Fixing your real estate problems RIGHT NOW - Live

All right, and like that, we're live. Hello, welcome back. Earlier had the camera die on me. Looks like we had an overheating problem, but we are back. We are here, and I'm excited to share this with you. So usually we go live every Wednesday, 3 o'clock, answering your questions. Just got out of the mentorship group earlier this morning, and I realized we've never really shared this on the channel. Sometimes you run into major problems with your deals. There's 3 or 4 examples that I wanted to use here. So So I'm gonna go live here instead of trying to film and edit a whole video on how to do this and just share exactly what's happened on some of our deals, what went wrong, where we lost money, and where you can actually save some money by doing this right and doing it better than I did. So with a working camera and working audio, here we go. By the way, on the last live, we had some feedback that the new mic had some issues. So please let me know if this sounds good or if we need to do a new setup here. All right. So deal number 1, 38-unit. I started sharing this before the camera died last time, but we bought a deal where we didn't raise enough capital upfront. We thought we could do it out of cash flow. It turns out we couldn't finish our deal out of cash flow. So we did our very best, but what we did is we structured the deal this way. $2 million, $300,000 needed to close. We had about $300,000 in reno. What did we do? We raised $300,000 to close the deal. We bought it and we went, now, you know what? We could have a couple problems. We could not own the real estate or we could own the real estate and then address all the issues. We opted for the one where we buy. We should have raised $600,000. We didn't. The answer was a simple one here. If you need new capital and you've improved a property, the obvious answer is cash out refinance, finish the project. Problem is, not every partner there qualified for the loan. Not every partner there wanted to do that strategy. So when we went ahead and put this together, what ended up happening is no one contributed the darn money, or they let us know, hey, this isn't something that I'm capable of doing. So we're stuck. We have a project here where we need another $300,000 to unlock the next $2 million in equity. We need to do a refi, but we can't knock it out. Well, there's a few resources, and this is going to solve most of your real estate problems. Real estate plays exactly like a board game. Here are your pieces. You have cash, you have cash flow, you have equity. You want to keep all those in balance as you move through real estate. But if you start with no money, you obviously don't start with every resource. You start with what you have and you build your resources. Just like any game you've ever played. So when we put this together, we lack the amount of cash that we need and we don't have the ability to get new debt right now. What is the solution? How do we manage this? Well, what we ended up doing is we bought the partners out with a note. So we got the cash flow up on the property but didn't have enough cash flow to finish our projects. Now you need to finish your projects because vacancy will absolutely destroy you. So to get a bank loan, what we ended up doing is we bought out the partners. We structured as a 2-to-1 in 5 years. Here's the other problem with the deal. 2-to-1 in 5 years. They all put in $100,000. They all own 20% of the deal individually. And what ended up happening is we were in a position where these people all had equity in the deal. They had to be bought out, but the only cost to buy them out is within the next 5 years, double their money. Well, we didn't have $600,000 available. In fact, we had no dollars available. How did we do it? With the new cash flow, we converted the equity into debt. The other owners seller-financed their equity to us. Instead of buying them out for $200,000 in 5 years, we wrote a 3-year note at $150,000 each, which means they got paid sooner. It's a higher payout if you adjust for time because they also got 10% interest. We use the cash flow to give them a better deal to get control now, and we went ahead and went through with the bank refi. What this allowed us to do in the future was put together a— well, again, we had a full bank refinance. We got the other $2 million of equity after we bought everyone else out, and everyone else was made whole. We owned 100% of our deal. We fixed the deal through a simple restructure. We had to renegotiate with the partners, then bank refinance. Problem solved. Another issue— this is one that's come up, this is a deal that could happen to you— we had a 7-plex in Seattle. We had a partner who did not want to contribute any capital, even though they had agreed to contribute capital. We had a partner who did not want to contribute any capital, did not want to finish the projects, but wanted us to keep it fully occupied because I agreed to manage the property at a ridiculous discount. I was managing a 7-plex for $300 a month. He wanted Cody and I to pay him rent for every month the building was vacant. I actually got a demand letter saying I want to be compensated for the vacant units that I am refusing to provide capital for. It was as bad as he actually applied for a credit card to get capital in, and he applied with my home address. So I actually got the rejection letter for him that said, you don't qualify, you have too many lines of credit, we're not allowing you to borrow more money. So we had a broke partner who absolutely— oh, thank you, good to know. Sounds like the mic is actually sounding pretty good. That makes me very happy. Good, we fixed the problem. Yesterday it was awful. It was echoey and it was garbage. So what we ended up doing with that partner, and this is sometimes what you have to do with the deal, we always buy them where you, how do I buy it? How do I never lose it? We never want to lose a deal. What we ended up doing was saying, hey, you know what? It's not working. What if we offload the property? First property we've ever sold. We bought it for $1.1 million. We sold for $1.375 million. So we had profit. Even with the 2 vacancies in there, it cash flowed the entire time. So we got paid to hold it, we got paid to get through a painful partnership, and we went ahead and everyone successfully exited. So while I would still call the project a failure, this is a piece of real estate that we could have held for a long time and made a lot more money on— a lot more money if we finished the projects. We all got paid to walk away. It was overall a win, but it was a painful win. And I made another mistake in there, which you guys can avoid easily. The person that we partnered with was a childhood friend. I've known them for about 20 years now. That relationship is pretty much over because they're frustrated that I didn't pay to fix all their problems and that I didn't pay them rent for vacant units, which is really weird, but that's where we're at. One more quick tip on this. We put together, uh, in every operating agreement you need to have what happens if there is a disagreement. We protected ourselves well here, and I'm grateful we did. They actually sent a letter from their lawyer for arbitration. They wanted to go to court to try to get me to pay them rent for units they refused in writing to renovate. Since we didn't want to do that, uh, we have a nice little thing that says, hey, first you have an obligation to come together and figure it out as a group. And if that doesn't work, you need to write an official letter in which we have 30 days to respond of, here are my exact complaints of what I want resolved and why they're not getting resolved. If our response is not satisfactory, you can do mediation, which by the way was not done in the state that they live in. If we get through mediation and there is no solution, or a partner refuses mediation, we can't get there, then you can do arbitration, which is very expensive. Make sure that if you have these deals and you have an actual issue that you put in your operating agreement what happens when all the partners don't agree. That saved us a lot of pain. And that gave us time to actually get through the deal and just get everyone paid. So failed partnership, people are going to be one of your biggest variables. So something to look out for. Moving on to the big one, Robin Hood Village Resort. We bought an awesome resort and it makes money and it does really well and it's super fun and it is not our business. We are multifamily value-add people who rock at entry-level housing. We do what's called functional flipping. So instead of seeing these grand HGTV things, we come in with simple flooring, simple paint schemes, good counters, good appliances, and we can rent units that are way nicer than the properties around them for slightly less rent than the crappy landlords who rent a lot of the junky entry-level housing. We actually get these nice spaces and we get them on market for $50 to $100 under market rent. So we can actually just keep these things occupied, keep happy tenants. We actually get to like serve a really good purpose and it's rewarding. However, the Robin Hood Village Resort is not that waterfront individual cabins and hot tubs. Each space is unique. Tons of marketing events, weddings, concerts. None of that is our brand, so I don't have the players for it. So we made two critical mistakes here. Wrong team. I took my multifamily team and said, hey guys, we should do this. And turns out no one's great hospitality on my team. I had the wonder. I was just wondering like, why is everything not working? Wrong players, great players, great team members, wrong game. No one knows how to play this game. Built the wrong team. The other problem is that we wrote the debt, which made sense at the time in a way where it pays itself off almost in full over the 8-year note. End of every year, we have a large chunk of principal, multiple six figures of principal that gets paid down. Problem is we didn't factor for what we really wanted to do with the resort. What we want to do is invest in it. We want to do amazing landscaping, want to replace some roofs. We want to redo some of the interiors that are dated. They're beautiful, but they're dated. We want to make things better, but the principal paydown drains the money out of it. Now, will we own this thing free and clear, like a $6 million resort, a few years? Yeah, that's awesome, but it doesn't help while you're trying to grow a business. The debt product doesn't match the project, which is a huge problem, and a lot of people find themselves there. Now, we don't have the exact solution here, but something that you can do and something I've become made aware of during this is if you have the wrong structure and the wrong team, you can build the right team and you can go buy the deal from yourself again. Something that we've entertained doing if you want a new debt product It's called a recapitalization. No one told us about this. Come in and just recapitalize. New debt product that matches what you're trying to do. New team of operators who want to do the thing, which in this case is run a resort and the events and all the things that go with that. And you can just come on in and build the business that you wish you built from the beginning. Viable option, legitimate solution. I have a question here in the chat. Uh, can you use cash flow from one property with partners to fix on other properties with separate set of partners? How would you do this? Yes. Uh, you're going to do an owner contribution. So if you have a property that's just cash flowing really well, or you can do a cash-out event, obviously the partners who are not on the other project, you don't want to put their money into that deal. So what you do is an owner distribution. So say I own a property 50/50, I can cash out a million dollars right now with a refi. One partner will get his $500,000, I'll get my $500,000, then I can do— so that's an owner distribution. Now it is my money, and that's a taxable event, that's income. Now I can contribute that money to the other LLC and fix the problems over there. So yes, but it needs to flow through accounts legally. The other way that you can do this as you get larger, I would not start here because it's a waste of time, but as you get a little bit larger and a little bit farther through your career, what you can do is you can go ahead and take the actual, um, you can take the ownership of all your LLCs and put it into a holding company. So that you don't have to actually pay yourself. I can have the same company, especially when I own a bunch of stuff 50/50 with Cody. The LLCs, the vesting is that same owner, so I can move money from the same account and service multiple different buildings and projects because my portion of the partnership is covered in the same LLC. For example, if my holding company owned 50% of the Robinhood and it owned 40% of the, uh, a 12-plex and 50% of a 38-plex. I can contribute in proportion to my ownership out of the account of the holding company. All that money is pooled and can be distributed to the things that I owe. Those are multiple ways to solve the problem. Don't worry about your entity structure a ton when you're buying. It's way more important to buy real estate and figure out the entity structures later. I've seen a lot of people try to optimize it, get in their head. Hey, I want it to look this way, or I saw the legal structure that was perfect. It's like, don't do asset protection and a bunch of crazy strategy things before you buy the darn real estate. Again, this is a board game. You start by getting pieces on the board, and then you can build your strategy and your structure as you get more resources. And as a recap, your resources available to you are going to be cash, cash flow, and equity. Equity appreciates over time. It allows you to get more and more cash flow. Equity is amazing, it's a great place to park money, it has some huge tax benefits. However, you need to have liquidity to get through the projects, and you need to have cash flow to continue to service all of your ongoing expenses. When those things are out of alignment, business is hard, which is why it's really hard to get started with no money. You can do it, we did it, but you need to get a solution to get your resources in line. So what do you do on these deals? So we, we've mentioned a few structural problems. We have one where we didn't raise enough capital on the front end, and the solution was to have our partners seller finance their equity to us when we got cash flow up and do a refi. We've had the wrong partner, which while we buy every building where we can own it, never lose it, we failed that technically because we got the wrong partnership and that variable killed the viability of our deal. So had to sell the building. That was a solution. We have— I've had a few projects like this. The Robin Hood is an example, but we've had deals where it's like we want to do a bigger project. We want to build another building on the land there. Something has changed where we have a new plan. You can do a recapitalization where you essentially would come in, form a new team, and buy the deal from your existing partnership to get a whole new set of debt, a whole new set of team members to do a new project. There's a lot of different ins and outs to this. The goal of this and why I decided to go live today instead of editing a whole video and doing all that, I'm excited about the topic. And I really liked the way our mentorship call went today, which by the way, we do those 3 times a week, multifamilystrategy.com, you can check it out. But we came in and we talked about, hey, these are legitimate problems. And I realized how much darn money and time Cody and I spent trying to learn how to play the game better and learn how to play it correctly. You don't have to go through that same amount of pain to make your deal work. You just need to understand what levers you can pull. So I'm going to end on this. What do you do when the problems come up? What are the actual action steps? Here's how we figured out everything. Coffee meetings. We talk about this all the time on the channel. You sit down for coffee with your partners. Cody and I do this all the time. You lay out what is going right here and what do we not want to disturb. It's nice to start on a positive note too. It's like, okay, what did we do right? If we have something that's not going the way we want it to, we go, what did we do wrong and how would we have prevented it? Because that's really good to identify. And now let's go work on solutions. What is the actual problem? Do we not have enough cash? Do we not have enough cash flow? Do we have an upset partner? Do we want to do a different project than we originally did? What went wrong? And what do we want to fix? Then you need to break down what are possible solutions to each piece. We could buy the partners out, we could have someone else buy into the LLC, which would be another way to recapitalize. What do we actually want to do to put together the deal to make it look the way that we want? Once you have that, you come in with an action plan for, okay, if we can get this and this and this together, we basically can restructure the deal and and have the deal that we wanted to have? Or is it something where we need to exit and then we need to come up with a plan of how do we profitably exit the property? What renovations need to be done? What projects are we handing to the next person? How are we going to frame this? Those are all things that you need to ask. What I see too many people do, and this is the goal of this, uh, of this whole live here, what I see people do is I see them panic. I see them fire sell. I see them call investors with no plan, say, hey, we're having problems, we don't know what to do. Take a step back, sit down with a peer, or even better, sit down with a mentor in your market who've gone through some of these problems and just learn how to address them. Come up with a game plan, and that's where you call your partners and say, here's where we're at. There is a problem, and this is the problem, and I have one or two possible solutions. This is what I would like to do, but this is something that we can get through. And what I found consistently is when we call a partner, or when I see a mentee or friend run into difficulties, when they come in with, here's a problem and here's a plan, people don't stress out as much. Nothing's ever as bad as you think. There's almost always a way through everything. It just takes a little bit of planning. You just need to know which levers to pull. So if this is something that you're stuck on or you have a deal where you're like, oh my gosh, my deal feels impossible, we've had that happen and we have never had a deal lose money ever. Like, the deals always work. Sometimes you do need to move your pieces around and you need to restructure. It is totally fine. I will answer a couple questions from the chat. This is an impromptu live, not the normal time we go live. So if you're expecting our normal Wednesday live at 3 PM Pacific, you might find this video later and go, oh, I missed it. Not your fault. I will answer a couple questions from the chat and then we'll call it a day. Do you have any hard rules on investing with friends and family? Yes. Do you like sticking with higher net worth investors that could weather writing off the investment loss? I'm going to answer the first one while I think about the second one. Investing with family, that one deal that failed is the only deal that we invested with a friend. And granted, there's $50,000 down for $1.1 million in real estate, insanely low down. So please, YouTube, don't blow me up with the comments of like, oh, you guys started with family and friend money, you're all rich. We all figured out how to scrape together. I owned 30% of that deal, so I figured out how to scrape together like $20,000 of my own, less than that. And Cody put in like 10-ish, the other partner brought in 25, and we closed the deal. It was super, super simple, very, very cheap buy-in as far as buying a multifamily property in Seattle. We knocked out that deal. And that partner was a nightmare. And the seller finance, the one holding the contract, that was the only time I've ever had a contract held with someone who I knew previously before I got into real estate. And it was awful. They did not know how to read a note. They didn't know how to read a deed of trust. They didn't understand how the game was played. And they thought for some reason that because they're seller financing, they still get to choose how the building's operated. They ran that place into the ground. The roofs had failed, the water heaters had failed, things were miswired, things were misplumbed. We fixed all the problems and they didn't like the way that we fixed it and wished that we just left it as a slum. It was frustrating the entire time. We hated the project. It was really— it just was not fun. So, um, never doing that again. Don't invest with friends, don't invest with family. It's also way too easy to find money for a great deal. Just start deal, then find the debt and equity and make sure that you, you know, Not family or existing friends. When you introduce money into a relationship, it changes it. Could be positive, could be negative. But if you have relationships that you don't want to change, don't introduce money. Do I like sticking with higher net worth investors? I do, but not insanely high net worth. You don't want to partner with people who can afford to bury you. If someone— and I've seen this happen many times— if we actually had a pair of mentees, I won't name them because it hasn't all gone live, but they, they went ahead and partnered with Grant Cardone on the deal. Grant reneged on his agreement there. Well, not reneged, he decided not to do the deal, but they put together a contract that specifically stated that they can't go find other debt. And that is a huge bummer. When they reached out, because Grant backed out of the deal, they reached out and said, hey, uh, can we go ahead and get permission to find a new investor? Grant's team just said no and then put him in contact with their lawyers. The investor was too big. You can't afford to sue him. You can't contact him because he's too big. He doesn't care about your little deal. Not his fault, just he kind of has bigger things going on. Wrong partner for the deal. Grant Cardone was not the one to fund their little deal. Fell apart. Legal had to get involved because the seller was very upset. And that's how the deal went. So I don't want really high net worth investors. I want people who are a little bit farther than me or a little bit more liquid than me, where we're all in the same general net worth area. When you're starting with no money, your investors are probably gonna have a little more money than you. I'm not recommending though that you go out and find someone worth $100 million. That would not be a best play at all. And also disclosure, We're not ragging on Grant. Grant, don't sue me. Um, the particular deal was with the Cardone Group. Grant met him, said yes, and, uh, stuck him with a contract, renegotiated their contract, and then backed out. It was a bummer. It happened. Everyone moved on. Slightly off topic, but who would reach out— who would you reach out to as a beginner to go over deals and numbers? I would find I would find a mentor, and you can look multiple ways. This is not me saying, hey, buy our mentorship, because that's, that's not at all what I'm saying. The best person to look over your deal and numbers is someone else in your market who already owns real estate, who knows the game, because they're going to know everything about your market, what you need to be looking at, things that other people, outsiders, might not know to even ask. The best thing you can do is find a mentor or a few mentors. They're not like people that you meet every week. I'm not saying a mentor like, oh my gosh, this is my life coach. It's someone who you can consistently rely on to ask questions and help you move forward. I have a few fantastic ones. My number one go-to guy when I am stuck is Lumberjack Landlord. You can find him on YouTube. His name's Matt. He's fantastic. You should have a few people like that in your corner who are a little farther than you, who can look over your deal. If you want to join a paid mentorship group to go over like general deals, of course I volunteer. We have a large leaning on creative finance though. We're just multifamily operators. I can help you play the game at any level that you are at. But another thing to look at is what mentorship groups out there, and there's a lot online. There's two things you're going to look for. One, the people you want to learn from are the people coaching the program, and that's not always the case. A lot of people will assign you to a coach. I would skip those immediately. You want to work with the person specifically who has done what you want to do. The second thing you're going to look for in any sort of mentorship group is really Is this teaching exactly what it is I want to know? I've had people take courses with creative finance where the person does a lot of creative finance. They're a master at creative finance, but when they took the course, they only talked about wholesaling and flipping. They didn't want to learn that. It was the wrong method. So find someone who's done what you want to do and is teaching the way that you want to do it. And those are the only two things that really matter in a mentorship program. Are you learning from who you want to? Oh, I guess there's 3 things. Are you learning from who you want to learn from? Are they teaching you? Have they done what you want to do? And is the thing that they've done specifically what their mentorship group is going to go over? If it has those 3 things and they're all checkmarks, that's the one that I would do. Do I have any good book recommendations or resources you use to get started? Yes. And neither of them are real estate books, which by the way, real estate books are cool. You can read them. I have found they're usually a huge hindrance because you read, this is how you do your property manager, and this is how you raise your capital, and this is— it's so much information that people just get stuck. And you read another book, and you read another book, you read another book, and then you listen to another podcast, another podcast, and podcast, and 5 years later you might own your first rental, maybe. Don't get stuck in the book thing. There's 2 books that really helped me, and they're both books on sales negotiation. One, Way of the Wolf by Jordan Belfort, and Wolf of Wall Street. Fantastic salesperson. He actually talks about the ethics in the book. So yeah, we, we've all seen the movie, we know who he is. He is amazing at selling. And when you are opening and closing a deal, the contents of that book talk about how to keep your pitch simple, how to script. I have used that for so much of my sales career, so much of my real estate career. Probably my favorite book. It is so simple and so well written. Just, this is how you sell. Excellent book, would read. The other one is on negotiation. It's by Chris Voss, very famous book. It's called Never Split the Difference. He was actually the lead negotiator for the FBI. So when you talk about negotiations, he has the qualifications. If you can apply those two things, I would say that Way of the Wolf talks about the beginning and end of close, how to open it and how to close a deal. Chris Voss talks about the middle of the deal, which is the most important piece in real estate because it's not a transactional sale where you're just going to bang out a deal every day. These are multi-month things to put together and close. The middle is a lot of it. Never Split the Difference is a great book where a lot of those principles can be related to closing real estate. Those are my two favorite books hands down on business. They're both on sales and negotiation. They're not actually on real estate. Cody has a favorite book called Deals on Wheels by Lonnie Scruggs. It's out of print, so it's ludicrously expensive, but the principles are talking about mobile home parks, which by the way, I'm getting to participate on a course with Yawn from Wally, who owns a lot of mobile home parks. We're talking about the creative finance piece of mobile home parks, but that book is what got Cody started. He took the principles that people used on small multifamily and mobile home parks and related it to larger multifamily, which is how we got started. That book is a great one on how to think creatively about contracts, and again, has principles that are going to apply all the way through your career. And that is about what I have for today. So quick emergency live. I just, I really liked what we talked about in today's mentorship call, and I wanted to share an abridged version with everyone here on YouTube. I really didn't wanna bother my editing team, change the schedule. I just said, hey, you know what? This is important. We need to share it. Anyone has any questions, let me know. I'm glad the audio's working better than yesterday. Lives will continue to get better. Thank you all for watching and supporting the channel. Like, subscribe. If you found this interesting, please share it with someone. Would love for this video to get some views because I think this saves people hundreds of thousands of dollars. So if you can help me on that mission, it's appreciated. Otherwise, I'll see you guys next Wednesday. At 3 PM Pacific Standard Time. Ty, I'll answer this question. I'll hop off too. You said, um, mentorship program times, uh, for the calls are 4 to 5 Pacific Standard Time Monday and Tuesday and 10 AM on Thursday. All calls are recorded. We have 3 different topics each week. Monday, open forum. It's like this, ask your questions, but it's live and interactive. Uh, the second thing is Deal Deep Dives. It's where the deals get done. Bring your deals, we underwrite them, we talk about how to pitch for capital. A lot of deals have been closed on that call. That's my favorite day of the week is Tuesday. Thursday is going to be a structured lesson. You guys are seeing a mini version of what we talked about today, except it's interactive and you get Q&A afterwards. That's actually, you know, a conversation and other investors. That's what you look at there. I'll answer that question because I think it deserves an answer. But other than that, we'll see you all on, uh, next Wednesday's call.