The worst thing that can happen in real estate - it happened.

Hello and welcome to another episode of Multifamily Strategy Live. I'm Christian Osgood, your host of the channel. You can watch pretty much anywhere. You can watch this on Instagram, on our YouTube channel, Multifamily Strategy, on Facebook, on LinkedIn, you name it, we are streaming there. But welcome back to the channel. Now I go live every Wednesday at 3:00. This week doing a special broadcast because exactly at 3:00 this last Wednesday, I was filming a podcast with Rich Summers down in San Diego. That episode dropped yesterday. If you haven't had a chance to see it, it's a fun one. Usually I spend all my time talking about creative finance, different deal structures. We talk just a ton about the same thing. This one, we actually talked about operations, we talked about partnerships, we talked about hospitality. It's a fun one. If you want to get a little different flavor and some excellent filmography because they have a great studio down there, go ahead and check out that episode. That is on The Rich Summers Report. You can watch that on YouTube or podcast pretty much everywhere. By the way, stay tuned. Multifamily Strategy Podcast should be launching here in the next week or two. We're getting the final touches on. But the best episodes of the interviews that we do on the channel are going to be airing pretty much anywhere that you can stream. So keep an eye out for that. Multifamily Strategy. Today we are talking about one of my favorite topics. When things go wrong, something we really pride ourselves on on this channel, me in particular, we share everything, the good, the bad, the ugly about real estate. There's a lot in business that is hard. One of the worst things that could happen to you is total loss of building. Now we have that happening and we're still going to get paid while it's happening. I'm going to talk about some of the deal structure. Um, it's underway right now. Final signing for this is going to be next week. Um, but I'm gonna share a little bit about what happened, what we learned along the way, and hopefully this is another thing that saved you guys a ton of money. Afterwards, we'll open this up for questions. Today's stream is planned to be about 30 to 45 minutes, so we'll go till the questions stop if they stop early, but I may have to cut a little earlier than I wanted. But We go live every week. Here we go. So, uh, this winter, Grant County, we had the coldest winter that we have on record in, I believe it was a little over 50 years. Almost everyone who had older buildings had some pipe burst. We actually fared very well for 150 units. We really had no buildings fail. I think we had, um, a pipe burst in a sixplex, and we got that fixed. It's relatively inexpensive. The big one though, we are in the middle of a hotel conversion. We had about 19 of 24 units, pipes burst, water flooded in, ceilings collapsed. It's like total loss of building. Worst thing that could possibly happen. This is why you have great insurance. Now, for this particular property, we're under builder's insurance because we're renovating the units, adding kitchenettes, getting it prepped for the conversion to lease up. Now, never had burst pipes in this building. It's also never been tested this cold. This is the only building that seems to have just massive catastrophic failure. We located a spot where it looks like the plumbing cam's too close to the outer wall and is uninsulated, so frozen that line caused cascading issues all the way down the line. Long story short, big plumbing disaster. Now, insurance company got an adjuster out there, gave us instructions, said we need to do some remediation prior to getting the adjuster out there. So they gave us a laundry list of things. Those, you know, we need to tear out drywall, document everything, rip out any damaged furniture, catalog it all, and then we need to dehumidify, which was actually the expensive part. Uh, we had to have a contractor rent quite a bit of equipment for that. After they instructed us to spend all this money, they got back to us and said, hey, we found a caveat. Your roof is 21 years old. If you have pipes burst on this construction insurance, if pipes burst specifically due to freezing temperatures and the roof is over 20 years old, they are exempt from having to pay out. That was buried about 30 pages into the documents, but is a very, very specific caveat. Now granted, the freezing pipes had nothing to do with the older roof. It is just an out that they had. So they had to spend about $20,000, then told us, hey, we actually constructed this, but we're not gonna reimburse you. That's about the worst thing that you can have happen. You spend money, you do not have a functional building, you just finished renovations, you've paid for insurance, and insurance is not going to cover you. That is a disaster of a situation to be into, potentially one of the worst things that can happen to you in real estate. You now have no cash flow, you have significant cost to renovate, you've already spent money renovating. What do you do? So in this case, we have an out and we're still going to get paid to play. We bought this deal a whopping $0 out of pocket, and we did it with equity partners. So there's no associated debt. We just have the equity partners. Now we do have a seller finance note, which is the first position debt, $700,000. So we have a 24-unit building, $700,000 of debt on it at relatively low interest. So we don't have huge payments. We do not have liquidity allocated to this project. To rebuild the building. We just don't. Cody and I took on a larger hotel conversion and a mobile home park that both need to be cleaned up. Both are capital intense, and that's where most of our resources are allocated. What do you do when you don't have the money to get through your project and the worst happens? In our case, it looks like we're probably going to be saved. The equity partners do want the building, and they're partnered with us on two buildings. Both need significant renovation. Now, Building A is a larger building that we've already pulled over $1 million out of. We bought zero down. I've made 7 figures. The other building, the damaged one, our totally annihilated hotel, it still has a ton of upside. It would cost, I think, $150,000 to $200,000 to get it where it needs to go. They're light turns, they're small units. They just need to have the ceilings repaired, the flooring replaced. They're concrete block. So the nice thing is the walls are fine. The lower level floors, concrete base. There's not actually astronomical damage. It's just more expensive than we have the allocations for right now. We have more liquid partners. They're willing to buy us out. In exchange, they want both buildings and an exit from the partnership. They go, hey, we want both projects. We have about $1 million in equity there. However, we have huge outflows of cash to get both properties where they need to be. We also have two other projects. They're saying, look, you have a million in equity, you don't have the money on them, and they're going to start bleeding money significantly every month. Solution: what if you just finance your equity to us for a quarter million? So they're going to pick up the equity like 25 cents on the dollar. However, we got into both deals zero down, we've extracted a lot of capital from both deals, and we're going to get paid to walk. I love this about real estate. I love this about creative finance. This is why you need to scale your portfolio. Because we had more pieces on the board, we were just able to adjust. And while we didn't make as much as we wish we could have on the projects, we made money holding them. We made money buying them. We made money on the exit. Did we make as much as we should have? Absolutely not. This project, I mean, it sucks. You pay for insurance and they come up with a loophole. This does happen to people. I met with my insurance broker and a couple of other insurance brokers. They have assured me there is no insurance product out there while under construction that would have covered this particular damage from happening. Like, when this happened, they're like, this loophole exists everywhere. You did everything right. Now, if someone knows something else, by all means share in the chat, connect with me on Instagram @ChristianOsgood after this. Would love to see what other options are. But with our research, it looks like we played everything right and still things go wrong. When you have enough pieces on the board, you adjust. When you are starting, focus on building that portfolio. I have multiple properties, I have multiple, you know, equity stacks, multiple debt stacks, multiple partners. I didn't start with that. I started with literally nothing, like absolutely no real estate. So when you're getting started, Scale up to the point where you can pivot out of your things. Now, do you want to dance around everything forever? No. Creative finance takes a whole lot of energy and a whole lot of creativity. At some point you get big enough, you're stable, you balance your 3 resource pools—liquidity, cash flow, and equity—and away you go. Until that point, build, then stabilize, then optimize, and off to the races. That's the worst thing realistically that can happen—total loss of building. Uh, we're gonna get paid to walk from this one. Love it. And, uh, Cody is our first one in the channel, by the way. I'm looking at the, the chat now. Congrats on selling your building today. So fun news, uh, there is another transaction that's going on. If you guys have seen that I've offloaded a little bit of real estate outside of this transaction, I have. I'm building the dream house. I bought the real estate that I need to hit my goals. I am now locking down that first goal, and then I'm going to scale massively, which I'm super excited to do. Super excited to do. However, right now, downsizing a little bit so I can get my base set up in Texas to go upsize again. We bought the real estate that we need. Cody had a couple things happen in his portfolio, and I won't overshare his story because it's his story, but he started out with a partner who was just like a total leech, and the guy sucked, and Again, won't go into details, but miserable partner. Cody started right in the beginning of his career having to do one of these adjusting of pieces. Part of that is I took the money that I'd made at CoStar over years and a duplex flip that I had done, and I bought into a couple of his buildings, which bailed him out of the partnership, which got our partnership launched and really got us to where we're at today, is we basically just took my money and his portfolio, we attached the two together, and we built a business. Fast forward to today. Cody's always wanted to own those buildings himself. We got to do something really cool that it means a lot to me. I'm sure it means even more to Cody, but Cody just bought back his 12-plex from me and the one other partner that bought him out in the beginning. Great stewardship of pieces. Cody recognized, hey, I can fix the problem and I can trade equity for cash. I need cash. One day I want the equity back. Well, today is that one day. Yes, it is creatively financed. I traded Cody some of my debt in exchange for the building. So kind of an interesting swap. But Cody is now the sole owner of the second 12-plex that he ever purchased. Same, same thing over the last year or so. He's traded out his pieces to own the first 6-plex he ever purchased. So Cody has played the game. Masterfully traded his pieces around, managed the situation. So, uh, thank you, Cody, for the congratulations on selling. More importantly, Cody, congratulations on owning your 12 and your 6. Cody is building a fantastic portfolio by himself. Excited to see what you do with the project. Zach, thoughts on hiring a public adjuster on your side? I don't really have any thoughts on that. I don't like hiring anyone. I have a— I run very few staff, but paying people to do stuff, not my thing. I like forming relationships, working with people, and, um, yeah, public adjuster is not really part of, uh, part of my game plan. Dylan, Cody mentioned, uh, something in Lumberjacks Live about being able to get up to 10 units with no balloon, 30-year debt FHA only. Can you explain more? That would also be probably a pretty darn good question for Cody. However, um, there are a ton of different debt products. Um, with Cody's talking about how to get up to 10 units, um, FHA, that is a move that I have not seen yet. So we'll have Cody back on to share that specific one, unless Cody drops in the chat and we'll share there. Tina, definitely an unfortunate scenario. Yeah. Total loss of building is not what you go for. And thus far, Cody and I have had a multi-year run of every project is a win. I mean, some are base hits, some are home runs. We've hit very few grand slams. But if you're using the baseball analogy, which is weird because I don't play baseball at all, um, we only win in real estate. Like, we just win after win after win after win. This is about the worst thing that could happen. We were totally due for something just ridiculous happening. This is the one. Um, I'm happy that we have the pieces to maneuver out of this. It's— it is going to be very good for us, and it's fair. The partners get— everyone gets what they want. The other partners get to do the project with their liquidity, and they get to own the buildings they want to own. Cody and I get to stabilize our cash flow, focus on the projects that we think have the most upside. It turned out perfectly, but the actual event itself is about the worst that can happen. Even worse, this happened during the last Robinhood event. So we were actually hosting a creative finance event in Union, Washington. I was getting the calls for this at 2 in the morning before I had to host a whole resort full of people for a full day. On top of that, Cody's girlfriend got surgery, so I didn't even have Cody. It was just me running a multi-person event, uh, on like 4 hours of sleep. Very hard. It's never what you want, but it's something to It's something to remember. Real estate is not going to go exactly as you expect, nor will any other business. If you want to do this as a side hustle or a full-time job, you're going to have ups and downs. This was a down. Very grateful for how our pieces are landing out on this. I said it wasn't an FHA loan. DSCR loans, you can get up to 10 units, 30-year fixed. Okay, that makes sense. Yes, DSCR. It's also called a non-QC loan. So they're non-conforming loans. So that's not going to be a loan that's going to be sold to Fannie Freddie. It's going to be— it's usually a portfolio loan. A bank's going to hold it up in their portfolio. It's usually going to be a little higher interest, not astronomically, but they are higher interest and they're going to be based off the debt service coverage of the property. We actually have a few clients and friends who use these on significant portfolios in Seattle. They also have some interest-only options where you'll get interest only for a first few years of those, which can really help stabilize cash flow. But that is something to look at. A DSCR loan, that makes more sense. I was not familiar with that loan product. That would make sense to me. Dylan, any areas within 3 hours? There we go. I got the questions popping up now. They weren't— they weren't popping up earlier. Any areas within 3 hours of Moses Lake? You won't invest in and why not? Um, there's plenty of places I want to invest within 3 hours of Moses Lake. In fact, most of them. I have property management in Grant County. There are still opportunities to take out in Grant County. I love being hyper-local. I love having control of the rents through the property management company. Um, I would not expand outside of that for that reason. Now, if you're just talking about general markets that I don't particularly love, um, Yakima has some rough problems. Doesn't mean money can't be made there. I wouldn't personally invest in Yakima, Washington, which isn't that far of a drive. Another market that would be hard to invest in would be, um, Chelan. Lake Chelan is up north. I just was on the Rich Summers podcast, and he actually owns a resort on Lake Chelan. It's really competitive up there. It's a beautiful vacation town. It's a bunch of wineries. People will overpay to own in that market. That doesn't mean you can't get in there and play and do a great deal. It's just there's so much resistance because of the price and the beauty of the area. It's just not an area that I see a ton of upside where you're going to find a ton of opportunity. You might be able to find a deal or two there, which means you're never going to get market control. So the things that I'm looking for: consistent population growth. I don't want seasonality, which is another problem with Chelan. But what I really want to see is stable jobs, stable population growth, enough population to sustain the community long term. So, you know, I'm not looking at like 1,000-person population towns. That we do own in Union, Washington. I really like stuff like Grant County. So really small towns or really small counties, seasonal areas, or areas with unusually high crime rates are all things that I would stay away from. And we do have plenty of those within 3 hours of Grant County. That does happen. Can you talk about recapitalization taxes? I can. I might have to be more specific. There's a lot on that. But the 101 level, you take depreciation from a deal as you own it. Traditionally, 27.5 years is where you take the value of the property and you depreciate it all the way down to zero. You can run a cost seg and you can speed that up. That's something Cody and I do often. However, for all of that depreciation that you claim, you're going to have some amount of recapture depending on how long you own the property. Conditions of how you're selling it. This can be mitigated, or at least rolled into the future, through a 1031, which is going to be a like-kind exchange where your money goes into escrow and they hold it. You find a replacement property and place it over there. But on a 101 level, that's what recapture is. How recapture is going to be treated on your individual deal depends on how you claimed taxes, if you ran a cost segregation study or taking standard straight line. Most of them are are a question for your tax professional. Your CPA should be looking at your portfolio and telling you what to do. Tina, you may ask personal career advice. I have, I have gone from, uh, trying to start a church that evolved into a horrible cult, which I will have a video coming out on soon. That was absolutely horrendous. Uh, never shared that story until recently, but, um, wild story. I have gone from like the worst of worst, um, entrepreneurial adventure turning south to screen printing t-shirts to selling apparel to selling data, uh, all the way through the corporate CoStar, LoopNet, Apartments.com thing. I own multiple companies. I own a sizable portfolio of real estate. If you want career advice, I have done too much for a 32-year-old. I will give you what I have there. Cody shares a little bit more. There are DSCR loans. You can get up to 10 units, 30-year fixed. Yes. So there is no balloon on 30-year fixed rate debt and there are products for that. That is a good one to ask your, your local lender. They're not— everyone does these non-QC loans, the non-conforming loans, but there are a lot of DSCR lenders. I tend to see a lot of these people are sponsors at meetups and events. If you're active in just getting around real estate professionals, you will run into people who service these DSCR loans and actively are marketing them. I see them almost everywhere I speak. Whenever they do a, hey, a word from our sponsor, every single time there is someone who has loan packages and they do DSCR loans as well as bunch of other products. Um, so keep an eye out for those. Easiest way to find them, uh, they do market, so you can hop on Google. But I have found, talk to other owners and just show up at a few meetups, and you will meet these lenders. Why would you subdivide land? For more value. If you have a bunch of land that has one use but subdivided, you can build a bunch of houses on them or different multifamily things. Subdivising is basically splitting up parcels that can be sold separately, which can up the price. But it's finding what is the highest and best use, tailoring it to that, and then selling it off. So it's increasing the value to others is what drives price. It's just supply and demand. So if you can take one thing and turn it into three things and sell each of those at a 25% premium because of their highest and best use, that's where you'd subdivide and win the game. People do this on huge acreage too. Well, they'll buy, you know, 100 acres and they'll subdivide the whole thing for development. Fantastic strategy. It's not my strategy. I'm not a land developer or a developer at all. I do not like development myself. I like redevelopment, which many will say is actually a harder project, but I do not personally do ground-up development. There are people who do it and professionals, and that's what they're best in the world at. You can kill it if you're really good at zoning and subdividing and you like working with the city. That is something that you can knock out. If you default and property covers bank, do you keep past cash flow? What if it doesn't but you have non-recourse? So if you default and a property covers bank, okay, I'm going to try to, I'm going to try to read this the way I think it's meant to be written. So if you default, the property goes back to the bank. So it reverts to the bank. They, they take the property. Yes, you keep the past cash flow because that's, that's your money. That's already, that's done. Uh, bank takes the property. If it's non-recourse, the property is the only thing that they take. If it is a recourse loan, which is most, almost all commercial debt, not, not all of it, but a good chunk of it is recourse debt, uh, until you get into bigger buildings. Uh, non-recourse, they get the building and that's it. If you've drained all the cash flow out of it and you fail the project, uh, not good. You do not want to have a foreclosure on your record that's going to come up for future debt, but you can walk away with just loss of the property. That is possible. Mason, any alternative software you like besides Reonomy for finding owner data? CoStar is pretty good, but it's way more expensive. Reonomy is is the best that I've found, and I've looked at a lot of them. Some people really like PropStream. I think Reonomy is a superior product. Uh, granted, they've realized they're superior, and I've noticed that their pricing is going up astronomically lately. But Reonomy is still the go-to. I don't personally use it. I still don't use software. Google Maps and relationships all the way. But if you want to streamline this, streamline this, or you're someone who likes doing the mass marketing, mass calls, mass texts— some people really thrive there. It's not me, but some people do. Um, Reonomy seems to be the gold standard right now. I would love to be challenged on that, but thus far pretty much everyone who uses all the software agrees with me. They usually fall on that. Some people have a preference for PropStream, but I think those people are wrong. What is a holding LLC? Does it hold multiple properties' incomes? Essentially, your holding entity is going to be the entity that owns the entity or entities that own real estate. For example, let's say I own XYZ Company and that is my holding company. Well, I have 123 Main Street, 456 Main Street, and 789 Main Street. 3 different properties, 3 different deals, 3 different partnerships. Let's say I own 50% of each of these. My holding company can be the company that owns all 3, and that allows me to take gains and losses from each of those properties and put it into the bank account of my holding company, which then can be spent freely across the 3 properties in proportion to the equity. If I didn't do that, I would have to do an owner distribution to myself and then an owner contribution back into the properties to move money correctly through the accounts, causing a taxable event when I pay myself. I just want to move money through the portfolio without pulling out of the company's bank account. You have that company own multiple properties. There's also a bunch of strategies that you can talk to a lawyer about on how you can have more anonymity on that and how you can really bury the holding company so that you can kind of hide what it really owns. Um, there's a bunch of strategy around it, but holding company can add some extra security to you as well as let you freely move money through your portfolio, which I think is one of the largest advantages of a holding company. If you have a great partnership it's great to have a holding company for that partnership once it's tried and true. Cody and I do that where we vest our interest in LLCs and we actually have a few of them, but in a few holding entities. What percentage of cap gain does it change and what is it based on? This is going back to recapture, I believe, or on the sale of property. So your recapture is based on off of depreciation. Your capital gains tax is just how much capital gains you have. So it's going to be based on your tax bracket, what the IRS charges you. That's going to be based on your other incomes, your other business. There's a lot there. But taking a capital gain, same as the stock market, it's just what did you buy it for? What did you sell it for? What's the delta? What was your actual capital gain? In this deal when you went to sell. But that's how capital gains calculated. If you own a property for 27.5 years, do you have to pay recapture if you did cost seg? Great question. Would have to ask CPA exactly how that works. I've never owned a property that long, so that question has actually never came up. I also almost never sell properties, so I'll be working on recapture on a 7-plex that I took straight-line depreciation on. In 2025 because I sold that early in this tax year. So I'll know more about that as it comes up, but I haven't done enough selling to really have to deal with that at all. Another flip I did, I sold it owning it just under a year. So I had short-term capital gains, but I didn't really take depreciation. I didn't have a, I didn't really have recapture. Put in there. Why don't I like development? Development depends on the market. You're betting on where the market's going to be in the future. We've seen that change too many times. Um, I just was at an event last night with, uh, Jamil. Uh, I think it was last night, but, um, Uh, Jamil is a prolific wholesaler. He owns a company called Astro Flipping, which is, um, it's an interesting business model, not, not my thing. But he made $12 million wholesaling, rounded up all of his family's money, went in on development project and lost all of it— his money, his house, his mom's house, his family home, all of their cars. He lost everything because he went, hey, I'm going to be a developer. And he did it around 2000, I believe it was around 2007. So 2008 hit, um, there was no money to refi. Completely wiped out, like loss of business, loss of houses, loss of family money. Total loss. Development is placing a bet on what you think will happen, and you are not always right. Now, on redevelopment, granted, you're not always right. For example, our topic today was our flooded building and how that was handled. Like, we're under builder's insurance, something horrible happened mid-project, and that's where the cards fell. In development though, you typically, if you're going ground up, it takes more time, and more time means more risk because more things can happen in that time. And if you were developing in 2020 and you didn't have the cash reserves and interest rates started spiking here throughout the years, um, you could have been mid-project expecting to be able to refinance at 3 or 4%, and now you have to refinance at 8%, and your deal no longer works. On top of that, your cost of goods, like especially lumber, went up astronomically during the, the virus that is not supposed to be named on, um, on YouTube channels so they don't kill you in the algorithm. But, uh, during that time that may or may not have happened, uh, fairly recently starting around 2020, Um, when that happened, cost to build went up astronomically and budgets got absolutely blown. Lots of development projects failed. That is why I don't like development. I hate variables. I want a simple, boring, repeatable business that can do again and again and again. I want my money to be boring. Development is exciting and dynamic, which are all ways to me that sound like, hey, you might make a ton of money or you might lose money. I do not like gambling. What are all the taxes I have to pay in Texas? Well, um, you're going to pay some of the highest property taxes in the country, which is offset by some of the lower cost of, of properties in the country. Like, you have lower cost to get in, higher taxes. Oftentimes about 1.8% of your purchase price is what your taxes end up kind of averaging around, um, usually within— it's very, very close to that, within 0.01 of that. Uh, very, very close. Uh, so very high taxes. You're gonna have all your basic utilities, so you're gonna have electric unless you build through the tenants, but electric, water, sewer, and/or septic. Um, I mean, that's what you're looking for there. You don't have the same income tax, and businesses love being in Texas because of the way income tax is treated, but they make up for it with the really high property tax. You also have a little higher utility costs than you do throughout most of Washington State where I invest. So your electric usually costs a little bit more, water definitely costs more, um, transportation costs a lot less. I know it's, it's Texas, but when you're looking at the actual— those are just general expenses. Uh, if you're looking at taxes, you're gonna have to pay property tax and you're gonna have to pay, uh, you know, tax on the money that you made. You have to pay federal income tax, um, and that will be a factor. Other than that Texas is a pretty tax-friendly state, just has a really high property tax. Uh, if you can't raise down payment under contract, do you lose earnest money? How do you communicate that or back out? Yes, if your earnest money is already hard. Sometimes there are contingencies. Usually it's during your financial feasibilities. Earnest money goes hard after that. So if you have money in— I actually don't even like to submit earnest money until after we've passed feasibility, if there's just no capital partner and it's not coming together, you would hypothetically back that back out. That being said, it has never happened in multifamily strategy in our whole mentorship group, and I've never heard of anyone who took the course, uh, who has ever gone through, found a truly good deal, signed off on it in feasibility, and failed to make the capital raise. The money always comes when you have a great deal. And if you don't have a great deal at the end of feasibility, then you back out of the deal and you don't lose any money. And we have had that happen before. You look at a deal and it looks great, and you learn new information as you look through the books and do your property walkthrough. You're like, oh no, they didn't tell us this. We've learned new information, we're going to pivot. And that is okay. That is what due diligence is there for, and that will protect your earnest money. I have had people ask though to make earnest money go hard up front, and the answer to that is always absolutely not. I'm going to trust you that you're not lying on anything, but if you do lie on something in the books right here, I'm going to give you money that is non-refundable. Like, that is just a way to get robbed, and people will absolutely do that. So if earnest money is due and there is no way to get it back in the contract where I go through feasibility, that's a deal breaker for me. I will not do that deal unless the price was so ridiculous that even if everything was awful, I would still buy it. And for that I'd have to basically be buying the building for the land value. How do agencies use exit tests to determine how long of IO they will give you? So different lenders are going to look at various situations, but they're just going to look at what is the actual project. Often on a project, that's really where the IO comes in more than just exit strategies. Any sort of lender or bank is going to look at deal based on what the project is. If you're doing a construction project or you have a heavy increase of rents, often you're not going to meet their DSCR requirements. Banks can sometimes just offer, hey, this falls in line for us if we give you a couple years of IO to lower your expenses up front and give you time to get through the projects that you have projected. So it's typically on a value-add project, so they're going to do IO, they're going to look at your project, and they're going to assign a, a reasonable amount of interest only to that. The last one I looked at for someone in our mentorship group had 2 years of IO to do a 1-year lift on raises. They went, hey, get your rents up, and if it takes twice as long, you have IO for that whole period. It's a 10-year note. Uh, that is just a bank deal that someone is doing zero down with a capital partner in multifamily strategy. Not everything has to be seller financed, just a good deal. Purpose of land assemblage: to increase the value of the land. If you control an entire area, you control the neighborhood, you control the rents. You can fix an area. Assemblage is very valuable because you have just a massive chunk of the city. It gives you more power, more control. It's worth astronomically more, exactly like the game Monopoly. Could you explain negative amortization? So you pay less than the interest on the property. So if I have 5% interest but my payments say they're equivalent to 4% interest, the principal value that I owe actually goes up. So I owe more on the property instead of paying it down. Amortization pays the property down, negative AM racks it up. Our very own Caleb Hommel did this on his second to last deal, 25-unit Stephenville, Texas. He won on price. The building's worth about $2.5 million stabilized. He bought it for 2. However, rents were really low. He's already gotten rents from $550 to $850. He just rented a 1-bed at $1,200. $550 to $1,200 is a huge, huge, huge increase in income. When he started, he had to get lower payments so that it would cash flow. So the negative AM allowed him to keep the payments down. Now every year, the amount that he pays goes up, so the actual fixed payment has a smaller negative AM for the first 2 years, and then it starts amortizing back the other way. It starts paying down the loan. He's going to accrue an extra $50,000 of principal, which is fine because it will be worth $2.5 million. You know, he'll owe $2,051,000. I think it was exactly $51,000 that'll be added to principal. You just look at anything with a negative AM, you add up how much principal you're adding, and you pretend that that is your, your actual purchase price, and you base your deal on that. So Caleb just does his math, math like he bought it for $2,051,000. That's, that's where you'd use a negative AMM, is to protect cash flow on a value-add project. How much would you overpay to get a seller second on hard money, uh, in first if you can get long-term debt? Well, if it's very long-term debt, I'll overpay by more. Because if I have 20-year debt and I, you know, I think properties will double, so if I got a property that was, say, a million dollar property, I would pay $1,250,000 in a heartbeat. I'd pay an extra quarter million dollars over what it's worth. I got 20-year debt that cash flows in that debt stack. It's not really the fact that the seller's in second or where the hard money falls out. All I'm looking at is no matter what my debt stack is. If it's long enough debt, I am willing to pay more for that because properties will appreciate on the long term. If you're talking 5-year debt, just don't overpay. I don't know where the market will be in 5 years. I do know that we'll have a full market cycle in any 10 years, and in any 10-year period ever, properties have gone up in value. So whether it's an up cycle or a down cycle, there will be a time in there where there'll be a reasonable exit of the debt where the property is going to be worth more. Longer the term, the more you can overpay. That being said, here's the biggest risk of overpaying: if you need to change your plan 2 years in— say you have a different idea for the property or you want to adjust your pieces— you can't sell a property that you overpaid for 2 years ago if it's still not worth what it needs to be. If you get great terms and the deal works for 20 years, but there's a reason you want to get rid of it, you're stuck with that piece. That's what we learned on the Robinhood. We have a great piece with a great debt product, 4.5% interest debt. But if we want to shift, which we did want to pivot the way that we stacked our capital, you don't have an option to sell it because we didn't overpay to get fantastic terms. How do you sell something that's overpriced because the terms don't go with it? So something to consider for everyone. That's something we've got stuck on. You overpay, you need to stick with that plan, and that plan needs to work. I'll do a quick run on this. Always to take on additional debt. There are like 1,000 ways to take on additional debt. I'll give you a quick highlight. Light of real though, uh, you can, uh, further encumber the property. So you get first, second, third, fourth, fifth, as many loans as people are willing to give you. I do not recommend doing that, but you can just get all these different loans on a property, which is going to go against title, and you can leverage it as much as you can get yeses for. I have seen people just stack leverage on leverage on leverage on a property and lose it and absolutely screw over their investors. Uh, do not do this unethically. Raise money that you can back with the equity in the project conservatively. Uh, that being said, there's a bunch of ways to raise debt. You just keep stacking debt against title. Another way, if you bought with an LLC, if you don't want to further encumber the property, you can encumber the LLC. So the LLC can own the property. Say I have, uh, ABC LLC that owns 123 Main Street. That LLC Now say I can't put a second for whatever reason. I have a no further encumbrance on my deed of trust, so I can't actually get more debt. I can put in there, this company owns this asset and you are backed by shares of this company, say 50% of the shares. So I've now backed you with half of the LLC's holdings. You can also put a clause in there to protect them that says if for any reason I sell or refinance the underlying debt, that note becomes callable. So that's a different type of debt. You can lend unsecured, so someone can just lend you money. You can lend with a personal guarantee where I basically say I back it with everything that I have. Like, if the property fails, I will still be— I'm still committed, I'm still on the hook, I'm still gonna pay you. Um, you can raise with equity partners, which isn't quite debt, but if you do a fixed buyout, it acts very much like debt. You can do debt due on accrual, so you have no payments along the loan until the end. So it's gathering 5% interest, but it's not going to be paid until whenever the balloon is. Um, there's— I mean, that's a quick highlight reel. You can get bank debt, hard money debt, private capital, middle money, which we also call mezzanine debt or bridge debt. So many options. Well, now, what's correct for your deal is going to be very much based on the contract that you have and the pieces that you have and the players that you want to include in your deal. Deal structure is my favorite part of real estate. I love playing that game. If anyone wants to get deeper into that, that is what we talk about in multifamilystrategy.com, the mentorship. If you hop in there, that is where we have the fun structuring the deals because that is the best part. We do it every Tuesday, look at live deals, spin the Rubik's Cube, find the pieces. Um, it's fun to do. But yeah, that's a highlight reel, ways to take on debt. There's a ton more. Uh, Dylan just had a great owner meeting, um, super similar beliefs to y'all. He said that, uh, he said he is here to answer all my questions. Do you think he works with partners? Or don't think he works with partners, um, but still great friendship. See, this is, this is the goal of owner meetings, and not everyone has to agree with you. I have owners that we meet with all the time who have a totally different philosophy. It's just about learning how other people play the game and applying it to your portfolio. It doesn't mean you have to do everything that's recommended. Meet with a lot of people. Don't meet with just one or two people. Meet with people who disagree with you. Meet with people who agree with you. Like, I just met with— I think yesterday— we run into Jamil. He doesn't use debt because he got burned on the development project. I use debt. One day I'm going to pay off all the debt, and we're actively working on that. But I lever and I create cash flow, and that cash flow pays off all the debt. And that's a two-edged sword, because if you do this wrong The debt can eat you alive, but I use debt to build a larger asset that has the capacity to take the debt out. It just takes time. Am I going to copy the strategy of wholesaling, taking my cash from wholesaling and buying deals in cash? Absolutely not. That has nothing to do with my skill sets, what I'm good at, or how I want to build my portfolio. Did I learn a lot of takeaways? Absolutely. Meet with other owners who have done cool or different things, especially the people who've met with what want to do. So Dylan, glad that meeting went well. Mason, do you replace cabinets when you're doing functional flipping? Yes, uh, not always. You can salvage them, salvage them by all means, put a new countertop on them. But ugly cabinets, just update them. They're not that expensive. As flips go, cabinets are definitely not your most expensive item. If they're messed up, just get new ones. Cabinets, um, that's gonna be a question for Dani, and she will answer that on another episode of Functional Flipping. But for functional flipping, you're gonna go affordable and nice. Anything that's modern that you can paint with a neutral color, a white, a gray, that's usually going to be your best bet. If you're going a little bit more upscale, say in Class B, you can start experimenting with other colors. For us in functional flipping, everything basically looks the same— same countertops, same cabinets. And you're looking at the stuff that they carry at like a Lowe's or a Home Depot, you're not going cheap cheap, but you're going to go on the lower end, something that looks nice and clean and simple. For the type of things that I do on the functional side, I'm trying to keep prices down for tenants so that they stay in the property. Something that looks nice but doesn't cost a lot allows me to offer a better unit at a lower price Price is really important to people, and I think a lot of investors forget that because they over-improve these units. They spend too much money, and then they have to charge more to make the money back. I think one of the kindest things that we do is I don't overspend on things that I think look pretty, and I just put stuff in a place, and I provide a place to live that looks clean and nice. And I think more people should do the same, but that is a personal philosophy. What's PICS pipe? I think you mean PEX. Uh, PEX is going to be— it is essentially plastic. If you see like the thick black plastic piping, uh, PEX is a, uh, it's going to be a basically plastic piping. It is better than galvanized steel because you don't have galvanic corrosion and all the other rust problems that you have with steel. Same with copper. It just— plastic doesn't rust. Pretty much everything has gone to PEX, and that is, uh, like, yeah, if you can upgrade a building that has copper or galvanized steel pipes and bring them to PEX, um, huge value added. They're way better, they last way longer, until we learn, you know, in the future, oh no, this causes cancer. But I mean, for the time being, it appears to be the best thing out there. Uh, could you overpay for property, sell it for less, and move the remaining debt to a different property? Yeah, you move that however you negotiate. So I've seen people do that where they basically just don't have a due-on-sale clause. So you sell the property, you take the old debt, move it somewhere else. You can change the backing of anything. It works. Danny just snuck in here. Danny, I have a question for you. Join the live. Oh, okay, fine. I have a— that's a good one. Fine, my wife snuck in and grabbed her water bottle and, uh, she's, uh, she's on the phone, so I can't. Bummer. I was gonna ask her the cabinet question. Well, ladies and gentlemen, that's Danny's, uh, guest appearance. What is your end goal in real estate? My end goal in real estate— this is fun— with real estate, I, I'll start with my primary goal. I will answer the question though. I want to retire my wife from teaching and wanted to build my dream house in Texas. Dream house in Texas is getting dangerously close to done. I just walked it. Um, uh, follow me on Instagram, by the way. I'm showing a whole bunch of that house build. Um, I'll post another video today. It is so fun. It's going quite well. Um, but it's a 4,000 square foot house, which— is that a mansion? No. Is it a big house? Absolutely. I live in a 1,300 square foot house. I have lived in this house for a long time. It's a cute house, like it. It's really small. Get in this great new place. It's going to be fantastic. But those are my goals, like move to Texas, retire wife from teaching. Done, done, done. Um, now I want to start showing— I really want to start testing where I want to be as an entrepreneur because I've taken care of the immediate money thing. I have the cash flow that I need to live the lifestyle I want to live. I don't have to work anymore. Now we get into the fun thing. And this is true of any business as well. This is— real estate is not the only way to financial freedom.. It is a way that is very consistent if you're buying for cash flow. Most people get the cash flow figured out in the first 2 to 5 years of investing. And what— and I'm counting that clock from when you buy your first investment property. Very, very common, you find financial freedom. Then you get to start saying, what impact do I want to have on the world? I want to keep investing heavily into multifamily strategy. This YouTube channel, the community, especially the mentorship group I, I, one, I think we have the simplest method of all time to buy real estate. Like, it is so simple, and we cut out all the gimmicky marketing stuff like, oh, this is the newest strategy, no one knows this way. It's like, it is so simple it's dumb. Is it easy? Absolutely not. But there's nothing new in real estate. Real estate's been around forever. You know, laws change, strategies tweak, but for the most part Real estate's really simple. I want to spread that to as many people as possible. I want to have the best online community for real estate. I want to be part of more wins, uh, personally in my portfolio. I want to do a lot more expansion in Texas here in the next few years. I, I'm loving buying in Texas. I like the properties down there. I'm liking the management. I'll be doing a lot of expansion down there, and I'll start doing a little bigger projects. I want to see how far we can take this. Uh, one of my biggest inspirations in real estate is Sam Zell. I mean, he, he went with a $1,500 first investment and sold his portfolio to Blackstone, which is what I'm not going to do, but he sold to them for— or BlackRock, whatever they're called. Uh, he sold to them for $39 billion, a portfolio that was made in one lifetime. Now, I don't want to sell to a major conglomerate, but I do want to test how far I can responsibly take a portfolio. And so that's going to be part of the game is like, how do we do this consistently without expanding just to expand? But I want to see how far we can take real estate buying cash flowing deals on long-term cash flowing fixed rate debt consistently and responsibly and see what I can build in a lifetime. I'm 32 right now, turned 32 last month. We have a lot of time to play. I'll document every damn thing on this channel. All right, I got 2 more minutes. I'm going to cherry-pick some questions. I'm going to go with some people who have— I've not answered their questions yet, um, and then we will call it a day. Jonathan, uh, how have you been chilling/recovering since the end of the 90-day burn? Well, I'm finishing a house and I'm stabilizing some companies and I've traded some properties it hasn't really slowed down that much. However, I have re-upped the amount of pickleball that I am playing, which has been fantastic. I played for almost 3 hours last night in the pouring rain, which is, by the way, very dangerous. Don't do that. Everyone fell multiple times. I am taking more time for pickleball is honestly what I'm doing. I'm taking more time. I will be— I went on a quick vacation, so I took a week in Mexico. Um, but other than that, like, I'm— I still work a ton. Like, during 90 Day Burn, I was basically working about 90, 100 hours a week. I mean, it was pretty much constant. I'm back down to like 70, so it's not like I don't work crazy hard, but that's how I've been chilling. Also watching slightly more Netflix, just at night. I like to watch an episode of something before I go to bed. Uh, the new Halo series is Fantastic. Season 2 is awesome. I loved it. Season finale was last night for those who haven't seen it. That has my, uh, the Multifamily Strategy stamp of approval. Will, my wife and I, uh, want to buy a multi. She's good credit, um, yours trash. That's fine. Um, I don't get credit checks on anything until I started doing bank loans recently. Um, doesn't matter, and you can credit's not that hard to fix, especially if you have money coming in from real estate. You can fix that quick. Um, have you ever done, uh, manual underwriting? Her debt is, uh, $75K school loans. I have $20K. Both have $10K cars. Together make $200K. Well, you have great income. You don't have super high debt. Um, you're gonna have options. Um, you may— like, I have my friend Henry Washington, first things that he bought, like, he did not have the credit. So like their first house, uh, was in his wife's name because that's, that's how he had to play the game. Everyone's pieces are unique, but if you're looking at things like seller finance or HR creative finance, those don't require bank loans, so your credit won't even come into play in a lot of the deals that I've done. A lot of people in our mentorship group too Same thing Caleb started, 18 years old, no credit at all. Like, just doesn't have a credit card, never had any credit history, uh, has $300. So you can play the game. Um, what I'm seeing here though, if you have a higher salary, $200K, slightly less than I was making when I started real estate, uh, $200K is a lot of money. You will be fine. You definitely have the pieces. If you want to buy a multi, you will be able to go out and buy a multi. That is just a fact. Now then, uh, should I only target multifamily owners who own deals I want, or should I be less picky? Definitely be less picky. I learned so much from everyone. There's people who I don't want to buy any of their deals, but I've learned an astronomical amount from them. Meet the players in your market. It's— think of this like a board game. You got your 3 resource pools: the liquidity, the equity, the cash flow. Those are your pieces. Meet the people that you're playing, understand how they're playing the game, who you're against, who, who's on your team. Um, you are building this exactly like you would win any board game. There are very few differences. There's a ton of parallels. It is hard to win a game of poker if you do not know the players. It's just the more you know people, the more you know what's going on, there is such an advantage. My qualification is, do they own multifamily? If they're an owner in my market, I want to meet them. Corey, good to see you here. Have you guys found more ways to automate the business? Yes, I am next week hiring my first ever— I still haven't chose the title, uh, suggestions are appreciated. Basically my assistant, that she could do my media, she could do my podcast scheduling, she's going to help me with some of the PM stuff, she's going to help me with, uh She helped me with a ton, but she's going to take all those administrative tasks that I have to do myself, like applying for podcasts, getting people on our Multifamily Strategy YouTube channel, sending out the darn links to get people on to stuff, managing my emails. I am offloading all that. So it's kind of like an executive assistant, but I really think we should use a cooler title than assistant. So suggestions for job title are appreciated, but I will be bringing them on next week. I'm very, very excited for this, but that's going to automate a ton of my stuff. Um, AppFolio has more automated features in it, so my property management is going a lot more on autopilot than it has, which is fantastic. And, um, my media teams are taking a little bit more off me as well. So I have 3 media teams who— some do shorts, some do different types of edits. I have someone on my YouTube channel, and I have someone who does all of the media for ads and marketing. Those 3 teams are now working together, reporting to 1 person who then helps me distribute everything across all channels. Right now it's still on me, but that's gonna be off me by next month. I will still be active in all of the messages, all of the— you guys wanna DM me on Instagram, it's gonna be me answering. You guys wanna shoot me an email, it's gonna be me. You call me, you text me, it's gonna be me. But the one who actually like posts the stuff that we put together, Is it going to change? Which is way too much of my time. I do 10 media posts across the platforms every single day now. That is taking way too much of my time, so I'm automating that off me. That needs to be not me, like, immediately. That is what we have time for today. I apologize that we didn't get Wednesdays in. If there was any way we could have, it was the exact time I was filming that pod with Rich Summers. I think it turned out pretty good. Love to see your guys' thoughts. Again, check that out. That is the Rich Summers report. You can watch it on YouTube, you can listen to it basically anywhere the podcasts are, uh, are sent to. Sure, it's on Apple Podcasts and Spotify. If anyone has any other questions, we do go live every Wednesday at 3. We will be there. And then I also just spontaneously go live, so, uh, keep an eye on this. Set your alerts for Multifamily Strategy. Like, subscribe. We are here to help everyone move forward, and we're going to be building this like crazy this year. So thank you for watching. We'll see you all on the next episode.