BiggerPockets Real Estate Podcast - 317: Building a $300MM Real Estate Empire from Scratch with Multifamily Investor Chad Doty

Episode Date: February 14, 2019

Ever dreamed of being a successful multifamily investor who owns millions of dollars in real estate while others manage your assets? Well, today’s guest is doing just that! Brandon and David sit down with Chad Doty, a one-time businessman who ditched corporate life and moved on to real estate, now owning 3,000 units! Chad shares TONS of meaty insight, including what he looks for when choosing a market, where he’s currently investing (and avoiding), and four rules of thumb for building a multifamily business. Chad gives great advice regarding overcoming high barriers to entry, getting brokers to take you seriously (even as a newbie), and adding value to properties in order to generate big profits. Plus, you DO NOT want to miss Chad’s take on finding deals others are missing, the order in which you should build your team, and how he would invest his grandmother’s last 100K! If you’re looking for an episode with so much value you’ll feel guilty you didn’t have to pay for it, download this one now! In This Episode We Cover: How Chad got into multifamily What evergreen is Two real estate myths What comes first: deal or money The market he invests in and why His success metrics The four components of any successful business Raising money to fund an apartment building Increase rent vs. decrease expenses What does his team look like managing thousands of properties Rules of thumb for communicating with property management His thoughts on the future of today’s market And SO much more! Links from the Show BiggerPockets Forums BiggerPockets Webinar Real Estate Glossary Grant Cardone on Multifamily Investing and Why You Should Never Buy a House! (podcast) BiggerPockets Podcast 316: How to Become a Millionaire Through Real Estate by 26 with Graham Stephan (podcast) BiggerPockets Podcast 113: Becoming a Millionaire Real Estate Investor Using The One Thing with Jay Papasan (podcast) Books Mentioned in this Show The Speed of Trust by Stephen Covey The Millionaire Real Estate Investor by Gary Keller The Goal by Eliyahu M. Goldratt Tweetable Topics: “Money flows to competency not to good deals.” (Tweet This!) “Capital formation is the ultimate entrepreneurial skill.” (Tweet This!) “If emotions are going to be out there, use it to your benefit.” (Tweet This!) “Embrace the suck required to get good. But once you do that, the world is your oyster.” (Tweet This!) “Hospitals are 24-hour blue collar job factories.” (Tweet This!) Connect with Chad Chad’s Personal Website Free Report for Evidenced Based Investing Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 317. Honestly, buy good dirt, you know. If you buy in a location where you'd put your grandma's last $100,000, odds are you're never going to lose money. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place.

Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing online. What's going on everybody in BP Nation? This is Brandon Turner, host of the Bigger Pockets podcast, here with my sniffly friend, Mr. David Green. David Green, did you get a cold, or is that just a weird sniffle that you didn't mean to do?

No, that was just a bigger pocket sniffle. That's one of the ways that I... It's how I express my enthusiasm for being here, actually. I'm overwhelmed and it expresses itself through sniffles. I'm doing really good. Thanks for asking and not pointing out an awkward thing. Instead, you and I just got back from Colorado not too long ago. And the bad news is I was overwhelmed with altitude sickness and nausea the entire time I was there.

But the good news is I spent a lot of time in my hotel room thinking about 2019, came up with some really good plans. I have an extreme amount of clarity on how I want 2019 to be different than 2018. And this is the most excited I've been in a really long time. Nice. You're going to finally pursue that clown college where you can go learn how to travel a circus? Yeah, it's a mixture of clown college. and slam poetry. I'm going to see if I can combine those two worlds together and create an act

that nobody's ever seen. This is the best idea I've ever heard. And with that, let's get to today's quick tip. Today's quick tip has nothing to do with what David just said, but very shortly, today's episode is a really, really, really good deep dive into the world of multifamily and commercial real estate investing. And as such, you're going to hear some terms that you might not know what they mean because like this is like a legit like deep analysis of you know like how to get into multifamily and how wealth is built there. So here's what I want to do. For a quick tip that is this, if there's a term you don't understand, jot it down, go to the site, search it. Like don't, don't go, oh, I don't know what he's talking about. I'm going to stop listening. But say, hey, I'm going to,

I'm going to use this as a indication of what I need to learn and how I can grow as an investor. So I'm just putting out there. Also, it's kind of a cool little thing. Did you know that if you're on the bigger Pockets forums and there's a word like an acronym that you're not sure what it means on a lot of them we have it we have like this cool little software where if you hover your mouse over an acronym it'll tell you what that phrase means like if you're like what's burr you can hover over it and it'll be like buy rehab rent refinance repeat anyway kind of a cool little feature on the bigger pockets forums which of course are free to hang out on so go hang out there and i would highly recommend that you do that especially for this episode this guy is good he's smart but he is meaty he is meatier than missionmeet

He is meatier than Grandma's Christmas jumbalaya in Louisiana. This is a meaty, meaty show. You probably want to listen to it a few times and make sure you chew every bite 15 times on each side. You don't want to choke. Was that an analogy? That was really good.

Yeah, that was a freestyle analogy. Like, it's another thing I'm moving up, like slam clown poetry. I'm mixing these two things together. I'm going to be the M&M of analogies. That's an analogist. That's a good point. Anology within an analogy.

It's like inception. Oh, weird. All right, moving on. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Fundrise flagship fund. Now, you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10.

The portfolio features 4,700 single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought-after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes.

Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund. This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect and even improve your property's cash flow.

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designed for the modern investor. Most investors spend all their time talking about their high-level returns. But that's not the number that actually matters. What actually matters is what you keep after taxes, and that's where multifamily real estate quietly stands out. With built-in advantages like depreciation, the right deals can generate steady cash flow while reducing the tax drag. Bam Capital structures its multifamily investments around those fundamentals, pairing tax efficiency with disciplined operators and a long-term approach. This isn't about chasing hype or guessing market timing. It's about building durable, tax-aware wealth over time. Learn more at biggerpockets.com slash bam. So today's guest is Chad Doty. Chad is a real estate

rock star investor, buys lots of big multifamily. You guys are going to love this show. He goes everything from how to get started with large multifamily. He talks about like the four, he calls them the four rocks, I think is what he said, about like that you have to have in order to build any size real estate business, make sure you listen for that. And then I love his advice towards the end where he talks about how to know what market to go into and it'll give you a hint. It has to do with your grandma's money. So just stick around for that. Again, this show is deep, complex and really, really important if you want to get into multifamily. So listen up. And without further ado, let's get into today's show. All right, welcome to the show, Chad. Good to have you here.

Thanks for having you guys. Yeah. Yeah. So let's get into your story and go through your real estate journey starting in the very beginning. How did you get into real estate? Let's talk about your first deal. Yeah, yeah. So I'm a recovering management consultant. I didn't grow up in real estate. Yes, exactly. I was with a small company called Arthur Anderson that got destroyed by Enron. Not on the odd-ed sacks side. I was in consulting. And a bunch of really good people got spread of the winds, went from nine billion in revenues and like, you know, thousands of employees to 60 attorneys in Switzerland in like six months. Anyway, but that was, I was maybe a year or so from partner in that. So it was close. So the hockey stick compensation model just went, p.

Yeah. And then so I left that. I went to go work for a company, realized I'm chronically unemployable, and I hate being staffed to someone else's goals, worked in another consulting firm, then decided to start my own consultancy. But then along the way, you might be billing a good rate, you know, $200, $300, $300 an hour, but you're still just training time for money.

Yeah. So it was this goal of how do I make it where I can scale lifestyle and financial security and then financial freedom in ways that are purely a function of I have to work harder and harder and harder and harder. So I actually started with, I did a, had an options fund for two years. I did S&P credit spreads for like two years, made money, but hated it. And then eventually I went to real estate and what it was, I wanted to deconstruct the lifestyle I wanted.

So I wanted it to be evergreen. I wanted it to provide me cash flow ongoing. I wanted to have really good tax advantages, and I want to make sure I didn't hold its hand every single day. I didn't want to flip. I didn't want to own a job. I wanted to create a business. So then when I looked at the risk profiles of all the different asset classes in

multi-family, or in real estate, you know, retail, office, hospitality, land, storage, what have you. Multi-family, to me, was the most compelling because, and again, this is my preference. It's not an absolute. But for me, it was I can make a little. little bit less money in every single deal, depending on the market cycle, but I can make money in every market cycle. I can have the best long-term track record of any of the asset classes, even giving up some long-term profitability. So I was like, okay, how do I make that happen?

And then, so it's, okay, we picked multifamily. Then it was, okay, how do we be really good at it and build a really, really scalable business? And then it was, okay, that's what we're going to do. So it was myself and another guy, we initially started it and then bought it in a third partner pretty much in the first year. The first one sort of exited about five years ago and then sort of built it from there. So sort of we picked the asset class, bought our first deal in 2009. So started the business in 2008. Okay.

So before I go into that first deal, which I want to, there's a couple quick questions I have for you. First of all, I'll just call out something I thought was kind of cool. You basically labeled four things that you found beneficial about real estate, right? You wanted something evergreen. And can you explain what do you mean by Evergreen? Yeah. And so recovering management consultant, military father, I can speak in acronyms, the entire call. Please check me.

So Evergreen is that it's a business model that will always be around. It can't be horse and buggyed. It can't be BlackBerry. It can't be Kodak? So can you think of anything that would disintermediate two things, a place to sleep and a place for your stuff? No one yet has an answer. Elon Musk might think one up, but it'll be on the Mars rover or whatever. So until then, so that business model is not going away.

and then inside multifamily, I didn't mention this, we work within the middle of the bell curve. So meeting household income is $57, $58,000 a year. That's also the bulk of that B-grade renter population. So for us, we work with 1985 to 2005 built assets that serve that client that is rents out of economic preference and economic need. So for us, it's okay, they're never going to go anywhere. How do we serve them as good or better than anyone else in our market? Yeah, I love that. I love that you said a couple things there.

First of all, you looked at where the vast majority of the people are in the U.S. that's not really changing. Yeah, that might change up to 59,000 around to 55. But the end of the day, those rents. You know, Grant Cardone, last time we had him on the podcast here, he mentioned how, like, he specialized in like $900 rents. Because like $900 rents, and he's using it as an example, but they aren't going anywhere. Like that's just the, and I like that you said the bell curve, because that's what that is,

right? Like, it's where the bulk of the people are. So I just want to call it that. That's super. So you mentioned Evergreen, which is great cash flow, I mean extra money, tax benefits, and the fact that you're in a business that you're not beholden to trading time for dollars. So those four things led you to multifamily. Fantastic. And then you said something that I just, I love this. You said, you asked yourself the question, how do I get good at that? And then you said, how do I become the best in my market at serving those people? Right. It's something that most people

don't think about. They just think, how do I get into it? Not how do I get good at that? that your management consulting background that led you to that? Or is that just kind of how you just think? It's a little bit of both. But if you model, if you look at people, so things your father tell you that creep in your life, you know, find someone who's done what you want to do, do what they've done and look at what they've got. So very rarely are remodeling people who are just in something.

We're modeling people who are successful at something. So that's your bar, not doing it. And in real estate, there's a couple of myths. that I wish we could eliminate from late-night TV and horrible books that sit in garage sales around the United States. The first one is that if the deal is good enough, money will find you. It's a lie. It's not even a mix.

Explain that. Well, so here's an example. Do you have siblings? I do. Okay, brother, sister? Both. Okay. Let's assume you have an older brother who's complete alcoholic and pick on siblings because

that's what we do. I've got a younger brother. And he came to you with an amazing deal. You looked at it on paper, but he's like, yeah, but I'm the manager. Would you invest in that deal? Not at all. Right. So money flows to people that know what they're doing.

Money flows to competency, not to good deals. Competency, find good steals, but you need the competency first. So if you want to be successful, my belief or our belief, and I think it's proven out, is become that person first. Don't go find a deal. Be good enough to be there. You know? And then the other one is you make your money when you buy, which isn't true either.

You establish your baseline profit if you buy below market, but you make your money when you operate and you sell. I like that. A little twist on how most people look at that. Yeah, I think it could be a cop out on both those. You're like, well, whatever, like I got a really good deal. The money is going to magically appear, and then it doesn't appear and people get stuck. And they're like, I'm not sure why.

So how would you answer the question? I know we're going to get into your deals here. Yeah. Which comes first the deal or the money. It's like, think of a newbie trying to buy their first deal, right? Which comes first the deal or money, in your opinion? I think you've got to back up a step. And there is.

So internally, we deconstruct our business a lot, and there's a term we use called your Mac profile, which is market approach and capability. And you have to know what those are. What do you get at? How do you want to approach the market and where is that market? Because you could be a ground-up developer in a market with flat rents and you're at equilibrium on supply and demand. You're not really going to do very well. Or you could be someone who owns long term and you're in an accelerating rent market. you go in and you don't have any value-out opportunity, you'll do okay, but you would do a lot better

if you understand how to do value at. So you have to align what you're good at first, then what markets you want to work in, and then what approach is working in that market. So those are the things. So if you know that, you then can go to all when you talk to your money, it's here's what we're doing. Here's our business plan. Do you like this business plan? If so, I'm going to go find deals. We're a big believer that hot money is far better than a hot deal. because a hot deal you screw up, you're killing your reputation, you're wasting your broker's time, you're in the middle of all these professionals in the multifamily space, that you're messing with our livelihood by you not being good enough to go raise the capital.

Where if you raise the capital, working with your investor's worst case scenario, they have an extra few months getting 2%. There you go. And I mean, that's our take. So before we go on much further and ask you about your first deal, I have a few questions that I want to ask you. The first is going to be for those who say, okay, it matters where I buy. Can you give us some advice of where you go to get some of your information regarding census data,

population growth, job, employment, migratory patterns? And then the second question is you made a very good point that I wanted to highlight that you need to work on yourself and who you are before you just go find the deal. And Brandon often says if you find a deal, the money will find you. And it will because in real estate specifically, people are investing in a deal. And that's if you screw it up, they can still get the deal, right? but the fact remains what you mentioned is true as well. If you're the kind of person who's not that great, you're not going to get the deal in the first place, right?

Like you got to work on yourself in order to find those. After you answer, what are some ways people can look and see where should they be investing as far as which part of the country? Because I get asked that question a lot too. Can you explain what are some things that you found were key in you working on yourself or the other successful people that you've met that got it? What did they do right? We could spend two hours on actually both. those topics. So we are demographers.

We definitely believe that, and it's proven out, that when you're acting, you're acting first at, and there's no national real estate market except in the finance space. Finance is national. Everything else is local. Okay. So psychographics are local, policies at the state level, at the MSA level, at the neighborhood level, at the zip code collection level, at the site level, you know, all that stuff. It's all local.

So there's MSA stats. You obviously have to have the employment growth and population growth, components of employment growth, components of population growth, all those trends are available from census, BLS, Texas A&N University, all those stuff you can get from those three sources. And if you don't want to go there, you can also subscribe to Neighborhood Scout, which is a fantastic tool. If you have a relationship with a mortgage broker, you can get access to Axio data, co-star data. And they'll have all those, like we've got Co-Star and subscriptions as well. But when we started, we didn't. You know, we were looking the stuff up on our own and then getting corroborating data. It's still a wildly inefficient market.

And the data is out there, but how you guys might interpret, like Brandon and David, you guys might look at the same set of data and come to completely different conclusions based on your own opinion and your business plan. But we're not big believers ever buying in a market where we're not buying at least out or above market, U.S. employment and out or above population growth. There you go. Period. And then, but then you also need to go into that employment growth and go, okay, where are those jobs going?

Are they innovation jobs at north of 95K that will have a trickle-down effect? Or are they core blue-collar jobs that will immediately impact? Both are valuable, but in different ways. So you got to go through all that stuff. But again, those three sources have most of that data. And if you need to buttress it, you can, again, go get Kostar, Axio, what have you. Cool. And then on, and there's easily 17 on metrics at the MSA level we go through, but I was just touching on some of the big rocks.

There's also crime schools, local level. There is state policies, tax policies, landlord tenant laws. I love to visit Portland, but I never want to own in Oregon. It's like little France when it comes to landlord tenant laws. California's beautiful, similar rules. There are websites. They're dedicated to learn how to live rent-free and manage the system every six months. I'm just, you know, if you're local to those markets and you understand them, that's fine. But as someone like us who were based in Richmond, Virginia, all of our assets are in Texas, Carolinas, what have you, we're like, well, we need something we can trust a little bit better. Success metrics, the people that, I mean, commitment's the number one thing, right? You guys have kids?

I do. Yeah, one. Okay. So, David, do you have a dog or cat? I actually try to live my life as clean as possible. I have done at home. It would die if it was there. not holding out to do you have anything.

All right. So just to test on, so commitment, right? So via unconditional love, I'm a firm believer that you don't witness unconditional love unless you own a dog. Because a dog will give you basically unconditional love. You only, you see it at that point. You don't experience unconditional love until you have a child. Because before that child is born and even immediately when they show up, you're like, I will take a bullet, I will do whatever it takes to make sure this child grows, thrives,

whatever. But you think about that unconditional love, that commitment. So imagine you took the level of commitment of this child will thrive to, I'm going to rock this business. And real estate, at least commercial multifamily, is a high barrier to entry business. Once you're in, you really have to try to screw up because there's so many good people wrapped around your team that are monetized, incentivized, not to fail. But the trick is getting there. And can you invest in yourself enough over a one to three-year period to get through it. There's different ways to get in. So that number one thing is commitment. And so it's not a, I think it'd be fun. It's more, I'm going to do this. And so that's the number one. We break our business model into four big

areas, business architecture, deal development, capital development, and asset management. And you kind of got a lead with one of those four to build your business to wrap around. and then at that point you're looking to find what do you need to buttress with external team or your own partnership. Can you say those four again? Can you see those four again? I want to write that down.

Business architecture. So basically the act of acting on your business, what are you doing to optimize the pieces that aren't going as well as you want? Okay. If you think about business like a wheel that's got spokes in it, let's say a wheel bare and minimum needs three or four spokes

to roll. If you grow one spoke too far, it doesn't roll anymore. If the spokes fall out, it doesn't roll anymore. So you can only grow as much as all your spokes can't. Okay. The other one is capital development. So bringing in equity, okay, and debt. Deal development, where are you sourcing the assets?

What MSA is, what sub-markets, what neighborhoods, what sites? How are you getting them? 96% of all the deal flow flows to a broker inside the commercial multifamily space. If you're a seller, you're widely incentivized not to. So what relationships do you need to create? You're very rarely as a letter campaign, I mean like very rarely is a letter campaign going to work in this space.

It might in residential but not in multifamily. And then asset management. What are you doing to take over 90-day optimize, CapEx plan, budget out, implement all that stuff, measured your value add, operate in that window and then sell or a refine key? you know those are the four big rocks all right so to summarize that all up you're basically i mean i'm going to use real simple terms yeah you got to have somebody who gets the money somebody you got to have the money you got to have the deal you got to manage it right and then

you have to run your business correctly i mean is that a good summary that's thank you for doing that for me because that would have taken me a while to do well brandon i've used to tell me things down to my level these big words that you're using are terrifying and so we're rapidly convert them into something that isn't intimidating to us but uh you well you i've you've you've you've you guys have had enough podcast podcast. I'm sure you're probably frustrated with it. Yeah, it's tough because you think, I think that way, right? No, I don't know with it. We do too. We're just making fun of ourselves right now. I mean, I think it's brilliant what you're describing. And what Brandon's about to do, which I know is he's about to explain this is the same way that it works in single family investing or

flipping or any business, right? That's where he was going. You got the three levers, right? The money, the deal and managing it. And then what you described was business architecture, which is a pretty cool way of saying like running an actual business. And as you, that that spoke analogy that you gave was so or good because that's the problem I'm having. I ran out and said, how can I be the best at everything? And I left my hub and I developed like nine different spokes that ended up at a wheel and was dominating it. And then I looked around and was like, I can't handle this. I'm really far away from my hub. I need to be at all the spokes. And my team was like, that's scary. I don't want to go out there with you. Right. And I realized that I didn't focus on business architecture nearly enough. I just ran out there and got the money in the deals.

manage the asset. So that's a very good point to bring up is that don't get caught up in the, in the bright, shiny thing and chase after all the stuff you want if you don't have an infrastructure to support you once you have it. Yeah. And whether it's infrastructure or focus, there's a lot of that. Like we, so at one point in time, we do multifamily only right now, but at one point in time, we had over 100 cash flow homes. We thought, hey, if we have this, it'll act like a multifamily. We made twice to three times as much money and half the time in what we do today because a portfolio of cash flow homes is hard to scale. You either have to build a property management company or you've got to rely on very mom and pop local property management. There's no good national. So you can make money.

It's just as you get bigger and bigger, your headaches start to exacerbate because of the control and non-localization of it. But at the end of still that, so focusing is helpful. It's also, what do you say, you know, the corollaries, what do you say no to? Right. You the bright shining object is we have to, what is it? It's in Buffett's letters, basically, is the trick is pick your top five projects and everything else you just say no to and forever. Yeah, yeah, right.

Once you finish those five, a new five will show up. Yeah. Yeah, I remember hearing a story. I think it was a Buffett story. And it's kind of like Abe Lincoln, every quote, Abe Lincoln, right? But I think it was Buffett where he said, like, yeah, I think he said they told this pilot.

Yes, that's a pilot story. Right, yeah, make a list of 20 things you want to do in life. And then take your top five and he says, those are your most important things. and the next 15 and the guy says like, yeah, those are my next important thing.

He's like, no, those are the never do. That's right. No matter what, don't do those. Those will kill your top five. Yep.

What I think we should do is we should write that quote and at the end of it say, Abe Lincoln and at the end it, say Brandon Turner. Michael Scott did that in the office one time. It'll show up on brainy quotes in like six months. Brandon quoting somebody else's quote.

So I agree with what you're saying about single family. I'm running into the same thing. I get a lot of people that say, how many doors do you have? That's not really a metric that you use with single family investing because it doesn't matter. But what happens is you get wildly inefficient

when you start stacking up single family homes. It's a great way to get into real estate. It's a great way to build wealth for that. The overwhelming majority of investors out there, this is your bread and butter is what you're going to do. If you get good at this or you commit like what you were just saying a minute ago, Chad, to this whole thing,

you do not want to stay in multifamily because it's like having a herd of cats as a herd of cattle that you can actually kind of control and exercise some power over and hire a cowboy to run it, right? Like trying to herd cats is horrible. And that's what it feels like when I've got all these single family homes with all these individual problems popping up and individual property managers trying to talk to me. And yeah, it gets really difficult. Yep. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time consuming, and expensive. But imagine if real estate

investing was suddenly easy. All the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Funrise Flagship Fund. Now you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10. The portfolio features $4,700, a single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes.

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Let's hear about your first deal. I'm very curious to hear about how your real estate experience started off. Yeah, you got it. So I was telling a story to a guy worth. multiple billions, which is not common for us to have in our border room, but he was there. And we talked about the fact that we started in 2008. And he's like, and this was a year ago, he's like, you're either really, really, really smart or really, really dumb to start then. And I was like, do I get to choose the answer or will time will tell? But it doesn't

be either. Yeah. Talk to me in 10 years. But the, we started in 08 with the idea of doing both, cash flow homes and multi-family. And then we ended up buying our first multi-family deal in 2009. It was a $4.3 million deal in College Station, Texas. We raised about $2 million or so. This one, we bought 1979-built, no environmental, but sort of on that edge of the 97980. Yeah. Bought it be an assumption because lending at that time was really hard that capital markets had constrained already. So it was hard to get. lending, but you could still assume a non-recourse commercial multifamily loan.

So that's like basically take over it. Yeah. Yeah, perfect. It was basically a 55% LTV assumption. So $4.3 million deal. We're bringing north of $2 million to close with our equity raise, including reserves. So did that deal, operated it. And it wasn't really a value I'd play.

At that time, we weren't seeing really much in the way of rent growth. So you're really managing occupancy and keeping your incentives low. And turnover. And it was a mile or so from Texas A&M. So not a small school, primarily a student population. So it didn't run it like a rent by the bed. It was still a rent by the door. But the difference in student housing is when you rent,

you can lease out the bedroom. Yeah. So you might have four people in there in a four bedroom. You have four different leases and it lets you make more money in that. But you deal with the constant almost 100% turnover every single year. And you're not always occupied because you deal with the summer lull. So that's rent by the bed student housing. sit rent by the door normal.

And it made money. I mean, that deal was spinning off anywhere from 4 to 6% cash on cash. Overall return was single digits annualized in the 8-9 range. So we made money on it, but the business model could have been a lot better had we done a value ad play a few years later and accelerated it. So did well, took care of the client, had a really good tax play on it too, sold it and moved into another project in Kentucky. So we did basically an exchange into another project with it.

But that's our first one. Why did you sell that first property? So we're business model-wise. We are a long-term holder of cash producing assets. That's core of who we are. So we want to get blended returns, but the end of the day, it must be consistently cash producing in a market.

We would put our last $100,000 in. So that one was doing well, but we did not see it continuing to excel. It basically had topped out, barring any re-skinned of it and rebranding of it, which we didn't think the site justified. So we're kind of like, hey, we don't think we can do much more with this. Let's go ahead and take it to market. Yeah, that makes sense. You know, sometimes like, especially when when you're doing value at, but even on a regular one, if you hear that point where you're just not getting, I don't know, what's the, what's the phrase we use

oftentimes like not depreciating. The law of diminishing returns. Yeah, diminishing returns. Yeah. Almost like you could just keep holding on to it, but at some point, your returns are dropping more and more and more. So that's definitely a piece in real estate is to evaluate that from time and time. So I'm wondering also about this deal. You said like in the beginning, you're getting four to six cash on cash return. You know, so in other words, for those listening, it's like the cash flow, what kind of return you get, right? Like just from the cash flow. And then eight to nine overall return like per year average, correct, basically for your investors. Now, you, I guess I'm wondering, did you give all of that to your investors? Was that,

what your investors got was like 8 to 9 or that was total and you guys were taking a piece of that as the managers of the deal or how do that structure kind of work in the beginning? Yeah. So all of our deals and this is a pretty common model. You mentioned Cardone. Yeah. You know, he's primarily made, but when you, there's, there's all these other syndicators in this space, but you're typically going to see an acquisition fee when you buy a deal. It's basically compensating you for all the time, effort, expertise it takes to put the deal together and get it funded and debted up and all that stuff. So we had that piece already. Then we got an asset management fee along the way. And then we got a percentage of the profits at the disposition. And there was

a supplemental refinance too in the middle that let us put some cash back to the clients. Okay. How do you raise money on a first deal? I mean, like a lot of people are looking at, especially when your first deal is a large thing. It's not like you bought a $80,000 house in Texas, right? Like you bought an apartment building. So how did you go and raise a couple million dollars just from your contacts from your past? Yeah, you've, the trick is when you go to do this, depending on there's the regulatory environment you're going to work in. So when you're doing commercial multifamily, it's not real estate anymore unless they're

on the title. And typically they're not. It's their percentage interest owner of an LLC. It's the 99% model. And in that case, they're dependent on the asset manager or owner, the syndicator, you got, you know, whoever, right, to make it do well. So now you securitize the deal. And if you've securitized the deal, you've got different models, reg A, 506B, 506C, and now crowdfunding,

which we're not big fans of because of its limits. But reg D 506B basically lets you work with an unlimited number of accredited and 35 non-accredited, but they must be friends and family. There must be people you know. So if you don't know people that are able to invest 50 to 100K or so in this, you know you have a gap. Not a limit. It's just you have a gap you have to fill, right?

So how do I then become the person that would be interested in the product I have where I can develop relationships to create those slices? So you've got to be able to do that. I'm not going to tell somebody, go talk to so-and-so. Because right now it's a little bit harder because since 506C showed up, which allows you to advertise and it works only with accredited investors, you can advertise to create investors. You don't need to worry about your friends and family.

but there is, can you get an accredited investor's intention? Are you that person who's good enough to do it? So you got to decide how you want to go to market with it. But yeah, you have to have a business strategy you can bring to your clients to get what's called an expression of interest. If I bring you a deal like X, would you be interested? If so, let me know. And when a deal comes around, I'm planning on having one the next six to nine months.

Let's sit down talk and it makes sense for you. Participate, if not, no big deal. So developing that first lets you go to market. And you've got to be the person who's worth it and then the network to get it. And then you can go. And in a sense, isn't that when you find that deal, then they're going to come? Yeah, but realize, but you're qualified. Yes.

I just buried your two ideas. Brandon's belief that a deal over and your belief that it takes a very qualified person to get the deal. And I brought it in a harmonious. Just shut up, Brandon. I'm helping you. Well, I'm not picking on. But what I'm picking on is, is we see it all the time, is the novice path is when they get into multifamily, they get access to deals and they look at the offering memorandum from the broker. And so an offering pro pharma is that from a broker is just, should be Latin for a lie.

And I have tons of broker friends here, maybe listen to this and they'll give me a hard time. But at the same time, they're taking T1 or projected income and T-12. expenses, which really isn't going to work that way, whereas a lot of assumptions baked in that you're not going to experience. So you really have to break it down yourself. So, but when you look at that, especially when you first start, it gets really sexy and romantic. I mean, a lot of money is sexy and romantic.

You guys would agree, right? I mean, making $100,000, $200,000 in cash flow. I date it. I take it out to colds. That's the only reason I bring his friend. Yeah, right. So we're all sluts at heart. But the, so when you look at this,

When you look at a pro forma, you're like, you get excited. You can't not get emotionally invested. And if you then, at that point, you're dead because observer bias is going to make you cherry pick the really good facts and not really look at the facts that aren't their neutral to bad. And then you're in trouble. Yeah. This is true for everybody, right? Whether you're doing a huge deal or a small deal. So how do you prevent against that bias that we all tend to have?

How do you fight against it? And how can a newbie by their first single family house? How do they fight against it? You make sure that you're only looking at deals where the things you don't control are already ruled out. So in real estate's illiquid, right? So it's not like you can buy it and say, oh, this sucks. Ditch it. It's not, it can be a shotgun wedding if you don't do your D. And so if you don't realize the family's crazy, right, you're kind of in trouble.

But it's your fault for not checking out the family. So the thing, what do you do, right? The MSA, the state, the submarket, the neighborhood, the zip code collection, the 5, 3, and one mile, the actual site itself. you don't even look at a site or location until you understand your management. So in single family, you might self-manage. In our world, it's always third party or an asset manager. So we only go to markets with those locations where I have an asset manager or a property manager I have trust with my kids.

And then we shop together. So when we're looking at a deal, I'm getting their opinion, I'm getting the mortgage broker's opinion, I'm getting all these pieces of opinion, not just our own Kool-Aid in a market we already trust. So we've already ruled out those variables where you look at a deal. This is very similar to how I invest in different markets across the country in the book Long Distance RealScent Investing. What I basically talk about is how I limit my own bias or my own ability to screw up a deal, right? Like I bring in different opinions, my core four, I call them, and they all have to be on the same page.

And what I do is I align their interests with mine to the point where if this is going to be a really rough neighborhood, my property manager needs to be so good. He's like, dude, I don't want it. right so even if i'm trying to talk myself into it because that spreadsheet magic that just looks so sexy like you said and you're trying to convince yourself this is a good person to date when it's obviously not like you've got your mom that's like no david that's not the right girl for you right like there's other people invested in this and the other thing you said i'll let you come in in a second to make like a like a beginner deal for newbie starter pack and have all the things that new people that are trying to talk themselves into a deal they all do the same thing right

Like they get a deal on loop net and they think that that means they're a broker because they're on loop net, right? And they are very interested in acquisition fees right away. And like you said, they like their pro formas are horrible, right? They're like, oh, this is the complete upside. It could possibly be. And this is the ideal situation of expenses that it could never be. And they make a business card that says CEO before they've ever bought a deal and they don't know what a title company is. There's all these things that you like, I can see your face.

You're like, yes, I see this all the time. And it drives me mad because there's a lot of. kind of want to be investors. And they all do the same thing, but it's all based on I want to believe I'm doing this and feel like I'm doing it without actually having to know what I'm doing. I don't. And the thing is you don't get mad at someone doing that. Because they are, at least they are trying, right?

You know, it's far easier to direct a body in motion than to get it started in the first place. So they're already better than 95% of the planet that says, okay, I'll be a meat puppet and do what I'm supposed to do and be a W2 employee the rest of my life. So kudos for that. But then it's okay, but then I think the other test is someone's going to give me 50,000, 100,000, whatever the number is, they're going to give me a slice of their hard earned labor and time, but they'll never get back. It is my job to do well with it. How dare I do that if I don't trust in my bones that I can do well with it?

That's the part that where that person would make me angry. Yeah, that makes a lot of sense. So let's go, let's fast forward to the end of your story real quick and then we'll backtrack. Where are you at right now? What's your business look like? How many units you have or, you know, like kind of talk about that for a minute. Then we'll pick about some questions. Yep.

We've done $425 million in transaction volume. So we're getting started. Right. Our goal is to get to, our preliminary goal is to get to a billion in asset center management. So the first one was $500 million. We'll hit that. We're currently acquiring a clip of about $100 million a year. Wow.

We've been doing this for 10 years. We deploy about $135 million in equity. it's about 3,000 doors. So that's sort of our space right now. We're currently pruning some of our smaller deals and everything now we're buying is in the 15 to $35 million range. So, and you're, you said you're still buying. I mean, right now, like $100 million a year.

I mean, the market's crazy right now, right? We all know that there's a lot of competition. There's a lot of people that are okay getting a small return, almost a no return, right? Especially foreign investors maybe are happy getting zero percent because they're not losing money, right? I hear those things, those complaints a lot. How are you able to pull out deals in in today's market when it's that competitive where you need to try to earn something better? Well, you're not, you might get 0% if you're in a core coastal market where the cap rates are like three and a half four or you're putting 50% down to get a little bit out of it cash flow

wise. But if you're still in a let's say five, five and a half market, which sounds really low compared to where it was, right? But what's a cap rate? It's a measure of risk. It's a market's opinion of risk-adjusted return. And the way the levers work is the lower the cap rate, the more meaningful the value add is for every dollar of NOI growth. So if you, it's tough right now to just park money and wait for inflation to help. And you'll do okay, but you're not going to make a lot.

But if you know how to add value, you know, whether you're adding it's operational in nature and that's pretty quick, or whether it's 2K a door, 4K a door, 10K a door. The cool thing about this asset class is you can go look at all the other things around you in your 5-mile market area and know exactly what your comp said is, what they do, what amenities they have, how they market, how they take care of the clients. And you can determine, because you're not beating them necessarily. You're trying to find out what you can offer that is a gap in the marketplace and knowing that gap. Okay.

And then, so there is a science to that. It's not, you're not guessing. So when you know you can do that with a value ad program, in a five and a half-a-half-cat market, you can still absolutely make money. Now, are you making a little bit less than you were two years ago? Of course you are. Because interest rates have unished up a little bit, although spreads have come down to help it, but you've got this cap rate cycle. But if you then compare it to other real estate asset classes, it's still doing really, really well. Retail is struggling. Office is struggling. Different components are, hospitality is doing great,

but when the market cycle turns, you're going to give some of that back. Again, our opinion, those guys in those asset class, you're an idiot, you're doing boring multifamily. But if you compare it to non-real estate-based assets, right, no one believes a stock market is not going to have some level of a recurrent correction, right? Or they're scared of death it is and they're not putting new money in. Even then, long-term stock market, 7% with lots of volatility,

including what half that's from dividends. Yeah. Okay. Then you look at money markets, CD, savings, bonds. So to the paper-based world, even though we're a little bit lower than we were, it's still better by comparison. And then if you're buying safety, it's still better by comparison. It's just a little bit less.

So real estate is the cleanest shirt and the dirty laundry right now. I say that on the fact. It's absolutely true in ways. Yeah, that's not bad. Can you give us some quick and easy wins? Like what are some things that you commonly look for, like your first set of criteria that you're scanning for that will catch your eye and say,

ooh, there's an opportunity. We can add some value here. This is worth looking into. Because what you're saying is basically the deals aren't just laying around for you to go pick up like they were in 2010. You actually have to know what you're doing. You have to see something other people don't see. You refer to as the gap.

You've got to find an opportunity and capitalize on it. So what are some things for people that are like, yeah, I want to be a multifamily guy. What should I be looking for? Let me only answer that in terms of a process. I think that might be as useful. Because I don't, I personally don't think there's any one thing, right? It's not like we always put LED lighting in or we always change out the countertops. Sometimes we don't.

Or we always change from black to stainless or beige to black or modify flooring. It, we literally, you know, 80% of your potential renters already live within five miles of the asset. So you know where they live. So you can look at those comps. It's labor intensive, but that's why you get paid. And that's why, you know, it's what you should be doing. So when you can, when, let's say you've got an easy example is you've got two assets within a mile of your property that are renting at a hundred and fifty a dorm more than you. Okay.

And it's because they've got better flooring and granite versus for mica, right? You're like, okay, if I can install those at a level that lets me monetize that and not match them, but fade them, draft them in the marketplace. So I can be a little bit lower, but still off of them kind of experience. That's easy right there because you're not trying to exceed them in the marketplace. You're just trying to draft it. So your marketing is, well, yeah, we look the same inside, but guess what we're cheaper. But you're making it, you're already creating a lift in your value.

So that process itself works all the time. I like you said drafting, like the term, like, you know, where you draft him behind a semi on the free way to try to get better gas mileage. You're finding what those guys are doing and saying, hey, I'm just going to do that. Maybe a little bit cheaper, maybe a little bit better. What's the phrase that we just learned in Go Abundance, water skiing someone else's wake? Yeah, yeah, kind of water skiing someone else's wake. Yeah.

Because, yeah, you don't have to reinvent this whole thing. So, I mean, are you generally looking, and I know the answer is probably both, but are you generally thinking when you're thinking value at, I'm going to add, like, increase rent, or I'm going to decrease expenses? Like, which is your primary focus if you have one? The simple answers you do both, but you've got far more elasticity in rent growth and other income growth than you do in OPEX. Because there's only so much you can constrain. Typically, your big levers are how much you can move rent and other income.

Also, what you can do scale-wise on your CAP-X plan. I mean, being able to save an extra 200 bucks per cabinet renovation across 200 units, and adds up. you know, or certain things like that. So, I mean, the rule of thumb is you're going to be spending between 45 and 49% of your gross income on OPEX. Yeah. But operating expenses. Yeah, operating expense.

Yeah. So, so. But in residential, it typically gets higher than that. So, but that's a general rule of thumb depending on the property taxes and the state you're in because that's, yeah, we haven't called that the 50% rule. Yeah. It's about 50%. You're going to spend half.

Yeah. Half your income, give or take. goes to expenses, not counting the mortgage. Yeah, and with some vacancy allocation. Right. Right. Right. Yep. So, yeah, it's mostly that growth. But there are ways to tack on other income, whether it's through a renter insurance program or cable bundling. So there are other incomes kind of interesting because it's a way to create consistent juice over time that when you can't move market rents. Yeah. So one thing I probably should have said earlier, we could have talked about earlier, but, you know, this is a little higher level show, and I like that.

I wanted this show to be a higher level show. But for those listening who have no idea what we're talking about, just a quick summary. So multifamily, commercial properties are valued. And go ahead, Chad, if I say anything wrong here, let me know. But multifamily are basically valued based on, well, I should say, it was based on cap rates, but you're essentially saying the more profit a business make, more profit in apartment complex gives you, or you could say NOI, right, the more NOI. Net income.

Yeah, the net income. the more the property is going to be worth. So in other words, if we can decrease expenses by saving money here and there or increase the income, that makes the value higher. So when we're saying value add, we're talking about that. Like, is that a good way of kind of trying to. Perfect. Summarize it.

Okay. Yeah. So like, and this works with primarily with multifamily. Yeah, it's a little bit true with single family maybe, but in reality, single family houses are worth what that single family house is over there. It's worth what they're all, you can compare them pretty good, which is what agents like David here will do. and they, when you hire an agent, they'll go and look at other houses and say, well, that one had a little

bigger garage. It's probably worth a little bit more. With multifamily, it's more of that one had more net operating income, so it's worth more. Yeah. That's the thing we didn't like is you can't control your per square foot comp. Yeah. You know, and when they, when they got rid of income, we had a bunch of duplexus tries and quads. And then once they kill the income appraisal in the four units and down, you're like, you just killed that space. Yeah, because we can't do anything that we can't change it. Like if I go and increase rent by a little bit, it doesn't matter. It's still worth what the other duplex is worth. Yes, that's right.

Or a single family with the same square footage. Yeah, exactly. Yeah, you're just like, okay, well, that sucks. I get exactly what people get in the multifamily. It's a really powerful way to increase that. So, okay, so now I'm going to move over to this time I'm fascinated by it's how you actually run your business. So you've got thousands of units. You've got obviously raising money.

You've got all those parts we talked about earlier. Somebody who's, you know, you're managing the business. You're managing the money, managing the deal flow, managing, managing, the actual properties. So what does your structure look like? And then I want to actually, I want to dig into like, I mean, how much time are you spending like on a spreadsheet running numbers? And how much time or is that somebody in your team that does?

Like, what does your team look like? I guess is where I'm getting at. So, and by the way, I literally will have these conversations in airplane. What do you do? Oh, I do this. Oh, really? Break it down for you. And then you get, that's, yeah, I get the juice of just deconstructing business models.

Yeah. So we've got 13 people. All right. We've, again, we're in Richmond, Virginia. None of our assets are here. We love it here. It's a great place to live. The problem is that the employment growth in Richmond is anemic compared to Texas,

Carolina, as Atlanta. Our name, the 37th parallel comes from two things. Funny enough, Richmond and San Francisco are basically on the 37th parallel, but on opposite coast. And my first business partner was West Coast. I was East Coast. another piece of it is two-thirds of net domestic migration occurs below that line. What does that mean?

So when you look at where people are migrating from the northern states to the southern states, that migratory path is a combination of environmental and job growth factors, and it's occurring primarily above that line. It'd be more than that if you took out Seattle. But think about what's happening in New York, unless it's Manhattan. Almost every single city in the state has declining population growth. look at Ohio, look at Indiana.

You know, I grew up in Kansas City, similar scenarios, just jobs aren't flowing there and they are really below that line. So, but when you're putting a business together, we knew we were going to build a business that was not, it wasn't going to be in a backyard. So assumption that we had to build around.

So right now, I'll tell you where we are current day. And then we basically, when we go into markets, we want to know that we can have a third-party property manager or that we can treat like a member of our team. So in property management, if you take a building, the building has an on-site manager that works nine to five there,

and they'll have one or more leasing agents that work with them and one or more maintenance staff that work with them. Typical rule of thumb is one FTE for every 50 units. So one full-time equivalent. So if it's 100-unit building, you'll have one in and one out,

one manager, one maintenance. And that scales approximately every 50 units. So those are staff of the property management firm. Okay. Then above them is a regional manager that controls anywhere from five to ten properties. And then above them will be a VP or relationship level person inside the property management company. And most of the companies we're working with have 20,000, 30,000, 50,000 units under management. Yeah.

So that person, what we do is when we go to partner with them, we're like, hey, I don't want to interface with your relationship manager. I want to work directly with the regional and the site staff. And I want to be able to basically, here's our business model. We want to know that we can work with them like our team. Because for us, we're very management intensive. We manage all the CAPEX. They just need to do the care and feeding and push our business plan. But you have to make sure the property manager is okay with that.

Some are like, hey, we got this. Leave us alone. And we're like, oh, for us, no, that won't work. So you've got to find that right partner. Yeah. So then we have asset managers on staff. I've got both of my folks, they've got multi, multi-year time with equity, multifamily, hunt, some really fantastic companies.

They just want to be in a more entrepreneurial organization. So we drew them over, got 50 years of combined experience across these two asset managers that then run our portfolio. But we didn't have them day one. We had to be big enough to bring them on and show them the big picture. But we've also got an office manager, a controller. technology, financial analysts. And it's myself and another guy, my business partner, Dan, we basically own 90% of the company. We're both co-managers. I do platform development,

capital development, and a lot of our marketing and messaging. And he does primary acquisitions and asset management. We're both prior Anderson guys. I mean, I trust him with my kids and all that stuff. So that's our current. And then we've got a registered rep who helps on the sales side and his partner in Austin, Texas. And they help us on deal raises. And then we also have marketing education, a gentleman retired doctor named Dennis Bethel out in Fresno, California, is our team. That's cool. Yeah, I just, I find that fascinating to dig into people because everyone's got business runs a little bit differently. And yeah, I just, I thought always a question I ask complaints too. It's like, well, how does your business work? Like, I mean, like, yeah,

take me inside that. That's cool. All right. So, all right, so you've got all these units. Now you've got these people running different things. Where are you headed? I mean, where do you see the future of your company going? Just keep more and more multifamily or do you want to scale up larger deals? There are models in front of us. There are companies that are 5x, 10X, 100 X or size that are still exclusively multifamily. Okay.

So, I mean, there's a company out of San Diego that started 20 years before us, been in business for 30 years, has five billion in assets that are management. You know, have they done some mixed use? Have they done a little bit of development? Sure. still have been multifamily primarily. So for us, it's, you don't know what the, I'm not a big believer in 10 year plans. Stuff shifts, right? You know, the evolution is those who can adapt. You know, so for us, it's, we know the asset class, it's not going anywhere, but how do you be the best in that asset class? Well, there's different ways to do it. But, you know, it's at a billion, which we think

will, will hit the next, let's say, five to eight years, is hopefully. But that requires us to get more equity. So we've got two fund products coming out. We're moving into the DST, the 1031 Delaware statutory trust space that lets us take equity, different equity sources of still own the same asset class and perform in that asset class. Okay, so I want to ask you a question before we move on to the deal deep dive. You mentioned all the pieces that you put together to build your team. For somebody who wants to follow in your footstep, can you give me the order that you would look for as far as the easiest way, like where your foundation is and what you build up from there as far as each team member is concerned.

Yeah, so it's back to your gap. So those four racks I talked about, business architecture deal, capital asset management. Asset management is one that early on, you can probably rely on third parties. And you won't make maybe as much money as you could, but you're not going to just blow up, all right? But it's really hard to outsource capital development.

Like, it's really, or marketing in general. I don't people, most people are not comfortable in that space, but sort of, you know, find someone who's done what you want, do what they've done, you'll get what they've got. That's the price of admission is you've got to be able to tell your story and put capital together. It's the ultimate entrepreneurial skill is capital formation. So I think either you or whoever you bring in, you have to solve for capital and you have to solve for deal. And then between the two, you've got to then figure out that business architecture.

And then you can add asset management later. If you start with that, that's great and all. But if you can't get the deals or can't get the money flow, it won't matter. So I think it's first identifying what you want to be best at or our best at, and then how do you augment the piece you're not? Yeah. And then go from there. Like for us, it was two people.

Then we added an office manager because we just hated admin. And we needed a lot of paper flow to move around. And then we added a deal analyst and an operations analyst skill set. and then we added client relationships and client management. I mean, we started in my library in my house. Then I built a back edition. Then we had five people stuffed here. Then we had one office space,

an hour and now we're in 9,000 square feet. Okay. I mean, it builds slowly. I mean, people might look at your story and be like, wow, I want to be right where Chad is. But like, you know, you took 10 years to get here and you have a lot of deals in each deal adds more income and has more ability to bring in more people. Yeah.

Knock on wood, 100% profitable track records. So we want to keep that. That's awesome, dude. So let me go to one last question before a deep dive. Everyone's talking about the market, the real estate market. Is it too late to get in? You know, this ain't 2012, 2011 anymore. How are you looking at the market, you know, obviously you don't have a crystal ball,

but what do you see for the future and how is you're investing changing because of where we're at in the cycle? Yeah, that's absolutely stuff we talk about all the time. For us, the first have to look at the tide, which is, demand. And when you look at components of demand growth in multifamily, it's the number one thing is really household formation. If you're if you're not working in a coastal market that has environmental nuances or a retirement market, it's household formation. So what's striving household formation? Well, it's you've got people moving into the renter life cycle and psychographics.

People just deciding to stay there or move in. So we're still, we still are, the population is still growing, right? And it's a mix of domestic and immigration. Even with all this talk about immigration, it's still a huge driver of the economy and it's never going to go away. And U.S. immigrants rent more than they own. And in the whole U.S., it's a right, not a privilege to own a home, is fading, right? So when you've got the echo boomers that are the 18,

30 range rents at a 75% rate and the baby boomers that are renting at the fastest growing rate and they're over 55 and age they're going to live until they're 85 and once you rent, you're never owned again. Those populations are still solidly in that renter group. Then we're adding more household formation. There's a great graph, it's a census chart just of the 18 to 35 age range that NMHC puts out, National Multifamily Housing Council. And you look at that curve, we still have another five to seven years of increasing renter populations before it flattens out a little bit just in that group. But it doesn't dip. And then it goes up again in another 10, 15 years. So we're not worried about demand. We worried about oversupply. So that's really market location.

And it doesn't affect B grade stuff as much, but there is a trickle-down effect. So we look that acutely. And then we do worry about the financing market because at some point is the market really gets frothy in terms of just volatility, it will affect how much capital says, yes, I want to buy a billion dollars of CNBS loans. I mean, like, no, I'm just going to stick in the mattress, you know, and it's going to go somewhere else. And so it'll be, it'll be harder to buy, but it'll still exist. But when that does, other private liquidity comes up, a little bit more expensive, but still there, but you've got to be ready for it. So for us, as a great analogy I saw at a conference.

It's not whether it's, some people think it's the eighth or ninth inning. What if it's a double header? So when you look at economic cycles, you can, we're in a really long one. And they do ebb and flow pretty consistently. But demographic cycles, they last for 20, 30, 50, 70 years. So if you're looking at those trends, we're in a double header. Economically, there's going to be some bumps, but the demographics aren't going to go away.

Okay. So you're basically saying the fundamentals look good. I mean, across real fundamentals. look good. What might happen is the market might get scared because something triggers it. But fundamentally, there doesn't look to be anything in the economy that's like scary right now like it was back in 07. Do you agree? Yeah, totally agree. And especially in the group that we serve that blue collar, light blue collar, they're still going to have that. In fact, there's the group we don't serve that's a huge need is that underserved low income group.

Yeah. It's a massive opportunity in that there's a need. it's just really hard to monetize. It's not sexy. It requires some government intervention to make those programs work, light tech, low-income housing tax credit. There's a huge need there. That's the biggest part of the demand curve. It's just that private money doesn't want to flow there

because of your rents are so capped. Yeah, I've actually said that quite a bit. I live out here in Hawaii now in Maui, and prices are just crazy. You're at a studio apartment's two grand to rent, right? But I'm always thinking if somebody can, and maybe I'll get into this, maybe not, but like if somebody can figure out how to like how to work low income housing there's a lot of pressure

from you know from the top levels of government we need more housing we need more affordable housing so there should be opportunity there and no one really wants to work that like you said it's not a sexy business yeah but you can you can make a lot of money with the incentives they do create but you got to jump through so many hurdles to be in that space the the barriers two x three x just normal multifamily to get in the light tech space yeah yeah we talked about that actually actually a couple weeks ago in the podcast, maybe it was last week or two weeks ago. Anyway, we talked about with Graham about this idea that like you can, you can make money in almost any kind of real estate. Like you just are you willing to go and invest into that thing?

Like, you know, opportunity zones or is it low income housing or is it, you know, whatever. Like there's a lot to do. It's just like to revisit the very beginning of this conversation today. You said, how do we get good at that? Right. So if I want to get into low income housing, how do I get good at that? I want to go into mobile home parks. How do I get good at that?

If I want to get into whatever, right? How do I get good at that? And then modeling others, it's a good way to do it. So awesome. All right. It's great. So let's move on a little bit and get it a little bit deeper into one of your deals. This is the deal deep dive.

If you think property management is expensive, try mismanaging a vacancy or an eviction or a maintenance issue that turns into a five-figure problem because no one caught it early. that's expensive. A good property manager isn't overhead. Their protection against small mistakes turning into big losses. And that matters more than ever in this economy. That's why I like Mind.

Unlike other property managers, Mind manages your property like an investment. They obsessively measure the things that matter for your bottom line. Things like occupancy, delinquency, and net promoter score. And they have the results to prove it. Go to mine.co slash show me

to see how mine performs and get your first month free, which is much cheaper than learning the hard way. All right. So this is the part of the show. We're going to dive deep into one particular deal. And you got one in mind, correct? Yeah. All right. So let's just dive in, just kind of a fire match. First of all, what kind of property is this thing? Where was it located? Kind of was an idea of the property before we get into the specifics. First, we bought it. It's 163 unit in Louisville, Kentucky.

Okay. Not Louisville, Louisville. If you don't say it right, then no, you're not from there. Yeah, what is the right way to say? Lewis. It's Lewisville. It's Lewisville. You got to sound like you're swallowing your tongue. It's Louisville. Louisville. That's a good point. That's tough to get right, though. In order to be incorrect, you have to sound like you're incorrect. Okay. Oh, there's going to be some Kentucky people ping you on your show and say even Chad screwed it up.

I'll tell you a bigger pockets. All right. How did you find this deal? We had a, we do some educational work. And we had a one of those people had. found the deal and brought it to us and said, hey, what do you think? We're like, fantastic. And this is the only deal that's actually happened like this. I don't think we shouldn't have got it otherwise. It was broker listed. It wasn't like out in the middle of nowhere. It's just it was being weirdly marketed, to put that way. So found the deal and then negotiated with the broker for a little bit, eventually said, we got this and got permission to go direct to the seller and then we

worked directly with the seller. Oh, nice. The broker lets you do that. Yeah, because he already had a commission agreement. He just wanted to get the deal done. Did you like, did you have to shugnight the broker and like hang him over the balcony and be like, get out of the way and let me do my own negotiating? I'm actually pretty sure the seller is the one who drove it like, because he's, he's a deal guy. So he's like, hey, we got this. Right. That's funny. That's funny. All right. So how much, how much did you pay for the property? It was 10.5 million. Okay. And was that what they were asking originally or did you, did you negotiate that down? They wanted north of 11 and we're like, it doesn't pencil out. It's not, and it was an assumption.

Okay. It doesn't pencil out at that. If you can get that, great, we're not a buyer at that price. Then it was, okay, they wanted a equity carry in it. So they would sell us to it at one price and get some equity slug later. We're like, what does that look like? Who has control? It's really messy.

You sure you want to do that. Went back and forth for a couple months. Eventually like, can we just buy it from this? They're like, yeah, no problem. So we eventually laid it on the price. Do you think if you had offered that, can we just buy it for this number in the very beginning that it would have worked. We did. And it didn't work, right? So that's the point I'm trying to make out. People make decisions emotionally, even the really, really smart, logical

spreadsheet nerds who do things. Like you wear people down, people get worn down. Things change in life. And that original offer, they said no, don't get discouraged because six months later, things could have changed, right? They could emotionally be worn down. They could have another deal they want to go by and they need to sell it at this price and it's worth it because they're going to make so much money on the next one when they 1031. So I love that you, you brought the same thing back to them and they ended up taking it. Okay, enough about me. How did you fund this deal? We put together, it was 4.79 million in equity. We raised. And the way we do it is, I talked about Mac profile and getting expressions of interest early on.

We've built a high net worth investor group where we're educating them at how multifamily investments work. Here's what we're good at. Here's why we do this. If you believe the same things we build, we believe join us. If you don't, no big deal. So we're not trying to pay. pitch anyone. We're just more, here's why we like it. Here's all the same data. Do you have the same conclusion we do? And if we're aligned, then they become part of our investment group, then when deals come up, we know, and this is a key thing for people listening, is you want to be able to pull your group of investors and understand, hey, where are you in terms of your min-max equity allocation to this? What's comfortable for you? So you kind of know

along the way, what is you're available to buy? Is it $2 million? Is it $10 million? Is it $30 million? And is it a hard, committed number inside a fund? No. But if you're good at what you do and you take care of your client, your loss will never be that much. So we knew going in, we had that ability to raise. So it wasn't a scary raise for us at the time. So it was only, it was 3.18 million in equity to take the deal down, do the assumption and all the prepaid. Then we add six months of rainy day reserves. We basically six months of debt services are going in, never, never not do rainy day reserve that just sits there staring at us doing nothing. But it's just good business management. So what did you do with the property? What ended up? Refract the office. We started the unit improvement program. We had to do repairs on deferred maintenance on roofs and stairwells and decks.

And we only held this property for two and a half years. Okay. So and then along the way, we had a broker who was saying, hey, would love to list this for you. We're like, ah, we're fine. we're in the middle of our path. We don't need anything. And he kept bugging us. And eventually we're like, what number makes him go away? So we're like, you got to give us 14.6. He says, we'll take it. Wow. So you'll have this will happen sometimes. We're a we're a singles and doubles business. We're moneyball. But if you take care of the downside, you'll get home runs

sometimes. So this one, this one was we bought for 10 and a half. We're going to sell it for 14.6 to a much, much, much, much bigger company that wanted to use this asset as an anchor play for their other lower grade asset. So they were working within multiple levels of the renter profile. This is an important piece to in the credit profile for people that are leasing apartments is, and this will be the same, I think, in residential too, but you typically look for their income as three times their rent. Yes, that's the three X rule. That's what we use. So you are looking at the 3x rule, okay, if the median household income in your zip code collection is 57,000, okay, where's their rent range? What about those? They're at 45,000. Where's there a rent range?

What about those? It's 67,000. What's their rent range? So a bigger player sometimes will go into a location and buy a portfolio and cover as much of that rental range as they can because they're not going to go to one asset and they can manage brand and co-marketing across those assets based on a different median household income. Yeah, that's fascinating. I've never heard that talked about. So if somebody comes in, I mean, like from a specific example, somebody goes into the $1,000 a month rental place and says, hey, I want to rent this. Like, oh, your income's not high enough. You can only qualify for $800. Well, we got this other product right here that's going to work for you.

So now we got that co-branding. Yeah. Bingo. Very cool. All right. So what was the outcome? And, you know, you sold for then 14.6. I mean, you know, without me having to spend too much time to math.

I mean, do you remember about if you had to guess how much money you made off this property like in profit? Yeah. I mean, let me go with this way. it was enough to take that money and reinvest it via 1031 exchange into a 419 unit building that was a lower cap rate just south of UT Dallas and Texas. So we put together, I mean, the chunk that went over was about 3.5, 3.7 million of those proceeds. That's cool. Hey, one question on this note that I should ask you earlier, but we'll do it here in the fire round.

Yeah. So one thing, when I'm looking, I mean, I haven't really started raising much money for anything really yet, but maybe I'll get into it. I'm sure I will at some point. But one thing that, like, if you offer people a 5% cash and cash, or you're estimating, let's say 5, 6% cash and cash return, but hey, at the end of the day, your IRA is going to be, you know, I don't know, 13, 14, 15. Your investors bulk at the, well, I want to get more than 5% cash and cash return, or are they really just looking at the end of the day, the IRA or the average? return. I mean, like, do you have, do people, is there a number where people, like, no, I won't do it. It's not high enough cash on cash. It wildly depends on the person. Okay. It, it does. Do you hear that? Hey, that's too low. It's like, no problem. What are you looking to get? And then are you looking to get it in this asset class? Because some people are like, hey, I want 8%. So, well, that's going to take a higher cap rate in a market with more risk. And are you okay with that? Nothing wrong with that. But it's like the old school financial advisory questions. What's your risk reward profile. And then, you know, for us, it's like, well, would you rather have an asset

class that's been historically really profitable with a manager who's got a 100% profitable track record who is as efficient as possible in this asset class and will automatically reinvest these and deals in greater cash flow? And by the way, it's a legacy company. We're not going to flip the company. We're going to be here until we're dead. And that's 40 years from now. What do you want to do with the money? Right. So if you want to make it a legacy play in a wealth building platform, we're pretty damn good at it. If you want different things, that's fine. We're just not fit. I like that. All right. So last question. Yeah. And I'll just steal it from David because I'm already on the roll. What lessons did you learn from this deal? That it absolutely pays to sometimes give people

ridiculous numbers to see if they'll take it. You know, because the reason why we sold it is because the number we gave them was basically what our planned profit would have been three years later. So we basically sold it at our year five and a half price at two and a half. So that IRA acceleration, our investors would have looked at us like we're stupid. had we not done it. And honestly, buy good dirt, you know, it's the, if you buy in a location where you'd put your grandma's last $100,000, odds are you're never going to lose money. That's a great rule of them. So it sounds really trite, like, duh, but if you literally, if you're literally taking that test to heart, you would avoid a lot of sort of like, well,

if I sell it fast enough, I'll be okay. Yeah, yeah, yes. Yeah. And that's where that emotion starts playing in and that, that bias that you just want to make a deal work. And anyway, I like that I like that if you're going to put your grandma's last 100,000. I love that. Because if motion's going to be out there, use it to your benefit. All right. Very, very cool. So let's shift gears one more time and head over to the world famous Fire Round.

It's time for the Fire Round. All right. Let's get to it. These are the questions that come direct out of the Bigger Pockets forums. We're going to fire them at you right now. Number one from Jonathan from Santa Barbara says, hey, guys. I'm looking to buy an investment property out of state. I'm in Southern California, and I've heard you can get better returns elsewhere.

I'm curious if anybody has advice on a good city to get started in. What would you say to a guy like Jonathan who just wants to know what city to go to? By returns, if he's talking about cash flow, is absolutely right. But from equity growth, if you can do a value-add-deal in California, you'll make a ton of money. You'll make more money than God. It's just, it's, you got to do it right. Good, stable markets, I would look at Denver's a little bit less expensive than the California, but still pricey, but it's solid.

going to go anywhere. Dallas, San Antonio, Houston, I would stay in the big three. 50% of the Texas population is going to live in that triangle in the next 20 years. Austin and San Antonio are kind of growing together. The Carolinas, you know, there's really not a bad city there as long as the population's over a half million. Atlanta, we like from the Louisiana, Mississippi, Alabama, corridor, not huge fans just because of school systems are so bad and crime is off the charts just from a state and local perspective. So blue collars hard there. It's doable.

Just not our place. Those are actually a good place to start. And those are good. All those while getting price here are still good blended cash and growth markets. Awesome. Great. Okay. Next question from Derek.

I am looking to start investing in multifamily properties. I've set up my pro forma spreadsheet and I am pretty sure I'm accounting for all the expenses, but I don't want to leave anything out. What are some expenses people forget about that come back to bite them? A lot of people, a good, what you should do when you go to buy is you need to underrepresent your going in occupancy. You need to give yourself about a two to three point buffer because you're going to deal with some level of changeover from one property manager to another. And just it's far better to over estimate expenses than under. So one way to do that is also just have a buffer on your occupancy.

That'll give you automatically some room on your pro forma and then only allow yourself to catch up to market after. the second or third year. So do that and you give yourself a lift. Really understand property taxes. It's your biggest expense. That's where most people get posed. A broker might say, well, let's just assume 80 or 85% of the sales price is what you're going to get pegged at for your value. Wildly depends on the market. What happens if they go to 95%? Then you have to beat it down via a tax protest. That's incredible advice. Whether again, you're by your first deal or your 100th deal. like you're 100 unit or one unit, you know, give yourself that buffer. That's perfect.

Number three, we'll call us the last one of the fire round. Deepa from Auburn, Washington says, I've been looking for my first multifamily deal. I have to listen to a lot of BP podcasts. I'm convinced the only way to find those deals is going to be through a broker. But I'm not sure how to approach a broker without any deals under my belt. Any suggestions on how to approach one that'll actually want to work with a newbie like me? Staple $100 bills to your entire body. No. So how are brokers paid?

Brokers are paid when deals close. So they're going to want to know, are you real, right? Are you competent? And you have the ability to close. And then so they're going to ask you questions like, what's your equity? Where are you looking to buy? Who's your management? Who's your closing counsel?

Because the team that associates with you creates transitive trust. you know right transitive property if a equals b and b equals c then a equal c right so if transitive trust you got you got really there's a fantastic book called the speed of trust but the transit of trust if you've got so but you've got to be good enough to get their time as well so the the first rule is have the ability if you have the money and i'm assuming this person has the capital otherwise they have no business looking right now stop full stop now work on that and then we're work on management in that market, who are the property managers that can provide you Intel and work with you that can also help you validate where you want to be. Then when you have those two

things, then maybe understand who might your closing slash title be in that location, then go to talk to brokers. Because until then you're wasting broker's time and your time and you're screwing up your first intro. It's far better to start with that be higher level than to be a total newbie and them always have that opinion of you because you only get a, you know, what, five, 15 seconds. Yeah. Brandon often talks about borrowing credibility, right? Like that's another way you're talking about transitive trust.

Like, well, you got this really good team around you. They're speaking towards your credibility. And then I say rock stars, no rock stars, right? So if you want a good team to work with you and you want rock stars to work with you, when you got to show yourself as one. And what I notice a lot of people do is they don't want to put the work in to learn the business. They don't want to figure it out.

They want someone else to make it easier for them. So they go to these people that should be on their team that they should be be partnering with and they basically without realizing it subconsciously, annoy that person by saying, teach me everything I need to know, make me feel better, take away my fear, right? Which is the easiest way to repel a rock star from me. Like if you come to me and you say you want to buy a house and I put all this time into you and it turns out you can't even get pre-approved and you can't get alone, I'm not going to be very appreciative of the fact you just took all my time to learn basics of buying a house, right? Unless you told me that in the beginning. So that's really good advice for people.

You need to build that trust. You want to borrow the credibility of a team and an order to do that, you got to make sure you're acting like a rock star and you'll draw the right people to you. Yeah, be that rock star. There you go. Embrace the suck required to get good. But once you do that, the world is your oyster. But until then, it's not. You mentioned you were a military dad. Were you a Marine by chance? Navy. So exposed to it. Yeah. Okay. So you got to heard the embrace the sec. Nice. All right. Next segment of the show is our famous for. We are going to ask you the same questions we ask every guest. And I'm going to let Brandon ask the first one. Question number one, what is your favorite real estate related book, if you have one?

It's hard in multifamily. I don't think there's any one book where I've been like, oh, so I defaulted to a book that I think does a fantastic job at forcing someone to think about demographics. And that's Gary Keller's millionaire real estate investor. It came out, what, 10 years ago, maybe longer? Yeah, probably longer. But it's still a fantastic book on building a business around real estate. and looking at market, submarket, for that particular asset class. Then if you want to get into the bigger stuff in our space,

you're getting commercial multifamily site planning books, and you're getting down in the weeds. These aren't Amazon buys at that level. But that book is still fantastic for real estate. Very good book. I believe Jay Papazan helped him write it, and we've had Jay on the show as well. Yeah, it's good.

What is your favorite business book? Bar none, answered it every single time the same way and give it out, and it's The Goalbred. I've not read that yet. The goal. I've seen it. It's been on my list on Amazon forever, and I've not read it. You're doing yourself a disservice, sir, especially, yeah, as a business owner, right? It's the concept of the theory of constraints.

We've all heard that, right? But it's done like a business fable. So it tells a story of a guy who gets dropped in to improve. a manufacturing location that's failing. That consistent, that can I, that constant never-ending improvement, that Kays-in process around constraint management can improve any business. And that book is just a fantastic intro to it. Cool. Okay. What are some of your hobbies? I've got a pretty active 13-year-old to play soccer everywhere. So I travel both intentionally and unintentionally because of that. We also travel a bunch to Europe, sail. I like the kite board, don't do it enough. Stay pretty

pretty active. So I'm not kind of boring stuff, but that's what we do. Yeah, I don't know that sounds boring. That's intense. Very cool, though. All right. What do you think sets apart successful real estate investors from those who give up, fail, or never get started? I talked about it early. It's that commit.

I've seen so many people that were, could have been, you know, have MENSA apps throw at them, but they find a way to rationalize something's better. And they're consistent starters and restart instead of just finding something that works and doing it. But if you took that, if you were to sit there and just really embrace that feeling of you're going to take care of that kid, right, that commitment level, that 100% commitment

to something, if you embrace that and applied that to your goal, you at that point would know you're unstoppable. It's not if it's just when. Yeah. So that's, I don't want to be overly Tony Robbins woo-woo about it, but it's true. Thank you for sharing this chat. This has been very good. The last question for me of the day is I just want to know where can people find out more about you. You got it. We're at 37 parallel.com. That's the number 37 p-A-R-A-L-E-L dot com. We have a ton of educational stuff and articles and webinar section. But we made our director of education, he's a doctor. And in medicine, they had this thing called evidence-based medicine, basically. What are those outcomes that are clinically proven to be better than others? Well, he wrote a book called Evidence-Based Investing. And it's basically, what is the third-party data and the activities that are proven to create better investment results?

So that book they can get at 37parallel.com slash EBI. And it's just a collection of third-party data. It's not a raw, raw, about 37 parallel, but it is about multifamily. It's a great, great little asset. Very cool. I'll have to check that out. Well, thank you again, Chad. Very much.

It's been fantastic. Really, really appreciate you being here. My pleasure, guys. Thanks for having me very much. All right, and that's our show today. So thank you guys for coming for listening, for watching. And, you know, that's all we got. So again, check out Chad's stuff. And we will see you all around on the next episode of the podcast. And of course, if you like this show, rate and review it in iTunes. And head over to the show notes at bigger pockets.com. Show 317. If you have any questions for Chad. And with that, I'll let David Green take us out. Yeah. Thank you very much, Chad. We had a great time today. This is David for Brandon Hansom Shirt Turner, signing off. I think you did that one before. I had to. I couldn't think of anything.

I didn't let you talk enough this time to give you enough ammo for it to help myself. Oh, that was good. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the height, you're in the right place. Be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing online.

Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calico content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.w.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own.

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