Multifamily Strategy Live - getting a little too creative

All right, and we are live again. Welcome, welcome, welcome. I swear I'll nail down a standard time here and be on time at some point to my own live, but guys, it is Osgood to see you. For those just joining for the first time, my name is Christian. This is Multifamily Strategy. We've bought hundreds of rentals, uh, and unfortunately one hospitality project we're going to talk about a little bit today. But we bought hundreds of rentals using creative finance, uh, starting with very, very, very little money. I want to show other people how to do the same, so we're going to share some of the best practices here. As always, you can ask questions in the chat as we go. We'll answer the questions and the call ends when the questions end, except for Today we are running the largest webinar I have ever run on Creative Finance, on how I got started and how the game is played. So if you guys happen to be watching during this live, you guys can go ahead and join that. There is a link to that on my, on my Instagram page. So I would love to see you guys there. Love to see you guys there. Diving on in here. Getting too creative. Every time we start with a topic, today's topic is as follows. There is a point where you can get too creative. The goal in creative finance 'Cause you can go, you negotiate, and you can make up really whatever everyone can sign for it. The problem is, as you get more creative, you get more complicated. If it's complicated, there's more room for error, there's more room for expenses, there's more room for misunderstanding. If it's simple, it's repeatable. If it's complicated, you're probably gonna have a structure you can only really use once. It's a lot of brain damage. It takes a lot of the fun out of the game, but it can also cost you some money. Here's two examples where that happened to me. First of all, we talk about this every once in a while, Robin Hood Village Resort. Bought hospitality, beautiful property. Beautiful property, Hood Canal. I love this place. However, we bought it differently than we really wanted to negotiate. Originally wanted to do $450,000 down. They countered with a million. Our solution was simple. The simple solution was, well, we're comfortable doing $450,000. They want a million down. We said, hey, we'll do $450,000 down, but every year we have pretty high income. We've had a lot of rentals at this point. We'll do $450,000 now and we'll do $2,250 every single year. End of the year, paid on the loan. End of the year, paid on the loan. End of the year, paid on the loan. By the end of the note, you have paid off resort. That's not half bad. Well, not quite the end of the loan, but you can pay it down a ton. That would've worked. That would've preserved a lot of cash for us. Still, in retrospect, would not have been the right structure, but it was simple. What the owner said, oh, I have a better idea. I have a better idea. How about this? You still do the million dollars down that we want, but then you just pay more. You just do that same structure where you pay more in the principal paydown. And I'll do you one better. We'll even extend the note one extra year. Guys, that's a terrible deal. Terrible deal. More than double the down payment for an extra year on a 7-year note. Now it's an 8-year note. Woo-hoo. Like, that's not helpful. That doesn't help anyone with anything. It's a bad deal. However, we were really excited to buy it. And so we went ahead and we pushed forward. Then we got to the technical, how are we going to structure this? Well, two of them are on a land contract. One of the parcels is seller finance. So we have three total transactions. You're buying a business and the real estate. You pay them off in sequence. So you pay off one parcel, then you pay off the next parcel, then you pay off the next parcel. It was structured in a way that was confusing and nonsensical. Well, now you have all these multiple contracts, you have certain properties getting paid off, you have a resort that is being— the whole thing is just really, really confusing and messy. And what ended up happening is we ended up choosing a deal structure that was not ideal for us, that dipped into our cash flow, and it took the income that we had worked so hard, the financial freedom that we'd worked to build. Well, our first $120,000 after tax each goes into paying down the Robinhood from our portfolio. Then what happened is, as things happen, my other companies took off. We did more multifamily. My property management company started growing. Multifamily Strategies started becoming a huge community. The YouTube channel grew over 100,000 subs. I mean, we started advancing and then we had this random hospitality project, that bonus 8th year on the note that doesn't, that doesn't help me right now. It is a large expense and it is an inconvenience. That was the wrong structure. What happened? We got too creative. We got— we made a deal work because we could do it. We did a structure that had a lot of moving pieces, and by the end of it, the whole thing was a mess. There was— there's problems with the partnership structure too. The whole thing, way too complicated, not worth it. Uh, here's another good one. We did a deal, uh, this is in Walla Walla, Washington, 60 units, uh, very, very cut and dry paperwork. But the logic here was, well, they need a large amount down. Instead of us coming with a ton of cash, there's 3 separate properties. Well, there's actually more than that, but we did it on 3 separate contracts. The largest building was going to be bank financed, and on that one we brought the price down lower. On the other buildings, they were going to be seller financed, and on those we raised the price of the contract. So on the ones where we went on terms, We gave them more price, and on the ones where we needed to win on price to get it financed, we went ahead and took the bank terms. And at that time, it was, it was kind of the peak of debt, so it was more expensive debt. Well, we went through, and as we were going through due diligence, interest rates— that's right when they were spiking. So they went up and up and up and up and up and up and up to where the bank deal was no longer feasible. Here's the problem: we solved for the solution of like, okay, they need a little bit more down, let's get that money from the bank. Let's take, you know, let's win on price on this side, terms on this side. This makes the deal work for everyone. Well, what happened is we have separate contracts that are in no way tied to each other. No way, shape, or form are these contracts associated with each other. They just are separate transactions. Went through due diligence, still liked them. Interest rates kept creeping up. We decided, hey, we're no longer going to buy the bank-financed one. The seller-financed portion of the deal still works though. And on that one, they're winning on price, we're winning on terms. We go, we sign for the deal. Sellers never show up, never sign. Now it says in the contract, you know, we have a contract to purchase this. It's not tied or referenced as any other buildings. It's just we have a contract to buy it. We call title. What's going on? I don't know. They call the sellers. Oh yeah, we're not signing for this. It's all or none. They're all contingent on each other. Turns out you cannot decide new terms for a contract after a contract has been signed between two parties. However, we got a little too creative. We had a solution and it was a simple solution. Put the price over here, put the terms over here, get the bank to want to lend on this one, get the seller to lend on this one. Everything works. However, how it worked in practice was we got to the end, we went to title to get earnest money back. The owners disputed and said, no, we want to keep the earnest money, all of the earnest money for all the transactions, the ones that you guys backed out of and the ones that you signed for that we did not— that we didn't want to sell. Title does not solve legal disputes. So even though we had 100% a right to the properties, we had to sue them for, uh, specific performance 14 months into a very expensive lawsuit. We had an opportunity came up where we really needed $100,000 to close. We settled with them to get $100,000 of our $135,000 of earnest money back. We lost $35,000 on a contract that we had every right to win, where we were correct, because we got just a little bit too creative. So Moral of today's story: creative finance is awesome. In fact, it lets you buy a lot of stuff, no to low money down. You can always structure the pieces. Don't get too creative. Every time we've come up with something, I'm like, wow, this is really out of the box and it's gonna have a few moving pieces. It never works out the way you think. Come up with the simplest solution that works for your deal. Don't get too creative. If the deal's just not coming together, you don't have to buy it. If we just walked and didn't do those two— those are two of the most expensive deals that we've ever been involved in. Just don't do them. All right. I got a question here on YouTube. When going to coffee with local landlords, we only target the landlords who own the building we want to buy, correct? No, you, you let you— well, I don't want to say target. Target doesn't feel like the right word, but I'm only meeting with people who own multifamily in the area that I want to own. I don't care what building they own. You own 6 duplexes. I don't buy duplexes, but you're a multifamily. I want to know the owners of my market. I want to, one, learn from them. Two, they have resources that you don't. They know people you don't. They have lawyers you don't. They have property manager contacts you don't. They know other owners that you don't know yet. The goal is to move from being an outsider to being an insider in any given market. It's not just targeting the people who have low debt or the exact building you want to buy, but you want to get around the people who've done the thing you want to do. So if I meet someone and they have a 25-unit building in an awesome area of town, in a town that I want to invest in, of course I want to meet with them. I'm also going to go meet with the person who has the 12-plex or the 4-plex or who has 10,000 units in that market, uh, as much as I am the person who owns 2 units in that market. I want to have the owners in that market know who I am, know what I'm trying to do, know why I'm trying to do it, and to build the relationship from there. I really— I sincerely do want to learn from them. Oh, you guys, uh, what if you're scared to talk on the phone but not in person? Could you text owners? Yes, and we've done that really successfully. You can actually— the way that we text is, it's very simple and it follows very similar to the script of multifamily strategy that one would do, uh, to reach out to owners. In fact, if I don't get an answer from owners on my first two calls, that's exactly what I do. I shoot them a text that basically says, hey, This is Christian. I just drove past your property on whatever street. Been trying to break into this market for a while. Wondering if you had any recommendations for me. Like, get direct with a text. Like, don't beat around the bush. It's not a like, hey, did I get the right person? They don't have a very specific short conversation with someone via text. But yes, it absolutely does work. I would recommend getting comfortable on the phone though. There's a lot of business that happens on the phone. I, I'm not actively trying to make like a ton of owner calls today, but I took a lot of calls with owners today, all day long. And it's not because I like doing it, it's because that's what I have to do to grow my business. What are the 4 phases of real estate? You said one of the phases is the build phase. Can you name the 4 phases? Explain. Yes. Love this. I love this. Somewhere on this channel, I'll do it again here shortly. Explain the 4 phases. First of all, you have the build phase. So when you've set your target, you know what cash flow you're going after, the timeline that you wanted in, and why you're trying to get there, like what life looks like for you when you reach your goal. If you can get that figured out, now you can really start get moving forward. So phase 1 is the build phase. You're acquiring as much cash flow as humanly possible. You are buying deals. We don't play defense until we've scored some points on offense. This is how you win the game. So get in there and play the game, get some rentals, get that passive income up. Build phase. Now you have stabilized. So you've acquired a bunch of properties, you have all the potential. Now you want to make sure that they're stabilized. Stabilized means you're at least, depending on your market, 90 to 95% occupied, and you're within 95% of market rent. So things are rented at where they should be at the occupancy that one would expect with no major deferred maintenance. That means you don't have, you know, You don't have a fully occupied building, but you have a water leak or you have a, a roof that's about to fail. Like you fix all the major deferred maintenance, you have no ticking time bombs, and you have a stable building. Now we get to optimize. This is where you can look at it and say, okay, the interiors are nice. The, the exterior is, you know, it is what it is. Every, every, no major maintenance items are missing, but maybe the building's ugly. This is where we choose new paint colors. We go through, we actually design, okay, do we build a courtyard here? Will this help with tenant retention? Add picnic tables. Uh, if you can build it far enough from your building, build barbecue pits, whatever it is that can upgrade your building. Sometimes you can turn a storage area into another unit. Optimizes with the pieces we have. What is the best asset at the highest income we possibly could achieve? And then you optimize. Once you are there and you've maxed your income, Now and only now can you go through and start paying off the debt. Phase 4 is debt paydown. Everyone who has mastered the real game, the real estate game, is where you win. You've hit your goal, you bought your properties, you have the cash flow, you have the income. You go ahead and you start paying off the debt. And a paid-off portfolio that hits more than your goal cash flow is a heck of a lot more when it has no debt on it. You are done. You have won. Congratulations. You have won capitalism. That is how the game is played. Uh, those are the 4 phases. A lot of people choose not to pay down their debt at any point. They stay levered. You don't have to do that phase. I will say this though, the best landlords who are the happiest, healthiest, simplest business models I've ever seen, all of them have paid down their debt. The people who mastered the game, who've been playing this game for 50 years, they didn't make that mistake that wiped them out because they stopped re-rolling the debt thing. Once they hit freedom, they protected freedom. And then over years and year after year, decade after decade, that portfolio appreciated and it had no debt. And so as it paid itself off, they're like, wow. You look back a couple hundred million dollars of real estate later and you're like, wow, we did the thing. It's a good strategy. How do I determine the amount of money for, um, uh, reserves and CapEx? Well, capital expenditures, you always go through with contractors and get your quotes and you add to that quote. Um, every project always goes over budget. Um, but that's how you do CapEx. You actually bring in a contractor during due diligence when you're under contract for the building. Uh, the actual reserves depends if it's an already stabilized building or near stable. Dave Ramsey's, uh, reserve model. I want to have 3 times the monthly rent in reserve ready to go. Highly recommend. That's a great way to do it. Uh, if I have the active CapEx project, if I have a renovation project, the correct amount of reserves are 2x the price of the project. So if I have a $2 million building, say I have $100,000 of renovation to do, I should start with a bare minimum of $200,000 in the account. Bare minimum $200,000. There are almost always overages on projects. Timelines take longer. Maybe the construction causes more vacancies. You need a little bit of extra money if you are doing a value-add project. So it's value-add at least twice the random cost, whichever's higher, twice the random cost or 3 months operating. If everyone left your building, do you have enough money in there to operate the building for 3 months? If you do, you're good to go. Have you ever inherited staff when you bought a new property? Yes, the Robinhood. I inherited 9 employees. Uh, how do you go about implementing your own managing process? Um, here's what I have learned. Fire everyone every time. I know that sounds harsh. Um, every time I— so I bought 2 companies, uh, 3 if you count the fact that Robinhood was a business sale and a real estate sale. Um, but I've bought 3 companies. I sold 1 company. I've done to date, I stopped counting at 70. I should go back and see. I, I've hired probably 100 people, maybe, maybe I've hired a little bit more than 70 people. I've fired well over 100 people. I've come into teams as a sales manager and also had to fire full teams. Getting teams, getting the right people on the team is really important, but I have never successfully, especially on a value-add project. Taken a team member who was part of the failing project and had them successfully transition to a successful project. Like, one of the first things you have to do is you clean house. You get the people who are used to running things the wrong way out of the org instead of trying to help grow them and grow their career. I've tried that so many times. You invest heavily into someone like, hey, I want to do this, I believe in this project, I want to be a part of it, and then 6 months later They're mad at you about something. They, they hate management. They hate the owners. They hate their employees. You get texts about it. They're causing problems. And then that attitude just bleeds into the rest of your team. I have— I can't, I can't imagine an instance where I would buy a property or a small company and retain any of the employees, maybe one key person for a transitionary period. Um, but that's, that, that's, that is how I've worked stack every single time. If I'm coming in, we're running it a different way. I don't want the old owner's methods in there. I don't want bad habits in there. I want a clean slate to start my businesses. Um, it is harsh and I think it's best for everyone. I think it's best for everyone who currently works at those buildings. I have, I've tried to retain them. Uh, I retained one, uh, when I started in Texas. Uh, we retained all the staff when we started the Robinhood, 100% turnover. I have no original employees there. Not, not a single one. Boy, that's just such a good— it's such a good question. It's happened to me so many times. I've done that with a PM company. Just find your own talent and build your own team. It works better every single time. Wow, short stream today. Not getting too many questions. We'll give you guys a second to ask a few more questions. Uh, by the way, you guys are invited to— I'm running another webinar tonight, so, uh, at the top of the hour, uh, something like 23 minutes, we'll be launching that. So I'm getting prepped. I'll get into my traditional black, black shirt. Uh, I like to wear that for— I like to wear the same thing every time, but I'll, uh, I'll get all, uh, all jazzed up for the that. So we have another 10 minutes. You guys have other questions? If not, uh, always fun to go live with you guys on a Wednesday. I like sharing the journey. This, this particular piece, uh, was one of the most expensive lessons for me and Cody to learn. So our topic of the day, for those who are just joining, creative finance is awesome. It's, it's allowed me— honestly, I've made a lot of millions of dollars over the last several years with creative finance. And we've, you know, add up all of our mistakes together, that's also 7 figures. Uh, but we've made multiple 7 figures along this journey. Every time I have had significant losses, it was an end result of trying to get too creative with the deal. Keep your deals really simple. And if you have a deal and you can get creative and it's getting just too creative, you don't have to do that deal. Just do a simpler deal. There's more properties out there. I promise you there's more properties out there. Uh, it took me a few years of doing this to learn that. I— my entrepreneurial drive and desire to be creative has cost me more than it's made me on some of these deals. And so that's my advice to everyone out there: get creative. Learn how to get creative. Understand what is normal and get a little bit outside of the box. If this is the box, operate over here. Don't operate over here off screen. That's— every time I've done that, uh, it gets expensive. And you're not going to repeat those strategies. You get a deal that's just like crazy unique and has a bunch of special clauses, what ends up happening? It got— it's a non-repeatable deal. You're never going to use that structure again. And just not the way to do it. Oh, one of my favorite questions of all time. One of my favorite questions right there on the screen. How do you do this with a 9 to 5? I have, well, every day I, I same schedule. Um, I, I'm not a morning person. I hate mornings. I get up at 8, I start work at 9, I end work at midnight. I have 2 meals a day and I work out every day. I have way more than a 9 to 5, unbelievably more than a 9 to 5. Um, you need to spend time on the front end. Making sure when you look at a deal, you know what a deal is. Like, get into the analysis, get around people doing deals. If you're trying to do it by yourself, it's going to take you years and years and years. And no, this is the— if anyone's going to blow me up in the comments for this, uh, this is not an ad for Multifamily Strategy. I'm, I'm just saying groups like that, you can get on my free page. I have a Facebook— go to any of my, uh, YouTube videos, like not the lives with the videos, there's a link to a free Facebook page. You can join a community there of people who do real estate. If you really want to get into it, you join my mentorship call, you can join a local meetup. I don't care what you're doing, you need to get around other people doing the thing you want to do. You want to save time, pay to get in a community. You want to go out and do it yourself, find the place where people in your market are meeting up and then meet up with them. Make friends, go out and be, you know, be a human, be social. Um, but if you get around people doing deals you know how to look at a deal and recognize when there is an opportunity. Once you get there, and that does take time, once you get there, 10-15 minutes a day on acquisition. Today I talked to a title company for 4 minutes. I talked to my lawyer for way less than 4 minutes, and I called a broker for a transaction that I'm closing. This is all to close a 44-unit. I spent like maybe, maybe 15 minutes if you include the ring times. That's my time on acquisition. I buy over 100 units a year, not because I'm amazing, just because I spent the time and got around people and intentionally learned when I'm looking at a deal. So now I know what I'm doing. The only time it takes a lot of time is when you're doing like your first or second deal. There's just more to learn. There's more learning going on there, which is fine. But In, in like Multifamily Strategy, for example, hundreds of students, a handful maybe don't have a full-time 9 to 5. I mean, basically it's all people who are employed. And I do want to point out, I am extremely employed. I run Multifamily Strategy, which is a huge and fantastic fun project. I also have a property management company called Apex Asset Management. I also have a company called Funnel Stacking, which is sales and marketing, where we have some unbelievably huge clients, including myself, where I'm not a large client, but we, we have big-name clients and we help them build their funnels and their businesses. And they actually launch communities with people who actually go out and do the things. We work with non-gurus to actually get content out to people. That's a company that I spend a lot of time in. Uh, but other than that, of course, I, I do own and buy and manage real estate. I have a very full-time job. How do you do it? Manage your calendar well. Build your team. As you get larger, you need more people. Is SEC registration just for syndication or something you have to do when you get equity partners? Uh, SEC is for syndication or anytime that you are creating an actually passive investment for someone. Investment for someone, capital partners. If you are in a joint venture, everyone has to be active. You lay out roles in your LLC and you track what everyone's doing in your company meeting minutes. If you have a non-active person, their only contribution was cash, you have created a security. They can sue you and you would lose. You need to file those with the SEC and they need to be a limited partner. Now, limited partner, it doesn't just mean syndication. Every time you're syndication, you're SEC. Depending on how you're structuring your deals, if there are LPs involved, you're going to need to involve the SEC, and it's usually going to be closer to a syndication. So it's not exclusively to syndication, but I think the big lesson here is if you want to do joint ventures, they have to be exactly that. It is a joint venture. It is two parties coming together. Yes, you can have consideration for they brought the capital, I brought the deal, and I'm going to be doing a lot of the day-to-day. That's fine. But if they're just doing nothing, they're uninvolved with the deal, they know nothing about the deal, you guys aren't meeting, that's, that's going to be a problem. They need to have decision-making power. They have to have some active role. Every LLC I have is other owners who, yeah, they had the capital for the deal. A lot of them wanted to learn some of the operations. They're, they're given specific tasks in maybe leasing or reviewing leases. We're all getting together as a team and determining what projects you're gonna do and the budgeting for this. We have quarterly meetings. Uh, that's what it looks like to do a real JV. And, uh, the nice thing with calling people is if you have a 9 to 5, uh, guess when a lot of people are available? 6, 7, 8 o'clock. I call people in the afternoon all the time. It's, it's real estate. It's not, you know, this isn't a work call. I'm not calling you to sell you life insurance. I'm calling you to talk about real estate. You can have a social call with another owner in your market after hours, no problem. So yeah, don't make phone calls at work. That's— I, I wouldn't do that. With no experience, what do you think the best way to start meeting owners and look for gaining knowledge and opportunity? Joining a brokerage and learning? No, no. Uh, the last thing you should do is that, uh, you would only get your broker's license if your aspirations be a broker. Otherwise, you're gonna be a terrible broker. Um, also, what's your goal? If your goal is to own real estate, getting a license to help other people buy real estate is not going to help you at all. Uh, joining the brokerage and getting in the industry, that was a huge mistake that I made. I, I kind of had the same train of thought. What I learned is, uh, no, that's dumb. That we're trained to go first grade, second grade, third grade, fourth grade, middle school, high school, college, first job, second job, third job, scale up, eventually save, buy investments. Um, we are trained to add steps. Don't add steps. If you want to buy properties, I would start by buying properties and getting around people who are buying properties. Skip the broker thing. It is not a— it is a waste of time unless that's a career path you want to go down, in which case absolutely do that. A very rewarding career path for a lot of people, and you can make a lot of money. But become a broker if only if you want to become a broker, not if you want to become a real estate agent. How do you structure an LLC? Uh, should you have one before a deal? No, you don't even know who your capital partner is, so you couldn't form the LLC prior to the deal. If you're buying a deal yourself, just own it in your own name. There's no significant advantage to having an LLC with a sole owner. If you're going to have a partnership, you would have to already know who the partners are for sure. Always start with the deal, then the debt, then the equity. So find the deal. Filing an LLC takes a day. So anywhere within the process, you get that done, get an EIN letter, open a bank account. It's a very simple process. And yeah, calling people after 5 isn't a terrible idea at all. I'm going to like right now, it's my time. It's like 5:45. I'll be calling owners after I'm done with my webinar tonight, so my time, uh, webinar goes from 6 Central to— I, I usually wrap up— I, I've done a similar presentation a few times, it's usually about an hour and a half, so I'll be doing some owner calls after 7:30 tonight. Not a problem at all, not a problem at all. All right, well, thanks for getting some bonus questions in there, guys. I always appreciate that. Again, I'm gonna go prep for that 'cause that's in 13 minutes. I'm gonna make sure everything's ready and probably should fix some of this nasty beard on my face here. I have not trimmed this in a few days. I'm gonna go get prepped so I look all pretty for my presentation. I'll see you guys on the next episode. I'll be back next Wednesday in studio. If you guys have any questions in the meantime, hit me up on Instagram @ChristianOsgood. We'll see y'all on the next episode. Episode.