Cody Davis on Creative Finance: Deal, Then Debt, Then Equity

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0:00 All right. So, earlier from Matt, we heard about the circle drill a little bit. And to break that down pretty
0:05 simply, it's where you're coming from, where you're going, and what changes when you get there. That's the baseline
0:10 of everything we built at Multif Family Strategy. The goal is to figure out wherever you are at, whether you're
0:16 making a whole bunch of money or you're not, you can get to wherever you want to go. And it all will circle around your
0:22 goals because everybody's goals are going to be a little bit different. So, to start this out, I want to hear some goals from folks. and we're going to
0:28 figure out how to get there today. Anybody brave enough to share? Okay. What's that mean? Okay. So, 15,000
0:35 a month and some I will try my best to make this legible. No promises. All
0:41 right. And one thing I'd like to mention is every goal we should quantify on an
0:46 annual basis. So, this is 180,000 per
0:53 year. We got to build to that. Who else wants to share a goal? What's that take? 18 a month.
0:59 All right. Uh I'm just going to write that out on an annual basis. So that's 216,000.
1:06 Matt said he's going to fact check me on everything today. So I'm going to try my best. So we have 216,000. Anybody else
1:11 have another goal? 100k a month. All right, that's an easy one to math. 1.2.
1:17 All right, I can do some math. All right, so each of these goals has the same thing in
1:24 common. It's just going to depend on what type of deals you buy and what deals you're buying for this are not
1:29 necessarily going to be the same deals you're buying for these two. So, I just want to put that out there. We're going to go over how to get to each of those
1:36 today and we will come back to those. Don't let me forget. All right. So, the
1:41 first thing once you've established your goal, which is the most important piece, most people don't know what they want.
1:46 Once you figure out what you want, you got to figure out how to get to it. And with apartments, the reason we like multif family above all else is there's
1:53 a multiplier. With a house, trying to get to $1.2 million a year could I mean
2:00 maybe, but that's pretty tough. With a duplex, it's about half as hard to get
2:05 there. But I I like apartments. And so we're going to go through the math today so we understand how it works and go
2:11 through some terms so everybody is on the same page. N Oi. Is there anybody here that doesn't know what that is?
2:18 Everybody knows what that is. Net operating income. What is this? Simply put the your cash flow if it's your cash
2:26 flow if you have no debt. That's all it is. This is a dividend. It's your
2:31 dividend on any asset. It could be a business. They have different terms for businesses, but for real estate, all
2:38 this is is it's your cash flow if you have no mortgage payment.
2:44 Next up, we're going to go over a cap rate. So, everybody heard of this
2:49 one. Cap rate is your cash on cash return when you pay cash. And the reason
2:56 this matters is because you're paying cash for every deal you buy. It's usually just not your own money. And we're going to work through how that
3:02 will actually play out in practice. If you're writing down notes, this is your dividend expressed as a percentage. That
3:10 is the simplest formula or simplest definition I've ever found. Got a question? It's a 6% dividend. If you're
3:18 buying, let's say you want to get to $1.2 million a year of net operating income because you got to get to net
3:24 income before you get to net cash flow. You're going to borrow money, you'd have to buy a $20 million deal on a six cap.
3:30 20 million times 06 equals 1.2 million a year, 100 grand a month. And luckily,
3:36 it's all math. It could be a $20 million deal. It could be a $200,000 deal. Well, it could be in Gary, Indiana, and it
3:42 could be a $20,000 deal. It doesn't matter how big the deal is, but it's
3:47 going to be your dividend. And there's a lot of people online that like to express this as, well, it's just your
3:53 NOI divided by your purchase price. But that doesn't tell you what it means. It just shows you how to calculate it. If
3:59 you don't know what it means, you don't understand the formula. And so, this is your dividend. the the formula is your
4:07 NOI divided by your purchase price if you like to write it down. So, if you have uh let's say 12,000 a year of net
4:16 income and your purchase price is $100,000, you divide it out and you'd have a 12% calf rate. That's the
4:24 simplicity of this. Does anybody have any questions before we move on? All right, so back to the goals.
4:31 If we want to get to a 180,000
4:38 per year on a six cap, we want to get to that on net operating income. How are we going
4:45 to figure out the valuation? You have to figure out the purchase price. And the reason I want to work through this
4:51 before we go into the really creative finance, we got to understand the simplicity of what we're shooting for.
4:57 180,000 a year of net operating income. How would we come up with how much real estate we got to own assuming it
5:05 divided by the cap rate? And that's going to depend on our market. Well,
5:12 let's say we're doing it at a 6% cap rate. And and I want this to be as involved as we can. If we're doing a six
5:18 cap, how much real estate do we need? Who's 3 million? How'd you do that? Okay. So, we would need 3 million in
5:24 property if we're taking down notes. So, that's $3 million worth of property. If
5:30 that is our cash flow goal, though, that means that we need to have no debt in
5:36 this situation. What could that also mean? It could mean that we have
5:42 6 million in property with 3 million in debt. Could mean we have 9 million in
5:47 property with 6 million in debt. What we're trying to calculate before we get into the creative stuff, try and keep it
5:54 as simple as possible. And if I ever get too complicated, please tell me because I I was told last year I did. So, I'm
6:01 going to try and make it simple. The reason I want to break this out is whether it's a cap rate where it's your cash on cash return when you pay cash or
6:08 it's your cash on cash return with debt. Regardless, this is how you figure out the number
6:14 you're solving to. So, if we want to get to 216,000, whose goal is that?
6:21 Yeah. 18 grand a month. What would your number be on a 6% return? Who can do it?
6:26 Israel. Okay. So, if if you want that $216,000
6:32 number right here, you're going to need 3.6
6:38 million in property to get that dividend per year. That
6:43 could be 7.2 million in real estate with 3.6 million in debt, but you're shooting for that goal. Now, if we're in a
6:51 different market where your cap rate or your cash on cash returns 10%, that's going to alter it. But this is how you
6:56 do the math to figure out where you need to go. When Christian and I were getting started, he talked about, well, I want
7:01 to get to 15 grand a month, 180 grand a year, but I'd be happy with 10. The magical number was $2 million. Is $2
7:09 million paying 6% is 120 grand a year, 10 grand a month. As soon as you get
7:14 crystal clear on these numbers, whatever your goal is per year, you figure out how much equity you got to have, it's
7:22 going to help you decide what type of deals you even want to pursue. Cuz when you find out you can buy anything, you
7:28 realize you don't have to buy everything and it's going to help streamline the process. Like buying this place,
7:33 Christian and I would have been rich faster had we not bought this. And so
7:38 this is hopefully when you understand it in practice going to help you decide
7:43 what to buy, what not to buy, and figure out how much equity and cash flowing
7:49 real estate you really need. Now, we get to talk about creative finance. And I
7:54 want to use a deal example that I just bought. And I'm trying my best to be a great
8:00 artist. So this is an 8plex.
8:07 I bought this Apex in Afraid of Washington. For those of you who don't know where that is, I didn't either. Uh,
8:13 this is just north of George, Washington. And if you don't know where that is, it's dead center between
8:18 Seattle and Spokane. So, I bought this Apex Infraida for 430,000.
8:26 And if you say that's a really good price, I will say it was, but there's a reason it cost that. This was the
8:35 price. This deal was listed on the market for a
8:40 whopping 200 and something days. Everybody and their sister had seen it.
8:46 Nobody wanted to buy it. Conventionally, it didn't make a whole lot of sense. The
8:53 net income on it if we talk about N oi
8:58 was 32,000 per year. Now different math problem. Who
9:05 can solve what the cap rate was? 2,000 year NOI 430 purchase price. It's not like it was a screaming home run deal.
9:12 The reason I'm ask questions cuz I don't want people to fall asleep. Divided by 430. Okay. So 7.4%.
9:20 I'm going to trust your math because I can't do that in my head. 7.4. Sorry. All right. So, we got a 7.4%
9:29 cap rate, which means what? If I paid cash now, I put $0 into this project,
9:36 yet I still paid cash. This is a weird mindset shift you have to get over. I paid cash for the deal.
9:43 It just wasn't my money. When it comes to structuring deals without any of your own money, you got to know that if if
9:49 this is your dividend, this has to be higher than your debt cost. Has to. So,
9:56 if your borrowing cost is higher than 7.4%. You're going to lose money on every dollar you borrow. This is the basis for
10:03 everything that we've built. I mean, even on this deal, the cap rate had to
10:08 be higher than the cost of the debt. That's the baseline for everything you do. If there's only one thing you take
10:14 away from today before I get super crazy, that's it. So, uh, I could borrow
10:20 up to 7.4% cost of capital day one. Now, as far as
10:27 structuring this, this is a average rate of return for Afraida. People want to
10:33 get between 7% and 8%. It was not a screaming deal.
10:38 So, what I ended up doing to make it a little bit better, we've heard about seller financing. They said, "No seller
10:46 financing available. Won't do it. Can't do it. We've got debt on it." So, what did I do? I got them to seller finance.
10:52 We like to do that. But, it was a little different than how we did this resort. It was a little different than how we
10:58 bought the white house over there. If you haven't seen it, you'll see it a little bit later today. On these deals,
11:03 the sellers financed the majority of the purchase. That's typical. We get them to
11:08 finance 80% 90%. That's what everybody's looking for online to get high leverage.
11:14 What I ended up doing on this deal to make this work really well for me is I said, "Well, I understand you have debt
11:20 here. What if I go get a bank loan for the majority of it and the seller carries back a second mortgage?" Have we
11:28 all heard a second mortgage before? First, second. Do we know how that works? Basically, the the number it has
11:33 is the order that it would be paid off if you sold it. So, if I have a first mortgage of 100 grand and a second
11:38 mortgage of 50, if I sell the property for 100,000, first gets paid off and the
11:44 second loses all their money. If I sell it for 150, the first gets paid first and the remaining 50 would pay off the
11:49 second, I'd get no money. Um, the order is just the order that they get paid off and recorded in. So, in this deal, I I
11:56 got a bank to actually give me 75% of the money. It was much different
12:02 than I've done in the past. I want to give this as an example before we jump into someone else's deal because someone
12:08 today got a LOI signed for an RV park. So, we're going to jump into that. But the bank financed 75%. I got 75% of the
12:17 money, which is wonderful cuz now I just have to find a small portion of it. I didn't have any money to put into this
12:22 deal. Christian can attest to it. I am broke. We don't have a lot of extra money. We're always throwing it into
12:27 paying down other debts. But I still wanted to buy the project. And so what I ended up doing to finance this is I
12:33 asked the seller to finance. And by the way, this bank was Colombia, formerly
12:39 Umqua. So if you want a bank just off the bat that will do seller seconds, they can do financing up to 100% LTV if
12:47 it cash flows. They may not give that to you on your first deal if you don't have a relationship with them, but they can
12:52 for sure get you done for 10% down. Now I've just got 10% left. And what I ended
12:57 up doing on this was I brought in a partner and we split it 50/50. And
13:03 without any money of my own, this 10% down from the partner was 43,000 bucks
13:08 plus 25,000 to renovate the building, I was able to get into a deal with a
13:14 leverage point that allowed us to cash flow with no money of my own. and they
13:19 were happy because they had never bought a building, but they had the $43,000 down
13:26 and uh the renovation budget of $25,000. It's all about a value exchange with
13:31 creative finance. You have to figure out what people want. It's why the circle drill, if you go back to the basis of
13:37 multif family strategy, so important. You map it out for yourself, but you also map it out for other people. When
13:43 Christian and I were getting started, yeah, one of his main goals, and this this leads into what I was just about to jump into with the the circle drill, got
13:50 to map it out for yourself, where you're coming from, where you're going, what changes when you get there,
13:55 but what is it going to be for the property owner or for the investor or the bank or the potential partner? You
14:02 got to map out that circle drill as well. That individual, they made a bunch of money in
14:07 e-commerce, their business got shut down, and they didn't want to go broke. Their main goal was to take the money
14:14 that they had made and put it into something that can pay them because they
14:20 don't know what they're going to do next for their career. And so something that was really important for them was to feel part of the transaction.
14:26 And so when it came down to asking for this structure, I showed look, I've already got 90% of the money. I need the
14:31 last 10%. It's a very easy ask because I mapped out that circle drill for them. It's a big piece of any creative finance
14:38 and I think it might be important to actually draw it out. Has everybody seen it? The circle drill. Okay. And if you
14:46 ever want me to go back, I can on this stuff. But basically, what you're going to draw is a big circle. I used to call these quadrants and I learned that
14:53 that's not what they're called. Yeah, I learned that one. A ripe age of
14:58 22. All right. So, you've got relatability. You've got goals. That is
15:04 a G, I promise. And then you've got significance.
15:09 And relatability. We all relate based on our past. It's where we're coming from, things we can connect on that we've been
15:16 through. This is going to get you in the room. The fact that all of us come from a past of potentially not having money
15:22 and wanting to get ahead in life got us in the room together on the topic of real estate. And then that's really
15:30 important to map out for yourself and others cuz that's how you're going to connect with them and get in the room. The problem is you get in the room and
15:35 then a lot of people like to stay here. You got to move to goals. And so with that one partner, his name is Cam. One
15:42 of his goals is to get enough passive income to where he's never going backwards again. He's the young guy that
15:48 he made a bunch of money and he bought the nice car and the expensive clothes and the watch and that's great, but
15:54 eventually the money goes away. Okay. So, one of his goals is to get enough passive income to where he's not going backwards if he can't get his business
16:01 going again. And the significance is it's not your why, it's what changes for you when you get there. The value of
16:07 money when you don't have to work for it, it changes. You look at giving differently. You respect people's time
16:14 differently because you know how much time it takes to actually get there. And so this is just a super important drill to map out because I had mapped that out
16:21 for that individual for Cam. When I brought this deal to him and I lined up the deal and then the debt and I showed
16:28 him what equity piece in that order he'd have to contribute, it was a very easy yes to say. There wasn't really any push
16:36 back. Are we all good on this? Okay, cool. Onwards. So, I'm going to give an example of a sixplex that I bought a
16:43 little while ago. this my peninsula sixplex.
16:48 This is the one Christian uh referenced earlier. That's how I got him to buy into Moses Lake. Talk about buying uh
16:54 with the circle drill. So, this is a deal I bought for 380,000.
17:01 The seller financed $290,000. So, this is the price. This is
17:06 the seller. And I actually got a basically a hard money loan for the down payment of 90,000. Talk about rookie
17:14 mistakes not getting any reserves. Learned that the hard way. But I bought this 100% debt. And day one, my total
17:24 payments on this were 2,700 bucks a month. I'm going to go over here. So,
17:30 and the actual cash flow of it was 3500. So that was my I guess I should
17:38 say NOI and this was oh I'm sorry if I could spell that was my debt. So probably
17:45 should have written that in a different order but this is 800 bucks a month of net cash flow. I'll give you an example
17:51 actually my wife and my 7plex. It's brand new construction. We own it. No partners on that property.
17:59 Uh we had talked about $15,000 to 22,000 in that range. The reason is that's two
18:05 to three months of mortgage payments to new construction. Now, if you have a
18:11 different type of margin, like we have pretty strong cash flow on that property, but on the 38 plex, now the
18:16 the 39 unit that Chris and I had, we never had proper reserves. Even 3 months
18:21 of mortgages on that may not be enough because the amount of things that break, the potential expenses, the expenses
18:27 there could be over 100 grand if something there fails like the septic or
18:32 water lines. We got to dig it all up. It's going to be age dependent. Um, but for most stabilized stuff, 2 to 3 months
18:39 of the outflow is a really good rule of thumb. Yeah. Really? Yeah. Kind of gross. There's eight
18:45 tanks. When we bought it, there were six and then we found two more. They were never pumped. All right. So, sorry again
18:50 for writing that in the wrong order, but what I ended up having was 800 a month of positive cash flow. That sounds
18:55 exciting until you figure out that I was young and impressionable and I borrowed
19:02 this on a one-year loan. $800 a month dollars doesn't quite handle the
19:07 obligation, which is why Christian I eventually after this deal came to the
19:13 idea that oh, you need to manage your options, things you can do, and your obligations, things you have to do. I
19:20 made a big obligation. How do you get yourself out of this was the question.
19:26 How do I fix my issue? And my idea was, what if I just get the value up enough
19:33 to go get a bank loan and now my 100% finance deal that has
19:40 800 bucks a month of cash flow when it's full. I can get the value up and I could pay off this one and I could pay off this one and now I have nothing in it.
19:47 So, how would we do that? Any ideas? Yeah. Raise the rent. All right. I like you. We're not remodeling. We're just
19:53 raising rent. We're being mean. No. Uh I did do some remodels. But the idea is if
19:58 you go back to the cap rate, your cap rate is your dividend when you pay cash. It is your return when you pay cash.
20:07 What if I bump the NOI up and offer the same return to the next person? The valuation starts to bump up. And so when
20:14 you're going into something, you understand, well, I have a dividend in one hand and a cost in the other. What
20:20 happens if I bump the dividend? Well, the value goes up to the next party. And that's part of what multif family strategy is about is figuring out, okay,
20:26 we can finance our way into it. Showed you a 10% down example. This is a zero down example. You can negotiate
20:32 anything, but you have to figure out a way to hold it forever. And managing these obligations is how you do it. So
20:37 on this deal, what I ended up doing was figuring out, okay, how much do I have to raise the rent to push my value up?
20:44 So let's do some quick math. We got six units. Uh let's say we raise rent $100.
20:52 Is that fair? There's a sixplex somewhere where we can raise rent $100. So we're going to do a $100
20:59 of what we call value ad. The VA 600 bucks a month, but we
21:05 always do it on an annual basis. $7,200 a year. Let's use a 7% cap rate. How
21:14 much did the value go up? 7200 divided by 07
21:19 $102,000. Okay. So, the value add in this situation was $102,000.
21:29 So, when I'm looking at a deal, regardless of how we're going to finance it, I know, okay, if I raise the rent
21:34 100 bucks, I'm going to add $102,000 to my net worth. But I have to ask, is a bank going to
21:41 like that? Is that going to be enough? is taking this from 380 to 480 enough if
21:48 I want to borrow $380,000 from the bank? Probably not. There's a a good rule of
21:53 thumb for real estate. You want to be 75% loan to value. So if you have a $600,000 asset, 450 in debt. If you have
22:01 a million dollar asset, 750 in debt. So how would we figure out, this is what I
22:07 had to do, so I want to work through it. How would we figure out what that property has to be worth in order to get this loan? If we know that we can go 75%
22:14 and if I'm going too fast, slow me down. If we got to get uh this amount in a loan, how do we figure out the
22:20 valuation? Not quite. Divide it by 75,000. All right. So, the equation if you want
22:27 to figure this out is you take your total obligation. We take our obligation, divide it by your LTV that
22:35 is required. It could be 60%, it could be 80%, depends on your market. And
22:41 that's going to equal the value you need. Value needed. And that's the simplicity of everything
22:47 we do to make sure we can keep it. So, your obligation, that's a good question, is the total loan that you have to
22:53 figure out because when I had an issue when I got into this, I did a one-year loan on this $90,000.
22:58 The problem with that is if I'm refinancing the property to pay off that, that was a second mortgage. It gets paid off in the order that it's
23:04 been received. That means I have to pay out the first mortgage. So I had to get 390 thou or $380,000 of debt within a
23:12 year. And I ended up getting a loan for 410. But this was the type of math that
23:17 I had to figure out how to do. You take whatever your total obligation is, your total debts, divided by the leverage
23:23 point, the loan to value, and that's going to show you the value you need. So you can plug and play any deal until you
23:30 get there. So if you say, "Okay, I raised around 100 bucks. That's going to increase $102,000 to the value. That
23:37 puts me at 382 or 482. Sorry, that's not enough. So, I might have to raise it
23:42 150. And you can guess and check until you start to see trends, till you start to see patterns. And it's going to give
23:48 you a lot of confidence on these deals. Well, cap on how much you can raise, right? Yeah. There there is a cap. And if you
23:55 can't do it in the time that you have for your obligations, what that tells you is you have to renegotiate your
24:00 obligations on the front end. So maybe instead of getting this for one year,
24:05 maybe I need three and I'm going to pay a little higher interest rate which will affect my day one cash flow. But all of
24:12 these pieces are always going to be moving. And the thing with creative finance, you can buy whatever you want. You can negotiate yourself into very bad
24:18 positions very quickly or very good positions relatively fast. Similar to how Matt mentioned, he built the
24:25 portfolio very quickly from just a year and a half ago. But you have to be very
24:30 intelligent about how you structure all this. And I don't expect everyone to have 100% clarity on all these
24:35 equations, but if you write them down and study them, you'll be able to get there. So, as far as creative structures
24:40 go, cuz uh if you don't have money, you got to get creative. I'm working on buying a 7 unit right now. This is in
24:47 Moses Lake. It's $1.6 million. I'm short on that. About $1.6
24:53 million. And so, I can't put it together right now. I can't do it like cash strapped. All the money comes in. I'm
25:00 paying off debts as fast as I can elsewhere cuz as soon as you're out of debt, you have freedom. In this
25:06 situation, I don't have the 25% down to buy this thing. I would need 400 grand. So, what I ended up doing to put this
25:13 under my control for a while. I think Christian mentioned it earlier, an option contract. I reached out to the
25:19 seller and the seller was actually doing Airbnb in all these. So, I had a perfect excuse. I'm like, "Hey, the bank doesn't
25:24 like that you're doing Airbnb. I need to rent these out longterm." "Well, that's not my strategy." is what he said. Said,
25:29 "Well, it's my strategy. Let me do it." He said, "How would we do that?" I said, "Well, let's do something called a lease option." So, uh the lease option, super
25:38 creative way to do it. And what it stands for is a lease with
25:43 an option to buy. It's all it is. So, I'm leasing the property every month for
25:50 6,000 a month. I've got seven units. Uh, I have to pay this seller $6,000 a
25:55 month. He's going to pay the taxes, the insurance, utilities. Um, but I'm going to lease out these units for about 1,700
26:03 bucks a month. 1,700* 7 is just shy of $12,000. I think it's like 119 somewhere
26:09 in there. So, I have income coming in day one. Day one cash flow with next to no money down. I don't have to put a
26:14 down payment to get this. It's like a residential lease. You go lease an apartment. I'm leasing seven at a time.
26:21 I'm going to then rent them out. And what that does is it's going to give me a one-year lease, one year of control of
26:28 the property to figure out the debt and the equity.
26:35 There's going to be a month of flux. And so rather than coming up with a $400,000 down payment today, I might have to come
26:41 up with a 6 to 12,000 negative over the course of 2 months. It's a much more
26:47 stomachable task. And with about 12,000 bucks a month of income coming in and
26:54 about 6,000 going out, once it's stabilized, you math it out, it's about 6 grand a month of cash flow with maybe
27:02 $12,000 out. I get all the money back in two months and then I have 10 more
27:07 months to to figure it out. You got a question? Mhm. Well, absolutely. Cuz what a bank cares
27:14 about I was afraid of banks for a long time. I only did seller financing and then like Christian mentioned a mortgage
27:19 broker said, "How the heck did you build this bubble gum and toothpicks? It was so ridiculous." Banks aren't that scary.
27:26 What they want to see is consistent income. And so, while I can't afford to buy this property today, and I I have a
27:34 path to get it to cash flow, I'll get a little bit of a payday for the first year. The main thing is I'm getting
27:40 control of a a million6 worth of asset for next to nothing down. And it gives
27:45 me a whole year to figure out my DTE, my deal, my debt, and my equity. If I can, if I can't get the rents that I'm
27:52 thinking I can get, I have an option. I can walk away. Gives me control of a big
27:57 asset. And if I beat my rent projections, maybe I can get a bigger loan from the bank. But sometimes, like
28:04 in this situation, it's about getting control. And with this lease option, I don't have
28:10 to take out any debt to do it. And if you're debt averse, I mean eventually you're going to have to borrow, you
28:16 know, in a year, but if you're debt averse, this gives you time to figure it all out. Seller, you can structure the deal however you want, right? I'll give you
28:22 an example to answer your question. If you build a brand new apartment building, has anybody seen those new apartments and they say two months free
28:28 rent? Same thing. All right? Anything can be negotiated.
28:33 The goal of my speech today is give you the ideas, but I mean, you look around at what people are doing and you'll find
28:41 your answer. They do a month off on new stuff over in Moses Lake to get a little
28:46 higher rent day one. So, they give you a month off, but then they bill it to you every month. So, instead of $1,300 rent,
28:51 get 13 off first month and then they charge you, 1400 for the next 11 months. There's so many ways to structure
28:57 things. Um, but you could do a month of no payments. You could do a month of a $3,000 payment. You could work your way
29:04 up over on the the property over there, the White House, to get the rent up. I
29:10 offered to the the tenant Dion's binder strategy. They picked their rent, but instead of working them up from the 500
29:16 that they're paying to the,000 that they need to pay. I said, "Well, what if we do a month at 750?" And then we we work
29:21 it up slowly. Everything can be negotiated on these deals. The bottom line is you have to make sure that your
29:28 obligations don't exceed what you can realistically do. Well, there's plenty of rules, but you have to make them. I
29:33 think the craziest thing I ever heard was on one of Caleb's deals. Christian would know better than me, but I believe
29:40 they did a negative amortization where the amount that they owed was bigger every single month. Talk about crazy.
29:47 Now, why would he do that? To make it cash flow more day one, and he knew he could take the value from 1.6 to a
29:52 bajillion dollars. If you know you can make the value way higher than it's going up every month, you might do that. Yeah,
30:00 it's super weird. But but my point is if you can break it down to a simple
30:06 business model, there's a building. It costs a certain amount of money. I don't have any of the money. So instead of
30:12 buying it, I'm going to lease it, but I have an option to buy it. It's about as simple as it can get. Gives me control.
30:20 And now we have to figure out the DDE, the deal. Well, we know what the deal is, and I know what the rents are cuz
30:26 I've looked at it. You You got to do your due diligence, but we have to figure out the debt and the equity. And the bank wants to see where's the money
30:33 coming from for the down payment. How stable is the property? And what are you going to do with it? If I want to go get
30:39 a commercial loan for this place, personally, I wouldn't qualify because I don't know what I would do with it. I'd
30:45 lose it. I mean, that's what I would do with it. So, you just have to have a plan. Where's the money going? What's the stability? What backs it? How are
30:51 they getting paid? That's what any lender cares about. Yeah. So, you'd have to harbor like what about
30:56 an LLC? So, the LLC has this much fun. And with a lease option, if it's a
31:02 one-year lease or a two-year lease, you have that amount of time to figure it out. And like Christian, I mentioned on
31:08 our first big deal we ever did, 38 units, we forgot to raise the money until 3 weeks before. This is a whole
31:16 year of time to find a down payment. So, for those who are truly on the fence, like, I don't qualify. No one's taking
31:22 me seriously. Even if this is worth a million550 just for the consideration you could pay
31:27 him a million6 and get control of something because now you can take that experience of I I know how to manage
31:34 these buildings. You can show it to an investor and say I've done this before. I've been managing it for 6 months. This
31:40 is the lender list that I've interviewed and uh this is the down payment we need and this how much is going to cash flow.
31:46 You can show a track record with this strategy. Anybody have any questions on this before we move on? Anthony, it's
31:53 going to depend on the market and it's going to be a market average based on the quality and what it is. For example,
31:59 the bigger an asset, the lower the cap rate. Let's logic through that. If it's
32:05 really big and really stable, why would we get a lower dividend? Well, why why would we expect a lower cap rate on
32:12 something that's really big and stable? It's less risk, right? It's a it's a risk adjusted return. And so on a deal
32:18 like Robin Hood, it might be a little higher cap rate than a hotel in downtown Seattle. It's a little more risk than
32:25 downtown Seattle. And so an investor is going to want to get compensated for that. But as far as what the bank's
32:31 going to do, they're going to look at what an appraiser says. And the appraisers are the ones looking at all the other comps that have sold, trying
32:36 to find instead of the price per foot, it's the net operating income versus the
32:41 price it sold at. They're trying to get that average cap rate. Yeah, absolutely. You're not comping price per door. It's
32:47 more so the net income per building. Oh, absolutely. Yeah. So, I'm for anybody
32:53 who's buying in central Washington. I'll give you another bank. Colia works over there, but Kashmir Valley Bank, they have the lowest rates of anybody I've
32:59 seen for commercial. They're in the fives and sixes right now. I mean, on small deals, it's incredible. And they can go as low as a quart million
33:06 dollars. I straight up asked them, "What do you think the cap rate's going to be on an appraisal based on what you're
33:12 seeing?" And they said six and a quarter. Okay, that's great. They gave me my
33:17 answer to my homework. I don't even have to show my work. Now, you should still do the work, but it's really good to ask
33:22 because they're going to give you a good indication. Yeah, absolutely. All right.
33:27 Now, Cashmere Valley Bank. I want to go back to a very simpler page
33:34 and talk about the Apex that I bought. Some people are partner averse. They don't want to take on a partner. They
33:41 think a partner is going to ruin their life. I don't know about you, Christian, but you didn't ruin my life. So, it
33:47 worked. It worked out okay. We both made money. We both scaled farther than we could have together than we would have
33:52 by oursel. But today, Christian and I are not partnered on as much. We own that
33:59 property over there, which is a seven figure property, but other than that, we don't really have anything. He scaled up and I scaled down
34:06 on this partner deal here. This is the the partner money, the 10% down.
34:12 If you have to get started and you can line up a deal, a debt, and then you're worried about bringing on a equity
34:18 partner, there are ways to control that situation that Christian and I didn't understand in the very beginning. What
34:24 we used to do is we'd be like, "All right, everyone has the same ownership or more than us. Our first deal, we had minority ownership. We owned 20% of the
34:31 deal." That was a dumb mistake. There's something called a buyout option. Just like we talked about with the lease
34:37 option, there is something you can attach to an operating agreement, OA for short. By the way, any bank loan you
34:43 get, it's going to require you show an operating agreement if you have an LLC. The OA just illustrates who's doing what
34:50 in the LLC. That's all it is. Who does what, when it goes well, and when it goes poorly. Something that I will
34:58 probably never do a partnership on again without is a buyout option. This is
35:03 super important. Let's see. Buy out option if I could spell. And Christian, did you do this on
35:10 some of your bigger deals? You have first right to buy them out. Super smart. Super smart. And I don't have anything to do with those deals, so I
35:16 just get to hear about them. But I'm glad he added it. What this gives you the right to do is it says, "Okay, well,
35:22 they put in $43,000 plus renovation budget. They put in 70 grand. At any
35:28 point in the next negotiated amount of years, it could be four years, 10 years,
35:33 5 years. If I write him a check for X, I get to own 100% of it. You can
35:40 creatively finance your partners out of any deal. You can creatively finance your way into any deal. But this is
35:45 probably one of the most important things to have in your OA. The right to buy someone out. Yeah. So, let's use
35:50 actual numbers in this in this deal. 70,000 is the partner's money between the
35:57 renovation and the down payment. In year one, if I want to buy them out, let's say year one one, let's say I can buy
36:04 them out for 85,000, they got a decent return. They got 15,000 on 70. I think
36:10 that's like 15%. It's a good return. Well, maybe in year two it goes to 100,000.
36:17 Yeah. And so it starts to get a little bit better and better, uh, bigger for them. So, they're still getting a return, but it gives me the option,
36:25 not the obligation to where I could buy them out. If I get in a pinch and I don't have the money, then I guess we
36:31 stay partnered. We have to renegotiate something else. But this gives you the ability to buy them out. So, I'd recommend everybody adds it into an OA.
36:38 Christian and I did not have a buyout option for any of our partnerships. I still bought him out of some stuff and
36:44 he bought me out of some stuff. But it I if you want to go into business and
36:50 you're worried about the partner thing because one of the easiest, simplest ways, you can do convoluted businesses,
36:55 but one of the simplest ways is find a deal, get a bank on board or seller financer on board, and then find a
37:01 partner for the down. That's really simple. You've basic Yeah. Yeah. You basically architect the deal. You you
37:06 made it real. Yeah. You're you're playing matchmaker. you're you're lining things up is a good way to put it, but
37:13 this is still due back to the the bank and or the seller. This money in equity
37:18 is gone the day that it's you put it in a deal, you can't just pull it right back out. And so some partners, what we
37:26 found, get really weird about money when it's just in there. You can't pull it back out. We've lost some friendships
37:31 over that. Toquilla was a tough learning lesson. Fredo was a tough learning lesson. Some people get weird about
37:37 money. And so what you should do if you're worried about a partnership or a
37:43 potential partner getting weird during a situation, just have a buyout option.
37:48 And it could be spun both ways. It could be I have the right to buy you out for x amount and you have the right to buy me
37:54 out for x amount if things aren't working out. So that that would be my recommendation on that front. But you buy me out
38:00 with a if it's a signed buyout agreement. I've never seen a situation where they can refuse that. if like both
38:06 of us want to buy the property. Well, it's in in an event of. So, example, there's some gentleman over in
38:11 Moses Lake and in the event of a divorce, a death, or something similar,
38:21 that party can buy out the the other party who needs it at a set price. And what they do is they do appraised value
38:26 minus closing cost fees for brokers and excise tax. And so, it's a little reduced rate, but that's in event of
38:34 Yeah. So it's for specific situations. The main thing is you don't want ambiguity. You can do anything you want
38:40 with creative finance. Anything. You can finance anything. You can do it with car. You can do it with property, Airbnb. You can sublet.
38:46 Uh-huh. Yeah. Yeah. And I made it where I'm the managing member. So I control the day-to-day operations
38:53 and they they own they have beneficial ownership of 50%. But I'm the sole decision maker when it comes to running
39:00 the the running the project built into that contract. Absolutely. Yeah. because uh someone could own 99% of the deal and not have
39:07 any control of the deal if it is written that way. But we want to be 50/50 and I felt like I deserve
39:14 50% for putting it all together. Yeah. What's important to know about creative finance? One of the these are the main
39:20 takeaways you should get from today. Money is the least important part of any deal. There's never been a situation
39:25 where it's been the most part of any deal. When we bought the 38 plex for 2 million bucks, it it didn't really
39:31 matter if we borrowed the down payment as equity. When we were getting started, we thought it mattered, but it wouldn't
39:37 have mattered if it was equity partner, if we borrowed it at 12%, 5%. The deal was the most important piece,
39:44 and the debt is what allowed us to get the deal. So, you have the deal and the debt, but the last little bit of the
39:50 money, there's so many people with money. I mean, there there's a lot of people that don't have money, but it is
39:55 the least important part. I mean, I probably could have gotten that on 0% interest credit cards. That's how,
40:02 right? But this was on the market forever. And not only was it on the market
40:08 forever, they marketed it as a fiveplex. It was just sitting there. So, as a 5plex, it was like five units for 430.
40:14 And I drove it and I counted the doors. I was like, there's more than five doors. And there were some units that I
40:21 walked in. And what ended up happening is this used to be a 10plex. And what they did is they just the owner
40:28 lived in these units and they chopped them up. So there's a little doorway like that doorway there that they just put through a wall and so you'd have two
40:34 kitchens in a unit and three bathrooms in a unit. Like what is going on? And it
40:40 they left all the exterior doors in front and in the back. They all had back doors, too. It was the weirdest thing ever. So this deal today is worth like
40:46 $800,000 and we're getting a loan for 600 on it. So he's getting all of his money back and then we're pulling out another six
40:54 figures. I could, but this goes back to where we started, which I think is on this page. What is significant to my
41:00 partner? Is it more money or is it figuring out how to make money because
41:06 his business died? So, what I'm doing is I'm going to return his 70. He's going to get another 50 or so, and he's going
41:12 to take the 70 and the 50, and I'm going to get my 50 and he's going to throw his cash into another deal with me. You can
41:20 make money for anybody when you figure out the creative finance stuff. The question is, what are you going to do with it when you get it back, right?
41:26 Because if you invest for long enough, grant this was a six-month project. It went very quickly. It was on the market for longer than it took us to fix it. It
41:34 was ridiculous. But what is it all for? Is the root of how these deals get done.
41:40 And for him, getting control of an asset that cash flows, putting up the money, the little money he has from his
41:46 business so that he doesn't go broke again cuz his business died. And I solved for that. So, I got the deal
41:52 funded with no money. And that's what you can do, too. Oh, we're refinancing it. Correct.
41:58 Right. And you talk about how did we get the value up? Because these aren't valued. It's not just more valuable
42:03 because it's an 8 unit. They market it as a five. It's more valuable because we chopped those units back up and we got
42:10 the net operating income up a ton. Well, the 43 down and then it was it was about 30 grand. Yeah. In in renters and
42:16 closing costs, so about 70,000. But it doesn't cost a whole lot to wall up a door and when you don't have to add
42:23 kitchens like there's not a lot of money to be spent. This deal was sitting on the market 618 Basin Street. You can look it up. Google Maps is really ugly.
42:30 We painted the building. If anybody ever wants to go out there and drive it, you can check it out. But uh even though it
42:36 was an average rate deal, I had to look into it a little further and figure out, okay, the money is not important. If I'm
42:43 doubling the value almost taking it from 430 to 800, this doesn't matter. Anybody here is
42:49 going to figure out how to trade 70 for 350, right? 3 whatever the exact number
42:55 is here. It's just an exchange of value, which is why you can ask for 50%, Remy. You can
43:01 you can ask for whatever you want. I could have asked for 80% of this and put none of the money up, but that doesn't
43:07 fit the circle drill that I did with this gentleman. And the fact that he
43:12 gets 50% and he's going to have no money in the deal after 12 months. You know, 12 months was the conservative
43:17 projection for that deal. I mean, I just get to keep re-rolling with his money for a long period of time. And business
43:22 owners know business owners. Real estate guys know real estate guys. And so now I'm looking for the next deal cuz he has
43:28 other people that have money that want to lend it to us to go do those deals plus the down payment. But what Yeah,
43:34 absolutely. Yeah. But what you got to look at,
43:39 well, but you think about it for anybody in this room, would you be willing to
43:44 give up 50% of a deal to put no money in, have a cash flowing asset, and get paid tax-free money when
43:52 you do a cash out refi. It's not about what you give up. It's what you can give and get in the process. That's the
43:59 beauty of the creative finance game. So, while I'm giving him a phenomenal return, he put in 70, he's going to get
44:05 back plus another 50, and I'm going to get 50, which is a nice bonus, too. But
44:10 he then owns 50% of an asset. He didn't have to lift a finger for it. And I own
44:15 50% of an asset. I got paid to own it taxfree from the refi, and it didn't cost me a dime. It took me walking the
44:23 property getting an idea for it. I was on the MLS for almost a year. There's
44:28 deals like this that I see in Olympia and Shahalis and it and it doesn't have to be like that forever. Part of the
44:35 story you didn't hear earlier from Christian. He bought the duplex on Peninsula Drive next to the sixplex I broke down here earlier to figure out
44:41 our values. Well, he later flipped that and bought into a 12plex of mine cuz I needed money to go do other stuff. We
44:49 became partners. Well, shoot. I don't want to have partners on this. So, what did I do? Two years later, I bought them
44:56 out. that was really important to my circle drill to own a building that I bought by myself back again by myself
45:03 and he respected the circle drill and so our relationship grew. But the creative finance piece came from the
45:08 relationship. It was back to the circle drill. You got to make the numbers work. You got to figure out, okay, if I push the value up with those equations or if
45:15 it goes down because my expenses go up. It's a sliding scale, but it goes back
45:20 to this right here. Eventually, I bought Christian back out and he took the money and multiplied it in Texas.
45:29 All right, they just got a signed around LOI for 2.7 $2.7
45:35 million. All right, let's work through this deal. All right, so we're going to put D
45:40 P down payment. All right, so 800,000
45:46 down, which means we have 1.9 mil at 4 and a.5%. All right. So, we're going to
45:52 talk about the numbers really quickly because we don't have a whole bunch of time. What is your projected
45:58 cash flow? So, what we're going to put here is 130,000 of CF
46:06 cash flow, which on $800,000, I'm going to use my calculator because that's handy and
46:12 dandy. 130 / 800
46:18 16 and a4% Pretty good. Now, how much of this 800,000 do
46:24 you have? Okay. So, we're almost there. So, we So, we have 16.25%
46:34 and we're going to going to say cash on cash. All right. So, that's your
46:39 dividend. That's not your cap rate. That's not your dividend when you pay cash. That's accounting for the debt
46:45 payments on the million nine. So, here's the interesting part.
46:50 How the heck do we find 700,000? We have a $700,000 problem. I'm going to put
46:55 that here because you have 100,000 you can allocate to the deal.
47:01 So, this is our problem and we want to figure out how we own I'm guessing you
47:06 want to own as much of this deal as you can, right? Okay. So, you don't want to own like 20% like Christian and my first
47:12 deal together. Thoughts on this? We could find a really rich person to write a check for 700 grand. Is that going to
47:18 happen? Probably not. So, we're going to have to figure out, do we bring in a partner that's going to front almost all
47:24 the money and we keep all the equity? That might be a little bit of a hard sell. All right. So, we're going to do a
47:31 mix of debt and equity. And the idea is if someone invests majority of the
47:36 equity, you've got 100 grand, but someone puts up 700, they're going to want to own majority of the deal. So,
47:42 let's have them put less money in equity while still fronting majority of the capital. My proposal would be, what if
47:51 we had them loan the LLC
47:56 600K? We could put it at 12%. That's expensive. They're going to loan it at
48:02 12% interest. And I know I I write kind of at an angle as I get lower. At 12%
48:09 interest, they're going to do a capital contribution. This is going to be
48:14 equity of 100,000 the delta.
48:21 And then this is you also bring in a 100,000.
48:27 All of a sudden there's debtor's equity. You guys have an equal contribution and
48:34 you brought the deal and negotiated the debt. Now all of a sudden someone's brought more value. Now, yes, there's
48:40 interest on this. 12% on $600,000 is 6 grand a month. $72,000 a year. But by
48:47 structuring a deal like this, even if we account for this interest right here of
48:52 we have $72,000 per year, after accounting for that
48:58 loan, what is our cash flow? $130,000 minus $72,000,
49:05 58 grand a year. So, we have $58,000 a year of free cash
49:11 flow on a $200,000 equity investment. What's our cash on cash return?
49:17 I don't know. 58 divided by 200 is a 29% cash on cash
49:25 return on a deal that was originally producing 16. So for someone who wanted
49:30 to lend capital into the deal and get a 12% return, which is phenomenal if backed by a good asset, you guys have
49:38 equal equity contribution. If you were to say you deserve 60%. They get 40%.
49:45 You have a majority. Their 40% of the 58,000 is $23,200
49:55 on 100 grand. That's a 23.2% 2% return. Pretty good. They're getting a great
50:02 return on the deal. And you, on the other hand, are getting the delta of
50:07 that, which would be about 35,000 a year. So, you're getting a 35% return.
50:13 Delta just means the spread. Uh, so it's like between a number and a number. So you can turn this type of
50:21 return into predictable income because a loan is due whether it produces or not.
50:27 So the incentive for them is I'm just getting passive income. It's mailbox money. The partnership doesn't do well.
50:32 At least the deal owes me the money. So this cash flow can fluctuate. Uh that is
50:38 going to stay the same. So, they're getting a fixed return of 12% on their money, and then they're getting 23%
50:44 elsewhere, which is way above market average, especially when the deal only
50:49 pays out 16 and a quarter. Math is math. If this doesn't make sense, watch the video. But, uh, this is a way that I
50:56 would do your deal. If it were me, I would have them front majority of the capital as a fixed rate, highinterest
51:04 loan, interestonly payments, and you guys split the equity however you feel
51:09 fit. But for you putting this together, I wouldn't take less than 60%. Now you own 60% of a $2.7 million asset with
51:16 $100,000 down and you're entitled to your 35 grand a year of cash flow. So
51:21 all your money's out in three years. Yeah, you could do no prepayment penalty. You could do a prepayment penalty. How long is the seller note?
51:28 Should I ask? So if someone's lending the money and excited about this deal, and granted, this could be a few different investors.
51:35 It doesn't have to be one investor. They could have some of their money as a loan and some of it as equity. But if you
51:40 were to say, "Hey, we got 10 years on this debt and you're going to get a secured 12% interest for 5 years
51:47 straight." That beats any money market account I've ever seen. And they don't got to worry about it because they also own the deal that's paying them. Where's
51:53 the money going? What's the stability of what backs it? And how are they getting paid? The three things that matter to every lender. That's it. Beautiful. So,
52:00 this is how I would this is how I'd do your deal. Well, you get all your money out in 3 years and they're getting 72
52:06 grand a year plus the 3,000 of other cash flow from the equity. So, they're getting 95 grand a year on um 7 8 700
52:14 grand. That's a great return. Or the loan could be in second position. If they're secured against the property and
52:20 they believe in the property, you can like when I when I bought the sixlex, I'm going to keep this short cuz Christiey's going to kick me out. But
52:26 when I bought this sixplex right here, I didn't take on this person as a partner.
52:32 That might have helped with the pitch, but I was able to land it without taking on a partner. If these numbers were
52:37 different if it was 2.7, 200 grand down,
52:42 you just have your debt amount, right? So, you got the 2.7, you got 1.9 and seller financing, you got 700,000
52:50 in the the other debt or 600 grand, and then you have your down payments. like you just list out the the capital stack.
52:57 You just have deal debt debt equity. There's two debts, but that's how I
53:03 would do that deal since you got it under contract. And maybe instead of one person doing 700, maybe break that up
53:09 into three. And each of their positions is a proportionate amount of the debt and then the equity. And if they want to
53:15 own 50% of the equity combined, then maybe you have a little bit less of it go towards debt. So you have less
53:22 interest payments going out. But there's no reason you can't make 35% cash on cash on that deal for