Exactly how to raise private capital - How to buy real estate $0 down

Hello, YouTube. It's Christian. This is Cody. We are back. We're actually at the Robin Hood, our seller finance resort today.

Welcome to the channel.

Yes, welcome to the channel. Like and subscribe. We're here today to talk about raising private capital.

We actually raised $1 million of private capital for this particular transaction that we're sitting in right now as a JV, not doing any special syndication, not just borrowing the money from some rich person. It's— we brought in actual private money from a private lender and private lenders, by the way, If you don't know who they are, they're just people. So we want to help simplify that for you today because we couldn't have done this deal without our private capital source. Yep.

So I don't think we can go into private capital without first talking about deal debt equity. We say this all the time on our channel. This is the correct order to do things. Now, you brought up syndication. One of the reasons we don't do that is because they start with the debt and the equity piece. They start raising capital, they start finding limited partners. And often they do that before they have any deal. I've actually heard a lot of them recommend, well, pitch a fictitious deal and then find a similar deal and put them in it. That is not at all how we operate. Cody, open up deal debt equity for us.

Yeah. So, I mean, the most important thing is you got to find a property, an opportunity that you want to buy. That is the deal. And without this, there's no reason to go find debt. There's no reason to go find equity, meaning just cash. If you don't have a deal, there's no reason to go into debt. You shouldn't go into debt to buy a car. You shouldn't just go into debt to purchase an airplane. You shouldn't go into debt to buy liabilities. But what we do is we go into debt to buy assets that can then pay for themselves. We get the real estate to buy the real estate. However, most people structure it where they try and get the money first. Maybe they try and save up or they go get the down payment. Then they try and get pre-approved and then they go find a deal. And that is Exactly the opposite of what we want to do.

So really quickly, define an asset because the debt's a liability. If you start with a liability, that doesn't make a lot of sense. What is an asset? What are we defining as an asset?

Well, an asset is something that puts money into your pocket every month that can pay you not only today but into the future. If it makes money today, if it doesn't make money down the road, I don't want it. I don't want to have to go into something and have to sell it down the road. Therefore, I don't view a house just a— and this is very much so a Robert Kiyosaki mode of thinking, but I don't look at flipping houses as a good venture to pursue. I want something that will pay me every single month because the debt is a liability. However, the asset is the ability to take something and bring in income. So we go out, we find something that can produce money. Now we can go line up the correct debt that can get serviced by that property specifically. We're not just going to get some blanket product that could work over there, maybe not over here. We want to get specific debt for that property, which is usually seller finance. By usually, I mean always. And then we have to go find the down payment. But the down payment doesn't matter if we don't have the debt, and the debt doesn't matter if we don't have the deal.

So on the assets that we're buying, when you're finding that deal, would that make a cash negative deal? Also a liability?

A cash negative deal, that could definitely be a liability day one. Our 38-plex, which has made us more money than any single deal has to date— I think the Robinhood is going to trump that. However, that deal was losing money even if we owned it outright. There's no debt product that we could get that would make that profitable because the actual asset lost money for the current owners. It was bad.

That's what you call a negative cap rate, a rare but painful situation.

Yeah. And you can do that all the time on acquisitions. It's a very painful place to be. So that puts us where the liability outweighs the actual asset, because it can't produce income in excess of the operating expenses. However, you could go into that and get the income up. There's ways to make money in real estate when you're leveraging. You can either borrow less money to increase cash flow, you can borrow cheaper money to increase cash flow, you can increase income, or you can decrease expenses, or a combination of all of those. And in that case, we had to increase the income and make it a positive cash-flowing asset. You have cash flow and you have cash burn, and you want to make sure that you have positive cash flow. That'll make it a lot easier to come up with debt.

So your deal for this first part of the equation is essentially just the package of what am I looking at today? It's one set of math, one set of numbers. This is what I am buying today. Now, if it's making cash flow day one, congratulations, you bought an asset. If it's losing money, well, you're starting with a liability. And if you're using debt, you're buying a liability with more liabilities. So you need a conservative second set of math. Where are we bringing this property and what is the timeline to do so? If we have a clear path like we did on the 38 for, okay, we're buying it in this condition and this is exactly what we're doing on extremely conservative numbers to get it to where we need to be. Well, okay, that's the deal. So that is what you're doing with the deal is how am I going to use debt and equity to purchase an asset? And how is this asset going to fit our definition of asset, which is positive income that will pay you forever? How do you own it? How do you never lose it? If you can answer those two questions and it makes money the entire time you haven't lost it, congratulations, you have figured out a deal. Now let's talk about debt, because debt comes before we figure out equity. What do we do with debt?

Well, we use debt. That's the big portion of our purchases because we're doing usually high leverage on the actual acquisition. That's the big piece of the money equation. We want to borrow as much as we can at little interest rates as possible that allows us to cash flow. And we want as long-term money as we can. Now, with seller financing, it's a promissory note and a deed of trust. You can also do a real estate contract. That's going to be a little bit different. But a prom note and a deed of trust, one is your promise to pay, and deed of trust essentially says that they trust you're going to pay them. But you have to have contracts in place so that they don't have to trust you. So they're going to put a lien on title.. And in the event you don't pay them, they can take it back. And so they want your promise that you'll make the payments and they want to have the protection so they don't have to trust you.

Perfect. Now, that's pretty simple. It hits your cash flow. It's usually done in a monthly payment, almost always. I mean, there's other ways you can negotiate it in creative finance, whatever you make up. So you could have deferred payments till the end of the whatever balloon you negotiate. You could do it quarterly, but generally speaking, Debt is going to be a monthly payment on money that you've borrowed to a certain percent that you've negotiated. Now, if you have a deal that doesn't have enough cash flow to support that debt, that does not mean that your deal is dead in the water. Because remember, a deal is anything that could be made into an asset by your conservative math. If you are in a situation where there's not enough day one upside, we look at equity.

Yep. And equity is the cash that you bring in Equity, just cash, doesn't have a loan payment. It can have a preferred return if you're doing some creative structures or you're doing something with a syndication, but we're not doing that. Preferred return is great. However, there's no loan. If they're bringing in as a partner or it's just your cash, if there's no dividends, there's no dividends. If it's a loan, you have to make your payment or the lender forecloses. And so there's different structures where you can do it as debt. I've done deals with 100% debt. I've had other deals that didn't cash flow as much, no dividends to pay pay out, so I wanted to structure it as equity so I wasn't cash flow negative. And all that said, you can get really creative with the structures. Christian turned his house from a liability into an asset. He bought his house, which was a liability in one because it cost money to upkeep, doesn't produce income. He bought that with a liability, a debt product. He got it with a loan, so he bought a liability with a loan. Yep. However, he borrowed a second mortgage, a HELOC against that, invested into a deal that cash flows $10,000 a month. Ta-da! He gets 5 of that, And that pays for his living situation. So he turned his liability that he bought with more liabilities, borrowed more against it, and used that money to go buy an income-producing asset that takes care of his complete housing situation.

Now, very quick sidebar. When you're using debt, don't leverage anything you're not willing to lose. That's a principle that we have. I am actually willing to lose my little house in Renton to build what we've built. What we've done is very cool. Over 100 multifamily units. We're sitting in a— what now that we've expanded the campus with another acquisition, 12 acres.

Yeah, $6 million resort.

Now that we've got that place over there, we're getting to do stuff that no one realistically gets to do, especially at our age. And I am definitely willing to risk my house on that. However, if that's not you, if your only goal was like, hey, I want to own my house, I want to hold this, I would eliminate debt on that asset. I would not re-lever it unless that's exactly what you want to do and you're willing to lose it. You want to sidebar that really quick. However, if you are willing to set your goal and stick to it, then 110%. You can leverage your house or anything else.

And as a best practice, always get as long-term debt as possible. We've talked about balloons on the channel. You don't want stuff blowing up on you. We want to stretch out our payments as long as physically possible. 30-year, 40-year, 50-year if you can get that far. My longest is 30-year with no balloon. But we want stuff that'll pay itself off over the long term so we don't have a huge balloon pop on us and we owe $1 million tomorrow. You don't want to have a whole bunch of money have to transfer really quick because when money has to transfer quick, usually that indicates stress and there's a reason for that.

Now we're in the process of refinancing that 38 that we talked about. Yep. And we're doing that almost exactly at the 1-year anniversary. We have a 5-year note. I'm so much more comfortable that we have a 5-year note because what if something went wrong? We still have 4 more years to figure it out. We've proven that we can figure it out in 1.

Excellent.

Just don't roll the dice. If you can negotiate a 7-year balloon or a 10-year balloon or a 30 or just what we had a couple of people negotiate a 45, the farther you can kick that out, the better. It doesn't mean that you're not going to refinance or pay it off before that. However, why increase your risk? So that's a huge piece of using debt. With equity, the biggest piece I'm going to give you guys is Don't partner with a ton of people.

You can't do a good deal with a bad partner. We've talked about that on the channel. That is one of our principles.

Every time you bring a new person in, it adds a complication. You picture it all as just statistics. So I'm going to say I have a handful of dice. These are all investors that I can work with. Now, as I've done more deals with them, I've revealed more sides of that dice. I know when I've worked with the same person 5 times, it's always been good. I keep rolling and rolling. I'm like, wow, Every face on this dice is a 6, assuming that a high roll is a good thing. Yeah, you never know. I'm a board game guy. Sometimes it depends on the rules, but in this case, we're gonna say 6 is the preferable outcome. If I keep getting all 6s, I'm gonna say that I want to keep working with that individual.

Yeah, initial seed.

But you take another— you take a whole nother bunch of dice, and okay, I raised a whole bunch of capital with 7 other partners. What are the odds that one of those are gonna come up 1? You don't know every face of that dice. I hope this analogy makes sense. It makes sense in my head. But every time you roll the dice on an individual, the less you know, the more risk you have. And the more people you introduce, the more variables you have. You do not want variables. I say that all the time on this channel. I hate variables. It's the one thing in real estate that can blow you up, is the thing you didn't see or didn't anticipate or didn't count on. So when using capital partners and you're giving them ownership in your deal, You need to make sure that is someone you trust, someone that you're willing to work with in the long term, even if you have a 1-year termination of your agreement. Say we have a buyout agreement we're going to do in a year. Yep. I'm not going to do that with anyone who I'm not okay with staying on that for 5 years, 10 years. If something goes wrong, I want someone who I want to stick this deal out with and get it figured out with.

Yep. Hence Christian and I are partnered on everything. Yep. Except for duplex and 12-plex.

And we have very few other capital partners.

Yeah. So that said, keep it simple, manage your debt properly, manage your equity partners if you're going to even use equity partners properly, and start with the deal first. Because without a deal, the rest doesn't matter.

I'm going to add one more piece to this because what we're talking about today is raising private capital and deal debt equity. That is the formula. That's what you need to worry about when you are raising private capital. Cody, where do you actually go to find that capital? That's a question we get a lot. I feel like we should address it here.

Yeah. So only from people I built established relationships with, number one. And two, I don't do any advertising online. Like people that I meet with, this is why I put the relationship first. People that I build friendships with, become business partners with, they're people I've talked to for a long time. I don't solicit for money. I don't recommend people solicit for money. If you do, you're gonna have to go figure out all your regulations. It's the reason I don't do it. I don't want to have to worry about all that. I just, I'm not smart enough to keep it all in my head. I have a hard time remembering what we're doing anyway.

And I'm too busy with all the other stuff we're doing to remember all those.

Yeah, so I go out and I just build relationships with people that are in the space. And as they become friends, as we start building out the network that way and people start to really know who I am, I know who they are. If I need money, I just call them up. We go grab coffee and we get the deal done. But it's nothing special. It's just people that I have built the relationship with. Some of them are just property owners, but it's super simple. I'm not advertising for it. I'm not going out and going crazy looking for people. I'm just— as I meet people in the space, I start learning about their story. And if there's ever a time that I need help, I call them up and they're more often than not willing to do it.

And when you are playing the relationship game and everything is based on established relationships, there's two primary ways you're going to bring up that conversation. If you want to partner with someone on a deal and you haven't partnered before, and someone who you really think is the right person to work with, you can do one of two things is what we typically do. One, you can just ask them to analyze the deal with you. If you know it's a good fit for them, they're probably going to see that and identify that while they're helping you put it together. That's one of the cleanest and easiest authentic ways to build a relationship. If you're newer to the game, this is one of your first deals, Go to an experienced investor you want to work with. Hey, I think I found an opportunity that's exactly like what you described I should be looking for. Would you be willing to look at this deal with me? Either they're going to help you put it together, they're going to show you a reason why it's not a good deal, or they might be your capital partner. Another great way to do it is if you've met with them several times, you clearly know their goals, you can be a little bit more straightforward and just tell them, hey, I found an opportunity. I am completely sold on it. Based on our last conversation, you'd mentioned this and I think this is the deal that's going to do it for you. Can we meet up? Either way, meet in person. That is the key.

Yeah. And when all that's lined up, you send everything to your attorney, they get it all drafted up. Are you going to spend some money on that? Yeah, it's going to cost you a lot more money if you don't do that, though. Always get great legal counsel. Make sure the people that are helping you out have been there, done that before. You don't want someone that's new on the team. It's fun to work with friends, but it's It's a lot smarter to work with competent people that actually know what they're doing. And that's it.

That's all I have for today. Thank you guys for watching. I appreciate it. Welcome back to the Robinhood. We'll be filming here again, I'm sure, sometime tomorrow for Saturday's post. But it is actually this simple, like this 15-minute video, which is long for us. This is 100% of what we do for capital. Deal debt equity and don't violate principles. Ta-da!