How to Make Millions in 2023 with CREATIVE FINANCING

Right now the market's really gummed up because interest rates raised. Banks are a lot more hesitant and we're in a cash flow market.

Like, hard.

Hello and welcome back. It's another Monday, which means we are again joined by the one and only Terrence Doyle. Terrence, welcome back to the channel.

What's up, boys? Let's run it back.

We're talking about creative finance today and you are up and coming in that space for sure, doing a ton of deals. I think you've already seller financed more real estate than I have. So, right, but super stoked. I mean, that was just like fuel on the fire. Super stoked to chat with you about that. Can you give us a little insight on what you're working on in the creative finance space?

Yeah, you know, October of '22 was the first time I really did a deep dive with you guys in my same office we're recording this right now. And, you know, you guys really blew my mind, and I left that podcast the next day and I told my team, I was like, We got to figure this out. These guys are doing it. They've mastered it. I've got to figure out how I can apply that same mentality to our platform and our network and our reach and our access to capital. So I think what changed after that interview was every broker that called me that I'd been doing deals with, I was basically like, look, I don't want to look at any deal that's not seller finance. If you go back to October of '22, debt was 6%, 7.5%. You know, lenders were lending way less money, probably 50% of the leverage they were before. And it was making getting a deal done, especially value-add, almost impossible. Like getting a value-add deal, which is what we specialize in, deal done across the finish line with a bank was like, you know, it was just so painful. And so after talking to you guys, I was like, man, I think they're onto something. We've got to get— we remove banks from the equation. And prior to that, I'd done zero. Seller finance, creative finance deals. Everything had been done with a bank or a private money lender. And so that was obviously like training wheels, right? Even just like getting those words out of my mouth the first couple times was kind of difficult. I was clumsy, stumbled over my words. And then by November, I started to get people saying, hey, the seller's willing to, he'll carry back 50%. It's like, nah, it's not good enough. Hey, he'll carry back 80%. Nah, not good enough. And so we started to get closer and closer, right? And you know that when you start to, get counters back, start getting the phone to ring more, like, hey, they're willing to do this, they're willing to do this, you know that you're getting close to doing a deal. And so I was pretty hopeful by November that we were going to put something together. And the first deal that we closed with creative financing was this 24-unit in Denver Metro, just a core Denver neighborhood. And it'd been owned by the same guy for 30 years. He owed maybe $500 grand on a deal that a year ago was probably worth $220,000, $230,000 a door. So call it like $4.8, something like that, million dollars. And, you know, he started off with like, I want $4.2, and I'm willing to carry back— I'm just making this up— I'm willing to carry back like, you know, uh, $2 million bucks. And, you know, so we walked the property, put it under contract, and after inspections, he basically came to us with, after a couple different conversations, like, look, I want, I want $1,500 down and I want $10,000 a month for 5 years. You tell me. I don't really, he was like, I'm, I'm, it's insignificant. It's irrelevant to me what the interest rate is. I want $10,000 a month and I want $1,500 down. And so then, and I think I was texting Christian Osgood about this. I was like, hey, you know, how do you do this? How do you look at this? What are your thoughts on this? And we ended up with basically we pay him. So we closed on this property December 22nd, right? And we put down just a little bit over $1.5 million, which is what he wanted. He owed $500,000, so I want to put $1 million in his pocket. And because he was indifferent about the interest rate, we're able to say, okay, we're going to pay you $10,000 a month and it's going to be amortizing. So it was amortizing on a 30-year AM schedule. And that ends up being like a 2.25% interest rate. Right, fully amortizing. So we're paying down like $3,000 a month in principal. And, you know, the property, the property, the average rents, this is what makes the deal amazing. We bought it at call it $170-something a door, right? So well below the market. So you're talking about a 2019 price per door or basis. And then we basically got the best debt term. We basically got agency debt in the middle of COVID right? 2, 2.25%. Fully amortizing. And on top of that, the rents that he had are, call it, $900 a door. So $900 times 24, you know, you're basically— he was collecting after everything like $23,000, $24,000 fully stabilized, right? Because the rents were so far below market. And the market rents are, call it, $1,400. So day one, we're paying this guy $10,000 a month. $10,000 a month at a 30% expense ratio. So $8,000 a month. You know, we're netting, the NOI is $14,000 a month, we're paying him $10,000. So you're talking about $4,000 net a month. So $48,000 a year on $1.5 million. Like those returns on a going-in value-add deal, I've never done a deal in Denver where month 1 I'm cash flowing, cash flow positive, net, net, net after everything, right? And so that was the first deal we did. And you know, it was incredible. And I think the seller felt amazing. He cut pocketed $1 million after paying off his note. He gets an annuity, $10,000 a month. He gets an established operator that can do construction and could bring the $1.5 in a convenient manner, right? We closed this deal in like 45 days and operate it, and he just gets to collect money. And then in 5 years or before, we'll be able to pay off the note and he'll get the remaining, you know, I think at that point he's going to get like $2 or $2.3 million. So complete win all the way around. And, uh, you know, we were able to— and in this market, you know, sending distributions on a quarterly basis, uh, you know, is what everyone wants. People want cash flow. So that was the first deal, and I think I text you guys right after. And I've been trying to promote you guys as much as I can because, you know, that really set me on this track of like, okay, I want to do more, right? It was like a drug. It's like, dude, that was amazing. I just want to do that. And so we closed on our second one March— no, it closed on the second one, like, call it mid-February, and that was a 13-unit in, like, even a better neighborhood of Denver. And we have 2 more under contract that we close next week, seller carry. And then we have a 5th that will close in Des Moines, uh, probably sometime in April. And so you talk about 5 deals with what I think is, you know, some of the best debt terms and some of the best bases that we've had that are going to cash flow day 1 You know, that, that conversation we had, you know, I think was, was really life-changing and a change in the trajectory of Virco and what we're doing. So it was incredible. And I'm happy to unpack any of that. But seller finance, creative finance, whatever you want to call it, definitely the way to go in this environment. And you guys were definitely ahead of the curve there.

So 2.25% interest rate is ridiculous. The lowest we've ever gotten was 3%. And that was in— that was on a Seattle deal that Christian negotiated. And that was phenomenal. I mean, that was just a great purchase. But we've never gone below 3. You managed to get that on not only your first deal, was that your best deal? Or have you done a better—

I think it's— I think it was a good deal. It was a really good deal, right? I mean, had I, you know, had I had all the money, I would have put all the money into it. It was a really good deal. I think, you know, since then, it depends on how you define best, like really good cash flow, really good basis. You know, that deal when we sell it will be worth $250,000 to $300,000 a door. And and their rents will be $1,400, $1,500. So I love the trajectory of that deal. You know, we did another deal that was 13 units where the family, you know, was in a tough situation. They basically didn't want to manage an asset anymore, right? The parents that bought the deal and managed it passed away, and you got 3 or 4 brothers and sisters that just did not want to manage this asset, wanted nothing to do with it, but didn't want to pay a lot in taxes and just wanted an annuity. And so that deal was in a neighborhood of Denver that I think is just very, not affluent, but really solid, really strong. I'd say the median income is probably $80,000 to $120,000. So definitely not workforce, not like your country club, but somewhere in between. And that was a 13-unit deal, very clean. And the seller carried back 92%. So 92%. So call it on a $2.5 million deal, they carried back over $2.2 million at 4% interest only with no prepay. So that was a really good example of like someone calls me, hey, these guys want to sell. And I'm like, here's my number with bank debt. One of the things I learned was you got to frame it. So they have to understand how much more you can pay not using a bank. So I think my offer with a bank loan was like 1.6. Because I just didn't want to use a bank. And then my offer with the bank loan was, let's say, $2,300 or $2,400, or with, with seller financing was $2,300, $2,400. So they're gonna get significantly more if they carried back the paper. And then, you know, uh, we just were trying to get to a number that they wanted, and it ended up being, I think, close to $6,000 a month. And on that deal, we did full-term IO, uh, just because, you know, $6,000 a month with where, you know, where rents were at, you know, felt really good. We didn't— at that basis, I think The difference for me was at that basis, I didn't need to pay down the principal. I'm buying this thing for $170,000 a door, the comps are $250,000, $260,000, and it's only going to go up. And so I felt like, you know, there's no need to pay down principal. I'd rather take the cash. I'd rather have cash flow current in the current environment. And so at 92%, you know, I think Cody, you and I talked about this, to be able to control, let's say, a $3 million asset with $250,000 down, you know, that's ridiculous. And so, you know, one of the things we've discussed and kind of framed that to our partners in our fund is, you know, you basically, if you can put 8 to 10% down and then grow the NOI, let's say you can double the NOI, right, you know, you're basically going to get, you know, 5, 6, or 7 times your money over 5 years. So you're talking about a venture-type return, right? Venture capital buying, you know, startup tech or something in software with very little revenue, so really high risk. Typically, when you're going to get 5 to 7 times your money on any deal it's very risky. But here you get to buy a real asset in a strong location in a submarket of Denver, Colorado, and you're going to be able to get 4, 5, or 6 times your money, right? And get a venture-type return in real estate. And so that, I think, is one of the beautiful things about creative financing, is being able to get even more leverage at a very low interest rate, right? So it's not, it's not adding more risk to the deal because the basis is low. Right. I think one of the reasons that we talk about, you know, maybe you guys not liking syndication is because people max lever it and you get really bad debt with max leverage. Here you're talking about 2021 debt, 4% interest only with no prepay. No bank in the world is going to give you that, right? Uh, when the rest of the market's at 7, 7.5. And so that allows you to get an insane return on your equity with still not taking a lot of risk, uh, you know, having a hard asset to back you. So I mean, you know, that was probably pound for pound one of the best deals I've ever done. And, you know, wouldn't have, wouldn't have happened without the conversations that you and I, you know, we've all had, and you guys really getting me to think differently about the way to structure finance, you know, finance multifamily deals.

And for those who aren't tracking with that, it's easier to multiply 8% down than it is to multiply 40% down. What? Imagine that if someone goes out and we're doing this in real time right now, we're working on a $4.5 million purchase conventionally financed, we're gonna have to put a million and a half down, but it's got a phenomenal location, so we're just going to buy it. However, on a lot of our deals, we put $450,000 down. It's so much easier to get the asset value to go up $450,000 to double my money than to get to go to $6 million to double the $1.5 million down. And that's exactly what you're doing right now. And I'm guessing you're getting non-recourse loans. These seller notes are non-recourse, right?

That's right. That's right.

That's ridiculous. Put 8% down, getting non-recourse debt. 4% interest only, full term.

That's right.

Anybody else can get that with a bank, sign me up right now. But I don't see that.

That doesn't exist because, you know, the, the, the, the governing bodies that, you know, oversee banks won't allow that, right? Because they're going to view that as too risky, right? And even right now, I think most banks on a DSCR basis can only lend 50 to 60% of, of value of purchase price, not to mention the construction. So that puts you at less than 50% of total project cost. Most deals, to your point, Cody, most deals don't pencil because if you put 50% down, to double that money, the asset has to increase in value by 50%. That's really hard to do in real estate unless you're going to hold it for 20 years. And most people our age don't want to hold things for 20 years to double their money. They can do that in other ways much more efficiently, uh, with the same amount of risk. So to your point, yeah, the less money you're able to put down— now that the key to that is Most people, I think when they hear seller finance, they're like, "Oh, did you give them their price?" It's like, "No, no, no. I got the price I wanted. I'm buying it at a basis of in 2018 or '19 or a pre-pandemic price before inflation took off. And I'm buying it with debt that you can never get." And so when you put those two together with a 2018, '19 basis in the property, so the right price per pound, price per door, price per foot, whatever you want to use as the metric, and you get the right debt, That to me is where seller financing is very powerful, right? The people that talk about seller financing that don't, you know, that are basically just giving, you know, paying a premium on a price per door per foot to get that attractive financing, that to me isn't interesting. You've got to put both together. You've got to buy the deal right, as if you're using a bank, and then you put on the secret sauce of the right debt, right? With the right terms, the right AM schedule, you know, all of the terms that we've been talking about. That's when it's very magical. And that's when you can create something that is not— you're not able to recreate using bank debt, or you know what I mean? So putting both together is, I think, what is necessary.

And I think what a lot of people miss, and I think it's mostly because of all the online gurus who go like, this is the best strategy, and they brand all this stuff like Subject To is the only way to go, or creative finance, seller financing is the only way to go, or you have to syndicate.

And we're doing bank stuff right now. Yeah, it's just what's the opportunity? What's the debt product? But when you're able to find it like you are, And that's taking a step further than we did it. We normally pay close to market value. We're not usually getting a steep discount on stuff. You took it to the next level.

Yeah, but the combination of strategies— you're going, okay, I have a fund, I know how to syndicate, but I'm not syndicating to get the fees of syndication. I'm syndicating because you have to buy right. So how do we push returns? Well, if we get lower down and better interest, turns out we multiply money easier and we cash flow better. So you negotiated more terms and now you have better deals. The other people who are syndicating who only focused on learning syndication, only know how to raise funds, go to the bank, buy the deal. Right now the market's really gummed up because interest rates raised, banks are a lot more hesitant.

It hurts. Our max cash out is like 64% LTV. That's max. And we're in a cash flow market. Like, hard.

What have you been seeing with banks on your deals? Because you're a lot more bankable than us. Banks know you have deeper bank relationships. For the deals that you're doing with a bank or have recently done with banks, Is that process as easy as it was the last few years, or has that slowed down for you too?

I mean, dude, this is what motivated me. I, I— last summer, you know, we, we were doing 2 or 3 pretty large deals, and it was the first time in my career— and, you know, think about, I've been doing this since 2008. I've closed on hundreds and hundreds of properties, hundreds of properties since 2008. I have really deep track record relationship with a lot of local banks, uh, even friends with, you know, families that own banks in Des Moines and Denver. And I had 3 deals retraded within a week of closing in 2022. 3 deals with people that I know extremely well, that— and it was really just from pressure, you know. And, you know, what's interesting about capital markets is when, when things tighten from the Fed level, it just trickles down, you know. And then banks have to tighten their underwriting, and then it trickles down to investors like us, and then we have to trickle it down to our residents and our investors, right? So it's just this massive food chain that just trickles down. And so when I I was battered and bruised last summer. I mean, I was so jaded by the time I met you guys. And it was, the conversation we had was what I needed to basically say, I can still operate and do deals and I don't need to use banks to go through that pain, right? I mean, it was so many sleepless nights, so many like heart-wrenching conversations like, what are you talking about? You're not gonna close. What do you mean you're gonna retrade the term sheet? I mean, it literally felt like when you're in a negotiation with a seller, it's like, hey, the electrical panel's bad, the roof is bad, I need $100,000 off. That's literally what banks were doing. Except you were taking it from 75% of purchase to like 60%. So it was just like, oh my gosh, I can't even do this deal now, right? I mean, so all that to say that, you know, putting, you know, like I said, putting value-add real estate, so buying outdated legacy assets with, you know, the creative mind that, you know, in this idea of creative financing where you take, and it really comes down to like what you guys said, there's no box. It's like, What does the person need? Okay, you're solving for $10,000 a month, no problem. Okay, how much do you want down? Okay, I'm solving for this and this. I can get you a solution if you give me the data points I need to solve for, right? And that's really what it comes down to, is just, hey, what do you need? I can get you where you want, but just tell me what you need, and I'll come to you with a proposal that gets what you need and gets me the return that my investors need and we need as a sponsor and as an operator. Um, you know, so we've only done one bank deal since I saw you guys. I did one bank deal. We bought a deal in Des Moines that was like 80 units and it was direct to seller. It was a seller that we'd worked with in the past and we bought that deal for like $54 a door and the rents were like $700. So, you know, one of the banks that we had and this is, you know, the market had stabilized by December and we were able to get 80%. The only reason we did that deal is because I was able to get 80% of total cost. So I basically bought a $4.5 million deal and I put $1.1 down. So that made sense. And I was able to lock the rate at like 1.50% over the 5-year because this bank wanted to close out their year. I personally guaranteed it. They loved the location. They'd seen us operate and they were less concerned and fearful about the market. They felt a little— things were stabilizing, inflation was coming down. The market was much more stable then even than it is right now. And so that was the last big deal we've done. And I haven't done— and I don't have a deal under contract right now to do with the bank. The only deals I have under contract are seller financed. That was kind of an anomaly just because of the basis, the location, and the relationship I had with this bank. We had just paid off a really big loan from them. Let's say we paid off a $6 million loan and they were going to lend $4 on this deal. So it just, you know, that was a collision of a bunch of different variables that worked out. And we— that was, you know, we got, like I said, 80% of total cost, which is phenomenal. And we got 5.3% interest only for 24 months on a 5-year fixed. So those were really good rates, right? I mean, that deal made sense because that bank, the bank debt was good, the basis was good. But that was the last bank deal that I've done. You know, in bank rates right now, I mean, the Treasury's at 4%. Most banks want 200 basis points over the Treasury. So you're talking 6%. They want fees. They want a lot of covenants. They want a high DSCR. It's just, it's very hard to do a deal with traditional banking right now because of the regulatory environment that they're under.

That is my favorite part, just to round out today. That is my favorite part about your business model. You're not just doing it for one specific debt product. It's not just seller financing. Some people are just seller financing or just private capital or just bank loans, and those people box themselves into the corner, and that's That's the reason I appreciate you jumping on because you actually think, you logic through the situation and you put the best product for the deal that presents itself. That's my favorite part about your whole business. You're flexible. That's awesome.

I mean, I think I've been an entrepreneur my whole life, right? I think that's helpful. I started when I was in your age, really, Cody. It's like I've never had to have this kind of institutional mentality that you get boxed into being a W-2 employee or having to go through this corporate ladder. It's like I've always seen the world as, okay, what are the problems? What are solutions? How do I get from point A to point B and do it? You know, how do I hack the system, right? How do I hack the system? I don't need to go— I've always been a contrarian, right? If everyone's going left, I want to figure out how to go right and beat everybody to the finish line. And so I think applying those same principles to real estate is definitely an advantage, um, you know. And I think, you know, just thinking creatively outside the box— there's not one way, you know, there's multiple ways to get where you want to get. And at the end of the day, it's about communication. How do you structure a conversation with either a broker or a seller that— or a bank that gets them what they need and you what you want?

Love that.

What just amazes me is the size of organization you have. A lot of people that— because you've had strategies that got you to where you're at and you have a big fund, you've had bank relationships. What I've seen with most people who get as large as you've gotten is they hit a point where like, you know what, I don't need to learn more because I'm ahead. And I just respect that. That's not you. You can hop on a podcast, you got takeaways from a 31-year-old who's been in real estate for like 2 and a half years and a 23-year-old who's been in real estate for 3 and a half years.

I was 22. Yeah.

Oh yeah, right. You're even younger then. Turns out if it's in the past, we were younger in the past. But when you're doing this, it amazes me that you can build as much as you've built and you just, you can take a step back and pivot as quickly as you do. That is the thing. When we talk about Terrence, it just blows me away. How you can operate that nimbly at the size that you are, because you're not a 5-person company. We've been to your offices, which are awesome.

I've never shot hoops in anyone else's office before.

Yeah, insane. You've built a really cool business with a lot of people, and the ability to say, you know what, we're going a different direction, and then just to pull it off, I don't see that often. That speaks a lot to your operations.

You've got a great team. I mean, you know, my brother, we've got, we have an amazing team of people, and thankfully we've had some, you know, people with us for a long time, and they have a lot of confidence what we're doing, and You know, finding the right people, getting the right people on the bus, the right seats, the right roles, and holding people accountable. You know, all those things are the hardest part, right? Buying real estate is easy. And as you guys continue to grow, you'll see this more and more. You know, the people is the hardest part, right? So you got to find really good people and try and align interest as much as possible, get them all rowing in the same direction. And it's hard. I mean, I, I'm the first one to say that, you know, I'm a way below average CEO and maybe an above average investor. But, you know, being a CEO is the hardest part. And, you know, that's a steep learning curve, you know, very steep learning curve.

Well, I can't speak to your ability too much on a CEO because I've only seen what you've shown us. However, you are an above average investor. I know that for a fact. Walking your properties, meeting your team, you know what you're doing. So we really appreciate you jumping on for today's segment and we'll see everybody again on Monday.

Mm-hmm.