Christian and Cody Davis Explore Creative Finance: Episode 8 of the Live Sessions

I see Dylan's earned a hug from Lori. That's an important part of the event. All right. So, in just a few minutes, Cody's going to come up and talk to us about creative finance. I'm going to actually intro this section though because I'm really excited about this. We have a creative finance event. It's kind of like my favorite thing on planet Earth. So with creative finance, as everyone filters back in, as we mentioned in section 1 of today, you have the ability to buy absolutely anything when you can get creative. Anything that Garrison can't help you with. See you there. This is actually really fun. In mentorship, usually I just automatically— everyone just listens when I talk. It's fun that you guys are so, uh, so in conversation. I'm just gonna keep saying words and eventually they'll listen. This is awesome. This is— honestly, it's very, very, very rewarding to just watch. The first presentation, I realized I was about 20 minutes early. I said what I wanted to say. I'm like, uh, this is probably gonna be fine. I'm just gonna let everyone talk. This is so fun to see All of the community should turn this back on. It's so fun just to see the community happening here. It is so rewarding to see this come together. Cody will be up in just a few minutes. I wanted to intro creative finance because this is one of the two pieces we've talked about doing the deal. We've talked about the deal structure. We talked about finding deals. We met with brokers. We've done all of this cool stuff. Where does the money actually come from? That's like 90% of why everyone's here. Get reminded on is the money actually going to come in from my deal and how do we get creative? Now, the answer to creative finance, and Cody's going to go super into depth on all the different ways that we do this, but the answer for creative finance is what is the least creative way to get this deal done? It's that same map of what do I need and what does the seller need? Think of it like a Venn diagram. I know that I need long-term cash flowing fixed rate debt. I just want to get paid when we close the deal. I just want my income to go up. We just do that. You don't have the Robinhood pain. You don't do— you skip all the things that I just said were dumb if you just do things that pay you from day one. I was just in a conversation over there talking about our deals that like our harder projects that we've done over the last little bit. Some of them, we went really low in the account finishing the reno, but we have a whole bunch of units that are 90 to 100% rented all over Texas, in Stephenville, in Abilene. We've never missed a distribution. Everything is pretty much running more or less like a well-oiled machine. We did have one project Where it's 144 units. We did 822 work orders as of Monday. That's an insane thing to expect. That being said, the property is printing money because we just structured a deal in a way where it was making enough money where if we had to spend our 2-year budget in year 1 to get it doing what it's supposed to do, we can do that. We've had deals that have gone perfectly. We've had deals that were, you know, they were not exactly what we expected. But everything's more or less working because there's that intentionality to the deal structure. And what I found is we just stopped getting so darn creative. The goal is never how creative can you get. One of my favorite Cody quotes, if it's simple, it's— what was it? If it's simple, it's repeatable. If it's repeatable, it's scalable. The structure for some of these deals, the Robinhood is 3 transactions. 2 of them are contract for deed. One of them is seller finance. So there are different ways of structuring a seller finance note. One of the cabins had some additional debt on it that we did subject to. So I have a subject to cabin. I don't remember if it's 3 or 4. It might be Phil's cabin. One of those has a small subject to on it, like a super, super, super small one. It's 3 transactions and a seller finance business transaction that— what a stupid way to put together. And then we did a special allocation of taxes for the investor. Like, I don't know what we were like. What a stupid, non-repeatable structure. The goal of creative finance, all I'm saying is the goal is not, I want to get creative. And hopefully that landed with Eric yesterday. You're not meeting with your broker being like, hello, I don't have money, so I'm hoping we can get creative. It's, are you solving a them problem? And does this structure make sense for your pieces? What I'm sure Cody's about to get into Is you're looking for cash flow. We've already established what you need. It's just structuring the deal the way the deal wants to be structured. That is, that is all it is. Get your inputs, understand what it is that you are buying, do your due diligence, and then structure around that. What would make this deal make sense? Do not go, I heard this really cool creative clause, and so I'm going to try to force this into a deal. Which is so easy to do. Most common questions that I personally get in the top 10, what do you think about this specific strategy? And I hear a ton of different shit. Hey, I saw this online. This one guy said this one thing. I'm like, love that clause. Don't build a business around a clause. Or the right— My total use of subject-to has been one cabin at the Robin Hood. It doesn't mean that subject-to sucks. It also doesn't mean that it's amazing. It's just, it is a strategy they can do. So the ability to get creative is very important. The amount that you can minimize your creativity, the simpler your business is going to be. Cody Davis, welcome back up. I was so excited for your section that I just, uh, there goes my magnet. There you are, sir. I was so excited for your section. I just started talking. This is my favorite thing. Creative finance is so fun. Cody got me started on the creative finance train. This was the missing piece. For me, I did the stupid thing where I spent— I read every book and did every podcast and got a career in real estate because I was missing what Cody's going to talk about today. So Cody, I'm super, super excited for you to lead this section. Thanks for making it.

All right. By the end of this section, everybody here will be able to get a bank loan.

Amen.

Seriously though, right? The point of what I ended up building, I was probably amongst the least qualified to get into real estate. Had no money. I still have never had a job like a W-2. I didn't have a good source of income. I didn't have any family in the real estate business. And You know, just this last week, signed for bank loans for just shy of $4 million without partners. That's off of the merit of the portfolio that I built. And so my goal of today is to share the how. It's the different structures that I've done. I'm only going to share structures that I've personally done that allowed me to build a few things out to qualify and be a real estate investor. So if you're taking notes, which I would recommend you do, there's a few things you have to build and you have to be able to build a business around if you want to scale. One of them is called a schedule of assets. That's going to be way more important than your credit score. Another one's a debt schedule. This is something that I'm sure anybody here that's built a portfolio has built out. Schedule assets is just All it's the business you're trying to build. If you built a business, I met with 2 guys, they, they did like 40 houses and you know, that, that's their schedule of assets. That's what a bank's gonna look at eventually. And however they did it, whether they did it with a bank, they got creative. They eventually built a business of that. Your debt schedule's just all your payments and what you owe. So those are things that you're gonna want to build. But as far as the creative piece, I'm gonna share deal by deal what I did. If anybody has any questions along the way, please raise your hand, stop me, because I'm just going to go in the order of how things happened. I ended up buying a 12-plex in a little place called Quincy, Washington. I talked about that a little bit yesterday. Small town America. And what ended up happening, I did true seller financing. The owner, they ended up having it paid off. They bought it for not a lot of money a long time ago. They had no debt. And so what ended up happening, I signed something called a promissory note. A promissory note is an IOU. It's a promise to pay. It's a piece of paper that says, I promise to pay you this amount per month for this long at this interest rate. In one day, I'll pay you off, or it'll just get paid off over these payments. That is a super important document that most people don't even understand because the promise to pay, you make the rules. You say, I promise I'm going to pay $3,000 a month for 37 months, and then I'll pay you off, or it's going to be 8% interest or 1% interest. Anything you can think of, you can do. And so my first deal, I ended up having 2 IOUs. What's better than one? 2. So I did 90% of the purchase price as a promissory note to the seller. That was seller financed with 10% down. So they Basically said, I'll accept payments on the 90%. You just have to bring a 10% down payment. What's the problem?

You don't have it.

I didn't have it. So it was $112,500 down. I was only short $109,500. So while I had a little bit, it wasn't quite enough. So what did I do? I got a second promissory note, except for this time it wasn't from the seller. This was from someone who wanted an interest rate. So I pitched everybody I knew that was at the real estate brokerage I was working at. That's where I met Christian. I was a real estate agent, wasn't really making a whole lot of money, and I had to go pitch people that had money, 6 figures to lend, asking for a loan. I almost had to bank on the fact that I was going to fail. Oversucceed and they were going to get the property from me. But basically what I did is I pitched all the other agents in the office. I asked to pitch their clients. I botched majority of the meetings and I got one person to say yes. Granted, the meetings before that, I forgot the purchase price and I'm a numbers guy. So if when I forget numbers, it's a, it's a big deal. I forgot the purchase price. I forgot the NOI, forgot the cash flow, the mortgage payment. There's not a whole lot more numbers that you gotta know when you're making a pitch. And I couldn't remember 'em. So I botched pitch after pitch until eventually I got one. And what I did is I wrote it out on a whiteboard. We were sitting downtown Tacoma in an office. Christian knows exactly where I was sitting. Yes, I do. Yeah, there was a whiteboard and I just, I wrote it down ahead of time, put it on the board so I couldn't forget. And they said, sure. They ended up giving me a 1-year promissory note. Again, every term is made up. All numbers are made up. Terms are made up. I have 1 year to pay them back. It's 1% a month. This is when rates were 3 to 4% a year. I was paying 12% a year. But what ended up happening is I had 1 promise to pay for 90% of the money, 1 promise to pay for 10% of the money. You add those 2 together. I had 100% debt from the get-go, and that was my first 30 units. I did that on a 12-plex. I then did it on another 12-plex, which Christian eventually bought in, and then I bought him out. And then I did it on a 6-plex. And that essentially, that structure, doing a seller finance note at a, a low interest rate and an investor loan at a high interest rate allowed me to cash flow with no money in day one. No partners, no syndication. I could just buy stuff with the signature. And what I didn't know back then, which I know now, is exactly what I talked about yesterday. My total cost of capital as a percentage between the 2 notes was lower than the cap rate. I had a lot of the money at a cheap interest rate and a little bit of the money at an expensive rate, and I still was able to cash flow with no investment. So that is preferably my favorite way to do real estate. You cut out the partners from day one. You can do 100% debt. You can do a first mortgage. You can do a second mortgage. Can anybody guess how I paid off the second promissory note?

Refi?

Nope.

With money.

With money. But it wasn't my money. So what I ended up doing is I called up the seller And I said, hey, I've been paying you interest. The loan was at 6% interest, 30-year ARM, fixed rate, no balloon. I called up the seller and said, hey, I would like to pay off this second mortgage, which I'll get into the clauses later because clauses are not the most important thing. They are important. But I called up the seller and said, hey, I would like to borrow $150,000 a second. I've been paying you interest. Will you do this? And you know what they said? Yes.

Yes.

So I ended up doing 100% seller financed. I did a cash-out seller financed refi because my, my second mortgage, I borrowed a little more than I needed to close it. I had a $125,000 loan. Called the seller, I got $150,000. That paid off the $125,000 and put some cash in my pocket. So the seller actually ended up financing more than 100% of my purchase price. That was the first property I ever bought. Truly no money in. That second mortgage they gave me is for 4 years with an option to extend. And so they gave me a lot of flexibility. And since I bought that asset, day one, it was cash flowing about $800 a month. I thought it was going to be a little more than that. And then reality hit. Today it cash flows consistently over $5,000 a month.

Nice.

That's one asset, zero money down, and I've been able to scale from there. So let's fast forward to the first partnership deal that I ever did with a mutual contact of all of ours. Bought a 38-unit with Christian. We ended up, instead of doing 100% debt, we looked at the deal. You could have paid cash for that property and it would've been negative cash flow. It was a negative cap rate. I've met some real estate agents that say you can't have a negative cap rate. Well, that may be in theoretical land, but in reality, the operating expenses were actually more than the rental income it produced. And so we couldn't justify borrowing a down payment at 12%. It probably, looking back, would've been cheaper, but getting started, you do what you can with what you have. You get in where you fit in. So we ended up taking on 3 partners. The cool thing about creativity, and meanwhile we're just building the schedule of assets, right? Back to the first thing I mentioned, we got a couple assets on the board. When we did that, we brought in partners. Let's say I'm gonna pick people out of the crowd. We got Chris and Chris. I only had to know one name there. And then we got Phil, and they all wanna throw in $100 grand. They put money in. Now we're in business together. We shake hands, we sign the docs, and We're off to the races. Down the road, Chris A and Chris B want to get bought out. I don't have the money. So I say, what if you seller finance your position to me? And that's how Christian and I were able to get 100% ownership of a 38-unit in our 20s without having any cash. We ended up doing a seller finance note with the partners. They gave us ownership. We gave them a promissory note. What's the problem with that? An IOU is only as good as the collateral. If I just sign, I will pay you X. There was a— we're live, are we? Uh, this is going to get recorded.

Yeah, let's do it anyway.

Do it anyway close does work, by the way. So there was a broker that Christian and I knew that borrowed money from someone and their collateral was they wrote on a promissory note, I will not fuck you, and then signed it.

They got fucked.

Yeah, that person did. It was awful. So it's one thing to do seller financing, but you also have to know how to collateralize it, right?

It—

which all that means is if I don't pay you, what do you get? Meaning if if I just say I owe you to Matt and borrow $100, right? What are his chances of getting $100? It's only based off of the scheduled assets that you have if it's personally guaranteed and if you actually give him something. If I give him my shoe, maybe that's $10 of collateral. If I give him my phone, he probably feels pretty good about the loan. So there's different things that you can do, and this isn't going to be a legal day where I. Put everybody to sleep, but the main way that real estate loans are collateralized is called the deed of trust. The way I remember it is one's the IOU, and one says, "I trust you're going to pay it," but just in case you don't, I'm going to record a loan against your property. And in Washington State, granted, there's different ways, different areas do it. I don't know how Texas does it, but in Washington, they're just ordered in the way that they get paid off. So the first mortgage to the seller, if I sell it, they get paid off first. The second mortgage, if there's any money left over, gets paid off next. I've seen people with third mortgages and fourth mortgages. Do you want to be paid off first or fourth? Right? I'd want to be paid off first. And so the, the order is first is the least risky. Second's a little bit riskier. Third's a little riskier. Fourth, don't do fourth, but people do it. You have to find a way to make everybody satisfied. So if Matt was satisfied with loaning me $100 and I give him my shoe, great. If he wants my phone, no, you have to find what's the level of collateral that your partners are okay with accepting. And so we ended up doing, uh, the partnership and then we bought out the partners seller financed. That is something that we've done again and again.

Another structure.

Let's fast forward to Peninsula. Oh, you got a question?

Yeah, just what's the selling point on that? They're giving an equity stake with the possibility of growth. They know—

So yeah, so the question, what's the incentive? In that situation, people put in $100,000. There was 3 people for $100,000. We signed a promissory note for $150,000. That $150,000, we did that in the first year. So they had an immediate bump on their principal, right? And then we were paying interest. I think it was 10% interest on that deal. Here's the thing. If we pay 10% on $150 grand, but they only invested $100 grand, their return is actually 15%, right? They were getting a wonderful cash-on-cash return, and it was supported by the real estate. Here's the other thing. Because Christian and I did an IOU to these people, we did a seller-financed buyout. Christian mentioned we did a massive cash-out refi and pulled out a lot of money. We didn't have to split it with anybody. We had mutually agreed-upon terms with the seller-financed partners, so we got to keep 100% of the cash. We basically got to burrow out their money and pay them later. Which everybody wanted. They, they wanted the interest. They didn't want the cash. So it was a win for us, win for them. You can trade around pieces, but you can buy out partners seller financed. You can buy out owners seller financed. There's a lot of ways to do it. Something else that I ended up doing, the very 3rd project I ever bought, I'd bought it by myself. It was at 16, 100% debt. I had that seller finance second mortgage. It was $90,000. Based on what I've shared, can you guess how I paid that one off?

With money.

With money. Okay, there's a trend here. Money has to come from somewhere. However, unlike the first property I bought, the seller was not willing to pay that off. They had no interest in doing that. So I also could not have qualified for a bank loan at that time. I didn't understand what a schedule of assets was. I didn't know what a debt schedule was. I didn't know what a T-12 was. There was no way a bank was going to give me a loan. So you guys are ahead of where I'm at at that point in time. I ended up taking on a partner. You can buy out partners. You can also take on partners. Christian had a little bit of money from his career and from some deals that he had done. He bought 10%, I think, of that deal. Of the little 6-plex? Yeah. So he bought in. I sold a small share of the LLC. And I got cash.

So I'm glad you're covering this up. Christian and I had a text conversation and I was talking with Chris number 1 here about it.

Chris 1. Okay.

And, uh, I had forgotten about it until just now, but is that an equity pledge agreement is what you're going—

No, not if I'm taking on a partner. So it wouldn't be an equity pledge. I would I would sell my equity in the LLC is what I did. So, okay. I actually took on partners. So Christian bought 10%. When you're in real estate, you meet people that own real estate, right? And so I met someone along that journey that ended up becoming a good friend and they bought in 30, no, 39%. And so essentially I sold 49% of the LLC. I took that newfound cash and I paid off the second mortgage. Now I owned about 50% of the LLC, just a little bit north of it, but I had zero investment and now I had time. And later, as the business grew, had cash flow, I got a bank loan and bought them out again. Pieces can move. It may not be the most tax-efficient way, but if you want to do something in real estate, you can. And there's mechanisms to do it. Talked about a promissory note, talked about a deed of trust. You can take on partners, you can buy out partners. Now let's get a little bit more creative. We talked about seller financing, the majority of it. A recent deal that I did, I bought a little 8-plex. This is in Ephrata. I paid $430,000 and that was 13 months ago. They said it's not seller financeable. Can't do it. Won't do it. We have a loan. So you know what I got them to do? Got them to seller finance it, but they didn't seller finance the majority of the purchase. I connected, and I'll give you the bank names. I connected with Columbia Bank, and what they ended up doing, they gave a loan for 75% of the purchase price.

Mm-hmm.

They said, you have to put 10% down. No matter what you do, you gotta put at least 10%. So I called the seller and I said, look, I need you to seller finance 15% of the purchase. And what I'm going to do is I'm going to give you 85% of the money upfront. Bank comes in with 75%. I come in with 10% down, which was $43,000, and they're just going to hold back— it was about $60,000. It was 15% of the purchase price. Now all of a sudden I control almost a half million dollar asset. With $43,000. Doesn't suck. You can do 10% down with banks. You can do it seller financed. But if you're just trying to do one strategy of the high leverage seller financing, you're going to limit yourself. The main thing is understanding you can do anything you want to do. You just have to figure out who has what you want and how to qualify for it. So a few lenders that you could connect with that allow seller finance seconds, Columbia Bank, Cashmere Valley Bank, MC Bank. And it's just a tool in your toolbox that can help you get deals done. A question I want to propose for everybody here, anybody can answer. I've asked this every single year, so if you've already answered this question, please don't ruin it. If I buy an asset for $100,000 and I sell it for $200,000 net of fees, what's my return?

50%. Can you repeat it?

If I buy something for $100,000 and I sell it for $200,000 net of fees, that's just— I get a check for $200,000. What is my return?

100%. Depends on your down payment.

Yep, you got it. Depends on the down payment. This is where creative finance becomes important. If I put in 100 and I walk away with 2, I doubled my money. In that 8-plex example, let's simplify it to numbers. If I bought it 10% down for 100 grand, I sold it for 200. I turned my— again, I borrowed the 90. I turned 10 into 110. 1,100% return on capital. Everybody else that looked at that 8-plex that did not buy it was looking at putting 25% down. 30% down to get the same amount of upside.

This—

because it's not like it's gonna just have more upside because I put less money down. They're getting the same physical dollars in upside, but they have to put triple the investment into the deal. So this is how you can make a base hit property into a home run. That deal sat on the market for 221 days. It's just sitting there. It's right next to one of Christian's properties. We're basically neighbors. But because I only had to put 10% down, I, it just appraised for $725,000 and I got a loan for $507,000. I'm in it for $480,000 all in between my down payment, some closing costs, some reno. Got to pull all that money back out with the bank. And the main thing is I didn't have to tie up very much money. There was less than 6 figures tied up in that deal. Whereas someone else would have to put six figures just for the down payment, not even including the renovation. So a seller finance second mortgage can be a huge tool for you. Something else you can do: you can have two seller financed mortgages upfront. This is something that can be very helpful. Let's say a seller wants to be at eight percent interest. All you have to do is give them a path to. Be there. The seller could finance two mortgages instead of one. They could have a first mortgage at four percent for most of the money, and then you could have a second mortgage at eight percent. Just show them a path to get them what they want. And I just want to spark ideas here. My goal is that at least gets you to think. There's so many ways to do this. Another one, we bought Tequila. Tequila is a little seven unit. This was a Christian negotiation. He did this, not me. They wanted $250,000 down. Christian got it accepted at $50,000 down. The way he did that, he had additional down payments structured every 12 months, and he wrote the note where the cash flow paid for it. The real estate bought the real estate. So rather than having this big capital investment— I mean, if you think about going and buying a big deal, it's a lot easier to come up with $50 grand than it is to come up with $250,000. On your first deal, but the numbers could be bigger. Maybe it's instead of a million, it's $100 grand, or instead of a million, it's $200 grand. Whatever the number is, we structured it where the real estate cash flow was more than enough to make that additional down payment every year. That's why we thought we could do the Robinhood. We structured additional down payments every year, right? And we thought the real estate was going to pay for it. It can be a two-edged sword. All of these things can help you, they can hurt you. The beauty of real estate and creative finance, you can do anything you want. The problem is there are repercussions and consequences for doing anything you want. So you have to be highly intelligent and calculated about how you structure it. Does anybody have any questions on this so far?

I, I'm so far removed from this world that I— it's hard for me to conceptualize sometimes why Why do people even accept seller financing? Like, in the example of Chris and Chris, these guys could deploy that capital in a better place, right? That capital is important to them. So what's like the incentive for these guys to take that?

Yeah, it just depends when enough is enough. So I'll give you an example. I'm working on buying a property from someone right now. It's seller financed. I've bought a lot of seller financed stuff from them. My monthly payment to them when I buy this last project is $83,500 a month. When is enough? Like they don't have any money invested in the deal anymore. They've already gotten their return. They've been investing for decades. A million dollars a year or shrink it down $100 grand a year or $50 grand a year. Some of these people have no money invested and all they want to do is spend time with their family. Or they just want to go travel. They don't want to think about anything. Even as passive as my apartments are, I've got a few hundred apartments. I had to take a call right before coming up here, right? It, there's some level of work with ownership. Even if I 1031 and buy something nicer, Class A, I have issues at my Class A stuff too. It happens. So a promissory note's truly passive unless they stop paying. So as long as you believe in the collateral and you think that there's going to be income for decades to come, then a promissory note, just walking away, is a very logical solution. And a lot of people do it.

Yeah, just dovetail on that and ask you how many— what percentage of the folks you're talking with that do bridge financing like that reference tax concerns? In other words, did they have it structured where there was no tax No big deal, or, hey, that saves me on taxes. I don't have to give away the big capital gains tax. What percentage did that factor in their minds?

None of them have ever brought it up to me, and I don't bring it up to them. I'm not their CPA. You know, they're all grown adults, right? They can pay to have professional advice. I'm just here to give them a solution because at the end of the day, everybody has what you want. Right. And so right now, if I don't have a lot of assets, I got more time than people that have been running these assets for a long time, but they have more money. And so what I'm doing is I'm giving them their time back with the payment, and that's worth more to them than necessarily a, a tax consequence. But a lot of the people that I buy from, I'm putting 5% down, 7% down, 10% down. They're not really realizing a lot of cash upfront.

Are Are you able to take a Q&A question right now, or you need to finish up?

No, I don't see why we can't do a Q&A.

His question triggers something. I rent on Airport Road on a corner lot across from McDonald's, across from the— near the airport. The dear folks are about 90. They want to sell. We don't want the tax consequence. We don't want, you know, big tax consequences. Well, the problem is they want dramatically more than they're receiving in rent because it's in a favorable location. They think somebody might figure out a way to pay them multiple millions for that plot, which they got a good point, and they're wonderful people.

They know me.

They even give me extra keys to the mailbox. I give them suggestions on who to use if they need to maintenance the property. I would like to buy. I'd buy that commercial building from them. Couldn't get a better location ever. But they're going to be asking more than it's worth in the way of cash flow. So I'm thinking, if I say, well, if I give you 5% down, if I structure it this way and I give you your cash flow, you don't have to worry about it anymore. And then I owe you the balance when I sell it, or your heirs, shall we say. That's what they're thinking. Is there a better way to structure it that you'd come up with?

Well, it just depends on the end goal. If you want it to cash flow more and they're stuck on their price, you borrow less money or you borrow cheaper money. So you negotiate an intro period. It sounds— that's a commercial deal?

Yeah, it's just a commercial office building.

Okay. So like if it's triple net, maybe every 5 years, or maybe it's already built into the leases, there's bumps. Maybe you structure your pay increases As principal paydown, additional mortgage payment when you get those bumps. So as an example, let's say the net cash flow before debt today is $20,000 a month. Put it, the payment at $15,000. And then if the new rent is supposed to bump up $5,000 in 5 years, then the payment goes to $20,000. And that $5,000 a month extra payment, it's just paying down the loan balance. Structure it with the deal though. Make sure the deal will pay for it, right? Look at the actual net income and then just subtract a little bit till you're comfortable, and that's your payment. And if there's built-in clauses on that commercial deal to go up, if they want their heirs to inherit more, you know, increase the payment, but don't make it more interest. Make it principal paydown. So you start actually chunking that down over time.

Thank you.

And it sounds like in that type of situation, that's more of a legacy play for Them anyway, so they don't need necessarily. They don't need to take you super tight on the cash flow. They just want their kids to have something. So give them something, but make it logical and make sure that the real estate pays for the real estate.

I was just going to circle back to what you were saying earlier. You know, to your question about why would people do a promissory note? I think people like people we talk to. They're older, they don't want to throw their money into high-risk stock, right? What are they going to do, throw this money into a stock that could plummet, you know? Or what's their other option for a secure investment, a 5-year Treasury bond or something, some kind of secure investment? So I think they're already in the real estate world, they love the idea. Well, what are they going to do, a REIT, some kind of REIT where they get, you know, where are they going to get in a REIT, 6% maybe? You guys probably know better. So I think these people just love the idea of having exposure to real estate. No, you know, they got no time into it. Like you said, it's 100% passive. They're getting exposure to it. They get guaranteed— they're feeling guaranteed return because they understand cash is trash. They're not going to want to go throw it into some stock if they're trying to get out of the game and they're at the end of their life. So they're There's a lot of reasons why people love—

we've had—

I was surprised by it myself.

Absolutely. Yeah. And when people lend money, whether it's seller financed or investor capital, people care about 3 things. Really, it's just 3 things. Where's the money going? What's the stability of what backs it? And how are they getting paid? If you can't logic test your way through those questions, You're not going to get very far. So whenever I think about a seller finance deal, promissory note, private money, if I'm buying something on payments, where's the money going? It's not going anywhere. It's staying in their asset. Their equity is just staying there. What's the stability of it? If they believe in the asset and they've been managing it for a while, they understand the risks of that Cash flow.

No, nobody, nobody understands it better than them.

Exactly. The seller is the expert in that situation. And how are they getting paid? With the income that they've already been cash flowing. It's a very simple pitch. You don't have to ask those questions to the owner, but you need to be able to outline those questions in your conversation with them.

So to try to help answer this gentleman's question about seller financing is sometimes you'll find an owner who wants to seller finance because their property is not bankable in a conventional way.

Mm-hmm.

Which is— I've run into that a couple times already. And then My question is, the promissory note, is that like a legal document type thing?

It is, yeah.

Okay.

It's a legal promise to pay. But again, you got to have collateral too, which is typically a deed of trust. Yep, it does have to be backed. And there's different ways to do it. Like here on the Robin Hood, we had some promissory notes for parts. There's multiple parcels here. So some of this is on a promissory note. It was seller financed. Some of it was on a real estate contract with a subject-to clause. So a real estate contract, it's, it's just a little different. Promissory note here in Washington, the, the buyer gets legal title. With a real estate contract, typically the seller keeps legal title as collateral, and you get, as a buyer, equitable title. So you get to do what you want with the property. Within the contract terms, right? But they're holding on to legal title similar to a car loan. So there's so many ways that you can structure it.

So would that be similar, I guess, to like a master lease agreement type?

Oh, that's different because in a master lease— and granted, I don't do lease options. I, I don't think there's really a use case for it in the type of real estate that We've been buying. If you're going to do that, you might as well do a real estate contract. So I definitely not an expert on the lease options, but I haven't found a use case yet where I would take that over a real estate contract personally.

Okay. Yeah. Can you walk us through the conversations you had with these owners like at the beginning? Like what did that conversation actually look like?

Yeah. So actually talking with owners. Or talking with brokers. I mean, it can be very similar. It's conversational. I let them know what I'm working on when it comes to the actual payment terms. What I, and I just did this last week cuz I'm helping a buddy of mine sell some of his stuff, seller finance to another buddy of mine. Do you need to be cashed out or are you open to holding a contract?

Mm-hmm.

That's it. I put the necessity on the one I don't really want and I put the optionality on the one that I do want. Do you need to be cashed out or are you open to holding a contract? It's very easy to say that they're open if they can do it. So that's, that's the way that I've phrased it in the past and continue to do it.

So I have the— I've never done a creative finance deal, so I have this mental block that you're shrinking your available market to 1 out of 100, 1 out of 10, 1 out of 2.

I've just I'm an engineer, so the stats. Okay. Yeah, you like the stats around it. Majority of the deals that I've done have been some element of seller financed.

Okay. But out of how many places that you pursued, did you find that stat?

Well, I've— so I've personally underwritten every single deal on the MLS. And I still do that. So if it's on CREXi right now, in Washington State, I've seen it. And that is up to date as of yesterday. So I've looked through what is online, and the reason I do that is so that while I'm not actively pursuing all of them, I have to know what's going on. I have to understand what markets are doing what, and if I like the trends in a certain market. There are certain markets that I'm just going to stay out of. Like, I would not buy in Pierce County, at least I wouldn't buy in Tacoma. I would not buy in King County, Seattle area. Been there, done that, learned lessons. But I still look at all the deals, right? And then—

See, that lets you know that might be a better target than—

Well, yeah, you can pick your markets, right? Because you need your cap rate to be above your factor rate. And so—

I just mean, how do you— what is it that you're tuning into? That says, ooh, this is a likely seller, at least a seller second, if not a full seller finance deal?

You're not going to be able to tell just from the photo, right? You got to actually call the broker. But again, if you see a listing— Christian talked about this yesterday. Okay. Yeah, Christian talked about this yesterday. If you see a project that you want to buy, call the broker. And once you get the financials, you get the T-12, you look through everything, this is just a tool. Just like a partnership is a tool. My wife and I own over half our portfolio with no partners. Doesn't mean I'm not going to take on a partner for the right deal, but it starts with the deal first. And the debt and the equity, it's all negotiable. Something else that you could do is you could have the partner who's bringing in the money, they could lend part of the money as debt and bring part of the money as equity. Right. It doesn't have to be just one or the other. The same person could do that. We bought a 12-plex that way because we learned about capital accounts for taxes. And it's like everybody needs to have a path to become equal contributors. So we just started from day one. We had a partner lend us the money for our half, and so we borrowed it from the same person, and then they just wrote a check for their half as equity. You can do whatever you want, but Just looking at the deals, look at every deal in your market. Doesn't have to be in your state. If it was like California or Texas, that would take a bajillion years to look at every deal in the state. But look at every deal in your market at the very least, and then the ones you like, call the broker. Keep these ideas in mind and underwrite it differently. Don't just underwrite it 25% down bank loan. Look at it as 25% down, but 15% of that is Seller financed.

But do you purposely target somebody that's 80% current debt? You only have room to do maybe a seller second on there.

No, because you could also buy stuff with hard money, even though I don't like hard money. You could also buy stuff with a bank loan. There's bridge money. There's so many different products. Target the real estate you want to buy and find a way to do it.

Thank you, Eric. Can I— more to you? I think what you're getting at here, like, your mental block is like, hey, I'm learning this creative thing, how do I use this creative thing? The big thing that they've told us, that it's a tool, but that's the thing, is like, you have to solve a problem. If creative finance solves the problem, then it's a great tool for the job. If it doesn't, it doesn't, but there may be other ways to do it.

Yeah.

Have some creative flavor to it. Some of that's been seller financing, some of it's been like, hey, I'll pay you a fee on the side to get your number down where you need, but it just isn't a tool. So it doesn't need to be a roadblock. It's like, hey, I see a solution to this. It's like, if they're willing to do this, I can buy this today. I can close.

And my encouragement— and then we'll go to Elgin— my encouragement Is to map it out in this order. Figure out what you want, figure out who has it, and then figure out how to finance it. It's that simple. But I'd be willing to bet that 90% of the people here don't have clearly defined goals of what they actually want, because most people don't. I mean, you could think you know what you want. Maybe you want 10 grand a month, or you want to be able to do XYZ, but you haven't really spent the time to figure out What it is you want and who's actually living that life. Because if you can figure that out and you truly know what you want, like you've spent time, attention, spent weeks, months thinking about it, you're crystal clear. Now you can just figure out who has that. How did they get that? How do I get that? How do I finance it? And then you can go through the list of the stuff we've talked about and the stuff you're going to find along the way to finance that and then use the cash flow to pay it off. Simple model, but if you don't truly know what you want from the from the get-go, you're probably going to do what we did and say the story is worth more than the real estate, and then buy something like this and lose a million dollars.

That was the stupidest saying we ever had, and it's ended off of that for two years. What a dumb idea!

It's all over our YouTube.

You're gonna do a review video of yourself. This guy's an idiot. Yeah, I should do that.

Dumb idea. Yeah, live and learn. But we didn't really know what we wanted. We had an idea and then we got an element of that. And I got to a place where I could have bought the condo for my mom and then she didn't want it. And Dani retired from teaching. So yeah, now they work together. We got there, but if we had clearly identified the other pieces of what we wanted, we could have realized, oh, we don't have this yet. We probably shouldn't branch off right now. Could have figured out who has more of what we want and then just go figure out a way to buy those. So that's my encouragement. Elgin?

I was going to say one of the things that Christian says is figure the deal out conventionally. What is it going to cost? What's it going to look like if you had to put conventional money down and go to the bank and get it? And then if it works that way, then you can be able to shift and find out what they might take, what they might want, what their problems are, what their issues are, why are they getting out of it. And then you start solving the problem. I need it this way, I need to buy it this way, I want to buy it this way, and they want out for some reason. If it opens up a conversation, like he said, do you need to be cashed out or are you open to holding a note for a small portion of this because it makes it easier for me to buy your property and you don't have to deal with it anymore of me just giving you money? You know, and you solve that problem.

Anybody else have any other questions?

Just quick.

We'll go in the back and then go to you.

Okay, this one's short.

So how do you figure out what you want?

Because I mean, maybe you have a goal of this much cash flow, but then how do you narrow it down?

So don't start with cash flow. What do you want to do, right? Like, as an example, I want to live in Gig Harbor. If I just set out a goal in the beginning, cuz it sounds good, I want to cash flow $15,000 a month. Assuming I don't pay cash for a house, $15,000 a month is probably not enough to buy the house I want in Gig Harbor and have kids and have the car I want and help my family. And, you know, I'll save like it for that location, for what I, where I want to be. Cuz it's beautiful and it's, it's not right next to family, but it's kind of close. Like that, that would be silly to start with a number. So I'd map out where do you wanna live? What do you wanna drive? How often do you wanna travel? How much do you want to give away? Do you wanna have a buffer for major health concerns in the family to be able to help them out?

Yeah.

If you even have family that needs help, like figure out what you truly wanna be able to do and then figure out a budget for that and then build a business to do that. You're gonna have to meet with different people. You're not necessarily like to live that lifestyle. I can't just get advice only from someone who has 5 paid-off duplexes. It's not gonna work. So I'm gonna end up meeting with people that own maybe 5 paid-off 20 units, learn how they got to where they're at and, and stuff like that. But you gotta figure out where do I want to be? What do I want to do? Do I want to be able to help support people in my community? And then Put a budget around each of those items and figure out who's gotten to that level. Like if you want to learn how to get a— I'm not going to give the numbers, but it's like a 4,000 square foot house in Texas. I know a guy you could learn what business he built to get there, and then you can meet with other people, figure out who else has that lifestyle if that's what you want, and then build a business to get to that. And then you use these tools, the creative financing, Potential partnerships, bank loans, hard money to go get that and use the cash flow to pay it off. But start with what it is you'd like your life to look like. Don't start with a number.

So you mentioned that some local banks, uh, for people who don't live in this area, do you have suggestions? For other banks?

I have not done deals elsewhere, so I wouldn't be able to give you firsthand experience.

Would you stay away from major banks like Wells Fargo and Citibank?

Yeah, I don't borrow from them. Yeah, I don't use any big banks. It's all local community. And there are— I've got buddies that are doing 100% combined loan-to-value on deals. Like, they found banks in their market that will allow the seller to finance 100% of the down payment. I haven't found that yet here. If I do, maybe I'll let you know. But no, you get what I'm saying, right?

After you've maxed them out.

Yeah, after I cap out my loans. But you get the idea. There's different banks with different products all over the country. You just have to go chat with them. Let them know, hey, my— I've got buddies that are doing this structure in Washington. Have you seen anything like this here? Is this even allowed at your bank? I'd be buying a value-add. I'd make sure it cash flows and hits you guys' debt coverage between the 2 loans. Would you look at this? And a lot of them are going to say no. Move on to the next one.

Right.

I think we're good.

No, I'll say a little bit more on creative finance, then we'll open the next break. I'll steal the mic from you.

Thank you. Thanks, Cody.

All right, rounding out a little bit more on creative finance. There's, there's so many plays. Cody mentioned, uh, one that— this is a good example of using it, I, I think, using creativity correctly. Cody needed a little bit of cash. You mentioned that I bought into a 10-plex of his. I, I, it was either $10,000 or $15,000. It was, it was somewhere in that ball— it wasn't a huge buy-in for not a lot of a 6-plex. I bought into a little 6-plex, got 10% of it. Cody and I wanted to separate out the property management company. That was something that I had proposed to Cody of like, hey, I would like to take on this project because Danny's now involved in the company. And so now we have 2 Osgoods working and one Davis working because he was single at the time. Hello, Ashley. Perfect timing. Good to see you. But as we're doing this, the way that the company was structured, I was like, this is the project that I want to take on. At the same time, Cody was working with the original seller of that building, and that seller was a little bit bummed that Cody had sold some of his equity. And Cody's like, hey, for my relationship with this seller, the best thing that can happen to me is I can get my equity back. And so we looked at it, and at the time, the PM company mostly just managed our stuff. kind of hard to peg what the value was of the company. And we just came up with like, okay, well, how about this? You want more equity in your original portfolio and this company's kind of a bear of a project and I want to take on that project. What if we just swapped pieces? And Cody texted me like 5 times a day for the next 3 days being like, are we doing this? We're doing this, we're doing this. We get this done. I want to do this trade. It hit what we wanted to do. And so we traded the pieces. Later, I was able to scale the company. I built it up. And when I moved to Texas. I didn't want to run a Washington State property management company from Texas. I wanted to do my adventure in Texas. I ended up selling the PM company for $250,000. I bought into Cody. Cody owned 40% of the PM company. We had one partner who was a small little partner. He owned about 40% of the company. I got 40% of the company for a $15,000 investment. I now own 90% of the company. I sell the company for $250,000. Seller financed a few years later. I sold to the group that I wanted to, and the fact that they ended up crashing the business afterwards was a bummer, but I, I did get to choose the person I thought was most likely to succeed in the transaction. I got the price that I wanted for my company. I handed it off to the person that I intentionally wanted to. Creative finance was the way for me to turn a $15,000 investment into one of Cody's properties into an extra 40% of a $250,000 sale. That we executed about a year and a half later. Everyone got exactly what they wanted. There were no losers in this transaction. Cody didn't miss out. It was a ton of work to get from A to B, but I got to do the project I wanted to do. That's a good example of how would we get there? I remember where we were. We were driving, we were about to go over Vantage, which if you drive from DeMoses Lake from over the mountains, you go across the Columbia River. It was right before we hit the river. I proposed, I was like, well, what if we, what would your thoughts be about Danny and I taking over the operations of the business? And Cody's like, well, how would you propose you got my equity? I'm like, well, with, with money. He's like, okay, what, what money? I'm like, that's, that was, that was what I was thinking myself. Um, I don't know what money. Um, I had an idea. What, what if we took some of our equity and we traded pieces around? I gave you a piece piece of what you want, you gimme a piece of what I want. We eventually were able to trade around the whole portfolio to better align with our lifestyle. The really cool thing that Cody did where him and Ashley own a majority, or at least half their portfolio without partners, like they built the business they wanted to build. A lot of it was just trading pieces around and there was little notes between Cody and I. I seller financed. There's one building we got too creative on, but when we separated out the Robinhood, Cody traded a 12-plex. I traded the 12-plex back to him. He had a note to me for a while. He paid off the note at a discount to pay it off early. There's a whole mess of creativity that we had back and forth because the objectives kind of changed a little bit. Your deals— money is so much more fluid with creativity than I think a lot of people realize. That's why I wanted to give this example. I got a huge money multiplier with a little bit of creativity on the way that Cody structured his deal and then the way I structured the sale of that company. I did a small seller finance note to Matt when I sold the RV park. I had a little teeny, teeny little bit that we got the things. It's just moving the needle. And it's a— I should know what BOE— $25,000, is that what it is?

Yes. Yeah.

Okay.

He doesn't know me much. Uh, we did a little note to help close a transaction, a little less interest than the rest of the transaction, and it made it so that he was able to close that deal. Uh, used private money for the first, has a little holdback for me. And then Eric, you guys met yesterday, was my partner on that deal. It wasn't this miracle creative finance thing. It was Matt, and Matt proposed it. It was a little bit of creativity on the end of a deal to get the deal closed. I think Matt's going to make a ton of money on it. We'll officially find what your cash-out refi is at some point. Probably next week.

Probably next week.

He's started his appraisal process. It should go really well. But Matt's done really well on the project. It's just trading the pieces around. I bought a deal for $300,000. I dunked another $300,000 into it, was able to sell it to Matt for $1.1 million. Matt's gonna bring it to, I think you're gonna get the value to like $1.7 million or more for where you're going to get. Is that about where you're pacing on that?

I'm thinking between $1.6 and $1.9.

Oh, $1.7 is between $1.6 and $1.9. That is a good guess from Christian. Matt will make a bunch of money on it. I made a bunch of money on it. This is what a good deal structure looks like. The next thing we're gonna talk about is creative equity, which I get so excited about 'cause I think it's actually easier than creative finance. People have a bigger mental block on this, so I'm going to try to make it as stupidly simple as possible. But it's the exact same thing that we just talked about here where you guys are going to— what I think you guys are going to start hearing is like, wait a second, this sounds a lot like the last presentation. How do you buy everything? Someone?

With money.

With money. Yes, exactly. When you are buying a building for $1 million, you're buying it for $1 million. Where the money comes from, it could be from the seller, it could be from a lender, it could be from other partners, it could be from your earned income, it could be from your borrowed income. You just pay for everything with money. Where does the money come from? It comes from either debt or equity. So that'll be our next topic. Everyone take a break, clear out the rest of that coffee. I'll talk to you guys soon.