$70 MILLION in Debt?! How to Fix Your Debt w/ Terrance Doyle!

Cody has no variable debt that I'm aware of.

Yep. I listen to Dave Ramsey. Welcome back to the channel. Today I'm here with Christian and our buddy Terrence. We are talking about fixing your debt products so you don't end up like Christian with his $100,000 HELOC jumping rates.

Yeah.

If you want to know how to lose real estate, this is the crash course on exactly how to do that. How you keep it is long-term fixed rate cash flowing debt. When you don't fix that rate, bad stuff happens. A lot of people got under the impression that we're going to stay in low interest forever because we had a really long market of really low interest rates that kept going down and down and down and down, and everyone got lulled to sleep. I was one of those people. Fortunately, it was only on $100,000 on a $21 million portfolio. But when I took the debt, I got a HELOC against my house and that HELOC was 4%. 4% is fine.

That's good money.

I'm like, that's awesome. So it's basically free money. And Cody and I went and took that $100,000 with $200,000 of other investor money and bought $2 million of real estate with it. So you look what we did.

It's a good deal.

Awesome. However, what gets really annoying is that same debt is 9.2% today, which is awful. Had I done that on a larger amount of money, say I did an actual bank loan where we banked the property on variable debt, going from 4% to 9.2% on a large loan would have killed that deal and I would have had to start over in real estate. That is just a fact.

Well, that's hard. I mean, that, that reduced your global cash flow by like $400 or $500 a month, which is a pain, especially when you're starting.

I am so grateful that it was not a ridiculous amount of money. That is the only variable debt in my entire portfolio. Cody has no variable debt that I'm aware of.

Yep.

I listen to Dave Ramsey, but that guy learned it on a whole different level. But you don't want to end up like me on that little deal. You want to fix the interest rate. And I took that lesson and I never ever ever will take variable rate interest for anything ever again because I hate variables. There's enough variables in real estate without your debt moving up and down. Terrence has a way better story for this because he's experienced on a whole different level because he actually has more to play with. You're a much more established operator. I appreciate your willingness to share your deal. But yeah, tell us a little bit about why you fixed your rate and what can happen if you don't.

Yeah, thankfully, you know, we had had a really good run of working with local banks. And what I learned in 2021 and '22 was when you start to do larger deals, local banks kind of cap out at $20 to $25 million in debt. Right. And so we found this killer deal. We bought it from the original owner, 1974, in Arvada, Colorado, which is a nice little suburb, quiet, safe suburb. You guys walk the property. You know, super clean. I think the rents when we bought it were $1,000, right? These are 3-bed, 2-bath, 2-bed, 2-bath, 2-bed, 1-bath with a pool, amenities, the whole thing, right? Beautiful property on 13 acres, right? 13 acres in Denver.

Just keeps going when you walk it. It was really cool.

And we bought it for like $225 a door. I mean, we killed the deal, right? And so, you know, when I was doing that deal, we were looking at Fannie, we're looking at Freddie, all these different debt options. And then we met this debt fund and they're like, hey, we'll give you 77% of total cost, right? So let's say we're buying it for $64, put in $4 million with closing costs, you're at $70 million. We'll give you 77%. So you only have to bring $14, $15 million to own this, you know, $80 million asset. And I was like, great, you know, let's wave it in. And at the time, you know, it was tied to SOFR. So I'm interested to hear, you know, Christian, what your HELOC is tied to. It was tied to SOFR or LIBOR, right? LIBOR, SOFR, the same interchangeable. So, and at the time, you know, SOFR was like close to zero. So it was 300 basis points over SOFR. So the rate the day we closed October of '21 was 3.15. 3.15 on $51 million in debt, which was roughly like $170,000. Our first payment was like $174,000. Right? Now fast forward to last month, February, of 2023. SOFR as of today was like 5.2. So 300 basis points above that, you're at 8.2. Now, we bought what we call a rate cap. So it capped it at 6.5. Okay, so we get basically like a swap. So we get paid for that. But removing the swap, you know, the last, the debt payment from February was SOFR basically going up 5x in, what is that? 18 months or something like that. The payment was $370,000. $370,000. To your point, like most— in most— with most operators, that would like put them out of business, right? It's like, how can you support— how can a property support $370,000 in payment and interest payment, right?

That's more than all of our companies and our real estate makes.

One parent deal on the 9th of every month. We wire that out. Now, here's the, here's the saving grace, is that we took those rents from $1,000 and the average rent today is $1,562. So you take $276 and $1,562 at 98% occupancy, we're collecting somewhere close to $480,000 a month with all the other income. So $480,000, you know, we can service that, right? Um, but it's still painful. And so that's the only That's the only floating interest rate in the entire portfolio. So thankfully, the rest of the portfolio is cash flowing and making distributions in a really strong and healthy position, right? Because we've got fixed rate debt below 4% blended, right? While rents the last 2 or 3 years have gone up on average 150% over pro forma. So Denver, Des Moines, the markets we operate in, I mean, rents have continued to go up and we're in a workforce housing space that is very sticky. And so if you have a clean, safe and affordable property. You know, we've got everything close to 100% occupied. Everybody's paying. You know, we're in a really tight spot, sticky spot in the market. Now we have that one property that taught me a life lesson I'll never forget. When you go floating, you have no idea what can happen, right? No one would have predicted that interest rates would have 4 or 5x'd in 16 to 18 months. No one could have predicted that, right? So some of the biggest— oh, it can happen. Anything can happen, right? And so I think what's interesting is you see a lot of, you You see a lot of big-time syndicators or even funds, or you saw Blackstone, you saw all the top guys, right? In the last 6 months, they were stopping distributions, stopping distributions, right? Because they did the same thing. They tried to max lever to juice the return, to make this synthetic return when everyone was overpaying for properties. What that created and is going to create is a tsunami of pain that's going to come the next 6 to 8 months. Operators, syndicators, and funds that overpaid, had floating interest rate, that weren't able to grow NOI. Like, thankfully, we were able to grow NOI roughly $160,000 in 16 months, right? That's an insane run, right? Thankfully, we bought right, we executed the business plan, and it's going to save us at the end of the day. Not everybody bought right and executed and was able to grow NOI at that rate. And what you're going to have is people that grew NOI maybe 10% but the interest payment doubled, and every month they're losing $100,000, $150,000 or more. Now, that's not sustainable, and so you're going to see people either reworking their deals with the banks or having to get properties back or doing big capital calls. Either way you slice it, a lot of distributions on big multifamily has stopped, which is why we love the multifamily mom-and-pop space. Buy deals that are not sexy, that are not institutional, where you can get fixed-rate debt either from the seller or a bank or a private lender. Fix the debt, remove that variable, and you can cash flow, and you can keep your distributions going, which keeps investor confidence up and allows you to continue to grow your business. And so that's one of the reasons why we're in a position of growth and we're bullish right now, because we're able to dictate terms and buy and work on buying deals versus working deals out with banks like a lot of our other competitors in our space. So Fixing your debt, taking that variable off the table is really one of the most important things that any young investor operator can learn right now.

Well, we appreciate you sharing that story. And for those who are watching, if you too want an additional $200,000 a month in cash flow, fix your rate. I know that would help me, so I'm going to fix all my rates.

Yeah, we'll continue doing that. That is absolutely the way to play the game. Just fix your rate. It's all about long-term fixed rate Cash flowing debt. Terrance, you're a master at buying that. I like that both of us have learned the lesson on that pretty early. It's like, okay, we have one variable and we both got bit by it and we don't like that.

That makes your $500 loss a little bit negligible.

That's why I appreciate having Terrance on. Everything we do, Terrance has just done bigger and badder. And I appreciate you sharing your knowledge. A lot more zeros. I know. I love that one deal, your cash flow fluctuation is enough to wipe us out. And you're like, yeah, you know what? That one deal still sustains it.

We're okay.

It's one of 100 deals, but that one deal can float Cody and Christian's whole entire company.

Painful. Making that payment every month is very painful, but I'll never forget that lesson, and it'll be a great story to tell my grandchildren, and I'll never do it again, so it's a great learning lesson. The great thing about real estate, just to close the loop here, is you can learn valuable lessons and still make money. 'cause we're still gonna make a lot of money on that deal. Hopefully it'll be my biggest win when we go to sell or refinance. But, you know, valuable, valuable lesson. You couldn't learn that in any school, any class, regardless of the name of the institution. Only way to learn that is to do deals and to be in the game. And valuable lesson that'll stick with me for the rest of my life.

Love it. Thanks, Terrence.