Epic Real Estate Investing - Becoming Your Own Investment Bank with Salvatore Buscemi | Episode 159

Episode Date: June 1, 2015

Sal Buscemi introduces us to a new way to raise money for your real estate investing. -------------- The free course is new and improved!  To access to the two fastest and easiest strategies to a paycheck in real estate, go to FreeRealEstateInvestingCourse.com or text “FreeCourse” to 55678. What interests you most? E ducation P roperties I ncome C oaching Learn more about your ad choices. Visit megaphone.fm/adchoices

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It's not too late for 2015 to be your best year ever. Epicintensive.com This is Terrio Media. Casting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. Welcome. Welcome back to the Epic Real Estate Investing podcast, the place where I show people how to escape the rat race using real estate. Shift your focus from making piles of money to making streams of money. Change that one thing, just one time, and you are on your way to financial freedom. It's not the most exciting path, I'm going to warn you.

but it is the fastest and once you get there life then becomes exciting so have you signed up yet are you coming out here to l a because you know it's coming up the epic coaching intensive on june 18th 19th and 20th at universal studios california come on out make it a family trip hang out at the spouse and the kids can go to universal studios while you get your learn on and get your systems in place to make 2015 just totally rock. Go to epicintensive.com. Epicintensive.com. And if you're not totally satisfied, you will get your money back.

That's my promise. All right. I've got a great show for you today. Gonna switch gears a bit. Talk about something that we haven't really ever talked about before. But it's good information, I think, and it's about becoming your own investment bank. So on the phone, I have an expert on the topic. He is a managing director of Dan Drew Partners LLC in New York City,

a commercial real estate advisory boutique firm that focuses on placing capital from prominent institutional investors into middle market distressed commercial real estate investments. He is also the co-founder and CFO of Las Vegas-based Oasis Fractionalized Real Estate Equity. That's a $15 million fund oriented solely towards the low basis acquisition, management, and redemption of broken, fractionalized hard money. mortgage assets with a focus towards corrective development-oriented solutions to capture equity opportunities that are traditionally unavailable in a traditional receivership or liquidation environment.

Woo! That's a long sentence. He started his career and spent five years as an investment banker with Goldman Sachs, working with clients across a broad spectrum of industries. While at Goldman Sachs, he also collaborated closely with the firm's divisional leadership during the transition from a partnership to a publicly held company. He's a graduate of Fordham University in New York City. He has held leadership positions on several nonprofit boards and is about to grace us with his presence right here on Epic Real Estate Investing.

And I'm going to go get him on the line, so I'll be back in 30 seconds right after this. There are two steps to wealth. First, stop doing what poor people do. Second, start doing what wealthy people do. The wealthiest people do what they do best and delegate the rest. If only you have the time and resources to do it, now you do. We're VAs for Real Estate.com, and we have some free information for you. Get the five-step shortcut to hiring a rock star virtual assistant that will make you millions.

Go to VAs for Real Estate.com. Stop doing what poor people do and do what wealthy people do. VAs for real estate.com. Today on the phone, managing director of Dan Drew Partners LLC in New York City, Mr. Sal Bushemi. Sal, welcome to the show. How are you? Thank you very much for having me today. I appreciate it.

Very good. My pleasure. Glad you could make it. I know you're a very, very busy guy. And we're going to talk about something rather new, something that we've never really touched on this show before. So I'm excited to get into this topic. Starting your own investment bank, I guess, is what it is. Yes, that is correct. Okay. Yep. Perfect.

But first, before we start, just give us a little bit of your background and tell us what you're all about and how you ended up to where you are today. Yeah, I mean, I have a very interesting background. I mean, maybe, you know, I don't find it very interesting. But, you know, it's a little different than what I think a lot of people in this space were learning about how to become, you know, real estate entrepreneur. I actually studied hard, got good grades, went to the top schools and worked at the top investment bank in New York City as an investment banker. And I was doing a lot of real estate work then, and by early 20s, remember we were talking about this before, you know, early 20s, you know, you're very busy what you were doing with yourself. And I don't remember my 20s at all working on Wall Street. I was at Goldman Sachs at the time in New York.

And I really learned this business from the best. And, you know, that's really, you know, something that I'm very proud of. But I've also been able to parlay that into my own successes by what I learned there. And, you know, I just want to make sure I'm clear here. I'm not someone who was poor, broke, destitute, took a pill one night and woke up rich the next morning. There's a lot of work that went into this. And what we've been able to do is to, you know, replicate the systems that we put together to build funds. The fund is a, Matt, is a word that's abused in this industry, you know, several times over,

especially the word hedge fund. But what we are is we're at private discretionary fund, and we provide debt and equity for commercial real estate assets. Our sweet spot is below $30 million. Assets below $30 million. And these are people, you know, we call them, there's two types of people that come to us. There's the people who are investors who have found something interesting to buy. Maybe it's, you know, an REO or something off market or something.

some sort of insight knowledge that they have, and they don't have all the money they need. They come to us. The second one, and this is important, is what's happening in the market today, is that what you saw in residential foreclosures is starting to happen again in commercial. There's a lot of loans that are coming due in the next three, four years. And we call that a hard wall of maturity. So a lot of these commercial loans have 10-year fuses on them, 10-year maturity on them. So they have to be refinanced.

The problem is out of that $1.7 trillion in commercial loans that are coming due, half of them are underwater. So there's a tremendous amount of opportunity here if people know how to play it right and they have the right strategy to be able to really pick up some assets really cheap. We'll probably see something that we haven't seen since the RTC. Markets are still kind of upside down. Things are getting kind of weird. Some things are getting overpriced. There's a lot of foreign investors coming in. However, what we call the smaller-balanced commercial stuff, that's where a lot of opportunity is.

And that's what we do. Before that, I've ran two funds. Both of them have been distressed. One was a $30 million, distressed mortgage fund called Dandu Strategies at the time, and we were basically the kitchen sink for Bear Stearns. A lot of their subprime stuff we were buying. We were turning around and flipping it. They started that when I was 28 years old.

And then most recently in Las Vegas, we did a triage hard money fund called O-Free Fund, OASIS fractionalized real estate equity. We raised $15 million from that from another institution, and we were buying hard money funds that were facing, you know, regulatory issues. They were in trouble. They did something bad, bankruptcy or, you know, receivership, and we were able to buy these assets very cheaply. We were actually taking over the funds and the management of these funds and just basically selling them off, sort of like a corporate raider, if you will. But there was a happy ending to the investors because they got money that they thought

they would never get back again from a lot of these clowns that were selling, you know, these hard money funds from, you know, a stage here. So that's really more or less, you know, what we do on a day-to-day basis. Okay. Perfect. So one question I have is, you know, when you talk about commercial real estate, that's a pretty broad description. So what type of commercial properties are you looking for? We are, we are, we don't buy anything.

We fund a lot of things. I want to make sure I make that. Got it, got it. You don't buy anything. We don't, you don't buy anything. We fund a lot of things. So you're acting in the sense of a lender? As a capital provider.

Yeah, I mean, a lender you think of loans. A lender you think of debt. We do more of what we call structured finance. So, you know, there's these terms that people like to throw around in commercial, but they have no idea what the heck it means. You know, sometimes we're mezz, mezzanine, sometimes we're press, preferred equity. So, you know, we're, we're, we're, we're, we're we're all over the capital structure. So, you know, we're able to go much higher on an LTV

due to the fact that we can do, you know, some, you know, some structured, customized financial solutions. Okay. But really, getting back to the, to the acids that we look at, we call them the proverbial four food groups. And what that is is retail, multifamily, office, warehouse mixed use industrial. So those are the four buckets. And those are the buckets that get funded today. And that's really most important. They're stable at, they're not always stable. Sometimes they need full open heart surgery. That's fine. You know, those are some of the, you know, the example I was talking about before was somebody who has found something interesting to buy, but they don't have all the money they need. They might need something that's a rehabber.

You're not going to be able to go to a bank and get a rehab loan on an apartment complex in Memphis. After you finish it, you'll be able to do that. But it's no different than residential. It's just different loan products that is customized and fit to suit for the transaction itself. Got it. Got it. And then you mentioned that in these four classifications or the four food groups, there's a lot of opportunity coming up. A lot of things are underwater.

What's the reason that these things are underwater? It's a very good question. You know, it's, I call it thematch.com scenario. And I don't know if you've ever, I know you've been married a couple times. I've even been on Match.com before, so. Oh, good. Okay. So we're going to do this example then, okay?

Uh-huh. Let's explain it crystal clear. Uh, and when you think about it, think about when you're on Match.com, you see that photo and you think it's, she looks like Holly Madison. You're like, oh, my gosh, this is the one. She's beautiful, great, awesome. Uh, this is exactly what I'm looking for. Mm-hmm.

But you know on Match.com, there's a lot of doctors photos, correct? Yes, there are. So, so. So, so, so, so, so, we. We call that the current net operating income or the current NOI, all right, which is what assets should be underwritten under is the current N. But what people really found out, you know, so that was being sort of like, sort of made up.

What people actually were doing is that they were actually buying things off of the pro forma N. And so they were, and the pro forma N. Is essentially a guess or a lie. You don't have to worry about being a lie because it is. So they were overpaying for the asset. And what happened is not only were they overpaying for the assets, but credit was so loose 10 years ago. Think about 10 years ago, you know, 2005, 2006, you know, anybody could get a loan commercial with the same way.

They were over leveraging these properties because they were over, they were layering them with too much debt because they had a valuation that was too high. And that's what happened. So now that the underwriting has gotten to be much more conservative, that underwriting now is going to be going back to the current NOI. So take it as if, okay, so if you look at it today, yeah, you bought what you thought was Holly Madison, but what you really are meeting at the Starbucks throughout the dinner at a bar is really looks like Joan Rivers, rest of her soul, of course, but there's two materially different situations that you're looking at here. And that's how it was translated loosely as to what people did. There were a lot of doctors and dentists that were told things that they didn't understand

where they were buying assets that they thought were cheap relative to where they are. In Southern California, you cannot compare apartment complexes prices per unit the same you would in Laredo, Texas. Does that make sense? So, you know, that's how people got in the trouble. They were over leveraged to begin with. People bought, they paid too much, and the banks willingly lent them the money to do that because they were competing with each other to get the loans done. That's what happened.

Now these loans are underwater because there's valuations do not support the debt. Sort of like if you were to do a BPO on your own house or a realtor, you know, list your house. You know, you might owe $400,000 on it, but it's only going to, it's only worth market value $330,000. And this market, we don't call it a short sale. We call it, well, you're going to have to do a discounted payoff. or the next level of opportunity is, I think, is going to be bankruptcies, voluntarily, you know, involuntary bankruptcies. Right, right. It's funny, the game of semantics that goes on in real estate and finance.

Oh, it's crazy. It really is a dog-eat-dog world. Yeah. All right, so, okay, so here's the question I'm kind of getting at, and it's about commercial real estate, and hopefully you can appease me here, and then we're going to talk about starting your own investment bank. when these properties were purchased, they were purchased off of a stated income of what they thought the income was going to be. When they purchased the property, owned it, ran it for a, owned it for a while. The income didn't turn out to be what it was supposed to be.

And so now that income doesn't support the loan, and that's how they've gotten in trouble. Exactly. What we call that is the bad operator. So, you know, and the joke in the industry, and I didn't make this up is, who is this person? guy bad operator and how does you keep getting a job? Right. And so usually what you'll see is somebody, you know, they bought it at like a two cap, a three cap, when they should have only paid probably an eight or seven for it. So they're redlining the asset, which is similar to redlining your car.

If you put it to the red line too long, pretty much it's going to blow up. So what these guys do is they mismanage it and they become bad operators. So what do they do? Well, the first thing they do is they want to save five points. so they fire the management company. And then they think they're saving money there. But then they don't have anybody taking, you know, now it's like there's no substitute teacher in charge of the kindergarten.

There's no teacher at all, no parental supervision. Right. So then you have problems getting rents collected, nobody's servicing it, and pretty much you have an asset on your hand. You have a revolt because nobody's managing it. So you see that happen a lot. Also, a lot of people brought in investors in here, too, equity investors. And they're wiped out.

So, you know, they've been tapping the equity investors for more money, capital calls, to pay the juice payments, the monthly debt payments. And guess what? They ran into trouble that way because, you know, you can only rob Peter so much to pay Paul before things catch up with you. It's sort of like paying one credit card with another credit card. It just doesn't make – after a while, it just doesn't – it's not sustainable. Absolutely. So that's where it is. Right.

But, you know, but also there's other one important part, if I can say. And that the banks are saying, you know what, I want out of these loans. You have to cash us out. You have to refinance and get us out. And that's really where the pressure is today. That's the shotgun approach that's happening. The banks are saying, okay, your loans up. We're not going to extend it.

We're not going to pretend anymore that it's performing we want out. And that's what's going to cause a lot of pressure. You know, the future that you're staying is all the opportunity that's coming up. And I can see that. That's clear. the other have you considered or studied or is this even relevant the who those tenants and clients are going to be for the future as far as you know just kind of the way the the landscape of how commerce is changing retail is changing even just working for a company in a giant office building even that's changing just kind of our culture of how we work is changing is that taken into consideration oh absolutely i mean yeah i mean right now in new york city i mean new york city i mean new york has always been, you know, an anomaly. I don't think that's really appropriate.

But today you have a lot of, you know, the culture is, you know, doing the virtual commuting. That's what it is today. Instead of spending an hour commuting from, you know, somewhere in Texas to northeast Dallas, you know, your boss might say, just clock in, you know, and do it that way. And, you know, instead of spending the time on the road, spend the extra time working virtually. I'd say right now the biggest risks today are what anything, whereas consumer, we're, tail-oriented. This is, you know, the Borders books, for example. This is the circuit city. Best Buy, I think, now is like a, you know, more or less, you know, a de facto showroom for Amazon.com. I mean, my wife goes to Best Buy, find something she likes, scans,

you know, the, what do you call it, the code, the barcode on it, there's an app that finds it on Amazon. She's able to buy it for a couple hundred bucks cheaper. I mean, she did that last month. So that's what's happening today. I would not be bullish into that. The things that are really going to be steady, eddy, sedentary, are really going to be in your secondary markets, your smaller markets, grocery anchored pharma anchor chains. That's really what it is.

People need drugs and people need food. And people do not, you know, the whole premise of, you know, getting, you know, food delivered to you, it's not something that's really swept America yet. It probably won't be because it's considered a luxury and it's a higher cost luxury item. You know, retail stuff, Best Buy is kind of scary, I would say, right now. You know, things like that.

I think if you look at it, you know, a good place to be if you're looking at retail. Costco's are still going to be there. They're going to be there for a while. And even if you get into certain, you know, at government levels, we were looking at a post office deal the other day, too. You know, that's a 40-year lease on it, guaranteed by the government. I mean, there's always going to be a post office there, whether it's profitable or not. It's going to be subsidized by the government.

So, yeah, there's definitely certain things there. With respect to multifamily, the risk in the late credit booms in the 2K, 08, 05, I wouldn't say 08, but like 2004 to 2007, what happened was that you had a lot of people who were being offered first-time loans to buy brand new homes. And that put a lot of pressure on multifamily. And the reason for that is because, hey, if you weren't, you know, if you weren't paying your rent, don't worry, no problems. you could have these no income, no asset loans, and you'd be able to buy a brand new house with $110,000, you know, 110% mortgage. No skin out of your pocket. You have nothing into it, no down payment, and you're getting some cash in closing. You can go out there and buy that BMW, that three series, and now all of a sudden, you know, you went from being a deadbeat to someone of prominence.

Right. That's over today. You're starting to see more of a renter nation because there's lack of certain. as it relates to employment. And people today, I think, you know, seeing what their parents went through, I think the generation, you know, anyone between the age of 25 and 40 are saying, you know, it's better to be a renter than this home ownership stuff because I don't want to be tied down in case I lose my job or my wife loses my job.

Right. You know, we want to be mobile. Right. Then that would translate into it would be a good time to be a landlord as well then. It would be. Yeah, it would be a good time to be a landlord right now if you buy a right. Right, right. That's always, that's always a given.

You got to buy a right regardless of what you're going to know how to buy a right. You don't want to wind up like the plastic surgeons in Southern California who we had to bail out because, you know, they bought a apartment complex in Laredo, Texas, thinking that what was only a time before Laredo, Texas real estate prices were going to go up and match Southern California and barely hope. Well, we know that's not the case, but that people were just so desperate to do a deal. They were betting things up at the time. And whenever you get into that level of desperation, you know, a moment. You should never make any investment on emotions, and that's what these guys did. Right.

That's what happens. So you got to buy right. You got to know how to buy right. So you're telling me Laredo, Texas is not the next Beverly Hills. I mean, no, I don't think so. I don't, no. And I don't want to offend any of your members of your family. No, no, no, no, no.

Market, market, market. You know, that's what it is. It's all about the market. We just met, Sal, that's my sarcasm coming through, so. Oh, good, okay. Yeah, I wasn't putting you on this spot. Yeah, I wasn't putting you on the spot there. Super.

So let's talk about becoming your own investment bank. What does that mean? And how do you help people do that? All right. We have to change. I'm just thinking that your listeners, your audience here, has been someone who has read a rich dad book and they've been told to buy stuff and own it and have the bank, you know,

lend money against it. Very accurate. That worked a long time ago, but it doesn't work today. Banks aren't lending. and you know you don't want to be and you don't want to be a landlord owning a bunch of residential homes. There's not a lot of, nobody ever got rich owning a lot of residential homes. They're all problematic in their own certain way. I know you want to debate that.

I know you might want to debate that. I do. But I won't. Okay. Okay. So, you know, but a lot of people who bought these homes during the last credit boom wound up giving them back because the rents did not keep up with the prices. that they paid. That's the problem. Now, I know the housing market pretty well. I've managed a $30 million pound sheet before buying a lot of these non-performing things. So I get that. Today, you

have to change your mind, and you have to think like a bank. Banks, Wall Street, in general, makes money if the market goes up or if the market goes down or if the market's flat. You know, Morgan Stanley, Goldman Sachs, they make record earnings when the market goes down. They make record earnings when the market is up. What you need to do is you need to think of yourself as being a bank, pooling capital together to invest into properties, not becoming a landlord, not becoming someone who deals with the proverbial tenants and toilets. You want to be a capital provider.

That's how the banks win. I've been all over the country. I've been to cities, born and raised in New York City. I've been in cities as small as Silverton, Colorado. And I can tell you, Matt, that the tallest building in each one of those cities has the name of a bank on it, not a landlord, and there's a reason for it. And so what we're seeing now is that people are saying, you know what, I don't want to be a landlord anymore. I still want to participate in real estate.

I know it's a great wealth creator. It's an equal opportunity wealth creator, regardless of your degrees or how smart you are or, you know, how driven you are is really what comes down to it. But you also have to have what we call intellectual capital. You have to know what you're doing, or if you don't, you need to know someone who does. And the important part is that now it's better to become a capital provider or working with someone who is a capital provider to be able to get inside of deals where you're getting an equity stake and some points, quite frankly, and you're owner by virtue of the fact that you have an ownership stake in that without having to deal with the tenant and toilet.

That's what we call equity owners. Whenever we do deals, depending on how much open-heart surgery they need, depending on how bad we have to triage them or what we think about the market. We're always going to take a 10% stake in it. You know, we're going to go for that, and we're going to do that because we know that that deal is going to be, once it's stabilized, there's going to be something that we're going to be collecting checks from. So we'd rather take the bulk of our compensation in the form of what we call, and this is just an industry term, hope certificate. Okay?

And that's really it. So imagine, you know, if you're driving down your street and you see these big strip malls or office complexes, irrespective had the performance today. But imagine if you owned a 10% equity slug in each one of these. You had a profit participation in these deals. That's how real wealth is created today. So the real wealth is created by either starting your own funds, which we talk about in a book that I wrote,

or aligning yourself with an institutional lender or syndicating your own capital to place into these deals. And that's how you're able to do that. You don't have to worry about putting on the hard-hast. knocking tin, instead you're doing a lot more of the desk work, putting the deals together, becoming the paper pusher, and really getting these deals done. That's what real estate investment banking is. Got it.

Got it. And you help people do this? Exactly, yeah. Okay. Super. So I've got a pretty broad range of an audience all the way from the person that's just kind of tinkering around trying to do their first deal to people that, you know, have a million-dollar, multi-million dollar portfolio.

So it kind of explained to me because we're coming up. against the time right now. Explain to me who your ideal client is and how they should get in contact with you if it's a good fit. Okay, this is a great question. The ideal client for us is someone who has or knows of someone who is an experienced real estate operator, and they're all over the place. I mean, if you live in any city in the country, unless you're living in the, you know, the Mojave Desert, you're going to find a commercial owner-operator. It's very easy to do that. There's LinkedIn groups that can do that, and you can align them with.

And what they all need is that they're very good at managing properties, but they're not good at finding capital. So the ideal client for us is someone who's experienced who is looking for money to be able to buy more stuff, more commercial stuff. That's our ideal client. The ideal client that you'll see change over time is going to morph into more so of the guy who has his hair on fire, and he's calling 911, because the bank is making them buy his note back at a discount.

You're going to find a lot of those. You're going to see a lot of what we call DPO opportunities, discounted payoffs or short sale opportunities. But we never want to use the word short sale with commercial because it's not professional. Right, Matt? That's right. That's right. You've got to get the semantics correct.

Yes, exactly. You got to wear the right clothes to the party. So we talk about this, you know, how to be able to do this in the form of, you know, pulling your own hard money together to do this on the first book of three. that I've just released. I have one other that's coming out is called Raising Real Money. But the book that we're talking about right now, people want to learn more about this business. They can get a free copy of this. We're only giving away 20 copies because that's all we have left by going to making the yields.com. Making the yield, Y-I-E-L-D.com, and they can basically get a copy of that, and then they'll get a lot of some cool infographics and stuff to do to start working on this and finding these

opportunities today. You're going to see a lot of these opportunities. You're going to see a lot of people who say, hey, you know what, I'm a great contractor. I'm a great handyman. I'm very poor with money. I don't have any good credit, but you know what? I know this 100-unit apartment complex down the street. This guy's not running it well. He lives overseas or he lives in California. I'm in Laredo, Texas. You know, I can buy this. Only I had the money. And that's where we come in. You know, we provide the discretionary funds. We're not a bank. Our rates are a little higher. So we're going to be somewhere. We'll help factor that in.

It determines on the risk, of course. But we'll be somewhere between a nine and the 13 for that. But again, it's the availability of capital that counts rather than the cost of capital. If your credit was good, then you wouldn't be talking to us. But also, you know, if you know you're going to make a big chunk of money, $500 million down the line, you know, you don't care how much you're paying for capital. You're only worried about the access to capital. So that's really how it works there.

And it's a great, you know, there's other institutions like us out there. You know, they expect you to be experienced doing that. But we're a little more patient because we drive a lot of our deal flow off of our intermediary base or base of students that we train to be intermediaries, and it works out really well. So, you know, it's really, really good stuff. So, yeah. Fantastic. Very interesting, very enlightening.

Thank you, Sal, for your time. Thank you, Matt. Yes, and if we have some response on this episode, which I'm pretty sure we do, I've already got an idea of a couple of our audience members that would be very interested in this. And we'll have you back. Wonderful. I really appreciate that. Matt, thank you so much for the time. You bet.

You bet. That's Sal Bushemi. Go to making the yield.com. He's got 20 copies of his book there by the same title, Making the Yield. Go ahead and get that, and we'll be right back. Attention, attention. Shocking website reveals that shocking website. aren't really that shocking.

All kidding aside, go to find motivated sellers ASAP.com to get the inside scoop on how the nation's most successful real estate investors really find their deeply discounted properties. Go to find motivated sellers ASAP.com. Deeper discounts, less secrets. Find motivated sellers ASAP.com. That's it for today. I'll see you next week. Or catch me tomorrow on Turnkey Real Estate Investing.

I'm Matt Terrio, living the dream. You've been listening to Epic Real Estate Investing, the world's foremost authority on separating the facts from the BS in real estate investing education. If you enjoyed this show, please take a minute to visit iTunes and share your thoughts. Thanks for listening. We'll see you next time here at Epic Real Estate Investing with Matt Terrio. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit C-desweetradio. com