Building a $300M Real Estate Empire from Scratch with Chad Doty | BP Podcast 317

this is the bigger pockets podcast show 3:17 you're listening to bigger pockets radio simplifying real estate for investors large and small if you're here looking to learn about real estate investing without all the hype you're in the right place stay tuned and be sure to join the millions of others who have benefited from bigger pockets calm your home for real estate investing online what's going on everybody in BP nation this is Brandon Turner host of the BiggerPockets podcast here with my sniffly friend mr. David green David Green you got a cold there was that just a weird sniffle that you didn't mean to do now that was just a bigger pocket sniffle that's one of the ways that I excited it's how I express my enthusiasm for being here actually I'm overwhelmed and it expresses itself through sniffles I'm doing really good thanks for asking and not pointing out an awkward thing instead you and I just got back from Colorado not too long ago and the bad news is I was overwhelmed with altitude sickness and nausea the entire time I was there but the good news is I spent a lot of time in my hotel room thinking about 2019 came up with some really good plans I have an extreme amount of clarity on how I want 20-19 to be different than 2018 and this is the most excited I've been in a really long time nice you're gonna probably finally pursue that like Clown College where you can go learn how to travel a circus yeah it's a mixture of Clown College and slam poetry I'm gonna see if I could combine those two worlds together and create an act that nobody's ever seen the best idea I've ever heard and with that let's get to today's quick tip hi today's quick tip has nothing to do with what David just said but very shortly today's episode is a really really really good deep dive into the world of Multi Family and commercial real estate investing and as such you're gonna hear some terms that you might not know what they mean because like this is like a legit like deep analysis of what you know like how to get into multifamily in how wealth is built there so here's what I want to do it for a quick tip that is this if there's a term you don't understand jot it down go to the site search it like don't don't go oh I don't know what he's talking about I'm gonna stop listening but say hey I'm gonna I'm gonna use this as a in occasion of what I need to learn and how I can grow as an investor so I'm just putting out there also it's got a cool little thing did you know that if you're on the BiggerPockets forums and there's a word like or an acronym that you're not sure that means on a lot of them we have it we have like this cool little software where if you hover your mouse over an acronym it'll tell you what that phrase means like it'd be like what's bur you can hover over it know be like by rehab revered by let's repeat anyway have a cool little feature on the bigger pockets forums which of course are free to hang out on so go hang out there and I would highly recommend that you do that especially for this episode this guy is good he's smart but he is meaty he is meteor than mission meet Co he is meteor than grandma's Christmas jambalaya in Louisiana this is a meaty meaty show you probably want to listen to it a few times and make sure you chew every bite 15 times on each side you don't want to chose it was that an analogy that was really good yeah that was a freestyle analogy like it's another thing I'm moving up like slam clown poetry these things together I'm gonna be the mm of analogies that's an analogy just that's good point and now's you within an analogy it's like Inception all right that is Chad Dodie Chet is a real estate Rockstar investor buys lots of big multi-family you're gonna love this show he goes everything from how to get started with large multifamily he thanks about like the for because I'm the four rocks I think he's what he said about like that you have to have in order to build any size real estate business they show you listen for that and then I love as advice towards the end or he talks about how to know what market to go into and I'll give you hints it has to do with your grandma's money so just stick around for that again this show is deep complex and really really important if you want to get into multifamily so listen up and without further ado let's get into today's show alright welcome to the show Chad good to have you here thanks for having me guys yeah yeah so let's get into your story and go through your real estate journey starting in the very beginning how did you get into real estate let's talk about your first deal yeah yeah so I'm a recovering management consultant I didn't grow up in real estate yes exactly I was with a small company called Arthur Andersen they got destroyed by Enron not on the audits tax ID isn't consulting and a bunch of really good people got spread of the wins went from nine billion in revenues and like you know thousands of employees to sixty attorneys in Switzerland in like six months anyway but that was I was maybe a year or so from partner in that so it's close so the hockey stick compensation model just went and then so I left that I went to the work for company realized I'm chronically unemployed well and I hate being staff to someone else's goals worked in another consulting firm then I decided to start my own consultancy but along the way you might be building a good rate you know two hundred thirty bucks an hour but you're still just trading time for money so it was this goal of how do I make it where I can scale lifestyle and financial security and then financial freedom in ways that are purely a function of I have to work harder and harder and harder and harder so I actually started with I did a had an options fund for two years I did sp credit spreads for like two years made money that hated it and then eventually I went to real estate and what it was I wanted to deconstruct the lifestyle I wanted so I wanted it to be evergreen I wanted it to provide me cash flow ongoing I wanted to have really good tax advantages and I want to make sure I didn't hold its hand every single day I didn't want to flip I didn't want to own a job I wanted to create a business so then I might have looked at the risk profiles of all the different asset classes and multi-family or in real estate you know retail office hospitality land storage what-have-you multifamily to me was the most compelling because and again this is my preference it's not a absolute but for me it was I could have I can make a little bit less money in every single deal depending on the market cycle but I can make money in every market cycle I can have the best long-term track record of any of the asset classes even giving up some long term profitability so I was like okay how do I make that happen and then so it's okay we picked multifamily then it was okay how do we be really good at it and build a really really scalable business and then it was okay that's what we're gonna do so it was myself and another guy we initially started it and in but at a third partner pretty much in the first year the first one sort of exited about five years ago and then sort of built it from there so sort of we picked the asset class bought our first deal in 2009 so started the business in 2008 okay so before I go into that first deal which I did a couple quick questions I have for you first of all well I'll just call out something I thought was kind of cool you basically labeled four things that you found beneficial about real estate right you wanted something evergreen and can you explain what you what do you mean by evergreen yeah and so recovering management consultant military father I can speak in acronyms the entire call please check me so evergreen is that it's a business model that will always be around it can't be horse and buggy it can't be blackberry too can't be code act so can you think of anything that would disintermediate two things a place to sleep in a place for your stuff yeah no one has yet has an answer Elon Musk might think one up you might it'll be on the Mars rover or whatever so until then it so that business models not going away and then inside multifamily I didn't mention this we we work with in the middle of the bell curve so median household income is fifty seven fifty eight thousand dollars a year that's also the bulk of that b-grade renter population so for us we work with nineteen eighty five to two thousand five built assets that serve that client that is rents out of economic preference and economic need so for us it's okay they're never gonna go anywhere how do we serve them as good or better than anyone else in our market yeah I love that I love that you said a couple things there first of all you looked at where the vast majority the people are in the US there's like that's not really change I mean yeah that might change up to fifty nine eight thousand and round a fifty-five but they're a day those rents you know Grant Cardone last time we had him on the podcast he mentioned how like he specialized in like nine nine hundred dollar rents cuz like nine dollar rents and he's using it as an example but they aren't going anywhere like that's just the and I like that you said the bell curve that's what that is right like it's where the booklet people are want to call it that that's super so you mentioned Evergreen which is great cash flow I mean extra money tax benefits and the fact that you're in a business say you're not that you're not beholden to trading time for dollars so right those four things led you to multifamily fantastic and then use it something I just I love this you said you asked yourself the question how do I get good at that and then you said how do I become the best in my market at serving those people right I think it's something that most people don't think about they just think how do I get into it yeah how do I get good at that yeah that your management consulting background that led you to that or that's kind of how you just think it's a little bit of both but the humoral if you look at people so things your father tell you that creep in your life yeah you know find someone who's done what you want to do do what they've done okay what they've got so very rarely or remodeling people who were just in something we're modern people who are successful at something so that's that's your bar not doing it and in real estate there these there's a couple of myths that I wish we could eliminate from late-night TV and horrible books that sit in garage sales around the United States the first one is that if the deal is good enough money will find you it's it's a lie it's fighting well so the here's an example do you have siblings I do ok brother sister both okay let's assume you have an older brother who's complete alcoholic and and pick on sibling because that's what we do I've got a younger brother and he came to you with an amazing deal you look that on paper he's like yeah but I'm the manager would you invest in that deal not at all right so money flows to people that know what they're doing money flows to competency not to good deals competency find good steals but you need the competency first so if you want to be successful my belief or our belief and I think it's proven out is become that person first don't go find the deal be good enough to be there you know in a the other one is you make your money when you buy which isn't true either you establish your baseline profited by below market but you make your money when you operate yourself I like that little twist on how most people look at that yeah I think I think it could be a cop out on both those you're like well you know whatever like it I got a really good deal the money just gonna magically appear and then it doesn't appear and people get stuck and they're like I'm not sure why right so how would you answer the question I know we're gonna get in your deals here yeah which comes first the deal or the money it's like think of a new a newbie turn about a first deal right which comes first the deal with money in your opinion I think you got to back up a step and there is so internally we deconstruct our business a lot and there's a term we use call it your mac profile which is market approach and capability and you have to know what those are what do you get at how do you want to approach the market and where is that market because you could be a ground-up developer in a market with flat rats and you're at equilibrium and supply and demand you're not really gonna do very well or you could be someone who owns long term and you're in a accelerating rent market you go in you don't have any value add opportunity you'll do okay but you would do a lot better if you're under set how to do value add so you you have to align what you're good at first then in what markets you want to work in and then what approach is working in that market so those are the things it's so if you know that you then can go to off when you talk to your money it's here's what we're doing here's our business plan do you like this business plan if so I'm going to go find deals we're a big believer that hot money is far better than a hot deal because a hot deal you screw up you're killing your reputation you're wasting your British time you're in the middle of all these professionals in the multifamily space that you're messing with their livelihood by you not being good enough to go raise the capital where if you raise the capital working with your investors worst case scenario they have an extra few months getting 2% there you go and I mean that's our key so before we go on much further and ask you about your first deal I have a few questions that I want to ask you yeah the first is gonna be for those who say okay it matters where I buy can you give us some advice of where you go to get some of your information regarding census data a population growth job employment migratory patterns and then the second question is you made a very good point that I wanted to highlight that it Matt you need to work on yourself and who you are before you just go find the deal right Brandon Thompson says if you find the deal the money will find you and it will because in real estate specifically are investing in a deal and that's if you screw it up they can still get the deal right but the fact remains what you mentions true as well if you're the kind of person who's not that great you're not gonna get the deal in the first place right like you got to work on yourself in order to find those after you answer what are some of the ways people can look and see where should they be investing as far as which part of the country because I get them asked that question a lot too right can you explain what are some things that you found where key in you working on yourself are the other successful people that you've met that got it what did they do right right we could spend two hours and actually both those topics on so we are demographers we definitely believe that and and it's proven out that when you're acting you're acting first and there's no national real estate market except in the finance base finance is national everything else is local hmm okay so psychographics or local policies at the state level at the MSA level at the neighborhood level at the zip code collection level at the site level you know all that stuff it's all local so there's MSA stats you obviously have to have the employment growth and population growth components of employment growth components of population birth all those trends are available from census BLS Texas A&M University all those stuff you can get from those three sources and if you don't want to go there you can also subscribe to neighborhood scout which is a fantastic tool if you have a relationship with a mortgage broker you can get access to Axio data costar data and they'll have all this like we've got co-star necks in subscriptions as well but when we started we didn't you know we were looking the stuff up on our own and then getting corroborating data it's never it's not it's it's still a wildly inefficient market and the data is out there but how you guys might interpret it like Brandon and David you guys might look at the same set of data and have a completely different conclusions based on your opinion and your business plan but the it we're not big believers in ever buying in a market where we're not getting buying at least at or above market us employment and at or above population growth there you go period and then but then you also need to go into that employment growth and okay where those jobs going are they innovation jobs at North of 95 K that will have a trickle-down effect or are they core blue-collar jobs that will immediately impact both are valuable but in different ways so you got to go through all that stuff buddy again those three sources have most of that data and if you need to buttress it you can again go get co-star Axio what have you yeah cool and then on and there's easily 17 on metrics at the MSA level we go through but I was just touching on some of the big rocks there's also crime schools local level there is state policies tax policies landlord tenant laws like we don't I love to visit Portland but I never want to own in Oregon it's like little France when it comes to landlord sinawali California's beautiful similar rules there are websites they're dedicated to learn how to live rent-free and manage the system every six months abuse you know if you if you if your local those markets will understand them that's fine but as someone like us who were based in Richmond Virginia all of our assets are in Texas Carolina's what have you were like well we need something we can trust a little better success metrics the the the people that mean commitments the number one thing right the you guys have kids I do yeah okay so David you have a dog or cat or you actually try to live my life as clean as possible I home it would die if it was their mouth but I think have anything alright so just just a test on so commitment right so it via unconditional love I'm a firm believer that you don't witness unconditional love unless you own a dog because the dog will give you basically unconditional love you only see it at that point you don't experience unconditional love until you have a child because before that child is born and even immediately when they show up you're like I will take a bullet I will do whatever it takes to make sure this child grows thrives whatever so but you think about that in case you love that commitment so imagine you took the level of commitment of this child will thrive - I'm going to rock this and real-estate at least commercial multifamily is a high barrier to entry business you know once you're in you really have to try to screw up because there's so many good people wrapped around your team that are monetized incentivize not to fail but the trick is getting there and can you invest in yourself enough over a 1 if your 3 year period to get through it you know there's certain ways to get in so that number one thing is commitment and so they it's not a I think it'd be fine it's more I I'm going to do this and so that's that's the number one everything else then is are you better at a particular there's we break our mod business model into four big areas business architecture deal development capital development asset management and you've kind of got a lead with one of those four to build your business to wrap around and then it's then at that point you're looking to find what do you need a buttress with external team or your own partnership over there or again use do the forward you know one right there done business architecture so basically the act of acting on your business okay what are you doing to optimize the pieces that aren't going as well as you want okay them if you think about business like a wheel that's got spokes in it it let's say a wheel barrow minimum needs three or four spokes to roll right we can throw one spoke too far it doesn't roll anymore the spokes fall out it doesn't really anymore so you can only grow as much as all your spokes can okay the the other one is capital development so bringing in equity okay and that deal development where are you sourcing the assets what MSA is what sub markets what neighborhoods what sites how are you getting them ninety six percent of all the deal flow of flows to a broker inside the commercial multifamily space if your seller you're wildly incentivize not to so what relationships do you need to create you're not you very rarely as a letter campaign I mean like very rarely as a letter campaign gonna work in this space it might in residential but not in multifamily and then asset management what are you doing to take over 90-day optimize capex plan budget out implement all that stuff measured your value-add operate in that window and then sell or refine keep you know those are the four big rocks all right so to summarize that LP you're basically I mean I'm gonna use real simple terms you gotta have somebody gets the money you gotta have the money you gotta have a deal you gotta manage it right and then you have to run your business correctly I mean there's not a good thank you for doing that for me cuz that would have taken me a while to do he does these big words that you're using or terrifying rapidly convert them into something that isn't intimidating you guys have had enough but but guess guess I'm sure you're probably frustrate with them yeah it's tough because you think I think that way right we do too we're just making fun of ourselves right now yeah it's brilliant what you're describing and what Brandon's about to do which I know is he's about to explain this is the same way that it works in single-family investing or flipping or any business that's where he was going yeah got the three levers right the money the deal and managing it and then what you described was business architecture which is a pretty cool way of saying like running an actual business and as you that spoke analogy that you gave was so or good because that's the problem I'm having I ran out and said how can I be the best at everything and I left my hub and I developed like nine different spokes that ended up at a wheel and was dominating it and then I looked around and was like I can't handle this I'm really far away from my hub I need to be at all the spokes and and my team was like that's scary I don't want to go out there with you right and I realized that I didn't focus on business architecture nearly enough I just ran out there and got the money in the deals and managed the asset so that's a very good point to bring up is that don't get caught up in the in the bright shiny thing and chase after all this stuff you want if you don't have an infrastructure to support you once you have it yeah and in what its infrastructure or focus there's a lot of that like the week so one point time we do multifamily only right now but at one point in time we had over 100 cash flow homes we thought hey if we have this it'll act like a multi-family we make twice the three times as much money in half the time and what we do today because a portfolio of cash flow homes is hard to the scale you have to build a property management company or you've got to rely and bury mom-and-pop local pretty management there's no big national so you can make money it's just as you get bigger and bigger your headaches start to exacerbate because of the control and local is a you know I'm not non localization of it but at the end still that's so focusing is helpful it's also what do you think you know the corollary is what do you say no to right you the bright shiny object is we have to what is it it's in buffets letters basically is the trick is pick your top five projects and everything else you just say no to forever because you never it was five a new five will show up yeah yeah I remember hearing a story I think it was a bumpin story and it's kinda like Abe Lincoln every quotes a blank but I think it was Buffett where he said like yeah I think you said they told this pilot yeah it's a pilot story right yeah you twenty things you want to do in life and then take your top five and he says those are your most important things and the next fifteen and the guy says like yeah those are my next important things like no those are the never do that's right no matter what don't do those those will kill your top five yep so what I think we should do is we should write that quote and at the end of it say Abe Lincoln and at the end of it say Brandon Turner if I just got to that in the office one it'll show up on brainy quotes unless Brandon quoting somebody else's so I agree with what you're saying about single family I'm running into the same thing yeah I get a lot of people that say how many doors do you have it's not really a metric that you use with single family investing because it doesn't matter but what happens is you get wildly inefficient when you start stacking up single family homes it's a great way to get into real estate it's a great way to build wealth for that the overwhelming majority of investors out there this is your bread and butter is what you're gonna do yeah you get good at this or you commit like what you were just saying a minute ago Chad so this whole thing you do not want to stay in multifamily because it's like having a herd of cats as a herd of kids opposed over herd of cattle that you can actually kind of control and exercise some power over and hire a cowboy to run it right like trying to herd cats is horrible and that's what it feels like when I've got all these single family homes with all these individual problems popping up an individual property managers trying to talk to me and yeah it gets really difficult yep all right so enough of that let's hear about your first deal I'm very curious to hear about how your real estate experience started off yeah you got so I was telling a story to a guy worth multiple billions which is not common for us to having our boardroom but he was there when we talked about the fact we started in 2008 and he is like and this was a year ago he's like you're either really really smart or really really dumb to start then and I was like am I do I get to choose the answer or will time will tell but um we started tell me yeah talk to me 10 years but the we started a no 8 with the idea of doing both cashflow homes and multi-family and then we ended up buying our first multifamily deal in oh nine it was a 4.3 million dollar deal in College Station Texas we raised about two million or so this one we bought 1979 built no environmental sort of on that edge of the 1979-80 bought it via assumption because lending at that time was really hard that capital markets had constrained already so it was hard to get lending but you could still assume a non-recourse commercial multifamily loan so that's what we live if you take over it and yeah yeah it was basically as 55 percent LTV assumption so 4.3 million dollar deal we're bringing north of two million dollars to close with our equity race including reserves so did that deal operated it and it wasn't really a value-add play at that time we weren't ceiling seeing really much in the way of rent growth so you're really managing occupancy and keeping your incentives low and turnover and it was a mile or so from Texas A&M so not a small school primarily student population so didn't run it like a rent by the bed it was still a rent by the door but it the difference in student housing is when you rent you you can lease out the bedroom so you might have four people in there and a four bedroom you have four different leases and it lets you make more money in that but you deal with the constant almost a hundred percent turnover every single year and you're not always occupied because you deal with the summer low so that's written by the bed suit housing we just right by the door normal and it made money I mean that deal was spinning off anywhere from four to six percent cash on cash overall return was single they just annualized in the eight nine range so we made money on it but the business model could have been a lot better had we done a value-add play a few years later it accelerated it so did well took care of the client had a really good tax play on to sold it and moved into another project in Kentucky so we did a basically an exchange into another project with it but that was our first game why did you sell that first property we so we're business model wise we are a long-term holder of cash producing assets that's core of who we are so we want to get blended returns for the other day and must be consistently cash producing in a market we would put our last hundred thousand dollars in so that one was doing well but we did not see it continuing to excel it basically had topped out barring any rescanning of it and rebranding of it which we didn't think the site justified so we're kind of like hey we don't think we can do much more with this let's go ahead and take it to market yeah yeah that makes sense you know sometimes like especially when when you're doing value add but even on a regular one if you use that point where you're just not getting I know what's that what's the phrase we use often times like not depreciating the law of diminishing returns diminishing returns right almost like you could just keep holding on to it but at some point you're just dropping more more and more yeah it's definitely a piece you know in real estate is to evaluate that from time to time about this yeah you said like in the beginning you're getting four to six cash on cash return you know so in other words for those listening it's like the cash flow what kind of return you yet right yep just from the cash flow and then eight to nine overall return like per year average correct basically right four years now you I'm I guess I'm wondering did you give all of that to your investors was that what your investors got was like eight to nine or that was total and you guys are taking a piece of that as the managers of the deal or how did that structure kind of work in the beginning yes so all of our deals and this is a pretty common model you mentioned Cardone you know he's primarily made but when you there's there's all these other syndicators in this space but you're typically gonna see an acquisition fee when you buy a deal it's basically compensating you for all the time effort expertise it takes to put the deal together and get it funded and debt it up and all that stuff so we had that piece already then we got an asset management fee along the way and then we got a percentage of the profits at the disposition and there was a supplemental refinance to in the middle that let let us put some cash back to the clients okay so how do you how do you raise money on your on a first deal I mean like a lot people are looking at officially when your first deal is a large thing it's not like you bought $80,000 house and Texas right like you bought a apartment building so how did you go and raise a couple million dollars just from your contacts from the past yeah you've the the trick is when you go to do this depending depending on there's the regulatory environment you're gonna work in so when you're doing commercial multifamily it's not real estate anymore unless they're on the title and typically they're not it's there they're a percentage interest owner of an LLC it's the 99 percent model in that case they're dependent on the asset manager or owner this indicator you got whoever right so to make it do well so now you've securitize the deal and if you've securitize the deal you've got different models reg a 506 B 506 C and now crowdfunding okay and which we're not big fans of because of its limits but reg 5 Oh Smeg D 506 B basically lets you work with an unlimited number of accredited and 35 not accredited but they must be friends and family there must be people you know so if you don't know people that are able to invest 50 100 K or so in this you know you have a gap not a limit is just you have a gap you have to fill right so how do I then become the person that would be interested in the product I have where I can develop relationships to create those slices so you've got to be able to do that I'm not going to tell somebody you know go talk to so-and-so or because right now it's um it's a little bit harder because since 506 C showed up which allows you to advertise and it works only with accredited investors you can advertise to create investor so you don't need to worry about your friends and family but there is there can you get an accredited investors intention right are you that person who's good enough to do it so you got to decide how you want to go to market with it you have to have a business strategy you could bring to your clients to get what's called an expression of interest if I bring you a deal like X would you be interested if so let me know then when a deal comes around I'm planning on having one the next six to nine months let's sit down talk and it makes sense for you participate if not no big deal you know so developing that first lets you go to market and you've got to be the person who's worth it and then the network to get it and then you can go and in the sense isn't that when you find that deal then they're gonna come yeah because but but but realized when you but you're qualified yes I bet I just married your two Pheidias Brandon's belief that a deal and your belief that it takes a very qualified person to get the deal and I brought up just shut up Brandon I'm helping you well I'm not picking on what I'm picking on is is we see it all the time is the novice path mmm is when they get into multifamily they get access to deals and they look at the offering memorandum from the broker it's so in an offering pro forma is that from a broker is just should be Latin for a lie and I have tons of broker friends here maybe listen this and they'll give me a hard time but at the same time they're taking t1 or projected income and t12 expenses which really isn't isn't gonna work that way or as a lot of assumptions baked in that you're not going to experience so you roulette the break it down yourself so but when you look at that especially when you first start it gets really sexy and romantic I mean a lot of money is sexy and romantic you guys would agree right I mean making hundred thousand two hundred thousand dollars I did it I'd take it out to cold that's that's only reason I burned his friend yeah right so we're all [ __ ] at heart but the so when you look at things okay um when you look at a pro-forma you're like you get excited and you can get emotionally invested and if you then at that point you're dead because observer bias is gonna make you cherry pick the really good facts and not really look at the bat facts that aren't they're neutral too bad and then you're in trouble yes this is true for everybody right whether you're doing a huge deal or small deal so how do you prevent against that bias that we all tend to have how do you fight against it how can a newbie pretend by their first single family house how do they fight against it you you make sure that you're only looking at deals where the things you don't control are already ruled out so in real estate to liquid right so it's not like you can buy it say oh this sucks ditch it right it's not it can be a shotgun wedding if you don't do your deed so if you don't realize the family's crazy right you're kind of in trouble but it's your fault for not checking out the family so the thing what you do right the MSA the state the sub market the neighborhood the zip code collection the five three and one mile the actual site itself you don't even look at a site or a location until you have to until you understand your management so in single family you might self manage in our world it's always there party or an asset manager so we only go to markets with those locations where I have an asset manager or a property manager of trust with my kids and then we shop together so when we're looking at a deal I'm getting their opinion I'm getting the mortgagor opinion I'm getting the brokers opinion getting all these pieces of opinion not just her own kool-aid in a market where to trust so where we've already ruled out those variables where you look at a deal this is very similar to how I invest in different markets across the country in the book long distance real estate investing what I basically talk about is how I limit my own bias or my own ability to screw up a deal right like I bring in different opinions my core four I call them and they all have to be on the same page and what I do is I align their interests with mine to the point where if this is going to be a really rough neighborhood my property manager needs to be so good he's like dude I don't want it right right even if I'm trying to talk myself into it because that spreadsheet MAGIX it just looks so sexy like you said and you're going to convince yourself this is a good person to date when it's obviously not like you've got your mom that's like no David that's not the right girl for you right like there's other people invested in this and the other thing you said but I'll let you come in in a second ya need to make like a like a beginner deal for newbies starter pack and have all the things that new people that are trying to talk themselves into a deal they all do the same thing right like they get a deal on loop net and they think that that means they're a broker because they're on loop net right and they they are very interested in acquisition fees right away and like you said they think they're pro formas are horrible right they're like oh this is the complete upside it could possibly be and this is the ideal situation of expenses that it could never be and they make a business card that says CEO before they've ever bought a deal and they don't know what a title company is there's all these things that you like I can see your face you're like yes I see this all the time and it drives me mad because there's a lot of kind of wannabe investors and they all do the same thing but it's all based on I want to believe I'm doing this and feel like I'm doing it without actually having to know what I'm doing yeah I don't you and the thing is you don't get mad at someone doing that kid because they are at least they are trying right you know it's far easier to direct a body in motion then to get it starred in the first place so they're already better than 95% of the planet that says okay I'll be a meat puppet and do it I'm supposed to do and be a w-2 employee that's how I but so so kudos for that but then it's okay but then I think the other test is someone's going to give me 50 thousand hundred thousand whatever the number is they're gonna give me a slice of their hard-earned labor in time if I never get back it is my job to do do well with it how dare I do that if I don't trust in my bones that I can do well with it yeah that's the part that where that person would make me angry yeah that makes a lot of sense so let's get it let's fast forward to the end of your story real quick and then we'll backtrack yeah where you about right now what's your business look like how many units you have or you know I kind of talked about that for a minute then we'll pick up on some questions yep we've done 425 million in transaction volume we've gotten started Yeah right our goal is to get to our plenary goals to get to a billion in assets under management so the first one was 500 million will we're currently acquiring at a clip of about a hundred million a year we've been doing this for 10 years we deploy about a hundred thirty or thirty-five million in equity about three thousand doors so that's sort of our space right now we're currently pruning some of our smaller deals and everything we're now we're buying is in the fifteen to thirty five million dollar range this is solely and your said you're still buying I mean right now like hundred yeah you know one hundred million a year I mean the markets crazy right now right we all know that there's a lot of competition there's a lot of people with that are okay getting a small return on almost a no return right especially foreign investors maybe our are happy getting 0% cuz they're not losing money right I hear those things those complaints a lot how are you able to pull out deals in in today's market when it's that competitive or you need to try to earn something better well you're not you might get 0% if you're in a core coastal market where the cap rates are like three and a half four or you're putting fifty percent down to get a little bit out of it cash flow wise but if you're still in a let's say five five and a half market which sounds really low compared to where it was right but what's a cap rate it's a measure of risk it's a markets opinion of risk adjusted return so it's so and the way the levers work is the lower the cap rate the more meaningful the value-add is for every dollar of analyte growth all right so if you it's tough right now to just park money and wait for inflation to help them you'll you'll do okay but you're not gonna make a lot but if you know how to add value you know whether you're adding its operational in nature and that's pretty quick or whether it's a to KO door for kid or ten kid or the cool thing about this asset class is you can go look at all the other things around you in your five-mile market area I know exactly what your comps set is what they do what amenities they have how they market how they take care of the clients and you can determine because you're not beating them necessarily you're trying to find out what you can offer that is a gap in the marketplace and then that gap okay and then so it's if there is a science to that it's not you're not guessing so when you know you can do that with a value-add program at a five-and-a-half cap market you can still absolutely make money now are you making a little bit less two years ago of course you are because interest rates have winched up a little bit although spreads have come down to help it but you've got this cap rate cycle but if you then compare it to other real estate asset classes it's still doing really really well retail is struggling office is struggling different components our hospitality is doing great but when the market cycle turns you're going to give some of that back again our opinion other those guys in those asset classes like you're an idiot you're doing boring multifamily but but if you compare it to non real-estate based assets right no one believes a stock market is not going to have some level of a recurrent correction right or they're scared to death it is and they're not putting new money in even then long term stock market 7% with lots of volatility including what half that's from dividends okay then you look at money market CD savings bonds so to the paper-based world even though we're a little bit lower than we were it's still better by comparison and then if I'm lying safety it's still better by comparison it's just a little bit less so real estate is the cleanest shirt in the dirty laundry right now I'd say it's actually it's absolutely true in ways can you guess that when quick and easy wins like what are some things that you commonly look for like your first set of criteria that you're scanning for that will catch your eye and say ooh there's an opportunity we can add some value here this is worth looking into because what you're saying is basically the deals aren't just laying around for you to go pick up like they were in 2010 you actually have to know what you're doing you have to see something other people don't see you have to what you refer to as the gap you got to find an opportunity and capitalize on it so what are some things for people are like yeah I want to be a multifamily guy what should I be looking for look let me only answer that in terms of a process I think that might be as as useful because I don't I personally think there's any one thing all right it's not like we always put LED lighting in or we always change out the countertops sometimes we don't or we always change from black to stainless or beige black or modify flooring it we literally you know 80% of your renters already live within 5 miles of the asset so you know where they live so you can look at those comps it's labor-intensive but that's why you get paid and that's why you know it's what you should be doing so when you can when let's say you've got an easy example is you've got two assets within a mile of your property that are renting at a hundred fifty a door and more than you okay and it's because they've got better flooring and granite versus Formica right you're like okay if I can install those at a level lets me monetize that and not match them but fade them draft them the marketplace so I can be a little bit lower but still offer them a kind of experience that's easy right there because you're not trying to exceed them in the marketplace you just trying to draft it so your marketing is well yeah we look the same inside but guess what we're two per but you're but you're making it probably creating a lift in your your value so that's the process itself works all the time I like you said drafting like that you know like the terminal you know where you drafting behind a semi on the freeway to try to get your gas mileage you find out what those guys are doing and saying hey I'm just gonna do that maybe a little bit cheaper maybe a little bit better that's a phrase that we just learned and go bonus water-ski in someone else's wake yeah yeah someone else's yeah cuz I yeah you don't have to reinvent this whole thing so I mean I are you generally looking and and I know the answer is probably both but are you generally thinking when using in value add I'm going to add like increase rent or I'm going to decrease expenses like which is your primary focus if you have one the the simple answer is you do both but you've got far more elasticity in rent growth and other income growth than you do in OP X okay so because there's only so much you can constrain you're typically your big levers are how much you can move rent another income also you're a what you can do scale wise on your capex plan I mean being able to save an extra two hundred bucks per cabinet renovation across two hundred units it adds up you know or certain things like that so it mean that the rule of thumb is you're gonna be spending between 45 and 49 percent of your gross income on op X but which an operating expense the happen expense yet so but in residential it typically gets higher than that so but that's a general rule of thumb depending on the property taxes in the state you're in because that's all yeah we have been called that the 50% rule yes yes about 50% yeah yeah happier income give or take goes to expenses not counting the mortgage yeah with and with some vacancy allocation right yep so yeah it's mostly that growth but there are ways to tack on other income whether it's through a renter insurance program or cable bundling so there are other incomes kind of interesting because it's a way to create consistent juice over time that when you can't move market rents yeah so one thing I probably should have said earlier we could have talked about earlier but you know this is a little higher level show and I like that I want I wanted this show to be a higher level show but for those listening who have no idea what we're talking about just a quick summary so multifamily commercial properties are valued and and go ahead if I say anything wrong here let me know but multifamily are basically valued based on well I should say is based on cap rates but you're essentially saying the more profit of business make more profit in apartment complex gives you though or you could say Noi right the more the more I know income yeah yeah the net income the more the property's gonna be worth so in other words if we can decrease expenses by saving money here and there or increase the income that makes the value higher so when we same value add we're talking about that like is that a good way of kind of trying to perfect summarize it okay yeah so like and this works with primarily with multi-family yeah it's a little bit true a single family maybe but in reality single-family houses are worth what that single-family house is over there it's worth with that they're all you can compare them pretty good which is what agents like David here will do and they when you hire an agent they'll go and look at other houses and say well that one had a little bigger garage right but multi-family it's more of that one had more net operating income so it's worth more yep that's the thing we didn't like is you can't control your per square foot comp yeah you know and when they when they got rid of income we had a bunch of duplexes fries and quads and then once they kill the income appraisal in this four units and down you're like you just killed that space yeah because we can't do anything that we can't change it like if I were if I go increase rent by a little bit it doesn't matter it's still worth what the other duplex is worth yep and that's right or this is my family with the same square footage yeah exactly yeah yeah it's like okay well that sucks I get I will exactly what people get in a multi-family it's a really powerful way to increase that so okay so now I want to move over to this time I'm just fascinated by is how you actually run your business so you've got thousands of units you've got obviously raising money you've got all those parts we talked about earlier somebody who's you know you're managing the business you're managing the money managing the deal flow managing the actual properties so what does your structure look like and then I won't actually I want to dig into like I mean how much time are you spending like on a spreadsheet running numbers and how much time or other words that somebody in your team that does like what does your team look like I guess is where I'm getting at right so uh and by the way I'm as a I literally will have these conversations in airplane what do you do I do this oh really break it down for me and then you get that's yeah I get the juice so just deconstructing business models the so we've got 13 people all right we've again we're in Richmond Virginia none of our assets are here we love it here but it's a great place to live the problem is is that the the employment growth in Richmond is anemic compared Texas Carolinas Atlanta and that our name the 37th parallel it comes from two things uh funny enough Richmond and San Francisco are basically in the 37th parallel but on opposite coasts and the my first business partner was West Coast I was East Coast another piece of it is two-thirds of net domestic migration occurs below that line what does that mean so when you look at where people are migrating from the northern states to the southern states that that migratory path is a combination of environmental and job growth factors and it's occurring primarily above that line maybe more than that if you took out Seattle you know but think about what's happening in New York unless it's Manhattan almost almost every single city in the state has declining population growth look at you know Ohio look at Indiana you know they're on you know grateful I grew up in Kansas City similar scenarios this jobs aren't flowing there and they are really below that line so but when you're putting a business together we knew we were going to build a business that was not it wasn't going to be in our backyard so assumption that we had to build around so when we so right now I'll tell you where our current day and then we basically when we go into markets we basically want we want to know that we can have a third party property manager that we can treat like a member of our team so in property management you know if you take a building the building has an on-site manager that works 9:00 to 5:00 there and they'll have one or more leasing agents that work with them and one or more maintenance staff that work with them typical rule of thumb there's one FTE for every 50 units so one full-time equivalent so if it's a hundred unit building you lab one in and one out one manager one maintenance and that scales approximately every 50 units so those are staff of the property management firm okay then above them is a regional manager that controls anywhere from five to ten properties and then above them will be a VP or relationship level person inside the property management company and most the companies were working with have 20,000 30,000 50,000 units under management so that person what we do is when we go to partner with them were like hey I don't want to interface with your relationship manager I want to work directly with regional and the site staff and I want to be able to basically here's our business model we want to know that we can work with them like our team okay because for us we're very management intensive we manage all the capex we they just need to the care and feeding and push our business plan but you have to make sure the property manager is okay with that some are like hey we got this leave us alone and we're like for us no that won't work so you got to find that right partner so once you have so then we have asset managers on staff I've got you know I've got both of my folks or they've got multi multi year time with equity multifamily hunt some really fantastic companies they just want to be in a more entrepreneurial organization so we drew them over got fifty years of combined experience across these two ass managers in our portfolio but we didn't have them day one you know we had to be big enough to bring them on and show them the big picture but we've also got an office manager a controller technology financial analyst and it's myself and another guy my business partner day and we basically own 90 percent of the company we're both co-managers I do platform development capital development and a lot of our marketing and messaging and he does primary acquisitions and asset management or both we're both Priory Anderson gasps I mean I trust him with my kids and all that stuff so that's current and then we've got a registered rep who helps on the sales side and his partner in Austin Texas and they helped us on deal raises and then we also have marketing education the gentleman retired doctor named Dennis Bethel out in Fresno California there's our team that's cool yeah I I just I find that fascinating to people because everyone's got business runs a little bit differently and I just thought was a question I asked complaints to is like well how's your business work like they're really yeah take me inside that that's cool all right so all right so you've got all these units now you've got these people running different things where you headed I mean where do you see the future of your company going I just keep more multifamily or do you want to scale up larger deals we could there there are models in front of us there are companies that are 5 X 10 X a hundred exercise that are still exclusively multifamily so I mean there's a company out of San Diego that started 20 years before us been in business for 30 years has 5 billion in assets our management you know have they done some mixed-use how they've done a little bit of development sure but it's still been multifamily primarily so for us it's you don't know what the fee I'm not a big believer in ten-year plans stuff shifts right you know the evolution is those who can adapt you know so for us it's we know the asset class it's not going anywhere but how do you opt in that asset class well there's different ways to do it but you know it's at a billion which we think will hit the next let's say five to eight years is hopefully but that requires us to get more equity so we've got up to fun products coming out moving in the DST the 10:31 Delaware statutory trust space that lets us take equity different equity sources still owned the same asset class and perform on that asset class ok so I want to ask you a question before we move on to the deal deep dive you mentioned all the pieces that you put together to build your team for somebody who wants to follow in your footsteps can you give me the order that you would look for as far as the easiest way to find a ssin is or what you build up from there as far as each team member is concerned yeah so it's it's back to your gap so those four rocks I talked about this answer architecture deal capital asset management asset management is one that early on you can probably rely on third parties and you won't make maybe as much money as you could but you're not gonna just blow up alright but it's really hard to outsource capital development like it's really marketing in general I don't people most people are not comfortable in that space but sort of a you know fine Sun was done what you wanted to do what they've done you'll get what they've got that's the price of the mission is you've got to be able to tell your story and put capital together it's the ultimate entrepreneurial skill is capital formation so I think either you or whoever you bring in you have to solve for capital and you have to solve for deal and then between the two you've got to then figure out that that business architecture and then you can add asset management later if you start with that that's great null but if you can't get the deals or can't get the money flow it won't matter so I think it's first identifying what you want to be best at or are best at and then how do you augment the peace you're not yeah I'm going to go from there like for us it was two people then we added an office manager because we just hated admin and we needed a lot of paper flow to move around and then we added a deal analyst and an Operations Analyst skill set and then we added client relationships and client management I mean we started in my library in my house then I built a back addition then we had five people stuffed here then we had one office space an hour in 9000 square feet so I mean it built slowly I mean I'm people might look at your story and be like well I want to be right where Chad is but like you know you took ten years to get here and you had a lot you have a lot of deals in each deal that's more income and as more ability to bring in more people it's knock on wood I percent profitable track records so we want to keep that so that's awesome dude let me go to one last question before deep dive everyone's talking about the market the real estate market is it too late to and get in you know this ain't 2012 2011 anymore how are you looking at the market you know obviously no crystal ball but what do you see for the future and how is your investing changing because of where we're at in the cycle yeah that's absolute stuff we talk about all the time the for us the first have to look at the tide which is demand and when you look at components of demand growth in multifamily it's the number one thing is really household formation if you're if you're if you're not working in a coastal market that has some environmental nuances or a retirement market its household formation so what's driving household formation well it's you've got people moving into the renter lifecycle and psychographics people just deciding to stay there I'll move in so we're still we still are the population still growing right and it's a mix of domestic and immigration well even with all this talk about immigration it's still a huge driver of the economy and it's never gonna go away and us immigrants rent more than they owned and in the whole US it's a right not a privilege to own a home is fading right so when you've got the Echo Boomers that are the 18 to 30 range rents at a 75% rate and the baby boomers that are renting at the fastest-growing rate and they're over 55 and age they're gonna live until they're 85 and once you rent you're never owned again those populations are still solidly in that red sugar then we're adding more household formation um there's a great graph it's a census chart just at the 18 to 35 age range that nmh see puts out national multi-family housing council and you look at that curve we still have another five to seven years of increasing renter populations before it flattens out a little bit just in that group but it doesn't dip and then it goes up again in another 10-15 years so we're not worried about to me it we worried about oversupply so that's really market location and it doesn't affect be great stuff as much but there's a trickle-down effect so we looked at acutely and then you know we do worry about the financing market because at some point is the market really gets frothy in terms of just volatility it will affect how much capital says yes I wanted to pull I want to buy a billion dollars of CMBS loans I mean like no I'm just gonna stick in a mattress you know and it's gonna go somewhere else and so it'll be a little bit harder to buy but it'll still exist but when that does other private liquidity comes up a little bit more expensive it's still there but you got to be ready for it so for us there's a great analogy I saw at a conference it's not whether it's a it some people think it's the eighth or ninth inning what if it's a doubleheader hmm you know and so when you worry when you look at economic cycles you can we're in a really long on one and they do Evan flow pretty consistently but demographic cycles they last for 20 30 50 70 years so if you're looking at those trends we're in a double-header economically there's gonna be some bumps but the demographics aren't gonna go away okay so basically saying the fundamentals look good I mean across real estate the fundamentals look good what might happen is the market might get scared because something triggers it right but like fundamentally there doesn't look to be anything in the economy that's like scary right now like it was back in O 7 yeah totally agree and especially in the the group that we serve that that blue collar light blue collar they're still gonna have that in fact there's the group we don't serve it's a huge need is that underserved low income group yeah a massive opportunity in that there's a need it's just really hard to monetize it's not sexy it requires some government intervention make those programs work like tech low-income housing tax credits there's a huge need there that's the biggest part of the demand curve it's just that it money probably money doesn't want to flow there because of your rents are so capped yep yeah actually said that quite a bit you I live out here in Hawaii now and Maui prices are just crazy right a studio apartments two grand to rent right right I'm always thinking if somebody can and maybe I'll get into this maybe not but like if somebody can figure out how to like how to work low-income housing there's a lot of pressure from you know from the top level of government we need more housing we need more affordable housing so there should be opportunity there and nobody really wants to work that like you said it's not a sexy business you can you can make a lot of money with the incentives they do create you got to jump through so many hurdles to be in that space the the barriers to x-3x just normal multifamily to get in the light tech space yeah yeah we talked about that actually a couple weeks ago in the podcast was last week or two weeks ago anyway what we talked about with Graham about this idea that like you can you can make money in almost any kind of real estate you just are you willing to go and invest into that thing like you know Opportunity Zones or is it low-income housing or is it right you know whatever like there's a lot to do it's just like to revisit the very beginning of you of this conversation today you said how do we get good at that right so if I want to get into low-income housing how do I get good of that I want to go into a mobile home park how do I get good of that if I want to get into you know whatever right how do I get good at that bring then modeling others it's a good way to do it so awesome so it's great yeah it's great so let's move out move on a little bit get a little bit deeper into one of your deals this is the deal all right so this is the part of the show we're gonna yeah we're to dive deep into one particular deal and you got one in mind correct yeah all right so let's just dive in just kind of a fire matchup first of all what kind of property is this thing where was it located kind of it was an idea of the property before we get into the specifics first we bought it it's a hundred and sixty three unit in Louisville Kentucky okay Louisville Louisville if you don't say it right then oh you're not from there now what is the right way to say mess it up all the time Louisville its Louisville yeah you gotta sound like you're swallowing your tongue it's Louisville that's tough to get right though I don't in order to correct you have to sound like you're incorrect okay I'm sure there's gonna be some there's gonna be some lucky people ping you on your show and say even Chad screwed that up Oh still you would not bigger pockets all right that's right how did you find this deal we had a we do some educational work and we had a one of those people had found the deal and brought it to us and said hey what do you think we're like fantastic and this is the only deal it's actually happened like this I don't think we should have got it otherwise but we got it it was it was broker listed it wasn't like a out of the middle of nowhere it's just it was being weirdly marketed good that way so found a deal and then negotiated with with the broker for a little bit eventually said we got this and got permission to go direct to the seller then we work directly with the seller the broker lets you do that yeah cuz we cuz he already had a commission agreement he just wanted to get the deal done did you like did you have to Suge Knight the broker and like hang him over the balcony and be like yeah the way let me do my own negotiating I'm actually pretty sure the seller is the one who drove it like cuz he's a deal guy he's like hey we got this money that's funny all right so how much how much did you pay for the property it was 10.5 million okay okay was that what they were asking originally or did you did you negotiate that down they wanted north of 11 and we're like it doesn't pencil out it's not it and it was an assumption okay so it doesn't pencil out at that if you can get that great we're not at that price and it was okay they wanted a equity Curie in it so they would sell us to it at one price and get some equity slug later we're like what does that look like who has control it's really messy you sure you want to do that went back and forth for a couple months eventually like can we just buy it for this they're like yeah no problem so eventually laid it on the price do you think if you had offered that can we just buy for this number in the very beginning that would have worked we did and it didn't work right so that's the point I'm on trying to make out people make decisions emotionally even the really really smart logical spreadsheet nerds who do things like you wear people down people get worn down things change in life and that original offer they said no don't get discouraged because six months later things could have changed right they could emotionally be worn down they could have another deal they want to go by and they need to sell it at this price and it's worth it because they're gonna make so much money on the next one when they 1031 so I love that you brought the same thing back to them and they end up taking it ok enough about me how did you find this deal we put together it was four point seven nine million in equity we raise the way we do it is I talked about Mac profile and getting expressions of interests early on we we've built a high net worth investors roof where we're educating them at how multifamily investments work here's what we're good at here's why we do this if you believe the same things we built we believe join us if you don't no big deal so we're not trying to pitch anyone we're just more here's why we like it here's all the same data do you have the same conclusion we do and if we're aligned and they become part of our investment group then when deals come up we know and this is a key thing for people listening is you want to be able to pull your group of investors and understand hey where are you in terms of your min/max equity allocation to this but what's comfortable for you so you kind of know along the way what is your available to buy is it 2 million is it 10 million is 30 million and is it a hard committed number inside a fund no but if you're good at what you do and you take care of your client your loss will never be that much so didn't you have so we knew going in we had that ability to raise so it wasn't a scary raise for us at the time so it was only it was 3.1 eight million in to take the deal down do the assumption and all the prepaids then we add six months of rainy day reserves we basically six months of debt services or going in never-never not do rainy day reserve that to sit there staring at us of doing nothing but it's just good business management yeah okay so what did you do with the property what ended up we refresh the office we started the unit improvement program we had to do repairs on deferred maintenance on roofs and stairwells and decks and we only hold it held this property for two and a half years so and then along the way we had a broker who would say hey we'd love to list this for you were like a dwarf ID we're in the middle of our path we don't need anything he kept bugging us and eventually we're like what number makes him go away so we're like you got to give us 14 six he says we'll take it so the and we've some of our so you'll have this will happen sometimes we are a we're a singles and doubles business we're Moneyball but if you take care of the downside you'll get home runs sometimes yeah so that's what this one was we bought for 10 and a half we're gonna sell it for fourteen point six to a much much much bigger company that wanted to use this asset as an anchor play for their other lower grade assets so they were working within multiple levels of the renter profile it I mean this is an important piece to in the credit profile for people that are leasing apartments is and this will be the same I think in residential too but you typically look for their income is three times their rent u3x rule that's what we use so you are looking at the 3x rule okay if the median household income in your zip code collection is 57,000 okay where's the rent range what about those are at 45,000 where's our rut range what about those at 67,000 what's their rent range so a bigger player sometimes will go into a location and buy a portfolio and cover as much of that rental range as they can entry because they're not gonna go to one s and they can manage brand and co marketing across those assets based on a different median household income yeah that's that's what this player wanted to do never heard that talked about so somebody comes in I mean like from it from a specific example somebody goes into the $1,000 month rental place and says hey I want to rent this like Oh your income is not high enough you can only qualify for 800 well we got this other product right here that's gonna work for you so now we got that co-branding yep yeah very cool all right so what was the outcome and you know you sold further than 14.6 I mean you know without me having to spend too much time do math I mean I do you remember about if you had to guess how much money you made off this property we only put this way it was enough to take that money and reinvest it the 1031 exchange into a 419 unit building that was a lower cap rate just south of UT Dallas in Texas so we put together I mean the chunk that went over was about three 3.5 3.7 million of those procede let's go ahead well in question on this note that I should ask you earlier but we'll get here in the fire round so one thing when I'm when I'm looking I mean I haven't really started raising much money for anything really yet but maybe I'll get into it yeah I'm sure I will at some point but one thing that like like if you offer people a 5% cash in cash or you estimated let's say five six percent cash on cash return but hey at the end of the you're IRR is gonna be you know I don't know 13 14 15 your investors balk at the oh I want to get more than five percent cash in cash return or they are they really just looking at the end of the day the IRR or the average return I mean like do you have do people is there a number where people I know I won't do it's not high enough cash on cash it wildly depends on the person okay it does do I hear that hey that's too low it's like no problem what are you looking to get and then are you looking to get it in this asset class cuz some people are like hey I'm a percent it's like well that's gonna take a higher cap rate in a market with more risk and are you okay with that nothing wrong with that but it's a it's like the old school financial adviser questions what's your risk reward profile and then you know for us it's like well would you rather have an asset class that's been historically really profitable a manager who's got a hundred cent profitable track record who is as efficient as possible in this asset class and will automatically reinvested ease in deals in grow your cash flow and by the way it's a legacy company we're not gonna flip the company we're gonna be here until we're dead and that's 40 years from now what do you want to do with the money right so if you want to make it a legacy play in a wealth building platform we're pretty damn good at it if you want different things that's fine we're just not fit so all right so last question yep and I'll just steal it from David because I'm already on the roll what lessons you learned from this deal that it absolutely pays to sometimes give people ridiculous numbers to see if they'll take it you know I mean because the reason why we sold it is because the other number we gave them was basically what our plan profit would have been three years later so we basically sold it at our year five and a half price that you're gonna have so that I are our acceleration our investors would have looked at us like we're stupid had me not honestly buy good dirt you know it's the if you buy if you buy in a location where you'd put your grandma's last hundred thousand dollars odds are you're never gonna lose money right that's a great rule of thumb so if it sounds really trite like duh but if you literally if you're literally taking that test to heart you would avoid a lot of sort of like well I sell it fast enough I'll be okay yeah yes yes yeah and that's where that emotion starts playing in and that bias I just want to make a deal work and I like that if you're gonna put your grandma's last hundred thousand it's it cuz if you're gonna if motions gonna be out there use it to your benefit yep all right very very cool so let's let's shift gears one more time a head over to the world-famous fire round it's time all right let's get to it these are the questions come direct out of the BiggerPockets forums we're gonna fire them at you right now number one from Jonathan from Santa Barbara says hey guys I'm looking to buy an apartment or investment property out of state I'm in Southern California and I've heard you can get better returns elsewhere I'm curious if anybody has a advise on a good city to see it started in what would you say to a guy like Jonathan who just wants to know what city to go to um by returns if he's talking about cash flows absolutely right from a but from a equity growth if you can do a value ideal in California you'll make a ton of money you'll make more money than God it's just it's you gotta you gotta do it right it good stable markets I would look at Denver's a little bit less expensive than the California but still pricey but solace and we're gonna go anywhere Dallas San Antonio Houston I would stay in the big three 50% of the Texas population is gonna live in that triangle in the next 20 years Austin in San Antonio kind of grown together the Carolinas very you know there's really not a bad city there as long as the population is over a half million Atlanta we like from the Louisiana and Mississippi Alabama Court or not huge fans just because the school systems are so bad and crime is off the charts just a state local perspective so blue collars hard there it's doable it's not our place those those are absolute good place to start and those are good all those while getting pricier are still good blended cash and growth markets awesome okay next question from Derek I'm looking to start investing in multifamily properties I've set up my pro forma spreadsheet and I am pretty sure I'm accounting for all the expenses but I don't want to leave anything out what are some expenses people forget about they come back to bite them mmm so a lot of people they good what you should do when you go to buy is you need to under represent you're going in occupancy you need to give yourself about a two to three point buffer because you're going to deal with some level of change over from one property manager to another and just it's far better to over estimate expenses than under so one way to do that is also just have a buffer on your occupancy that'll give you automatically some room on your Performa and then only allow yourself to catch up to market after the second or third year so do that and you give yourself a lift really understand property taxes it's your biggest expense that's where most people get posed a broker might say well if this assumed 80 or 85 percent of the sales price is what you're gonna get pegged at for your value wildly depends on the market what happens they go to 95 percent then you have to beat it down via attacks print that's that's an incredible advice whether again you buy your first deal or your hundredth deal like I mean your 100 unit or if one unit you know give yourself that buffer that's perfect I number three we'll call this the last one of the fire round deepa from Auburn Washington says I've been looking for my first multi-family deal I have to listen to a lot of BP podcast I'm convinced the only way to find those deals he's gonna be through a broker I'm not sure how to approach a broker without any deals under my belt and these are gestures on how to approach one that'll actually want to work with a newbie like me staple hundred dollar bills your entire body [Laughter] know so how are brokers pay right brokers are paid when deals closed so they're gonna want to know are you real right are you competent and you have the ability to close and then so they're gonna ask you questions like what's your equity where you looking to buy who's your management who's your closing counsel because the team that associates with you creates transitive trusts you know right transitive property if a equals B and B equals C then a equals C no right so if you can have like that phrase and so if you got really there's a fantastic book called the speed of trust the transited trust if you've got so but you've got to be good enough to get their time as well so that the first rule is have the ability if you have the money to assuming this person has the capital otherwise they have no business looking right now stop . now work on that and then work on management in that market who are the property managers I can provide you Intel and work with you that can also help you validate where you want to be then when you have those two things then maybe understand who might you are closing /title be in that location then go to talk to brokers because until then you're wasting brokers time in your time and you're screwing up your first intro it's far better to start with that be higher level than to be a total newbie and then always have that opinion of you because you only get it you know what five fifteen seconds yeah Branden often talks about borrowing credibility right like that's it's another way your time I transitive trust like well you've got this really good team around you they're speaking towards your credibility and then I say rock stars no rock stars right so if you want a good team to work with you and you want rock stars work with you when you gotta show yourself as one okay what is a lot of people do is they don't want to put the work in to learn the business they don't want to figure it out they want someone else to make it easier for them so they go to these people that should be on their team that they should be partnering with and they basically without realizing and subconsciously annoy that person by saying teach me everything I need to know make me feel better take away my fear right which is the easiest way to repel a rockstar frenemy like if you come to me and you say you want to buy a house and I put all this time into you and it turns out you you can't even get pre-approved and you can't get a loan I'm not gonna be very appreciative of the fact you just took all my time to learn basics of buying a house right unless you told me that in the beginning so that's really good advice for people you need to build that trust you want to borrow the credibility of a team and in order to do that you got to make sure you're acting like a rockstar and you'll draw the right people to you yeah be that Rock sir embrace it embrace the suck required to get good but once you do that the world is your oyster but until then it's not you mentioned you are a military dad were you marine by chance Navy so exposed to it yeah okay so you got heard the embrace a sec nice alright next segment of the show is our aim is let's get the famous for question number one what is your favorite real estate related book yes it's hard in multifamily I don't think there's any one book or I've been like so ideal alte - a book that I think does a fantastic job at forcing someone to think about demographics and that's Gary Keller's millionaire real estate investor no it's it came out what ten years ago maybe longer yeah but it's still a fantastic book on building a business around real estate and looking at market sub market for that particular asset class but then if you want to get into the the bigger stuff in our space you're getting commercial multifamily site planning books and you're getting down in the weeds these aren't Amazon bias at that level but good that's that book is still fantastic for real estate very good book I believe J Pappas and helped him write it we've had J on the show as well yeah what is your favorite business book Barna an answer to every single time the same way and give it out and it's the goal like Eli Goldratt it's been on my list and Amazon forever and I'm not read it so you're doing yourself a disservice sir especially yeah as a business owner right the it's the concept of the Theory of Constraints we've all heard that right but it's done like a business feeble so it tells a story of a guy he gets dropped in to improve a manufacturing location that's failing that consistent that can I that constant never-ending improvement that Kaizen process around constraint management can improve any business it and that book is just a fantastic intro to it cool okay what are some of your hobbies I've got a pretty active 13 year old to play soccer everywhere so I travel both intentionally and unintentionally because of that we also travel a bunch to Europe sale I like the kite board don't do it enough say pretty pretty active so I'm not kind of boring stuff but that's what we do boring boarding that's a very go though alright what do you think sets apart successful real estate investors from those who give up fail or never get started I talk about early it's that commit I've seen so many people that were could have been you know hint you know have Mensa apps through item but they let they find a way to rationalize something's better and they're consistent starters and restart instead of just finding some that works and doing it but if you if you took that if you were to sit there and just really embrace that feeling of you're gonna take care of that kid right that commitment level that a hunter sent commitment to something if you embrace that and applied that to your goal you at that point would know you're unstoppable it's not if it's just when so that's I don't want to be overly Tony Robbins woowoo about it but it's true thank you for sharing this Chad this has been very good the last question for me of the day is I just want to know where can people find out more about you you got it we're on we're at three seven parallel comm that's the number thirty seven PA are a double LEL comm we have a ton of educational stuff and articles in webinar section but we made our director of Education he's a doctor and in medicine they have this thing called evidence based medicine basically what are those outcomes that are clinically proven to be better than others well he wrote a book called evidence-based investing and it's basically what is the third-party data and the activities that are proven to create better investment results so that book they can get at three seven parallel calm slash EBI and it's just a collection of third-party data it's not a route 37 parallel but it is about multifamily it's a great great little asset very cool also just to check that out some well thank you again Chad very much has been fantastic really really appreciate you being here my pleasure guys thanks for having me very much thank you alright that's our show today so thank you guys for coming for listening for watching and you know it's all we got so again check out Chad's stuff and we will see all around on the next episode the podcast and of course if you like the show rate and review it in iTunes and head over the show notes at bigger pockets that comes live show with 317 any questions for Chad and what that'll add David Green take us out yeah thank you very much Chad we had a great time today this is David for Brandon handsome shirt Turner's I had to I couldn't think of anything I didn't let you talking about this time to give you enough ammo for to help myself good you're listening to BiggerPockets radio simplifying real estate for investors large and small if you're here looking to learn about real estate investing without all the heights you're in the right place be sure to join the millions of others who have benefited from BiggerPockets calm your home for real estate investing online

Channel: BiggerPockets

Views: 54,251

Keywords: biggerpockets, real estate, real estate investing, investing, rentals, investing in real estate, bigger pockets, real estate empire, building a real estate, building a real estate empire, building a real estate business, bp podcast, biggerpockets podcast

Id: 07DUfiLhlPg

Length: 83min 28sec (5008 seconds)

Published: Thu Feb 14 2019