More Deals Than Capital?! How To Scale Up Your Business

A lot of people when they're getting started are afraid of interest only, but there's a lot of benefits and security in that. Hey YouTube, welcome back to the channel. My name's Cody and I'm here today with Axel for episode number 3. Axel, welcome back.

Awesome, thanks for having me back.

Today we are talking about scaling because you mentioned something to me in episode number 1, and if you haven't seen episode 1, refer back to it. But you mentioned that you have more deals that you're writing offers on than you have capital. You're doing what, 40, 50 offers a month?

We'd love to get to 50 in a month. Usually, we're anywhere 35, 40, low 40s. That's kind of like our internal KPI. Like, if we hit 35, we had a good month. Recently, it's been ramping up a little bit more, which is great. We've had more conversations with sellers, but roughly exactly what you're talking about. Yeah.

So you're sending in an offer a day. That's ridiculous.

Yeah, that's our goal. We want to make an offer a day.

Now the nice thing is it's cool to send out offers, but you have more deals than you have funding for, which is a problem that most people aren't blessed with. Most people have more money than they have opportunities. How did you get to that point? Because I would— I mean, I don't believe that that's how it was in the beginning, was it?

Um, no, I think, um, you know, it's interesting in the, in the life cycle of our business, it's kind of ebbed and it's flowed. You know, we've had periods of time where, um, you know, we've just had a lot of deals. We've just been in a situation where a lot of things align. And I think everyone who's been in real estate for a while, it's almost like an EKG sometimes in terms of where you're spending time and how much you're doing. It's just up and down, up and down. Sometimes when you get into those up moments, you have more deals than money and you try to figure out how to monetize everything or, you know, put the money together, refer some of the deals out. And then other times you have more money than deals, right? Because you're at the bottom end of that curve. And that's where, you know, we had more money than we had deals for most of late 2022 and into early 2023 because the market literally just grinded to a total halt. But now it's starting to, you know, now that we've been in this elevated interest rate environment for a while, I think, and at least in the market we're in, we're starting to feel more comfortable with where pricing is and we feel comfortable with underwriting to certain levels of returns where so even if debt goes up a little bit more, it comes down, like we can hold and it will feel comfortable for a longer period of time. And now we're in a situation where we have slightly more deals. And when I say we have more deals than money, I mean, we've shifted our focus to going back to looking at some smaller deals, right? Which are a little bit harder to raise money for because you can't just go out there and raise $5 million at once, like doing a fund or something and then going and putting it in all these different deals. It's like we have to raise deal by deal. It just requires a lot of work. It's a lot of paperwork, emails, all that stuff. Investors right now are getting more and more skittish. The big thing that happened in the early 2010s is deals are everywhere, but money was harder to find. It was just not a lot of banks lending. There wasn't a lot of investors who wanted to write checks. I'm not comparing what we're in now to then because it's totally different, but it's starting to feel as if that's what's happening where investors are getting a little bit more skittish. Banks are only lending on projects that really make sense. And, um, it's just money's a little harder to come by. So I feel like that's where we're at right now in our business.

I don't know what I was doing messing around in middle school back in the early 2010s. I should have been buying real estate.

I was in high school, you were in middle school. We were both, we were both preoccupied. Yeah, we should have been doing something else.

So you've mentioned in a past video that you've done some creative finance. Is that helping you a lot on your deals to avoid all these rate hikes? I mean, how are you handling this?

Yeah. So, we, I mean, every time we make an offer to a seller, when I say we do these 30+ or 40+ offers a month, they're basically all direct-to-seller. We spend a lot of time going direct-to-seller through cold calling, cold emailing, and sending direct mail. Those are really our 3 pillars. And anytime we connect with a seller, we arrive at 2 prices. We have our price if we just go buy it, we call it cash, but it's really we're going to go get a loan from a bank. Local credit union, something along those lines. And then we have a price if the seller holds back a percentage of the deal, right? We can't make that offer on every deal because oftentimes the seller doesn't have enough equity to do that. And there's no avenue for seller financing. But if the sellers don't, you know, if they're a long-term owner, they have significant equity, we'll make them two offers and we'll structure them in such a way that works for both of us. You know, one, typically the take all your money at closing is a lower price offer. Hold back. You know, we usually default to 80% of the purchase price. That's our default. And then if they express interest, we'll start to negotiate. Maybe, you know, we'll do a little bit of a higher LTV, a little bit of a higher rate, lower, lower LTV, lower rate, and then we'll start to get into that song and dance. But we usually start right at, you know, right now we're usually at like 4.5% on the seller financing side, something that's around where the, you know, the 10-year Treasury is, right? Kind of that's where we price it. And then we do some simple math. It's like, all right, what are we going to save in interest by paying the seller 4.5% versus paying the bank 7%? Amortize that over a couple of years and adjust the purchase price accordingly. It obviously saves some money on the seller financing side by not having to go through the appraisal process, you know, the loan underwriting process. And, and that's how we arrive tactically at the two different prices. And then we make the offer, you know, both offers to the seller, and then the seller themselves tells us what he cares about or she cares about. You know, very oftentimes sellers very quickly are like, no, no, I'm just not doing seller financing. Like, I'm, I, you know, we go the other way, but they're like, oh, that's interesting, but the rate seems like it's a little low, you know. And then we're like, all right, well, we can do a 5.5% rate, but you have to give us a little bit more, uh, you know, on the LTV side, or you, or we need to do interest only, or we need to do this, or we need to do that, or what have you. So that's typically how we pursue it. You know, we have a, we're having more and more and more of those conversations now because the difference in what we can pay is growing. Because as rates grow and there's a bigger gap between seller financing and what we would just pay cash, those offers are becoming much higher in terms of the dollar amount on the seller financing side. So, more sellers are open to having that dialogue. But that's at a high level how we approach it. And then we get into the specifics depending on the deal.

As far as actually scaling your portfolio up, you're making all these offers and you're giving them two options. That could be logical options for them either way they want it, you know, scale up, take the cash or amortize out your— basically annuitize what you've built over the past decade or two decades or three decades and exit. That's cool. But how do you actually manage the capital? Because capital management, I found people that do better with that do better in the long run. How are you managing your cash flows? How are you managing when to move equity to something else? What do you pull it out in a loan? Like, how are you going to do that for the long term and how have you been doing it in the past?

That's a great question. I'm really glad you asked that because, again, nobody really talks about that, right? Because that's one of those tactical behind-the-scenes things that's really important to get right or else you're jeopardizing the empire for a pot of gold oftentimes, right? So, in terms of what we do in our business, we treat each individual deal as if we were raising the capital to do that specific deal. And even if it's a deal that it's just I'm doing personally, it's an 8-unit deal in Southern New Hampshire and I'm just buying it myself or whatever, I'm still pretending like I'm the one investor in the deal. We figure out exactly how much capital is required to execute the business plan, how much we're spending in renovations, what's going to be our vacancy in the first year as we turn units, and what do we need to put aside for reserves. Let's put aside a contingency in case something, a heating system goes or this happens. And that's all fully funded at the time of closing in its own operating account for that specific deal. Now, of course, I have some freedom, right? There's a level of discipline that's required in order to leave that money there. I could go in there and take it out and move it somewhere else and, you know, rob Peter to pay Paul, so to speak. Go, go, go take $5,000 from there to go turn a unit over here. But we're really, really focused on not doing that. And that is, for me, the easiest way that I found to manage cash when it's going to all these different deals, and especially when you're doing deals yourself that have some kind of value-add component. Because it's very easy to be like, "Oh, price makes sense. Let's get it closed. We'll just fund the renovations out of cash flow. We'll make some contributions here and there to make sure that we get through the business plan," etc. But then you realize you're doing that with 3 different deals, kind of lose track of where you're at, what's needed where. You're sending money into different places. You're moving money over here, moving money over there. And then that just becomes a really stressful way to run a business. Long story short. So, the way that we prioritize doing it is what is the capital required to execute on this entire project? And then, we put it in that account day 1, which is what we do when we raise capital, right? When you work with investors and raise money, you got to raise all the money upfront because you can't keep going back to your investors asking for more, right? That's terrible business. So, I just pretend that that's what I'm doing and that I'm the investor for deals I do. And then, obviously, when we raise capital from investors, we're raising literally all of the capital that we need to execute the project, sits in the account, And that's what we use to operate the deals.

And how do you respect debt in relation to scaling? Do you pay your stuff off? Do you lever till you drop? Because there's two big trains of thoughts there. And the channel knows what we want to do, but what do you do?

Yeah. So, I used to use a lot more debt. When you're early in the business, you just have to use a lot of debt. And yeah, the risk-reward might not make sense for some guy who's 60 years old and looking to get out of the business. When you're in your early 20s, like, you don't have other options. Like, that's your option. A lot of debt, hope things go right, sell your kidney if it doesn't, and try and stay in the game. So that's what I did forever. And then I got to a point where I was like, okay, like, don't necessarily need to take that approach anymore. We can go a little bit slower, we can grow a little bit more predictably. And, and then, you know, what really drove it was when you're raising investor capital, you need to structure the debt in such a way to where you aren't jeopardizing the deal. So, you know, we don't really use bridge loans anymore in terms of short-term bridge loans. You know, every loan that we do now is at least, you know, we at least have at least a 5-year term on it. We fix all of our rates now and we try to negotiate structures with local banks and credit unions where we can fix our rate maybe at a higher rate, but we just negotiate down prepayment penalties. So we do have the freedom to sell the refinance and pay like, you know, maybe a point, point and a half. So we're trying to get our best of both worlds, right? We used to do a lot of floating rate with no prepays.. But we stopped doing that before rates started going nuts. You know, not to pat myself on the back, but it was like, we're like, why would we fix a rate or float a rate when the Fed has told us for 12 months they're going to raise rates? So we stopped doing that back in early '21. So we structure the debt in such a way to where we're just not forced to do anything. I don't want to be a forced seller at loan maturity. I don't want to be a forced refinancer because our rate's gone up. We underwrite everything as if we're just fixing the rate and holding it for 5 years. And then from an LTV standpoint, differs on the deal. You know, we still, we still come in with 70-75% leverage on pretty much everything that we do. In reality, that's 65-70% leverage because we're always buying at a discount. We feel comfortable with our underwriting in terms of we're underwriting to, you know, just a return on cost that's much higher than our interest rate, and we feel okay with that. And again, that's— I think that's always subject to change, but that's, you know, kind of works for our business right now. And as it relates to our strategy over time, I don't know if I'll— maybe I will be, maybe I'll become the guy who's down to pay things off and to live off the higher nominal dollar amount of cash flow. Haven't really hit that stage yet. We're still trying to turn capital and earn the highest and best that we can reasonably from a risk-adjusted standpoint without overleveraging or doing anything that we don't need to do. And I think the challenge is if you're in the business of raising money, you unfortunately just have to provide compelling returns or the investors are going to be enticed to go elsewhere. And the more debt you use, the better returns look, right? And we always are trying to strike that balance. And we tell our investors, we're using moderate leverage that is structured from a loan term standpoint in a way that we're not jeopardizing your capital or our capital or the deal, but allows us to still deliver quality returns. And that's what we're doing right now in deals we raise money on. But deals I personally own, like, I'll let the loan balance start, you know, start going down. I just always want to be in interest only. That's my big thing. I never want to be in amortized debt. So, if I buy a deal and it's got 2 years of interest only on it, or I refi a deal with, you know, 24 months of interest only payments, and then it starts to convert to amortized, you know, to an amortized loan, I always look to refi again to get back onto an interest-only payment schedule. I never want to be on amortized. I never want to just send my money into the equity that I, that I have to pay to access. But, um, but oftentimes it's just a rate and term refi. It's not necessarily an LTV cash-out refi. So I try to— the stuff I know personally, I try to keep around, you know, 55-60% leverage. Um, and then when it makes sense to refi, you know, I will. But anyways, probably more than what you wanted there, but that's kind of how we think about it.

That's smart. A lot of people when they're getting started are afraid of interest only, but there's a lot of benefits and security in that.

Yeah, I feel as if I'm a better steward of my own money than the bank is. Like, I don't want to give my money to the bank, which is what you do when you pay down a fully amortized loan. You're giving your capital to the bank, and obviously that's de-risking the loan for them because you're paying down the principal balance and the deal is getting less risky for the lender over time. But, but I just, I want more nominal cash flow on a monthly basis that I have the freedom to go out there. And, you know, whether it's something that I'm going to do to grow the business, whether it's make a hire or buy a new property or whatever, or it's just I want to put that money in the bank that I can reach into and access if something goes wrong. Because it takes at least 45 days to get anything out of a bank from an equity standpoint. If you're going to go out and try and do a cash-out refi, that's the bare minimum. So, I would rather control that on my end. Absolutely.

Well, I appreciate you sharing today how you scale, how you manage your money, which is really important. Nobody talks about that and the overall plan.

It's a stressful part of the business because if you don't get it right, you find yourself running thin everywhere. And it's important to—

Not a fun place to be.

No, no.

I feel like everybody's been run thin if they've played the game the way that we've played it with creative finance, massive leverage. It's not fun to stay there forever.

No, exactly. It's like once you don't have to do that, like just try and get out of doing it. Which is funny because some people can never get out of that because they always want more and more and more and more. You know, I think it's like helpful if you clarify your goals. Like my goal was I wanted to build a real estate business that could afford to hire 2 or 3 people and I'm not stressed out. And once I get there and I feel safe that I can make payroll and continue growing the business, I'm going to just approach the entire business in a different way. Um, which, you know, that's what happened to me a couple of years ago, and it kind of changed how I started doing things. But again, you know, sidetracked. But I think it's important to clarify what that is for you in your business.

Love it. Well, thanks for jumping on to episode number 3. We'll see you again next week. And for those who are watching, make sure to hit the subscribe button, and we'll see you next time.