4 Multimillion dollar businesses in 2 years - Christian Osgood's Story

I describe him as literally one of the most inspiring real estate investors that I've known about. He's extremely good at creative financing. Him and one of his business partners, Cody Davis, have a couple of episodes on the BiggerPockets podcast, and I think you guys are going to be really inspired by his story and what he does. So I am super proud to introduce you guys to Christian Osgood. Hello, nice to see everyone. Man, it's been a while since I've done the drive all the way down here during rush hour. Last time I did that, it was during COVID and there was no rush hour, so this is a longer commute than I remembered. So good to see everyone. I'm gonna do something a little different than I usually do. Typically I have like a very specific theme, I talk about just one topic. What I'm gonna do today, I'm just gonna share a lot of my story of where we went from about 2 and a half years ago to where we're at now and the principles that got us to where we're at. So there's a lot of creative finance, and it's how to build a business in a way that is sustainable. Along the way, I've learned how to buy literally anything regardless of financial position, and I've learned why you don't want to buy everything just because you can, because I did too many businesses and too much at the same time. So it's a lot about how to balance building and really how to set targets that are worth attaining, because I've done things the wrong way, the right way, good blend of everything in the middle. And so I'm going to share my story, and the goal here is I share enough where there are some good questions. I'm going to talk for about 30 minutes, and we're going to open up for questions for about 30 minutes. And I hope that there's enough interesting things in here where there's just a lot of good questions, and you guys will carry us through this. So about 2020, I left my job. That's when COVID shut down all outside sales, and I was working outside sales for the CoStar Group. So LoopNet, Apartments.com, CoStar Data Products, they own like a million other websites, basically the internet for commercial data. I worked there for 4 years as a sales rep, and I did I did fairly well, but my original goal was to get into real estate investing, which brings us to principle number 1. If you want to be a real estate investor, you do in fact have to buy real estate. A lot of people forget this, or they forget to buy enough real estate, they don't scale. It seems really obvious, but I think a lot of people actually forget this. That happened to me. I ended up with 1 duplex after 4 years in a career where I made plenty of money to buy a duplex, I would have qualified, but I was so focused on my job, and I added this step of I want to be in real estate around real estate people. So I worked at CoStar so that I meet with property managers, with banks, with other investors. And what ended up happening, I sold a whole bunch of stuff to all those people and I bought no real estate for myself. So if you're anyone who is at the beginning or you have just a few small properties and you want to scale up, a good thing to do is focus solely on the buying the business because you actually have a build phase where you need to go acquire the assets that you want. So in 2020, when they shut down my job and I was working from home, which I can't stand, I ended up leaving the job and going, I'm just gonna go find something else. I ended up in a little brokerage in in Tacoma. That's where I met my business partner Cody Davis, who some of you may have seen on BiggerPockets as well. He's the most watched episode of all time by actually pretty extreme margin. He's done pretty well on that. I ran into him down there when we were trying to learn how to build a business. I found an entrepreneur who was amazing at buying literally anything. He had bought in the past a ton of condos. When I met him, he had just bought two really cool new office buildings. So they're old buildings, but new to him. He had just purchased these big office buildings, he had all these companies, and I was like, this is really cool, I wanna learn from this guy. So I left my job, I took my salary to 1/5 of what it was, and I went, I'm gonna dedicate myself to learning and buying real estate. I almost immediately bought my second building. Well, actually I bought my second and third buildings that I ever invested in, duplex number 1 and duplex number 2. Previously I'd done a little single family. But I learned from this guy all sorts of creative finance things, and Cody had learned the same thing. The only problem that he had with his business model is that there was absolutely no math done whatsoever, and his buildings lost a crazy amount of money. Like, I believe there was a point where he was hemorrhaging like $53,000 a month. So, that comes to principle number 2, and this is how we built basically everything. The only 2 questions that you have to answer when you're buying real estate is how to own it and how to never lose it. If you can figure out how to actually get it, which this guy was amazing at, he's like, I can come up with the deal, and I can close the deal, and he could raise capital. So it was like great skills. However, if you don't have a long-term strategy to hold that asset forever, you don't actually build a portfolio. And so for me, that right there eliminated the business plans of wholesaling, of flipping, of being a broker, all the different things that people like to add into being an investor. The end goal is I want to buy properties and I want to hold those properties because holding properties is where you find actual financial freedom. And you get all those cool benefits of, you know, monthly checks and appreciation over time and hedging against the market, inflation, all the other good stuff. So how do How do we buy it? How do we never lose it? So this is where I met Cody Davis, who's outside to speak at multiple events as well. Cody's fantastic. He's a good speaker. He's a good speaker, and he's also one of the best buyers of real estate that I've ever met. He's really good at doing the part where you find the deal. So I communicated with him in the office. At this time, he was 21 years old. He just closed on his 30th unit right across the street from my property. I set a goal of, hey, I actually want to retire my wife from teaching, Dani, and we used to have 10-year goal, and she got injured at school, and then COVID shut down everything, and the politics got super weird, and our 10-year goal became a 1-year goal. And so now it went from like, oh, we'll get there someday, to like, okay, we're not going back to teaching next year. So I left my job, you're leaving your job, we got to do something. So I talked to Cody, I was like, I think the goal for me right now is let's just get to 30 units by the age of 30. Downside, I was like 29 and a half, and I had 4 units. And so Cody, and so Cody comes to my office, he's like, I've given some thought, and by thought I mean like 15 minutes of thought. He's like, "Well, I was walking over here. I can't help you because I want to buy a 38-plex and I need a partner on it. And 38 units will put you at 42 units, which is not 30." And I was like, "Huh, that sounds interesting," which goes into principle number 3. The opportunity that you get is not always the opportunity you're looking for. I was not looking for a heavy value-add 38-plex. I had no experience managing that type of property. I had fully renovated a duplex. 2 units is not the same as 38. This property was a fantastic price, $2 million for 38 units, Central Washington. There only was a few problems with the building. It had bad roof, bad tenants, a homeless camp on site, a chicken infestation, cockroaches, and a bad septic drain field. Oh, and bad electric. So when we were putting this building together, I'm like, wow, it's been on market for 13 years, no one wants to buy it, and I can see why, because everything at this property is run wrong. Their collections were $5,000 a month on 38 units. Which is horrible. The fortunate news is that I was recently unemployed. Cody has never been employed in his life except for a 15-minute stay at Safeway where he realized, I don't want to work at Safeway. So that is Cody's entire 9-to-5 career was 15 minutes. We didn't have really any income streams. And I went, you know what this lets us do? This gives us complete focus on the project. What is this actually worth stabilizing? What would it take for us to pull this off? If we got 100% attention on it, what would it look like? And it turns out that was the main problem, is there's no investor for that particular asset at $2 million who had the time and energy to go, this is the project I want to do. Because it's a horrible project. If you're already established, you don't want to buy that heavy value-add. That's a huge pain. If you're a duplex owner, no one in my sphere wanted to go buy a beat-up 38-unit. However, stabilized, we pegged the value at about $3.5 million. So I'm like, we have like $1.5 million worth of mistakes. We'll pay a newbie tax for not knowing what we're doing on half of this. We believe we can fix the collections. We put it under contract, seller financed, $2 million purchase price, $300,000 down. No one had actually met with these owners, by the way, and asked what they want. All they wanted was enough to pay off their existing debt, which the $300,000 down did, $100,000 to walk, which is that margin in there, and they wanted to live on $10,000 a month while they waited for us to pay off the loan. So I was like, okay, it brings in $500,000, cost $10,000. I don't have money. That doesn't work. It does in fact have to cash flow. So what we did is we just customized the note. We said, hey, for the first 6 months, it's gonna be a $3,000 a month payment. It's gonna be a lower monthly payment, and then it will step up as we have time to fix the collection problems. Now, with maintenance and utilities and the basic things that go on, it started us like $1,000 negative per month. We raised enough money on the front end and had a little bit of a set aside there where I'm like, okay, we can fix the problem of a $1,000 bleed when we have 15 tenants who are not paying right now. We have to fix 2 of them and we're breakeven. We can do this. What we did immediately was went to the housing authority. This is in the middle of COVID while the relief programs are going. We have all these people who are behind on rent. What can we do? They're like, well, we can pay 3 months of what they owe past due and 3 months into the future. So immediately we brought in 6 months of rent for about 20 people, right into the pot, which I'm like, yes, renovated the building. Did a first refinance. That first refinance pulled out $300,000 and pulled out additional money that paid out our initial investors. So we paid back our initial investors, got them out in the first 6 months, and we got $300,000 to start renovating the building. And reinvested all of it almost immediately. Did not take long to burn through it. I mentioned earlier a newbie tax. When you don't know what you're doing, you don't know what renovations cost. We were renovating beat-up units that were really small for about $25,000 a unit. They were really nice. Stone countertops, took all the brick walls and put the drywall on them so it looked just super clean, stainless steel appliances, and yeah, rent's not a lot higher because the asset only demands so much rent. So we way over-improved it. That was our— so we ended up getting, I think, 7 units done. We got them all leased, cash flow was way up, and the appraiser loved those units when they walked through. They asked us to show them 10 units, so they saw 7 extremely nice units and a few beat-up ones. We got a second refinance. Less than 6 months from the first one because we got the values up. We actually fixed it. We were able to show a vision of, look, this is where we can take these units. This is what this asset looks like. We can prove that instead of the $300 rents we started with, we can rent these at $1,000 a unit consistently again and again and again and again. So we pulled out another $300,000. We reinvested in the building again. New siding, new windows. We finished a vast majority of the renovations. The building got to a $4.1 million valuation. We have pulled out throughout the entire course of the 2 years on that building, we've pulled out $1 million that we reinvested in the building, and we have a little over $1 million in equity in the building today held there. So that was the first million-dollar deal that Cody and I did. We talk about this all the time on how to make the first million dollars. The part that we don't always get to share enough about is the whole million dollars went back into the building to make the next million. You don't actually get to spend the money during your build phase. During the same time, we bought a 7-plex, a 6-plex, a 12-plex, a 10-plex, another 12, another 6, and we got to— in our first year of partnership, we were sitting at 85 multifamily units together. Over the next year, we did a few interesting things. And again, we had no money because we reinvested it all back in the properties. So starting with about $0 in the bank, but a little bit more cash flow, we ran into Robin Hood Village Resort. Resort. And this is hospitality, our first go on Airbnb and that entire business model and that entire market. We said, you know what would be a great idea as two guys with no idea what we're doing? Let's go $4.5 million resort on the water, 4 hours away from the rest of our portfolio, totally new vertical. Stupid idea. So principle number 4, just because you can doesn't mean that you should. We bought this seller financed. It was— we were told by a friend who brought this deal up, it's gonna be zero down, cash flows day one, seller finance mortgage. I was like, $0, that is in budget, we can do that. There's literally the conversation, I was like, that's budget, we can do that. We wrote down, we went down, and this place is awesome. A few of you have been there at some of the events that we host there, which I really appreciate. But waterfront, it's 12 acres in the woods, almost every cabin has its own individual hot tub. It's really cool. You talk about having like creating a unique space. I'm terrible at design, so I'm really grateful that like the space kind of takes care of itself. It is a very picturesque little cabin resort. We bought that, but it was actually $1 million down and we didn't have $1 million. So we did what we always do, we went, okay, what is the deal? And then let's figure out what the debt and equity needs to be. The deal is $1 million down. With that, they're going to carry another 3.5 to 4% interest. We looked at the books on the property, we looked at our vision for the property and whatever brand we had already built. I'm like, we can run our own events here, we can do weddings better than them, and we can open up two spaces that the owners were actually living in. Made sense to me. Problem with this, while the Robin Hood actually does very well, and we did increase operations first year, we did $100,000 better than their best year ever in 88 years of running that resort. What we didn't factor for was we were good at buying multifamily and we had great teams for multifamily. And I started a property management company that runs all the multifamily. Adding hospitality to that took all of my best teams and spread them over multiple verticals, which means we were less efficient at leasing, we were less efficient at owning literally everything. And when stuff went wrong at the resort or we didn't do things correctly on Airbnb or we didn't market well, we had to learn a whole new thing, it would halt every other project that we were on. We've sat down and looked at our whole portfolio. I think it would have been several million more in transactions and probably about $20,000 a month more income had we just kept buying the multifamily deals we could have bought instead of getting into hospitality. In like 4 or 5 years when we pay off the resort, I'm going to be super happy because we wrote a really aggressive note where basically we don't the resort just pays itself down. So we don't see any money from it. We spend all the money it makes and it pays the loan down, but it'll take about 5-6 years and the whole resort's gonna be paid off. When you pay off a $4.5 million asset, that's awesome. In the meantime, super painful. Wish I didn't do it. Way, way, way too hard of a project. You don't know what you don't know. The other thing that we learned in there was employees. Started the property management company that currently has about Well, she runs the contractors, but we have like 20 people that she runs full-time for tons of maintenance repairs. She left teaching. We successfully retired her into a much harder, more brutal job. Actually, she'll disagree with that. Teaching was a lot worse. But a very hard job that we really appreciate that you do. She runs about 20 people. We have 2 brokers. Partners, and then we have 2 actual W-2s there. The resort has 9 W-2s. When you put all this together in 2 years, I'm really grateful that we learned how to buy it all, and I'm glad we stuck with the principles of how do you buy it, how you never lose it. The answer to that question every single time is long-term cash-flowing fixed-rate debt. If anyone's ever seen our YouTube channel, Cody and Christian Osgood Multi-Family Strategy— shameless plug— That is basically— we say that in like every single video. If you guys watch our channel, I'm sorry, you're probably tired of hearing that, but that is the main thing. Long-term cash-flowing fixed-rate debt. You lose real estate if you negotiate awesome debt and it's 2-year debt and you run to the end of the debt and all of a sudden all that value of all your negotiation is gone. What do you do then? Needs to be long-term fixed rate. Fortunately, we branded really hard on fixed rate like the year before interest rates went from 3 to 8. So we look like geniuses, it's just basic business. I hate variables. Variable debt is variable. We don't want to do it. So what we ended up doing is fixed all of our debt so that when we get cash flow, the cash flow never changes. And as rent goes up over time, which it virtually always does, there's some exceptions to that, but in any span of time, rent goes up, property values go up over any significant amount of time, you fixed your rates throughout, it auto-adjusts for inflation, and you're good to go. Buy cash flow, long-term, fix the rate, and eventually what we plan to do is hit a phase where we slow down buying and we actually just pay off all the debt, which is what— the last thing I'm really going to talk about is what we found that most of the masters of the game do. At some point, you can scale forever, and you'll see a lot on the internet on like, oh yeah, you just lever up, lever up, tax advantages, all these great things. What they don't talk about is it is an absolute pain to owe people money every single month and have to make sure that everything is in the right account at the right time, the right— it's just stressful. And if you're looking for financial freedom and you decide to build a larger business, it's just kind of nice to hit a point where you're like, and then I paid it off and I own it, and the only way I lose it is if I stop paying my taxes, which is really easy to pay when you don't have any debt on the darn property. So what we found when we interviewed all these different people who did what we want to do, most of them who are a little farther in the career had paid their debt down or off, and we're talking 25% or less leverage. Not everyone, but a lot of the people that we have met have done this strategy. They spend the beginning of their phase in what they call build phase. They buy the real estate that they need to buy to hit their end goal. Goal. And some of these people have huge goals, some people have smaller goals, and their portfolios reflect that. But basically, you're gonna build the foundation for what you want to build on top of. So if you need, you know, you have a goal of, I want $100,000 a month, for whatever the heck you need that for, you're gonna need a pretty huge foundation of real estate. You're gonna have to buy quite a bit in your build phase. If your goal is $10,000 a month, you need about, what is it, $2 million of equity yielding 6%. Like, $10,000 a month, that's not that hard to build over a relatively short period of time. In real estate, if you buy well and manage well, the equity will appear fairly quickly. So you do your build phase, then the most important and the hardest part is the stabilized phase. Typically, when you are buying properties and you get a fairly good deal, you're solving a problem for someone, which means there's going to be some amount of value-add. If you buy a turnkey property, you're going to pay a turnkey price. You're usually not going to get a huge yield because there's no work We're usually fixing a problem. Now, it is not usually chicken infestations, it's not usually a failed roof, but oftentimes it's going to be, hey, they have bad books on this property, or there is deferred maintenance. The plumbing's galvanized steel pipes that are 70 years old, they're going to fail at some point. Some of these things you're looking at fixing on a property, but you come in and you're trying to address the immediate things to stabilize. We're going to come in, we're going to make sure rents are near market. I like to keep them a little bit below because people are less likely to move if there's nowhere else like that to move. And then don't over-improve the property. You look at what is all the properties around this that are doing well at market rent. Let's do this much better than those properties with our rent this much lower, and then no one ever leaves. If you can do your deal where the deal works at market rent minus $50, and you do the same thing as everyone else except your counters are this much nicer and instead of cheap carpet you have some nice LVP floors, people will stay there. They'll be happy, you'll do a good job of maximizing your rent, and vacancy is something that we found is very painful. We ended up doing, uh, in when we were at 140 units, we did 40, we had 44 people either move out or go through evictions or a whole mess of things while we did our renovations, we simultaneously just took 44 people out of a 140-unit portfolio. Vacancy is super freaking expensive. Don't over-improve. You got to get them full, then you got to keep them full. So that's stabilized. You lose a ton of money if you don't do that phase fast. So that is the hardest one in my opinion because it costs a lot of money. And if you start with no money, you have to have a really good plan for I raised enough or I cash flow to get right through these projects. You get them done, and then fortunately once it's done, it's done. If your goal is $10,000, after you're stabilized, you should have hit your financial goal. Two last phases. Optimize. This is where you have, like for us, we have some land parcels attached to our multifamily. We're building on those. We had properties that were fully stabilized, but they had butterfly roofs. If you guys aren't familiar, it's not even a flat roof. Flat roof, which I already don't like. They literally have a valley that the water drains off of. I had this in Moses Lake in a building that Cody convinced me to buy into. You get an ice dam on the end of it because it freezes, and then you just get a pool of water on your roof, which invariably will leak through. The roof that I'm talking about in particular had 4 layers of tarps with tires that actually did a fantastic job pulling the water off, but was it absolutely trash and made it unfinanceable. So optimization is where we did a good job stabilizing. We pulled new money against the property and we put two large pitched roofs on the property. They look awesome. They appraised for astronomically more and we were able to pay off the seller. Actually got a reasonable rate on the debt and now we have a fully stabilized, optimized building. It is as good as it should be for the area that it's in. Once you finish all of that, the last phase is the debt payoff. We're doing this in phases. We are starting to pay off some of our first and smaller properties actively right now while we're scaling up on our next block. So we have a block of properties, we're doing no more debt against those properties, they cash flow, they're optimized. We're gonna roll that all the way down to zero on the first 100 units while we build the next block that we're gonna make about 250 units and it'll be the exact same cycle there. So while we pay down this one, we build up on this one and then stabilize, optimize, and cash flow from here finishes off this one. And you basically just build a little stair step of, I own this free and clear, now let's go bigger and go to our next one. We own it free and clear, and so on and so forth. But in a 2-year span, what we ended up pulling off was— I think it's still too much things to do at one time— we did 210-ish. I need to count them again. Somewhere around 210 multifamily units, a resort, a property management company, a sales company, a YouTube channel that for some reason does okay, which I really appreciate, and we travel around and speak a whole heck of a lot. We got really busy, but we did build a business in a way that ended up being sustainable. All the buildings cash flow, save one very specific sixplex that is very intentionally not cash flowing. That is a renovation project, and a hotel that we just vacated so that we can convert to multifamily. That's supposed to be vacant because that is the project that we bought. 24-unit hotel in Washington for a million bucks. That conversion is going to work very well. That is, right now we have a preliminary appraisal, but should appraise around $2 million, which is going to be a lot better than the $1 million that we bought it for. Some room to improve. Outside of that, everything is stabilized, everything is optimized or on the way to be optimized. And that is the business that we built in a couple years. The mindset change for me was going, I have an immediate goal and I'm going to set my target bigger and I put a specific timeline to it and I cut out all the extra steps instead of trying to qualify myself for, well, geez, do I need a broker more or do I need to spend more time at CoStar, build more relationships? Who's my accountant gonna be? I went, let's buy a bunch of problems, like a bunch of problems, all these buildings, and then go, oh shoot, we don't know how to account, which now we need an accountant. And then you get the accountant and then you fix the problem, and that's where you really make money. You get paid to solve problems as a real estate investor. So start by getting some problems and then solve them and progress and progress and progress. That is the basis of what we did. We did a lot of creative financing. Almost everything has been seller financed, so I can talk if you guys have any questions on that. Good topics to answer. We've done land contracts, conventional seller finance. We've done some creative stuff with options, though I'm not big on option contracts. There are some very specific uses for them. I bought in Washington, I bought in Texas. We've done a lot of a lot in a couple years. And with that, I'm going to open open up to questions on literally anything.

Can you define option contracts?

Option contracts. So there is a lease option which has a fatal flaw in Washington State. So you can do a master lease. However, I buy commercial multifamily. I'm not a— you can buy the duplexes, and I have 9 of them. I'm not against buying small buildings, but I have found consistently that large multifamily buildings make more than small multifamily buildings, and it's easier to do projects when the building makes more more money. So I do like buying larger things. If it's 5 units and up, you're actually not supposed to sublet on a master lease in Washington State a commercial building for, uh, for commercial residential. You're not supposed to do that. There is something called a management contract, which means I take management, and as the manager of this building, I do have the rights to purchase this building. So you do a management a management option instead of a lease option. There's technically no lease. It is allowed. I've actually seen a lot of people do this in the motel space, but essentially an option is just an option to purchase at a fixed price at a fixed period of time. So the time that you would use this— the building is not seller-financable and the building is not bankable because it is not operating correctly. If you are a good enough operator, which I have found consistently, it's not hard to be a better operator than the last guy or gal. When you come in and buy this or put them under a management contract, a lot of these that I've seen and when I've looked at using it has been, okay, their collections are bad, their books are terrible. We are good at getting collections, we are good at doing books, we're really good at doing books. So we're going to clean that up and once it's cleaned up, it's bankable and we can execute the option contract. So all that's doing What we're doing is putting a flag down the road that says we cannot buy it and meet our goal of cash flowing fixed rate debt the way it is right now. We have a plan to do it and the other owner's not doing it. So we're gonna take over, option to purchase, put the little pin down on the map, and now you have X amount of time to do it. But that is the option contract. If you're going commercial, it's a management option. Don't do a lease option. I have seen people get bit with that one. Yes. Do you have a plan in place to cover liabilities as you're being seasonal? Yes. So, caveat— Cody hates that I do this because I always answer the question with a caveat first, but caveat— I'm not a huge fan of doing the overprotection thing on the front end of everything. Like, if you're buying buildings, just buy the darn buildings. Like, if you're getting started or you're your portfolio is small, don't worry about asset protection until you have something to protect. Like, get points on the board before you play defense. Once you get a little bit larger, which is where we're at, we do— we've moved some of our larger LLCs feed through to a holding company. You increase the umbrella insurance. Some of my LLCs are now hidden under more LLCs that have other LLCs, so it just takes longer to look up my name. Which means I get bothered more, or bothered less by people because they're like, oh wait, this LLC owns this one, which also created this one, which, oh yeah, yeah. So there's a few things like that you do on asset protection, but the biggest things, especially in Washington where it's really easy to pierce the corporate LLC veil, is do excellent business, realize that you're a target, and have great legal teams in place, and have have really great OAs. I have had the biggest problem I've found in the portfolio as far as being a target is having partners who realize there's a bunch of money here and they suddenly are not your friends anymore. And I have had that happen before. My lawyer is badder than theirs in a good way. They're good. They're the right type of bad. They send an email and it fixes the problem. But that's a lot of the stuff you do is you build teams and systems and you just get really good at not making sloppy mistakes. I found whenever there's a problem or someone challenges something, having excellent books and excellent legal counsel has made it extremely easy where most people will just back off. That being said, it is always a risk. As we pay things down, there is one strategy that we use that I think is really good for everyone. When you pay down a loan— so I talked about paying off real estate— a lot of people come up with the mindset of like, okay, I'm gonna pay this down over time. Dave Ramsey has that little debt snowball model. Not that he would approve of anything that I do, but he has the debt snowball where it's like, okay, we make additional payments, we pay it down, and then once it's paid off, we have more payments we can roll to the next thing. Problem with that in real estate is as you pay things down, you're not putting more of your cash into that asset. Asset. If something happens and you lose that asset, you can lose that cash. Your risk actually goes up. You want to be highly levered until you have enough cash to pay it off. If you pay it all off in one check, your risk goes— it's on the lender, it's on the lender, it's on the lender. There's no debt. And if you really want to get sneaky, and because some people go go after you on a legal standpoint specifically because they see, oh, they own this stuff in cash, they're rich. You can also just start another company and then have that company lend to that company, and now you have a mortgage again. But without getting super complicated, you pay it all off in full one time when you have enough money. You sideline all that cash. It does two things: one, keep the leverage on the lender until you're ready to pay it off, and two, if something goes wrong, you an extra failed roof, something comes up that's cash heavy, you have a pile of cash to fix your problems, which is a good place to be. I started with no reserves, didn't have any money. One of the things we focus very hard on is building and maintaining reserves. It's not a reason not to buy properties, but it is very important to have. And reserves are something that we work on there until we can pay off all the debt. And when you pay that off, you have more cash flow. More cash flow does solve a lot of your problems, not all of them, but it'll solve a audit runs.

So I feel like it's kind of like a common narrative in real estate investing that like you focus on the unit count, right? So did you have like a light bulb moment where you were like, it's better to pay off assets rather than keeping acquiring more and more assets? Or do you think that was just kind of like in your foundation of meeting with like experienced investors and that's kind of always how you thought from the beginning, or was it kind of like this lightbulb moment where you're like, I should pay off these assets and not just idealize the unit count?

I think unit count changed for me because my original goal was, I'm like, I think a lot of my problems are solved by 30 units by 30. That's a good step forward. So I set a unit count goal. Problem is, every market, every deal, your unit count has a different yield. So all that really matters is your cash flow, and the math for cash flow is income minus expenses. It's not rocket science, right? So at the end of the day, it's what is my actual cash flow goal? Like, what is the money for? Which for me was, try my wife buying a house in Texas, and we're mid-build. We break ground on that really soon. So got enough cash flow to hit my goals. We're there. Now stabilize it and don't lose it. When you pay it down, you in fact have more cash flow because you have less debt. Pretty simple, right? So for me, I stopped thinking about unit count as soon as we really got into the business side. When I stopped thinking about this as a— I'm investing and I'm trying to— I'm just trying to figure out what I'm doing— to like, okay, this is a business. Business runs on cash flow. What is the margin that we have? What is our current debt stack? I try to stay at all times below 65% LTV and keep the cash flow as high as possible. Once you have the cash flow goal, then That is all that matters. So if you can get there, you know, say whatever you're trying to do, you get there in 50 units and someone else does the same thing in a different market, but it takes them 100 units, unit count really doesn't matter 'cause unit count's not a business metric. It doesn't matter. Bank doesn't care. They do like looking at your numbers and seeing that you make money though. Christian? Yep, how's it? Go next. Okay, so the first deal that you— to backtrack to your first deal that you were working on. Yeah. You mentioned that you had a $300,000 down on that. Yes. Did you expand on the investor side? Yes, the investor side. So this is what we call the stupid tax. So on the investor side, we needed $300,000. We forgot to actually raise that until a week before the deal, and then we're like, oh shoot, we do have to have that. We made 4 calls, and I had no contacts outside of like a few of the brokerage clients. I was like, I love this deal. And so we actually pitched this, and this is how I pitch every deal today. I pitched it off the problems. I called him, I was like, I have a deal. It's been on market for 13 years, no one has bought it. There is a collection problem, a homeless camp, and I think one of the roofs is probably bad. We're gonna make a million dollars here. I believe we're gonna make a million dollars here by fixing all these problems. Problems. We are the group to do this. I'm invested in this market. Cody manages 30 units. This is a 38. I manage 4 units over there. We basically already do this project. We made 4 calls, 3 people gave $100,000, and the deal was funded. What we funded it as— because there's no cash flow, you have 2 options. You can raise as debt, which I love doing on a high cash flow deal because the property pays for the debt. Or if you have a value-add deal like this where you don't have a lot of cash flow cash flow to give out as debt, we brought on equity partners. 3 partners got 60% of the equity. In retrospect, 49% so you don't have excise tax when you buy them out is the way to do that. However, we gave them 60% and a 2-for-1 in 5 years. So in 5 years, we will double your money. Your $100 will become $200, and you'll be bought out, and you'll share in the cash flow along the way as we get operations going. What we ended up doing is buying them out in month 6. But the option was an option to buy them out 2 to 1. Doubling someone's money in 6 months is ludicrously expensive money. If you're an IRR guy, borrowing at 200% is dumb. Now do a good enough deal so that you can afford it. The deal did do that, and 2 of the 3 actually accepted a— they seller financed the debt out, so we could— or the equity. We converted their equity into debt. We said, hey, look, instead of buying you out at 2, can we buy you out at 150 at a 10% note now that the property can pay it? So we turned the equity into debt, which allowed us to refinance the property, pull out the money, and then pull out money again while we own the building. So that's how we structured that one. That should have been astronomically less expensive. What we now do is on a project, we usually do tiered buyouts. So if it's— and I'm not against that. I think 2 to 1 in 5 years is great on a lot of deals. And that quick buyout, a lot of people are happy with that. It's a reasonable return in a reasonable amount of time. But if we're doing a structure like that, we actually have benchmarks every year. So if we buy you out within the first year at this price, second year, third year, fourth year, and depending on their goals, I may give us a little incentive for if we really speed through this project, You're gonna get an extra turn in 2 years. If it goes longer, your multiple actually gets a little bit, a little bit higher. So I usually give us a little carrot on the stick for if we just knock this out of the park, our buyout's particularly favorable our way. Most people are okay with that because they put their money in and we quickly give it back with significant growth. They're usually happy to go. But that was how we raised that, and that was the lessons learned on the raise because that was, uh As our buddy Dave would say, stupid on steroids. It's dumb. It works, but it does— it just doesn't work, doesn't mean it's a good idea. Susan? Um, yeah, so that same project, yes, where you did 7 units, like 25K each, okay, I'd like to see you when it's there. Um, what is your rehab budget now, or do you have like a set number, or does it depend on the property? It really depends on the property. Like, if I had an average turn that I do in Moses Lake, Washington— $8,000? $7,000? I'm close. $7,000 is gonna be our average. She manages the contractors. A heavy reno though— we're doing one right now that's like $35,000, and it needs it. So it does depend. Heavily on the project, but if there was an average, if I'm looking at a building where I'm like, okay, needs paint, I'm going to replace the floors, which I almost always do. Glue-down LVP is magical. Looks good, lasts forever, and when it gets damaged, you heat gun it and hold on. It works really well. So I'm like, we're gonna do flooring, we're gonna do paint, we're probably replacing a countertop, and there's usually some doors that need to be swapped out. Overall, there's usually $7,000 for stuff I know if I'm buying a whole building that looks okay, $7,000 is probably the right budget. Sometimes it is like, oh yeah, there's 12 units, we're gonna need like $300,000 to fix this. Totally depends on the project. Absolutely. Yes. Yeah, the option contract. Something you could put in place at the beginning when you start to deal with the management process, because if the seller is already hesitant to do a seller finance to you and then you take over the management and you get a rental that looks nice and you do the repairs that they are supposed to do, I feel like they're going to be more hesitant to sell to you because then it's— then the cost of contracting things like legal in the state of Washington, or maybe if I manage it Yeah, so the nuts and bolts of a management contract is there are going to be two contracts. There's going to be an actual management contract, so that's the contractor coming on as manager, and there's going to be the option contract. The option contract is the important one. At that point, you're going to typically put money down. I've seen them done no money down. It's not common. You pay an option fee, and that is consideration in your contract. Contract for the right to purchase it at a fixed price at a fixed period of time. So that's document number 1. That document references the management agreement, which is tied to that, that you will sign after you sign the option. Technically, someone could sign a management agreement and then run away. So you sign that one first, then you sign that agreement that is referenced in there for what it looks like for you to manage the property, what rights you have on the property, what things that you are and are not allowed to do. Are going to be outlined in your management contract. But it's just the two in conjunction. The bare bones, like, basics of options is I, the future buyer, have the option to purchase this property— say it's a 20-unit building— for $1 million at January 1st, 2025 for this consideration. Contingent on this is also this management contract referenced on whatever, and that's going to be the basis of your agreement. The fun thing with options as well, my goal with real estate, and I think everyone should be, how do I buy it, how do I never lose it? So like, let's execute these options. But if you have a change of direction, for example, I bought a property in Tukwila and then I built my entire portfolio over in Moses Lake and Ephrata. I'm trying to sell my Taquilla property right now, not because it doesn't do well, it does phenomenal. I just, I don't want to manage Taquilla because everything else is over there. Option contracts are kind of fun because you can sell an option contract. It's basically like a super long time bomb on a wholesale. If you wanted to, you can go, huh, I got great books on this. I no longer want to buy this. Someone else wants to buy it for a million. I can charge them $50,000 markup because I have I have a great deal now that is completely bankable that I control. So option contracts are, they're really cool, as long as you keep in mind the end goal. If you want to own real estate. I hate seeing people get into options and they're like, oh, I can pull money out of this, and then they end up with a bunch of cash and no real estate. Be careful with them, but that's the basics of an option. Yes? There are a lot of the business lawyers who have— I have found lawyers who own real estate but are business lawyers are typically my favorites. They usually can do a blend of business and real estate. I also kind of geared towards that since I have businesses and real estate. I'm like, I like to have a good lawyer who can write both sides. But really, any real estate lawyer who who owns real estate themselves and has any significant book of clients should be able to write that. That being said, I've run into a lot of awesome lawyers, you ask them to do something creative and they literally just have no idea at all. I cannot give mine only because one of their partners just left and they are too busy and I know for a fact back, they will not have time for my stuff. So I can't give them more business yet. I will release your name when they hire someone new. But there are lawyers, and I had to do a little bit of shopping, but what I have found is the easiest way to find a good lawyer is I call the people around the property that I am trying to buy, like the bigger owners, and I meet with them and I just go, hey, I'm about to be your property neighbor, and they usually go like, well, I'm not selling I'm like, awesome, I'm not buying your property. I do want to know a little bit about how you run your property because I'm trying to make this a better place and I want to know the other owners in my market. Most owners are okay with that, and that's almost always where I get my references. I just call the other people who've been playing the game longer than me. I'm like, who do you use? And so I just do the referral train. I ended up— the lawyer I use right now is the lawyer who put together the transaction for the Robin Hood. Our resort. And since that is a business and seller financed, and there's actually a small like $50,000 subject to because they didn't want to pay off one of their debts on one cabin, which is just silly. I was like, I'm like, okay, cool, if you can do all those contracts, you have my business forever. She did a great job with the contract. So that's— I, I have one. We ended up not executing it because they tried to retrade us on price by like a lot. It's like 40% markup in the last second. Actually, we could do the same deal, just I want, you know, half a million dollars more. That was a no-go, but I have put together that contract. It's absolutely something you can do, and it's actually really simple. You just have to line out the terms of the financing in the option contract. So it says we're going to do this purchase at this price, this purchase will be seller financed, Seller finance, then you basically— it's almost like a PSA. It's very similar to the financing addendum. Check a couple boxes, this interest, this rate, seller finance, done. They're pretty clean and simple. If your lawyer can't figure that one out, I'd find a different lawyer because it's not like— it's really not rocket science. We actually have a lady that is totally willing to sell it, but she inherited it from her dad. Oh yeah. She wants to be— it's like selling her. She wants to be there. I think that option, that management option, would go very nicely with that. That might work. Make her an equity partner. Uh, I would— I like the management option where you get control, but she can kind of like stay around for a while. I have found the one time that I have let a family member be an equity partner, it has not been good Good. It has been a negative experience. Would not recommend to a friend. We did another contract. We made a huge mistake. We actually needed to take square footage away from the building. There's a setback rule in the state. Yeah. To add value to the remodel. And we— what we put in the contract, that you can't take away any square footage. The city needed more parking. What we wanted to do with the building, we needed to take that staircase away. That's like backed ourselves into this corner now where we can't, we can't do anything with the building because we need to knock out the staircase. We need to knock out that staircase to get in that apartment. That is sentimental to her, so she's not going to agree. Yeah, and that really plays into the, the, uh, how do you never lose it thing is you really need control control over your deals. That is one of the things I've learned with partnering in general. You cannot have too many cooks in the kitchen. If you're going to be the operator, you need to be the operator. Cody, my business partner, is the other person on the deals, and even then, I own the management contract. A lot of the management stuff runs through me, and we have very defined roles so that he knows what he's doing and I know what I'm doing. We don't cross over each other. When you add additional investors into that or other equity partners should get a vote. That's where it gets really frustrating. I don't like the family thing on seller financing because your financier either is or is related to another one of the partners. And I have had that problem happen where it's been a bit of a disaster, where the condition for this amazing deal was my son needs to own 50%. I want you guys to partner because I trust you as an operator and my son doesn't live near the property. And I knew his son for years. I was like, okay, this works. There's someone I know, there's a family I trust, he's gonna lend. Then we had a million disagreements on how to run the property and literally just like could not lease units, could not get through financing. So many things went wrong on a fantastic deal because we're 50/50 and the entire family, like I'm like, guess who the lender sides with when there's a dispute? And so then I get notices like, well, I'm calling the note due. I'm like, well, we actually have to be in violation of the note if you call it due. And then he disagrees, and then my lawyer has to tell him he's wrong, and then his lawyer fires him, and it's a whole mess. So I'm very cautious on who I let have equity. I usually reserve equity for partners who have have a fixed buyout in a fixed period of time. But the management option could work. You can take control and she can feel involved and get to know you guys over a period of time, as long as you have an option to buy us in. [Speaker:AUDIENCE] I mean, this is a great idea. I definitely think we should do that. [INAUDIBLE] [Speaker:CHRIS MESSINA] I still learn things that I didn't know were a thing like every week. We've done a lot of creative stuff, but there's new stuff all the time. I just got a new contract from Cody that I have never read. Came in 2 days ago, he's like, you gotta check this out, there's a royalty structure. I was like, I don't know anything about that. We're gonna learn the next new thing. Yes? Where do you find most of your deals? I find more than half of my deals, I find direct to owner. This is the model. When you've figured out what you want to do, find someone who's already done it in the market you want to do it in, and then ask them how they did it. Like, that's how I found all ideas. There are, and I found this in almost every single market, I've done this multiple places in Texas, we're doing a deal right now in Kentucky of all places, we've done this all over Washington State. You go, okay, I'm trying to build a portfolio of X size, who in my market already owns a portfolio of X size? And then you call them and you go, hey, I'm trying to build this portfolio for this reason. And then they usually say like, who the heck are you and I'm not selling. I'm like, that's awesome because I don't have anyone money. I do want to know how you got here, because I like— when I started, the call was like, hey, I have a duplex and I just bought a second one. We're property neighbors now. I'm trying to retire my wife and buy a house, and one duplex at a time, I just figured out, is totally not going to get me there this decade. Like, not even close. How did you buy this property? And then they started sharing their story a little bit. Now we meet for coffee. And one thing leads to another, and more often than not, they actually just recommend me to another deal. They'll call and they'll be like, hey, I'm not buying this deal, but it just came up. This would move you forward. Check this deal out. And I get that all the time. We've had 3 or 4 people now where we've had this relationship for a couple years, and it's amazing how often this call happens. They call and they go, hey, I had an idea. I am ready to be out. What if you just bought all my stuff on contract. We are buying, what was it, 86 units all built in 2017 from someone who has been building, building, building, building, building, and he just decided this year, I'm done, I'm stressed, I hate managing my properties, I don't like doing evictions, I'm out because I've made enough money, and if you guys pay for my life for the rest of my life, I can do whatever I want. I was like, that is, that is true. I don't I don't know that you should sell your real estate, but if that is what you want to do, I'm a buyer for new builds at 5% interest on 15-year notes. So that's 86 units that we're going to be buying over the next 2 years, I think maybe 3, just because we had that conversation and he's consistently seen us buy buildings and how we operate. Now we have trust. He's like, if I sell you the building, I know you're going to operate it the way that I want you to operate it because we have a relationship, and I've seen you operate. So if I want to get payments for the rest of my life, I'm going to give the portfolio to you guys. We just had a call— oh, actually, it wasn't even a call, it was an owner meeting Cody had today where someone else in Moses Lake said, I am ready to give up about half my portfolio. I would like to just figure out how to put it to you and Christian Osgood to do this $0 down, which is in budget, and We can do it at 6% interest on a 15-year note. Caleb, who's one of our mentees, and he shows up on my YouTube channel quite a bit, he moved to Texas into one of his deals. He bought a 25-unit, really nice campus on 2 acres in a city called Stephenville. He's been there for 3 weeks. He's met almost every owner in the town. He has had 3 people call him in the last week, owners who own a lot of the town. They're like, hey, I have a friend who is selling their business. Would you like to look at buying their business and the building? I'm telling him not to do that because I think he's gonna do what we did and end up with a hospitality thing that you didn't want. However, he has opportunities coming to him that way. Other people, the city actually reached out, called and said, hey, we heard you were talking to people We want more student housing. And they gave him a map and they said, anything in this zone, if you want to convert it to student housing, we will automatically approve it. We will connect you with the school and have the school master lease it for you. He's doing those deals same way, except it took me 2 years. He's doing it in 3 weeks. That is the best way to find deals. The other way, which is— oh yeah, Caleb's 20. He's a freak. He's a freak. When I met him, he had, he had 3 $300, and he was DoorDashing. And that was back when we had a mentorship program where it was $300 a month. His second payment bounced. He didn't have $300. So, like, he— when I talk about starting from nothing, I mean, Caleb literally had nothing, and he's at 53 multifamily units. Yeah, he started with the other strategy because he lived in San Diego and buying in Texas. You look at the deals on market, and everyone who's looked at them conventionally been there for like 120 days, you just reach out and go, tell me about the deal. What's going on here? I know this has been around a while, but has it stuck? 1 out of 20 of those, there is something you can do creatively that actually hits the owner's goals. I don't think enough people spend time identifying the owner's goals, or they're way too direct and weird about it. So, cold broker, like, what's wrong with the deal? It's like, actually talk about the property, come up with a plan, and understand the opportunity. If you can come up with a plan where it's like, hey, we'll take the books example. The property has bad books, it's not bankable, there is no buyer because no bank's gonna lend. I have a plan to fix this. You seller finance, I can fix the books in 2 years, and the bank's gonna lend on this. I want a 4 to 5 year note so that I have margin to do that in case anything goes wrong. Or something happens in the market, I want twice as long on the note, but I have every intention, as soon as I can, I'm gonna pull this into bank debt. This is what it's gonna look like. I do that all the time. That's a great way to find deals. You come up with a basic creative solution, simpler the better. If it's really simple, it's easy to explain, it's easy to get a yes. And as long as it matches what they're looking for, that's the other way to find deals. I think about 40% of our deals have been on market, and about 60% have been direct owner. The only thing, and we find our deals on Google Maps. I have no software, no anything. Go down the street on Google Maps, like, that's a building. I'd like to own that. And then you call the guy who owns it. That's been our strategy.