How Cody Davis MASTERED Creative Finance

All right. So earlier from Matt, we heard about the circle drill a little bit. And to break that down pretty simply, it's where you're coming from, where you're going, and what changes when you get there. That's the baseline of everything we built at Multifamily Strategy. The goal is to figure out wherever you are at, whether you are making a whole bunch of money or you're not, you can get to wherever you want to go and it all will circle around your goals because everybody's goals are going to be a little bit different. So to start this out, I want to hear some goals from folks and we're going to figure out how to get there today. Anybody brave enough to share? Okay. What's that mean? Okay. So $15,000 a month and some— I will try my best to make this legible. No promises. All right. And one thing I'd like to mention is every goal we should quantify on an annual basis. So this is $180,000 per year. We got to build to that. Who else wants to share a goal? What's that take? $18,000 a month? All right. I'm just going to write that out on an annual basis. So that's $216,000. Matt said he's going to fact-check me on everything today, so I'm going to try my best. So we have $216,000. Anybody else have another goal? $100,000 a month? All right, that's an easy one. To math. 1.2— all right. I can do some math. All right, so each of these goals has the same thing in common.. It's just going to depend on what type of deals you buy and what deals you're buying for. This are not necessarily going to be the same deals you're buying for these two. So I just want to put that out there. We're going to go over how to get to each of those today and we will come back to those. Don't let me forget. All right. So the first thing, once you've established your goal, which is the most important piece, most people don't know what they want. Once you figure out what you want, you got to figure out how to get to it. And with apartments, the reason we like multifamily above All else is there's a multiplier with a house trying to get to $1.2 million a year. Could— I mean, maybe, but that's pretty tough. With a duplex, it's about half as hard to get there. But I like apartments. And so we're going to go through the math today so we understand how it works and go through some terms. So everybody is on the same page. NOI. Is there anybody here that doesn't know what that is? Everybody knows what that is. Net operating income. What is this? Simply put, your cash flow. If it's your cash flow, if you have no debt, that's all it is. This is a dividend. It's your dividend on any asset. It could be a business. They have different terms for businesses, but for real estate, all this is, is it's your cash flow if you have no mortgage payment. Next up, we're going to go over a cap rate. Has everybody heard of this one? Cap rate is your cash-on-cash return when you pay cash. And the reason this matters is because you're paying cash for every deal you buy. It's usually just not your own money. And we're going to work through how that will actually play out in practice. If you're writing down notes, this is your dividend expressed as a percentage. That is the simplest formula or simplest definition I've ever found. Got a question? It's a 6% dividend. If you're buying, let's say you want to get to $1.2 million a year of net operating income because you got to get to net income before you get to net cash flow. You're going to borrow money. You'd have to buy a $20 million deal on a 6 cap. $20 million times 0.06 equals $1.2 million a year, $100,000 a month. And luckily it's all math. It could be a $20 million deal, it could be a $200,000 deal, it could be in Gary, Indiana, and it could be a $20,000 deal. It doesn't matter how big the deal is, but it's going to be your dividend. And there's a lot of people online that like to express this as, well, it's just your NOI divided by your purchase price, but that doesn't tell you what it means. It just shows you how to calculate it. If you don't know what it means, you don't understand the formula. And so, This is your dividend. The formula is your NOI divided by your purchase price, if you like to write it down. So if you have, let's say, $12,000 a year of net income and your purchase price is $100,000, you divide it out and you'd have a 12% CAF rate. That's the simplicity of this. Does anybody have any questions before I move on? All right. So back to the goals. If we want to get to $180,000 per year on a 6 cap, we want to get to that on net operating income. How are we going to figure out the valuation? You have to figure out the purchase price. And the reason I want to work through this before we go into the really creative finance, we got to understand the simplicity of what we're shooting for. $180,000 a year of net operating income. How would we come up with how much real estate we got to own, assuming it— divided by the cap rate. And that's going to depend on our market. Well, let's say we're doing it at a 6% cap rate, and I want this to be as involved as we can. If we're doing a 6 cap, how much real estate do we need? Who's— $3 million. How'd you do that? Okay, so we would need $3 million in property. If we're taking down notes, so that's $3 million worth of property. If that is our cash flow goal though, that means that we need to have no debt in this situation. What could that also mean? It could mean that we have $6 million in property with $3 million in debt. Could mean we have $9 million in property with $6 million in debt. What we're trying to calculate Before we get into the creative stuff, try and keep it as simple as possible. And if I ever get too complicated, please tell me, because I was told last year I did. So I'm going to try and make it simple. The reason I want to break this out is whether it's a cap rate where it's your cash-on-cash return when you pay cash, or it's your cash-on-cash return with debt. Regardless, this is how you figure out the number you're solving to. So if we want to get to $216,000, whose goal is that? Yeah, $18,000 a month. What would your number be on a 6% return? Who can do it? Israel. Okay. So if you want that $216,000 number right here, you're going to need $3.6 million in property to get that dividend per year. That could be $7.2 million in real estate with $3.6 million in debt. But you're shooting for that goal. Now, if we're in a different market where your cap rate or your cash-on-cash returns 10%, that's going to alter it. But this is how you do the math to figure out where you need to go. When Christian and I were getting started, he talked about, well, I want to get to $15,000 a month, $180,000 a year, but I'd be happy with $10,000. The magical number was $2 million. It's $2 million paying 6% is $120,000 a year, $10,000 a month. As soon as you get crystal clear on these numbers, whatever your goal is per year, you figure out how much equity you got to have. It's going to help you decide what type of deals you even want to pursue, because when you find out you can buy anything, you realize you don't have to buy everything. And it's going to help streamline the process. Like buying this place, Christian and I would have been rich faster had we not bought this. And so this is hopefully when you understand in practice, going to help you decide what to buy, what not to buy, and figure out how much equity in cash-flowing real estate you really need. Now we get to talk about creative finance, and I want to use a deal example that I just bought, and I'm trying my best to be a great artist. So this is an 8-plex. I bought this 8-plex in Ephrata, Washington. For those of you who don't know where that is, I didn't either. This is just north of George Washington. And if you don't know where that is, it's dead center between Seattle and Spokane. So I bought this 8-plex in Ephrata for $430,000. And if you say that's a really good price, I will say it was, but there's a reason it cost that. This was the price. This deal was listed on the market for a whopping 200 and something days. Everybody and their sister had seen it. Nobody wanted to buy it conventionally. It didn't make a whole lot of sense. The net income on it, if we talk about NOI, was $32,000 per year. Now, different math problem. Who can solve what the cap rate was? $2,000 a year NOI, $430,000 purchase price. It's not like it was a screaming home run deal. The reason I'm asking questions, because I don't want people to fall asleep. Divided by $430,000. Okay, so 7.4%. I'm going to trust your math because I can't do that in my head. 7.4%. Sorry. All right. So we got a 7.4% cap rate, which means what if I paid cash? Now, I put $0 into this project, yet I still paid cash. This is a weird mindset shift you have to get over. I paid cash for the deal. It just wasn't my money. When it comes to structuring deals without any of your own money, you got to know that if this is your dividend, This has to be higher than your debt cost. Has to. So if your borrowing cost is higher than 7.4%, you're going to lose money on every dollar you borrow. This is the basis for everything that we've built. I mean, even on this deal, the cap rate had to be higher than the cost of the debt. That's the baseline for everything you do. If there's only one thing you take away from today before I get super crazy, That's it. So I could borrow up to 7.4% cost of capital day one. Now, as far as structuring this, this is an average rate of return for a freighter. People want to get between 7% and 8%. It was not a screaming deal. So what I ended up doing to make it a little bit better, we've heard about seller financing. They said no seller financing available. Won't do it. Can't do it. We've got debt on it. So what did I do? I got them to seller finance. We like to do that, but it was a little different than how we did this resort. It was a little different than how we bought the white house over there. If you haven't seen it, you'll see it a little bit later today. On these deals, the sellers financed the majority of the purchase. That's typical. We get them to finance 80%, 90%. That's what everybody's looking for online to get high leverage. What I ended up doing on this deal to make this work really well for me is I said, I understand you have debt here. What if I go get a bank loan for the majority of it and the seller carries back a second mortgage? Have we all heard a second mortgage before? First, second. Do we know how that works? Basically, the number it has is the order that it would be paid off if you sold it. So if I have a first mortgage of $100,000 and a second mortgage of $50,000, If I sell the property for $100,000, first gets paid off and the second loses all their money. If I sell it for $150,000, the first gets paid first and the remaining $50,000 would pay out the second. I'd get no money. The order is just the order that they get paid off and recorded in. So in this deal, I got a bank to actually give me 75% of the money. It was much different than I've done in the past. I want to give this as an example before we jump into someone else's deal because someone today got an LOI signed for an RV park. So we're going to jump into that. But the bank financed 75%. I got 75% of the money, which is wonderful because now I just have to find a small portion of it. I didn't have any money to put into this deal. Christian can attest to it. I am broke. We don't have a lot of extra money. We're always throwing it into paying down other debts. But I still wanted to buy the project. And so what I ended up doing to finance this is I asked the seller to finance. And by the way, this bank was Columbia, formerly Umpqua. So if you want a bank just off the bat that will do seller seconds, they can do financing up to 100% LTV if it cash flows. They may not give that to you on your first deal if you don't have a relationship with them, but they can for sure get you done for 10% down. Now I've just got 10% left, and what I ended up doing on this was I brought in a partner. And we split it 50/50. And without any money of my own, this 10% down from the partner was $43,000 plus $25,000 to renovate the building. I was able to get into a deal with a leverage point that allowed us to cash flow with no money of my own. And they were happy because they had never bought a building, but they had the $43,000 down. And the renovation budget of $25,000. It's all about a value exchange with creative finance. You have to figure out what people want. It's why the circle drill, if you go back to the basis of multifamily strategy, is so important. You map it out for yourself, but you also map it out for other people. When Christian and I were getting started, yeah, one of his main goals— and this leads into what I was just about to jump into with the circle drill— got to map it out for yourself, where you're coming from, where you're going, what changes when you get there. But what is it going to be for the property owner or for the investor or the bank or the potential partner? You gotta map out that circle drill as well. That individual, they made a bunch of money in e-commerce, their business got shut down, and they didn't want to go broke. Their main goal was to take the money that they had made and put it into something that can pay them because they don't know what they're gonna do next for their career. And so something that was really important for them was to feel part of the transaction. And so when it came down to asking for the structure, I showed, look, I've already got 90% of the money. I need the last 10%. It's a very easy ask because I mapped out that circle drill for them. It's a big piece of any creative finance, and I think it might be important to actually draw it out. Has everybody seen it? The circle drill? Okay. And if you ever want me to go back, I can on this stuff. But basically what you're gonna draw is a big circle. I used to call these quadrants, and then I learned that that's not what they're called. Emergence. Yeah, I learned that one at the ripe age of 22. All right. So you've got relatability, you've got goals, that is a G, I promise. And then you've got significance. And relatability, we all relate based on our past. It's where we're coming from, things we can connect on that we've been through. This is going to get you in the room. The fact that all of us come from a past of potentially not having money and wanting to get ahead in life. Got us in the room together on the topic of real estate. And then that's really important to map out for yourself and others because that's how you're going to connect with them and get in the room. The problem is you get in the room and then a lot of people like to stay here. You got to move to goals. And so with that one partner, his name's Cam, one of his goals is to get enough passive income to where he's never going backwards again. He's the young guy that he made a bunch of money and he bought the nice car and the expensive clothes and the watch and That's great, but eventually the money goes away. So one of his goals is to get enough passive income to where he's not going backwards if he can't get his business going again. And the significance is, it's not your why, it's what changes for you when you get there. The value of money when you don't have to work for it, it changes. You look at giving differently. You respect people's time differently because you know how much time it takes to actually get there. And so this is just a super important drill to map out because I had mapped that out for that individual. For Cam, when I brought this deal to him and I lined up the deal and then the debt, and I showed him what equity piece in that order he'd have to contribute, it was a very easy yes to say. There wasn't really any pushback. Are we all good on this? Okay, cool. Onwards. So I'm going to give an example of a sixplex that I bought a little while ago. This my Peninsula Sixplex. This is the one Christian referenced earlier. That's how I got him to buy into Moses Lake. Talk about buying with the circle drill. So this is a deal I bought for $380,000. The seller financed $290,000. So this is the price. This is the seller. And I actually got a basically a hard money loan for the down payment of $90,000. Talk about rookie mistakes, not getting any reserves. Learned that the hard way, but I bought this 100% debt. And day one, my total payments on this were $2,700 a month. I'm going to go over here. So, and the actual cash flow of it was $3,500. So that was my, I guess I should say NOI. And this was, oh, I'm sorry if I could spell. That was my debt. So probably should have written that in a different order. But this is $800 a month of net cash flow. I'll give you an example. Actually, my wife and my 7-plex, the brand new construction, we own it, no partners on that property. We had talked about $15,000 to $22,000 in that range. The reason is that's 2 to 3 months of mortgage payments. To new construction. Now, if you have a different type of margin, like we have pretty strong cash flow on that property, but on the 38-plex, now the 39-unit that Christian and I had, we never had proper reserves. Even 3 months of mortgages on that may not be enough because the amount of things that break, the potential expenses, the expenses there could be over $100,000 if something there fails like the septic or water lines. We've got to dig it all up. It's going to be age dependent, but for most stabilized stuff, 2 to 3 months of the outflow is a really good rule of thumb. Yeah. Yeah. Kind of gross. There's 8 tanks. When we bought it, there were 6 and then we found 2 more. They were never pumped. All right. So sorry again for writing that in the wrong order. But what I ended up having was $800 a month of positive cash flow. That sounds exciting until you figure out that I was young and impressionable, and I borrowed this on a 1-year loan. $800 a month doesn't quite handle the obligation, which is why Christian and I eventually, after this deal, came to the idea that, oh, you need to manage your options, things you can do, and your obligations, things you have to do. I made a big obligation. How do you get yourself out of this was the question. How do I fix my issue? And my idea was, what if I just get the value up enough to go get a bank loan. And now my 100% financed deal that has $800 a month of cash flow when it's full, I could get the value up and I could pay off this one and I could pay off this one. And now I have nothing in it. So how would we do that? Any ideas? Yeah. Raise the rent. All right. I like you. We're not remodeling. We're just raising rent. We're being mean. No, I did do some remodels, but the idea is if you go back to the cap rate, your cap rate is your dividend when you pay cash. It is your return when you pay cash. What if I bump the NOI up and offer the same return to the next person? The valuation starts to bump up. And so when you're going into something, you understand, well, I have a dividend in one hand and a cost in the other. What happens if I bump the dividend? Well, the value goes up to the next party. And that's part of what multifamily strategy is about, is figuring out, okay, we can finance our way into it. Showed you a 10% down example. This is a zero down example. You can negotiate anything, but you have to figure out a way to hold it forever. And managing these obligations is how you do it. So on this deal, what I ended up doing was figuring out, okay, how much do I have to raise the rent to push my value up? So let's do some quick math. We got 6 units. Let's say we raise rent $100. Is that fair? There's a 6-plex somewhere where we can raise rent $100. So we're going to do $100 of what we call value add, the VA, $600 a month. But we always do it on an annual basis, $7,200 a year. Let's use a 7% cap rate. How much did the value go up? $7,200 divided by 0.07, $102,000. Okay. So the value add in this situation was $102,000. So when I'm looking at a deal, regardless of how we're going to finance it, I know, okay, if I raise the rent $100, I'm going to add $102,000 to my net worth. But I have to ask, is a bank going to like that? Is that going to be enough? Is taking this from $380,000 to $480,000 enough? If I want to borrow $380,000 from the bank? Probably not. There's a good rule of thumb for real estate. You want to be 75% loan to value. So if you have a $600,000 asset, $450,000 in debt. If you have a million-dollar asset, $750,000 in debt. So how would we figure out— this is what I had to do, so I want to work through it. How would we figure out what that property has to be worth in order to get this loan if we know that we can go 75% And if I'm going too fast, slow me down. If we got to get this amount in a loan, how do we figure out the valuation? Not quite. Divide it by 0.75. $1,000. All right. So the equation, if you want to figure this out, is you take your total obligation. We take our obligation, divide it by your LTV that is required. It could be 60%, it could be 80%. Depends on your market. And that's going to equal the value you need, value needed. And that's the simplicity of everything we do to make sure we can keep it. So your obligation— that's a good question— is the total loan that you have to figure out. Because what I had an issue when I got into this, I did a 1-year loan on this $90,000. The problem with that is if I'm refinancing the property to pay off that, that was a second mortgage. It gets paid off in the order that it's been received. That means I have to pay off the first mortgage. So I had to get $390,000 or $380,000 of debt within a year, and I ended up getting a loan for $410,000. But this was the type of math that I had to figure out how to do. You take whatever your total obligation is, your total debts divided by the leverage point, the loan-to-value, and that's going to show you the value you need. So you can plug and play any deal until you get there. So if you say, okay, I raised around $100,000, That's going to increase $102,000 to the value. That puts me at $382,000 or $482,000. Sorry, that's not enough. So I might have to raise it $150,000. And you can guess and check until you start to see trends. They start to see patterns and it's going to give you a lot of confidence on these deals. Well, yeah, there is a cap. And if you can't do it in the time that you have for your obligations, what that tells you is you have to renegotiate your obligations. On the front end. So maybe instead of getting this for 1 year, maybe I need 3 and I'm going to pay a little higher interest rate, which will affect my day 1 cash flow. All of these pieces are always going to be moving. And the thing with creative finance, you can buy whatever you want. You can negotiate yourself into very bad positions very quickly or very good positions relatively fast. Similar to how Matt mentioned, he built the portfolio very quickly. From just a year and a half ago. But you have to be very intelligent about how you structure all this. And I don't expect everyone to have 100% clarity on all these equations, but if you write them down and study them, you'll be able to get there. So as far as creative structures go, because if you don't have money, you got to get creative. I'm working on buying a 7-unit right now. This is in Moses Lake. It's $1.6 million. I'm short on that about $1.6 million.. And so I can't put it together right now. I can't do it like cash-strapped. All the money that comes in, I'm paying off debts as fast as I can elsewhere. Because as soon as you're out of debt, you have freedom. In this situation, I don't have the 25% down to buy this thing. I would need $400,000. So what I ended up doing to put this under my control for a while, I think Christian mentioned earlier, an option contract. I reached out to the seller. And the seller was actually doing Airbnb in all these. So I had a perfect excuse. I'm like, hey, the bank doesn't like that you're doing Airbnb. I need to rent these out long term. Well, that's not my strategy, is what he said. But well, it's my strategy. Let me do it. He said, how would we do that? I said, well, let's do something called a lease option. So the lease option, super creative way to do it. And what it stands for is a lease with an option to buy. That's all it is. So I'm leasing the property every month for $6,000 a month. I've got 7 units. I have to pay this seller $6,000 a month. He's going to pay the taxes, the insurance, utilities. But I'm going to lease out these units for about $1,700 a month. $1,700 times 7 is just shy of $12,000. I think it's like $11,900, somewhere in there. So I have income coming in day 1, day 1 cash flow with next to no money down. I don't have to put a down payment to get this. It's like a residential lease. You go lease an apartment. I'm leasing 7 at a time. I'm going to then rent them out. And what that does is it's going to give me a 1-year lease, 1 year of control of the property to figure out the debt and the equity. There's going to be a month of flux. And so rather than coming up with a $400,000 down payment today, I might have to come up with, $6,000 to $12,000 in negative over the course of 2 months. It's a much more stomachable task. And with about $12,000 a month of income coming in and about $6,000 going out, once it's stabilized, you math it out, it's about $6,000 a month of cash flow with maybe $12,000 out. I get all the money back in 2 months and then I have 10 more months to figure it out. You got a question? Well, absolutely. Because what a bank cares about— I was afraid of banks for a long time. I only did seller financing. And then, like Christian mentioned, a mortgage broker said, how the heck did you build this? Bubble gum and toothpicks. It was so ridiculous. Banks aren't that scary. What they want to see is consistent income. And so while I can't afford to buy this property today and I have a path to get it to cash flow, I'll get a little bit of a payday for the first year. The main thing is I'm getting control of $1.6 million worth of asset for next to nothing down, and it gives me a whole year to figure out my DDE, my deal, my debt, and my equity. If I can't get the rents that I'm thinking I can get, I have an option. I can walk away. Gives me control of a big asset. And if I beat my rent projections, maybe I can get a bigger loan from the bank. But sometimes, like in this situation, it's about getting control And with this lease option, I don't have to take out any debt to do it. And if you're debt averse, I mean, eventually you're going to have to borrow, you know, in a year. But if you're debt averse, this gives you time to figure it all out. Seller, you can structure the deal however you want, right? I'll give you an example to answer your question. If you build a brand new apartment building, has anybody seen those new apartments? They say 2 months free rent. Same thing. All right. Anything can be negotiated. The goal of my speech today is give you the ideas, but I mean, you look around at what people are doing and you'll find your answer. They do a month off on new stuff over in Moses Lake to get a little higher rent day one. So they give you a month off, but then they bill it to you every month. So instead of $1,300 rent, get $1,300 off first month, and then they charge you $1,400 for the next 11 months. There's so many ways to structure things. But you could do a month of no payments. You could do a month of a $3,000 payment. You could work your way up. Over on the property over there, the White House, to get the rent up, I offered to the tenant Dion's binder strategy. They picked the rent, but instead of working them up from the $500 that they're paying to the $1,000 that they need to pay, I said, well, what if we do a month at $750 and then we work it up slowly? Everything can be negotiated on these deals. The bottom line is you have to make sure that your obligations don't exceed what you can realistically do. Well, there's plenty of rules, but you have to make them. I think the craziest thing I ever heard was on one of Caleb's deals. Christian would know better than me, but I believe they did a negative amortization where the amount that they owed was bigger every single month. Talk about crazy. Now, why would he do that? To make it cash flow more day one. And he knew he could take the value from $1.6 to a bajillion dollars. If you know you can make the value way higher than it's going up every month, you might do that. Yeah, it's super weird. But, but my point is, if you can break it down to a simple business model, there's a building, it costs a certain amount of money. I don't have any of the money. So instead of buying it, I'm going to lease it. But I have an option to buy it. It's about as simple as it can get. Gives me control. And now we have to figure out the DDE, the deal. Well, we know what the deal is. And I know what the rents are because I've looked at it. You know, you got to do your due diligence, but we have to figure out the debt and the equity. And the bank wants to see where's the money coming from for the down payment, how stable is the property, and what are you going to do with it? If I want to go get a commercial loan for this place personally, I wouldn't qualify because I don't know what I would do with it. I'd lose it. I mean, that's what I would do with it. So you just have to have a plan. Where's the money going? What's the stability? What backs it? How are they getting paid? That's what any lender cares about. Yeah. So you'd have to get harder, like LLC, so the LLC has this much funds. And with a lease option, if it's a 1-year lease or a 2-year lease, you have that amount of time to figure it out. And like Christian I mentioned, on our first big deal we ever did, 38 units, we forgot to raise the money until 3 weeks before. This is a whole year of time to find a down payment. So for those who are truly on the fence, like, I don't qualify, no one's taking me seriously, Even if this is worth $1,550,000, just for the consideration, you could pay him $1,600,000 and get control of something because now you can take that experience of, I know how to manage these buildings. You can show it to an investor and say, I've done this before. I've been managing it for 6 months. This is the lender list that I've interviewed and this is the down payment we need and this is how much it's going to cash flow. You can show a track record with this strategy. Anybody have any questions on this before we move on? Anthony, it's going to depend on the market and it's going to be a market average based on the quality and what it is. For example, the bigger an asset, the lower the cap rate. Let's logic through that. If it's really big and really stable, why would we get a lower dividend? Well, why would we expect a lower cap rate on something that's really big and stable? It's less risk. Right. It's a, it's a risk-adjusted return. So on a deal like Robinhood, it might be a little higher cap rate than a hotel in downtown Seattle. It's a little more risk than downtown Seattle. And so an investor is going to want to get compensated for that. But as far as what the bank's going to do, they're going to look at what an appraiser says. And the appraisers are the ones looking at all the other comps that have sold, trying to find instead of the price per foot, it's the net operating income versus the price it sold at. They're trying to get that average cap rate. Yeah, absolutely. You're not comping price per door. It's more so the net income per building. Oh, absolutely. Yeah. So I'm— for anybody who's buying in Central Washington, I'll give you another bank. Columbia works over there, but Cashmere Valley Bank, they have the lowest rates of anybody I've seen for commercial. They're in the 5s and 6s right now. I mean, on small deals, it's incredible. And they go as low as $250,000. I straight up asked them, what do you think the cap rate's going to be on an appraisal based on what you're seeing? And they said 6.25%. Okay, that's great. They gave me my answer to my homework. I don't even have to show my work. Now you should still do the work, but it's really good to ask because they're going to give you a good indication. Yeah, absolutely. All right. Now, Cashmere Valley Bank. I want to go back to a very simpler page. And talk about the 8-plex that I bought. Some people are partner-averse. They don't want to take on a partner. They think a partner's going to ruin their life. I don't know about you, Christian, but you didn't ruin my life. So it worked. It worked out okay. We both made money. We both scaled farther than we could have together than we would have by ourselves. But today, Christian and I are not partnered on as much. We own that property over there, which is a 7-figure property. But other than that, we don't really have anything. He scaled up and I scaled down. On this partner deal here, this is the partner money, the 10% down. If you have to get started and you can line up a deal, the debt, and then you're worried about bringing on an equity partner, there are ways to control that situation that Christian and I didn't understand in the very beginning. What we used to do is we'd be like, all right, everyone has the same ownership or more than us. Our first deal, we had minority ownership. We owned 20% of the deal. That was a dumb mistake. There's something called a buyout option, just like we talked about with the lease option. There is something you can attach to an operating agreement, OA for short. By the way, any bank loan you get, it's going to require you show an operating agreement if you have an LLC. The OA just illustrates who's doing what in the LLC. That's all it is. Who does what when it goes well and when it goes poorly. Something that I will probably never do a partnership on again without is a buyout option. This is super important. Let's see, buyout option, if I can spell. And Christian, did you do this on some of your bigger deals? You have first right to buy them out. Super smart. Super smart. And I don't have anything to do with those deals, so I just get to hear about them. But I'm glad he added it. What this gives you the right to do is it says, okay, well, they put in $43,000 plus renovation budget. They put in $70 grand at any point in the next negotiated amount of years. It could be 4 years, 10 years, 5 years. If I write them a check for X, I get to own 100% of it. You can creatively finance your partners out of any deal. You can creatively finance your way into any deal. But this is probably one of the most important things to have in your OA, the right to buy someone out. Yeah. So let's use actual numbers in this in this deal? $70,000 is the partner's money between the renovation and the down payment. In year 1, if I want to buy them out, let's say year 1, let's say I can buy them out for $85,000. They got a decent return. They got $15,000 on $70,000. I think that's like 15%. It's a good return. Well, maybe in year 2 it goes to $100,000. Yeah. And so it starts to get a little bit better and better, bigger for them. So they're still getting a return, But it gives me the option, not the obligation, to where I could buy them out. If I get in a pinch and I don't have the money, then I guess we stay partnered. We have to renegotiate something else. But this gives you the ability to buy them out. So I'd recommend everybody adds it into an OA. Christian and I did not have a buyout option for any of our partnerships. I still bought him out of some stuff and he bought me out of some stuff, but it, it if you want to go into business and you're worried about the partner thing, because one of the easiest, simplest ways you can do convoluted businesses, but one of the simplest ways is find a deal, get a bank on board or seller-financer on board, and then find a partner for the down. That's really simple. You've basically— Yeah, yeah. You basically architect the deal. You made it real. Yeah. You're, you're playing matchmaker. You're, you're lining things up is a good way to put it. But this is still due back to the bank and or the seller. This money in equity is gone the day that it's— you put it in a deal, you can't just pull it right back out. And so some partners, what we found, get really weird about money when it's just in there. You can't pull it back out. We've lost some friendships over that. Toquilla was a tough learning lesson. Fredo was a tough learning lesson. Some people get weird about money. And so what you should do if you're worried about a partnership or a potential partner getting weird during a situation, just have a buyout option and it could be spun both ways. It could be I have the right to buy you out for X amount and you have the right to buy me out for X amount if things aren't working out. So that would be my recommendation on that front. But you buy me out with a— if it's a signed buyout agreement, I've never seen a situation where they can refuse that. It's like both of us want to buy the property. Well, it's in an event of— so example, there's some gentleman over at Moses Lake. And in the event of a divorce, a death, or something similar, that party can buy out the, the other party who needs it at a set price. And what they do is they do appraised value minus closing cost fees for brokers and excise tax. And so it's a little reduced rate, but that's an in event of, yeah. So it's for specific situations. The main thing is you don't want ambiguity. You can do anything you want. With creative finance, anything you can finance, anything you do with car, you can do with property, Airbnb, you could sublet stuff. Uh-huh. Yeah. Yeah. And I made it where I'm the managing member, so I control the day-to-day operations and they own, they have beneficial ownership of 50%, but I'm the sole decision maker when it comes to running the, running the project built into that contract. Absolutely. Yeah. Because someone could own 99% of the deal. And not have any control of the deal if it is written that way. But we wanted to be 50/50 and I felt like I deserved 50% for putting it all together. Yeah. What's important to know about creative finance, one of the, these other main takeaways you should get from today, money is the least important part of any deal. There's never been a situation where it's been the most part of any deal. When we bought the 38-plex for $2 million, it, it didn't really matter if we borrowed the down payment. As equity. When we were getting started, we thought it mattered, but it wouldn't have mattered if it was equity partner, if we borrowed it at 12%, 5%. The deal was the most important piece, and the debt is what allowed us to get the deal. So you have the deal and the debt, but the last little bit of the money, there's so many people with money. I mean, there, there's a lot of people that don't have money, but it is the least important part. I mean, I probably could have gotten that on 0% interest credit cards. That's right. But this was on the market forever. And not only was it on the market forever, they marketed it as a 5-plex. It was just sitting there. So it was a 5-plex. It was like 5 units for $430,000. And I drove it and I counted the doors. I was like, there's more than 5 doors. And there were some units that I walked in. And what ended up happening is this used to be a 10-plex. And what they did is they just— the owner lived in these units and they chopped them up. So there's a little doorway like that doorway there that they just put through a wall. And so you'd have 2 kitchens in a unit and 3 bathrooms in a unit. It was like, what is going on? And it— they left all the exterior doors in front and in the back. They all had back doors too. It was the weirdest thing ever. So this deal today is worth like $800,000 and we're getting a loan for $600,000 on it. So he's getting all his money back and then We're pulling out another 6 figures. I could, but this goes back to where we started, which I think is on this page. What is significant to my partner? Is it more money or is it figuring out how to make money because his business died? So what I'm doing is I'm going to return his $70,000. He's going to get another $50,000 or so, and he's going to take the $70,000 and the $50,000, and I'm going to get my $50,000 and he's going to throw his cash into another deal with me. You can make money for anybody when you figure out the creative finance stuff. The question is, what are you going to do with it when you get it back? Right? Because if you invest for long enough— granted, this was a 6-month project. It went very quickly. It was on the market for longer than it took us to fix it. It was ridiculous. But what is it all for is the root of how these deals get done. And for him, getting control of an asset that cash flows, putting up the money, the little money he has from his business, so that he doesn't go broke again because his business died. And I solved for that. So I got the deal funded with no money. And that's what you can do too. We're refinancing it. Correct. Right. And you talk about how did we get the value up? Because these aren't valued. It's not just more valuable because it's an 8-unit and they market it as a 5. It's more valuable because we chopped those units back up and we got the net operating income up a ton. Well, the $43,000 down and then it was, it was about $30,000. Yeah. And renos and closing costs. So about $70,000., but it doesn't cost a whole lot to wall up a door. And when you don't have to add kitchens, like there's not a lot of money to be spent. This deal was sitting on the market, 618 Basin Street. You can look it up. Google Maps is really ugly. We painted the building. If anybody ever wants to go out there and drive it, you can check it out. But even though it was an average rate deal, I had to look into it a little further and figure out, okay, the money's not important. If I'm doubling the value, almost taking it from $430,000 to $800,000, this doesn't matter. Anybody here is going to figure out how to trade $70,000 for $350,000, right? $370,000, whatever the exact number is here. It's just an exchange of value, which is why you can ask for 50%, Remy. You can, you can ask for whatever you want. I could have asked for 80% of this and put none of the money up, but that doesn't fit the circle drill that I did with this gentleman. And the fact that he gets 50% and he's going to have no money in the deal after 12 months, you know, 12 months was the conservative projection for that deal. I mean, And I just get to keep re-rolling with his money for a long period of time. And business owners know business owners, real estate guys know real estate guys. And so now I'm looking for the next deal because he has other people that have money that want to lend it to us to go do those deals. Plus the down payment. But what— Yeah, absolutely. Yeah. But what you got to look at— Well, but you think about it for anybody in this room. Would you be willing to give up 50% of a deal to put no money in, have a cash flowing asset, and get paid tax-free money when you do a cash-out refi? It's not about what you give up, it's what you can give and get in the process. That's the beauty of the creative finance game. So while I'm giving him a phenomenal return, he put in 70, he's going to get back plus another 50, and I'm going to get 50, which is a nice bonus too., but he then owns 50% of an asset he didn't have to lift a finger for. And I own 50% of an asset. I got paid to own it tax-free from the refi, and it didn't cost me a dime. It took me walking the property, getting an idea for it. I was on the MLS for almost a year. There's deals like this that I see in Olympia and Chehalis, and it, and it doesn't have to be like that forever. Part of the story you didn't hear earlier from Christian, he bought the duplex on Peninsula Drive next to the sixplex I broke down here earlier to figure out our values. Well, he later flipped that and bought into a 12-plex of mine because I needed money to go do other stuff. We became partners. Well, shoot, I don't want to have partners on this. So what did I do? 2 years later, I bought him out. That was really important to my circle drill, to own a building that I bought by myself back again by myself. And he respected the circle drill. And so our relationship grew. But the creative finance piece came from the relationship. It was back to the circle drill. You got to make the numbers work. You got to figure out, okay, if I push the value up with those equations or if it goes down because my expenses go up, it's a sliding scale, but it goes back to this right here. Eventually I bought Christian back out and he took the money and multiplied it in Texas. All right. They just got a signed around LOI for $2.7 million. All right, let's work through this deal. All right. So we're going to put DP, down payment. All right. So $800,000 down, which means we have $1.9 mil at 4.5%. All right. So we're going to talk about the numbers really quickly because we don't have a whole bunch of time. What is your projected cash flow? So what we're going to put here is $130,000 of C, F, cash flow, which on $800,000, I'm going to use my calculator because that's handy and dandy. $130,000 divided by $800,000, 16.25%. Pretty good. Now, how much of this $800,000 do you have? Okay. So we're almost there. So, so we have 16.25%. And we're going to— she's going to say cash on cash. All right. So that's your dividend. That's not your cap rate. That's not your dividend when you pay cash. That's accounting for the debt payments on the $1,900,000. So here's the interesting part. How the heck do we find $700,000? We have a $700,000 problem. I'm going to put that here because you have $100,000 you can allocate to the deal. So this is our problem and we want to figure out how we own. I'm guessing you want to own as much of this deal as you can, right? Okay. So you don't want to own like 20% like Christian and my first deal together. Thoughts on this? We could find a really rich person to write a check for $700 grand. Is that going to happen? Probably not. So we're going to have to figure out, do we bring in a partner that's going to front almost all the money? And we keep all the equity, that might be a little bit of a hard sell. All right. So we're going to do a mix of debt and equity. And the idea is if someone invests majority of the equity, you've got $100 grand, but someone puts up $700, they're going to want to own majority of the deal. So let's have them put less money in equity while still fronting majority of the capital. My proposal would be, what if we had them loan the LLC $600K. We could put it at 12%. That's expensive. They're going to loan it at 12% interest. And I know I write kind of at an angle as I get lower. At 12% interest, they're going to do a capital contribution. This is going to be equity of $100,000, the delta. And then this is you also bring in $100,000. All of a sudden, there's debt or equity. You guys have an equal contribution and you brought the deal and negotiated the debt. Now all of a sudden someone's brought more value. Now, yes, there's interest on this. 12% on $600,000 is $6,000 a month, $72,000 a year. But by structuring a deal like this, even if we account for this interest right here of— we have $72,000 per year after accounting for that loan. What is our cash flow? $130,000 minus $72,000, $58,000 a year. So we have $58,000 a year of free cash flow on a $200,000 equity investment. What's our cash-on-cash return? I don't know. 58 divided by 200 is a 29% cash-on-cash return on a deal that was originally producing 16%. So for someone who wanted to lend capital into the deal and get a 12% return, which is phenomenal if backed by a good asset, you guys have equal equity contribution. If you were to say you deserve 60%, they get 40%, you have a majority. Their 40% of the $58,000 is $23,200. On $100 grand, that's a 23.2% return. Pretty good. They're getting a great return on the deal. And you, on the other hand, are getting the delta of that, which would be about $35,000 a year. So you're getting a 35% return. Delta just means the spreads. So it's like between a number and a number. So you can turn this type of return into predictable income because a loan is due whether it produces or not. So the incentive for them is I'm just getting passive income. It's mailbox money. The partnership doesn't do well. At least the deal owes me the money. So this cash flow can fluctuate. That is going to stay the same. So they're getting a fixed return of 12% on their money and then they're getting 23% elsewhere, which is way above market average, especially when the deal only pays out 16.25%. Math is math. This doesn't make sense. Watch the video. But this is a way that I would do your deal if it were me. I would have them front majority of the capital as a fixed rate, high interest loan. Interest-only payments and you guys split the equity however you feel fit. But for you putting this together, I wouldn't take less than 60%. Now you own 60% of a $2.7 million asset with $100,000 down, and you're entitled to your $35,000 a year of cash flow. So all your money's out in 3 years. Yeah, you could do no prepayment penalty. You could do a prepayment penalty. How long is the seller note? Should ask. So if someone's lending the money and excited about this deal, and granted, this could be a few different investors. It doesn't have to be one investor. They could have some of their money as a loan and some of it as equity. But if you were to say, hey, we got 10 years on this debt and you're going to get a secured 12% interest for 5 years straight, that beats any money market account I've ever seen. And they don't got to worry about it because they also own the deal that's paying them. Where's the money going? What's the stability? What backs it? And how are they getting paid? The 3 things that matter to every lender. That's it. Beautiful. So this is how I would— this is how I do your deal. You get all your money out in 3 years and they're getting $72,000 grand a year plus the $83,000 of other cash flow from the equity. So they're getting $95,000 a year on $700,000. That's a great return. Or the loan could be in second position if they're secured against the property and they believe in the property. You can— when I, when I bought the sixplex, I'm going to keep this short because Christian's going to kick me out. But when I bought this sixplex right here, I didn't take on this person as a partner. That might have helped with the pitch, but I was able to land it without taking on a partner. If these numbers were different, if it was $2.7 million, $200,000 down, you just have your debt amount, right? So you got the $2.7 million, you got $1.9 million in seller financing, you got $700,000 in the other debt or $600,000. And then you have your down payments like you just list out the capital stack. You just have deal, Debt, debt, equity. There's two debts, but that's how I would do that deal since you got it under contract. And maybe instead of one person doing $700,000, maybe you break that up into three and each of their positions is a proportionate amount of the debt and then the equity. And if they want to own 50% of the equity combined, then maybe you have a little bit less of it go towards debt. So you have less interest payments going out, but there's no reason you can't make 35% cash on cash on that deal for yourself.