Why Boring Businesses Rule!!

Hello and welcome back to Multifamily Strategy, again with Caleb Hommel with the, uh, Business Brotherhood channel. We're both talking business, we're talking real estate. I missed the live this week because I was on a plane. There was nothing I could do to go live. From the air. I try not to do that, but I was flying back from Atlanta this week, and that's how it, uh, how it worked out with flights. So doing a bonus live here on a Sunday evening with our good friend Caleb. Caleb, welcome back to the channel, man. Now it's possible Caleb is frozen, which would be a bummer, and it appears so. So we'll probably see Caleb again in a minute. But while we wait for Caleb to reappear in another area, um, welcome back. So last week I had the opportunity to go to Atlanta. I got to hang out with some amazing people, um, down in the Buckhead area. Got to see the aquarium with my wife, which is something that we've always wanted to do. I got to see a whale shark, all sorts of stuff that was really, really fun. I did not get to go live, so as questions pop up in the comments, I will be answering them both on business and in real estate. So excited for a bonus episode on a Sunday night. So we're gonna get rolling. Uh, why boring businesses? This is something that I've wanted to have a lot of content on for some time. Boring businesses are awesome because they're repeatable. When they're repeatable, they're scalable. Every business that you should be in is scalable. And if you can scale them infinitely like you can in real estate, you're good to go. I love real estate. Uh, I love our mentorship group because I get to actually invest in other people. I get to watch Everyone be successful in real estate, start to expand. I get to answer questions, which keep me sharp. And as a business model, it's something that is more or less infinitely scalable, that is simple and repeatable. I am teaching things that I know from my own experience to other people, which is multifamily strategy. The only metric is, are other people being successful? Like, it's a very simple business. So online products, like them. Real estate, love it. The game is super simple, and we'll talk about that today. And if Caleb appears again, we'll talk to him more about how he's doing real estate. He has a couple of transactions that are very interesting. So I'm going to shoot him a text, then we're going to roll. If you guys have any questions, post them in the chat. I'm excited to, uh, I'm excited to go through this today. Boom. Okay, we're gonna see if we get him back in or not. That could be the, the shortest appearance of any guest on the channel. A quick frozen Caleb and away we go. So why is real estate boring? And I've actually talked to a lot of successful entrepreneurs about this. There's a few people who just don't care for real estate. I was actually at an event with Dana White, and Dana White was talking about why he doesn't like real estate. It's not interesting. He likes the action. He likes high risk. He likes stuff happening. There's not a whole lot going on in real estate. Sure, sometimes you have property management nightmares, but usually you have these things in property management, so it's not your problem. You're not the one dealing with the drama. Real estate is fairly predictable. There's only so many things that can go wrong. You have electric, you have plumbing, you have a roof, you have like— if there's too much moisture, things are going to mold, so keep that in check. If there's not good lighting, people can fall and get hurt, so have good lighting in and outside of your unit. If the plumbing and electric is good, your roof is current, there's no bugs eating your siding, like there's only so many things that can happen, and almost all of them can be addressed through a maintenance plan or having a good inspection, even once every other year, just having a basic inspection on the property, you pretty much have fairly fixed variables. You can buy real estate very simply with or without money. And I think that's where a lot of people get stuck. And we'd love to talk about that on this channel. It's not just, hey, this is the seller financing channel. Notice Multifamily Strategy doesn't have the word creative, finance, seller, any of that in it. This is just how to buy real estate. We've been talking to a lot of people about this recently. My last two deals were hard money, over 100% financed, loan to cost. Now, loan to value, they're worth a lot more than we bought them for. We won on price. If you win on price, you have more options with money. You can also buy things conventionally, which is why we had Caleb on today, actually. If he appears again, it'll be nice to see him. But like his deal he's doing right now, it's his fifth deal. His first 4 were all seller financed. The next one is bank financed, and he still doesn't qualify. He's been less than 2 years in business. A bank would not qualify 21-year-old Caleb, even with his 50-some-odd multifamily units. A bank would not qualify him to buy what he is buying. He just brought on an investor because he got a great deal and it works with bank financing even though it doesn't hit their DSCR requirements. It is such a good price per unit. That they're willing to value it on pro forma. They'll give him 2 years of interest only to bring that DSCR back up. That's your debt service coverage ratio, and he's going to qualify. So you can buy all this real estate, and this is why it's simple and this is why it's repeatable, and this is why real estate's fairly boring. If you can't win on price, you have to win on terms, which basically means creative financing, or you're not going to do the deal, and no one's going to buy the deal. Because if you lose on price and you lose on terms, there is no deal. If you win on price, you can do hard money. You could bring on a capital partner and pay them on the backend so you don't drain your cash flow. There are so many different opportunities to adjust your pieces and to buy real estate that it becomes a pretty easy game. You start looking at every deal roughly the same. How much upside is it? Where is it going to be valued at when I'm done with my project, roughly and conservatively? Does it cash flow day one? And if not, how could it cash flow day one or near day one? Buy it, increase income, stabilize it, put it in management, repeat. Every time you do this, income stream goes up, income stream goes up, income stream goes up, and you just keep doing deals. Is your first deal going to be hard? Yeah. There's a lot you don't know. You don't know. You're going to pay a little stupid tax on not knowing things and you're like, oh, now I know these things. It's a very simple game, which is why it's a great business. Now Caleb has a, a company that I've worked with, uh, many times on multiple projects of mine, especially when we're running events and other things, uh, where he has a sales company where he'll actually come in and sell for other companies. He has systems and automations and employees who all they do is close leads. It's a super simple business and Caleb does insanely well. Um, and he's really good at it. Like when I put him on an event, we more than doubled our ticket sales. And it was like within 3 days we had done what we've done in 3 weeks. His company is very good. He knows how to train them. He knows how to write good script. And that's all he had to learn. Find someone else's product, add your systems, train your employees on the product, hands off. He does some marketing advice to get leads flowing in, but it's like there's 3 parts of every sale. You have the open, The negotiation, the middle, where you, you know, foster the relationship, and then you have the close. Caleb's company does the middle and the close of the transaction. He'll consult with you on how to do the open, but if you have any sort of marketing, his company just plugs right in, plug and play. Doesn't develop new products, doesn't have his own product. They just sell and they eat what they kill, and they're totally worth their money. It is a fantastic model. Simple, repeatable, scalable. And that's gonna be the theme of today's conversation, at least for me. Simple, repeatable, scalable. Every business you do needs to have this. Now, in real estate, buying real estate does not count as a business. You need to be specific. For me, I buy entry-level housing, 1 beds, 2 beds, or 3 beds in markets that are not major cities. I do not like to buy downtown. Now, there are so many strategies that work for downtown hospitality, Class A, self-storage. There's a million things in real estate. The beautiful thing is there are simple ways to make them all work. However, if you want to build a business that is just super repeatable, you want to find the one thing that you were just amazing at and that your market needs. Like, find something in your market that there's really a need, and then just do it again and again and again and again and again. If you've got an expert at that, your expenses go down because you get better and better at playing that game, and you start moving a lot faster. You build more relationships, you build a reputation of being good at what you do. And away you go. Now, do you make huge, amazing money right off the bat on these opportunities? No, they're slow, they're a grind, they're steady, but they're predictable. If you are starting your business or starting to build passive income or trying to get out of the 9 to 5, you need to find these simple service-based businesses like providing housing or like in Caleb's case, running a sales company. You need to find something like this that is simple and something that you can repeat again and again and again. If you can do that, then you become a master of it. That is where you start going from, hey, I made $10,000 to I made $100,000 to I made $1 million to I made $10 million, and so on and so on and so on. Later in your career, you can do higher risk projects out of the stable base of cash flow that you have built, which is what Cody and I are doing. We're doing that right now with our hotel conversions. Those are very capital intensive. I mean, hundreds of thousands of dollars of cash to get these done. Now, you spend a few hundred thousand dollars and you make a million dollars. And then you do it again and again and again. But you can't do that because if you're— when you're starting, because if you're wrong on any of your predictions, you all of a sudden just have a bunch of money out there. They're very expensive. You can get stuck. And that's where people lose the game. You build a base of cash flow in basic businesses or basic rentals and push forward from there. That is the best way I have ever seen to play the real estate game, to play any business game. This is exactly how you do it. All right. I'm gonna dive into some questions here and let's see what we got. Luke, good to see you, man, by the way. Luke is often on the channel. I'll throw this up here. Have you ever seen the video of a guy riding a white shark? It's freaking epic. I have not. That sounds terrifying. I don't think I'd recommend that as, as our topic is simple and repeatable. That sounds difficult to repeat consistently. When you bring on an equity partner, Do you have to specify that cash flow pays debt, then gets split instead of just your portion paying the debt? What if they become an equity partner later in property? Um, okay, so when you bring on an equity partner, everything is negotiable. Equity partner, it's why it's such a great part of creative finance. If you're bringing in the money, you get to set the terms. So you need to specify how cash is treated. For example, I have a few deals where the equity partner has, we'll say, 60% of the equity and the cash flow we've written, it just goes back into the LLC and we just stack cash in the LLC because we know that it's an older building and while it doesn't have any known problems, something will eventually come up. So the LLC just stacks cash. No one gets paid cash flow distributions, and we are not allowed to take cash flow distributions until they're made whole, which is either out of sell or refinance. It's unlikely that we'll go 10 years and save up enough cash flow to pay off all of the money they originally put in. So there's going to be a sell or refinance somewhere along the line, even though the deal itself has 10-year fixed rate debt. Somewhere before that, we'll go ahead and balance the accounts. They'll be paid, and when we're all in that deal with no money out of pocket, that's when we can start doing cash flow distributions, which will be done in proportion to everyone's equity. That's totally custom. It goes in your operating agreement. I have operating agreements that say 100% of the cash flow goes to the investors until they're made whole. I have operating agreements that say 100% of the cash flow goes to me and they're paid a 2-to-1. So they put in $90,000, they're going to get paid $180,000 in 5 years when I buy them out. And if I don't, they get all my equity and they get these amazing duplexes at an amazing price. So you do have to specify that upfront. Here is, I mean, here's the basics of presenting a deal to anyone. So you're gonna come into any individual, hey, I have this opportunity. This is why I think it's a good fit for you. And you share something that's relatable with your relationship with them of why you believe that the deal is a good fit for them. Here's what I'm trying to do. Here's why I'm excited about it. Let me share the numbers. People need to understand, is this a project that interests me? Like upfront, is it the type of thing I want to be invested in? Once they're sold on, okay, this looks fun, I want to be a part of this project, where's their money going? How is it being protected? How are you growing it? And how is it coming back? You just have to answer those questions. And so when you're writing your operating agreement, you're going to make it very clear. This is how much money we're asking for and you're putting in. This is how we are paying you either throughout the deal or at the end of the deal. This is when you can expect the money. This is how the money is backed. Away you go. That's, that's how you raise capital. And it's going to be, again, custom to every deal. You can do it any which way. That's why it's so important to have these relationships. So when you propose something to someone, you know that it actually fits their goals. We call that the circle drill. We have this all over the multifamilystrategy.com course. But if you've taken Multifamily Strategies, circle drill is weaved throughout the entire body of the course. Because you're mapping who they are, your relatable points, their goals, the significance behind them, so that when you make a proposal, you know that it's going to hit exactly what they are looking to do. That's why we always get a yes. How long should I expect, um, it takes for me to be able to refinance a multi-family deal by myself? Uh, generally speaking, if you're doing the deal by yourself, they're going to want to see enough net worth to back the loan. So if you're going to get a $2 million loan, you should be worth $2 million. The nice thing is you're building equity in properties as you're doing this. Your net worth actually goes up pretty quick. It takes a little bit longer to get your cash flows and liquidity up, but net worth just skyrockets fairly quickly when you're doing a good job operating value-add properties. The trick is getting the money out of the property, which is what you're asking here. How long would it take? As long as you have the net worth to back the loans that you're doing, you usually, from purchase, 12 months and a day is the most common. I do have some lenders who will give me what's called middle money or mezzanine money, uh, where it's a little higher interest rate at 6 months. So if, say, I took some of that with hard money— I'm doing this right now— I bought it 13.5% interest, still cash flows, by the way. Now we're going to refinance it at, uh, in mezzanine money on on a 2-year product at 9.5% interest. Is that still expensive? Absolutely. Is it expensive as 13.5%? Absolutely not. Saving 4% interest is fantastic. So we'll put it in that debt product, pull a little additional money with that, finish our project, and then with more than a year of operations, we'll refinance one more time into our long-term, what we call perm financing. But that's the thing that you're really looking for, is increasing the net worth. The nice thing is you have to have the net worth to back that loan. When you're starting, you have to build that up. So give yourself some time, but I don't have to have the net worth to back all of my loans simultaneously. So once I had $2 million net worth, I can refinance all 5 of my properties that are worth more than $2 million. Just refinance, refinance, refinance. I qualify, qualify, qualify. So that's really what you're looking to build up is your net worth in the front end, which is why equity is so important. And then you make sure that cash flow is stable throughout. And if you have high equity and you have great cash flow, that is what matters for getting bank loans. And bank loans are a great way to up your liquidity. 3 resource pools. They usually go in that order: equity, cash flow, liquidity. As far as growing, always start with some cash flow, but equity is the first one to build. You then transmute that into cash flow, and cash flow is very easy to trade for cash. Hey, son, try to do the seller finance strategy in another country. That's me. So trying to do it in not every country doesn't work fantastically. I've seen some areas of Europe where you actually can do it, by the way, but it's a lot more restrictive and a lot less common. I've seen some people in the UK who've actually done seller finance transactions. I've consistently heard that it's a lot more difficult to get it done there.. So depends on where you're at in the world, but seller financing, I mean, it's a very basic form of finance, right? It's someone owns something and they're selling it to you with negotiated terms. You're paying them over time. It's a very basic model, which again, then ties right back to our theme of today, boring businesses. Seller financing is very boring. People just don't know how to ask for it, which by the way, you ask for it by asking, would you carry contract or are you open to seller financing after you've talked about the deal? In that order. If it's a natural part of the conversation, you're just asking, are we taking it out with the bank? There's multiple ways to do that. Uh, if you're open to financing, we can talk terms. It's just basic, basic, basic, but a lot of people don't do it. Got a message here from Cale. Let's see if we're going to get him back or not. It looks like his Wi-Fi is not working. He is in a, uh, he is in a friend's building right now, so we're gonna I'm, I'm gonna doubt he ends up showing up again. So for those who are here early, you got Caleb for 2 seconds frozen on the screen. Luke, how can I show credibility with no track record whatsoever for a deal that is on market? Um, what is your go-to way I talk my way out of it when it naturally comes up? First of all, it doesn't always come up. It really doesn't always come up. Your experience level is just a thing in a deal. Your confidence is what's going to carry you through this. When Cody and I first started, 38-plex, never bought a deal that big. No experience managing that, no experience raising capital. No one ever bothered to— no one asked, no one asked at all. I just said, here's the project. Okay, why are we doing this? Well, we're gonna do this project, this project, this project has bad roof, we're gonna clean up this homeless camp, we have a plan for all this. They love the plan, then we executed the plan and it worked. We had a 2-year plan, we executed it in 11 months, done. There's no reason people would have had confidence in us. We believed in ourselves and we can communicate that. Again, goes back to the circle drill. We talk a little bit about tonality in the course too, by the way, but the way that you speak, the way that you have tonality, the way that you actually present the deal, most people aren't as worried about experience level. I have not had that question asked almost ever. When it does come up, You just tell them the truth. Well, I haven't done a lot of deals like this, which is why it's so important that we do a deal that looks as good as it does. I've had it looked at by X person and Y person, whoever's helped you underwrite this deal. That's why relationships are important. I've had other people look at this. They agree this is the opportunity. Here's how we're going to execute it. Don't get caught up on that objection, but that's how you're going to build that. I doubt it's going to come up on your deal unless you sound unsure, and then someone's immediately going to be like, okay, well, how much experience do you have in this? This. But I have found people don't ask me for credit checks. People don't ask me for proof of funds almost ever. I've been asked, but very rarely. We bought a $4.5 million resort. They never looked at a single statement, uh, never looked at a personal financial statement, a Schedule Real Estate Owned, uh, they didn't check anything. They just said, okay, I like your guys' plan, let's see if you guys can execute it. There's $1 million down, we wired $1 million, and away we go. Also, by the way, that money took 7 minutes to raise. We had no experience running resort whatsoever. Present confidently. What submarkets around Dallas are your favorite? I like Weatherford a lot. That market— someone go to World Population Review and look at the like, just look at the graph. It's, it's insane. I actually think there's a way that I can screen share. I haven't done this before on, uh, on this particular channel, so I'm gonna try it. But, uh, Weatherford, Texas, worldpopulationreview.com, um, it's like straight up, they're just getting a ton of people moving in. The area is really pretty. Um, that's a fantastic place. I know there's some areas north of Dallas that are getting a ton of growth as well. Uh, but yeah, DFW, Caleb, invest in a place about about an hour and a half-ish out of Fort Worth, maybe an hour 20, called Stephenville, Texas. Uh, great market. I've been there a couple times. Uh, really fun college town, farming town, a lot of cattle ranching out there, but it's like super stable, very pretty, tons of development. That's the type of stuff I like to see— stable jobs, growth, happy people, and population growth. Let's see, World Population Review, and we're going to say Weatherford. This will be a total test, by the way. I'm going to see if I can actually share this or not. Learning. Okay. Zooming out just a wee bit. Okay. Let's see if we can do this. Go present. Share screen. And share. All right, theoretically everyone can see this. We'll find later— I'll find out later in the chat if I actually pulled this off. Weatherford, Texas, population 2024. Population's in the 80s, 3,000. I am going to say, minus a quick little blip here in 2020. I'm going to say that people enjoy living here. There is no possible way development is keeping up with this type of growth. This is an example of a market that is an absolute gem. Someone is going to make a ton of money if they clean up an area like Weatherford, Texas. When I talk about population growth, this is what I call a perfect graph. I look at this first, then I look at the jobs and the people in the area and see if that's the type of stuff that we want to buy. I'm going to stop sharing, hop back, I'm going to check the comments to see if it's actually working. People let me know. Well, someone will let me know at some point. Let me know in the comments. But yeah, that's what, that's what a submarket around Dallas that is just ridiculous looks like. If you see population growth like that, start buying there. Dylan, how do you go about moving an equity partner to a different deal before a balloon comes up? You sit down and have lunch with them. That's usually what I do is usually lunch. Occasionally it's dinner. Um, I think it's a little bit more than a coffee meeting. You want to make sure that you have some time to talk about it, but you talk about the deal you're in, what's going well. You talk about the next opportunity and, uh, yeah, that's, that's basically it. So in this example, instead of buying someone out with cash, again, resource pools, if you're low on liquidity,, but you have another deal come up. Well, deals contain a blend of all sorts of things. You can have liquidity in a deal, you can have cash flow in a deal, you can build equity in a deal. So deal's going to bring in new pieces. If you have a piece that matches what they're trying to do, that's where you explain to them, I have a new opportunity. Instead of paying you cash right now, would you be open to joining me on this deal and I give you equity in this deal? So you can offer equity instead of cash. You have to explain what that equity comes with and why it'd be a good deal for them. But that's something that you can do. You can roll them into the next deal before a balloon comes up for their money. Now, if you have a balloon on your debt and you need to roll to a different deal, I mean, that's an easy conversation. We have to do this. It's time. We have a balloon coming up and we're not refinancing. We're going to sell. But moving the pieces around, you have options and you have obligations. Each of these usually has a timeline. You just keep the timeline in mind. When it's time to propose something, sit down, grab lunch. Hey, this is how I think this moves you forward. This is how it would move me forward. So I appreciate your cooperation, but let's make this happen. By the way, a lot of people do miss that. Explain how it moves you forward. People do typically want to help you. And it's one of the first questions I have for people when they bring me an opportunity, especially if they're not an investor in it. That always makes me uncomfortable. But it's like, okay, why aren't you investing in it? Or why aren't you just funding it if it's such a great deal? Why aren't you putting more into it? Why are you giving me an opportunity? So you just wanna be able to explain these things. Like, this is how this deal moves me forward. This is why I think it matches what you're trying to do. I appreciate your help. Is this something we can do? And I, I usually get a yes to that. I usually— no one's ever said no to that ever. If you search partner to a note, do you typically amortize it or IO? Always go for interest only. Anyone who tells you to amortize a note and that's beneficial is wrong because you can always pay down the note even if it's interest only. You could just choose to pay it down like it was amortized. You want the control of the money. Another thing that's really great is when you have 3 deals, you can choose which deal all that cash flow goes towards. So interest only just means you have control. It doesn't mean you're not paying down the loan. It doesn't mean that you don't have cash reserves. Where you get in trouble with interest only is you have all this cash flow and you make decisions that don't increase your equity. You buy a sports car, you buy the ridiculous house way too early. Any of these things can really hurt you if you're relying on IO. Wrong strategy. Now, if you're using it to stockpile cash and pay down your debt, that's the correct way to use interest only. I do the same thing when we do notes to investors and say it's an interest only loan. I'm I'll never propose anything other than that because interest only is in fact the best debt product that you can get because you control what you want to amortize on your own schedule. I had an argument on that before with someone, a very kind argument, but they were adamant, oh no, amortized is safer. No, it's not. The risk is always on the lender. So if you are paying more money and the lender is lending you less money, your risk increases by paying down that loan. You want to hold the cash and control the cash. That is where the power is. That's, that's stability. That's what you want to see. New to real estate investing. I have $100K liquid. I had $20K personal HELOC. What would you— or line of credit, I guess, not necessarily home equity line of credit, but okay. So we have $120K to work with. What would you recommend if you're in my position? All I've done so far is try to educate myself. Well, that's a good start. Education is great. I'd spent too long doing that. I spent way too long doing the education thing. I learned, I got jobs in real estate, I read books, I attended podcasts, and what I found was Buying a piece of real estate is everything. My first piece of real estate was a duplex, $30,000 down. My second piece of real estate was $0 down, another duplex, but with $50,000 of value add that came out of pocket. So when I first got started, you could do those first deals with the money that you have and still have money left over. That was enough to create a $2,000 a month cash flow, which covered my mortgage on my tiny little house in Renton, Washington, right outside of Seattle. The most important thing you can do is go buy a deal. It could be a duplex, it could be a 50-unit building, it doesn't matter. Don't focus too much on the cash that you have. Focus on finding a deal because different deals have different pieces. You could get more cash flow out of it, the amount down you're going to need. You don't know any of these things yet. Don't limit yourself though to like, oh, what could $100,000 buy me? If you find a 45-unit building while you're looking for that duplex, and it's a fantastic deal, and you can ask 3 people for, hey, would you guys fund this? And I take an equity stake and I buy you out at completion of the project. You could end up with a 45-unit building and move yourself forward decades in your investing, which I think is the mistake a lot of people make. They focus on, I have this much money, what should I be looking for? It should be, I'm looking for deals, and when one comes up, if I put $100,000 into it, can I own it without partners? The pieces you have doesn't dictate the deal that you're going to find. Anyone who found a deal— I, I think this is true of everyone listening— everyone who has a deal, if it's right there in front of you, let's say it's a $2 million deal and you have $100,000, like, well, that doesn't help me buy this, but you are absolutely convinced that it's going to be worth $4 million in 2 years. To make $2 million, I guarantee you can find the money, and I guarantee you can communicate to others why they should invest in this deal. If you're going to double $2 million, and in the case of Cody and I, we only put $300,000 down to make that $2 million. Now, we did a few hundred thousand dollars in reno, but we had a 7-figure profit on our first deal. If I was continuing to look for duplexes and what $100,000 could buy me, I would not have bought that deal. That was $300,000 down, $0 out of my pocket. There are plenty of deals where I will buy into, or I will put money down, or I will just buy myself. But I don't only look for those, I look for deals. And then I figure out with the pieces we have, how would we solve this? And when you solve for X, which is a deal that cash flows on long-term fixed rate cash flowing debt, you're done. Buy it, increase your income, then buy another one. Dylan, say someone has 30% ownership, uh, could you give them more or less depreciation than the 30%? Yes, but you can only give— so you can do special allocations of depreciation. You have to have a logical reason to do so, like for example, they put in all the cash up front, therefore we are assigning more depreciation to them. That is a sensible thing. Um, the equity is not the main thing here. What they're really looking at is your cost basis. You can only claim money in depreciation based on what you have in the deal. If you put zero of your own dollars in the deal, you can be assigned depreciation, but you can't actually use it to write off against anything because your basis in the deal is $0. Now, if you borrowed that money from them, so say the investor got their 30% equity by lending or applying 30% of the money for the deal, their equity and they lent the other 70% to you, they, they're then lending it to you and you're putting in the deal. Now you have money in the deal, you can claim the tax benefits. It'd be a little bit weird if you guys had equal money in the deal though and one took more equity than the other. So it depends on your deal structure. It's a question for your CPA, but technically yes, you can do special allocations of depreciation. Talk to a lawyer and a CPA before you do it. That is not one that you want to screw up. You do not want to cause an audit, and more importantly, you don't want to fail an audit if the IRS disagrees with your application there. Zero, loving these streams. Well, Zero, loving having you here. You always ask great questions, so we appreciate having you in the stream. If you have IO first 3 years of 30-year AMM, does that mean it takes 33 years of ownership to pay off? Um, no, no. So typically there's going to be a— well, I mean Let me take that back. Technically, it means the deal would be paid off in 33 years if it's interest only for 3 years and then converts to a 30-year amortization. Yes, in 33 years the deal would be paid off. However, they almost always have a balloon. Now, if you're doing seller financing, occasionally you do get a 30-year term. Cody has one of those. That was his first deal, was a fully amortized 30-year note. There's likely going to be a balloon in there, so it's amortized on a 30-year schedule., but say 5 or 10 years in, you're going to have to either sell, refinance, or otherwise pay off the note. There's a lot of different ways to play that game when you come to it, but the balloon basically says, hey, you're not actually paying this loan for 33 years, but the math is done so that it would be paid off on that schedule in 33 years if you have 3 years of IO and then a 30-year note with no actual balloons, 30-year AMM. Yeah, that would technically, that would technically work. How'd you find owners in Canada? I'm having a difficult time finding owners the way you showed in the video. Owners in Canada, you typically have to work through a real estate agent in the area. They have access to more methods than you do. But if you have a list of like, hey, I would like to figure out who owns these properties, work with them specifically. I've noticed that Canada, while we have a lot of mentees who've been very successful in Canada because the strategies work, The way that you find owners is a little bit different. And it's even state by state in the US, it is different. But you're gonna work a little heavier with brokers on finding the data or real estate agents to find your actual data points and get those first pieces of contact. Once you have that rolling, it's a little easier. And every country is gonna be unique. Every state's gonna be slightly unique. But it is a little bit harder in Canada with your privacy laws. So that is a good observation and an accurate observation. Jeff, I'm looking for $100K private money. I have a guy that has 3 houses and 2 2-bedroom apartments with garages under the apartments and wants $100K for everything. 2 units rented, 3 vacant. All right. Well, people message Jeff Gregory if you guys want to look into his deal more. I'm curious where that is. You can put that in the chat where it's located. But, um, yeah, very fun. Depending on where that is, that could be a great deal. Also, depending where it is, could be a horrible deal. If that's in like a shady area of Detroit or Gary, Indiana, uh, $100,000 may be overpaying for, uh, for 3 houses and a couple apartments. Uh, Dylan, if someone offers a 5-year balloon, how do you offer it to be an option? What metric do you offer to keep it in line until that point? Okay. So someone offers you a 5-year balloon. How would you make that an option? You'd put in— you typically— the easiest way to do it, or most common way I should say, is an option to extend. I actually have a lot of balloons like this where in 5 years, if the loan is still in good standing, and there's metrics around that, but it's basically we're current with no disputes between the two partners. I have an option to extend for a fixed fee, and it could be $5,000, it could be $25,000, could be 1% of the transaction, whatever it is, or 1% of the money borrowed. So like one point on the loan. There's a million ways you can negotiate it. Beautiful thing is they're all negotiable. But if you want to negotiate an obligation to be an option, you put in an option to extend and parameters of what that extension will look like. That way you have the ability to make a decision at the end of the loan term whether you want to refinance or you want to continue on for a set period of time. All of it is negotiated with the other party, but that is how you turn your obligations into options. We do that on most of our deals. Should you get insurance for LLCs? Uh, yeah, um, just an umbrella policy is super, super, super inexpensive. I have millions of dollars, uh, insured for very, very, very little monthly cost. So yeah, you should insure your LLCs in an umbrella policy, but you're insuring your properties on a property level. Individual LLCs don't need anything. You need a personal umbrella policy and your real estate all needs individual insurance policies. Your LLC doesn't need anything. Your umbrella policy will cover it if you get sued. Awesome. Everyone, I've gotten to the point in chat where everyone let me know that our screen share worked. So now we have the power to do this in lives. This is gonna get a lot more fun. I can actually show people how to do things. Yes, I like this power a lot, a lot more. I'm not sure what country only has an interest rate of 2.2. That is insane. Do you recommend the method? I mean, if interest rates are low, prices are high. Everything, it's just a, it's a free market. That's what I love about real estate. People get worried about like when the interest rates are high, they're like, oh no, interest is too high. We can't do real estate. Well, it's like, okay, well prices are going to come down to match. Buildings aren't just going to move where they don't make any sense. Low interest, prices are higher. High interest, prices are lower. It's just supply and demand. So I wouldn't say the interest rate in any given country is going to change your strategy because it's really market conditions you're looking at holistically. Can you cash flow on long-term fixed rate debt? If you can, do it. If you can't, you're not going to be able to. I'm going to guess in any country that has very low interest right now that you are going to be paying a super premium for any real estate there. If you seller finance 80%, how do you get 20% from a lender? If both want first position? Well, you can't have both want first position. That's just not an option. You can't have two people in first. The bank always goes first, and in seller financing, the seller will almost always be first. I don't know why a seller would agree to be a second position loan selling their own equity to you. So you're gonna have to find a lender in second. That's almost always true. Now, you get what you negotiate, so you absolutely, on a technical level, you you can just get a different deal and you can pay more or less to one person or put one person in one position or another position. You can play with anything, but on a seller finance note, typically your lender is going to be in second position, which is often why we use equity partners, because a lot of times lenders don't want to be in second position and it's a little bit harder to find the money. So when we're doing this, it's like, okay, well, we can have some difficulty finding the money, or You can come in as an equity partner with a buyout, and this is how cash flow is going to be split. Ownership typically is the way around that. But yeah, if two people— if you're getting a first and a second, you're going to have to find someone comfortable with seconds. It's also going to be higher interest rate, often cost you more money. All right, busting through. My wife has notified me that dinner is just about ready, so I'm going to go super fast. Here we go. Lightning round. What are the terms usually on your private money loans as debts to fund down payments on seller finance deals? Well, if they're in second position, we average— it's usually— it used to be like 10%, it's now like 13%. If I'm borrowing with an equity partner, it's usually closer to 10%. So if I raise the money myself from individuals, 10-ish. If we're going to a hard money lender, it's about 13.5 points. It is expensive in second position though. How would second position, uh, position get money if you default in the first position? Uh, would have to just be stuck at a loss. Um, so second position gets money after the first has been paid off. Then you get paid after all liens. So if there's not enough money to pay off the first position loan, say that you sell at a huge loss, second position doesn't get paid. That's why you pay more for second position debt. Their risk is notably higher. They're farther down the stack of who gets paid if you have to sell the building or otherwise lose the building. Second position, more risk. I've seen buildings that have thirds and fourths. So yeah, the farther down the stack you are, the later you get paid. Someone doesn't know what seller financing is. How do you explain it without sounding broke? Well, if someone doesn't know what seller financing is, they're not going to seller finance to you. Like, first of all, if you have to explain it, it's not going to happen. Just realistically, you're going to find another way to do that deal. They're not going to be comfortable with someone trying to buy the property, explaining to them the financing methods. I don't see that happening in almost any case. However, I would just explain it as what it is. Like, well, look, you can finance everything you own just like the bank. They're going to write a loan. If you're okay with me paying you in installment payments, this is what I think it would look like. And then just tell them what the terms look like for them. So if we're going to use a $100,000 property as a basic example, property is $100,000. Cool. I need to— let's say we're seller financing 100% of it. I can pay you in cash, but I don't have the cash. And I don't have a bank that wants to lend on this. It's too small of a loan. So your options are I can pay less for the property, or I can give you your price. And this is what's going to look like. I can pay you 8%. I'll pay you off in 5 years. But you're going to make interest on your money. I'll give you 20% down. So write a $20,000 check. But you just tell them like what worked for you. So you write the deal that you want and you just present to them like, this is what it would look like. That's the best you can do to explain it. Do most of your deals have balloons? Yes. I have one balloon or one deal that doesn't have a balloon. Very, very common to have a balloon though. So far, so for debt hammer, you buy more than what you want, improve, then sell to pay off for the amount you want to keep. Not necessarily, no. So you're going to stabilize your properties, which are going to give you cash flow. You're going to optimize it, which is going to increase your cash flow. And then you're going to use that cash flow to start paying them off one at a time. Now you can speed it up by selling off a few properties, which is something that I'm doing right now, but that's not the only way to do it. I'm also selling off some properties because I'm moving to Texas. I have a huge portfolio in Washington. I am having more fun investing in Texas. Just personally, I have found— I talk a lot about this. You have an easier time buying in blue states because other people don't want to own there. There's more competition. However, I'm a little bit more established, established brand. I am playing with more money now because I played this game for a few years with more pieces. I'm ready to compete in a red state since I'm in this for the long haul. Ease of operation is actually very important to me. I'm just getting tired of Washington State divvying out fentanyl and having beautiful buildings that have been renovated. Suddenly getting surprise fentanyl issues and it's very expensive to fix. Stuff like that in blue states is very common right now in all of them. I'm going red as far as my investing. So while doing that, conveniently, if you have a bunch of liquidity events, you can pay off some debt. I would rather have— right now I have like a 225-ish unit portfolio. I would rather have 100 units with a very, very, very low debt stack and you may see me go down to 100 units. And if that means you're going to unfollow me on Instagram, that's a bummer, but I don't care. I'd rather get cash flow with less work and less units. If cash flow is the same, say you're making $20,000 a month with 100 units or $20,000 with 200 units, person with 100 units, you just have less problems and less risks and less management for the same amount of money. We're all in real estate. I mean, I love providing housing. Love renovating buildings, but at the end of the day, I can do more for more people with more money, including myself and my family. Like, I can provide better and I can provide more for others and I can reach more others and I can renovate more properties with more money. Money's the resource we're after here. So like, optimize your portfolio. Less is more. If you can get the same cash flow with less properties, let's do it. Okay, Oklahoma is a great market. So if you can buy a bunch of houses pretty much anywhere in Oklahoma, I'm sure there's exceptions, but if you're buying a bunch of houses in Oklahoma, yeah, you're probably gonna do pretty well. I would— anyone who wants to own in Oklahoma, reach out. I'm a Washington and Texas guy now, so those are my two markets. Oklahoma, not buying there myself, but stamp of approval. Talk to owner selling because taxes and insurance are increasing so fast in Houston. Oh my gosh, they are, especially insurance. Ludicrous. That he can't raise rents fast enough to stay positive. How would you go about that? Talking to an owner? Well, it's his operating problem. I would just say, hey, I'm still interested in buying it. It'll be your problem if he can't raise it and run it profitably and you believe that you can. Just say, hey, it's a challenge that I'm willing to take. This is what it's going to look like. I can make this happen. If you're having trouble managing it, let me take a crack at it. There's a lot of people, by the way, you have a lot of hesitancy around raising rents. As long as you're not just like— oh, I love this about real estate, actually. If your rents are too high, people won't move in. The market pushes your rents. And so if your local government is putting in laws or raising taxes or insurance companies are raising rates, you have to run a profitable business or else the building goes It goes in decline and the tenants will lose their housing and everyone loses. You overprice it, no one lives there. So the market determines your rents. It's not your fault. People get so mad at landlords. Oh, they raised my rent. They did. No, they did not. Companies and politicians raise rent for people who are struggling to keep up on rent. It's typically not always, but typically landlords who have, they feel guilty about raising rent. Like, oh, I feel so bad for these people who live there. You have to step away emotionally from business and say, hey, it's okay, it's not my fault. I am going to run a business that is profitable so that we can continue to improve the building and improve communities. You only have two types of buildings: building in decline or a building that is getting better. I always want to have buildings that are doing better, and that only happens with a profitable business. Period. There are no exceptions to that. Run a profitable business, fix the problems, provide excellent communities. Don't just charge a bunch of rent and pull all the money out and buy a sports car, but reinvest in your communities and it will continue to pay you dividends and rent will continue to increase. And if you locked in fixed-rate debt, your expenses stay roughly the same. Taxes, insurance will go up, but rent typically outpaces those. You will get paid more and more every year for continuously reinvesting into your property. And you get to feel good about it because you actually have positive economic effect and grateful tenants at the end of the day. I said I'm going to lightning round and then you hit my passion point. Why don't owners want over 25% Section 8 sometimes? If they're using agency debt, some agency debt does not like to place in that. That is some of the lowest interest conventional debt available. And so it's like the insurance company money, but if you're lining up for agency, they don't like to see a large amount of Section 8. For me, where I do a lot of bank loans and seller financing, I will load as much Section 8 as I want into any of these properties, and I can adjust later if I want to. But it is such an easy way to stabilize. It just means there's certain very low-interest debt products that I may not qualify for because I'm doing too much Section 8. It's just something you accept or don't accept. It's up to your business model. There's not a right or wrong answer there. But that, that is the reason. What is the purpose of land assemblage? Control. If I own— you think of Monopoly, it's a perfect example. But if you own multiple properties that are all right next to each other, you can do this again and again and again, but they're worth more because you control rent in the area. If a developer wants to come in, they can build on those. You can build on those if you have a bunch of land parcels, or you assemble like a 12-plex, then right next door a 13-plex. Also, if you're doing a bunch of established rentals and you're just buying them right next to each other, outside of just getting control market rent, which is very, very powerful, ease of management is no joke. I own stuff all over Grant County, and that's just one county. Ephrata, Washington, Quincy, Washington, Moses Lake. I am actually selling some of my properties on the other side of the lake just to focus on the downtown core stuff that I'm having the most fun with. I'm just taking the money and repairing buildings with it. Already finished or mostly finished projects on the other side. Going from, hey, just all one city to I'm just going to invest on one street. The closer your buildings are, the easier they are to manage, the easier it is for your team to manage, the easier it is for you to increase rents, more stability, more cash flow, the whole nine yards. Assemblage is awesome, and ultimately That is the game that you are trying to play. Put as many properties touching each other as humanly possible. The more they touch each other, the more power you have. Could you explain a link loan? No, I'd actually need to do more Googling on it. I haven't done link loans. I'm sure someone here could. I am not an expert on everything. This is one where I need to look up the term. So no, I can't, but I can admit that I don't know. I don't know everything about everything. Could you explain negative amortization? Yes, I can. It looks like this is going to be the last question. Negative amortization. Caleb, oh, I wish he was on this call. Caleb actually has a negative am loan. So a negative amortization, or it's actually, I've always heard it as reverse amortization. Instead of paying down over time, you're actually adding principal to the loan. You actually pay— your actual payments are less than the amount of the interest. So he actually has a deal for the first 2 years, it's a reverse amortization. So principal actually goes up a little bit every month because his interest rate is higher than his monthly payment. Why would you do this? It keeps your cash flow up by keeping your actual bill down. He's paying less than the interest, while he stabilizes the property. Now, he bought it for, I would say, about $300,000 under market value, maybe more. He argues $500,000, so somewhere in there, $300,000 to $500,000 under market value. Through the course of his 2 years of reverse amortization, he bought for $2 million. He's going to add about $53,000 to the value of the loan. Essentially, if you do your math, is I'm really buying this for $2,053,000, and then I'm going to refinance at a certain point. But he basically just accepted like, I'm buying it and I'm baking into the pricing the reverse AMM. Totally fine. Now he just gets more cash flow through his first 2 years of operations, and it goes up a little bit every year, or I guess the reverse goes down. It depends on how you want to say it. It's an inverse. But first year, he's adding more money to the loan. Second year, it's almost break-even. He's right underneath the payments for the actual interest rate. And then every other year is interest only. He has a 5-year note. At the end of 5 years, he refinances into bank debt and he'll owe a total, if he doesn't refinance before then, of $2,053,000. That is our final question we can go through today. Unfortunately, I know that there are a bunch of questions that have appeared since that last one, but that is what I have time for. I am back in town this Wednesday. So on the normal scheduled time for Multifamily Strategy, where we go till the questions end, Wednesday, 3:00 PM Pacific Standard Time. If you're Central, like my Texas properties, that is 5:00 PM. Watch for it here, YouTube, X, LinkedIn, Instagram. We are on all platforms. At the same time on the same feed. Have any other questions for me? I'm Christian Osgood on Instagram, @ChristianOsgood. Ask your questions there. If you want to learn more about MultifamilyStrategy.com or join the mentorship group, the course, or any of our other products, check out MultifamilyStrategy.com or follow us on YouTube at Multifamily Strategy. Until this Wednesday, I'll see you all later.