Christian Structures Creative Partnerships: Episode 9 of the Live Sessions

All right, party people, let's press on. We got one more before lunch, which like seems way too fast for this to already be upon us. But we're going to talk creative equity. So everyone filter on back to your seats. I didn't give you a 25-minute break this time. We're keeping some pace going here. I want to make sure that I give everyone time to go out, enjoy the canal. I heard rumors that we might visit some other properties from people around the area. We'll see. Uh, but I want to give everyone options of what they want to do. So I'm going to try to respect everyone's time while absolutely nailing this presentation on creative equity. Super excited for it. It's one of my favorite things to do. I favor equity over debt, uh, more often than I think a lot of investors do. And so I'm going to try to make it so stupidly simple because the actual premise of how you structure the rest of the money, if there's more money needed for a deal, Is actually a pretty simple thing to do. Also, how fun is it? I know I'm tooting my own horn here a little bit, but we have an event with no sponsors and no sales pitch. Like, who has ever been to a real estate event where they don't end the thing with like, by the way, spend more money? We don't have that. We literally just get to talk about real estate for 2 days. I'm so happy about this. Or they, I'll offer you a strategy call, which turns into a sale. I've been to some great events where they're like, also, you should buy my $135 product. And I was like, no, thank you. I will pass. I think it's just really fun to get to do this. I love that you guys get to come out to a place that we bought with creative finance and structured the creative equity wrong, which is exactly what we're going to talk about, how to do it right. We did the finance on this thing really freaking well. 4.5% interest on an 8-year note. We did a great debt product. We way too much principal paydown, but we overall, we did a really strong debt product. We messed up the equity egregiously on the Robinhood, which is what I'm finishing the paying of correcting. Uh, so today we're talking creative equity. This is the part where you bring in the partners if you need it. Now, if you have a deal that has a ton of cash flow, if it just cash flows like crazy day one, you should in Almost every circumstance, take it out entirely with debt. If you can just own the building and you can borrow the money and the property pays the money, you don't have to worry about this step at all. Deal debt done is awesome. That's how I bought the RV park is it was 100— I was actually, it was about 200% private capital. I got the 100% of the money to buy the deal and almost 100% of the money to redo the entire septic system and the clubhouse and the We structured that deal in an awesome way where we got more than 100% financing. Those deals are available. That's another type of creative finance that is getting creative on how you finance. Equity is where you bring other people in, and there are some advantages to equity that you cannot replicate with debt. However, you can always structure your equity to mirror debt. So if you have a deal as an example, and I'm going to go into some of my favorite structures, But if you have a deal where you would like to take it out as debt and the bank says there's no second position, we will not allow you to further encumber this property. I cannot use the property to take on the debt. Well, what is the structure now? Well, if I really wanted to take on, let's say I was trying to do a private note and the property can sustain 10, 12% debt cash flow and 15% cash on cash, I can structure my investor payment as a preferred return, and I can have an agreement that I have an option to buy them out in X amount of time. I can literally just mimic a note, but I structure it as instead of interest, it's a preferred payment. And instead of a balloon, I have an option to purchase with a penalty for not purchasing. So a common structure that we've done is you come in, you're going to fund our deal. I'm going to buy you out in the future. And if I don't buy you out, because options have to be optional, otherwise it's not an option contract. If I don't opt to execute this, then you just get all of my equity. I'll back it with 100% of the deal, but you back it with the LLC. So this is where equity comes in though. It is filling in the gap for whatever you need after you have lined up the opportunity and after you've lined up the debt. So you're going to find that there's a list of things that you may need. Things that you have probably run into by this point, if you've made some calls or negotiated some deals, you may have run into, hey, bank would love to do this deal. We love the way you structured it. We have some hesitation on your experience. It's a great deal for conventional finance. They want an operating team. You just don't have the net worth for this loan. Banks will do that. I'm doing one of the deals. The bank did not care at all. The one that was the bigger note, the bank didn't care. The second deal, the $172 million, they're like, you don't have the net worth to back this $10 million note. You almost do, but we want one more person worth about what you're worth on this deal. I was like, okay. And so I asked one person, but you're building out whatever last piece is missing. If you need a little bit more money to close the deal, you can't do it as debt. Money is one of the things they can bring. They can also bring experience. They can also bring credit score. They can also bring work that you need. Cody already had a business plan for the 38-plex when we partnered. Cody's specific thing that he wanted from me in that deal is, hey, I can— this is exactly what he told me. I can do this deal. I'll do the deal with or without you. I really don't want to do this deal by myself. I think we should do this together. I Cody specifically wanted a partner who is doing what he's doing to take out that size project because there was a ton of project to do. The main reason that we partnered, that was the deal to partner on, was you bring work to the deal that you actually bring labor and thought, and I am looking for an actual operating partner. So whatever the pieces are, this goes back to our very intro of today. What is your path from A to B? Now, what I love about equity is it comes last, which means you already have an opportunity. You've already identified what the seller wants and what you want. You've structured your deal and you've chosen a debt product. So now you know 2 things. You know how much cash flow that you have right now from day one, and you have a conservative projection of how much your building is going to be worth. Now, for those in the mentorship, you guys have access to the calculator. Those in our school community, there's also free access to the calculator. I'll also email everyone to make sure that you have access to this. So if anyone's missing it, you can calculate very easily with the math that Cody showed us yesterday. And we'll also send you this presentation. You can't miss this, how to calculate the value today and the projected conservative value of where it will be when your debt ends or your partnership ends. That is your exit math. So now we have 2 pools of money. There's only 3 resource pools. There's cash flow, there's liquidity, and there's equity. On your deal, we have a projection of how much cash flow will we get paid throughout the life of this project before we restructure. And we have how much value are we creating? Generally speaking, you can do a cash-out refinance conservatively at 75% loan-to-value. So if I have a note for $500,000 and I get the value of this property to $1 million, I can very, very conservatively pull out $250,000. That plus whatever cash flow we have is the total amount of money that we have to pay ourselves and pay our investors. That's all the— there's nothing else. That's the only 2 things. You have cash flow and you have your forced depreciation. You're going to be really conservative on this one because you can't control everything here. So we don't want to miss this number. Conservative value that we will be able to pull back out of the property. Definite, where are we at day 1? Add your cash flow to your future liquidity event. Add the 2 together. That's how you're going to structure your deals. Now, you're on a sliding scale. I'm going to go over a couple different models that work really well with equity, but you're on a sliding scale of, let's say we did 100%, we structured it just like debt. I have a cash-flowing deal, but I need to have 2 things. I need a partner who has the liquidity. help me back this loan, which I'm going to have to give up some equity for because they're going to sign on this loan. They are actually contributing and taking on risk because we are sharing the risk. I'm going to give them equity. In addition, they're going to bring some of the capital that I need to the deal. However, the deal would've worked really well with debt if I had the other pieces I need. So I'm going to structure this high cash flow deal. I might pay the same exact rate that we would've paid depending on what they're looking for and the security of the deal, 7, 8, 9, 10, 11, 12%, whatever they want as a preferred return. I'm going to bring them in at that cost. And if in the future we have a business plan, do we have a cash-out refinance and I can pull out more than they put in conservatively? It's basically the BRRRR method from single family. So they put in the money, we pull the money back out. Instead of paying myself, I didn't put money in, they put money in. So I take the money out and I give them their return and— Now I own the property. The real estate bought the real estate. We treat it like that. Sometimes you have deals and who's seen a deal where you're like, hmm, I can see how we can close this, but the cash flow kind of sucks. It's positive. It hits 1.25 DSCR. We did everything Cody told us to do yesterday, but it's not like a great deal day one. It's just like we don't lose money day one. Good starting. It's closable. No one's super excited about day one.

Yeah.

But the upside is there. Phil did a deal, 9 units, turn it into 10 units. It's not a crazy project, but we got to do some rent increases. We got to do some reno. I'm going to take a project and I'm going to, at the end of it, it's worth a heck of a lot more than we started. You can structure the buyout. You can either reward them on the back end with a multiple or on the front end with cash flow, or you do something in between. One extreme, like 10%. People are pretty— if you're doing 10% and you buy them out for about what they bought in at in 5 years, everyone's usually pretty happy. That's a pretty good return. On the other end, if you can double their money in less than 5 years, if I didn't give you any or barely any cash flow through the deal because we're like, hey, we just want to get to the end. It's an easy pitch to land. We make money when the project is done. We're not going to pull money out of this project to pay ourselves because that will slow down getting to the part where you get a whole bunch of money. Super easy pitch to land. The extreme on that side, if you double their money in like 4 years, most people are like, that's a pretty good return. I'm pretty happy with this. Anywhere between there, you have some cash flow, you give them a little bit, maybe do a 1.5x, but those are your sliding scales. Your deal in your calculator will tell you what it wants to do. High cash flow day 1, structure it as debt if you can. If you can't take it on as debt, equity partners structured as similarly to debt as humanly possible. If it has the upside, do not sacrifice cash flow on a deal that is narrow. That is a great way to lose real estate. It's also an easy pitch to land. It is in my best interest and your best interest to not draw money out of an active project until we are done. The finish line is the goal, not the cash flow in the middle of this project. Our security is the fact that it is cash flowing day one. Let's leave that in the LLC and not touch it. That's all you have to do to raise equity. So I'm going to get into a couple of my favorite types. I did put together some slides for this. So here are my 2 favorite zero out-of-pocket bank finance, because I told you guys we're going to get creative. These are like the way to go low to no money down with the bank participating. So first of all, the equity partners, like I mentioned, you can share their qualifications, they can fund the deal, the property can still buy them out. So we can put anything together, we can share the money, we can share their credit, we can share their experience, We can share their time. 38-plex, Cody really wanted my time and a little bit of the potential bankability because we were going to refinance. So I brought— that's okay, we didn't need that anyway. For this deal, I didn't bring any money to that deal. I had an awesome credit score. Turns out seller financed, we didn't need the credit score. Cody wanted a little bit of my experience for the resume, a little bit of the liquidity for a future refinance, And a bit of my time. Those were the main things that I brought to that deal. We then had 3 other capital partners. They brought one of the things Cody and I really needed to close that deal, money. We did in fact need money to close. That was a piece of this. $100,000 each. As Cody mentioned, we seller financed them back out of the deal later. We did essentially a bank refinance and then a seller finance of their positions. The deal bought the deal. The investors came in and gave us the pieces that we need. You're just filling the blanks. What do I need to close the deal? Don't add steps. Don't try to make everything a massive partnership. The fewest people as possible to get you the piece you're needing. You're missing some money. They bring in the money. You need the experience. You know what would have helped us on the Robinhood immensely? Bringing in one operator who ran a few boutique hotels. We had to figure out the model from scratch on how to staff. We overpaid and underperformed staff for the first 2 years here by like $100,000 because we had a stupid hourly model where the slower they go, they get paid the same. So they just did, like, we incentivized in our, our man— our genius management plan. If you are lazy, you get paid exactly the same as if you are not lazy. And what happened is everyone was lazy. It's amazing. We realigned the structure. Profitability went way up. Someone could have just come in who already knew that. The experience would've been unbelievably valuable. One of our team members had run the cleaning of an Airbnb. That was our net hospitality experience in our company. Partnership is more than just the money. It is any and more of these things. What are you missing to successfully do your project? Add it to your team. Whole thing. The option agreement is what you typically would attach to these on almost every transaction. Almost. I have an agreement that I have a fixed period of time to buy them out for a fixed price. Note, this is very similar to a note or seller financing. Instead of a balloon, we just have a time to buy them out. Functionally, it's almost the same thing. Your options are optional, but you can put penalties for not executing on an option. We do this or this happens. The duplexes that Cody and I did right after the 38-plex— this is weeks after the 38-plex— 3 side-by-side duplexes. I met a guy, I think in our call center, and then I met him for coffee. A random person just came Came into our universe. We had a deal. Cody and I, Cody wanted to retire his mom. I wanted to retire Danny. Turns out Danny wanted to keep working and Cody's mom didn't want to be retired. So we had some stupid goals of helping family that didn't want to be helped. But that was what our goal was. Let's put together the cash flow. We are, so we structured the deal. We'll take 100% of the cash flow. You put in $90,000, you double your money. His stated goal was, I want to double my money in real estate every 5 years. That was what we talked about over coffee. I was like, I have a deal that does that. Just straight up, I have a deal that does that. If we don't execute on this, we got a great price on them. If we don't execute, you just get our equity. So your worst case scenario, we got 5 years of cash flow, you parked your money, it wasn't the best investment ever, but you ended up with great price and you get 3 duplexes and they all cash flow and it's not great collateral. But if we do what we said we'll do, which we're What we did, you just double your money. You put in $90,000, you get $180,000 at year 5. Super, super simple. The real estate buys the real estate. Now, on occasion, you may have strategic partners. I have partnered with people who I have worked with before and I really like working with them, and then I keep working with them again. There's a handful of you who've worked with me on projects. Some of you guys have been investors, and on the few deals that we syndicated, we've never missed a distribution. You guys have been paid. Some of you guys have participated. Some of you guys have been really passive. Everyone got more or less what they said that they wanted to do in the deal. There are people who I've partnered with who I love partnering with again and again and again. It's up to you how you want to do this. You can structure, and I think Cody did a really great job. I think Phil's doing a really great job. You can structure it in a way where you just don't introduce a lot of people and you're very strict about buying the people out. I think it's a really great practice. For the way that I am having fun scaling my business in Texas personally, the way that my business works, I am finding that Christian can't actually technically do all the work for everything all the time.

What?

I know, it was a bummer to find out. Uh, so I actually literally, I need the time more than I need the money. And so some of my partnerships are actually structured around I want to work with people who I like working with, who I've successfully worked with before, who are helping me with my most limited resource, which ended up being my time. It is harder for me than the money. Right now, if I want to scale past where I'm at. So this just goes back to, you need to know what it is that you're actually after. You have a simpler life if you bring in less people. If you're like me and you're just a glutton for pain, just glue a lot of people into your universe and just go for it. But know who you are as an investor. The option agreement is something, generally speaking, you should have a fixed way to get out of every partnership you're in. For money, fixed price, fixed time. If you love the partnership, you don't have to, you can renegotiate. You made it up in writing, you all signed it. You can sign a new document. If we're like, we love this partnership, we want to do 12 more deals together. Awesome. Rip up the option agreement, do a new agreement. You should put this in place. This is your security. You should have a way out of every partnership. If you did the work, you put together the deal, It's one of the most practical things that you can do. Option agreement, all it is, I attach it to the OA as an addenda. It's just by this time, I have the right to buy you out at this price. Something we did wrong on option agreements, Cody and I, Cody had mentioned this earlier. Debt is often cheaper than buying out people with equity. If you structure it around a 5-year buyout, I think we structured ours as a 3-year buyout.

3-year buyout.

3, if I recall correctly. But if you have a multi-year buyout and then you buy them out in year 1, the original document was written that we would buy them out at— we had 3 or 5 years. I'm trying to remember. Cody, do you remember which it was?

It was 5.

Can you also share the mistake on the 38 with that deal? Yes. So we had 5 years to buy them out, but we really structured it so that we wanted to refinance as fast as possible. Since we refinanced at the end of year 1, the way that it was written, if I buy you out for double, that is the same thing as borrowing at 100% interest. You put in $100, at the end of the year I pay you $200. The, the option was fine. Like, the way that it's written is fine. It's, oh yeah, in 5 years, double your money. That's great. But what if we do it in one? So what I, I learned is when I do these multiple projects where it's like, hey, we legitimately may do this early, we just do a stair step. It, it's, hey, if, if I buy you out in this time, this happens. If I buy you out in this time, this happens. Cody, additional color on this? Do you remember the other mistake we made? Uh, well, the problem with making a lot of mistakes is that I try to forget a few of 'em. Uh, Cody, what, what, what did, what else did we learn? Nobody signed the option agreement before we closed. Oh my gosh, I forgot about that. Oh, one of the most— this is really going to be helpful for your success on seller financing and in equity. When you write the agreement, sign it. Very, very important. Uh, when we went to execute our buyouts, we went through and I think one of them signed, if I recall correctly. I think one person— It wasn't valid because no one else signed. No, but no one else countersigned it. So we just said, I don't know how it got missed. Uh, but I remember when we went back through our documents, Cody mentioned we bought them out for $150,000 at 10%. So we went back and called everyone and negotiated, hey, we agreed on this. We would like a different proposal because we're doing this really early. So we were able to renegotiate, but we had no leverage whatsoever in the negotiation. So if they didn't want what we pitched, We just couldn't buy them out. We just, we couldn't execute our refi. We had a critical problem in how we wrote it. Start with the end in mind. What are you trying to do? Does the option agreement recognize the business plan that you have? And then Cody reminds us also, when you agree on stuff, then sign it. Very important. Another model that I really love, 50/40/10. Uh, there's a, this is a general rule. You can structure this however you want. 50% bank finance. Bank loves being in first. There's almost no bank. I've never seen a bank agree to go in second position. I see private lenders will do it occasionally. Never seen a bank do it. Bank wants to be first at 50% loan to cost, loan to purchase price. Bank's usually in a very good position. If the property defaults, they only owe half of what you bought it. They're only lending half what you bought it for. They're, and they're paid first. They're in a great position. Many banks, not every bank, but many banks will allow second positions. MC Bank for, Me in Washington, they basically stopped checking even the debt service coverage. I just say, hey, can I glue another note to this? Like, yeah, we don't care. It's crazy. 50/40/10 is a way to do 50% seller, or sorry, 50% bank, 40% seller. There are many people, there's a couple reasons you'd do this. Most common that I have found, most people do not own their real estate outright. There are more people than you think own their real estate outright. It might be like a lot more people than you think. It's much more common than you think. There's also a ton of people who have debt on their real estate. Who here who owns real estate owns a significant amount of it without debt? Show of hands. I've got a place for it. No one here would be able to 100% seller finance their property without getting creative. There's ways to move things around, but without assuming we're not going to do any like crazy substitution of collateral and move debt somewhere else, generally speaking, we're not in positions to seller finance. I have a 10-plex that is literally listed on the MLS in Moses Lake right now. I have got 2 offers on it where people said, hey, we would just like you to pay off $700,000 of your note so that you can then seller finance it back to us at 3%. I'll do 4. Guess how excited Eric is to have to present that offer to us? You can't always use seller financing. It is not a one-size-fits-all magic tool, just like subject-to isn't a magic tool. Just like substitution of collateral, just like all these other cool clauses that you can use, it's not a magic tool that will always work. Sometimes it just doesn't fit what we're trying to do. What this allows people to do— there's a lot of people who do have 40% equity. It is much more common. They've owned it for a while. It's gone up in value. They bought it originally 75% LTV. Now they're really closer to 50% LTV. They're in a position Where they could seller finance something. Excellent use of this. I would love to buy it. We need to get a little bit creative. There's a cash flow constraint. If I can get their debt cheaper, we can have the bank cash you out for 50% of the purchase price. Our down payment is the 10%, which I'm going to get to in a second. In this scenario, 60% of the purchase price has been paid to them. We're not coming in on a stupid offer of Hey, you're not in a position to do this, and I want you to just hold a contract low down to me. A lot of sellers will go for this. I have a ton of deals that use some seller financing. This is usually what it looks like. As you expand, you will sometimes find banks that will allow you to go beyond this. You might just do 50/50, and I've seen banks let people do that. It's not common. I would not assume that you're going to get that in your underwriting. Assume the max loan-to-value you're going to get blended between your 2 debt products is probably going to be 90% in most cases. However, the 10%, where's it come from? Bank does 50%, seller does 40%. You or the equity partners that we just talked about do the last 10%. But how much easier is it to raise 10% of the total money? I love low-down deals. How much easier is it to multiply? Remember Cody's question earlier? If you buy it for $100,000 and it's worth $200,000, how much did you actually make? Well, it depends on how much you put down. If I put 10% down, I just got $110,000 of equity built in for a $10,000 investment. We got a huge return. We multiplied this many, many, many times over. If I bought it in cash, I doubled my money. Low down payment is really, really important. If you can cash flow, And structure deals this way, the less you have to raise, the easier it is to cycle out the properties. That's why so many of these low-down deals are the ones where you hear Cody and I saying, hey, we bought out the partners really quick because we didn't have to increase the value by very much to get rid of the partner because we didn't have a lot down in proportion to what we bought.

Yeah.

Leverage. This is, this is why real estate, by the way, to Dylan's question earlier, uh, this is why we do real estate because we get crazy cool leverage points backed by real estate. And you can cycle the money and multiply the money while getting paid to do so. Yeah. And then on this structure, talk about how you think you do the zero down, because if you own another property, the $10,000 doesn't have to be cash. It could be a note against something else. Yes.

Okay.

So if we want to get really fun with it, I'm going to take one step back actually. As you get started, these are the main things to focus on. You need to get a couple of pieces on the board. For the other board game nerds out here, most more complex board games, like assume we're just not playing like Sorry or something, like in a real board game, as the game goes on, the game usually evolves and people score points and get more pieces on the board. As you get more pieces, you have more available plays, which means you can get more creative. And I'm gonna use a couple of examples. Cody might have another one in mind as well, but you can, sometimes you can move the debt from one property to another property. So you can do, there's, uh, One of my friends did this, 3 seller finance deals, same seller. Got the value up on all the deals, went back to the seller a couple years later and said, hey, can I actually just take the debt from one of these properties and move it to the other 2? Opened up a property free and clear, was able to cash out, refinance that property to buy the next property. So we'd let the real estate buy the real estate. It's a SpongeBob play that we did. That's what Kaela, Cody and I call it. You just take the debt and you move it somewhere else. It's great. All you do, you just grab it, you just stick it somewhere else. If you want to be really crazy with it, I don't like selling real estate, but if I had a deal that I wanted to sell, we call this play the debt mule. You take your debt, you get a way to put it all on that property, and then you slap it on the ass and send it on its way. And all of a sudden you've paid off your debt because you sold the property. It's a great way. It's like, hey, if we're already selling this thing, I don't need the cash right now. Let's just Strap this thing with as much debt as we can and send it on down, delever the rest of our portfolio. There's a bunch of ways to play with equity. You don't get to do that if you have no real estate and no contracts and no seller financing. As you get more pieces, you can move them around creatively in a way that's relatively simple. Again, disclaimer, you don't go into real estate hearing this event saying, Ooh, Christian said the debt mule. That was really cool. This is my new strategy. I'm going to only focus on how to buy properties so I can strap debt to it and then sell it. It's an option that you might come up with, and that's what you want out of creative finance and creative equity. You are building yourself a portfolio full of options with your money. As you grow in equity, you have more options. As you have more contracts and more more loans. Is it a little more complicated? Yes. You've also played the game a little bit longer and you can get a little bit more complicated with your pieces. Just some really cool creative plays come up, but that's how creative equity ultimately works. I put this slide up yesterday. You, I, next time we do this, I'll get the bigger TV to work. For those in the back, this says everyone worries about money. If you raise the money based on, hey, I'm worried about money, you're only gonna find deals that fit the model that you decided originally was gonna work for you. The people who are— I have someone who has talked and he's still not part of— never joined Multifamily Strategy. He has texted me for 2 years saying, I need you to sign a contract, which I'm like, I'm not going to do this, where you are recognizing that I am going to do a BRRRR deal while I'm in the mentorship. And I'm like, no, you're going to do a deal that makes money. If you marry a strategy before you do this, you might find a way to do a zero-down deal that makes a ton of money where you make $2 million and you don't BRRRR it. And I'm not going to tell you not to do that deal. You do not marry a strategy. Everyone worries about how the money's coming in. It's really easy to decide. The money is going to look like this. So now all of my deals must fit exactly in this debt box. Your actual buy box is, I want to buy this property in this area that looks like this, that makes money day one, and is not some crazy structure to make it work. It works as long as we do bedroom rentals and this model keeps working. It works as long as I Airbnb it. You can't do that. If it works conventionally, you build a simple, simple business model. Your debt product is not part of your buy box. Your equity product is not part of your buy box. There's just cool things that you can do. Cody and I can probably do a multi-day event just bouncing back crazy ideas of like how you could move things around. Creativity is really fun. Focus on just getting the deal done and getting the pieces, and then you get more creative as you go. If you worry about the deal first, we can then tailor the debt as Cody just showed us how to do, and you can tailor the equity, which I just showed you how to do. How do we buy every single deal? We buy it with—

Money.

Money.

Yes.

This is 100% of the money between the debt and between the equity. If you have the deal and you have all of the money, you have closed, you've done the thing that you came here this weekend To do. That's— this is the process. Don't get married to one piece of it. Where's the money actually come from? It comes from everyday people. This is where most people, I feel, get stuck. They go, I don't know people who have money. You know who also didn't know people who have money? Me. I didn't grow up with a family that had a ton of money. Cody didn't grow up with a family of people who had a lot of money. Caleb had less money than Cody's family and my family, I'm pretty sure. Like a lot of the core people that you've seen me work with, a lot of us came up from very close to nothing or a very average background. None of us are real estate connected people. I've taught multifamily strategy for 5 years now. I keep data on everything that we can keep data on. One of the things I track really, really tight is how did the money come in for every single deal? I try to interview you guys as much as I can, understanding your deal structures and debt structures. Almost every single time it is someone you already know or someone that they know up to about $2 million. Now, later when Dylan talks about marketing and branding and building your actual personal brand, you can scale beyond that, but up to $2 million of capital raising is almost always done from someone who is already in your phone book, regardless of who you are. We teach a ton of different strategies on how to do this with webinars, how to market and Facebook groups, how to join local meetups and how to connect. There's a ton of ways to raise capital, but what actually happens is it's someone that you know or someone that they know funds your deal. And it's, it's almost every single time. Phil was worried about it. He texted like 2 people and they're, one of 'em's like, heck yeah. And then they closed. Phil paid him off so fast. I think he might've like, I think his investor might've lost money on, uh, yeah, he did. Yeah. Phil was so successful that his investor lost money. He pulled money out of the market and paid capital gains, and the return was less than the capital gains. Yeah. Phil did so good that— He's hungry for more, though. Yeah. And then now he's going to structure it. So I was like, Phil, you have to take my money longer. What a terrible problem to have. You're too successful. We need to restructure so that you're less successful, or at least you have to pay me longer. It's a great structure. That is such a common story. You also have multifamily strategy. There's a whole community of people that you're now within 1 degree of separation from. Some of you guys have all partnered with each other. There's several people here who work together. It's not hard to fund a good deal, a deal that makes money. The pitch is always the same thing. If it has day 1 cash flow, this deal is already making money. That is our security. You're answering 3 questions when you raise capital. It is, first of all, what is the project? And this is roughly 85% of the actual— if you tell me there is a deal in Texas that's 100 units, and I think about the— Mark, actual example here. When I call you and I'm like, dude, we found a deal. It's like 200 units. I need your help on this. Before I tell you the numbers, your, your general thought is, I hope this is a great deal, right? Like you're already excited about like, okay, we're doing this project. It's in Longview. I really hope that everything he says after this is positive, right? Yeah, absolutely.

I'm in.

The main thing is telling them what you have. What a lot of people will do is they start with the numbers. They, they, they start with a spreadsheet and they go, hey, I'm going to send you a deal. Look how it makes money. Making people money is important. It happens to be the least important of the 3 things that you're going to present. The number one thing is, is it an adventure they want to go on? To Dylan's earlier question, why real estate? For a lot of people, they already decided that they want to do real estate. They believe in real estate. They're excited to go on the adventure with you. It's a business venture that they are invited to join you on. Talk about the freaking property. Problem is, we were so good at that that we bought a Robinhood. Don't do that. But it's a really exciting property. It's, it's so easy to sell someone on the actual project. The next most important thing, how is it secured? It is more important that you do not lose money than you make people money. If something goes wrong and everyone's made whole, you don't really get sued. It's impossible to control every variable. It is so important to protect the principal. That is the most important job that you have before any return. Do not lose other people's money. If you're going to play with other people's money, do not lose it. So explain the deal is cash flowing from day one. Great starting point. You want to raise capital? I have a property. It's already making money. I'm excited about the project. I feel pretty good about putting money in it. I'm in a pretty stable position. Oh, by the way, it's also going to make you money. Okay, perfect. Now we have an investment. Now you pitch them on what does the deal want to do? Is it cash flow heavy? Let's share cash flow. Is it future upside heavy? Let's pay you out of the future upside. 100% of capital raising. Take the pieces you're missing, fill them in, close your deal. Done. To illustrate this, I forgot I did this slide. Great timing, Christian. This illustrates exactly what I wanted to say.

Okay.

So if the cash flow's really high, either debt or a preferred return. So you buy a property, it's ripping cash, it's cash flowing 15% day one, all day long. I can do an 8 to 10% preferred return. I can buy you out at principal value later. Someone's like, I'm going to park this. It's already making this money. That's really, really stable. I'm going to give you hyper stable. What I found is most people want to have some, emotionally want to have some piece of the upside. So I would usually structure like, hey, it's gonna be a 10% and we're gonna buy you at like 110%. Like you get a little, a little equity bump, you get a little piece of the upside. It feels better to the investor. It doesn't cost you a lot. It feels a little better to them. A high cash flow deal, we're gonna structure it with high cash flow. Cash flow is tight day one, but we have lots of upside. We did a deal, Matt and I did a 44-unit, a top one Or two. It's probably the best deal I've ever done. But it's a it's a forty-four unit building that I remember that I actually thought through this entire speech before I did it. So we have a slide for this. It's this forty-four unit building. We bought it for one point eight million dollars. It was built in the two thousands. For Stephenville, Texas, that is a crazy ridiculous price to buy a deal for. In fact, it was such a good price. And partners are going to— the projection, probably triple or quadruple their money. It's a very, very, very good deal. Very, very, very stable. There's an assignment fee on the front end. I'll talk about this briefly, but we did a year of relationship building in this market. We structured the deal. We found the debt product, which was a bank that I've worked with before that was willing to let us do this deal. We got through the LIHTC certification. This was a government-permitted deal. Partners are making a ton of money. Part of the offering is like, hey, we are signing it from ourselves to the LLC for 2% of the purchase price. Caleb and I put together the deal. We split $36,000. It wasn't anything to write home about. What we offered our investors, we're getting paid a little bit upfront because we put a ton of work in. Not, I mean, not a lot, right? We both got paid like $18,000. It was helpful, but in the scope of the deal, basically nothing. Investors are structured on this deal as first money in, first money out. We do not get paid again until their original principal's out, and then we're going to cash flow the daylights out of this thing after that. Depending on how big we do the refinance, they might actually get a significant multiple on their money when we pull it out. We're looking at a HUD loan that HUD is open to doing a cash-out refinance. We've got the value way up on this. Day one, it was not a super high cash flow deal. It was cash flowing, But they were under their market rent caps and they were like 90% occupied. We structured the deal in a way where the investor's money is super secure. We prioritize our payments to our investors. I mean, what a great structure if you're an investor, right? I believe in this deal so much that I will just not get paid until all of your money is back. I will be in this for $0 except for my work. Now I'll actually be in it for negative $18,000 because I got paid $18,000. I will put in the work over the next couple years. I believe in the deal so much that I do not need any other money out of this deal because the end of this is so sweet. I would rather hold more equity. And on this particular deal, we own 50— Kaela and I own 51% of the deal. Everyone is going to make a ton of money on the deal. We keep running into a stupid problem here where we increase the distributions and the account just keeps on having too much money and we can't spend it back on the property because we We fixed everything. It's just a great deal. The structure for this, it did not start as a cash flow monster. If you looked at the day one, the deal's kind of okay. You look at the deal in the future, it's a phenomenal deal. Moderate cash flow, ton of upside. We agreed not to do cash flow on this deal on the front end. I think we went through the first— Matt, you're one of the, you're one of my people on this. Did we do no distribution for 6 months or 1 year on this? I couldn't remember.

6 months. 12 months.

12 months. Okay, so the first year we just reinvested in the property, we got it leased. We currently have 100% occupancy at 100% of the market cap with a waiting list of, uh, we were at 10 people. I think we're back down to like 6. We literally— it, uh, we had someone move out, uh— oh, Matt, you don't know this. Oh, we had someone move out, uh, 2 weeks ago. It took us 4 days to move in the next person because my contractor got delayed by a day. We have a 3-day average vacancy when someone leaves. So you factor for your 5% to 7% vacancy in your deal. Someone leaves, we don't even lose a month of revenue. We lose less than a week of revenue. Crazy good property. It just, it wasn't that sexy day one. It was just super sexy in the future. So all of the incentives are based on doing a deal that's super sexy a little bit later. Investors are expected to get a super significant multiple on their money. I don't get paid till their principal's returned. While I have no cash flow on this particular deal structure, so this would've been really bad for Cody, my original metric of getting $10,000 a month. I got to retain more equity, which is more important to me today. We fixed our $21,000 negative. I have more than that positive now by a bit, quite a bit. This particular deal, I don't need more cash flow. I want more equity in Stephenville. I optimize the way that my investors used to be where they're like, hey, I want more of the deal. We'll give you more of the cash. I'm like, I want more of the deal, but I want to give you guys more of the money out of it. I want the long-term equity.

Yeah.

You just figure out the pieces you need and you write the deal to that. This is what creative equity looks like though. It's not that creative. I wrote down what I want. I figured out what everyone else wants. We offered exactly that. And then everyone said yes. And then we just keep paying ourselves. I love this example because there's some properties that we don't keep paying ourselves and they're more frustrating projects. This is just a great illustration of when everything goes perfectly right, This is what it looks like. I currently have no cash in it. My investors will relatively shortly not have cash in it. I'm going to start working on the refi process of my entire portfolio here on everything in the next several months. I have a couple of options of how we're going to do that, but I'm looking at trying to get this project finished in 2027. No one has a single dollar in this deal. Everyone is making money on it. That's too many words. I'm not reading that slide. That's creative equity. Questions on equity and raising capital? We didn't really get too much into the raising capital because honestly, by the time you have all of this packaged, I promise it's gonna be the easiest thing. Like, it's just not hard to get other people to want to make money with you.

I have 2 questions.

Awesome. If you can come up to the mic for me, that makes it— that'd be awesome.

All right, 2 questions.

Yes, sir.

The first would be, um, so if you said 2x in 5 years is kind of the standard.

Yeah.

You said include other options like something at 3 years. What are your standards for kind of that?

So it depends on when I would want to refinance. So you take the actual business plan for your deal into consideration. If I'm likely to refinance pretty early on it, I'll want to put a stair-step in there. But I would say Generally speaking, double their money in less than 5 years. So let's say by year 4, we double your money. If we do it by year 2, instead of doubling your money, it's like a 1.6. It just, whatever is reasonable for your deal, it kind of goes into the category of what is the deal telling you it should do conservatively?

Mm-hmm.

And you'll structure it to that. But if I'm likely to do something at year 2, it just incentivizes me. I get to keep more money. If I buy you out early, which is great for them. If I need more time on it, I have a built-in buffer and it costs me a little bit more, but we built it into the deal. It's a great structure. That'd be a good example.

Okay. Question 1.5. Do you do like a 7-year option as well? Like if you miss target by a little bit?

Oh, phenomenal question. When you're writing debt products or options, this is especially important in creative finance. If you have a project that you were expecting to take 5 years, give yourself an extra 2 years. If I have a 5-year project, I have 7-year debt. If we miss this, you can do a lot in 24 months. Thank God, because I gave myself 24 months on the Robinhood project. You could do a lot in 2 years. Give yourself more time than you believe you need on every single project. Who's done a reno project here? Like a significant renovation project? It's about half the people here. Did it take you more or less time than you originally factored? Who did it in the exact time that they expected? Anyone? I got 2 of you. So about half of you have done a major reno project. 2 of us here have done it in the projected time. Always give yourself more time than you think you need.

Okay. The second one would be, say you do miss target by 5%. So you're going for 2 and you do 1.95, something like that. Do you have a standard like, oh, I always take out a note? Do you leave in the original contract like, hey, I can seller finance and give you a seller finance note at the end? Or do you pay out of—

I don't want to overcomplicate the offer. This is a great question. I want things to be simple. If they are simple, we can explain them. We can— one of my least favorite things was someone gets like Hey, there's option A and there's option B and there's option C. And if this happens, then this happens. If you overengineer it, whatever you thought was going to happen isn't what happens anyway. And then you have to go back to the drawing board. Get your business plan in place. And if you run into a problem, Robin Hood Village Resort, where it doesn't go the way that you thought, you bring everyone back in and you go, hey, we need to revisit this and renegotiate. You want to put a conservative plan in place so you don't have to renegotiate. But if you get there, In your example, we're going to buy you out for double and we can get to 1.9. You could probably work with them on what the solution is, and it is probably, let me do a note for the delta. That is usually what it is.

Mm-hmm.

I would not try to build every contingency into a contract because what's going to happen in real life isn't going to be what you factor for. Keep something simple in place that is very reasonable to hit if you run into a problem. Immediately inform all of your investors and come up with a game plan. Okay, thank you. As a fun fact, we were actually— were the people who brought in the money for the Robinhood did not want us to reach out to the other investor to start working on a solution. So we had to like shotgun a solution, which was a really uncomfortable place. I would have liked to have just informed every investor where we're at. They wanted to control that part of the relationship. It was what we— we did a wrong Structure on everything on the Robinhood. The equity was 100% wrong on the Robinhood. Zero things right. We got a 0 out of 10. The equity pledge agreement? Yeah, so an equity pledge agreement is a, is a cool thing. This actually goes into creative finance more so than it does equity, but it's the in-between. Sometimes you have a no further encumbrance on a property, very common with banknotes. You cannot go out and just take additional debt on this. Sometimes you need additional money. Where does money come from? You earn it, you borrow it. Money comes from money. It comes some— you get money from a ton of different ways. You have to secure it with something. You can secure it with the equity of the LLC that does not fall on title. It's a very common way to raise debt where it's essentially the pledge will look like this. I own 100% of this LLC. I can't put more debt on the property on title. I cannot do a second position note. I, however, own 100% of the entity that owns 100% of the real estate. I can back you with 30%, as an example. If that is enough collateral, I can back you with 30% of this entity. You would put in that contract that I can't go dilute your shares in the entity, so I can't then go sell all the properties out and be like, ah, you got 30% of nothing. You're going to put your securities in that contract, but it's basically just saying, This owns 100% of this property. I can't change that equity anymore while I owe you money. You have a right to 30% of the LLC that has 100% of the property. It's the same thing as being backed as 30% of the property functionally. That's an equity pledge agreement. It's just a way to get around a property that you otherwise could not put more debt on. You put the debt on the LLC that owns the property.

That's right.

Which is amazing that that's legal, that it shouldn't be, but it is. So we do it. Thank you. Cruise on up. We'll run 5 more minutes. I know we're a little bit over. We'll run 5 more minutes, then we'll break for lunch.

Real quick. So, yeah, you might have talked about this and maybe I didn't catch all of it, but I want to dig into the cash flow day 1 rule.

Yes.

Right. So in Vancouver, I want to buy— let's say I buy a multifamily or quadplex or something in Vancouver.

Yeah.

I want to go in. It needs a coat of paint. It needs some beautification. And I wanna furnish it and then the people come in and rent the rooms, right? Yeah. Yeah. And the, and the units. So that's time that I'm working on it to make it nice and furnished and beautiful. That's no, there's no renters paying me. So like, that's technically like a violation of the day one cash flow rule, right? Like, how do you get around that?

So from my experience, yeah, I don't do those projects until I have cash flow because every time I do those projects, they take longer than I thought and then I need more money. The way that you do them functionally, if you're going to do it anyway, I'll, I'll tell you how to do it. This would be, this is how you play with fire and hopefully don't get burned. If you're going to do that, which I usually would say don't do until you have enough cash flow to just back the delta, but sometimes you have a little project. Fourplex is not a crazy project and you're like, hey, I have a, I have a clear business plan.

Right.

I've done businesses that don't cash flow because they don't exist yet. I, you could sometimes put money into something that doesn't exist. If you are going to do that model, you need to have enough money in reserve for that. Do not buy that property and have exactly what you think you need to renovate it and no reserve. You need to go in with, I have, I'm gonna go 50% over budget. It's gonna take twice as long as I think it will, and I have a reserve behind that. You need to come in with more cash than you think, and you will be able to make it through the project. If you run out of cash, the one rule is you cannot stop the project. You must complete the project.

Mm-hmm.

It will not make money if you don't get humans in it. So you need to get it to a point where you can get humans in it.

Right.

Try to not run out of money. If you do run out of money, do not stop the project for any reason. Find more money, get it done. Do not stop. That is the only way that people lose is they give up because it got harder. They ran outta cash. Find new cash as long as the deal can sustain it. But the answer to your question, have enough money to do 1.5 times your project in twice the time that you think.

Yeah, that confirms my understanding.

Thanks. Perfect. The don't stop, keep putting money at it rule, is that the same rule applied for gambling? Yes. You cannot lose if you— So you take down the house. Are we recording? Yeah. You can't lose if you don't quit playing. No. Um, the nice thing about real estate specifically, I know, I know it was a funny question, but I will answer it literally because it's my favorite thing about real estate. Real estate is a gamble. You will not factor for everything that happens in your partnerships. People, this is why, this is why I like the no partnership model, by the way. If you don't have a bunch of people, you don't have a lot of variables. The less debt you have, the less variables you have. You are making an educated bet. What I like about it is you are statistically very, very, very, very likely to win if you have day one cash flow. If you have a solid business plan, day one cash flow, You're likely to win. If you have a deal that goes a little sideways, or if you have a deal that went really sideways, you just— that is one where you actually do just keep playing because it's— you are the house when you know how to do underwriting. If you can do math, keep betting, you will go through it. That was the one piece of Grant Cardone advice. I have mixed feelings on the man. That was my favorite piece of advice from him is like, if you have problems, just outscale your problems. Our problem was Robinhood Village Resort was the biggest investment we'd ever made. So the answer was keep betting on something that we actually are likely to win at. Robinhood is not even close to the largest deal that I've done. It's now a smaller problem. It's now manageable. We just scaled the scope of our problems and made less mistakes the second time. So to actually answer your question, in real estate, actually, yes, keep betting. Deck stacked in your favor. Great place to go for lunch. I love this. This is a gamble. You're likely to win. Keep gambling. All right, guys, there are a few fantastic restaurants here. How much room they have for everyone, we're going to find out.