Christian, Cody, and Erich Answers Questions for Day 1: Episode 6 of the live sessions

Welcome to the final session of the Multifamily Strategy Robinhood Creative Finance event. If you've realized, we haven't talked too much about creative yet. That will be heavily into tomorrow and super excited for that piece. So tomorrow's topics are going to be mostly equity and creative financing. It should be Cody's last section. We'll be getting creative specifically. As we get rocking here, everyone cruise back to your seats. We're at one of my— actually, probably my favorite part of all of these, uh, the Q&A with all 3 speakers. So we're gonna grab a Cody, we're gonna grab an Eric, and we're gonna roll some Q&A. So as everyone filters back, I'll go over the rules of the game. So Cody, Christian, and Eric will all take the stage, and we will sit on these chairs, and we will answer your questions. So your mission—

Call.

Is simply to come up to the mic and ask your question. The camera crew's question— or job will be to film you asking that question and then film us answering the question, because turns out this makes really good content. Also, it's really fun, uh, to get to do this, uh, this portion. So what we'll do is we will try to, uh, choose the best person to answer each question. Uh, speakers, your role: speak into this mic and this mic. So basically come to this mic, you can clip this on, hold this. We'll just, we'll just pass this one around. Um, and that will be our— that'll be our program. I tried it. Do I want to keep slipping off? We'll see if we can get it. I'm not super confident about that, but it— don't get too touchy with this. Um, if it falls, we'll pick it up, and then, you know, for those being livestreamed, we'll figure you out. You guys can hear us all right down there. Let me make sure that we actually have it On, which will help. Yes, it is. Good. Okay. So let's go ahead and dive into the final session. Uh, so as we get the last few people over here, see a few more, um, any questions you guys have remaining, hop up. This is like my favorite time. We're end of the day. You guys learned a lot. We're gonna make sure that there are no remaining questions for any of what we talked about— broker relationships, finding deals, Analysis and math. Get the questions out. I'm gonna hit a button here, but everyone else start, start lining up.

There we go. Hi. Okay, so when you're in the process of working with a broker or you get a deal on seller financing, right, and you're like, okay, let's take the next step, let's go into contract phase, And then it's like, okay, we want to move quickly. The inspection, how does that work? Like, if you only have a couple days and you're like, yeah, I really want to get like an inspection done, you know, like, how does that work for the investor? Do they sometimes waive the inspection?

So I think a little bit more into that. So you're going to get your offer accepted, you're going to have an inspection period. Let's say that's ten days, just for ease of numbers. Well, part of the contract is written in there that with proper notice, they have to give you access. So now you'll you know in in Seattle, it's forty eight hour notice. So as long as you give them enough time to give it to their tenants, you'll have your inspector lined up. And you want to you want to once you go under contract, you want to get the inspector in there right away. Yeah. So you know. After that, you start going into more analysis on rehab budget, everything, if it was worse than you thought, better than you thought, all that stuff.

Right.

Okay. Yeah, that makes sense.

Hey, Eric, this one's for you. If you have a property that you're looking at and there's multiple brokers on there, like on CREXi, and you've contacted one, left a message with another, And there's nobody responding to you. Is there a chance that they just don't care? What's the— do you just keep going around to, to somebody that will answer your question?

Yeah.

When you look at a property that's listed by like Colliers or a larger firm, they'll usually be a team and there'll be a team lead. So one of those is the one specifically, or they'll have like 2 of the 5 guys that specifically for that property answer questions. So If you've called them, you've left a voicemail. I mean, I would just be more aggressive with the voicemail. It's like, hey, I'm calling. I'm interested in buying this deal. Is one of you going to call me back? And I mean, just you start getting a little more aggressive with it and they'll call you back.

Okay.

Thank you.

Also notice that was very similar to what happened on the call where we got Garrett on the phone. Garrett's answer for a lot of the questions was, hey, Chase is our lead on this deal. I'll track down this information for you. That's pretty common. So if you get someone there, there is usually a lead broker. That was a good example of what happened in our call.

Also, to add to that, if you really want to get them going, you can say, do I need to reach out to the seller directly because I'm not getting a call back? And then they'll call you back.

Yes.

How does that go? Yeah.

If you can't get anybody to wait on you at a store, walk around and near the cash register, just sort of wave your hand like this. Bang. Somebody comes. 2 questions, oddly enough, about your lights. If you're, you're on YouTube or Zoom a lot.

Yeah.

Uh, do you like those for— and, and can they adjust in color? And I like them because they're small, but can you comment? Is that a photographer question?

No, I gotta, I gotta answer some of these questions. Chris can answer them better than me, but I'm more than happy to do this. Uh, for YouTube light, as Chris was talking about this at the beginning, uh, lighting is super important. Even when there's daylight, we like to have all the lights on all the time. I have actually found that when we run Zooms and when we run stuff, being thoughtful about your surroundings, your background actually has a huge relation to how seriously people take you. I get— my lawyer hates it when I use my personal email. He's like, dude, if you send your personal email to investors, even if it's easier for you to track, they see Gmail. Sometimes people are just like, oh, this person's not serious. It's the same thing with background and lighting. You want— generally, my general policy is like, figure out what looks good for you, do some playing with it. But I like to have a static setting where I know when I present, the lights are going to look exactly the way they're going to look every time. So like dial it and just come up with a system for my setting looks like my setting every time someone sees me, so it's not jarring.

Do you mind me asking, where do you get those, or the brand name or something, anything?

B&H Photo.

B&H Photo.

And those are Savage 204 LEDs.

Savage 204 LED.

Like I said, Savage 204 LEDs. We don't get it.

It's got colors, so it gives you a human flesh tone and a daylight.

There you go.

Awesome.

About how much? $700 for the pair. $700 for the pair. Gotcha, man. You don't save money, but you get better stuff. And it fits. It fits awesome. Second question, you said you know something about student housing.

Uh-huh.

I'm back.

Then here we go.

Love student housing.

Do you know much about Dixie Decker and how she views student housing?

No.

Okay. Well, she wrote a book about it and trains people about it and seems to have a lot of— she's had a lot of success with it. Nonetheless, there's a unit that's coming available in a declining population town that I'm aware of in a state that's, shall we call it, a blue state, maybe? New York. Some people there would argue. But say you're in— it's not—

They lean mildly left.

It's not in New York City. Well, it's interesting that, so I'm told by those who lean extremely blue, that only New York City voted blue and the rest of the state voted—

That's consistent with most states that are mostly blue. You tend to have major population hubs in almost every state tend to be blue.

Here's the point. If an 85-unit that is going to auction. It's a distressed asset.

Yeah.

And you check into it and it was used as student housing. And if you called the planning and zoning director and talked with him and said, what would it take if we converted this to condos? What would the process be? Would you be open to hearing about that? And if so, when would the committee meet and yada, yada. And if he said, well, I'm the committee, I'm the chief building inspector, you would email me and I'd both talk about it now. And we did.

Yes.

And I said, well, usually you guys need us to either improve the— what do you call it— the separation, fireproofing between the two. Of course, everybody has to have, you know, we have to price everybody on their own utilities, yada yada. But I think he said, why would you do that? I said, well, if it's not working as student housing, if it's 20% occupied.

Yeah.

Maybe it would serve the community better because there's not much affordable housing out there. Where you're at, this particular place is $225,000 to $275,000 is the average house, which seems low to the rest of the world, but for there, You know, somebody young wants to buy the first property. And he said, okay, I could consider that. And he said, tell me the address. I gave him the address. Oh, that one. Oh, that one. I said, oh, well, you obviously know somebody. He said, yeah, a lot of complaints. I said, well, do you mind me asking, were they just not maintaining, you know, the students? Yeah, they just weren't. I said, well, why is that? They were out of town. They were very difficult to deal with. So they just weren't. And then the reputation spun. Kids talk in school.

Yes.

And it plummeted. So my question is, if I wanted to fix it up and sell it, buy it, fix it up, and sell it as condos, make money that way, is that a dumb idea? That's question one. Number 2, in that situation, which I said, well, he said end units had experienced trauma and that, you know, they weren't heating correctly. I said, well, it was built circa 2005, so about now a 21-year-old HVAC system. I can see. He said, I think it's the windows. And there were water problems. There were just things they didn't fix. And so enough people grumbled that it's down to 20%. Question is, is that something you'd still consider favorably holding as a rental and improving that? It is near a major university, although a declining population in the town with declining manufacturing jobs, all that.

Yeah. So the short answer is no, I wouldn't do that. One, because—

Which would you not do?

Both.

Okay.

So the conversion process— and I've converted hotels into multifamily— it is a harder rebrand than most people account for. Taking one thing— it's a thing from one thing into another. Getting the community to accept that it's another thing is a totally different project. It's really difficult. But the biggest thing is it's almost impossible on a 20% occupied deal that failed as student housing to start with cash flow. So what it puts you in is a risk-reward profile We're changing the use of this. We have a reason to believe it would work. However, it currently is not proven. So we're starting at medium to high risk automatically. The reward would have to be absolutely insane to have a good risk-reward ratio. To me, in rentals, I believe that the ideal scenario is ultra-low risk, moderately high reward. That is almost always the perfect deal where it's like we have an outsized return. It doesn't need to be insane, but the risk profile is just so—

Yeah.

crazy low, they're easy to raise for.

Okay, let me amend that by saying, um, average price to build for these units is ballpark close to $200 grand a door. Does that sound anywhere near reasonable in New York?

I don't know the exact cost to rent in New York. The question is—

To build.

Yeah, or to build. The question is, do you— if you want to specifically be a builder, it's a different risk-reward profile. So if the answer is— if the question is what would What would I do or how would I look at that? I want to invest in something that is proven. A good time to start doing development and building, in my opinion, is if you have enough cash flow for if the property doesn't work or it takes longer and you get stalled. If you have enough cash flow from your existing business to completely float that and still be fine, I think that is the time to start developing. The developers that I know that have done really well, that's the model that they did. They started with rentals, they built their cash flow. They paid down their debts. They had solid DSCR, in many cases paid off their property completely. Then they played with the house money to develop and they did hit the projected returns and they did make a ton of money. The people who lose all the real estate typically as developers, they're super rich until they're not because they have— they're one failed project away from bankruptcy. And so I try to avoid that model until we've built enough passive income from the real estate to offset it.

Okay, so a whole lot of hesitancy.

Yeah. One thing to add is, at least in Washington, if you do a condo development, you're also on the hook as that developer for many years after, like if anything goes wrong. I think they just changed it, but it's either 7 or 10.

Yeah, 10 years is what I'm familiar with. So good, good point. So if you're thinking an 85-unit is worth 10— I mean, $200 grand a door, maybe even $100,000. Granador or something, the auction starts at half a million.

And on any of these deals, it— whenever the— for me, when I am doing my acquisitions, the— this could be a good deal or this should make sense. I don't just buy for upside. I really do believe in the model of buy based on cash flow for appreciation. So a lot of the development stuff I have found when we've done them, I usually, even when it goes well, I'm like, The time and energy it took to do that, I could have just bought things that were cash flowing and increased my income. If you could do anything, I like setting the difficulty level a lot lower because the consistency is a lot higher.

Thank you very much.

My my question is probably going to be for Cody. As we begin to move from broker calls. And try to find owners.

Yeah.

You talked about using Google, so you got to learn Google Maps and everything. You talked about going to the tax assessor's office. You talked about, uh, then, uh, looking for, uh, open corporate so you can get the phone number, or at least the LLC. After you get to there, do you drive properties? Do What do you do to try and get that person on the phone? Can you reiterate that so we'll know basically where we're going?

Well, I mean, to answer your question, to get them on the phone, you call them, right? Like, you find their phone number online. But my goal is not to talk to Eric or talk to Christian or talk to another owner of a building for 30 minutes on the phone.

It's to meet with them.

I would like to get together for coffee because Because that's where deals get done. So when I'm calling, start with a relatable point, whatever it is, whatever your hook is to keep them on the phone before hanging up. And then as quickly as I can get a goal from them, I want to transition into a coffee meeting. And that is what I've tried to do. It could be, hey, I'm going to be in Moses Lake next week. Are you available sometime on Tuesday?

How do you get brokers to let you— that you're working with— to let you talk to the owners?

Well, I'm not calling listed properties. Eric would be upset.

Yeah.

Well, if you're working with a broker and you, you're trying to get to the sale, right, and you want to talk to that owner and develop a relationship with that owner because you're actually trying to buy his property.

Yeah, I would do that after closing.

After the closing?

Yeah, if it's a listed deal, then it's after close.

All right, thank you.

Hello, this is for all 3 of you.

So as a person or an investor is looking to scale and build their business, their portfolio, what are the most important—

what's the most important system or systems that they have to get right in order to keep that generational wealth going?

Because I think everyone here is trying to build that, right?

The first thing that comes to mind for me is outside of— you need to know how to underwrite a deal. You have to start the deal correctly. After that, your management systems are the most important thing. You make— the adage is you make money on the buy. You really set yourself up to make money on the buy. You make money on the successful operations of the property, especially with real estate, as Cody went over today. Net operating income. You want to keep that net up, which means you need to manage your expenses and your incomes. You need to be good at the operations. So my focus would be when we have a market, do I have multiple plumbers, multiple electricians? Do I have my legal team set up? Do I have the team that I need to expand in this area without losing money? As a quick example, I did this in Washington. I set up my team. I moved to Texas, I set up my team, I sold that company. They kind of fell apart as a company. My team fell apart, and all of a sudden, my ability to influence our rents and our expenses went from, I have a ton of influence, to I have very, very, very little influence. And we had to re-engineer the entire thing. It is really expensive. So I think as the number one system is you need to have your management structure and your contractor structure in place before you enter a new market.

Yeah, I think just to add to that, if you have a bunch of smaller properties, yes, just leveraging up into, into more, your risk is spread across. So it's definitely something that needs to happen. But to add to Christian's point, you can go from a duplex to a 10-unit And then start adding to that. And also, when you get to— when you start to get north of 20 units, you can start to look and you know you're going to acquire another 20 or another 50. Hiring is a big thing. The asset manager you hire, you want someone that will— that's a go-getter, that will— you don't have to tell them what to do every step of the way. You know, that, that That's probably one of the biggest ones. But, you know, you can do— you can leverage up on your own just initially going to 10 units and managing that.

Right.

But if it's, if it's out of state, yeah, it's the person you hire. That's, that's going to be the big one.

I'll just add on 2. So a user-friendly portal for the tenants goes a long ways. Tenant satisfaction is going to determine your turnover. Another thing that will kill you financially is not having a scope of work for property. So actually walking every unit on the front end should just be part of your due diligence, but also checking, do we have cleanouts? Do we have galvanized plumbing? And then trying to do a lot of preventative maintenance because when you have something go wrong, as we all know, it's always Friday evening when it's rainy. And nobody can go out there, and now you have upset tenants. So having your systems in place, whether it's just a chart of we got to do this, this, this, and this, check, do we have cleanouts? When were all the toilets replaced? When were the— when was the plumbing replaced? So that we have relatively low counts of issues where the tenant's going to get upset and want to move.

Cool.

Thank you.

So I want to ask what your opinion of an SBA loan is, and can it apply to a multifamily?

SBA loans are more difficult to get than a lot of debt products. Can it apply to a multifamily? Yes, under very specific, specific circumstances. Usually it is not going to be the weapon of choice, and usually they're on 10-year AMMs. Most Often. So you can do them really low down if you have a company that specifically needs the real estate and it's a significant tenant of the property. Generally speaking, I wouldn't intend to use that unless you had a very specific set of circumstances.

So let's change the investment to an RV park where it's considered more of a business.

Yes, you would have a much better chance of landing it for an RV park. The question is, is the SBA debt product going to be the best debt product to take it out?

Right.

Which often case, if it was, if it was going to work as an SBA loan, you would usually have a DSCR option that's lower interest than the SBA loan or a longer AM. So there's usually better debt products, but you absolutely could do a low-down SBA product on an RV park where it's run as a business, assuming that it's not long-term rentals. It's Midterm or short-term rental strategy. So yeah, same, same exact thing for self-storage.

Okay. So aren't they typically a higher interest rate than a DSCR loan?

Typically, yes. And a much shorter AM, which means your monthly payments are way higher. Typically.

I've, I've read where they can be as high as 14% interest.

I have my SBA loan that I had to buy out a specific partner from a specific company. is at 9.5% and a 10-year ARM, which I have 8 years left. That's a good example of an SBA product for a normal business transaction, doing partnership or equity swaps. Very, very similar to your use case. My actual debt product right now is 9.5% on a 10-year ARM. So it's like the payments are significant. There's almost always a better debt product.

Okay.

You also might be able to wrap it up with another loan. So the first self-storage facility I bought was SBA loan and it was wrapped with a I think from SoundCredit. So it allowed for the SoundCredit debt coverage ratio plus the SBA, which was a little less down than we wanted to put. So it helped.

Could you expand on that? Wrap it up.

Yeah. So basically you have 2 loans. One person was willing to take second position.

Okay.

And the other one was first.

What if you could find the seller that's willing to take a second position On the down payment. Would that be advisable?

Say that one more time.

Say, say you want to buy a person a property and use the SBA loan for 90%, and you wanted to see if the seller would do a second mortgage on the 10% for the down payment. Is that advisable right now?

He'll answer some more, but because he's, he's got a couple connections. But I have an RV mobile home park for sale, and a lot of the banks have pulled back on allowing second positions. So it's, it's tricky. You just have to, you have to do your homework and figure out which bank would, would allow it. He's done it a couple of times, though.

All right.

Yeah.

Again, I, I don't see the use case for, at least if you're going to do multifamily, I don't think the cap rates are high enough to justify doing an SBA loan. I don't really see that with a lot of real estate, at least in Washington. So if I were you and you want to do seller second, most banks will go up to CLTV, like combined loan to value of 90% with a seller second. But you have to have a great business plan. You have to show that you can cash flow the debt payments still, which again, Like we talked about with the math, right? You got to have your rate factor less than your cap rate. That's going to be difficult unless the seller is going at a really low rate, right? But it's super doable. Done it multiple times. Doing another deal like that right now, and it's possible. But you're probably going to have better success with the community lender.

Okay, thank you. Appreciate it.

Absolutely. We have a debt product we're closing probably next week, maybe the week after. We're Getting the final paperwork drafted where it's a refinance, but the seller is doing a holdback. So the bank's allowing a second on that. So it is a very common debt product that's allowing us to take out the get us back to where we're trying to go, but bring our interest from 13.5 to 6.5, which is turns out a lot better.

All right. So I talked to a few of y'all about this here, but what is y'all y'all's three y'all's opinion? on buying real estate in Washington State? I mean, what's the case for and the case against? I mean, it's not a very landlord-friendly state here.

I feel like I'm more pro-Washington than all y'all.

That's probably true. I'll start. This is— I actually want everyone's opinion on this.

All right.

For me, I am a huge fan of buying in your backyard. So where do you have competitive advantage? I have competitive advantage in Washington because I lived in Washington for 32 years. I know the markets, and when I built my portfolio, I could drive over the mountain. So right now, if I did a deal in a market where I am currently located and have resources in, it could still make sense for me to do deals in Central Washington because I have resources. However, it's much easier for me to do it in Texas where I have my PM company. So I'll look at where do I have the greatest advantage. If you could do real estate anywhere, do it where you have the most advantage. So for me, I'm cutting off my deals in Washington. I made that decision this year, not because I hate Washington. It's I have more control to do it in a slightly easier market, or actually notably easier market to operate, which is really helpful. If you're from Washington or you live in Washington, there's no Texans trying to buy up your Washington properties right now.

Right.

What do you think?

I personally prefer to buy in markets that aren't hyped up. So I believe there's more opportunities in places like this than some of the more popular investment areas. And there's going to be difficulty everywhere, right? So there's just different types of difficulty.

Yeah.

And I've found that in a lot of the hyped up markets, you have a lot more people that are losing real estate right now than some of the more Steady Eddie areas. And so I've met a lot of really well-off folks and most of them are invested in blue states. So I'm just, I'm not going to reinvent the wheel.

Cool.

Eric?

And I think to add about Washington is even though it's becoming less and less landlord friendly, the rules that were passed, right? Rent increases are 9.6% a year. That's actually, it's quite a bit.

Yeah.

The landlords that are hurting and where deals can be found, of course, if they choose to sell now when their rents are, let's say it's a 1-bedroom at $1,000 when it should be at $1,600, they also have been told by their brokers what is the likelihood of the sale and where it's going to trade. So that's also where you can get good deals. But just know that it's going to take a longer process. It could take 5 or 7 years to really see that progress and get your cash flow much higher, right? And then trade on the back end. So, but at the same time with Washington, we still have all the jobs, even though there's layoffs, major employers.

Oh yeah.

You can't, you know, throw that to the side.

Yeah, okay. Well, thank you.

Absolutely. So, um, my question is similar to hers. So I live also in Seattle, and I spend some time in New York, like I live between the two, New York City.

And so I'm trying to figure out where to invest. And I know like some people go to the Midwest or the South, but you guys are talking about staying in your backyard.

How would you build a buy box for someone who's new to multifamily? I think one of the first things that you need to consider in any business that you're doing is what business do you want to be in? If you legitimately are like, hey, I love Washington, I want to be involved here, I would, I would choose Washington. If you're like, hey, I love New York, I think it'd be fun, maybe that one sounds like a real challenge, but Depending on where you're at, like, what do you actually want to do? And then reverse engineer from there. Like, okay, who has done it in my market and what did their business model look like? And so in Washington State, there's a ton of investors here from Washington State. We're in Washington State. You can absolutely do deals in this local area. They're typically going to be less common to find cash flow, which means if you find a cash flowing deal in this market, you're probably going to make a lot more money than you are in other markets where it's easier to find cash flow. Your appreciation here is usually much higher than some of these cash flow heavy states. So I would— I think the question is really what business do you want to build and where are you most interested in? Because people do own real estate in every single market. There is absolutely a way to do it.

Okay, thank you.

Absolutely.

So I asked Phil this question earlier, but wanted to see what the rest of the opinion was. What do you do if you're trying to come up with your down payment money and you've explored all your options that you can think of, like immediate family, friends, and so forth?

Find more options. If you've gone through all the options you've thought of, go through the options other people— go through the options that other people have thought of. Uh, there's another thing where everyone had— anyone can do the thing. Like, there's— take Caleb Hummel, for example. He's my favorite example because he was the least likely to succeed. He's 18. He has no friends or family with money. He finds a great deal. There's no connection. So you go through his phone list and it's like, okay, I got my high school baseball coach and I got my uncle. Like, he has no connections. There's always someone who wants to make money in the same market that you're investing in. You can look at the people who own down the street. That'd be a good start. Who already has invested in this area? Let's get them on the phone. Let's say, hey, I just got this deal under contract. I'm super excited about it. Problem? Don't quite have the capital here. Would you take a look at this deal with me? It's not uncommon for them to do that. But yeah, my answer would be, if you've exhausted all your options, find more options. There are definitely people who have money who want to make money on a deal in your area.

What about these companies that advertise, you know, private money lending?

If your deal has a lot of cash flow and private money sounds— so now we're on the debt side of deal debt equity. So we're back from the equity down, back down to debt. If we're looking at borrowing, does the deal want you to borrow at more expensive rates and does it support it? If yes, that could be a good debt product. And now you've solved for X. If no, then we want to look at equity. What does the deal want to do? If it cash flows 7% and private money rates are at 13% interest, probably not the right debt product for your deal.

Right. Okay. Then you got 2 debts you got to service. If you borrow down payment money in your original.

And a lot of hard money lenders, very few of them will do seconds. Usually if you're doing a hard money lender, they usually want to be in first position and have all of the debt on the project.

Right.

Usually.

Okay. Thank you.

Absolutely.

I think really quick, just to add to that, like you said, get the deal right. If you get a deal that's Day one, you know it's a great deal, 10% cash-on-cash return. Type into Google syndication groups near me or whatever, call up those people and say, hey, look, I've got this deal under contract, I need the capital, want to see if you might want to invest with me. And that could be a really good start, or even the investment Facebook groups. Facebook groups. Hey, I've got a deal under contract that's a 10 cash on cash. Does anybody want to invest with me? And that, that'll just get the ball rolling.

Okay.

Appreciate it.

That's awesome. Wonderful advice. Thank you for both of you. Question I had was, if the SBA has said, okay, we'll loan money on this project, does that lend that project credibility necessarily based on the SBA saying, okay, I'll lend on it?

In a way, yes.

Do you mind asking why someone would say that?

So if the bank's willing to lend on it, whatever it is, then yeah, there's a doable deal. Now, it would— if we're talking about your deal you brought up earlier—

No, I'm going to go to a different location, whole different thing. I can— if you need to know, I can share that.

Yeah, let's, let's go a little bit more into detail.

Let's say just north of Dallas-Fort Worth, between Frisco and Sherman.

Ooh, great area.

Let's say it's in a little town called Anna.

Okay.

Somebody had the land at a smoking, stinking price, and they've got a really good builder with a great reputation, and they're going to build a ground-up 16-unit residential assisted living. They're going to charge $8,000 a month. Everybody else is charging $9,000 to $12,000, so to speak. Somebody said. Anyways, when they finish it in 18, 19 months, which is the projection, then they'd have $1.5 million equity at that point.

Perfect.

Probably refinancing at the end of the 3rd year or so, between 3rd and 4th year. If you put your money in, you get all your money back end of 3rd year, 4th year. You stay in the deal. After 19 months, you start getting about a 7% distribution. And at year 8, you still are getting that distribution. And at year 8, when they sell it, you get all your money back again. So the rates of return are pretty good. And the SBA's saying, yeah, we think this is good. So my question is, does— and I have a partner who, former senior tax associate with Deloitte, former senior tax manager for Wachovia and Wells Fargo. He's kind of like, yeah, but if they delay in construction and they don't have penalties and if, if, if in all of this, I'm thinking of SBA, And the senior GP managed 100 CPAs in New York City for 20 years. These guys are scrutinous as heck. Does the SBA lend that kind of credibility, that kind of scrutiny to these kind of projects? Because there's always questions from investors. That's my question. Because I'm asked to raise capital for it, and if I'm going to do it, I'm going to start in about a week.

Yep, I have strong opinions, and I'll let you guys go first.

Well, I like all your opinions. That really helps.

Sure.

That's why.

So I wouldn't lean on a lender's perspective just on a deal. The sponsor is way more important. So how many of those deals have you guys done? And, you know, that'd be my first question. Also, how well capitalized are you guys from a cash flow perspective? Because a lot of people go play developer and they have money sitting in an account. They may have a few million bucks extra sitting in an account, but the problem is They're a capital gains business, not a cash flow business. They qualify for the loan, lender's on board because everything looks good, and then they run out of money and they have no means to regenerate that cash. So the lender could love it. The lender could also be stupid. Like, I've seen loans that should not have been placed here in Washington State. They should not have gone through, but they did on pro forma. And so lenders can get really excited about making money, but the The problem is if the sponsorship team doesn't have the actual cash flow to keep floating that when it goes wrong, because most deals have issues pop up, and if you don't have the experience to weather that, now you're in a tough spot. So has, has the ownership team done that type of deal?

The sponsors have the cash flow and it's in their wheelhouse and that type thing, but what you said that triggered was, uh, same concern that My partner asked, and that is, does the SBA, looking through their stuff, are they thorough enough to catch everything that you're concerned about?

It's not their job to catch everything. That's my point, right? So they're trying to lend money. So like, has the sponsorship team done a bunch of these deals and successfully leased them up for $8,000 a month? Is my— it would be my question because that's much more important. than getting a lender approval. We got a loan approval for $1.9 million when we had like no money. Should that loan have gone through? Probably not. It did. We had no liquidity. Like, it should not have happened. So—

Quantify how many is too many. If they'd done 6, is that enough or should it be more than that?

Have they actually succeeded from breaking ground Getting the financing, cash flowing all the way through it without running out of money, and then doing the full lease-up, right?

All it takes is one successful deal.

Yeah, one deal will take you a long way, like he's mentioning. But if you haven't done that or you don't have the cash flow to support it when it goes wrong, there's just a lot of speculation. And I've met a bunch of people that have speculated on things and then they get left holding the bag of negative cash flow and That's not fun.

So what it tells me is it really more like one deal, 3 deals. You're thinking at least 3 deals. Somebody's had at least track record of 3. That sounds—

Yeah. And then again, having a cash flowing business, if you don't have recurring income from something, those— the deal risk goes way up. Christian mentioned this earlier. Builders go bust if they don't build the cash flowing base first. So a lot of the successful people that I've met and that Christian's met and Probably, Eric, they get into development, they have a cash flowing business first. That business you mentioned will cash flow a lot when it's done, right? $8,000 a unit, 16 units. I mean, we're talking a lot of money right there. But if you can't get there and you don't have the cash flow to get there when it goes wrong, and now you're in a tight spot. And that's the side of it that people don't like to talk about. But that's reality for a lot of people.

Big help. Thanks.

And one thing I just wanted to point out on that too, like the SBA loan that I have, they shouldn't have given me. Like the, the, what they lent on was like, it was ridiculous. Like I, there's so many lenders out there. I, I don't put any weight if the lenders, if we have a lender who's in, I'm like, that's a great first step of, of things I'm excited about. It's like a 1 out of 10. I was like, it's good, but The lender being on board, Cody nailed it. When you're investing in a deal, you're investing in the financials of that deal. And if you are an investor, not the primary operator, you're investing in the people operating the deal. Those are the 2 things that you're underwriting. Who am I giving my money to? And what is it backed by? Neither of those are really the lender's problem. So it doesn't have no weight, but it doesn't carry a ton of weight. I want to start off and say, Cody and Christian, you've made a giant impact in my life, uh, and I want to say thank you for that. You know, I was in your mentorship early on, and I mean, it means a lot to be able to meet you in person. Thank you. I'm a huge fan of you. Oh, uh, most of my deals have been creative, and I think a lot of people kind of come to the program because y'all have done a lot of creative. So I wanted to give you a chance Can you tell us about one of the most fun or creative deals that you've done and kind of how it was structured so that we can just broaden our brain of like, what's even possible when structuring deals? Boy, there's a bunch of them. I'm going to think of the most fun.

I don't know if this is the most fun, but it's the most recent. I basically seller financed my development at no interest and a little bit less conventional, bought dirt from a builder.

Okay.

The builder built the deal, like through framing and siding with their own money at no interest. And so I'm getting certificate of occupancy in like 45 to 60 days, and I've paid maybe $11,000 of interest on a $3.5 million deal.

That's awesome.

So that was a cool one.

Yeah.

All right.

I'll just tell kind of a recent story that can give you guys hope for if you go under contract and someone's not willing to do seller financing. 18 units, run down, uh, old man owned it outright, was not willing to do seller financing. No problem. We're looking at getting perm debt. It's going to take $700,000 down. We get through inspection, we waived inspection, sent earnest money into escrow. We still had another 60 days to close, and we, at the end of inspection, They're really late to get us the actual signed leases. I wasn't concerned about it because it was that good of a deal. But when we got the leases, um, I noticed the same signature handwriting was on the bottom of every single lease.

Oh.

So, you know, it was unfortunate that the son-in-law, you know, had issues and didn't keep up with leases, nor did he have copies, and he felt pressured, so he did this. Uh, and they didn't have copies of the original, so What I did was I went with the broker who brought me the deal to the house of the owner, and we sat down and basically explained to him the situation and that I can't get financing on this because that would be fraudulent if I delivered these, these, uh, books and records. So I told him, I said, look, you know, when I put my foot forward, I want to You know, give you my word that I'm going to close, and I can close this, and I know you want to sell, but the only way to do this is seller financing. And we don't have to do it long. We can do 2 years, uh, no payments for 6 months, and I'll give you 5% interest only. At that point, the owner of course changed his mind, and it went from a deal that was not seller financing at first in the middle of the deal went to seller financing. So these are situations that come up, but first and foremost, it was looking at perm debt and seeing how that worked as well. So there's just a quick seller financing story. That was crazy.

Notice with seller financing, you're always solving a them problem, not a you problem. That's a perfect example. You, you didn't open with seller financing. You started with conventional. There was a problem. You overcame it with creative. The least amount of creative, always how you close. My favorite recent one is, it's called Anson Park Seniors, 80 units. It is seller financed from the bank. The bank was a 70% owner of the property. To get through the Texas compliance for LIHTC, they're like, it's actually easier for us if we can skip the committee and give you guys a year to close. However, we don't want to wait a year. So they proposed, what if we just write a custom note? Let's just negotiate seller financing. And they called it seller financing. The difference is we had to go through the bank's committee to get it. So it's totally bank financed, but the bank was the seller and we got to name our price, down payment, and interest rate. It was completely negotiable like another seller finance deal. So on my actual schedule of real estate, it shows as bank financing. But it's also seller financing, which was a really interesting way to do a really low-down deal.

Thank you.

Yeah.

Also, it's 100% occupied. We're rocking that project.

Okay, so for someone who's new like me, and I'm sure y'all have stories because you've been new once, and y'all probably have stories too, and you start to get those questions in your mind like, what if this thing, and what if that thing? And I have legal questions for an attorney, like a real estate attorney. Do you, like, retain somebody so you can just call them up and be like, hey, I wanna pick your brain? Or do you get, like, a legal Zoom subscription? Or, I mean, how do you deal with some of the legal things that pop up?

For legal, don't— generally speaking, don't pay for it until you actually come up against it. So I have a lot of, like, I have a lot of questions all the time, which is the beautiful thing about ChatGPT is I'm like, hey, I just have a thought. Tell me the thing. Like, Chat knows a lot about law. It's one thing I really do like about AI is it can read law really quick. It probably knows more than your lawyer does. If I'm coming up to an actual legal question in a transaction where I'm like, hey, this is a real thing right now, I will always get legal counsel on those things.

Okay. I'm glad I asked you.

Yes.

Cool.

Thanks.

Also helps if you have multiple questions to keep them very simple. They will bill you per email and per conversation typically. So try to get it all like shoved into one question. Try to just be like, Hey, one question, and then ask 5 questions with that one question. It'll cut down on your billing.

So kind of for all of you, but Eric, you've mentioned sellers are particular on timing and maybe measuring the buyer by the time they put in their LOI for inspections and due diligence. As a recovering frugal engineer, I don't like to spend money on inspections till I've gone through what the seller should be providing first, like the fake lease Type scenario that you found. So what is reasonable between the two? That can we start our clock on due diligence, my inspection, offset to seller delivers full DD docs, and then plus 10 I'll have my inspection done? Or how would— how can we handle that so the seller's not spooked, but cheap engineers like me don't start shoving out inspection money before we know that leases are all valid and The books are good or bankable.

Good question. You can definitely do that. Exactly. We talked about starting due diligence after books and records are received. Highly unlikely to get that accepted. But what you can do is beforehand, you know, anybody who's interested in making an offer, I will present them with a T-12, a current rent roll from the management company. And that's enough to go off to expect that the leases are there. Now, if you actually go under contract, And during feasibility, you get the leases and one of the leases is wrong. Well, that allows for renegotiation right there, right? A retrade because it's not what they presented. So, so first and foremost, just getting a T-12 or you can probably get that. Yeah. Rent roll along with a couple of previous years' P&Ls or Schedule Es. That's all you need to get dangerous.

Okay. So one of the things I come across is that T-12 has great rents, but it doesn't have delinquency. And then finally you get true docs and you have, well, half of that scheduled rent has never arrived. So you're just saying go for a retrade on new financials there. I try to avoid a retrade, at least in my philosophy.

And that's a, that's a great habit. But it would be part of the initial talks with the broker when you're interested in a deal. like, hey, what's one of the first talks we have or biggest questions that I would ask for a client is, hey, what's delinquency and eviction like? And then they would just be upfront with you. Yeah, we've had, you know, 2 evictions in the last year. You know, those took 3 months to rent out and now we've got new rents and this is the income. So then you take that into account with your offer.

Okay.

Thank you. All right. And with that, we are going to give the band some time to prepare because I know they're going to rapid set this up. Danny is coming in at 6. Dinner starts at 6:30, so there's time to hang out. Depending on where the tide is, you guys can play with the kayaks. But this is a great time to just network, relax for a little bit. Dinner will be served here again about an hour and a half. So mingle. There's a bunch more water in the pub, so I'll make sure we'll get that. That will be refilled for tomorrow, so don't worry about drinking the last of it. That is, uh, we have planned for that. Everyone, end of day 1. You guys made it. Congratulations. Thank you.