not doing anything, and I get it, everybody needs a nest, a nest egg. But that, that million dollars just at 2 1/2% inflation over the course of 10 years would be, be worth $769,000 in 10 years from now. Okay, now you did nothing with it, all right? And you know, you still have 769,000, but it's, you decided to take a loss day one. Okay? So you've made a decision now if you were to take the same million dollars and you were to invest it and something that made 8% return and we still took out the inflation component of that, you would be over that 10 year period, you'd be looking at a million nine, I mean a million 5.9. So million six. All right, so 769 to $1.5 million and now 8%. And that's a straight compounding. But I did take out for inflation. But that is something that's fairly, fairly doable. I mean the S and P over any given 10 year period is 11, you know, private equity, my world averages, you know, 13, 14 a year. But the delta on that, you know, being 850, 900 grand is significant. So if you're willing to say no, you have to be aware, and I say aware that you are, you're deciding that I'm losing money. And we all know it. We've all, and we've all experienced the last year, it's not two and a half percent collectively, you know, 12, 15%. So we've taken a big hit this last couple of years. And I'm guilty of. I didn't have all my money invested the way I wanted to, and I went back with my, my, one of my mentors and a financial advisor, and I probably missed out on a few hundred grand because I didn't have it placed correctly over the last couple of years. Inflation just, just, just terrorized me.

So, yes, and I would say, you know, my, I've been pretty vocal about this. My greatest mistakes were not getting into real estate sooner and not doing smart deals with smart people like you. Like, I, as I, I often say I'm a delusional optimist who invested in people who are delusional optimists. And that's the problem with VC deals because it's like, I look at it, I'm like, oh, I fell in love with an idea.

And a founder. Instead of saying, you know what? I took some stuff, I took it off the table. And a nice 13% or an 11 compounded adds up real fast. And 10 years goes by really, really quickly.

And the, the, you know, the, the millions I have in, in dumb VC deals, like I had one in one that was away for 14 years and you know, I got multiples on it. I probably got 6x, but still compared to the 8 that didn't. And I had a big one that just died this year. And I'm like, yeah, it could have been could. That woulda. You know, it's the coulda, shoulda, woulda. And I think the slow and steady beats the hell out of the out of the park chances. And your chances of being successful with VC deals are, is very, very low. Statistically speaking, this a much better bet. So any thoughts on that before I move on to the next one? Because I, I gotta ask you of a metaphor about the Hokey Pokey. And at first when I saw this, I'm like, yeah, I'm not gonna do that. And now I get it, I get it. What's the Hokey Pokey?

Oh, well, I, it came up the other day and it's just, I, it, I was thinking about this podcast and I've got some other stuff I'm working on and if you. It's the fear factor. And I, I kept thinking and I heard this song, I was going, well, that was good timing, but put your right foot in Put your right foot out Put your right foot in. I started thinking about, I Go. We do the Hokey Pokey all day with. With new investors, you know, and. And I'm sitting here going, right foot in, right foot out, left foot in, left foot out, right arm, left arm, you know, and then it's up at the very end of the song, it says, you know, you do the okay, and you put your whole body in. Okay. And I don't know if that's, you know, And I started thinking about that it's only when you commit, because so many people, they stick their hand in, they stick their hot out. They put their foot in, put their foot out. And you talked about, you know, you not. You wish you had done it earlier. I guarantee you, you and me both, I guarantee you, we put our right hand in, we put our left hand in, our right foot, our left foot. And then finally, whether it's five years, 10 years, 15, we go, wait, I haven't put my whole body in yet. You know, I need to. I need to, like, go, all right. And I was going, like, it just caught me. And I said, I got to show that with you. So. So we're doing the. We're all in.

We are. And.

I have something to say to you offline here when. When we're done that I don't dare broadcast, but I'll just tell.

You know, I say this to my audience, like, after having spent time with you and seeing and being able to deconstruct a lot of your deals, a lot of them, and see how you've thought, one of the things I would just flat out say is, if you ever get a chance to work with Darren, do it, because this guy will educate you and teach you how to think, which is the best value you'll ever get from anyone. It's like, my best investments in life have always been finding good coaches who play the long game. And you're a long game with a lot of history who's survived these ups and downs without letting the ups and downs hurt your brain and your courage and your confidence, it's been shaken and you've had a lot of. Lot of hard life lessons thrown at you over the past few years. So that's my endorsement of you, and you're welcome. And then the second side is you've spent a lot of time preparing some really good resources. So I've got a couple more questions for you, but I want to make sure that anyone who wants to learn more and have a conversation with you, head over to clubcapital. Co. That's co. Go. And there's a page where you can get some of Darren's resources. And you can also just send an email to Info Clubcap Co or pick up the phone and just call 512-433-6325. But talk a little bit about some of the educational goodies that you and your team have put together. And then I've got another big question for you.

Yeah, so. And I appreciate that, Mike. So we have, I put together, boy. I've got a, a webinar recorded a pref equity 101. I've got a, an executive summary kind of a two pager and I've got a couple of articles on pref equity because it's a lot of our common equity investors were not familiar with it. So even guys have been with me. So we, we put a, we just put some, you know, content together and I would encourage everybody to go to the, the site you just gave on the Club Capital.

Forward slash go. And we will have everything on there and there'll be several documents. It'll be a webinar. I'm actually this, I'm doing a. It'll be recorded. We're doing a Q A this week out on that same site that. So you'll hear investors asking questions. So people are going like, wow, I didn't think of that. And you know, you'll hear and it's a 45 minute. We'll probably have, you know, 30, 40, 50 people on it asking new questions and we have a Q A section on there for prep equity. But. And then you'll also see our company as a whole. You'll see our team, our performance, our track record. You'll see all of that. But you know, specifically, you know, we're focusing in on the prep equity and that's the stuff we're doing today.

Yeah. Which again, know that like anything, there's always going to be shifts in where money's going, how to reduce risk, how to put together these deals and interest rates and all sorts of demand. You know, this is shifting all the time and you're going to do the right thing because you got your own money in this. It's not like you're gambling with someone else's. This is. You've got skin in the game with all of your deals and you've got reputation in the game with every deal you ever do. You know, it's, it's, you're approaching this as though you're staking your reputation on both sides, your investors as well as the people you're doing the deals with.

Very much so. No way. I'm a firm believer, you know, when we go in, our entire team goes in and investing alongside of our investors is, is important. So it's, you're not going to see us promoting something that we wouldn't do ourselves.

Right? So this always feels like a cop out question, but.

It'S, what are the questions I should have asked you that I didn't? And if you put yourself in the.

Seat of an investor. So let's say you get some people who raise their hands and go, okay, I'm at least going to start a conversation with Darren. I'm going to get his stuff and I want to talk to them.

What do you think they should be asking you that they often don't. Or what are some of the first questions you'll typically get that we, I might not have asked you today. That'll get, get them, get them in the game. Yeah, yeah.

So I can't wait to see what you're gonna ask me offline here in a little bit. But one thing I don't think investors do a good enough job doing is plan B, plan C, exit strategies. Okay? Because when you get a, an offering, it's called an offering memorandum, and a sponsor sends that to you. They typically say, here's the pro forma, here's the time frame, here's the exit. Okay, well, guess what? What just happened to all these developers two years ago? Not one of them prepared for prep equity. I mean, maybe, maybe one, okay, a few, a few small percent. But asking that sponsor, okay, what if plan A doesn't happen? What's your contingency? You know, where, where is your break point, you know? Or do what if rents are down 20%, can you cover the debt? But if you can't cover the debt, what are you going to do? And that guy should say, well, we have to go get more equity. Well, how are you going to get that equity? Well, we'll do a capital call with our investors and if you don't want to do that, the sponsors can put the money in, which is the person you're talking to, or you can go get prep equity or whatever. But you need more than one. They have to have more than one answer, all right? Because if they have one and that didn't go perfect, you might not be with the right sponsor. So I encourage to ask exit strategies because it's not going to go perfect all the time. And I think a lot of us got very spoiled between, you know, 2000 and I'm going to say 1213 to 2020, 2021. That decade right there where everything just worked. I mean, there was so much money flowing in here and, and money was cheap. That's. That's. I would not count on that for the foreseeable future. I think things are going to back up like they were in the early 2000, and appreciation is going to normalize. Costs are going to normalize. You know, returns are going to normalize. You'll see stuff that was 2000, 3, 4, 5 numbers, not 20, 15, 16, 17 numbers.

That again, would be that fall in my category of pick the right partner and make sure there are no surprises and.

Get educated right. And.

Be prepared for changes. And picking a partner that knows how to think on their feet, it's knowing when to play the long game and playing the short game is my interpretation of what you just said. And that just takes. Again, the right partner is going to come clean and say, like I say, I don't like surprises. Good news is great, bad news is fine. No news is never okay. And again, I was involved in a pretty sizable investment that just blew up recently, and.

A couple of them, actually. And the, the thing that all bad deals I've been involved in all have in common is they involved a lot of no news.

No news.

Yeah. You got a wrong partner when there's no news. Go ahead.

I want to comment on that. Okay. Because that was going to be part two. But, you know, what should they be asking? You know, how are you going to communicate? When are you going to communicate? And I'm going to give you a couple of examples.

And there's when, when sponsors go dark, you. They, they bring that on themselves. Okay. And it's typically not good news. All right? And I can't tell you when you do a reference check, you want to ask the person you're talking to about the communications that sponsor had with them, all right? You know, did they only report good news? Did the report timely? Because every. We're all big boys, okay? We all can lose money. We all. I mean, we lose money in the stock market every day. You know, I mean, every day. But the communication is out there. All right? It's more streamlined. But, you know, I, I completely agree with what you just said. If the sponsor's not in a, in a proactive approach, even if it's bad, I mean, because you, I mean, I would appreciate you calling me, say, darren, I lost your money and here's what happened.

Yeah.

And here. Try to do. To recover it. And if we don't have option a B and C to recover it. Then, then, you know, you're not really giving me an answer, you're just giving me an excuse. So. No, you're, you're spot on with that one and I'm glad you, you know, reinforced that because that, that's, that's really, really important.

Yeah, well, that's, that's something that again, I feel strongly that someone who's dancing with you is gonna find out.

Is just that, you know, you're gonna communicate and you, and you treat this with.

You know, you look at someone's money and people get really emotional. I've seen again, a recent deal that fell apart that I was in and holy cow, the founder has gotten attacked by everyone. And it's some of, some, some of the money's been in there 12 years and I know people have less than six figures in and they're treating this person like a fraudster and they get so emotional and weird about it. And it's like first of all, the energy that you're putting into this, you could have made that money back already and you entered into this knowing the risk. But the big mistake was there wasn't a communicative partner. And that makes all the difference in the world. So it's just keeping people educated and informed and knowing how emotional folks get about their money and where that scarcity gets kicked in and, and you know, you've seen it so many times and I know you've weathered some big storms both personally and professionally throughout all this, which is another reason why you got to pick a warrior who's going to go to, to battle with you. So with that, are there any other questions that I should have asked that I didn't? Aside from again, I want to just repeat.

Make sure you take advantage of some of the free tools and resources that Darren's put together for you because that alone is worth it. Just heading over to ClubCapital Co go or just don't be afraid to pick up the phone and, or send an email to Info clubcap Co. So what else, if there's anything else that I should end on that. I didn't ask you that. You want to reinforce or say Darren.

I, I gotta.

Well, I'll reinforce something. It's, there's, this is one of the best two or three year windows if you're, if you were waiting for like, when's the right time to buy the stock? Okay, well, you, you don't want to buy it when it's going up, right? You want to buy it when it's going down well, we're going to be down for another couple years. All right, it's down flat. All right. But we've picked one asset that will perform. Perform one investment vehicle that will perform. And if you're, if you really think, you know, you want to be part of what that hockey stick. Not, not. I don't expect it to be near as good as 20, 10, 11, 12 when it just literally, you know, went, went to the moon. But it's going to be strong, I think. I think fortunes are going to be made between now and 2027, I really do, in the real estate market. And you're going to see, you know, it's going to be a little uncomfortable maybe because you're going to still hear bad news about interest rates and inflation and all that. But it, I got to tell you, my, I'm old now, but my last 25 years of being in the private equity space, this will be my third opportunity to really capture. And I missed 1 and 2 because I missed 1 and 2 and I'm not missing this one. So.

That, that's very, very wise.

It's very wise. I'm just soaking that in and reflecting it and seeing where else that applies. But so here's what, is there anything else we want to share with folks about just getting their foot into the game and getting past the initial fear of doing something that if they haven't done a deal like this before, that would push them over the edge and say, yeah, you know, this is the reason why you'd want to take this risk. Aside from all the other things we've covered, is there something else that we didn't, you know, should have?

Yeah, Mike, not really. I think the, the thing that I like about the pref equity and the reason I want to talk about it with you because it is a short window, like I said, two to three years. It's so safe. I mean you're, you're in class A real estate in a booming economy compared to the rest of the U.S. i mean, Texas is, we're fortunate, I feel very fortunate that we live here and do business here and it's a great way to see everything about the investment in a very safe, secure, cash flowing, income generating position. And I don't really, I can't say this. I mean there's all kind of good deals out there, but there's also a lot of deals that don't have the surety and safety that this would. And that's for, for new people or I'll tell you What I had. I'll be quick on this one. I had a call yesterday.

From a woman that's 68, 69, and she got her son on the call. And he said, darren, he goes, my mom's been with you guys for, you know, eight years now, and y' all done it really well. I said, yeah. He goes, but you've never done a deal like this. You've always done. He's pretty, pretty knowledgeable in the real estate. He said, you've always done common equity, you know, and we were pulling her out of the common equity going forward because of her age and, you know, she wants income and capital preservation. He goes, I really like this. And I said, well, okay. And I can't say his name, but I said, all right, well, tell me why. He goes, I understand it. I see the safety, I see the cash flow. I see that it's short term. She's not going to be sitting out here seven, eight, nine, ten years. It's defined. And she goes, this makes a lot of sense for her. And he said, we were going to go elsewhere, we were going to T bills or something else, but you know, this, we're going to double what we make on a T bill. You know, granted, it's not quite as liquid, but it's not, you know, five years out. It's, you know, three. So. But that's all I'll say on that. I've kind of beat that, beat that drum a lot. But this is really one of the better opportunities for experienced investors that understand what the upside could be in an acquisition of a deal and for new people, just the safety, surety and income.

I think, again, getting back to the summary.

Perfect market timing, low risk, income generating with multiple safety nets and experienced offers that are available now. That is a very beautiful perfect storm. And that's what I look for now as an investor, especially given the fact that I'm playing a safer, smarter game and I'm not swinging for the VC fences like I used to, knowing that, you know, time's ticking and, and you want something that's going to create some quality returns, but also build some relationships that are going to matter for the long term. So that would be my summary of what I just heard right now. So with that, I'm going to give you the last word. Darren, anything else before we wrap up?

Man, I am grateful for this opportunity, Mike. Thank you. You asked a lot of great questions and I will, I will leave, I will leave everybody with this. And you said it earlier, okay, I don't know when it hit me, but I wish it had to hit me about a decade earlier to start doing private equity investing. And the whole time and compounding, you know, I'm fortunate I have younger adult children and for the sheer fact that a little bit of knowledge that I'll give them to get them started will dwarf what I've done should they pursue what I'm doing. And even as an investor, it's going to give them, you know, the knowledge to do that and they'll be able to. And, and private equity is now available to people 20 years ago if you couldn't find it. So, you know, the only thing I just, you know, start, start, start, start, execute, go. You know.

It could be small and just go. That's all I can tell you.

And the best place to go is ClubCapital co. Go. How's that? There's the book of the day. All right, well, we'll officially wrap up this episode. This is Darren Davis. I'm Mike Koenigs. This has been Capability Amplifier. If you enjoyed this episode, make sure you share it with someone. You know, give it a rating and also let me know if you'd like more episodes like this. I like getting my hands dirty, especially with people that I've worked with and working with and I refer to. And I love deals. I just love seeing deals. And if I had a regret right now is that I didn't start doing real estate sooner and I didn't understand that there were alternative vehicles available that didn't require so much work and this is one of them. So with that, this is another episode. Thanks for watching, thanks for listening. I'll see you in the next one soon.

Sa.