Creative Finance Portfolio Updates - with Cody Davis!!

Hello and welcome to Multifamily Strategy Live. We are going horizontal here, so we are optimized for both YouTube, Instagram, and everywhere else you may be watching. So regardless of where you're watching, welcome to the show. We have it— yeah, we have again today the amazing Cody Davis. Welcome back to the channel.

We did the thing.

Yeah, for those who are used to our journey, uh, Cody and I started Multifamily Strategy together, uh, years ago. There was a time years and years ago where this was just Cody's, uh, YouTube channel. If you go all the way back to the beginning, there's like 12 videos that are just Cody. Then we joined together, and then the thousands of videos that follow, uh, we built together. He is back in Washington today. We're going to give you some Cody updates, some portfolio updates, but really wanted to just pass along like what it actually looks like to build this business. And 3 years in where we're at. Um, so Cody, what brings you back to Washington?

Well, I've been working on the Moe's Lake portfolio while you've been tackling the hotel. Yeah, I like my tasks a lot more. We're getting a lot of renovations done, a lot of renovations. I think we're gonna have 10 or 12 units online here shortly, which will be very helpful. Yeah, at an average rent close to $1,000. An extra $10,000 to $12,000 a month in income does help.

Yes, it does. Even if you guys own it 50/50, I'm going to say that, uh, half of that still moves a lot of people forward, including us.

Yeah, it definitely moves us forward. And if we get the rest of our portfolio leased, which I think we can in the coming months, that'll be an extra $30,000 to $40,000 a month. So that will be more better.

I can use an extra $30,000 to $40,000 a month. I believe that is more than I need to support a child.

Hopefully. I think we're okay.

So I think, I think, uh, kiddo coming to the world will have enough income if we can get those bad boys leased. Yeah, we've done it.

But we're getting a lot done. Motel is moving forward. Oh, love the bromance from Lincoln. Yeah, thanks Lincoln.

Bromance, the second most Korean I've ever touched right there. Yeah, actually, yeah, first most we forced the high five for a video.

I remember that. Yeah, it was an awkward high five too.

We missed the first 5. We're not touchy people. Love you, bro.

But I like that. But yeah, the motel is moving forward. We got a ton of units all ready to go and get leased out. The apartments on Grape are actually moving forward really quickly as well. So we should be 90% occupied across the portfolio.

So when you fly in from Tennessee to like work on a hotel or work on our 38-unit building, What are some of the projects that you're doing over there? Because I've got pictures of plumbing, I've got pictures of painting. Like, what types of things are you doing personally as an owner, uh, to renovate these units?

Yeah, so I've done plumbing, electrical. When it comes down to resealing tubs or showers, done that. Reglazing.

Yeah, the word I was looking for last time we went live.

Ah, yeah, well, we— I've reglazed a couple tubs over there. So we sand them down with a wire brush, and if you use copper brush, it doesn't damage everything as much, but going through, getting those redone so that we can get it reglazed and nice for the next tenant. So I've been doing that, swapping out lights, swapping out all the sockets and switches, and making sure that, uh, breakers aren't tripping. So we've had to rewire some of, you know, reroute some of the 220 because we've got different brakes for the 110 and the 220, the way it's set up at that motel because it's old. So we've redone some of that so that We don't have as many issues in the middle of the night.

On Instagram, uh, Sullivan Moore actually asked, why are you doing the renovations?

Because I can. And when you're getting started, if you're on site, the people that are doing the other projects that you're not doing will work faster. We've seen that time and time again. So when I'm on site, even if I'm doing little things, people move the ball down the line a lot quicker, which is really valuable when you're getting started and when you're established, because we're pretty established. But getting people to work faster and harder is a plus. Now I'm doing some of the projects because I'm 24 and I have people there that will teach me how to do it. And it's a good skill to have if you can just go in and fix something. It may not be the best, uh, use of your time up front, but if you learn the skill, you can teach it later and it's something you have forever.

And that's one of the big things too when you're starting— what projects are worth your time? Now, is it worth a flight from Tennessee simply to paint a few units or do a plumbing issue?

No.

But like Cody mentioned earlier, we have $40,000 of additional revenue that can be brought out of our existing portfolio with the projects we have. Being there on site to, one, speed them along, but two, just physically oversee the contractors, boots on ground, get the project going. If the reward— say you own like the hotel, I own 50%, Cody owns 50%. If you have a bunch of these buildings you own at least 50% of, and you're talking an extra $15,000 to $20,000 a month personally in cash flow, that is worth the freaking flight. Yeah, to speed it along, because it's every single month that'll come in forever.

Yeah. And great, with motel, our average monthly rental rate is a little north of $800. We're close to $850. We have— I think we've got 13 left to go, so we're looking at an extra $10,000 a month in that property. We've got over $10,000 a month to bring in on the 37-plex still. $20,000 a month. I only get $10,000 of that, but it's all to the bottom line at this point. So will I fly across country, spend $6,000 in travel, spend a week of my time to get an extra $120,000 a year, of which, because I was structured, it's tax-free? Yes, I will do that. Yes.

Dylan on YouTube has a question, which means I can throw it up on the screen. Uh, but what does it look like talking to the city about motel conversion? So it depends on your city. Uh, we actually have someone in our mentorship group Multi-family strategy, who's looking at a deal in Mason County, a hotel conversion down there. They will not budge on the ground floor needs to be done nightly stay hotel, needs to be commercial use, and they will actually check on it to make sure. So on that one, they are open to the conversion for mixed use, but they're not open to using the entire building for multi-family. They will not give a rezone. They will give a conditional use permit if you meet their conditions.

Ours, they wanted us to knock down the building and rebuild it. Yes.

They want us to take it and move it forward towards the street, fill in a pool, which we did fill in, uh, but fill in a pool and basically build a whole new building for them.

So we said no. So what are we doing? We are running it functionally the same way within our zoning requirements. We're doing extended stay, motel, hotel, residential. Extended stay, people can stay in a hotel as long as they want. These people are doing monthly rentals. And so functionally we're the same as apartments., but we don't have that zoning. So there's a slightly higher cap rate, which means a slightly lower price.

Now the city did have a little bit of an issue with that originally. And when I talked to them, I just asked them like, hey, can you clarify for me how long someone can stay in a hotel? And they got back with like, well, as long as they really want. I'm like, awesome. That is great news. Um, in addition, we're going to spend a lot of money cleaning up this hotel and it looks a lot better. It was basically a, hey, look, if you want us to fix the problem here, We will fix the problem. We just, you know, go away. Yeah, that was basically it. I'm like, you can't do anything to harm us. We can run our project without getting the rezone though. Appraisal will look at our building with a little bit less value than if it was actually rezoned into multifamily. So while we don't get the value of rezoning, we have functionally the same project with the same long-term fixed rate and the same cash flow. Exactly, which is at the end of the day what really matters. Sullivan Moore, have you considered a project manager if the project consists— if the projects are, I think, they mean consistent, it could be valuable. We have— so my wife Dani actually does do most of our project coordination, like a vast majority of the actual contractor coordination. Cody does a good deal too with some of our subcontractors or individual GCs. But between the two of them, we do have department heads, my PM company, does oversee these. There is a difference though when you are working on site alongside them all day. The speed of which people will work when you are just there is different. I would not say that we are at a place in our portfolio where it would be financially responsible to have someone whose full-time job was just to oversee the GCs, like, like stay on site on the project. But when we can physically be there, it is often still worth our time to be there. I think we're right in that in-between phase if Cody and I maybe had a 500+ unit portfolio there. Now it's like, yeah, you have so many projects going on all the time, you start bringing even more things in-house.

But we're not at that level because I wouldn't— with the type of properties we buy, I would never want to get to 500 units.

I would also agree with that.

That'd be too many buildings.

It'd be a complete cluster in that area. We would be competing with ourselves for leasing for that type of asset. Yeah, which would be counterintuitive. I think in Moses Lake, probably getting to maybe maximum half that size in that area would be the maximum size that one would want to go without just finding another market to open up and do the same thing on. So the way we operate, I think, I think we're running it right. Um, from Vicks, it's difficult to manage and oversee value-add projects if you're out of state and have a full-time job. I understand, probably, um, doable with a good PM., but it probably costs a lot more.

Okay. So buy value-add in-state or don't buy value-add.

Solve the problem.

Yeah.

And you can do value-add out-of-state. I think Caleb Hallman did a pretty good job on that in our mentorship. He eventually did move to the state though, because he was like, hey, I bought enough here where it's actually now worth my time. Kind of same as Cody making this trip.

Yep. And I'm worth my time to be there. And I'm moving to Central Washington. What I've been told for 5 years, and I'm finally doing it by all the ultra-wealthy people, tens of millions, hundreds of millions. You should live where you invest long term. So that's what I'm doing. And Christian's doing the same thing. I own, uh, multiple properties, 61 units in Texas, uh, 79.

Oh, though, though, about to, about to off some of those, so that number will go down, uh, unfortunately, to exactly 69. But of course, um, we'll count my house, we'll say 70 units. Um, I'll be going down to 70 units here, uh, in the relatively near future, but We're starting to invest in that area. I'm having a lot of traction in that area, and I am moving closer to that portfolio. I also still have a lot of friends, family, and partners who are in market in Grant County. So now I can have two hubs of investment, and we have partners who can live in and around the actual portfolios, which I think is immensely important. I really do think there's a huge advantage to living close to your properties. You can absolutely do value-add projects out of state. Just know that you will have higher costs and it will go slower especially when you're starting, when you're just trying to build your systems, processes, and manage contractors. And I have seen quality control issues in the Texas portfolio prior to actually moving partners down there into the market. Yeah, absolutely. Vic's Life also asked a good question: how do you finance renovations? Bridge loan? Hard money? Putting your own money in? How do we finance our renovations?

Well, with money. Yeah, in fact The money has to come from somewhere. We've done it on 0% interest lines of credit before. We've done it with our own cash. We've done it with bank debt. The 37-plex, what we did when we got started is we ended up buying it. We had investors for the down payment. We later converted those investors into notes.

So we took it off that property, which was equity partners, seller financed their equity.

Yep. Crazy cool creative finance. Now we had equity partners. Equity in the deal. We got the rents up, which pushed the value up, and our first appraisal we ever got on that was $3.4 million.

We bought it for $2 million.

We had owed about $1,650,000 at the time because we had a really cool debt product where we were paying it down super fast, which was awesome. It was awesome. But we ended up pulling out about $300,000 because we got the income up. And so we actually used a bank loan, pulled money out, threw it into the building, got value more, and then we went back to the bank, pulled out another $300,000, $400,000, threw it back in the building. And that's how we fixed our problems, by making more money through optimizing real estate.

By the way, when you're starting, I think that's often the right thing to do. A lot of people will take out these big cash-out refis, and your goal is financial freedom, and for the first time you touch a huge amount of cash.

And it was a lot of money for us at that time.

It was a lot of money for us. Having the discipline to say the right thing to do is to reinvest this back into this property and get the property where it needs to be. That is the difference in my mind between a lot of slumlords and good operators, is the discipline to say, hey, I'm going to wait a little bit longer and I'm going to push this building to the next level and the next level before we pay ourselves. Because we had an opportunity to just pull out a lot of cash, sustain the debt, and do whatever we wanted with a bunch of cash. When you're in your 20s That can be really tempting to do. And that was the last major refi we had before I turned 30. Like, we were—

that would have been huge.

We were both in our 20s. We could have said, hey, multiple 6-figure exit, let's go ahead and, uh, you know, slum, put it all on black, see what happens.

What if it works? We had a mentor that said that.

Yeah, he, uh, how many times has he lost all of his businesses? 3? All of them?

Every time? Uh, yeah.

Yes, the correct discipline is to reinvest back into the business. Don't hold large amount of cash for a large period of time. It doesn't mean don't have reserves. But if you have big cash-out events, one of the best things you can do with cash is increase your income.

And I went from— I got a big cash injection. It was closer to 7 figures than it was to 5 for the first time ever. Yeah. And I spent all of it.

You guys are wondering, it was 6.

Well, I spent all— I spent all of that money in about 13 days.

Yes.

Which is insane on investments. Yes, I only invested it. But yeah, it was a lot of money and it disappeared in like 13 days. So you don't want to hold cash.

Yes, you might want to hold it for more than 13 days, but you don't want to hold a ton of cash for a long period of time. Dylan, how do you know if you owned more in Moses Lake, it would be a problem?

It's not the fact that we own more. It's the fact that earlier I said I wouldn't want to own 500 units with the current inventory we own. It's not the fact that we own crappy properties. We've made our properties very nice, but that would be so many roofs. Right now our biggest property is 37 units. You might have something bigger in Texas, but I don't have anything bigger than that.

Not yet. I'm under contract for a 44, but that closes in like 90 days.

Yeah. So 37 units. If we had, let's just say 14 of those and we had 500 units, that's a lot of properties to manage. Now, if we had 70-unit buildings, because there's a handful of those and there's— they're building a bunch more. There's a 75-unit that's getting built right now. There's 96 in town. There's a 218. If we own stuff like that and then Pioneer Meadows at 181, maybe we just had 4 properties. Then I'd love to own 500 units in that area, but it's not feasible to, to manage that amount of properties in that area without directly competing with ourself. For that type of inventory because the people living in small apartment complexes would be applying to all of our buildings. We have to shuffle. Well, we need to fill this building, we need to fill this one. It's a conflict of interest amongst our own assets. Mm-hmm.

What we would do is we would buy some nicer buildings. So we buy some Class A and mix that in there. There's some actually some quite nice RV parks and stuff where— yeah, that is a different tenant than what we currently have inventory. So we can still expand there. But if you just have— if you dilute the market and you are just competing against yourself, that's usually against your best interest. Um, so we'd go ahead and do that a little bit differently. No one investing in Miami, uh, secondary? Yeah, um, we actually do have a lot of Florida investors in Multifamily Strategy. I've noticed we kind of have some hubs, um, New York, New Jersey, Florida, Texas, a lot of people out of California. And then naturally, because Cody and I are both from Washington State, we do have a good concentration there. But we do a lot just around the, uh, the outside of the country. If we do the Northeast, Southeast, Southwest, Northwest, we have a lot of hubs. So there are people in Multicounty Strategy. We have a free Facebook page if you want to network with some people. If you just post who who's looking to Miami there. That is on Facebook, um, just look for Multifamily Strategy. Um, I audit everyone in that group, so if you put in a submission, I'll read that and, uh, allow you access.

I like the next question.

I've got an answer for that. Oh good, I'll ask you the question then. Oh, with you guys having so much success, what has been a recent thing that you've learned to implement in your business strategies? That's a great question.

Yeah, absolutely. Take some chips off the table. Christian has done that. I've done that recently. I'm doing more of that. So is Christian. If you have a chance to get a win, even if it takes your portfolio back a little bit, take it, because you can rebuild if you know what you're doing, if you have the skill set.

Huzzah! And we're back. Sorry about that, phone call came in and disrupted us. Uh, Cody, you were right in the middle of a fantastic point.

Take chips off the table. I've done that. Um, everybody here knows about MFS, right? Yes. Okay, yeah, Christian bought me out of MFS. I needed money and he wanted total control of the business and we've taken it pretty far together. So he ended up buying me out. I then bought him out of some real estate and now I'm getting bought out of some real estate and we're going to reroll and buy bigger stuff. You need to get some wins, even if you pay taxes. Like if you got to pay the taxes, pay the taxes, get your wins, actually realize it. So it's not just paper net worth, paper this, paper that. Put some paper in your bank account. And when you can get a win, you should take a win. You don't have to hold everything forever, but you do have to figure out how do I buy it and how do I never lose it. And not losing it is not the same as giving up some pieces for a win.

How do you prevent an equity partner from stealing your deal or property? What kind of return on investment Is an equity partner typically getting, uh, I know it varies, and that is the correct answer. It does vary completely on your deal. Deal debt equity, equity is last. So once you've already figured out the opportunity and the debt stack, you're going to customize the last piece if you need more money, is the equity piece. So it's going to be the most custom. So typical returns is hard to answer. I've noticed something that we've done pretty frequently is if it's a 5-year exit, a lot of people are happy with doubling their money in 5 years. So if you're looking for super loose terms We do something like that a lot. So it's a shorter period of time, it's going to be less than double. If there's more cash flow, there'll be a lower buyout. So it depends on how much cash flow you're giving them regularly and how much you're multiplying their equity. So there is a little bit there. As far as how you prevent them from stealing your deal or property, depends how the contract's written.

Yeah, if we put the contract as Cody Davis and/or assigns Christian doesn't have right to the contract. He's going off the trust. We've done that many, many times.

Yeah, both ways. I'll throw it on a contract, he'll throw it on a contract.

Yeah.

And we've earned that trust.

We've done some deals on trust. But if you are doing that for the first time with someone, you got an equity partner, you probably shouldn't let them write it up in their name and/or assigns. You might want to do it in your name and/or assigns so you have rights to that contract. Now, if they're Once you have that equity partner lined up and you get the LLC put together, you could put it in the contract into the name of the LLC, and the LLC operating agreement will spell out who has the rights to do what. So even if Christian and I didn't have trust, if I was the managing member and I had the sole right to sign to that deal, he can't assign that contract to someone else without my consent. It depends on what the operating agreement says and what the LLC is.

What the ownership is.

But if it's just in Christian's name, he can do what he wants. He can say, I want to do this by myself, and then we'd probably be upset. But that's the name of the game.

Who has the control? When we're bringing on equity partners, so say you have like a third-party partner, we control that contract. So we control that contract until the final assignment, which is into an LLC, which we're the managing member of. In an LLC, once you've actually started, how do you keep a partner from sabotaging the company though? We've had that happen on the deal where a partner legitimately— and I can't—

we can't name names because we signed that we wouldn't, but they're a meanie head.

We have had partnership disputes with partners where they have intentionally tried to damage the LLC. And they did. And they did financially damage the LLC. And that is handled on your operating agreement in partnership disputes.

You have—

we do it in 3 parts. One, written statement that says, this is what I disagree on or what my problem is with the LLC, and this is what I would like resolved, which the other party has 30 days to resolve. So you have an obligation to solve it internally without involving lawyers. Then you go to a mediation, which is where we ended up solving our, our major dispute, which is— it's still very expensive. I think we spent about $25,000 in legal fees.

Um, oh, it was more than that. No, that was the final bill after we already spent $15,000.

Oh, there we go. So we spent about $40,000 in legal fees on a little 7-plex. A shame. Yeah, on a little deal. Uh, that was a bummer. Now fortunately that deal made a lot more than that, and so we did sell the asset. It did, you know, we— everyone had a profitable exit.

Very.

But the partner attempted to kill all the profitability for really nothing. Um, you can't prevent everything, but a good operating agreement protected us from having to go to arbitration, which would have cost six figures, possibly multiple six figures. As opposed to $40,000 of total damages split between Cody and I. Is it a bummer? Yes. Can you protect yourself from everything? Absolutely not. But the operating agreement protects you once you are established in your LLC. And prior to that, you should be the one controlling your contract. We have 1 minute before we start mentorship, by the way.

So let's take one last question. Oh my.

Just scroll back. I'm just going to, I'm just going to click one and I hope it's not a spammy weird one that we sometimes get. Okay, this is a very good question. What is the best way to encourage a seller to finance a smaller portion of a deal in order to secure SBA financing for the remainder? So essentially the question is really, how do you convince a seller to take a small amount of seller financing in second position if there is first position debt?

Yeah, I mean, the, the main thing— there's 3 pieces when you raise money from anybody, debt or equity. Where's the money going? What's the stability? What backs it? And how are they getting paid? Now, the more someone finances, the more risk they have, the more exposure they have to that deal. If they're financing a minority position, that means they're getting a bunch of money upfront. Now, as far as the money goes, where is it going? Well, it's just being backed by whatever they're selling you— property, business. So they know where it's going to lie, where the debt's going to be, because they own it already. They know if it's stable or not. If they're trying to scam you, they probably won't sell or finance because they know it's not very stable. Accurate fact. And how are they getting paid back? Again, this is an easy slam dunk because they already own what's going to pay them. They don't expect you to pay them. They expect you to operate the thing that will pay them. So the less they finance, if they're financing in second, that could be less risky to them than if they finance 90% in first. If you do a million-dollar deal, maybe they're financing 10% in second position. They're getting $900,000 less their closing fees upfront. They have very little basis left in that deal. And as far as it going in second goes, it's only really going to matter if they don't think it's worth what they're selling you for. If they think it's worth $800,000 and they're the debt piece that goes to the million, then yeah, they're probably not going to do it. But if they think it's actually worth what they're selling it to you for, then they have the collateral.

Yeah. And we now have to start our mentorship call. So those on the mentorship, you guys are watching, we'll see you on the Multifamily Strategy Mentorship. Those who want to join, go to multifamilystrategy.com, register there, and we'll see you guys on another live shortly. That's pretty good.