Is right now, the right time to buy and invest in real estate? Where should you put your money? Is it safe to put it into single-family, commercial, or multifamily real estate?
Today, Clint Coons of Anderson Business Advisors talks to Matt Faircloth, a full-time investor who has successfully completed projects involving dozens of fix and flips, office buildings, single-family homes, and apartment buildings.
Matt is a regular contributor and podcast guest on BiggerPockets and has an active YouTube channel dedicated to educating investors. Also, Matt’s the author of Raising Private Capital, How to Build Your Real Estate Empire with Other People’s Money. He started with a $30,000 private loan and has completed more than $40 million in transactions using private money.
- What’s Matt seeing in the market, right now? Affinity for multifamily assets, not A+ markets, but more tertiary working-class markets.
- How has COVID changed the market? So many deals and a new market that addresses financial distress and willingness to change from a pre-COVID to post-COVID price.
- Are funding sources starting to dry up and pull back on access to capital? Yes, people got caught at the wrong time. Closings were canceled during the COVID shutdown.
- What is a bridge lender? Someone who takes dilapidated real estate and helps you bridge where you stand today to where you can refinance them out to agency debt.
- What’s the criteria for a bridge loan if you don’t have multifamily experience? Produce a balance sheet. Lenders want $2-$3 million deals and may require an equal net worth.
- What are the typical terms? How long are they? Are there prepayment penalties? You’ll bridge into Fannie Mae or Freddie Mac to not be your amortized long-term lender. You may have to pay additional interest and an exit fee at closing.
- How does Matt compare what’s going on now to what went on in 2008-2010? The 2008-2010 crisis was related to debt. Loans were poorly underwritten, badly created, or should have never happened. In 2020, it’s an income crisis that supports those loans.
- What type of jobs do tenants hold? If they’re in workforce housing and work in the service industry, it’s going to be slow to recover. If tenants can work from home and stay productive, they keep going.
- Are there certain areas that are overbuilt or underbuilt? A-Class markets need to entice renters, while B- and C-Class markets are underbuilt. There’s a need and shortage for housing in middle-of-the-road markets, but a glut of housing in higher-end markets.
- What are common mistakes? Jumping in, being cavalier, and taking uncalculated risks.
- Who wants to get into multifamily space? Everybody thinks it’s a key to financial freedom. It’s a great asset for fundamental reasons, but not everyone should do it.
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Full Episode Transcript
Clint: Welcome everyone! Hi, it’s Clint Coons here with Anderson Business Advisors. This is another episode of our weekly podcast. I know with all the turmoil out there when it comes to investing, you’re probably wondering where should I be putting my money right now? Is it safe to go back in the single-family? Should I go into commercial? Or should I do multifamily? In fact, coming up to this entire crisis, multifamily was one of the hottest areas for investors.... Read Full Transcript
I went to multiple conferences where people were out there teaching how to get started in multifamily, or they were putting together syndications, which if you’re just getting started, you shouldn’t be making this leap on your own. You should work with an experienced syndicator who’s been doing this and understands the market.
I’ve seen some changes taking place. As you heard on prior podcasts, I’ve talked about some of the investments I’ve made in the last three months. Some of it has been multifamily. I never expected that this year would be the first year where I got involved in multifamily properties.
In fact, with everything that’s going on right now, I was able to close on two killer deals that changed specifically because of the market. That is the seller prior to all this COVID going on, with steadfast in their terms, price, everything. But once this hit, contacted me a couple of weeks later in the middle of this, and they were like, whatever it takes, I want out.
It really intrigued me. It went the opposite of where I thought things were going to go. I think that as real estate investors, we need to know all of our investment opportunities. Where we can go out there to put our money because these are times where I think there are plenty of opportunities for investing. In fact, it reminds me of 2008, 2009, and 2010 where a lot of individuals got scared. They backed away from the market because they heard people that lost money in real estate. That is always, in my opinion, the time to buy. When everyone else is pulling away, that’s when I want to go in.
In this episode, what I want to do is talk with a good friend of mine who is an experienced real estate investor when it comes to multifamily investing. He’s been investing for 15 years, he’s done dozens of projects, and he has a unique perspective. He has his thumb on the pulse of the market. If you’re listening in to this podcast and you want to get involved in a multifamily, then we should have an expert that can discuss with us some of the benefits, what’s going on out there, what he sees in his funds that he is putting together, what he is looking at, should he be diversifying now into other asset classes as well so that we’re making informed decisions. With that, I want to introduce Matt Faircloth. Matt, how are you doing?
Matt: I’m awesome, Clint. Thank you so much for having me here.
Clint: Hey, thanks for coming on. I know you’re really busy right now. We all seemed to be busier than we were before because everybody wants to do podcasts and Zoom meetings. It’s kind of crazy.
Matt: It is. Obviously, we couldn’t have predicted this circumstance where we as a world would have been in even just six months ago. When this thing started to roll through the US in March, we all thought it was going to end up a certain way. I didn’t realize that I was going to be (as you said) even busier but just in a different way now than it was just back then. It’s been like a crazy sci-fi movie in a lot of ways.
Clint: I know. You and I were just in Colorado right before everybody started shutting everything down. It was a week and a half beforehand. We’re like, oh, let’s just get on the phone next week. That couldn’t happen.
Matt: That was only a month and a half ago, Clint, but it feels like a year ago.
Clint: That’s so true. You’re right. Yeah, I know. Or it just happens to be that we’re getting older and everything. It’s hard to remember.
Matt: No. It is. My brain’s just getting rusty.
Clint: We got a bunch of listeners here. I start telling you about those two deals that I’ve done this year that I’ve seen sellers, they came back to me and wanted to unload these properties. Maybe we start, before we go that deep, what are your thoughts right now? What are you seeing in the market?
Matt: We’re multifamily, and we also own some smaller assets and things like that. As you said, I’ve been doing this for 15 years. Our primary affinity right now is multifamily assets in, not A+ markets, but more just tertiary working-class markets in that. We’ve looked at deals and it’s become a running joke with me and my acquisitions manager about is that a pre-COVID or post-COVID price. Because we’ve seen so many deals—this is new stuff to the market where they’re not even acknowledging than anything is shaped.
They’re putting out pricing, cap rates, and things like and big assumptions of increase and everything. I guess crossing their fingers and hoping that things are just going to go right back to where they were and we’re just going to elastic back in that. Those have been just interesting. People not coming down to reality. But I’ve also seen and heard of sellers getting way more real on the prices.
Again, it’s too soon to see any real true financial distress. You’re not going to see foreclosures. You’re not going to see bank home properties coming online. Because it takes a while for banks to take possessions of these things. I also don’t believe that most multifamilies are going to get to that point. Because the banks got ahead of this thing and started helping their own and started doing deferments, assistance, and forbearance if they need it and things like that.
I don’t think we’re going to see blood in the streets. Sorry, those of you guys listening, I don’t see the multifamily market getting cut in half any time soon. But what I do see is that folks that were looking to sell, that maybe were even under contract to sell pre-COVID have gotten much more realistic because of COVID and have dropped their prices to factor in COVID related reality. That’s what I’m seeing.
It will continue to see a correction in the market but not blood in the streets, everything half price like some folks may have been hoping they’re going to see. I don’t believe that’s going to happen. We’re just going to see maybe a 10% drop, and it’s already starting to show up in some markets and on some properties.
Clint: Okay. I was listening in to a presentation and it had to do with financing. I forget the name of the group that was putting this on. They were talking about the equity markets and what’s going on there. One of the things they had brought up is there are certain funding sources now that are starting to dry up, and there has been a pullback on access to capital, especially on the institutional side because they’re concerned about the asset class itself and appraisals. What do you think is going to happen there for individuals who started being able to gain access to cash to buy in?
Matt: We saw that too. There was some blood in the streets, but it was people that got caught at the wrong time. The world started to shut down around March 15. There were closings that were scheduled. Let’s just say you’re scheduled anywhere between March 15 and March 30. I heard horror stories of banks canceling deals at the table.
You go to the closing with your pen and a bottle of champagne looking to pop the cork that you just closed on an apartment building or on a deal and the banks are recalling the deal at closing, saying, hey, listen, we’re not going to fund this. That caused many buyers to get left high and dry with their deposits. Buyer and seller had to either renegotiate, repackage, or just say, okay, sorry, we didn’t make it to the table.
I just described what happened in March. April, everything went to sleep. The only lenders who were active were agencies—Fannie and Freddie. But they also had put in a lot of restrictions on what you had to bring to the table to close a deal. Let’s say you and I are going to buy a 100 unit apartment building deal. Equity you and I have to put together is $2 million, fair enough. We put it together, either out of our own pockets or from equity from investors. We assemble the deal.
If we were doing an agency loan that would have been a closeable transaction up until the agency changed their terms. And what they changed it to say was, okay Clint and Matt, we want you guys now to bring all the equity to the table, but we also want you to bring up to 18 months worth of interest and principal to the table if you’re going to have an amortized mortgage. We’re going to bring you 18 months worth in interest and up to 12 months’ worth of taxes and insurance.
On a larger property, you could be looking at $20,000–$30,000 a month in debt service. That’s not unreasonable to have it on a larger deal. What’s 18 times that plus the 12 months for the real estate taxes. You and I may be required last second to come up with, let’s say, another half a million dollars to close the deal.
Now, we have to bring all of that to the table in our own cash or an investor and yes, they do give it back to you. After 12 months of good performance, they will return that capital. But that first year could really […] from the cash on cash return perspective. If you calculate the IRR that your deal has and the cash-on-cash that the deal has, that additional capital to the table killed a lot of deals that Fannie and Freddie were doing. That’s April.
Where we are now is a lot of bridge lenders are starting to come back in. What a bridge lender is, is in essence, someone who will take a dilapidated piece of real estate and they will help you bridge where you stand today to the point where you can refinance them out to agency debt. Slightly riskier, a lot of times the rates are floating, meaning the rates change every month, and there’s a lot of terms and carve-outs and a lot of teeth in those loans.
If you don’t behave well on those loans, they can sink those teeth pretty quickly into you. But they’re intended to bridge you from a dilapidated property up to agency debt. Mind you, agency debt typically won’t do a deal that’s not 90% occupied. If you and I are looking at a real dog that’s 60%, 70% occupied, we can get a great deal. I can’t use Fannie or Freddie on that. When Fannie and Freddie were the only kids left on the playground in April, a lot of those dilapidated deals had nowhere to go. You couldn’t finance them.
The bridge lenders are just now starting. It’s not like pop the champagne, we’re back to normal again. They’re just now beginning to get back into the space. Their rates are higher, the loans to value terms are lower, they’re way more finicky, but they’re starting to do deals again, which is exciting.
Clint: Yeah. For the listeners that aren’t familiar with this, what it means is the bridge lender is going to help these individuals stabilize a property to get up to 90%, 95% occupancy, do the rehab work if anything needs to be done to make sure that it passes the agency inspection, correct?
Matt: That’s correct. What’s great is any syndicator that wasn’t doing agency debt pretty much had to go bridge. They did great programs. We’ve used them regularly. They’ll lend to you a sizable amount of the purchase price, and they’ll also give you a sizable amount of your construction budget. If you and I were going to go and buy a dilapidated apartment building that was built in 1960 and hasn’t been touched since then. Because we all know that apartment building. I probably lived in a few of them in my youth.
There are plenty of buildings out there that just need a really good facelift to bring them up to market conditions and to have people willing to pay market rents for those properties. But face lifting a 100 unit apartment building can take a lot of money. You got to update the kitchens, you got to maybe redo all the roofs because maybe all the roofs are original. There’s a lot of original fit-out that could be there that we just need to update. That takes a big budget. It could take millions to update these apartment buildings.
What’s great is the bridge lenders will produce that construction dollar for you and they’ll also produce a good amount of acquisition. Bridge loans are really what turned around a lot of apartment buildings in America over the last 10 years. They’re great products if you use them properly. They could be weapons of destruction if you don’t. But they can be a great product to get you into those coveted agency loans that are super low-interest rates, super long rate locks, non-recourse meaning there’s no personal guarantee wired.
They’re great products, but the agencies have a lot of things that they require including occupancy. The bridge helps you get there. They’re great vehicles. It was a real shame when they went dry for a while. But as I understand, they’re getting back in slowly, but they’re getting back in.
Clint: Okay. Let’s assume that I’m a single-family operator. I have about eight or nine homes and I’m enticed by the idea of moving into multifamily. I’m going to look for maybe 60-unit complex, foray the 60 units. If I needed that bridge money and I wanted to find a bridge lender out there, are they going to loan to me? Or do I not meet the criteria that I’m lendable because I don’t have experience?
Matt: You got to produce a balance sheet. Let’s run with that 60-unit example for a minute. Typical deal in […] markets that I deal in is around $50,000 a unit. A 60-unit deal, that’s $1.8 million in a buy price. Plenty of lenders are not going to touch that deal because it’s going to be too small for their lending requirements. Most lenders want to get in $2–$3 million thar bridge lenders do.
But let’s just say—for conversation’s sake—you find one that will take a deal that’s tall. You’re going to pay a little bit more on the interest rate. A larger bridge lender may charge—today’s market—between 6% and 7&, pre-COVID between 5% and 6%, but their rates are higher now. For that deal you just talked about, that someone’s scaling up and getting into a larger product, they may be in the 8%, they could be in the 9%. It’s possible. But guess what, they get to buy that 60-unit., they get to rehab it, and they get to move it over to the agency eventually.
The only thing that they need to have, Clint, is they got to have that balance sheet. Let’s say, as I said the property value, buy price is $1.8 million. They need to show they’ve got a good chunk of that, sitting in liquid cash. Let’s say 10% of the loan amount sitting in liquid cash in their bank account. Show me we have got $180,000 in cash that you could build this property out. God forbid, something happens.
And also show you got a net worth that some lenders’ requirements are different. Normally they require net worth that’s add or equal to the loan amount. For $1.8 million property, you might be borrowing $1.4 million or somewhere in there. You got to show you got a net worth of $1.4 million. They’ll consider everything. It’s not like accredited investor calculations. You can consider your home.
Clint: Your house.
Matt: Yeah. You could throw that in there, all that stuff. Retirement accounts, everything you got. But then the challenge for most investors is to show that liquidity because who sits around with that kind of cash just sitting on the shelf. Most people put their cash to work. You got to be able to show that. Now, you can bring in a loan sponsor. Somebody you might know that has that amount of liquidity or even just liquid stocks that they could liquidate to help you out in the deal.
You can assemble balance sheets, but one way or another, if you can show that you have somewhat of a track record and a balance sheet, these bridge lenders, they’re not going to turn you down. They might tie you up at a personal guarantee for that size deal, but you can still get the deal done. It’s a good segue. Short story, my first true big multifamily was a 49-unit. Almost exactly what you just talked about. That’s how we got into the larger multi-space, with the 49-unit. It was a good stepping stone.
Clint: Those loans, what are the typical terms? How long are they? The prepayment penalties?
Matt: Yes and no. They know you’re going to be bridging into Fannie and Freddie. Their purpose is not to be your amortized long-term lender. They want to have a beginning, middle, and end to your loan. Rates, as I said, can be in the 8% or 9%, even on the smaller stuff or on the bigger stuff. You might be able to get them down to 6% or 7%.
Loan to value today is between 70% and 75% from what I’m being told. And for deals that we’re looking at used to be 80%, not anymore. Used to be 100% of construction, you’re probably going to see less than that now. And they also require that you do the work and then they’ll reimburse you. Yes, it’s 100% in construction, but they’re not going to and give you the money to replace all your roofs and then you go replace the roofs. They’re going to expect you to go replace the roofs.
They’ll come in inspect them and say, okay, yes, those are replaced roofs and we’ll now give you a reimbursement for your expenses. You have to have enough cash to front the construction and then they’ll reimburse you behind.
Their origination is going to be somewhere between 1%–2% of the loan amount. That’s called points. A lot of times, they get you on the way out the door, Clint, too. Let’s say it’s a three-year loan. They loan you and me $1.4 million to go and redo that 60-unit you’re talking about plus construction on top. They’ll say, okay, guys. This is a great project. We love it. It’s three years. Now, what we want to see is that you’re going to guarantee us interest for 80 months.
If you and I are really good businessmen, we get that property turned around, we beat our contractors, crack the whip, get that turn around done, wipe the sweat from my brow, get all that work done, and we get it done in 12 months, then we qualify for a refi. Guess what, that lender is going to say, hey, listen, that’s awesome. Congratulations. But you owe me 6 more months’ worth of interest. We may have to pay additional interest at closing. You could pay upwards of a year worth of interest at closing, that’s number one.
Number two, a lot of these lenders have something called an exit fee, which it’s not prepayment penalties, but it kind of is. All that is is instead of charging you everything upfront on origination, they might charge you 1% on origination when you get to loan and another percent on a loan when you exit for the loan. At the end, they kind of kick you on the rear on the way out the door.
They can ding you on the back end getting out of this. You have to be very cautious of knowing what those expenses can be because they can really drop down your refi proceeds when you’re refinancing these bridge loans. It’s important to read all the fine print in those loan documents.
Clint: Exactly. You’re only going to make that mistake once. I’m saying that from experience.
Matt: I know because I did. It’s what the gray hair on this side of my head came from, Clint. It was that one deal.
Clint: I know.
Matt: It’s important to have attorneys like your firm review those loan docs, man. It’s a fine-tooth comb. You got to break out the microscope. People joke all about a little bit of a light reading. If you can’t sleep, read these loan documents. No, read the loan docs. And get a brewed cup of coffee, make sure you’re wide awake, and then read the loan docs.
Clint: And reread them.
Matt: Yeah. There’s a lot of teeth in there. There’s a lot of teeth in those loan docs. You got to make sure that you uncover any way that they can get you or any ifs, thens, and whats.
Clint: How do you compare what’s going on now to what went on back in 2009, 2010, and that timeframe.
Matt: It’s funny, like I said, I’m lucky enough or whatever to have been around. I’m one of the few apartment building guys or real estate guys that have been around since then. I got started in 2005. What I view the 2008, 2009 crisis to be was a debt crisis. That was a bunch of lenders who had their sources of capital, the warehouse lines that they had access to, the Wall Street product, and the mortgage back security markets and things like that that they relied on to create loans—all that crumbled.
That made it very hard to get a loan. And a lot of loans that had been propped up on a house of cards that had been poorly underwritten, badly created, or just probably should have never happened. I don’t know if you saw the […] those kinds of loans that they were talking about that movie, that’s what that was. That was just a recorrection of a market that had gotten way overheated on lending. Again, this is just Matt Faircloth’s humble opinion. I’m not an economist or anything like that. I’m just a boot on the ground kind of guy. But I believe this is an income crisis.
This is just different. This is the other side of the spectrum. This is not the loans, this is the income that supports those loans. This is making sure that America can pay their bills still and that the folks that live in these rental properties still have the income that they can make their mortgage payments. I don’t think we’re seeing anywhere near a liquidity issue on the debt side.
This is all about cash flow and about people pumping their own earned income to the economy to keep things going. Supporting local restaurants and supporting local businesses and everything like that. And then that cash they put in a local business then flowing into the next thing. The cash flow economy, the cash cycle, we’ve lost the biggest consumer, which is Middle America and then all of America. All the income owners are all sitting on their hands right now.
We’re the ones that keep the economy going. Why everything stopped is because nobody’s spending their earned income because either people don’t have it anymore or they’re waiting to see what happens. They’re sitting on their hands and cutting back their expenses and businesses are closing because there’s nobody walking on the doors anymore. That’s my view on this. Again, that is through Matt Faircloth’s glasses, not necessarily the truth, but that’s what I see.
Clint: If you’re evaluating a market on where to invest, I would say now it’s become really, really important. I mean, it was important before, too, but those tenants—predominantly, what type of jobs do they hold? Because if they’re in the service industry that has taken a major hit and it’s probably going to be slow to recover, do you factor that in? I would have gone into that market in 2019, but 2020, no. I’m going to a market where there’s little more stability.
Matt: I do now, Clint. I do now. I didn’t do that a couple of months ago, but I do now. We have been a tertiary market, C-Class housing investor. Because in 2008, I owned a lot of C-Class housing. Guess what, man, we didn’t have a hiccup on rent prices. All of a sudden the property you own was worth $200,000 was now worth $100,000 because you couldn’t get a loan on it anymore. Maybe it was propped up on a bad loan. But with enough appreciation and with enough cash flow and everything like that, things came back around.
We got stuck holding some properties longer than we wanted to in 2008. But guess what, there’s still cash flow. The reason why is because rents never dipped in 2008 on the Middle America stuff. On the C- and D-Class properties, we didn’t see a rent correction. That’s what’s interesting. And most of the folks that worked in those markets didn’t really see an income crisis. They kept their jobs, they didn’t see major layoffs. A lot of the layoffs happened at the top in those markets.
People that earn towards the median of a market can typically find another job pretty easily. They can just change careers, whatever it is. That’s what happened to a lot of our tenants. What’s happening now is the folks that can continue to work that can work from home or that can do what you and I are doing and stay productive, they’re able to just keep going. But that’s not Middle America. That’s not the C-Class tenant, that’s not workforce housing.
The workforce housing tenants is relying on subsidies in the government, they’re relying on unemployment, and those things they’re hoping things open up very quickly. Or they’re in an essential service-based industry. These are your nurses, your police officers.
Believe it or not, a lot of my tenants work construction. Those guys are still working in most markets. We’ve got lucky enough. Also, we’ve had many tenants that lost their jobs, have had a shortage of income, or are now relying on unemployment to be able to pay their rent. This, I believe, is affecting a different side of the market—currently. Now, I have a prediction on what’s going to happen in the future, but again, that’s me.
Clint: You’re talking about construction. I was thinking about the other day, I was talking to my brother, he has an asphalt business. He’s monitoring how many permits people are starting to put in for. Depending on how long the permitting process is because he’s in an area where he is currently doing a lot of work on the asphalt side, he said, hey, I’m going to be busy through the entire season, but next year, they’re not permitting. They’re not pulling anything to do any building in this area because they’re expecting to take a big hit there.
Matt: Clint, I believe a lot of the construction folks are finishing what they started. Pre-COVID, we were in the middle of a big rental on a project in Trenton. We were turning probably four to five apartments a week in a few of our rental markets. We’re just going, take that dilapidated apartment building, upgrade the units and junior kitchens, and all that kind of stuff. We’re still employing a bunch of people doing that kind of work.
I’m already down the road. I got to finish that. It’s not like, I can say, okay, COVID, we’re going to stop turning apartments. I got people looking to rent. We’re going to keep going. We’re working on a land deal, in a couple of markets to go and build on some land and some other markets. We’re not sure if that’s going anywhere because we’re looking at, did we really think the market’s going up and their 10% for us to be able to really, really squeeze the lemon on this deal? We think there might be a pullback.
We’re a lot more cautious about looking a year out versus looking the next four months out. My binoculars are a lot clearer there than they are a year out. It’s a lot of different than it used to be (until just recently).
Clint: A year and a half go, one thing I was noticing with Class A properties, just say Seattle. A ton of buildings are going on for multifamily, and they’re just pumping all these things. But then they’re having a problem in filling the properties. That there’s an oversupply. Because you drive down the street and one guy would say, you get three months for free rent. The next one will be, oh, we’ll give you a free car if you sign a lease. Just throwing out goodies to entice people to rent from them.
Matt: Yeah. I had a friend that renewed his lease in Philadelphia and his landlord gave him three months for signing a two-year lease. This is recent. This is probably six months ago. This is pre-COVID and all that. But it was still one of those things where you start to look at that. I think certain areas are overbuilt like Seattle, Philly, the A-Class markets, and stuff like that. On the other side of the coin, a lot of the tertiary C-Class markets, even B-Class markets are underbuilt. There’s actually a need, there’s a shortage for housing in a lot of the middle of the road markets, but in the higher-end markets, there’s a glut of housing.
Clint: Where are you looking then?
Matt: We’re sticking to what we know how to do. We’re really great at taking apartment buildings that exist, upgrading them, and turning them around. I’m looking for stuff that cash flows now. A lot of people in my market were like, okay, if it doesn’t cash flow in year one, I get it because it’s a pig. I got to clean it up, and knock the dust off of it, get it performing again, and everything like that. It’s okay that it doesn’t make any money in the first or maybe even second year.
We’re not okay with that anymore. I’m looking for deals that cash flow now sooner than later. That means I’m going to pay for a higher cap rate where that’s all I’m going to pay for deals. I’m not going to pay for stuff that’s a big value add. But I want to get something that makes some money now that I can still squeeze the lemon to make further. Earlier, I was okay with deals that didn’t make much now (if anything at all) for the opportunity to squeeze the lemon really big in the future. A lot less risk. Looking for a lot more stability.
We are looking at new construction because it’s interesting that if you can time your construction properly, you could probably build through the recession. Most of the circles you and I are in, folks talked about like, okay, we’re going to come out of this. We’ll probably pop the champagne, have a little bit of celebration time, and have the economy rip […] for a month or two. And then the real ripple effect that this thing is going to hit and we’ll be at a recession for the foreseeable future.
That’s interesting because recession means everything pulls back. But maybe you build something that’s able to get put on the market once we start coming out of this thing. Because recessions typically last somewhere around 18 months. If the recession started now or it started a couple of months ago, then we’ll be out of this thing somewhere towards the end of 2021. I’m intrigued by that model to slow build (if that makes sense).
I think your brother’s right. 2021 may stink, but the end of 2021 is when we might start to look towards recovery. Wouldn’t it be interesting to have something to be ready for release then?
Clint: Yeah. You basically timed it. What are some of the mistakes you see that people wanting to get started in this area, they typically make?
Matt: I think that folks think their shoes already dropped, and they’re looking at their chops to get in. But I think that they don’t realize the pause button is on right now. And yes, lending is starting to wake up. What’s funny is folks that are offering deals are still talking pre-COVID prices and everything like that. But I don’t think we’ve seen the real effects of this yet.
The mistakes I’ve seen people make is to jump in, come into cavalier, and think that they can time when they’re going to jump in on things. Back to my comment about building something to time it, it still scares me because it’s still trying to time the market. Most folks lose when they try to do that because the market can be very unwieldy.
Taking uncalculated risks is a big mistake I’ve seen people make or trying to stretch today. We’re the big unknown. Not 100% sure where things are going to look like in the next month.
Clint: The idea of owning a multifamily property is put in front of the numbers and the common sense that should go behind it. I see you were following these routes.
Matt: That’s the way it was the last three or four years, Clint. I spoke at events. I spoke at a lot of bigger pockets conferences back when it was okay to speak in public. As you did too. I did a lot of that. I used to do (just for fun) show of hands, who is looking to flip houses right now? Maybe 5% of the room. Who’s looking at wholesale? You’d see more hands go up because it’s their perception that wholesaling is a vehicle to get into real estate if you don’t have any money.
Not really true. But people think that that’s the case. Maybe 20% of the room would raise hands. I said, okay, who wants to get into multifamily? And the entire room would raise their hand. It’s been put on this pedestal that it’s the end all be all. Buy a multifamily and it’s like an ATM that starts spitting out checks for a million dollars.
Clint: That’s mobile home parks, I’ve been told.
Matt: Right. It’s the one and only key to financial freedom, and people have their blinders on so much. I think it’s coveted more than it should be. It’s a good asset, it’s a great asset for a lot of fundamental reasons, but not because everyone should be chasing it. I think it’s over chased. Pre-COVID it was over chased. Yet to be seen if that chase is going to continue or not after COVID.
Clint: Now that we’re in this flux, you’re still investing. Are you even changing your mix, what you’re looking at, and what you’re doing?
Matt: Yeah. We’ve decided to diversify. The model up until now has been to transfer a lot of risk to investors. Investors don’t realize that, but that’s what syndicators have been doing up until now. They have been transferring most of the risk over to investors. Think about it, all the deals that we do are non-recourse. They’re not going to come get my house if this deal goes under. There’s no personal guarantee for me.
I’m not tapping my chest. I’m saying me, as in the collected me of all syndicators. The investors are beholden to a pref, but there’s no guarantee the syndicator has to pay that. I’ve seen deals, there’s a preferred return to investors, but there was no plan to pay that until after the property refinance or maybe after the deal was done. Maybe out of the out sale the pref would’ve got caught up on.
And then investors were entitled to an enormous part of the upside, 70% of the upside on a property. Which means the syndicators are only making 30% of the profit and everybody’s okay with that. But when you look at it, the syndicator actually doesn’t have much to lose, aside from reputation, but they don’t have much to lose on deals like that.
Actually, they’re very investor risk centered. The investor is the one who stands and takes the most risk. Risk meaning potentially lose their equity or potential for their profit to be taken on the deal. They’re not going to get the returns they thought they were going to get.
We’re taking a lot of that risk back. We’re going to be bringing on to ourselves, just offering investors maybe something with not an enormous upside potential, but as you know the higher the risk that something is, the higher the return it has to pay. That’s why you see stuff. If somebody is presenting me a deal that’s hey, Matt, I got this deal that’s going to make a 40% return. My immediate thing is okay, what’s the risk? Because if you offer me a 40% return that means you got to pay me that 40% return for me to be willing to palate that risk.
Think about it, it’s a two side coin. We’re going to be taking a lot of that risk back and offering investors a nice, stable rate of return with lots of tax benefits, we’re also going to make it liquid. Meaning they were going to introduce liquidity with something that’s not been involved in today’s market. We’re going to get people diversity that they can invest in a couple of different projects all at once with their dollars, and they can recall it.
They say, okay, Matt, listen, I need to pull my dollars back because I find something better or because (God forbid) the recession hits and I need that cash to uphold my homestead or something like that. I can recall it. We’re going to make it recallable, liquid, with stable rates of return, and we’re going to be taking on the risk. Yes, we’re going to make the upside, but investors are going to be okay with that in exchange for liquidity, solidarity, and monthly payments that you can count on. Not wait until the end of the deal to get your pref or that kind of thing.
Clint: That I think is key—what you just said there. My partner and I, we did a small deal earlier this year just on single families. What we offered when we did our raise is we said, listen, you want your money back in a three-year time frame, we’ll give you all your money back. The reason why we’re willing to do something like that is because I want the homes that we were buying, that we bought, I’ll put it in my own portfolio. If somebody wants out, you can have all your money back. I don’t care because I’m buying for the cash flow.
What you’re saying is you’re so invested in these, you see the long term value on this project. You want to keep it. That’s a lot of difference in someone who’s not. They’re trying to flip the property right to move on to something else. To me, as an investor, in doing a deal like that, that gives me more comfort knowing that you’re willing to do it.
Matt: Through the right set of glasses, it does. And investors need to get away from the concept of if I go on CrowdStreet and I see that there’s a deal that’s returning a 24% IRR. Listen, I can make any deal, show you a 24% IRR. All you got to do is increase the sell price on the back end, increase what a refinance is for, and hocus-pocus, I got that same deal on CrowdStreet. But just because it’s there with those IRRs, it doesn’t mean there’s no guarantee in there. It’s all speculative. But if you look at the deal, a lot of that profit that you propose to make is on the back end.
Now, folks are seeing through these things now and they realize the back end of this upsale in properties might not exist, might not sell them for we think we’re going to sell them for in the future. I think investors are going to take security and predictability over risk in the next couple of years. I think we’re trying to stay ahead of that for what people want and produce something that’s going to meet that.
Clint: That’s great. I know because at this time, if you’re going to get into this space, you really want to work with someone who knows what they’re doing. There are too many unknowns. And I talk to a lot of clients and that has been bringing this up. I said, hey, learn from the experts and then maybe look at it when things calm down. But to me, it’s not the right time to do it on your own.
Matt: No. Just as you have, we’ve got a community of people that can come and pick our brain when they want to. It pays to be underneath an umbrella of a larger operator that knows what they’re doing that’s got maybe got a few grays on their head and has been through a few market cycles like we had and stuff like that. That’s what we created our insight, the DeRosa Insiders Community, which folks can join for not much. I think it’s $24 a month they can join. But it gives the right to pick my brain, and we look out for them.
It’s funny, it’s like a feeding frenzy. It’s like chum to sharks right now. We put on the community that we’ve got a 60-unit apartment building that’s too small for us and it’s down the block from 160-unit that we own. The PM staff that runs our 160-unit could easily run the 60 units. It’s right there. It’s right next to it. There’s a lot of new-age investors that are hopping in on this that want to be a part of the smaller deal. It’s like this feeding frenzy going on, which is great, but you got to have an operator that can watch your six on something like that, which we can because we’re right down the street.
With the changes going on, I would not venture out of my own in a market like this. I would definitely look to be a part of a larger whole, be a part of a team, or whatever. It’s just too much to know. Things are changing too rapidly to be on your own trying to figure it out right now.
Clint: I agree, and have access to something like what you just said. With $25, that’s ridiculous. Not only get to be able to ask you questions but also to find other individuals that you’re part of that are doing deals and you can bounce ideas off of them because they’re going to bring you experience. It’s like a mini mastermind. The link is going to be in the show notes.
When you listen in, you can go to the show notes, you can click on the link, and it’ll take you there. If you’re interested in signing up for that. Guys, definitely, this is a space that you want to be in, and you want to get more information. I’ve seen people selling classes for $10,000, $15,000, $20,000. For $25 a month, this is a great way to start and then start building your knowledge, especially to have access to something like that.
Matt: Absolutely. It’s okay. Listen, I paid money like that for courses and stuff like that. It’s all about the deliverable. It’s one thing if you’re getting just a weekend class and weekend exposure to stuff and everything like that. I put that a little bit lower on the pedestal versus a community. I think at this point, if you’re getting access to professionals, you can pick their brain on a regular basis, then if you’re becoming a part of a community, regardless of what the price tag is, if you’re getting that, then I think it really enables you to tighten up. Because it’s just too much to know right now.
Things are changing too much. You need a group that you can bounce ideas off of and people that are getting the information you don’t have. As you know, there’s new information coming out every day. The whole thing that I just told you about how loans are changing and everything like that, I just got access to that data last week. Before that, the bridge lenders weren’t in the market, but I just found out last week that they’re coming back in. I jumped in, figured it out, what are we doing, and I put it out to my community because people need to know these things.
The information is coming out so quickly that you got to have a community that can keep you in touch.
Clint: Hey, we’re out of time. This went so fast.
Matt: Man, that flew by.
Clint: I know. It did, right? Before we got started like, how long is this going to be? I say, probably about 20, 30 minutes. And what, 45, 50.
Matt: And here we are.
Clint: Yeah, there it is. Thanks for coming on. I really appreciate it. Everybody, if they want to get a hold of you, we got the links in the show notes. Any parting comments you want to leave?
Matt: Check out those links. I’d love to have you join our communities. I would say on a grander sense, not to pat everybody in back, but these too shall pass. We’re not going back to the way the things were a couple of months ago, but we’re definitely going to a better place soon. There’s going to be some fallout, but I don’t think that the sky is going to fall and that we need to stock up with cases of cans of soup, bottled water, and toilet paper in our basements or anything like that.
I think that we’re going to be okay. I just think that we need to tighten up as a world and as a community to get through this thing together. The more you look at things that way, I think that the better off we’re all going to be.
Clint: Yeah. One thing you didn’t mention, I’m going to do it for you, is the fact that you’re a best-selling author on Amazon and wrote the book Raising Private Capital.
Matt: Yeah. I forgot to mention that. I forgot to go there. They can check that out. It’s on my website, derosagroup.com. They can buy a copy of it. Or they can buy it in bigger pockets, or they can pick it up from Amazon, too. Wherever they want. I’m just so grateful that the world picked it up as much as it did. As you said, it’s an Amazon bestseller, and I’m super grateful that it’s there. For everybody who checked it out, picked it up, and wrote so many great comments about it on Amazon. It’s built such a movement behind it.
The premise of the book briefly is everyone knows people with money. You don’t need to come to me for money, you don’t need to come to anybody else for money. Odds are, you know millions of dollars worth of contacts in yourself—everybody does. You just don’t know where to look for it. My book teaches you how to look in your own network for the money that you need for your own deals.
Clint: Absolutely. That’s so important. For those listeners, I’ve done another podcast with Dugan Kelly who’s a syndication attorney that then will show you—once you’ve found that type of money in those individuals—how to structure the right way. Be sure to check that one out as well in our podcast talking about it. You know Dugan as well.
Matt: I do.
Clint: Good guy.
Matt: Great guy. It’s so important, for your firm and for Dugan’s firm. It’s important to have a good lawyer behind you because there are so many ways in real estate and in business in general, you can get tripped up. It’s just important to have a lawyer watching your six that can keep you out of trouble like your firm and like Dugan’s firm as well.
Clint: I tell them, you want to make sure you got somebody there to save your assets.
Matt: Save my assets. I love it. I like that.
Clint: All right partner, good talking to you.
Matt: Thanks, Clint.
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