$13,000,000 in Real Estate Debt?! Where Did The Money Come From?

I love debt for this deal because we make 10% on someone else's money. Tada!

$21 million of real estate later, where the heck did the money come from?

Well, I don't know. We certainly didn't start with any. How did we do that? We're gonna share in today's video. Hey, I'm Christian. This is Cody, and welcome back to Multifamily Strategy.

We are talking about where the money comes from— debt partners and equity partners? There's some ambiguity in the real estate space of where money comes from. I sure didn't have it. I know you didn't. I mean, you had a little bit more money, but you also traded 8 years of time for it.

Yeah, and we blew through all that money in my first 2 deals.

Yeah, you blew it without even partnering with me, you jerk.

I apologize. However, how did we actually buy all this? We want to share this quick caveat. We're gonna talk about DDE— deal, debt, and equity. Before you get to any of these steps we're going to talk about throughout the entire video with the debt and equity, You need to start with a deal. Do not worry about the money until you have a deal. However, this video, we want to put your mind at ease and let you know exactly how the money is going to appear once you find that deal. But don't forget, the deal always comes first. All right, let's talk.

Now let's say you find a great property. We're looking at a great property right now. We're buying from the housing authority downtown, huge brick building, mixed-use, multi-story with multifamily on top. Retail on bottom. Love the asset.

It's insane.

It's really cool. It's going to be our prettiest apartment building that we buy for probably quite some time if we get it. Offer's out, so we'll see. However, when you see this, we might own it, so we might drop some photos in. We had to find a deal before we found the money, and there's two forms of money. There's debt and equity. Typically the debt is the big piece unless you're playing with a whole bunch of cash. Good on you. We're not playing with a whole bunch of cash. So the biggest portion of our acquisition is the debt. We try and get as much money as possible in the form of seller financing. That is where we write a promissory note to promise to pay made-up money, but we promise to pay them over time because they have equity in their assets. So we're leveraging their equity in the form of our debt, and we want to get as much of that as possible because debt is cheaper than equity. If I go to someone down the street and I say, hey, I want your money to buy this deal, typically it's going to cost not only cash flow, but if I want to buy them out later, it's going to cost a lot of money in comparison to what they put in. Rather than with just debt, I just have to pay them off. It's at face value. So we want to get as much debt as possible. And that's where the bulk of our money comes from. Of the $21 million of real estate, $12.5 million. The big piece is the debt.

And that's true whether you're doing seller financing or just conventional. Usually the biggest piece is going to be the debt. You're not usually going to go to the bank and get less than 50% loan to value.

At least I'm not.

Yeah. And if you are, again, congratulations, you're working with more cash than we are. That being said, usually that's the biggest piece, which is why the order is deal, then debt, then equity. If you're lucky, you can do this with 100% debt, which is going to be cheaper than buying out with equity in the future.

Problem is debt does cost cash flow on a monthly basis, typically, typically. So if you have 100% leverage, does the property actually cover it? And typically it's not gonna. On my first few deals it did because I borrowed cheap enough money. One of the 4 ways to increase cash flow is to borrow cheaper money. That said, that's not always the case on your deals. So it's a mix of debt and equity. Once you line up the debt and you have the deal ahead of that, You know that it will cash flow. Then you have to find the cash piece. Now, where does that come from? Who has money?

Well, who has money?

Not me.

Yeah, people have money. And if you're thinking that, oh well, a bank's not a person, banks are made of people. Other people have money. If you don't have it, that's okay because the deals are in shorter supply than money. The fun thing with money is we just keep printing more and more and more. There is a finite amount of land and building takes a whole lot more time to build than it does to hit a button and adjust the money supply, which is basically what the government does.

Magic.

Yeah. So because money is magically created and real estate is not magically created, the deal always comes first. The people have the money. So to quote our good friend Grant Cardone, who has your money and how do you actually get the money? Well, with debt, it's usually a fairly simple instrument. I have a deal that yields X amount. We're going to say I have a deal that does 20% cash-on-cash return. That means for the money that we have in the deal, it's going to yield 20% back.

We're going to use big numbers. We're going to put $1 million down. Woo! And we get $200 grand a year in free cash flow. That's a good deal.

That's a great deal. And I'm willing to bet that 20% cash-on-cash return is enough to service debt. Say we raise capital, we get someone who wants to ride with us for, let's say, 10%. Private individual goes, I will absolutely place a note. Backed by a deed of trust. And if it's a second position loan, we'll say the down payment is coming in second position. It's behind the primary seller finance debt. We can service that 10% out of our 20%. I love debt for this deal because we make 10% on someone else's money. Ta-da!

So we'd make $100,000 a year in free cash flow, and they would make $100,000 a year in free cash flow.

It's a good deal and everyone wins. On our end, what did we do? We lined up the deal and the first position debt. So we brought more than just a, hey, I have an opportunity. It's, I have most of this transaction figured out. We got the deal and debt. We either need more debt or equity. Since debt works here, if you're looking for a 10% return, we got a deal that makes that, makes double that. Everyone wins. We have money. We'll place your money. You don't have to find the deal or figure out anything. You just get paid every month.

Easy proposal. Now, some people think that you can't get 20% cash on cash because you'd have to steal the property. Not true. Borrow cheaper money. The debt is the big piece. If you're going to hold the deal forever, the price is a little bit less important. You don't have to get a crazy steal from the owner. You could just go in and negotiate really cheap terms on your money. If you borrow at 2% while everyone else is borrowing at 6%, your returns are going to be a heck of a lot better. So the deal comes first, then the debt, and then once you have that all lined up and you have a great package that nobody else can get— terms are way more valuable than the actual price— then you share it with people in your sphere that could potentially partner with you on a joint venture that you know, you like, you trust. You get it all mapped out in your OA with your attorney, and then boom, you're off to the races.

And if you think you can only do that with seller financing, while it's easiest because you have the most variables where you can negotiate, our friend Matt Hawkins, Matt the Lumberjack Landlord, check him out on YouTube. He has 136 units last time I talked to him, and he does not have a deal that cash flows less than 20%.

And he doesn't have any partners or any seller financing. Yeah.

Now he has a high-paying job and he saved up and he house hacked over time.

And he did it for 20 years. Yeah.

So where did his money come from? That came from an employer and himself and a lot of time. That being said, you don't need partners for this. Any of his deals though, any of those deals that cash flow over 20%, great candidates to just bring on a debt partner who wants to return, who wants to be very, very passive. Now let's talk about the trickier and a little bit more nuanced.

There's tricks?

Well, uh, we'll say higher difficulty. There's no tricks to this.

Okay.

But it is, it is a little bit more to put together on an equity piece because you really have to match the right property to the right person. Because on equity, they're getting a piece of the ownership, as Cody mentioned earlier. We want to own everything ourselves, which means with the exception of a select few capital partners who we will work with forever, generally speaking, we're going to buy them out, which comes at a premium in the future. So why would we use equity? Sometimes you don't have that 20% cash flow day one. In fact, we've had a deal, one of the first ones we did, uh, the first one I ever did together, 38 units, it lost money operating. There was no money to pay in monthly expenses.

That was bad.

Yeah, and granted, that's the first deal that we made a million dollars on a single transaction. For that deal, there is no way we can negatively cash flow a deal and then add additional debt to that. That would be— you want to know how to own it and how to definitely lose it? That is how you do that. So we need to have people who are willing to put in $300,000 for the down payment.

Yep.

Who are willing to wait for a larger return knowing, hey, day one, there's nothing to share, but this is where we're bringing the property. How do we propose something like that, Cody?

Well, with a buyout agreement. They come in, they put in their money, and they'll get their share of the cash flow when we get it to cash flow positive. And then we have a buyout agreement down the road. There has to be a timeline, there has to be a dollar amount. If you don't have those, it's not an actual op— or it's not part of the actual operating agreement. It's not gonna work. So it's all in writing, all established by the attorneys, and if they put in $100,000, then we have a buyout that says we can buy you out, in an example we'll say $150,000. And we can do it in the first 3 years or first 5 years or first 10 years, whatever it is, and in the meantime you'll share your tax benefits, you'll share the cash flows, and we'll take care of all the operating expenses if it goes negative. That's how we typically run ours. Yeah.

The actual presentation of this. This is not pitched as a, hey, look at all these numbers and look how much money you're gonna make. A lot of people want to dive right into the numbers. I'm gonna tell you how to tell the story for this, and the story is always worth more than the real estate. This is true for you, this is true for your capital partners. So the first thing you are going to do is you're gonna talk about the actual building itself. If you throw a spreadsheet in front of me, I have no idea what I'm looking at.

I'm a numbers guy, and I'll know what I'm looking at, I just won't appreciate it.

Yeah, well, I don't know what it's tied to though. There's no context. I just have a spreadsheet. I'm like, these look like good numbers. And then you look at a building that's falling over, has no roof, and all of a sudden they're not good numbers. What are we actually buying is the first and most important piece. So let's start telling the story. Uh, well, I'm gonna keep using the 38 for an example. That was a turd. Yeah, and that's part of the story. We have the grossest property in Moses Lake on the best, highest traffic street corner. In Moses Lake. It has never received any love. It's been stuck on market for 13 years, and we are the two guys who are going to fix this property. Here's how we're going to do it. They have a bunch of non-collections. We're going to fix those. There's a bunch of government programs we've already talked to who can help us with the back due rent. This was in the middle of COVID There were all sorts of programs available. So we're going to stop the bleeding now. Then we're going to come in and fix up the units. So by the time this relief pulls back, we have ready-to-rent amazing units that are approaching market rent, which we did, which is exactly what we did. But that's where you tell the story.

It's—

and the fun thing with this is when you talk about the bad things like 38, you're overcoming the objections by explaining the deal. The opportunity is the problems. We are the guys who are going to come in and fix the problems, and fixing those problems is going to make us a million dollars. Yeah. This is how we are doing it.

What happens if this goes wrong? Oh, don't worry, it already did. Everything already went wrong at that property. Nothing can go wrong. Nobody's paying, the property's in bad condition, but it's a great location.

Yep, and we are equipped to fix the problems. So, congratulations, you've shown them the building, you've created an emotional tie, you've explained the project, and you've already overcome a majority of their objections. Now you get into the numbers. Here's what it looks like day 1. And on this deal, day 1 is bleak. However, we negotiated lower payments for the first 6 months. In the first 3 months, we're gonna fix all those problems, and here's how we're gonna do it. And we explain how we're gonna do it, and then we show them a spreadsheet of this is what the numbers look like after we get done with our first phase of stabilizing the rents, doing the basic maintenance, and collecting on the non-paying units. Now we go out a year. Where are we at a year from now? Well, here's a new set of numbers. We've stabilized more units, we've finished renovation of units, and now we've re-leased. That's all it took for us was 3 sets of numbers. Day 1, month 3, and year 1. And we did those verbally. I didn't even have a spreadsheet for those.

Yeah. And once you get into it, you have to execute upon your plan. It's one thing to get money. If you want to keep getting money, you have to show that you can execute and you can properly manage your cash. That's my— one of my only jobs in our org is to manage the cash, because if it goes away, then we run out of money, then we're done. As soon as you run out of money, just like at the casino, you can't bankroll it anymore, well, you leave. I don't want to leave the multifamily game. I have too much fun. If you want to bring in investors and you want to bring in people that will support you along the way, you do have to keep the money going back to them. Otherwise, your game stops. I don't want to do that.

In our org, I wear a lot of hats. A lot of people wear a lot of hats. Cody has less hats than everyone because he wears some big hats. I don't know if anyone—

Like Dion-sized hats.

Uh, this is an obscure reference, so comment below if you actually get this one, but Doug Dimmadome from Fairly OddParents, he wears a hat that goes out of the screen. You know what I'm talking about.

That's my hat. There we go.

That's Cody's hat. I have a bunch of hats on hats on hats on hats, but Cody has the big old money hat. And that is how you keep your business. This might be my favorite video we've ever recorded.

Doug Dibidome.

Doug Dibidome, owner of the Doug Dibidome. Anyway, real estate guys, guess who, guess which cartoon character I remember from my childhood? The one guy who owns all the real estate. But if you want that to be you, you need to understand the cash management and how to actually get the cash. Cody and I have raised in our partnership, We bought $21 million of real estate without any money of our own.

Well, it was $25 grand, $10 of mine and $15 of yours.

Okay, so comparatively, as a percentage, without any money of our own, I mean, we've put in very, very little money into a very, very, well, for us, a very large portfolio, tens of millions of dollars, and we're gonna be expanding a lot this year. You can do this too if you just understand what is the correct vehicle. Is it going to be debt, which is preferable, or is this a project that can't service debt day one? In that case, we need to do equity. I'm going to add one last piece to this video.

Do it.

You can convert debt to equity and equity to debt. If you have a deal and you're getting the cash flow up, you can still buy out someone's equity with a note in the future, and you can convert things back and forth.

And there's taxable implications on that. Absolutely. You got to talk with your CPA, but I did that with a BRRRR deal. But it wasn't really a BRRRR because I didn't refinance. It was like a BRRRRs I sold. So I bought it, I rented it out after I rehabbed it, and instead of refinancing it, I sold out a portion, a good portion of it to Christian, and that paid off my down payment debt. Lots of ways to play the game. Yep.

Turn debt into equity.

Yeah. Without getting into the weeds on it, I didn't have to go to a bank. I just found a buddy. He gave me money and I used the money to pay off my debt.

So just keep looking at your deal. Wherever you are in your cycle, do you need money? Does it need to be debt? Does it need to be equity? Does some of your debt need to be converted to equity? Vice versa, can you buy back some of your equity with debt? But keep those variables in mind. It's all based on cash flow. If you can service debt, convert it to debt. If you can pay off your debt with your own cash, pay it off. Pay it off. I'm not saying just stack debt forever, but the first goal is to own your real estate. So if you have equity you can buy with debt, convert it to debt. If you have cash, pay off the debt.

Just like that, you own real estate. Stay tuned for our next video and make sure to click the link down below, free PDF. And if you want to learn more about this, themultifamilystrategy.com. Make sure to hit the subscribe button and we'll see you next time.