Richard

David:
This is the BiggerPockets Podcast Show 655.

Amy:
And never say, “I don’t know.” And a lot of us are still learning, right? A lot of you are going to get out there and implement that four-second power pitch and you’re not going to know what to say next. So instead of saying, “I don’t know,” just substitute that with, “That’s a great question. Let me turn back to my team of experts and I’ll get back to you within 24 hours.” And then get on the phone and reach out to your community or other people in your network who have done this before, if you have a coach, and be like, “This just happened, what do I say? What do I do?” So we always want to position ourselves as the polished professional poised for aggressive growth.

David:
What’s going on everyone? This is David Greene in the Smoky Mountains, checking out cabins, recording from one of my own cabins. I’m actually in the theater room right now joined by my co-host, Rob Abasolo, fellow cabin investor, fellow short-term rental investor, and fellow co-host of the best freaking podcast in the world, the BiggerPockets Real Estate Podcast. Rob, how’s it going?

Rob:
Good, man. Yeah, it looks like you’ve got the whole theater system there, so you can finally watch Interstellar after all this time.

David:
You know, you did see that I posted and tagged you on an Instagram thing, but I wasn’t able to watch the whole movie. It just took too long to get going to that.

Rob:
What? How did you stop watch… Oh my god. I would rather have you just not watch it. How are you going to tell me this on air? You didn’t prep me for this?

David:
No, I got to watch it again. That’s what I’m getting at. I’m trying to be honest here and confess that. That doesn’t count.

Rob:
Right.

David:
We were shooting pool and I kept winning and I just couldn’t stop. Nobody could beat me. I ended up getting distracted. Wasn’t able to watch the show. There’s a little humble brag about how I was better at pool than all the people that never play it, which really isn’t saying a whole lot. But our house is just so much dang fun, man. It’s hard to do one thing at that property in Scottsdale.

Rob:
You’ve seen the final product of our Scottsdale mansion, right?

David:
Yeah, I was there. I will be going back. So if you guys follow me on social media, you will see about a potential trip that you can sign up for to take. But I’m going to be going back there again, because that place is so much fun. I just like being there. Rob, when’s the last time you were there?

Rob:
When we set it up, but I am flying out there hopefully in the next month to go and get the final footage of it so that I can release like my… I’m cutting together like a TV show, HD TV riff on… I’m trying to make a very funny version of an HD TV show out of the episode that I shot out there. So stay tuned for that. That’ll be fun, I think.

David:
Did the episode that you made with me in it, did you put that out yet?

Rob:
No, that’s not out. That’s the one that we’re editing together. It takes a long time to edit a 40-minute video in my style with Caleb and stuff. It’s taken weeks. But we need the final B-roll that shows everything coming together and then the resolution, and then boom, we’ll get all the TV offers.

David:
If the length of time that you took to get that place ready for the market is any indication of the speed you work at, I’m sure that video will be released sometime in 2028.

Rob:
That’s right. Yeah. Well, we’ll see. Stay tuned everybody. 2028.

David:
Yes. Stay tuned. And tune in for today’s podcast. I suppose you already are. That is really good. So this is the finale, the wrapping up of the four-part series with our guest, Amy Mahjoory, who specializes in raising capital to put into deals and teaching other people how they can do the same. So in the first three episodes, we went over Amy’s four-part system. It’s an acronym that spells out FACT. I will let Rob give that to you guys in a second here. But in today’s episode, we actually dive really deep into what to do with the money once you’ve raised it, red flags to avoid getting into both in raising money and who you should be giving your money to. And then we get into some questions that people asked on previous episodes where Amy and Rob both weigh in.
It gets a little spicy at the end. So I want to make sure you listen all the way there, because this episode turns down Tapatioville and I want to hear what your guys’ comments are. So listen to the stuff that we talk about, leave us a comment on YouTube, ask some questions there. We read those. In fact, today’s questions that we played in the show came from the YouTube comments. We look at all of them and we try to include them in future shows.
Part of the topic is free content and for today’s quick tip, I’d just like to remind you, BiggerPockets is almost completely free. 99.9% free. So use it. Go to the forums and read the questions or ask your questions. Go to the blog and read the stuff that people have taken their own time, effort, and I can’t really say sweat. Because typing on a keyboard doesn’t make you sweaty, but I suppose you do get a little bit of finger exercise when you’re doing that. Listen to all the podcasts that we have. Listen to the other podcasts that we have. Cruise through our YouTube channel. You can immerse yourself completely in BiggerPockets and get a free education that will make you much more money than you would spend if you went to actual college. I’m going to put a pin in it right there and I’m going to leave it with you, Rob, for last words, before we get into the show.

Rob:
No, nothing significant here, other than I want to say that actually, this might be my favorite episode of the series. Every single one is always an eye opener, but we get into some pretty tactical nuances of just, oh man, private lending and the power of that can just be so specific to every scenario. So we kind of talk about the good and the bad and the ugly for every single scenario. No, not every single scenario, but a lot of them.

David:
I never thought about this till right now. But you built almost your entire portfolio up to this point using private lending, right?

Rob:
It’s true. Yeah. [inaudible 00:05:15]. Yeah. Yeah. The first couple were privately funded. And then after that I just started partnering up with people and using all my sweat equity to basically run it for them. And yeah, it’s paid out very well and-

David:
Yeah, but partnerships is a form of still like-

Rob:
Yes for sure.

David:
… private lending. They’re lending their money and they’re getting equity in the dea.

Rob:
100%. Yeah. So it’s worked out really well and now I’m scaling even past that. So it’s been really exciting and I think a lot of people will be really empowered after this.

David:
All right. Well, BiggerPockets Nation, thank you for being here. We are going to get into the show and we’re happy to bring it to you. Amy Mahjoory, welcome back to the BiggerPockets Podcast. How are you today?

Amy:
Thank you, sir. It’s great to be here. I’m doing well. Excited to catch up with you guys.

Rob:
Awesome. Well, I’m really excited to get into the rest of the final installment of the series, where we’ve talked about how to raise money for newbie investors and even experienced investors. We learned a lot, me and David, just in how we can apply your different principles to the practice of actually going and getting money.
So to sum up here, you have a framework that we call FACT, F-A-C-T. And that F stands for foundation. So that’s where you go in and you meet somebody and you set the foundation. You let them know what you do. So you call this your four-second power pitch. It’s 13 words. And if I recall correctly, I believe it’s, “Hi. I’m Amy. I teach people how to make double-digit returns in real estate.” And so if they’re interested, depending on their interest level, you follow up with them.
And then you go to the A, in fact, which is action. You take action. This could be many different ways, but I believe some of the, I think you gave us four or five different ways, but this could be hosting a meetup to basically establish yourself as a local professional. There are many different ways that you can take action. But however that is, it’s effectively moving your leads down the quote, unquote pipeline, if you will.
Then we have C, where you establish credibility. And this is where you basically go from a group setting or the more informal setting down to a very personalized setting where you’re actually telling them about the financials of the project, what you do, your experience, and just basically proving your financial acumen and that. If they give you your money, you’re going to deploy it correctly.
And then finally we get to T, which stands for transaction. And that is actually closing the deal, right? They wire you the money. And what happens at that point? What are the logistics of them giving you the money? And then after that, we move into a little bit more of the complex side, which is nurturing and making sure that there’s a little bit of a high touchpoint there after you close them. And you make sure that they’re excited about the deal and that there’s communication to make sure that they understand that their money is safe. Did I sum that up correctly?

Amy:
That was perfect.

Rob:
Whew. All right, good. I was getting nervous. I was like, I’m pretty sure this is all correct. But I know all this, because we just did it like an hour ago. But I believe we left off on the last episode with a bit of a cliffhanger. David was going to answer it and then he was like, “Hey, let’s do it on the next episode.” And I believe that question, David, was, how do you feel about getting your investors kind of involved in the project? Not necessarily giving them a job responsibility, but actually having them come out to the site and getting them amped up about the different project that they are investing in.

David:
I’ve had some time to think about that since you first asked me. I think for some people, the short answer is every investor, every person raising money is going to have a different skillset, a different value to add. So they’re going to want to structure it differently. And I think in this episode we can cover some of the ways that it can be done. And so as people are listening, they can ask themselves, well, where do I fit in? And how would I want to structure mine? Because it’s definitely not a one size fits all. The way that Rob raises and deploys money is going to be different than the way Amy does it, different than the way I do it. So it wouldn’t make sense to put the same system together, because we’re all deploying the capital differently and we’re appealing to different lenders or investors depending on how you structure it.
So if I was trying to set something up where I had repeat business, you were going to give me your money, get paid back, give me your money, get paid back. I think it makes sense to bring them out to the project. Have them walk the property, see what’s going on, meet the contractor. He comes up walking with this hard hat and a big smile and they get to feel good that they’re meeting the people. It sort of becomes personalized. It shuts off the part of their brain that’s always saying, what if this and what if that? And what if this is a big scam, or what if they’re not even putting the money in the property? If they can drive by and they can see progress being made, oh, the framing is up. Oh, the drywall’s up. That’s going to put people at ease. I think that’s a smart idea for a situation like that.
I personally don’t want something like that, because what I’m going to get is a bunch of people that are going to say, oh we’re here. We have a full-time real estate investor. Let’s ask a bunch of questions. Let’s see if we can get some of these contacts for our own deals, right? Or let me use this as an excuse to say, I need an update on every single thing that’s going on because they want to learn. Then I’m not going to want to be raising money from those people. I’m going to want the passive investor. And I’m going to turn down that person who would’ve been able to make money and now they can’t, because they kind talk themselves out of the deal.
The other thing that I would point out is there’s different ways to structure how people get compensated. So I would say the more common way is you give away equity in a deal. So they get the upside, but they also get the downside. And while the market has been rising, which it has been for the last eight to 10 years, very rarely did downside come into play. And that’s why I want to make sure we highlight this. Because you could do everything wrong and there was so much appreciation, you still paid people back. Maybe they didn’t get as high of a return as what they wanted, but they didn’t lose capital. And as we’re entering into this bear market, no pun intended, because I’m in the Smoky Mountains and there’s bears everywhere up here, that’s changing a little bit. You’re at a point now where, if you miss your numbers, if you don’t execute on the deal right, it is very possible that your investors could lose money, especially when it’s structured with equity.
So the first thing people have to understand is, if you get the upside, you also get the downside. If you lose the ceiling, you also lose the floor. There’s nothing wrong with that. You need to know going into it that’s the case. I don’t want to structure my deals that way because to be frank, if somebody lost money in a David Greene deal, the hit to my reputation would be worse than if I just paid them back their money so they didn’t lose it. Right? If I lost money with the platform that I have as a level of trust that I have with the audience that makes BiggerPockets look bad, that makes me look bad. That makes real estate investing as a whole look bad.
I’m not a random person without a platform who’s like, hey, invest at your own risk. If it doesn’t go well, well, that’s investing. I don’t think I’m in a position I can get away with that. And then there’s an emotional price to pay. I just wouldn’t sleep at night. If I lost my money, I can make more money back. If I lost someone else’s money, I think, as just my personality, that is not worth it. The price I would pay feeling bad is bigger than the upside if I made them some money and made some myself. Basically, I’m going to guarantee any money that anyone lets me borrow, they’re going to get it back. They’re getting their capital back and they’re going to get back the interest that I told them they were going to receive.
So that doesn’t make sense for me to invest with equity just based on that strategy. If I’m going to guarantee their return, which I’m going to have to, I might as well just make it debt. I will pay this interest rate on your money for the period of time I have it. Now, I’ve structured mine where not only is it a guaranteed payment to you that isn’t dependent… When I say guaranteed, I mean, it’s not dependent on the performance of any one property that I put the money into. It’s guaranteed by income from that property, income from other properties, income from book sales, income from the businesses that I own, income from every single thing that I do is guaranteeing that person their return. So I know that I can pay them back their debt. And because I know I’m set up this way, I also want to make it as convenient as possible.
So what a lot of syndicators will do is they’ll say, “Okay, I’m going to borrow your money. In five years, when the deal sells, you’ll get all your principle and you’ll get all of the interest. You’ll get it back at the end.” Or some of them will say, “You’ll get a check every quarter when my bookkeeper reconciles the books and you’ll get some money.” There’s nothing wrong with that, but it makes it harder for the person who let me borrow their money to sort of use it. So I’m set up towards more convenient. They get a check from me, or not even a check, they get an electronic deposit in their account every month for agreed upon whatever the interest rate is. Right now I’ve been lending at 10%. So they let me borrow their money. They get a 10% annual return.
One 12th of that every month goes right into their account. They don’t have to think about it. They don’t have to ask about it. It goes right there. They can use it for whatever purpose they want. They want to pay down other debt, maybe they’re lending money to me at 10% to pay down interest at five or 6% on something else, they’re actually making money to do that. Maybe they want to live off it. That becomes passive income to them. It’s paying their mortgage for them. It’s paying their rent. It’s easier for someone in that position to figure out, what can I expect? What money do I have coming in? How much do I have to work?
So I try to make it as convenient as possible and as safe as possible. The downside is they’re not going to get an amazing high return in case I go do an incredible deal with that money. If I go find the best deal ever, they’re not getting half the equity in that deal. But on the other end, if I go after the best deal ever, and it doesn’t work out, I run into permitting problems, construction balloons, the cost of supplies, everybody’s kind of dealing with that right now, they’re not on the hook for it.
So I think this is a good example of how someone in my position, I feel much safer giving a guaranteed return versus someone in a different position. Maybe for them to be able to raise money, they almost have to offer more of an equity position with less guaranteed money because they don’t know how the deal’s going to work out. I’ll throw it back to you, Amy. What are your thoughts on these different approaches and who should be taking which approach?

Amy:
Oh man, that’s a loaded question and my mind is all over the place, in a good way, because I’ve experienced all this stuff. Wins, losses. What do we do? Liquidating assets, draining my retirement account. Because similar to you, David, I mean 2017, and I’m very transparent about this on webinars, from stage, it was the worst year of my life. And, David, I didn’t sleep. I’m getting emotional now. I cried every day. I problem solved every day. It was the perfect storm for these properties I’d bought in Downtown Chicago and I could have filed for bankruptcy, but I came up with every solution. Half those deals had personal guarantees, which I still sign personal guarantees today, because I agree with you. And it sucked.
And it was just a matter of liquidate, selling all my rental properties, draining my retirement account. I had to put private money lenders on payment plans. I mean some people, eventually I had nothing more to give. I secured their investments on future projects. Those projects went south. So eventually some people didn’t even get their interest back. Most got their principle back, but it was like, I have nothing more to give. I gave everything that I could. That was also… However, the silver lining is that’s why I’m way more conservative now in my analysis of projects. Back then when I was buying properties, I had assets. So I was going into these deals and buying them. They were a little riskier. I wasn’t sticking to my standard net ROI of 10 to 15%. I didn’t do my due diligence as my company blew up and hiring general contractors. One guy took off on me. Anyways, it was the perfect storm.
To your point, there are so many ways that we could structure deals. It’s a matter of what works for you and what your goals are. So even today, 10 years later, I still raise all of my capital from private money lenders who they’re debt investors. And I also make it very clear in a respectful way like, “Hey, you’re a silent stakeholder. You’re not going to have a say in the design aspect. I will proactively keep you informed every single month through progress picks and executive reports, whether it’s good or bad. I’m very transparent. And at the same time, we’re going to start syndicating deals.” So those offers are going to look very different.
Even in today’s market, one of the things we’re going to be talking about in the October conference is everything is shifting. Even hard money lenders, they’re not allowing second lanes now. So how do we structure deals with our private money lenders who are in a equity position and bring them onto the LLC so that they feel better about being in the first lane? But then you’re right. Do they take a loss if we take a loss or do we eat all of that? Right? So there are so many ways you can structure it. You have to do what makes you comfortable and what makes sense for you.

David:
Yeah. And this is especially relevant right now because, like I said, the market is turning and technology, social media, I mean you can be a person with a charismatic personality and relatively good looks and get on TikTok and get a million followers pretty quickly and raise money very easily. And to the person who’s new, listening to this podcast as maybe one of the first because they just saw someone talk about real estate investing or they heard passive income for the first time, they’re getting into the space, very naive. They wouldn’t know what questions to ask. They wouldn’t know how to vet if this is a person. That’d be terrifying to be in that position where someone’s saying raise money and they’re offering a return. There’s no way you can know how accurate that would be.
And then you throw into it, all these fake spam bots that are online that are pretending to look like us and they’re using our likenesses to raise money. Then they’re having different people say, I made this much money in crypto. I made this much money in NFTs. I made this much money in real estate. So your FOMO is at an all-time high like, well, I have to do something. I need to take action. Which one of these people should I give my money to? It’s hard to know how to go about doing this. I don’t think that there’s an easy answer. I know people want to say, well, who should I give the money to? I don’t think it is a quick, easy answer. There’s principles that you can follow that will reduce the risk. Rob, what’s your thoughts on this entire thing?

Rob:
It’s a choose your own adventure, Dave. I mean, I really don’t think that there is a right or wrong. I’ve done a little bit of both and I think that it makes sense in certain applications, right? So you’re talking about your structure, which we’ve talked about this at length, even for our partnership and raising money on different luxury properties and everything. And I like it, because it is property specific and it keeps the equity side out of it. And you don’t have to really answer to investors in the same way, because there is a difference. If you’re raising money from somebody at, let’s say a 10% return like you’re talking about, basically I feel like that’s going to be different than if I bring on a partner that’s 50/50, because now they’re vested in it. Now their name is probably part of the debt and there’s a little bit more emotion there from the investor. Not everyone can be a passive investor.
And so I think that’s a little bit tougher to manage. So I certainly see the application of, hey, I’ll give you a 10% return. You give me your money. I don’t really think the equity thing makes sense for anything that’s necessarily in the short term, right? If you’re doing a flip or if you’re doing a set of flips, those in theory are very quick investments a lot of the times. If you go and you buy a house, you’re going to remodel it within three months, maybe sell it within six, depending on how big that remodel is. And in that instance, I think a quick flip and a quick return for that investor makes sense.
But it also comes down to what options do you have? Some people don’t have options, right? If you’re new into the real estate space and you’re approaching a private investor about money and it’s your first deal and they say, hey, I want 50% equity. I think that newbie should take it. I don’t think they should say, oh, it has to be a 10% return. Because again, like I said on the last episode, I think the experience is incredibly valuable to work through the nuts and bolts and learn what it’s like to actually get into an investment like that. Now, obviously there’s a lot of caveats to specifically that scenario, I’m not saying just give up everything, but there are scenarios where that makes sense.
But I think where I disagree on the fun side of things is, and where I don’t like this model nearly as much is, yeah, I mean we can go and we can raise 10% and you’re guaranteeing that. And I like that. I mean, I really do. I think that’s a very good way to do it on a deal-by-deal basis. But how, David, can you go and buy a 100 or a 200-unit apartment complex? I think there’s a moment there when it comes to scaling that you’ll need to go and raise some of those funds that you… I mean, there’s some level of guarantees with funds and syndications, but if you ever want to go the big 100, 200, 300-unit complexes, I just don’t really know how that model really makes sense at that point. And if the investor doesn’t want that, no big deal.
But for me, I am. I do want that. I do want 100 properties or 200 or 300 properties. Right now, this year, I’m going from 15 units. I just closed on another 20 units. And I actually raised that with a private investor funny enough. So now I’m at 35 and then I’m raising money for another 23 units. And pretty soon I’m going to be at 50. I’m going to be halfway to my goal of 100 units this year. But the only way I can do that is by going out and raising money and kind of going to that next level because the small secured debt, that format to me, doesn’t seem to make as much sense.

David:
I do what you just described sometimes. So I closed a couple months ago on an apartment complex in Fort Walton, Florida. If you guys watched the episode with Andrew Cushman, he and I buy apartment complexes together and we do structure them that way. Those are a little different because people know when they’re buying one of those, they’re not investing in… How do I want to say this? That’s very clear this is a deal outside of David. It’s an entity that is not David Greene. They’re not lending money to David, right? It’s marketed very differently. That’s made more clear.
And you’re also dealing with a different type of investor. That’s typically someone who understands that space, has done that a little bit more. I sleep well at night knowing this is a credited investor who understands these deals. This is kind of what they do, right? That’s not the same person who’s like, David, I have $100,000. I think the market’s going to go down. I don’t want to buy anything right now, but I want a return on my money. Can I let you borrow it for two or three years? And then I’ll get it back from you right around the time I think the market’s dipping. That person doesn’t really know real estate very well and I would never want them investing in the apartment complex, because they don’t understand how to even read the prospectus that we put together.
Amy, I’m going to ask you for your opinion on, in today’s market, how this should be approached. Because there’s certain people that are used to seeing the syndication model where the risk is shared amongst the investors, and then there’s other people that are terrified of getting into this because they want to invest and they don’t know what they’re supposed to look for. In my mind, maybe they should be debt investors as opposed to equity, but they don’t even know that they’re supposed to ask for that.

Amy:
Right. So one of the things I always try to do is I explain to private money lenders, “Hey, if you’ve never done this before, or even if you have, I’m always going to just educate you, educate you on our standard process. I will educate you on the different types of investment options that we have.” There was a gentleman I spoke to a couple of weeks ago and he said, “Hey, I only want to invest into commercial syndications.” So I don’t feel like there’s a right or wrong way. I just feel like there are different ways of investing your money. And we, as the real estate investors want to just educate our private money lenders on the different investment options that we have. And I still will tell them, like the gentleman who wanted to invest in a syndication, I didn’t have a syndication available at the time, but I said, “Hey, I’d be more than happy to introduce you to a credible investor in my network who is launching a syndication right now and raising capital. And if you want to park your money with him, great.”
So I’m all about collaborating and sharing resources. I just want our lenders to know what their options are. I’ve even gone as far as getting my underwriter on certain deals on the phone, my CPA to explain benefits of investing and leveraging out of your retirement accounts or life insurance policies, because that’s not something I’m an expert at and I don’t want to be an expert at that, but I want my private money lender to have enough knowledge, to make an informed decision for what makes sense for him or her.

David:
Let me share an example of how money flows in and out of smaller deals versus bigger deals. Because I think this can clear up some of the confusion that people may have with what type of deal is better for them. Most people that are investing in real estate, we’re looking for cash flow. At its basic general level, real estate with training wheels, you go buy a house, it collects a certain amount of rent. You figure out the expenses. The rent is more than the expenses. You take the difference. You multiply it by 12. That’s how much you make in a year. You divide it by the money you put in, you get an ROI and you want that ROI to be high, right? Double digits would probably be pretty good, right? Then maybe you factor in a little bit of, is it appreciating or is it stagnant? And that’s kind of all, you got to figure out. At entry level real estate, that’s how it works.
When you start getting into these bigger deals that someone needs to raise money for, because the ones I just described, you don’t see a ton of people raising money to buy stuff like that. The thing is, value is being created in these bigger deals, like a development or an apartment complex that someone’s going to buy and they’re going to put $6 million into a $20 million apartment complex that’s going to raise the rents over a three-year period of time and then add $10 million of value to the apartment complex. The tricky thing about understanding those is that the deal can be progressing just fine. The rehabs are happening. Rents are slowly going up, but they happen over a 36-month period as tenants move out, then you fix up that unit. Then the rent’s up on that one, but you still have the other 300 that you haven’t got to yet. You can’t just go in there and rehab the whole thing if it’s a duplex that people are used to buying.
So you run into a scenario where value is being added. Equity is being added. The NOI is going up, but your cash flow does not keep up with the rate of return that the investor would want. So when you’re offering a 15% internal rate of return, you can’t get that money every single month like you would when you bought the duplex. I’m trying to make sure I’m explaining this right. Maybe you guys could clear it up for me. Cash flow is one way that money flows in and out of deals. Like, if you look at blood, you need blood flow coming in and out.
But then there’s other ways that value is created inside of the deal that you can’t necessarily pay people back with. So with a bigger deal, you may have to wait five years before you can get that money out because there isn’t enough cash flow being generated, even though there is value that’s being created. And at the end of five years, there typically would be that kind of cash flow. And if you don’t know that just because it isn’t cash-flowing, doesn’t mean it’s not working or it’s not performing, you would be afraid of those kind of opportunities. Am I explaining this very well?

Rob:
Yeah, I think so. I mean, there are a few ways that that works out, especially if you’re talking about a bigger deal like that. I mean the cash flow typically, obviously you want to… That goes into the return. But a lot of the times the funds and the syndications, like the ones that I’m doing, for example, we put a sale date on it between it’s usually three to seven years. I think the one I’m doing right now is five to seven years. But because of the added value that you’re talking about, a lot of the times what we’re doing is we’re going to go in and we’re going to fix up a hotel, for example. And we get into pretty specifics here, but you’re talking about an apartment complex. There’s tenants. You have to wait for them to leave. I like the hotel model, for example, because people are in and out every day. And so we can just block off that.
But our idea is we’re going to go in, we’re going to renovate it. We’re going to get the value up. And then ideally do a cash out to pull most of that money back out and pay back to the investors. Every single fund is obviously very different. Not everyone does this. But for the funds that I’ve been a part of, we try to pay back the investors as soon as possible. That way, basically whatever cash flow does come from that, it usually ends up being a good return because a good portion of the capital has been returned at that point. But again, that’s like one way to do it.

Amy:
Yeah. I mean, there are some private money lenders who don’t need the income in the form of a monthly cash flow. And they’re more interested in taking advantage of all of the tax benefits they get by investing in a commercial syndication, forwarding the depreciation, 1031 exchanging certain investments. So it really just depends on… This goes back to knowing your audience and understanding what they have experienced in the past as a private money lender and what their expectations are moving forward.

David:
Yeah. That’s a great point. So thank you guys, you’ve kind of brought me to the point where I can clarify it now. If you’re trying to build wealth, you’re probably not going to have access to your money during the period of time it’s working. Okay? You’ve sent it out overseas for five years. It’s out doing its job and it’s going to return with a … full of spices that they’re going to make you are rich. Okay? That’s how the people that make good money in real estate, that are putting into these bigger deals, they don’t expect cash flow to come in every month or even every quarter. But when the money comes back, it comes back with a very big return.
If you’re someone who’s trying to find financial freedom, if you’re someone who’s trying to get yourself out of debt, if you’re someone who’s just trying to build momentum to where you can get yourself financially solid so that you can save money easier so that you can go take on some of these deals, maybe you want to focus on something that will get you monthly cash flow in the beginning. And I don’t think it’s an either or. I don’t think it’s which way is better. I think it’s, in this season of your life, do you need money coming in every single month so that you can get ahead or are you relatively safe and now you’re at a point where you don’t need to see that money right away, as long as you know that it’s working?

Rob:
This is quickly becoming my favorite episode of the series, simply because we’re actually getting into very… It’s very nuanced, right? I hate that, as a educator in the space, a lot of people ask you a question and it’s always like, it depends. But it really does, because every single investor’s different. And I’ve talked to at this point 100 investors in my real estate career and every single one is different and some care about one thing and the others are like, no, I don’t care about that. I just care about what’s the ROI on it or what’s the IRR, right?
I wanted to ask you, Amy, because I know you do raise a lot of money. This is what you do, right? And you talked about in the credibility aspect of the FACT framework, how you take them through how the money is deployed. So when you’re raising money and, again, I know this will probably be a “it depends” answer, do you not necessarily have a project intended for that money? If you’re going out and someone says, “Hey, Amy, I’m going to give you a million dollars.” Are you like, great. I’ll take that. And then you then go and figure out how to deploy it. Or do you usually present what deal that money is going to go into?

Amy:
So I’m always proactively looking for capital and building rapport and trust with individuals. If I don’t have an active project… Like right now, I have a couple. If somebody says they’ve got capital to invest, then I will turn to other trusted investors in my network and make an introduction. Hey, I’ve got a friend of mine in Scottsdale right now, who’s doing a million-dollar raise on a small syndication. And there’s more money coming in to my business than I need based upon my project. So I’m introducing them. So I’m all about collaborating. No, I don’t have that scarcity mindset where I’m worried about what if I get a deal tomorrow and then I need that million dollars. Because when you’re following a proven system and you know how to raise capital the right way from the right people, it’s not going to be difficult to get out there and raise capital from your existing network or a new network that you’re developing.

David:
And that’s why we wanted to have this conversation. Because if you follow the steps that Amy has laid out, you’re going to have people that say, “Yeah, I’ve got some money. What do you have in mind?” And you don’t want to be like, “I didn’t think I’d get this far.” Right? There’s that old meme of you start talking to the pretty girl. And then she’s like, “Yeah, you can have my number.” And you freeze like, I don’t know what I’m supposed to do now. You want to have some idea. And so I’m trying to plant some seeds in people’s minds that depending where they are, what opportunities to deals they have, how they can structure that.
And then the reason I think that’s valuable is, if I know I’m looking for someone like the people that I described, I’m looking for a person that has a lot of money in the bank, doesn’t want to invest in the market right now, whether that means they don’t have enough time, they don’t like the risk factor. They think that the market’s going to drop. Doesn’t want to have to learn the asset class. They just trust me. I’m looking for a different avatar person to give my 13-word speech to versus someone in Rob’s space. He’s looking for a very different classification, a person who’s going to put their money into his hotel that he’s going to be building. And then the money that Rob and I are going to raise eventually for the Scottsdale place that we bought, completely different person. You want to know who you should be talking to in the elevator, right? You’ve got a couple different people in there who you should be focusing your time on.
I want to ask you, Amy, as someone who is experienced in doing this for a while, what are some of the red flags that people should look out for if someone’s trying to raise money from them? And then, also, if they are raising money, what are some red flags they should avoid so that they don’t trigger that stereotypical Nigerian print syndrome that other people think, oh, this is a scam. I don’t trust you at all.

Amy:
Sure. As I’m putting myself in the shoes of a private money lender, if you guys are approaching me and you’re trying to raise capital from me, a red flag to me would be you on the first phone call asking me for money, trying to convince me of this amazing deal that you have. Or if I get an email from you that says, “Hey, I have a deal.” We’ve never even met. We’ve got no rapport. “Hey, I’ve got this deal.” Don’t put your private money lenders on an email blast until you have an established relationship with them. So if I see those types of emails come in, it’s a red flag to me. I will not give you guys the time of day.
If you reverse that and now we are out there and we are raising capital, things to look for in somebody that’s lending you money, I mean, there’s a lot… I always say, hey, we’re going to raise money the right way from the right people. And it starts with mindset. We have to believe that we really are providing these private money lenders with an opportunity to invest. And I believe that we are. Where else are they getting double-digit returns backed by real estate, above and beyond all the other controls we put into place, right? Because as control goes up, our risk goes down. And we control everything in our real estate business. So it’s a matter of educating this to our private money lenders.
So number one is we have to have the right mindset. If our private money lender doesn’t share a common mindset, if we don’t align on our moral or ethics, I don’t have time for that. That’s not somebody’s money who I want to put to work in my business. There are going to be people who… This has happened to me. I had one private money lender who just bullied me around with his money, but it wasn’t until he had actually processed the wire. He was great. He was my best friend. The minute he processed that wire, the next seven days were the most daunting.
He actually showed up at my property unannounced, which means he flew in from Florida on his private jet to Downtown Chicago, left me a voicemail saying, “Amy, we’ve got some big problems. I need you to come to the property right now so we can talk about what’s going on.” I didn’t call him back till the next day. And then in my passive aggressive voice, I was like, “Oh my god, I understand you were in town. Did I miss the memo?” And I said to him, to make a long story short, “This isn’t working now. I’m going to need your wire instructions and I’m going to just cash you out.” And I gave him seven days of interest. I don’t have time for that, right? You’re a silent stakeholder.
Other red flags for us is let’s make sure that we’re not data dumping on people. Until a private money lender asks for more information, don’t just give it to them. And never say, “I don’t know.” And a lot of us are still learning, right? A lot of you are going to get out there and implement that four-second power pitch and you’re not going to know what to say next. So instead of saying, “I don’t know,” just substitute that with, “That’s a great question. Let me turn back to my team of experts and I’ll get back to you within 24 hours.” And then get on the phone and reach out to your community or other people in your network who have done this before, if you have a coach, and be like, “This just happened, what do I say? What do I do? Right? So we always want to position ourselves as the polished professional poised for aggressive growth.

Rob:
Yeah. There’s a lot of gold in what you just said. I mean, I think first of all, just because you can take money from somebody, does not mean that you should. And obviously this is a good problem to have, if you do have all those options, but you really do want to vet your investors just as much as your investors are vetting you. And this is something I don’t think a lot of people realize because we’re so hungry to get into a deal. We’re so ready to get into our third or fourth and scale up, right? And so when someone’s like, “Take my money,” in your mind, the obvious answer is like, heck yeah, give it to me.
But for me, for example, I get people that reach out, I mean, several, several times a week, that will just out of nowhere, say like, “Oh, I’ve got a million dollars. I’d be interested in investing. Give me a call.” And I’m like, “Thanks, but no. First of all, how about just say hello first? Don’t just say, give me a call right now.” Because that right there shows they’re expecting a phone call. If they’re expecting a phone call from me before we’ve ever met, that already for me is a red flag. I don’t want that. And plus I don’t have… This kind of goes back into, don’t just take money because people are offering it to you.
You might disagree with me here, Amy, but because of the influx of investment inquiries I get, I don’t always have projects to deploy them in. And so that for me is my struggle right now is I actually have really great investor deal flow, several times a week people reaching out, I just don’t have anywhere to deploy it. And so it’s always like a, “Hey, thank you anyways. When I have a project, I’ll let you know.” So I’m always now actively working on what the other side of this equation is, which is deal flow, right? I think investor deal flow is important, but the actual deal flow is equally important.

Amy:
Just to piggyback off that. The power of raising capital, it is endless opportunity. Whether it’s to the listener out there, those of you who are experienced or not experienced, when you know how to raise capital within raising in ethics, you can do whatever you want in the real estate world. You don’t have to be a fix and flipper. You don’t have to wholesale properties, go raise capital and become an equity partner to somebody who is syndicating a deal. This is an opportunity that someone just presented me with a few weeks ago. I’ve been doing this for 10 years and I never thought of it. He said, “Go raise capital. I’ll give you 5% equity in this syndication.” So you don’t even have to have experience in flipping or wholesaling. You don’t even have to want to flip or wholesale. Just go raise capital and partner with other people who will give you equity stake in their company.

Rob:
Yeah. I’ve figured this one out recently where I was like, I should probably not always just not follow up with these investors that are like, “Take my money.” Because again, for me, I do have the fiduciary duty to perform well. So if I can’t perform well, if I don’t have a deal that I feel I can do that, I’m not going to really pursue that lead.
But I want to go back to what you were saying about what newbies are saying that could be a red flag to an investor because I think that’s where most of the people are going to be at for this episode. And you said one already, “I don’t know.” And just a very small shift in your language going from I don’t know to that’s a great question. Let me figure that out for you because actually partner handles this side of the business. Or, we have a couple ways we do that, but before I speak too quickly on it, let me send you the actual document where it’s written after this phone call or after this meeting because I don’t want to speak out of turn. Because what people will do is they’ll either say, I don’t know, or they’ll try to fake it till they make it, quote, unquote. And by faking it till they make it, they’re going to give bad information that they’re going to be held accountable to whenever the actual terms come to light. So are there any other things that newbie investors say that are kind of in that camp?

Amy:
Aside from what they’re saying, I mean, that’s a huge one. A lot of it is also our body language and our tone going into these conversations in person or over the phone. We got to be confident in our delivery. If anyone senses any sort of timidness or uncertainty in our voice, they’re not going to invest with us. Right now, take the script we’ve given you, that four-second power pitch, practice it at home. Perfect it. Even if you don’t know what comes next, just be able to rattle off those 13 words with confidence because that will be a red flag to a prospective lender is if you don’t sound confident in your delivery.

Rob:
Yeah, for sure. I think there’s a few ways you can do this. So A, if you end up not closing an investor, I actually don’t think that there’s anything wrong to ask like, hey, where did I go wrong here? What was something I said? If you’re close. Because a lot of the people that I know will reach out and you may have that relationship with somebody, but, hey, I’m just curious. You’ve already said you’re not interested. That’s totally fine. I’m just curious. Where did I go wrong? To not mince words here. And kind of find out and then also talk to other people who have raised money to find out their tips and tricks.
I recently had a similar story. It’s a little bit adjacent to real estate, but I’ll tell it anyways, because it’s something that I figured out that talking to a pro was really able to help me out. I’m becoming somewhat of a watch guy. I’m wanting to get into watch collecting and build up that side just because I’m fascinated by this asset class. And so I started doing a lot of research and I got pretty knowledgeable. I fell on watches and these are tough to get. So I’ll go into the dealer and I start saying like, “Oh, I want this and I want this.” And, “Oh, you know what, give me these four. Whatever’s available, I’ll take.” And they’re like, “Sorry, bud. It’s a yearlong wait list.” And I was like, “Oh, okay. All right, sure, fine, whatever.” And I left.
And so I got connected with another watch expert/reseller. And I was like, “Hey, man. Yeah, I kind of struck out several times.” He was like, “All right. Well, tell me about the conversation.” And I said, “Well, I said I wanted these five watches. I said that I was willing to whatever it takes to get it.” I said this and this and this. And he’s like, “Oh, these are all the red flags that you just said in one conversation.” He’s like, “Congratulations, you actually broke the record for listing all the same red flags in the initial conversation.” And he was like, no worries. Here’s what you got to do. Here are the tips and tricks. This works for me every single time.
And so he said, “Hey, go in. And instead of talking about watches, why don’t you talk about your life? Strike up a conversation with the watch seller, the time piece seller, if you will. And let them know that you’re a person, that you’re not just there to get a watch.” And he’s like, “And also don’t go in guns blazing saying, ‘Hey, I want any watch. As soon as it’s available, you let me know and I’ll come by and I’ll buy it.’” He’s like, “The last thing you want is for that watch dealer to think that you’re a flipper because the moment that they think that you’re just going to flip the watch and sell it, then you’re already blacklisted.” And he is like, and also do this and this and this. And I was like, “Oh, okay. All right. I did mess up.”
And so I went back to two and I implemented exactly what I said. And I was like, all right, I’m not going to say these five red flags. And I was able to actually get the watch, instead of waiting a year, within three weeks, both times with two different dealers. And I was like, oh. So there is a practice to working with somebody and making sure that you are educated and that you’re not just, like you said, data dumping and trying to prove that you’re smart. Because I think what we’re trying to do at the end of the day is prove that we’re people first, that we’re people that we want to work with. And if we can prove to an investor that they want to work with us, then at that point you can start leading with a little bit more data and kind of nurturing that relationship.

Amy:
Yeah, absolutely. I get a lot of investors out there who will say, “Shouldn’t I be marketing my company?” And I believe it’s the opposite. We’re marketing ourselves. And when people know us, like us, and trust us, the individual, then they’re naturally going to invest in our business. And we really have to just wrap up mindset and confidence. Remember, we’re not asking for money. So we don’t ever want to approach a private money lender and say something along the lines of, “Hey, I’m looking for $100,000. Are you comfortable lending me money?” Right? It’s, “Hey, I’m in the middle of a capital raise. This is the investment opportunity. Let me know if you’d like to know more.” And we just got to deliver that with confidence.

David:
What do you think about the red flag, Amy, of starting with the interest rate before you give them ease that they’ll have the return? That’s something I’ve seen where there’s someone raising money and they’re like, “Hey, I’m offering 18%. Are you interested?” And immediately they’re like, “Oh, that sounds scary.” Versus, “Hey, I’ve got a deal and it’s under market value and this is the plan to add value.” And they’re going to receive their capital back after 24 months. And we’re anticipating a return of this much. I think that’s a pretty significant red flag where someone comes out and says, “Hey, you want to invest with me and get a 75% return?” as the way that they open the conversation.

Amy:
Right. Like, I don’t even know you, right? Along the same lines of what Rob said, I don’t know you. I know nothing about the deal, who you are, and what you’re doing. I don’t care about your 18% return. So it’s going to be the latter of the two. I’m going to highlight how we protect, secure and ensure their investment, how long we’ve been doing deals in Downtown Austin. And by the way, we offer double-digit returns backed by real estate. If you’d like to know more, great, let me know. And I’m still not going to ask when I frame it that way.

David:
One of my favorite books is Pitch Anything by Oren Klaff. We’re working on trying to get him on the show. The title of the book is a little bit kitschy. I understand, like it kind of turned me off. I didn’t read it for a couple years just because pitch sounds so negative. But what he is really getting into is how the human brain processes information. And one of the key points in the book is that the very first thought emotion anyone experiences to any form of stimulus is, is this going to hurt me? So when you guys say, I don’t even know you, nobody’s assumption is you’re probably nicer than Santa Claus, a stranger. No one’s like Will Ferrell and Elf is what we’re getting at.
Their first thought is always, how are you going to take advantage of me? How are you going to hurt me? They don’t listen to a word you say until you’ve already proven yourself to be safe, which is why, like Rob was saying, by leading with here’s who I am. This is what I do. I’m a regular person. And eventually this is why I want the watches. I’m a big fan. I want to give them to my kids someday, whatever the case is. Now that part of their brain that says, threat, bad, negative quiets. Now they can actually hear what you have to say and then the appropriate time to bring up the price you want to pay for the watch or, Amy, in your case, what the interest rate would be.
I love highlighting that because that’s a mistake I see a lot of people say, “Hey, huge returns. Invest here.” It gives you that same feeling of in the ’90s when a little popup would come on your computer that you just knew there was a virus behind that. Like, this looks so shady. Even I’m afraid to tap the X to make it go away, because for sure this is going to hurt me. There’s human beings that walk around giving that same vibe and you don’t want to have that if you’re an honest person looking to put money to use.
Right. I’m going to move us on to the next segment of our show. In this segment, we are going to read questions from people that have asked about this specific topic and we’re going to let Amy and Rob answer them. Question number one comes from Stephanie Mokris. She says, “Okay, I am officially addicted to the BiggerPockets Podcast. I’m a travel nurse with a one hour 20 minute commute. And I love listening to you guys while driving. Thank you for all the value you provide to your audience. I do have a question regarding this series. What is the strategy used to pay the private lenders back? I can see in a flip or a BRRRR, but how about if the borrower used the private money for a turnkey property?”

Amy:
Sure. I get that question often. You can still raise private money for a turnkey rental property. There are going to be a few differences. Number one, you’re more than likely not going to offer double-digit returns because the numbers just don’t make sense. What I have found is it’s going to be around a 6% annualized return. Number two, it’s not going to be a 12-month term, a 12-month promissory. No. At a minimum you’ll want to get a commitment of two years. And number three, you will make similar to Dave monthly interest-only payments out of the cash flow. And number four, just make sure you’re targeting rental communities that are in preferably type A markets so the property appreciates, so that in two years you can do a cashout refi. Even if you’re not implementing the BRRRR strategy, we want to make sure there is a little bit of work you can do with the property and it’s in an area that will appreciate so you can do the cashout refi in two years, pay off your private money lender, and then the house is yours.

Rob:
Yeah, I think that’s great. We’ve done it a few different ways. I actually have a buddy who said that whenever he’s buying his short-term rentals, he exclusively will go to friends and family and raise the money private. He says that they don’t know the power of HELOCs or they might have a HELOC line of credit where it’s just sitting there. I mean, I guess a HELOC is a line of credit. But a HELOC for those of you that don’t know is a home equity line of credit that you can use. And so they have that sitting. And so he’ll say, “Hey, your HELOC interest rate is 4%. If you give that over to me, I will give you a 6% return on that.” So a total of 10% debt for him. And he just chips away at that every single month.
Now caveats here, obviously that is pretty close to hard money rates. So if you’re going to do that, make sure that your deal works pretty comfortably and that there is margin on that just for errors and for market stuff and everything like that. But he does that and he loves it. And his plan is exactly what you said, Amy. He wants to go out and cash out in two or three years. In fact, just because of the crazy year that we had, he said he could cash out already and pay them back. But for him, he’s like, “Well, I’d rather just keep the cash flow and keep chipping away at everything.”

David:
All right, next question. Rob, I’ll let you take the last one. This one’s pretty good. And I like getting into this stuff that other people avoid. “What happened to the good old days where BiggerPockets had real estate investors on, who were willing to share their successes and failures? They just loved talking real estate and weren’t trying to sell anything. As soon as I hear a guest say, ‘One of my students,’ I immediately write them off, not as a real estate investor, but as some wannabe guru. The people who are out there really buying real estate, don’t have time to sit on the phone and coach people.”

Amy:
Another loaded question. So using myself as an example, I’ve been doing this for 10 years. It took eight years of investors all over the country asking me to coach them on how to raise private money because we all have strengths and weaknesses. I’m very good at raising private money. I’m terrible at a lot of other things. I’m terrible at marketing. There’s a lot. Because this comes so easy to me, for example, and because it is one of the top two most challenging things that we are tasked with as real estate investors, I enjoy coaching and helping and teaching others. Earlier I said, I wanted to help Josiah because he just seemed like a great guy who is actually implementing what I teach and starting to see results.
All that said, I’m still a student of the industry. I’m still learning. I’m still growing. I still go to events myself. So even through my coaching community, I learn from my students all the time. So I believe that when you coach and give back to others, that tool will find its way back to you, whether it’s in that same topic or other parts of our real estate business, or even other parts of our lives personally. So that’s why I do this.

Rob:
Yeah. I’ll try to answer this diplomatically. If you go to an electrician or a plumber and you said, “Hey, man, I love that you’re a plumber. Will you come do that for free?” What are they going to say? They’re going to say no, because you are paying for their experience and their time. And that’s effectively what education is. You’re paying for your educator’s time to help you go to the next level.
But outside of just the loaded aspect of this question, there’s a lot of free content out there. For me specifically, most of my content out there, it’s all free. Like TikTok, Instagram, YouTube, I give everything for free. Now, obviously I do have coaching and everything like that. But for those people, I’m always like, well, you’ve watched 20 of my YouTube videos and those 20 YouTube videos, they’re all 15 minutes each, it takes one hour to edit every single minute in that YouTube video. So, if you watch a 20-minute Robuilt video, that took 20 hours to create. So if you watch 20 of my videos, you’ve just watched 400 hours worth of my work and that is for free.
So I don’t think that there’s anything wrong with online education if you trust the person that is there to educate you and if they’re credible. On top of that, I think the way you can really start sniffing this out and really getting to things is, is that person still doing what they’re teaching? It’s very easy to rest on your laurels and not continue specializing in the thing that you’re teaching, right? But for me specifically, it took five years to get to 15 units. So far I’m at 35. Now I’ve more than doubled it so far and I will quadruple it by the end of 2022.
So I think if you’re having a little bit of pause with the online education part of it, go and see what that educator offers and then make sure that they’re still doing it. And if they’re not, then, at that point, I think you can start to question it a little bit. But education is so underrated. Hormozi was just on the podcast. He got super fired up about this too. And I was like, thank you, amen. Because why is it such a bad thing to become smarter, Dave? Why is it such a bad thing, David?

David:
I can understand… It was Matt Spangenberg’s comment here. I can see his point that if you are good at doing this, you wouldn’t be teaching it. And I think that applies to a certain subset of slimy people who talk a big game and they are internet marketers, and then they go sell information that you could have got for free somewhere else. There is many of them. It’s easy to throw the baby out with the bathwater. But there’s other people who do this at a high level, who can reach more people via the internet than they could possibly do individual deals.
So like I mentioned, I’m out here in the Smoky Mountains. It’s been three days in a row, I’ve been driving around, looking at cabins all day long. I can’t really talk on the phone. The Internet’s in and out. You’re on these windy cabin roads. You can’t really do much of anything other than look at these cabins. I’m not being productive for anything else while I’m out here. It’s not the best use of time. Now I won’t do this forever, right? I will learn the area. I will figure out how this works and then I’ll buy cabins with my long distance investing techniques.
But what I’m getting at is, if I was to coach 1,000 people at one time on how I do this, that would be more money per hour than I could possibly make buying these cabins when I’m having to drive around, to look at all of them, and then write all the offers, and then talk to the agents. And you know how agents love to talk, right? So every time you want to get anything done with an agent, you got to listen to them talk forever with their high I personalities. You can tell that I’m a high D and that kind of drives me nuts a little bit. There is a scenario where it’s not necessarily true, Matt, where, if they could invest, they would be doing that instead of coaching people, because you can reach so many people at one time. You’re also spot on with the fact that there are some slimy people.

Rob:
Oh my god. For sure. 100%.

David:
And that’s one of the reasons that BiggerPockets grew to what we did is we firmly stood against the slime bots, right?. There’s people making a whole lot more money than me selling those courses instead of being on this podcast, but I’m not going to do that because I don’t want to be associated with those kind of people. It’s something you have to… I get it a lot of the time from, “Well, he’s a real estate agent. Of course, he says to buy homes.”

Rob:
15.

David:
I just bought $15 million worth of real estate in the last 30 days. Because I’m an agent, I’m telling people to go buy houses. Amy, go ahead.

Amy:
But this goes both ways as far as expectation and personality is concerned. As a private money coach, for example, there are plenty of people who I have turned away and I said, “You’re not a good fit for my coaching program.” Because in the beginning, because I really love this, if you can’t sense the passion and energy, it’s been like this for 10 years, I’m tired trying to convince people on the opportunities that they’re missing out on, how they can go buy five rental properties tomorrow, they can grow and scale their real estate tomorrow just by knowing how to raise capital. So if you don’t have that mindset, I don’t want to coach you. I just turned someone away the other day. I was like, “Keep your money and go figure it out on reading books or listening to podcasts or on YouTube.”
I’m the type of person, and this is exactly how I started, I want the fast track to success. I want the shortcuts. I don’t want to make a bunch of mistakes that’s going to cost me more financially in the long run. Again, we all have different goals and expectations, and there are plenty of coaches who will respectfully turn away your money as well, if your expectations don’t align with theirs.

Rob:
100%. Hormozi, I think he said he spent $170,000 for each of his four calls with Grant Cardone. And he said it was worth it 20 times over because of the value that he got from it. So you just have to ask yourself, what value am I getting from this? Is it something that’s going to help me? And if not, then move forward. Or, if you’re not going to get the value, then move on.
All right. So let’s move on here. So this one is Tamaz Poznanski. Sorry, Tamaz. I feel like I mispronounced that, but I gave it my best shot, Tamaz. Okay. Question. “Hello. What the entire paperwork process looks like and how it’s backed up for the investor, for the house that I’m trying to buy. So I want to see what the pros are of private money over hard money. And also how do I set it up?”

Amy:
So you’re going to want to use three standard contracts and the three standard ones I use in my business to protect, secure and ensure my private money lenders include, number one, the security’s going to be in the form of a recorded mortgage. Go get that from your real estate attorney or a title company. But that’s what secures your private money lender’s loan to the property. You cannot sell the house unless you get their written authorization.
Number two, the way you’re going to protect the investment is through a promissory note. Go get that from your real estate attorney or title company. A promissory note is just a one-page term sheet that summarizes the conditions of your loan. I, Amy, promises to pay you, Rob, $100,000 over the next 12 months at a 12% annualized return. And this loan is secured by the property located at 123 Main Street.
So, so far you got the recorded mortgage, the promissory note, then the third thing you’re going to do is talk to your insurance agent and say, “Hey, I got to make sure that my private money lender’s listed as a beneficiary or lost payee on our builders risk insurance policy for their loan amount.” You’ll give a copy of that two-year private money lender. This way, if a natural disaster happens, your insurance will pay back your private money lender. Those are the three pieces of paperwork that you will use as a part of your standard process.
Now, why private money over hard money? I love them both. Love my hard money lenders. Love my private money lenders. It depends on you. It depends on the deal. When you work with private money, you’re not going to pay any points. Because I don’t offer my private money lender points. You’ll pay a couple of points in hard money. It’s the cost of doing business. You’re going to have higher interest rates. They’re going to check your W-2. They’re going to check your credit. It’s all a part of their standard process, but you’ll have the money tomorrow. They’re still not going to give you 100%. So whether you work with hard money or not, you still got to come to the table with that gap funding, the difference. I don’t want to come to the closing table out of pocket. I want to use whatever money I have to go build my passive income portfolio, buy more rentals, lend to other investors, and then use other people’s money in my fix and flips and wholesale deals to make that infinite return. Anything you guys want to add to that?

Rob:
No, that was pretty good. That was pretty good. I think you summarized that very concisely and intelligently. I’m going to step back from this one.

David:
I do find it slightly ironic that Tamaz’s question, one of the first thoughts I thought was this is such a specific question that this is probably best directed to somebody who is coaching you. We get this a lot like, “Hey, can you share your spreadsheet with me?” And this is a spreadsheet that maybe Rob has spent four years developing and tweaking and making mistakes to try to get it to where it’s at. Or, “Can you just send me the document that you use to do these deals together,” that maybe Amy spent $50,000 over lawyers to put together. And you get someone who is getting free content, here’s about what they do and then says, “Now, can you give me the thing you spent $50,000 for,” and gets kind of salty if it doesn’t happen.
It doesn’t hurt to ask, but just don’t get upset if someone’s like, “Yeah, I’m not comfortable giving you my entire system that I’ve spent years and hours and made so many mistakes and lost so much money to come up with for free.” That would be more appropriate if you’re being coached by that person and you’re paying them to coach you. And then they say, “As part of my coaching program, I’m going to give you my complex spreadsheet or my legal documentation I use.” Do you guys disagree about that?

Amy:
No. And it comes up all the time.

Rob:
Yeah. Fun fact. I give mine away for free. All my docs. I give that, furniture shopping lists, templates. That’s why when people are like, “You’re just slimy.” I’m like, “Dude, it’s free. I’m sorry that it’s free.”

Amy:
I give away plenty for free. I just had someone call me the other day. And I’m at a point now where it’s like, again, I don’t need your money. Keep your money. You’re not a good fit for this coaching program. Because I don’t do one-on-one coaching anymore. And he said, “Hey, can I just give you like 500 bucks per call and do a couple of calls with you?” And I said, “Thank you for the offer. And no. Save your $500 because I’ve got 71 different strategies that I teach. And whether you’ve done this before or not, we all start with module one. So I can’t teach you everything to get out there and raise money the right way with two phone calls. I could literally talk about this for two months. So if you want to be a part of this community and raise money the right way, then,” I told him, I said, “let me know if you want to talk more about my coaching program.” And he ended up enrolling that night. But it’s like, it’s more than just two phone calls.

David:
Yeah. And by no means are we saying you have to go pay for a coach or even that you should go pay for a coach. I never did that for a long time in real estate. I’m going to use a gym analogy, because it just always works out so good.
The gym has everything you need. It’s got all the machines, it’s got all the weights. It’s got the cardio, it’s got the different levels. It’s got the sauna, it’s got the pool. It’s got the basketball court. It probably even has instructional videos on how to use this stuff, but that is different than hiring a personal trainer. The personal trainer will get you in shape faster. They will provide more than just access to the gym stuff. They will show you how to use it. They will push you. They will make sure you get there. They’ll teach you how to use it better than you would’ve been able to use it without them. They are going to sharpen your learning curve and your success curve. And that’s why you’re paying them. But that doesn’t mean you have to. If you don’t want to do that, you could just go to the gym.
BiggerPockets is a gym. It’s got forums. It’s got blogs. It’s got very cheap books. It’s got this podcast and five or six other podcasts. It’s got a YouTube channel. It has free webinars. It’s got tons and tons and tons and tons of stuff that you get to go use completely for free. But if what you’re looking for is a personal trainer, it’s okay to pay the personal trainer for their time and for their experience, because this is how they make their living. They got in really good shape and now they teach other people how to do it. I’ll kind of put a pin on it there. Let me know in the comments, as you guys are listening to this on YouTube, what do you think about what we said? Was this too controversial?

Rob:
Give us some hot takes, guys. Give us some hot takes.

David:
Do you agree with us? Did we not cover anything that we should have? I’m not afraid of the conflict. You guys can go ahead and bring it. Tell me if you don’t like something I said or what you didn’t like about it or, if you did, I will be happy to address that maybe in a different YouTube video for BiggerPockets, because this is a very controversial topic, but I don’t see any reason why I need to stray away from it.
Okay, Amy, this has been fantastic. I think this was a very good interview. I appreciate you being willing to wade into these murky waters that we just did, because borrowing people’s money is a very nuance and complicated topic. And I want people to get good at it. I want them to use your system. I want them to have success, but then once you get the success, you don’t want to be stuck saying, I didn’t think I’d get this far. What am I supposed to do? Because we want people to be successful with their investing. Do you have any last words of advice that you can offer?

Amy:
You guys got this. Again, you’ve got plenty of resources out there. Let us know. Let me know. I manage all of my social media. I am here for you as a resource. Any question you have, I will respond within one to two days. Just send me a DM. And I got you. I’m going to try to get through as many of the comments and questions as I can in these videos. So whether you work with me or not, you guys, I’m always here for you as a resource in any part of your real estate business. So don’t ever hesitate to reach out to me.

David:
Rob, how about you? Any last thoughts on this nuanced and complicated topic?

Rob:
No, I think it’s exactly that, it’s nuanced. And honestly this whole four-part series was really, I mean, gosh, just a really good rollercoaster of knowledge, right? Because we talk about the actual tactile concepts from start to finish for the first and second, and even the third one. Today was all about the application and the nuanced aspect of it, because I think this is probably where we were answering a lot of the questions that people have been developing over the past three episodes. So Amy, thank you so much. I mean Josiah already did, but I know a lot of people are going to benefit from just putting themselves out there. A power pitch. The power of four seconds and how it can change your life with the real estate is absolutely amazing. And I don’t think people should sleep on that.

David:
I’ve got one last question for each of you. I’ll start with you, Amy. In today’s market, where are you seeing the best opportunities?

Amy:
Best opportunities to invest or to lend in, or all of the above?

David:
No. For someone who’s either going to place their money with an investor, someone who has money, they want to invest.

Amy:
It really is deal specific. I always say, even in a recession or an economic downturn, we make our money when we buy. So private money lenders, those of you listening, if you’ve got money you want to invest, just make sure that you are talking to somebody in a market where they know how to buy. They’ve got a strict buying criteria. They’ve got a proven track record and they know what they’re doing. But you can really make money anywhere as long as you know how to buy properties.

David:
Wonderful. Rob, same question to you.

Rob:
What a curve ball, you. What a curve ball, Dave. Okay. Obviously I’m biased, so I’m going to move on from this really quickly. I think short-term rentals are going to be the place where people are getting the most return on just most of the typical asset classes, because obviously with interest rates and prices going up, I think the longterm returns are going to go down. And so that means that with short-term rentals, maybe we’re not going to get those super, super crunchy 30 to 60% returns like we were in the golden days, but those will now go down a little bit and I think be the gold standard for returns for the everyday investor.
However, with that said, where I personally am seeing the opportunity with where I am in my life and the way that I’m scaling up is I’m actually going and I’m acquiring the hotels, like I talked about, which is something that I’ve been very anti for a long time, anti hotels, and basically renovating and turning them into my version of Airbnb. So I’m taking down hotels by turning them into Airbnbs and raising money to do that so that I can basically just scale up a little bit faster than, I mean, it’s a lot more faster than I have over the five years. So I think I’m going to have a lot of fun here. The returns will still be really, really, really massive because of the amount of value that we’ll be adding. But it’s still in the short-term rental space. I don’t feel like I’m leaving my first true love quite yet.

David:
Wonderful. If you guys want to know what I think about that, you can find out and you don’t have to pay for it. Just go to BiggerPockets’ YouTube channel and look for a video of Christian Bachelder and I, talking about where we see opportunity in today’s market, what we’re both buying. And then another video with Kyle Renke and I, talking about negotiating strategies that we are using to get the best deals possible. And this is all on-market stuff that anybody can find. All right. Thank you both. Amy, really appreciate your time and your transparency here. Thank you for sharing your four-step system. And Rob, thank you for being you.

Landing founder and CEO Bill Smith joins ‘Closing Bell’ to discuss consumer trends towards flexible apartment rentals, the Landing business model and the growing number of flexible housing providers.

Dave:
Hey everyone. I’m Dave Meyer. Welcome to On The Market. Today, we have the Vice President of Research at the National Multifamily Housing Council, Caitlin Walter, joining us for a really, really informative interview. You’re definitely going to want to stick around for this if you’re interested in the multi-family space.
In large part due to bigger pockets, I think demand among investors for multi-family apartments, either as a sponsor, like you’re going out and buying the deals or as a passive investor, which is something I do pretty regularly, has exploded. And it’s because multi-family, over the last couple of years, has presented some of the best returns in the entire, not just in the housing and real estate industry, but across pretty much every investment class. Multi-family units has been very attractive and it’s why people want to get into it.
But the question, of course, remains just because it’s done well in the last couple years does not mean it’s going to do well in the future. So we wanted to bring on Caitlin Walter to help us understand the state of the multi-family housing market as it sits today, but also what is going to happen in the future? Is the crazy rent growth that we’ve seen going to continue? Are cap rates, which are the way that multi-family properties are valued, are they going to go up or down and change the valuations of apartment buildings? Is demand going to increase even though we’re seeing building at a much higher level than we have over the last couple of years?
These are questions I’ve personally had for a really long time, and I think you’re really going to like this interview if you have similar questions to me, because Caitlin does an excellent job explaining it. With that, let’s bring on Caitlin Walter, the Vice President of Research at the National Multifamily Housing Council. Caitlin Walter, welcome to On The Market. Thank you so much for being here.

Caitlin:
Thanks for having me.

Dave:
You currently work as the Vice President of Research at the National Multifamily Housing Council. Can you tell us a little bit about what that organization does and what you do there on a day-to-day basis?

Caitlin:
So the National Multifamily Housing Council is the trade organization that represents owners, managers, developers, as well as industry suppliers, so cable companies, things like that to the apartment industry. It’s typically the leadership of those organizations, although we do have a lot of opportunities for folks that are on the lower levels of those organizations as well. We provide research. We provide government affairs, outreach on behalf of our members, also a lot of industry best practices that we work on. And our owners, the companies can range from a couple of folks to thousands of employees, so it really runs the gamut. And at NMHC, I work in the research department, so we provide both in-house research as well as we do contract out some academic and consultant research to look at the multi-family industry, so typically rental units in buildings with five units or more.

Dave:
Well, you are the perfect person to be here right now, because so much of the data we look at is really mostly talking about single-family residences or small multi-family. That is, at least in my experience, the most readily available information about the housing market. And it is so great to find an organization like yours that provides really high quality, free for the most part if I understand, research that people can understand this market. I’d love to just start with a high level, overarching question. What is going on in the multi-family housing market, right now in August of 2022?

Caitlin:
So in August of 2022, and I should qualify, it’s the end of August, 2022, because it seems to change by the week.

Dave:
That’s true. It’s by the day. You have to say exactly what day we’re recording.

Caitlin:
We just released some research last week. We are fortunate. We have a lot of great data providers that provide free data for us to give to our members. Looking mainly at the professionally managed apartment universe, we still saw in the second quarter really high rent growth. We saw double-digit rent growth in most places. The highest places are in Florida it appears.
But people are getting nervous about the state of the overall economy, namely interest rates rising. We’ve seen a lot of costs going up over the pandemic and even before the pandemic, so insurance costs are going up, property taxes are going up. So while we are seeing those rent increases, we’re also seeing operations costs going up, too. And if you have interest rates increase, then that’s another cost item you’re going to have to absorb. So, folks are still optimistic about the fundamentals of the multi-family industry overall in terms of demand, but I think that some of the stuff going on in the economy is giving folks a little bit of a pause. But I’m hopeful that because the demand is so strong that we should be fine.

Dave:
You did some fascinating research, and I’d love to talk about this before… We’ll get back to the what’s going on in today’s market. But you brought up such a good point that demand is extremely strong and that’s led to a lot of confidence in this industry. You just conducted a really fascinating study about long-term demand trends for the multi-family industry. Can you tell us a little bit about that?

Caitlin:
Sure. So we worked with one of our partner organizations, the National Apartment association, to hire consultants Hoyt Advisors, who have worked for us in the past, to look at demand for apartments going through 2035. And it found that nationally, we’ll need to build 4.3 million new units by 2035 to keep up with demand. And of that 4.3 million units, we actually need about 600,000 of those units now to ease the affordability crisis.
The bulk of that demand is going to be located in the South, namely in Texas. It shouldn’t be surprising to folks. You look at the news stories where people are moving, a lot of it is in the Southeast. And that demand estimate is actually kind of on the conservative side because they took into account the fact that immigration largely hasn’t been occurring in the past couple years to a variety of factors. So if we get immigration ramping up again, then that demand number could go even higher.

Dave:
And so, you’re talking about international immigration, right?

Caitlin:
Yes. Yeah.

Dave:
That’s really interesting. So even with a relatively conservative immigration number, you’re saying that we need 4.3 million more multi-family units over the next, what was that, 12 or 13 years, and then 600,000 is needed right now. Can you provide some context? Is 600,000 a lot? Is that achievable in the next couple years? Or is that something that the construction industry is going to struggle with?

Caitlin:
So it is a lot. It is doable, but there are a lot of headwinds. So taking a step back, when the housing crisis happened in 2007 and 2008, that coincided with the Millennials coming online, which traditionally the highest age cohort that rents are young adults. So we had this generation that was the biggest since the baby boomers, that all need to rent apartments. And because folks were concerned about building because of what was going on with single-family, it also bled over to multi-family, so we couldn’t build. So we had all these years where we needed to be building 300, 325,000 units, and we were only building 100,000. So that, yeah.

Dave:
Whoa.

Caitlin:
I think that was the lowest we built. Then we had every year you don’t meet that demand, it just kind of adds to what you need to build. Our completions for the past few years have been about where we needed to be demand-wise on an annual basis, but we’ve still got that backlog of that 600,000 units. And so, obviously, rent growth is good, but we need those units at a variety of price points, not just the high end. And because we have this backlog, we actually, in a normal functioning multi-family market, what you would have is you’d have the Class A stuff come on that’s brand new, so then the older class A would move down to Class B. Rents would get more affordable to more people. But because we had this backlog, we actually had reverse filtering happen, so the Class B was Class A rents, basically. Those who would be paying Class A rents typically, they had to pay Class B and so on, so that’s why stuff has gotten more expensive.
So we have that problem going on. We can also only really build to the high end right now, because land is expensive, materials are expensive if you can even get them. The prices have been going up. It’s also just really hard to build period because of NIMBY, or “not in my backyard” opposition. Unfortunately, a lot of folks have these preconceived notions about what’s going to happen if you get multi-family in your neighborhood, which isn’t true. And so, it’s hard to actually get stuff out of the ground because you usually have to get your land rezoned to build multifamily. And so, if the NIMBYs are against it, then it’s hard to get the rezoning. So all of those things make it more difficult to actually build new units. So in theory, we could build that 600,000, but there’s a lot of reasons why that may not be happening right now.

Dave:
That’s extremely helpful context. And I want to get back to the affordability point in just a minute, but just to summarize, if I understand correctly, you’re saying that right now, we’re actually at a decent pace. But because between the Great Recession and recent period, it was so slow, we’d have to basically go above what is a normal level and we’re not seeing that yet. And so, this backlog of 600,000 apartments, multi-family units, has persisted.
When you look at construction data, at least on the single-family market, which is what I’m a little bit more familiar with in terms of the data, you do see that construction is starting to slow down a little bit. And that’s largely because of interest rates and people fear that will lower demand, and labor and material costs are going up very consistently. Are you seeing similar trends in the multi-family market? And is there concern that construction in multi-family actually might go down?

Caitlin:
So there’s definitely concern about it. Single-family building tends to be the first to stop when you see interest rates go up. Multi-family building is typically a longer process. It’s even longer now than it has been traditionally. We’re looking at two year plus timelines to get a project built. So because of that, when multi-family developers are looking at the time horizon, they’re kind of already building in more economic uncertainty because it is a longer time horizon. But that being said, it is impacting things, the interest rates. Folks are having to get deals repriced. When you have to get a construction loan, obviously, you have a higher interest rate. It’s definitely having an impact, but not a meaningful impact is what I would probably say right now.

Dave:
So that’s hopefully positive, right?

Caitlin:
Yeah.

Dave:
Because we would like, assuming I’m just going to say we would like, but let’s just assume that we would all like to erase these deficits and actually have enough units in the country to meet demand. So we would like to see construction stay at an elevated or at a level that we have currently, or perhaps even higher to erase the deficit that you said.
Now I want to get back to your point about building A Class buildings. And that’s sort of fascinating. I never really thought about how… It makes so much sense that basically A Class turns to B Class, turns to C Class. And because there was not enough A Class in the early 2010s, now there’s no B Class or C Class even, so that’s really fascinating. And I’m curious, because you’re saying you basically have to build A Class. And for anyone listening, that’s just basically the highest end, nicer level units. Is there demand for A Class? Is there a risk that what is being built doesn’t actually meet what people want or what people can afford?

Caitlin:
So it depends by geography. So you look at places like San Francisco, it’s so expensive to build there. You really have to have a high income to meet that rent. So it depends on geography. We did see in the pandemic a lot of building. We’ve always had a lot of suburban development, but there was a lot of demand for suburban development because people wanted a unit with a den or something like that. So there definitely is demand across the income spectrum.
With the Millennials coming online, it has made it so that a lot of them seem to prefer the lifestyle of renting. You can move from metro to metro. I know when I first started working for the Council, I was living in one place. I paid $500 and actually moved to another state with the same property manager. So there are a lot of benefits like that to renting. You don’t have to pay for your $8,000 HVAC if it goes bad. So folks have started to realize those benefits. So yes, there is demand across the income spectrum. Without some sort of subsidy, you really can’t build anything except for the high end. You can’t make those deals pencil.

Dave:
That’s what I’ve seen as well, is that it’s so expensive to just get things permitted basically. It really prevents builders and developers who might otherwise want to build affordable housing and they can’t do it. Does your organization track or advocate or do anything in terms of getting those subsidies? Or do you see that subsidies are starting to become more popular so builders can bring affordable units online?

Caitlin:
So I would say that there is more of a recognition that it is difficult to build. I’m optimistic because of that. It’s still up in the air as to what folks can do about it. The Biden administration has put out a housing plan to try to address some of those impediments. However, there really is a limited amount of things that the federal government can do. It really does come down to the local jurisdictions.
A couple years ago, the Council, myself, and some colleagues put out, it’s called the Housing Affordability Toolkit, and it has a cool infographic that lays out the finances related to building and why it’s so hard to build. And then, it looks at a variety of tools that local jurisdictions can use with local developers to try to actually build things beyond just at the Class A. So things like a voluntary inclusionary zoning policy, where developers can make the choice to take a density bonus so they can build a little bit higher or some more units in exchange for providing some units at a certain income level. And so, that way it achieves both parties’ goals.
There are some other things, too. You can do tax abatement. And it really is though, each jurisdiction has to look at what they have available to them, because what’s going to work in Dallas is not going to work in San Francisco for example. So we are seeing recognition, but unfortunately, there are some short-sighted things that folks want to do instead because it seems like a quick turnaround, like rent control. Folks think that that’ll fix things. That actually makes things worse.
So I spend a lot of my time talking to folks about why things like rent control don’t work or a mandatory inclusionary zoning ordinance don’t work, because then you’re not helping the developer make that lost revenue, and they still have to make their developments pencil. And so, we do work on things like that.
At the federal level, the Council, we advocate for more funding for the Low-Income Housing Tax Credit, which is a way to make more moderate workforce housing. Unfortunately, you still can’t hit the low income targets. You would need some sort of cross-subsidy like housing choice vouchers, which we advocate for more funding for that. It’s otherwise known as Section 8 vouchers. So there are some federal subsidy programs, but they’re way underfunded. What is there gets used, and so we try to make sure that what is there can be used in the best way possible and always ask for more money.

Dave:
That’s super helpful. I am very curious about the rent control issue. It’s actually something I’ve always personally just wanted to learn more about, because someone posed the question to me the other day about rent control. And Portland, Oregon was used as an example, because it does have rent control policies. And as of, I think, it was like in May or June, I was looking into it, and it literally had the highest rent growth in the whole country. So how does that make sense? And I know we could do a whole show about this, but can you just give us a quick explainer on why rent control doesn’t actually keep rent low?

Caitlin:
The shortest response is that it’s essentially a lottery system. Not everybody can get a rent controlled unit. There are stories about the old school rent control, which is what everybody knows in New York City. You pass it down generation to generation. Those are not the folks that largely need the unit anymore. There’s lower turnover and they don’t have income verification, so you don’t know that the low-income household that got it in 1952 is still the low-income household in 2022. I shouldn’t say 1952. I can’t remember what year New York City’s was enacted.
But you have these well-intended policies to have rent increases at a more normal rate. So it’s intended so you’re not going to see a 15% rent increase, you’re going to see a 5% increase. Usually it’s the CPI plus 5%. But unfortunately, it starts at CPI plus 5%, and then another city council comes in and they lower it. And then, before you know it, you have what happened in Berkeley, California, where you basically don’t have rent increases. We have these huge cost increases that property owners are trying to absorb for insurance increases, for property tax increases. You need to be able to absorb those costs.
And then, the other problem associated with it is we don’t have rent control around the United States, nor should we have rent control around the United States. So if I’m a developer that is trying to decide between building in a place that has rent control and building in a place that does not have rent control, I’m going to, and all else equal, I’m going to choose a place that doesn’t have rent control.
So we saw that happen last year. St. Paul and Minneapolis both approved rent control ordinances. One went into effect right away in St. Paul, and their development pipeline essentially stopped. So that’s what happens with rent control. And we did do a survey with the National Association of Home Builders a few months ago and found that yeah, folks do just avoid building in places that have inclusionary zoning ordinances or rent control on the books.

Dave:
Wow. Okay. That’s super helpful. We might have to do a whole other show about this. I’m sure there’s a lot to this topic.

Caitlin:
There is a ton.

Dave:
But thank you for the quick overview. So I want to get to some actionable items for our listeners, because I’m sure people are listening to this and wondering what as an investor they should be thinking about. And the first question that comes to mind is where are you seeing the largest demand? You mentioned Texas, but in your analyses, have you seen other areas that have disproportionately large demand or places that might have falling demand on the other side of the equation?

Caitlin:
Texas is one, Florida is another. They seem to have the highest rent growth right now. There are a lot of cities or metro areas that have been traditionally, I would think of them as single-family centric places like Nashville and Charleston, South Carolina. They’ve seen a lot of demand, but they’ve also seen a lot of building.
So what I tend to look at is I look at the population growth in a certain metro as well as what’s already been built there. And then, also what do you have in terms of employment opportunities? So, yeah. Texas has a ton of building, has a ton of population migration, but they’ve also got a lot of headquarters moving there, which was occurring even before the pandemic.
You look at Plano, Texas, they essentially built an entire new city. They’ve got several huge companies there. Places like Virginia, Northern Virginia, Amazon is going there. And it’s not just in Arlington. They have huge warehouse facilities in Winchester, which is not that far. Those are all things I look for. Again, places like Nashville, Charleston, they’ve gotten a lot of attention, but they’ve also gotten a lot of building, so they would be too that I don’t quite see quite so much necessary construction going forward.

Dave:
Is there anywhere that our audience can find some of this data that’s publicly available or easily digestible that you recommend?

Caitlin:
Yes. So if you go to www.weareapartments.org, it has a map of the US and it will have the total demand for the US, and then all 50 states and DC, as well as 50 metro areas.

Dave:
Oh, wow. That’s very cool. I did not know about that. And I love the URL. So weareapartments.com. We’ll definitely put a link.

Caitlin:
Yeah, weareapartments.org.

Dave:
Dot org, excuse me.

Caitlin:
Yes.

Dave:
And we will put a link to that in our show notes. So you mentioned at the top of the show that rents were still growing pretty quickly. What are you seeing in terms of rent growth? How fast is it growing, and is there any signs that it’s starting to slow down?

Caitlin:
So anecdotally, yes, we’re hearing it’s slowing down. However, it has not shown up in the data as of yet. So nationally, the rent growth, from RealPage, which is one of our private data providers, was 14.5% year-over-year in the second quarter, pretty high. So we’re expecting, and again, anecdotally expecting that rent growth to go down a little bit. I should note that that 14.5%, that’s professionally managed apartments, so they tend to skew a little towards the higher end. So mom and pops are not captured in that data. But I took a look, and I believe of the 200 or so metro areas that RealPage covers, all but maybe a dozen had double-digit rent growth. It was pretty crazy.

Dave:
Wow. That is remarkable. We’ve been seeing those double-digit numbers for, I guess, was it more than two years now? It felt unsustainable even at the beginning of that. And now, a few years later, we’re still seeing that. But you said anecdotally, I’m sure in addition to data, which of course lags by at least a month or so, it sounds like some of your operators are seeing that maybe start to slow down a bit?

Caitlin:
Yeah. Anecdotally, we’re hearing that. So again, you mentioned it’s a couple years that this has been happening. We had a lot of change at the beginning of the pandemic. Folks fled the cities, so we saw a decline. So for a while, that double-digit increase was just getting back to where we would have been had the pandemic not occurred basically, but we have well surpassed that now. But yeah, some of the apartments that have been in the pipeline for quite a while have started to deliver. So the thought is that this rent growth, we’ve probably hit our top. But that’s not necessarily a bad thing, because it’s easier to project out with less volatility.

Dave:
Yeah. That makes sense. And to your point about affordability, if rent growth keeps going up at a much faster rate than wage growth is going up like it is right now, that could definitely exacerbate the affordability problem that we’re seeing in a lot of markets right now.

Caitlin:
We saw in the beginning, obviously, there was the Rent Relief that was passed in Congress. But now we’ve seen with what’s going on with the stock market and interest rates, we’ve started to see kind of the higher end of the economy of the workforce be hit a little bit more, so that might be impacting things as well. It’s obviously not concerning at this point, but it might put a little bit of a damper on things.

Dave:
Last week, we were doing a show, and one of our panelists who is a regular on the show, her name is Kathy Fettke, was talking about some deals that she was looking at, multi-families that she was considering investing in. And she was saying that she felt like multi-family pricing for purchases, not rent, hasn’t adjusted yet. We’ve started to see at least in a few select markets on the West Coast in the single-family market, prices are coming down a little bit off their peak. Is there any evidence that pricing in the multi-family market has changed at all to date or is likely to change?

Caitlin:
I think it’s likely to change. Again, I’ve only heard anecdotal stuff so far. It hasn’t shown up in the numbers. So second quarter, Real Capital Analytics, who track a lot of the bigger purchases, I think their threshold is a million and a half maybe per transaction, they still had historic highs, in terms of sales volume. But I definitely know it’s something that people are conscious of, that deals need to be repriced, or some deals will need to be repriced, I should say. I would expect that to start to happen more.

Dave:
Yeah. I was looking at your data and it seemed like in, I think it was Q2 2022, correct me if I’m wrong, the sales volume for total deals done was one of the highest it’s ever been. Is that right?

Caitlin:
Yeah. And so, the tracking started in ’01. It still hit a historic high in the second quarter.

Dave:
Yeah. I think anecdotally we see that, just that bigger pockets in general. There’s just been a huge amount of interest in multi-family housing because of the things we’ve been talking about. There’s a lot of demand, rent growth has been really strong, it’s an attractive option.
But we were chatting before the show. You were sharing some data with me that cap rates, which for anyone listening to, is basically a way of valuing multi-family properties based off of their income. And generally speaking, sellers want to sell at a low cap rate, because that means they get more money for each dollar of rent they collect, essentially. And I’m really oversimplifying here. But buyers also want to buy at a higher cap rate. But right now cap rates are, you said extremely low, right?

Caitlin:
They’ve been low for quite a while. But in second quarter of ’22, they were 4.5%, and that was down from 5% in the second quarter of 2021. So yeah, they are low. A lot of people tend to compare single-family and multi-family, but a lot of the competition from multi-family comes from other commercial types, so retail office. And so, we have the benefit that comparing to office, that performance is still quite strong.

Dave:
Oh, that’s interesting. And do you see that or do you expect that demand is up in multi-family because retail and office have sort of taken a hit over the last couple of years?

Caitlin:
There were folks that needed to get money out the door for a variety of reasons. And if you’re competing for… Now, we did have the kind of side note of the single-family build-for-rent, which is a very new phenomenon, so that has changed the game a little bit. But yes, if you need to get money out the door and you have to choose between office, multi-family, and retail, you’re probably going to… A lot of them chose multi-family. Industrial obviously, is very successful, but yeah, if you’re comparing between those property types, then multi-family generally wins out.

Dave:
Yeah. That brings up a great question, because you see cap rate so low and expect that they will rise. And this is just my personal opinion, I think they’ll rise a little bit. But you wonder how much they would rise just because there’s so much demand for apartments as we’ve been talking about, and there’s demand from investors because it is relatively the most attractive property type as you said, or at least has been over the last few years. We don’t know what will happen in the future, but it does make you wonder how much they would rise. And if deals do start to get repriced, how dramatic that adjustment might be.

Caitlin:
Yeah. I think we’re still in the wait and see scenario, because we don’t know how much more interest rates will rise, what’s going to go on with the other sectors. I know there’s a lot of talk about adaptive reuse. We’re trying to work on some research for that. So changing a suburban office park into apartments is not an easy feat, but it’s definitely getting talked about more. I know I drove by a completely empty office park the other day and was like, “They need to do something with that. It’s been like this for years at this point.” So I think that folks are still trying to figure out what to do. But yeah, cap rates are low. So I think that if they went up, I wouldn’t be shocked.

Dave:
I love the idea of adaptive used too, by the way. I was talking to someone about that this weekend, that there’s just a lot of office space, in particular, that could be repurposed into multi-family housing. And like you said, not easy, but an interesting prospect. It’d be cool if they could figure that out.
The last thing I really wanted to talk about was over the last few years, there has been a lot made about institutional investors entering the housing market. And you just touched on it a little bit, because a lot of the build-for-rent phenomenon has been driven by those institutional investors. Are institutional investors… Traditionally, they are more into multi-family. These are big, high dollar buildings. But has the amount of dollars flowing into multi-family from these large hedge funds and other institutional investors increased over the last few years?

Caitlin:
I don’t know if it’s increased in terms of volume. It’s hard to get data on that. If you look at our top 50 though, it’s undeniable that there are certain companies, private equity funds, for example, that are at the top of the list. I would say, however, I don’t know that there is a universally accepted definition of private equity. There is actually an official one, but that’s not what people think when they think private equity.
For example, there is a company on the top 50 that has been at the top of the top 50 for quite a while. And I actually had to Google that they were private equity owned, because I didn’t even realize it because I think of them as a traditional multi-family manager. I think that private equity can mean different things, and that’s typically what people talk about when they talk about institutional ownership, are those private equity firms.
Undeniable that there are some things that don’t go right when you have institutional capital coming in, but there are a lot of things that can go well. You have an economy of scale, and so when you look at what happened with the pandemic, some of these companies were able to put in place rent freezes, their own voluntary eviction moratoriums, because they could afford to absorb that hit. It’s a double-edged sword. I don’t deny that. There’s a lot more attention to it. The size, if you look at the number of units owned on the top 50, has remained largely constant over time. There’s actually a company that’s owned more units in the mid-nineties than one of the big top 50 firms now. I can’t remember if they officially surpassed the nineties height, but yeah, there’s always been economies of scale.

Dave:
All right. Thank you. Yeah, it’s just interesting. Honestly, I’m not happy about it, but it makes me feel a little… I also struggle to find data about institutional investors, especially in the single-family market. And it seems that everyone who puts out a report has an entirely different methodology for how they’re getting that. And so, you can never really get a consistent answer. And you hear all this anecdotal evidence about it, but it’s really hard to quantify what the impact of these institutional investors are, it sounds like both for single-family and the multi-family housing market.

Caitlin:
Well, it’s especially weird on the single-family side, because you have the single-family rentals and then you have the single-family build-for-rent, which a lot of our members, multi-family members have started investing in the single-family build-for-rent, because it’s essentially an apartment community, they’re just single-family, detached houses. But they’re all in the same community. They all can have the same benefits of multi-family renting. So you can have your maintenance crew out there. You can have your leasing office out there. So it’s essentially the same thing, but single-family detached. And so, you have to figure out how do you quantify that, because a scattered site, single-family rental who were a lot of the big, bad institutional ownership, that’s a completely separate phenomenon.

Dave:
Yeah, that’s a good point. It is really just an apartment community, it’s just a slightly different property type. So this has been very enlightening. Caitlin, thank you. Is there anything else you think our audience should know about the state of the multi-family housing market or where you think it might be going over the next few years?

Caitlin:
I would say since it’s multi-family investors, a lot of folks will look at things like cap rates and sales volumes. And yes, they are important, but at the end of the day, it’s the underlying demand. I’m a land use planner by training, so that’s kind of where I default to anyway. But you have to know where the people are going and where they want to work and where they want to live.
So there are some TBDs, still. The teleworking phenomenon, we don’t know if that’s going to stay. I was a teleworker before it was cool in the pandemic. You don’t know how often folks are going to get required to be in the office. We’ve seen some stories about Boise, where maybe people have had to move away because the teleworking wasn’t as permanent as they expected. Where I live, West Virginia, they’ve tried to bring more teleworkers. And I don’t think it’s been hugely successful under their programs, so I think that part of the demand is still TBD. And if you’re really looking for places to invest, I would look at places that maybe are beyond the teleworking phenomenon and have good fundamentals there.

Dave:
That’s great advice. We actually just did a show on work from home, and we brought in a lot of data and it’s really interesting. And my hypothesis was sort of like, I don’t think there’s going to be more teleworking go forward. I don’t think any companies that have held out on remote work are going to start adding it right now. But I’ve already started to see just talking to friends who work at large, publicly traded companies, they are starting to step it back a little bit. And even though they stated a work from home policy are now saying, “Eh, you might need to be in the office one or two days a week.” And it could be interesting to see if that reverses any of the migration trends that we’ve seen over the last couple of years or at least slows down probably some of the ones that we’ve seen.

Caitlin:
I did my dissertation work on population, metropolitan development. A lot of the older literature talks about how it’s really proximity to a major airport.

Dave:
Really?

Caitlin:
Yeah. Which is at least is true for me. I’m the example of one. I live closer to Dulles Airport than I do to my office in DC. Because if you’re not going to live near where your office is, at least I can hop on a plane and get to a conference really easily. And that’s true for a lot of teleworkers apparently.

Dave:
That’s super interesting. I never thought about that at all. Well, Caitlin, thank you so much for being here. If people want to read your research or learn more about you, what’s the best place to connect?

Caitlin:
You can email me at [email protected] I’m, I guess, an elderly Millennial, so I’m not great at checking my LinkedIn or my Twitter. But I do have a LinkedIn, Caitlin Surgue Walter, if you want to look me up.

Dave:
Awesome. I haven’t heard the term elderly Millennial. That seems like an oxymoron, but I think I’d probably qualify as the same thing. Well, thank you so much. For everyone listening, Caitlin told us before, this is her first podcast ever. And I think I’ll speak for everyone. You did a fantastic job.

Caitlin:
Oh, thank you.

Dave:
You’re a natural.

Caitlin:
It was fun.

Dave:
So this was a lot of fun, and hopefully we can have you back. Our audience is very interested in the multi-family market, and you and your organization are doing some of the best research I’ve seen about the multi-family market. And we really appreciate everything you’re bringing to the investor community and helping us understand.

Caitlin:
Oh, thanks, happy to help.

Dave:
Huge thank you to Caitlin Walter for joining us today. That was a super informative interview. I know I personally learned a lot. And I’ve been trying to understand the multi-family market a lot better, myself personally. I have never sponsored a multi-family deal, but I do primarily invest in syndications and specifically in multi-family deals over the last couple years. And so, I’ve been trying to learn more about this industry. And I highly recommend you check out NNHC.org. They have a ton of amazing research about the industry, so definitely want to plug that.
The main thing I took away from this interview and why I was so excited to have Caitlin on in the first place, was just looking at the long-term demand trends. And when we are on this show, we talk a lot about what is happening in the market here and now today. And that is super important because as an investor, you should be staying on top of those things so that you can make decisions about what property you want to buy, what market you should be in, what you should be looking for, what questions you should be asking. That’s super important.
But it’s also, even when you take all of those things into account, it’s very difficult to time the market. And to me, what gives me confidence investing in multi-family are these long-term trends. And if there’s anything you want to see in something you’re investing in, is that there is long-term demand. And so, what Caitlin was able to share with us is that the United States needs 4.3 million new units by 2035. There’s a backlog of 600,000 units that has persisted for years, and that there is a chance that multi-family construction could decline with rising interest rates and increased prices. So to me, that means that demand for multi-family rentals, from the renter perspective, there are still going to be a lot of people who are looking to live in these multi-family apartments, and that means demand and potentially rent growth and revenue are going to continue.
So for me, this gives me a lot of confidence investing in multi-family. Of course, we also learned that some deals need to be repriced right now. Kathy shared a deal with us where she was seeing pricing for multi-families stay stubbornly high, even despite rising costs and rising interest rates, which should bring prices down a little bit. So you do want to be careful and you do want to make sure that you are buying at an appropriate rate. But to me, if you are investing in the long-term, which in my opinion, you should be, this bodes very, very well for the entire multi-family industry for over a decade, which is an incredible time horizon to feel comfort that there’s demand for your investment class.
So big thank you to Caitlin. I hope you all learned a lot from this episode like I did. If you have any questions for me or want to connect about this episode, please do so on Instagram where I’m @thedatadeli. Or if you want to connect with our community of investors and data-focused investors, you should do that on the BiggerPockets forums. You can just go to biggerpockets.com and we have a special dedicated forum just for On The Market Podcast. We’d love to answer some of your questions there. I will be there answering them and it’s just a great place to connect. So as always, thank you all for listening. We’ll see you again next time.
On The Market is created by me, Dave Meyer, and Kaylin Bennett. Produced by Kaylin Bennett. Editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined by Jamil Damji, for a very special episode today. Do you want to tell everyone who’s coming on today, Jamil?

Jamil:
It’s my best friend, my best buddy in the whole world, Pace Morby. I am thrilled to have him here. He’s a real estate genius, and he’s going to school us all in the world of creative finance. Your minds are going to be blown.

Dave:
Honestly, mine was. It was so cool, and just so you know, we obviously… Pace has so much information, but we brought him on today because what he’s really known for and what he’s a specialist in is creative finance. We’re going to talk about two specific strategies, seller financing and sub-to, and both of those, given the interest rate environment that we’re in right now are becoming, at least in my opinion, you’ll hear all about this, more and more attractive options for everyday real estate investors. It gives you options to pay less in interest basically, and so-

Jamil:
Absolutely.

Dave:
… if you are running into 6% interest rates and you’re worried about that and it’s causing you to shy away from deals, you’re definitely, definitely going to want to listen to this episode. All right, we ran way too long in talking to Pace because it was fun and he has such a great story, so we’ll keep this introduction short, and let’s welcome Pace Morby onto On the Market.
Pace Morby, welcome to On the Market. Thank you so much for being here.

Pace:
My favorite show in real estate, brother. Thank you for having me, both of you.

Dave:
Oh, you’re just saying that. You say that to all of the shows.

Pace:
I don’t. This show is unbelievable. I’ve been waiting for BiggerPockets to do something this epic. You guys are the best.

Dave:
Awesome. Well thank you. I want to start because if our audience doesn’t know, we are in the presence right now of one of the great bromances in real estate investing right now, I think, right? I mean-

Jamil:
A hundred percent.

Dave:
… Pace and-

Jamil:
That’s a-

Dave:
… Jamil, if you don’t know, are on a show on A&E called Triple Digit Flip. They work together, and I’m just curious, I don’t even know the backstory. How did you guys meet and start running these businesses together?

Pace:
Oh, can I tell this story?

Dave:
Please do, Pace.

Pace:
Okay, so this is an interesting story, maybe to us, but I was a contractor for a long time. I was working for Opendoor, Offerpad, Zillow. I was their main contractor doing all their turns here in Phoenix, Arizona. I would do their work, bill them, send them an invoice, and that’s how I was making money on their fix and flips. Well, Opendoor changed their business model. They went from spending a lot of money on renovations to very little. They threw in an algorithm where they go, “Look, hey, Pace, we’ve got some news for you.” I go into the office. I have 180 employees at the time just dedicated only to Opendoor. We were doing like a million a month in revenue with them.
They come in. I talk to a lady named Megan. She goes, “Well, we’ve got some good news and some bad news. The good news is, here’s a bonus check for a hundred thousand dollars. Thanks for all the hard work.” I’m like, “Yes.” “Then, the bad news is we’re going to change our entire business model, so we’re going to go from spending an average of $50,000 per house to spending closer to $3,000 per house.”

Dave:
Whoa.

Pace:
You imagine having 180 employees dedicated to that business model, and then all of a sudden you need maybe one-tenth of them?

Dave:
Wow.

Pace:
What I did is I deviated my business to focus on local fix and flippers and I said, “Okay, I’m not going to let go of my guys. I love my guys. I love my business. I’m going to deviate my clientele to find local fix and flippers that are doing also turns and that kind of stuff, quick fix and flips.” I find a guy, I’m not proud of this, but I found a guy that essentially was running a Ponzi scheme. I got into him a million dollars, so Dave, I’ve always been really creative.
How I built my business as a construction contractor is I would go to guys like this gentleman, let’s just say his name is John. It’s not John, but let’s just say it is John, and I’d go, “Hey, I see you’re fixing and flipping. I see public record. You’re doing 20, 30 deals a year. How about I come in and be your contractor? I will fund, I will be a line of credit to you, and I will fund your renovations and you can pay me at the end of your project when you sell the house.”
It was the fastest way to grow a business because essentially, all of these people that are fixing and flipping, they’re going, “Okay, well, I can get hard money to purchase the house, but how am I going to pay for the renovation?” I essentially was their private money lender and their contractor. Blew up my business like crazy. I was so well-known in town as the contractor to go to because of the creative way that I would go in and build my business. Well, this worked until it didn’t, and there was a guy that was buying really bad deals and he was borrowing money from friends, family. Finally, he hears about me and he calls me up, starts courting me.
Very long story short, four years later, I’m into this guy well over a million dollars in cash, and he comes to me and he goes, “I’ll get you all your money back. I know you’ve got these rentals, these sub-to and seller finance and these private house you have. If you can sell all of those and get me the cash I need to wrap up these next 20 projects, I can get you flush. I just need to finish these next 20 projects.”
The problem, Dave, is I was just so deep into this hole at this point, I couldn’t see way out except for I’m going to dig… Here’s what I’m going to do. I’m going to dig myself out and like get a tunnel to go upwards. That’s what I was thinking, so I go and sell 40 rentals, I sell my personal house just to save my bacon. Essentially, in the midst of all of this, I go, “I need a confidant. I need somebody that I can trust and I can get some advice from because everybody’s telling me I’m crazy.”
I was almost looking for somebody to justify my position. I was looking for… Whatever truth you seek, you will find it, like whatever… If you go out and you want to believe your own lies, I wanted to believe the lie that this guy was ever going to pay me back. I wanted to believe it so desperately, so I was going around town finding people that had done business with him trying to find somebody that was like, “No, the guy’s credible.” Well, I run into Jamil’s name and I’m like trying to find this guy Jamil. People talked about Jamil. He was like a ghost in town. He was doing 10, 15… Literally, this guy was a ghost. He was like a night owl. Nobody even knew where he was or anything, but people were doing deals with him, a lot of deals, like 15, 20 deals every single month.
His name was on the lips of like some of the most prolific investors here in Phoenix, so his name would come up everywhere I’d go, restaurants, eating with people, going to RIAs. I’d hear people on YouTube podcasting about, “This guy Jamil, this guy Jamil, but don’t talk about his name.” I don’t know what this… He was like Machiavelli. It was the craziest thing ever.

Dave:
Don’t look him in the eyes, whatever you do.

Pace:
Basically, it was just like that, and I go on Instagram. I find this guy with a user name of @jdamji, and it has no photos, no posts, and his profile photo is an owl.

Dave:
So mysterious.

Pace:
Seriously, this is it. I DM him and I go, “Hey, man, I’m in trouble with this guy named John, and I heard you’ve done a lot of deals with this guy. I’m kind of looking for somebody to help me through this with some advice.” Jamil takes two weeks to reply to me. This would be before Jamil was on social media. This was years ago, roughly six, seven years ago. Jamil goes, “We need to meet for lunch. We need to have a conversation.” This is a much longer story, but I’m going to wrap it up in 30 seconds.
Jamil sits me down and shows me through public record that this guy was running a Ponzi scheme. He was paying over retail value for houses with other wholesalers because what he was trying to do, this was his business model, he would tell all the wholesalers in town, “Go find me deals. Bring them all to me and I’ll do dispo or sell those to you to end buyers.” The way to beat out all his competition, from other people that were doing disposition, is he would overpay for these houses. Eight out of 10 times it would work, and the other 20% of the time he would overpay and he couldn’t sell the deal, but he didn’t want to go back to that wholesaler and say, “I’m going to bail on that deal,” and ruin that relationship. What he would do is he would bring the house to me and go, “Dig me out of this hole. Fund the construction. Hopefully we can rehab ourselves out of this bad decision I made.”
Jamil sits me down, shows me all through public record, “Pace, this guy’s leveraging 18% hard money. He’s got second position and third position loans from friends and families. This guy is running a Ponzi scheme to like the highest level.”

Dave:
Wow.

Pace:
Dave, I still didn’t believe Jamil. I sold my personal house.

Dave:
Oh, no.

Pace:
I sold 40 rentals and I got enough cash to give this guy. Right as I gave this guy the rest of my cash, I went through this six-month thing of liquidating all my assets to dig myself out, I get a bankruptcy letter. Hits me right on my doorstep, and the guy, he ends up filing bankruptcy on nearly $16 million of debt.

Dave:
Oh my God.

Jamil:
Yeah.

Dave:
Wow.

Pace:
Bonkers.

Dave:
I’m sorry to hear that. That’s horrible.

Pace:
It was one of the greatest things that ever happened to me, to be honest, okay.

Jamil:
It was.

Pace:
One of the reasons why is because I learned to never doubt a single thing that Jamil Damji has to say.

Dave:
It’s… Yeah, we all have to just… Whatever Jamil says, we have to follow from now on.

Pace:
Basically. This is what started a wonderful relationship. Jamil and I were actually competitors. We’ve always been competitors. We chase after the same cash deals here locally, and we go into a meetup, let’s say there’s a 200-person meetup here in Phoenix. Him and I are working the room with the same goal to get deals from people in that room. I’ll run up to people and I’ll go, “Hey, you got a deal for me?” They go, “I already sold it to Jamil.” I’m like, “Gosh, dang it.”
That’s how our relationship started. We started hanging out with each other a lot, and we realized that we were like the yin to each other’s yang. We started having so much fun that one day Jamil comes to me and he says, this is like three years into our relationship, he says, “I think we should take this buddy comedy on the road.” I think what we do is we just fly around and we go to local RIAs and we talk to people about how collaborating with your competition is one of the greatest things you could ever do.
I’m almost done with this story. This is how we ended up getting a TV show, too. We go and we spend money and time and energy going to these RIAs and people would say stuff like, “Man, do you have a coaching product?” We’re like, “No, we’re here to help you. We don’t have a product. We’re not coaches. We’re just here to show you what collaboration’s like.” People were dumbfounded and we created this amazing cult-like following of people that were like, “Wow, these guys are like genuinely here to just lay down the truth and teach us.” We’d go on appointments with people. We would go door-knocking. We would fly all over the country and do this with people.
Well, one day, Jamil and I are like, “Let’s take a two-week break.” At this time, I was just starting my YouTube channel and I go, “Cool. I’m going to go film YouTube. You go home, you take a break.” We’ve been on the road for like 60 days straight and just helping people. The day we get home, I get a text message from a guy named Ryan and he says, “Pace, I’ve got this deal. Cash deal, $165,000.” I go, “Love it. I want it. Send it to me. I’ll fix and flip that.” Five minutes later, Dave, he goes, “I’m sorry. The price is now $175,000.” I’m like, “What? Why? Why didn’t you just send it to me at 175? Why are we playing this game?” He says, “Well, because I have another guy bidding. He said he’d pay 175.” I go, “Gosh, dang it. Fine, I’ll pay 176.”
He comes back and he goes, “Okay, it’s 185 now.” This other guy just keeps hiking it up, and so I text Jamil and I go, “Bro, am I crazy to think that there’s no way to make money on this deal? Would you comp this for me? Some idiot is bidding me up on the other side of this wholesaler and I’m about to pay 186 for this thing I was about to pay 165 for.” Jamil goes, “I’m the other idiot.”

Dave:
That’s amazing. Did either of you buy it?

Pace:
We bought it together. It was one of those-

Dave:
Okay, yeah.

Pace:
… first deals we did together, and so I said, “Let’s just buy the deal together. Let’s stop bidding each other up. Dave, what we did is we went on Instagram and we told people, “Hey, we’ve never seen the house. We bought it sight unseen like you do fixing and flipping a lot of times. We go, “Meet us at the property. We’re going to do a walk-through.” We bring our YouTube crew and we ended up having like 40, 50 people go to this walk-through just randomly within like two hours of us posting this Instagram Story.
People show up. We film the YouTube video with all these people walking through the property with us, and Jamil’s just being hilarious, like he’s picking up the seller’s, the previous homeowner’s clothes and putting them on and using different voices and stuff. Well, dude, this is the craziest thing. Somebody sends this YouTube video to A&E-

Dave:
Whoa.

Pace:
… and they go, “There’s nothing like these two on TV. They’re competitors, but they’re collaborating, and they’re bringing the audience to the actual house.” Think about that. All these videos people do about like, “Hey, look at my house,” it’s like we started doing videos where we brought the audience as a live audience to our YouTube videos. A&E just fell in love with the strategy and what we loved, and so we got a TV show out of all of this stuff, so when… People are like, “I feel so bad that this guy filed bankruptcy on you,” I’m like, “It was the beginning of the greatest path of my life.”

Dave:
It’s so funny how that works out. It seems to always be the time you’re in the depths of despair that some glimmer of hope or something changes that leads to that best thing. I think that’s a really good lesson for people just investing in general, and appreciate you sharing your losses. Jamil did this on one of our previous episodes, too, but in this age of social media, you see people just presenting these front where everything is so great and there’s no losses and you’re always winning and making millions. There are hard times and it’s really cool to see how you turned what must have been really difficult, I’m sure it was really difficult at the time, into something that has been so fruitful and enjoyable for both of you.

Pace:
Yeah, it’s interesting. Looking at like the people who have a victim mentality versus, “How do I win the situation?” How do I… What’s that martial arts where you take the momentum being thrown at you and you throw it a different direction?

Dave:
That’s Jiu-Jitsu.

Pace:
Okay, cool, so it’s like Jiu-Jitsu. It’s like, “Okay, whatever energy’s being thrown at me, I’m going to use that momentum versus absorbing it and becoming the victim of that energy.” These are the things I’ve learned from Jamil is like how to use that energy properly, and it’s the same thing in this market right now. I see a lot of people complaining about interest rates and this and all these other things, and I’m like, “Guys, use these things to your advantage. You can either be a victim, or you can dominate in this exact market.” Jamil’s story about the 50… It was the 53-unit deal that you were talking about?

Jamil:
Yeah, yeah.

Pace:
Great story, and when it was going… I was watching this happen to Jamil, I was like, “I already know what you’re going to do, man. You’re going to use this as a learning lesson for hundreds of thousands of people to hear this story.” I think that video’s doing really, really well. People are loving it in the comments and stuff. Was that just recently released?

Jamil:
Yeah, it was just a released podcast we did here-

Pace:
[inaudible 00:16:29].

Jamil:
… on BiggerPockets.

Pace:
Anyway, the market, it’s changed a lot and I see a lot of people complaining about it and I’m over here thriving in this environment, excited about when these types of things happen, interest rate hikes, economic turmoil, those types of things. You just got to use it to your advantage. That’s all there is to it.

Jamil:
You know, to add to that, Pace, the interesting thing is for me, I’m a single-family guy. I’m a wholesaler. That’s my niche and I et it. I can wholesale and comp and do all these things in my sleep because it’s in my DNA, but I really want to get involved in other things. Pace and I, we both have an extremely lucrative life and I’m here, he watched me write a huge check to the IRS last year, and then he showed me his $3500 refund. I know how much money he makes, and so I’m like dumbfounded. I’m like, “Bro, what are you doing? How are you mitigating your tax situation? How are you accomplishing this?” This is the hardest thing that is in my life right now is, how do I keep the money I’m earning?
Had I done… Had I listened to Pace more, I would have been in this deal in a different structure. I would have been in this deal creatively and it would have saved my bacon, it would have saved the earnest money. The deal would have worked if I had put the deal together the way that he does. I’m watching this guy travel around the country, still right now, buying deals in Texas, buying deals in North Carolina, buying deals everywhere across the country using creative methods, minimizing his tax situation by depreciation, creating massive cash flow. While everybody is screaming about lending terms, he’s creating his own.

Dave:
Well, that is a perfect segue, and totally agree because we wanted to have yo on here, Pace, because you’ve become known in the real estate investing community for being one of the most creative people when it comes to financing deals. There is this challenge now, and I’m sure you’ll teach us how to make the best of it, but interest rates have nearly doubled over the last couple of months. For people who are just approaching their real estate investing with conventional mortgages, that makes cash flow more difficult to find. It makes everything less affordable, and so I’d love for you to just help our audience understand what alternative options are out there and how you, like you said, are thriving in this type of environment.

Pace:
Okay, cool, so last year, I did 40 BRRRRR deals, single-family BRRRRR deals. I don’t talk a lot about BRRRRR because it’s not on-brand for me. It confuses like what I’m talking about, but I love the BRRRRR strategy. I did 40 last year. This year, I’ll do less than 20.

Jamil:
Yes. I don’t know that you necessarily love it, Pace.

Pace:
Right. Okay. What it is is I guess I feel like I’m in a different lane. That’s all there is to it. I’ll do 20 deals this year that are BRRRRR and they’re way compressed, way, way, way compressed. A lot of the deals we had in our pipeline back in January that we were planning on buying and… You know, a lot of times, the BRRRRR strategy will take three to nine months, sometimes upwards of 12 depending on the size of the deal. We had to cancel a lot of deals or go back and renegotiate with the sellers and say, “I can’t do this on cash. We need to do this on terms instead.” Some of those sellers were like, “You’re renegotiating. This is not good business practice, and I’d rather just cancel the contract with you.” Some of those sellers were amenable to a seller finance situation, which was great.
Here’s the thing. Last year, dong 40 BRRRRR deals, this year doing 20, you can see that somebody doing BRRRRR, me actively, my business cut in half. However, last year, I acquired about a hundred rentals through seller finance. This year, I will buy 900 doors with seller finance and subject-to, 900, so my business has more than 9Xed through this economic situation. It’s because… I don’t know if you guys have ever heard of the analogy of fishing, where people will think that you fishing… Fishing works all day long. You could go out to a river or a lake and you can fish all day long and you will catch fish. No matter what time of day, you will catch fish.
However, there are certain conditions during the day where the kelp comes up off the floor and things are happening in the water based on the moon and all sorts of things that when your lure is in the water at those times, the fish are way more active. They’re taking the same bait that they weren’t taking two hours prior. That’s very similar to creative finance, so the creative finance strategies that we’re seeing dominate right now are seller finance, subject to novation agreements. Arbitrage right now is crazy, like Airbnb Arbitrage is crazy right now. Then, finally, lease options.
The two that I love more than anything is subject-to and seller finance, so I’ll give you a really good example. I’ve got a deal in San Angelo, Texas. 43-unit multifamily, zero dollars down, 4% interest, and the seller’s giving me 50-year terms with no balloon.

Dave:
Whoa.

Pace:
Whoa, right?

Dave:
Can you explain a little bit about why? Like what-

Pace:
Yes.

Dave:
… is the psychology of a seller that-

Jamil:
[inaudible 00:21:59].

Dave:
… motivates them to do that?

Pace:
Bro, I can tell you, this is one of the biggest barriers to entering into creative finance is that you… Rule number one of creative finance is never lose money. Okay, always cash flow. That’s rule number one. Rule number two is never put your brain in the seller’s head because so many times we’re like, “Why would they do this?” Oftentimes, the answer is because they have a lot more money than you do. They’re way older than you. They’re way more experienced than you are, and most people entering into real estate that are brand new that don’t understand creative finance are like, “Why would somebody give up a property that I’m desperately trying to get my hands on? Why would they do it in a way that makes so much sense for me?”
I’ll give you this story. Gentleman’s name is Mario. I actually was so excited about this guy because I flew out to San Angelo and I spent a whole day with him recording. I got 19 reasons why he did this deal this way, and I recorded the whole thing so that people could have it, and it’s on YouTube. You guys can hear Mario with his own words. He moves to America. He’s Romanian. He moves to America 35 years ago. The first deal he ever did was a subject-to deal. Why? He couldn’t get bank financing. He was a foreigner. He didn’t have the money, and so he’s like, “I want to get into real estate. What’s the only way I can do that?” Well, seller finance or subject-to.
He does a subject-to 35 years ago, and then he purchases an entire real estate portfolio and nearly $300 million of real estate over about 10 years all using creative finance because that was the only thing he knew. What you learn through all of this is a lot of times, people, what you focus on expands. People focus on BRRRRR, they focus on cash deals, and that’s what expands in their universe. Meanwhile, I say no to cash deals. People send me a deal on my Instagram. “Pace, I got a great deal.” Perfect, send it to somebody else. Send it to Jamil. I don’t want cash deals. I only want creative, and because of that, I’m overwhelmed. I turn down a hundred deals for every one that I buy.
Why did Mario do this? Number one, he’s 55 years old. He wants to truly retire. How does a seller sell a $3 million asset, not pay taxes, and truly retire? Well, some people will say, “Well, he should 1031 it. He should roll his gains to the next deal.” Okay, well, two things have to happen for that. One, he has to have another deal, and if he’s trying to retire, does that sound like something he wants? No, he doesn’t.

Dave:
Not retiring.

Pace:
He wants to retire, so, one, he doesn’t want another deal to roll into. Two, he says, “I don’t have another deal,” and so it makes sense for me if I take my money in interest payments from you, 4% interest, maybe I die tomorrow. Maybe I die in 20 years. Maybe I die in 30 years, but either way, I don’t need the money today. I just don’t want to give it to the IRS. I want those payments to go to my children. That’s another reason. The payments will bear interest. One of the things I ask in my interview, I go, “So Mario, will you make more money on this real estate transaction than you would going through a cash deal?” He goes, “Oh my gosh, literally three times more money. I will make three times more money on this deal.”
Here’s a couple of reasons why. One, no agents involved. Two, no appraisals are involved. Three, we’re not going through months and months and months of inspections and all that kind of stuff. You get a deal under contract with seller finance on multifamily or anything, and I can close three days later. Go through a title company. Takes almost no time. He can sell at the price that makes sense for him, so if you run this deal, this deal is only worth about 2.85 million. I bought it for 3 million. I overpaid on paper for this deal, but the difference is I didn’t give him a down payment. I immediately inherit a multifamily property that’s bringing in $30,000 a month after my payment to him because he’s been upgraded from landlord to lender. He’s now the lender. He receives payments from me. After all my CapEx, after my property management, after everything, I net $11,000 net net, in my pocket every month on day one.

Dave:
That’s with “overpaying” for that property?

Pace:
That’s overpaying for the property.

Jamil:
The landlord’s going to make, well, the owner’s going to make tremendously more money because even at 4% interest, that’s him. He’s the bank now. You paid him more money from the property than he would have gotten, and now he’s actually getting that. You guys ever look at an amortization schedule? It’ll make you sick.

Pace:
It’ll make you sick. If you go to… BiggerPockets has a bunch of amazing calculators. You guys should go look at those, but so, one, he did the calculation and when we were talking to him, it was a cold call. We cold call multifamily deals that are over 30 units and under 150 units. That’s where we get the deals from. People have a lot of equity. We’ll call them and say, “Hey, are you interested in selling?” That’s where this lead came from. Mario does the calculation.
He says, “If I put this on the market, I can sell this for 2.85 million probably. I’m going to have to go through a broker, and they’re going to have a broker, and we’re going to pay all of these commissions and all of these things and it’s going to take six months for me to get out of the deal. How about I just sell it for 2.85 million on seller finance and I put 4% interest on it so by the time I sold it for cash,” he says, “I would have walked away with about $2.45 million out of the 2.85?”
$450,000 went in his pocket, at least on paper, and the great thing is he’ll bear interest on that additional $450,000, not only the 2.4. Those are a couple of big reasons. The biggest reason I find with sellers on seller finance is they want to mitigate their tax liability. You only get paid on what you receive. I’m sorry, you only get taxed on what you receive. He’s not going to get taxed on that full $2.85 million today. He’ll get taxed only as he receives the money, and if he stretches that out over 50 years, he’s going to have other write-offs next year that will actually mitigate the gain that he gets next year. He essentially can set up a zero taxable event on this deal by stretching this deal out.
Those are like five of the 19 reasons he gave. His biggest thing is he like, “Honestly, I just make a decision, I go with it.” The other thing is, he now still has control of that asset. I own it, but he’s my bank. We set up a clause in the seller finance situation where if I default, it immediately reverts back to him. He keeps any payments I’ve made along the way. He keeps any improvements, any rent raises I have. He’s like, “This is the safest investment I could ever make. Where else am I going to put my $2.85 million right now? The stock market’s crashing, crypto’s crashing, everything’s crashing. Where else am I going to put my money that’s safe, secure, and I know the asset better than the person who bought it from me?”

Jamil:
Pace, what’s the instrument that you’re using called that reverts the property right back to the seller in case of a default?

Pace:
It’s called a performance deed. It’s something me an attorney created about six years ago where you get sellers that go, “Well, what if you default?” I go, “That’s a really great question. How do I create an instrument, a document that protects the seller and myself in the event that I default? Let’s say I get abducted by aliens. I’m not around to make the payment. I’m not around to manage the property anymore.
How does that seller get it in a traditional sense as they go foreclose on you? Who wants to foreclose on you? Nobody, and so what you do is you have a clause in your deed, or I’m sorry, in your deed of trust that’s called a performance clause. It says that on the 31st day of me being late, the property will revert back to them. The way we do that is we have a deed in lieu document that is pre-signed, notarized that the seller can go and file in the event that I default.

Dave:
That’s super cool. I mean, you have to… At first, when you say 4%, it’s kind of like, “Oh, 4% is not a great interest rate,” but you have to understand the seller’s mentality, like you said, and the context of what else is available for someone who wants to retire. Normally, someone might take that money. They might sell it to you just for cash or whatever, put it in a savings account because back in the day, you could earn 5% on a savings account. Now, it’s, what, 0.5% or something like that. Or, if you’re approaching retirement, a lot of times a financial advisor will advise you to put money in bonds. Bonds now are yielding far less than 4%, for example.
It really depends on where you are in your career. If you’re 22 years old and you’re trying to get wealthy as quickly as possible, 4% probably doesn’t sound that attractive to you, but if you’re 55 years old and you’re trying to retire and you can have, as Pace said, an extremely safe investment that yields you more than the other safe investments out there like a savings account or a bond right now, then, that is an incredibly attractive offer. I’m curious, Pace, if these like market conditions that we’re seeing right now are helping you generate leads. Are you seeing a bigger influx of people who are interested in this given what else is going on in the economy?

Pace:
Yeah, the word I would use is overwhelming, and if you don’t mind, I want to put a button on that 4%. If people understand amortization calculators, most of the interest you receive is in the first 10, 15 years. Effectively, that investor or that lender, Mario in this example, he’s not making 4% for the first 10 years. Then, if you do the research, what’s the average amount of time that an investor will keep a property before they refinance and pull the cash out of the deal to roll into another deal? It’s about seven to 12 years.
He’s looking at this like, “I’m going to give you a 50-year note, but you’re going to get greedy to the point where this is going to go up in value. You’re going to see a million dollars sitting on the table in equity and you’re going to go get a refinance at 5% with your bank, and I’m going to get paid all the way off.” I will have borne or bore 4% interest, which probably is more effective, is probably more at like a 12 to 14% rate considering that most of the payments I’m making are interest. It’s like 85% interest.

Dave:
That’s such a good point. Yeah, that’s such a good point that… If anyone doesn’t understand this, quick, as you said, you pay most of your interest in the first couple of years, but I appreciate this because it allows me to shamelessly plug my book that’s coming out-

Pace:
Yes, please.

Dave:
… which explains all of this. It’s called Real Estate by the Numbers. It’s available for preorder now on BiggerPockets, but it talks all about amortization and how loans work. That’s a really great point, Pace. Thank you for bringing that up, is that both as a buyer, it’s not great because you’re paying more money to the bank for the first couple of years. That’s why if you only hold the rental property for the first couple of years, you actually don’t do that well and it’s better to hold it for a long period of time, but if you are the seller, it’s completely different. If you’re seller financing, you’re making so much interest up front and that, I hadn’t even thought about that. That’s such an attractive option.

Pace:
Yeah, it really is, and if you really think about most investors strategies is that I go buy even a BRRRRR deal. I do a BRRRRR strategy. I’d take over a deal, sub-to. I’d buy something on seller finance. It’s going to appreciate, and you’re going to have some loan paydown, so what ends up happening is you go, “Where can I get some tax-free chunks of money?” You go refinance for four years, eight years, 12 years. We currently have close to…. We’re a little over a thousand doors right now in our portfolio, and I don’t have a single loan in my portfolio that’s older than seven years.

Dave:
Oh, wow.

Pace:
It just goes to tell you that we’re refinancing a lot. Like in December, we refinanced seven properties. We pulled a million and a half dollars out. We took that million and a half dollars, rolled it into new deals, and so most sellers that are savvy in seller finance, especially the multifamily world, most of those sellers, they bought their deals on seller finance. That’s how common this is. They are like, “Oh, of course, I’ll give you a 30-year note or a 50-year note because I know you’re not going to last 10 years.”

Jamil:
Pace, do you find that sellers in multifamily are more open to this seller finance are subject to structure than in single family? Or do you think it’s fairly even?

Pace:
It’s not even remotely close to even. It is so dramatically different. Sellers in the single-family realm, they’ve only bought one, maybe two properties their whole life, and so they don’t even remember what the word “escrow” means, let alone anything else. I’d say in the single-family realm, the first 300 deals I got in single-family, I surpassed that. That took me years to get that. In multifamily, I did that in a quarter because multifamily sellers, typically multifamily sellers used to be multifamily buyers. Going out and getting a commercial loan in multifamily requires a net worth requirement and it requires liquidity.
It is so challenging to go out and get a multifamily loan, and so most multifamily purchasers also use seller finance in order to get into the assets they hold today. It’s very common, and so when you say terms to a single-family seller, they go, “Wait, what? What are terms?” I tell the infamous F-150 story probably 50 times a week because it dumbs down what creative finance is to a single-family op or homeowner. When I talk to sellers on storage units, like A.J. Osborne, a lot of everybody knows A.J. Osborne. I was helping one of his acquisition guys the other day talk to a storage unit operator. I brought up terms and the guy’s like, “Oh yeah, I’m down for terms. You give me 20% down, I’ll carry the rest of the deal, all day long.”
A.J. Osborne’s team is like, “Oh my gosh, it was that easy?” I go, “Yeah, this guy probably bought it… I put the guy on mute, I go, “He probably bought this on seller finance.” I take him off mute and I go, “By chance, did you buy this asset with seller finance?” He goes, “Oh yeah, I buy all of my stuff with seller finance.” It so overwhelmingly common in the multifamily and commercial space because of the challenge of getting loans in that space.

Dave:
That’s really, yeah, I had never really thought about that, but yeah, I’m sure it’s so much easier for you to talk to people who have done this before. For those of us, myself included, who really just buy smaller things, it feels like no one would want to do this and that it would be a lot of education for single-family homes, but if you focus on multifamily, it sounds like there’s maybe just less resistance and there’s more comfort with it right off the bat.

Pace:
Yeah, I would say that 20% of what I’ve learned about creative finance has actually come from my sellers and a hundred percent of those sellers were multifamily sellers because these guys have owned, guys and gals, they’ve owned these assets for 20, 30, 40 years. They’ve taken the tax depreciation, they’ve done all the things, and now they’re at a point where like, “Where else can I put my money that’s safe? I can’t, and I don’t want to manage these anymore.”
This is what’s great about multifamily, too, and seller finance is that most of the operators in multifamily are Ma and Pa operators, which means they don’t have an operations manager, they don’t have an asset manager. They don’t even have property managers. Most of these people are going and physically knocking on the doors of their tenants and collecting rents on their 20-unit, 30-unit, 50-unit deals. When you ask for a P&L, some of them are like, “Huh, how about I just show you my bank account? I’ll show you my deposits.” That is very, very common in the 30- to 150-unit range.

Jamil:
Those sellers, because they don’t have a P&L, they can’t even… their buyer couldn’t even get a loan.

Pace:
No, and it is so common, so here’s what happens. A lot of them will go… Okay, like I’ve got a seller named Moe in Corpus Christi. He’s got 25 million in multifamily real estate. We just closed on 3 million of it and I’m slated to buy the next 25 million over the next two years from this guy. I’m going to like own 1% of Corpus Christi in two years. It’ll be great.” Moe, he started in life, a lot of these sellers started in life as business operators and they go, “All right.” Moe owned convenience stores. He goes, “Okay, I’m making money as a convenience store operator. I need to put my money somewhere I can get tax benefits.” They go to strip malls, they go to what they know. He’s already in a commercial building, so he buys the strip mall that he was renting in.
He then goes and buys multifamily, multifamily, multifamily. Gets to a point and goes, “Okay, I’ve got enough cash coming in. I really don’t want to operate this. This has become a nightmare for me.” Who do they hire? They hire their wife or their kids. They’re not going to Masterminds. They’re not learning how to scale their business. They’re not doing what we’re doing. These are old school people that have been doing this like with pencil and paper. Microsoft Excel is advanced for them legitimately.
You go to them and say, “Hey, I can take over this asset. I’ll pay you close to what you’re currently making now. You just got to let me get into this deal with very little money down, low interest, and give me a good runway that I can go and raise the rents and do something else with it.” Moe could not even… Moe goes, “Oh my gosh, you would take these off my,” this was a big paradigm shift for me. Everybody says, “Why do sellers do this? It doesn’t make sense.”
Then, Moe, my seller currently, is like, “Wait, you would take these off my hands and you would make a payment to me? Oh my gosh, this is like a dream come true. I have been sitting there dealing with tenants.” I go, “Well, Moe, the problem is you didn’t hire a property manager.” He goes, “Yeah, I don’t do well with people. I love my tenants, but I don’t like employees.” They don’t scale a business that is functional, and so you come in and you’re essentially taking over their business. It is so… It is like taking candy from a baby because we know how to scale and operate businesses.

Dave:
Yeah, but you’re not like stealing from them, you know? It’s not taking-

Pace:
No, I’m giving them more money-

Dave:
… from a baby.

Pace:
… than anywhere else.

Dave:
Yeah, exactly. Yeah. There’s just candy for everyone. You’re just helping them. You’re giving them almost it sounds like the same amount of capital that they need to live their lives, and you’re just taking over the asset, which is pretty incredible.

Jamil:
You think about that too, right? Because of the amortization schedule, they’re really getting all of that income right out the front, but guess what> They’re doing it without having to work now.

Pace:
The thing with like a cash deal that I… You know, we’ve done a lot of wholesale, a lot of wholesale, a lot of fix and flip. We still are very active in that business. I just don’t talk about it as much because it’s not my passion, it’s not where my heart lies. I love being ultra creative and figuring things out, and I could go on and tell you a whole bunch of stories about recent deals that we’re working on if we have the time. I look at a cash deal, and really when I’m going and buying, let’s say, a house that the ARV is $300,000. I could sell it on the market after I renovate it for $300,000. In order to make a good amount of money, I got to buy that for like 160, 170 because I know I’m going to have to go put 50 grand into it.
A seller has to sell a property to me for 50 cents on the dollar in order for me to make money, and so they’re getting something. Obviously, the house isn’t worth 300 grand in the condition I’m buying it in, but I’m basically buying all of that potential, and I have to really get my number as far down as possible for me to make as much money as possible. In creative finance, it is the only thing that I can make the seller win at a very high level, mitigate tax, have large amounts of money coming into them over time. Then, on my side, I can pay them more, but it actually becomes easier for me to acquire that asset because of the way I enter that deal. Zero dollars down or… I have not done a deal where I’ve put more than 7% down in, I don’t know, probably six, seven years.

Dave:
That’s crazy.

Pace:
It’s crazy. This deal with Moe, let me break this down really quickly. The deal with Moe, Corpus Christi, it’s the 30-unit, buying it for $3 million, so a hundred thousand dollars a unit. I go do… We get it under contract seller finance He wants 10% down. I go, “No, I’m not going to do 10% down, Moe. That’s crazy. All my other sellers are giving me 5% down.” He goes, “Okay, great.” “Well, I’ll give you 5% down.”
That’s $150,000. For most people that are new to this business, that seems incredibly daunting, and it is, but when I was brand new to this, that money wouldn’t come from me. I would just go to other people and go, “Hey, I’ve got a deal under contract. Who wants to be my financial partner? You bring the money, I bring the deal. We go 50-50.” Now, I’m 50% owner of a $3 million asset with no money out of my pocket, so 5% down. With Moe, it’s 3% interest, 50 years with him on the mortgage.
We go do the inspection and I go, “Man, in order for me to raise rents and take this asset over, I’m going to have to put a hundred thousand dollars into this $3 million deal.” I go to Moe and I go, “Hey, Moe, I’m still okay with putting a $150,000 down, but I want that $150,000 to actually go into the renovation.” Moe goes, “Okay, I’m cool with that.” I just want to make sure you’re going to operate this properly. My down payment is actually going into the renovation directly.

Dave:
Yeah. I mean, that’s why you call it seller or creative finance. It’s an incredibly creative way to use your money to mutually benefit both you and the seller. I’m curious, for Moe, this deal or the deal you were talking about before, have you done the analysis? Or do you think they would pencil if you were just using rates like-

Pace:
No.

Dave:
… if you just went to a bank and go… Just there’s no way, right?

Pace:
They won’t pencil unless you are okay with losing money for three years.

Dave:
No, that’s not pencil, right?

Pace:
No.

Dave:
I mean, I guess maybe for some people.

Pace:
I see some people… I saw a guy teaching creative finance. That’s why my first rule of creative finance is never lose money, even on day one. It’s never okay to buy a deal in the hopes that you’re going to raise the rents at some point to make the deal work. It needs to work-

Jamil:
Cash flow from day one.

Pace:
… day one, like maybe within 60 days because sometimes you got to improve it and get it filled up and whatever else, but definitely within the first 60 days. If I went down, for example, let’s look at the Mario deal. If I went down and I went to get a loan for that multifamily deal, my lender is going to give me… Right now, a commercial loan is about 6%. It’s double, it’s double what I’m paying, or it’s 50% higher than what I’m paying Mario.
Then, the lender is going to ask me to put about 30% down. That’s $900,000, and this is why people have to go and do syndications and funds is because they’re like, “Hey, guys, I got to go put 30% down on this deal. Let’s go pool our money together and I’ll give the lender 70% of the deal.” Guys, I didn’t have to raise any money for that Mario deal, and I’m a hundred percent the owner, no syndication, no fund because of the way that the terms allowed me to get into the deal.

Dave:
Do you think this is… I mean, sort of we asked this before, but is this just giving you more deal flow? Other people who aren’t considering seller finance just can’t make these deals work. Are you just finding that you can… You basically have a broader pool of deals to pull from because you have the ability to make deals work that people who aren’t thinking this creatively can’t make them work.

Pace:
Yeah. I’m like the guy in Santa’s shop that like I take all the broken toys that people screw up on and I make them better than what anybody else can. I’m in this little room by myself and I’m just tinkering around and making things work and people are like, “How did you do that?”

Jamil:
My community is cash buyer wholesale, and so a lot of the people we’re talking to that’s…. If we’re working agents, we tend to find if we can’t make a deal work based off of a cash price because maybe the house is too nice and it doesn’t need all these repairs or maybe the seller just doesn’t want to come off their number. What’ll happen a lot is people from my community will connect from people from Pace’s Subto community and they will create an opportunity there where normally there wouldn’t have been.
Even people in wholesale take note that this strategy adds a tremendous amount of tools to your tool belt because now when you’re… Say, for instance, you’re cold calling and you’re going direct to homeowners. They want a number that just doesn’t make sense for you. You can now monetize that because people are wholesaling these creative deals. My student body, they’re not all that interested in collecting property. They’re not super worried about depreciation or wanting to property manage or do the things that Pace is trying to do, but Pace is at a different season of his life and he wants to collect and have assets. There’s people that’ll pay assignment fees for these opportunities.

Pace:
I just paid a $210,000 assignment fee on a massive seller finance deal that I just bought, $210,000. People learn how to lock up the contract or at least get the seller interested, and then me or somebody on my team gets on the phone and actually works out all of the details. Then, I’ll pay somebody a massive assignment fee. That was 0% seller finance, so for me it made a lot of sense for me to pay a big assignment fee. They asked for 500,000. I’m like, “No,” but I ended up paying $210,000 to somebody for an assignment on a creative finance deal, so-

Jamil:
I think that was…. Was that an Astro student that you did that with?

Pace:
It was an Astro student, yeah.

Jamil:
Yeah, because I heard about that. It was a big win that we had on one of our support calls. They were like, “I just made $200,000 selling a deal to your best friend.”

Pace:
You know, it’s funny as I’ve got a text message right now from Ryan Larue, and if you remember at the-

Jamil:
He’s awesome.

Pace:
… very beginning of the show-

Jamil:
Yep.

Pace:
… Ryan is the guy that was between Jamil and I, that he was the guy pitting us against each other that ended up getting us a TV show. Ryan’s got a deal right now in Phoenix, 49 units, seller wants full retail for the multifamily. The challenge is he was in contract with somebody else buying it. What do you think happened to that contract?

Jamil:
Ooh, they walked away from their earnest money and had to tuck their tail between their legs because they couldn’t get lending.

Pace:
That’s exactly it. They locked the deal up. They put hard earnest money down. They were going to buy the multifamily with 30% down, get their lender to come to the table, and the deal had fell apart because interest rates came up. Ryan watches me. He’s not one of my students, but he watches me all the time. He goes, “This is the greatest thing.” He’s like, “I get one wholesaler that will bring me four or five deals a year that they’re like, ‘I don’t know what to do with this, but the guy says he is open to terms.’ I go, ‘Great. Let me get on the phone, and I work out terms.’”
It’s a 49-unit deal in Phoenix. Seller just wants his number. Here’s the thing thing for you to understand if you’re in the audience. Why do sellers like seller finance? They want to win at one thing. They want to win at their number. These guys are real estate investors at the end of the day. They look at things on spreadsheets. People don’t realize this. Wealthy people don’t have billions of dollars sitting in their bank account. They have assets that they add up and they go, “That’s my net worth.” When a seller is willing to sell something to you on seller finance, their number one priority is selling it at top dollar so they can say, “I won the game.”

Dave:
Yeah. They want that top line number. That’s what they care about because they’re like, “I bought it for X and I want it to double or I want to sell it for Y.” They’re willing to negotiate with you to make sure that that top line number is what they want it to be.

Pace:
I’ve got a really great single-family deal. I’d love to show it to you guys if we’ve got the time. Here’s the deal, so this is my document. You can see the seller who sold this house to me. By the way, I have their permission. They’re great, that we’ve done videos with them. We just closed on this deal, what was this? What was the date? July 15th, so roughly a month ago I closed on this deal. Single-family property, but it has two houses on it, literally two three-bed, two-bath houses on the same property. Look at what my monthly installments say, principal only. This lead came from a failed wholesaler locking this up at too high of a price and then trying to sell it to a hedge fund. The hedge funds, because of interest rates, they slowed down their buying, and in a lot of ways, just stopped buying altogether.
All these wholesalers are going around town canceling deals on sellers, and I come in and I’m just gobbling deals up. That was a zero down, zero percent interest seller finance deal with a seller. The same exact day, I bought a subject-to deal, same exact situation. The seller refinanced last year. I get a lot of sellers that have refinanced in the last two, three years, pulled out their equity, and now they’re in a situation where marketing softening, days on market have gone from three days on market to 90 days on market type of thing. Now, they’re like, “I can’t sell my house. I have very little equity, and now I’m getting low-ball offers.” We’re coming in and picking up houses left and right on sub-to because people are just saying, “Take over my house and give me 2,000 bucks for moving expenses and here’s my house. We’re just getting free houses with subject-to right now.

Dave:
That’s unbelievable and a good segue because I want to talk about subject-to, and I’m going to do a terrible job explaining what it is. You’ll do it better, but basically what it means if, correct me if I’m wrong here, is that rather than buying a house by taking out a loan in your own name or even using something like a death service coverage ratio loan, you’re basically just taking over the existing owner’s loan. To me, one of the main reasons I was so excited to have you on here today is that something like 50% of homeowners right now have a mortgage under 4%, right?

Jamil:
Yeah, wow.

Dave:
If you are trying to buy a home and 6% isn’t working for you, it just seems like a no-brainer for sub-to because you could assume you have a 50-50 chance that if you approach someone and they’re interested that that loan is going to be under 4%, which just seems incredibly attractive right now.

Pace:
Our average sub-to interest rate on all of our real estate-owned sheet is 3.2%.

Dave:
That’s crazy. That’s so good.

Pace:
That’s our average. We have deals, we have VA loans that are like 2.6%. We have so many, like my personal… the personal house I live in right now, it’s a… I bought this house for $3.3 million. Interest rate on it is 2.8% on a $3 million sub-to deal.

Dave:
Unreal, and if they’re similarly to seller finance, are you seeing a lot of willingness and deal flow right now? One thing-

Pace:
Yeah.

Dave:
… we talked about in the show is that there is this theory right now. Have you heard like the lock-in effect?

Pace:
Mm-hmm.

Dave:
Where people aren’t going to sell-

Pace:
Stuck in their houses.

Dave:
… because they don’t want to sell and pick up a new mortgage at 6% or whatever. I’m just curious if like sub-to deals are slowing down for you because people know that they’ve got something valuable at 3% and they don’t want to give it up?

Pace:
No, not at all, so here’s an interesting thing. I differentiate seller finance and sub-to in this way. Sub-to means the seller’s typically going through a painful situation. No matter what the economy’s doing, no matter what is going on, somebody’s always going through a divorce, somebody’s always going to lose their job. Something’s going to happen all the time. No matter what’s going on, the best of markets, the worst of markets, you’re not going to stop people from fighting with each other and getting divorced. These things happen.

Jamil:
Are you saying sub-to is great for like distress?

Pace:
Yep. Sub-to is pain. Distressful situation typically, and seller finance, so I call it pain and gain. Sub-to, it’s all about pain. Seller finance, it’s all about gain. That seller wants that gain. They want that top line number. That’s the most important thing to them. In sub-to, people are saying, “I can’t sell my house. It’s not selling. I need to get out of it.” Expired listings, if you guys want to go get a sub-to deal today, look at expired listings, thousands and thousands. I could pull up right now online public record. I could pull up thousands of expired listings just in the last 60 days in just Maricopa County alone.

Jamil:
You could just… Even easier than that, if you go… I mean, right now, I have a student who’s been cold calling real estate agents live and anything that’s sitting on the market even over 90 days, this doesn’t require you to go and do any research, guys. You can go right on to any of these platforms and look at days on market, 90 days or more, and you can call any of those real estate agents and ask them if their sellers would be open to terms. They are, “Really? Really? You want to do a deal? Oh my God, yes. Let me get my seller on the phone and let’s see if we can put this together.” It’s literally that easy right now.

Pace:
I’ve got a deal with an agent we just closed on last week. It was her first sub-to deal, and she said, “I had this property listed for 60 days. The homeowner had a job opportunity in New Zealand. He left thinking, ‘Hey, market’s hot. It’s going to sell in like a couple of days.’ He leaves, leaves the house vacant. Now, he’s got a mortgage payment he’s paying.” I come along. Somebody on my team calls. It was 60-day-old listing. We call the agent and we go, “Hey, what if we just take over the payments on that? Would the seller be open?” She goes, “Wait, that’s not possible. I’ve never heard of that before.” We go, “Well, if you talk to either our escrow officer or maybe our attorney, they can explain it to you that we do this all of the time, a few times a week just here in Phoenix, Arizona. She’s like, “Let me throw it by my seller.”
She calls the seller and the seller goes, “Oh yeah, subject-to? Yeah, I’ll do that all day long.” Seller knew what subject-to was and he was like, “I just don’t want to make the payment anymore. Take the house over.” It’s a five-bed, three-bath house. We’re turning it into an Airbnb. I took over payments. We paid the agent in that situation, so people always have that question. “Well, if you’re working a sub-to deal where you’re taking over payments and the seller’s getting basically no money, how do you pay the agent? Do you pay the agent?” Absolutely. Think about how most people buy houses. That’s a $700,000 house we’re taking over, by the way, a $700,000 house. If I’m a traditional buyer, how much money am I bringing in cash to the table to buy that deal? 150 to 200,000.

Jamil:
Yeah, 20%.

Pace:
I come to the table by paying this lady 20 grand in commissions. I’m $120,000 less to get into that deal than anybody else.

Dave:
You’re making the agent whole basically. You’re paying that 2.8-

Pace:
Yeah.

Dave:
… 3% commission or whatever.

Pace:
Basically the way I looked at it, too, is I bought the greatest testimonial from an agent you could ever ask for because she goes and she’s doing a video with us this week. She’s just like, “This is crazy that this solved my problem as an agent and my broker didn’t teach this to me. Nobody taught this to me. I thought that there’s no way that this is possible, and here you go.” She’s like, “I get listings that people come to me and they go, ‘I have no equity in this deal. Can you sell it?’ The agent says, ‘I can’t help you.’”

Dave:
Right.

Jamil:
Mm-hmm.

Pace:
This helps agents, it helps brokers, it helps the sellers. It is absolutely amazing. Going back to like what’s going on in the market right now, what I love about… The exit strategies are amplified as well because now, all of these buyers being told, “Interest rates are at 6%. You’re going to have to bring more money to the table,” all of this. If you’re a buyer, my sister McLaren, here’s a great example. My sister McLaren, she wants to move back to Phoenix, Arizona, and she’s like, Pace, everything’s 6%.” I’m like, “McLaren, just have your husband call on expired listings.” She calls an expired listings. Fourth phone call she gets ahold of is an agent who couldn’t even sell their own house. She’s moving into the house in two weeks, taking over payments, no money to the seller, expired listings.

Dave:
How does it work? Can you just explain quickly how it works with no money to the seller?

Pace:
The seller just says, “I don’t have enough, I don’t have any equity in the deal,” so why… If I-

Dave:
Oh, because they don’t have any equity, so they don’t even care. They wouldn’t make money even if they did sell it outright.

Jamil:
They’d actually have to come to the table with money if they were going to sell a traditional.

Pace:
Yeah, I’ve got a great… One of my favorite stories I ever had is a guy named Dave Byarsky. Listing was five and a half months old. The agent calls me up. She goes, “My listing’s going to expire in two weeks. I don’t know what to do. I didn’t know this guy didn’t have equity. He had just pulled cash out, refi six months prior. He has no money, and every time we get an offer, I have to deliver bad news that he’s going to have to cut a check for $40,000 to get rid of this house.” I go, “Okay, well, I can take over his payments,” and she’s like, “Would you? Would you?” I go, “Yeah, sure.”
Dave Byarsky, who’s now still a friend of mine, I go in and I say, “Hey, I can take over the payments.” He goes, “Amazing, so you’re telling me I don’t have to write?” It goes… Your mindset needs to go from, “Wait, why am I not paying the seller?”, to understanding that the seller’s going to say, “Wait, I don’t have to pay you anything?” Dave was so skeptical. He was like, “You’re going to send me an invoice or something. You’re going to send… There’s no way that… This is the seller says, ‘This is too good to be true.’” I am putting money in their pocket. I’m holding them back from having to deploy $40,000 to get rid of something they no longer want.

Dave:
Yeah.

Pace:
This is why we have to remind ourselves, “Don’t put your brain in the seller’s head.”

Jamil:
That’s so real though, guys, and I think a lot of people in the real estate investing space, the barrier to entry for them is always that.

Pace:
Mindset.

Jamil:
It’s your mindset. You’re not thinking the way that the other people are thinking. You have to step out of your shoes and you have to look at deals from the perspective of the different parties.

Pace:
Here’s a good action step for people that are wanting to know, “How do I go get a sub-to deal today?” Okay, go find expired listings. Google “expired listings” if you have to. There’s a hundred websites that sell expired listings, or if you have an agent in your local market, just call your agent and go, “Hey, can you pull all expired listings from the MLS?” Very, very simple. All you do is you call these people and you say, “Hey, I noticed your listing expired. Was there something you were looking for on the market that you were not able to receive?” That’s the question.
You let them talk and they tell you, “My agent this, they didn’t do open houses.” You’re going to hear them complain about somebody is now the common enemy is what I call it. You now have rapport you’re building. “Oh man, I’m sorry to hear that. I’m so sorry to hear that, I’m so sorry to hear that.” “Well, you know, me and my team, we’re buying properties. I’m wondering, would you be open to an offer of us making payments to you on that house instead of giving you a lump sum up front?”
It’s very simple. That is it. You’ve got people that were just beat up by the market and they obviously wanted to sell. They’re telling you on public record they want to sell their property. They’re also telling you on public record they weren’t able to, so you calling them, you’re going to be their savior. This is not hard sales. This is not, “Pace, how do I negotiate? Pace, how do I say the magical words?” Guys, they want to sell their properties and they were not able to do so.

Dave:
This is incredible advice, Pace. Thank you, and unfortunately, we have to go. You have incredible stories. I could listen to this all day, but we can’t. I got to ask you before we get out of here, you’re obviously very in tune with what’s happening in the market and the economy. What do you think’s going to happen just on a large scale in the housing market over the next couple of months? You think we’re going to see some declines? Or how do you see things playing out over the next year or two?

Pace:
You know, it’s interesting because there’s people on YouTube that are creating salacious material so that they can get clicks.

Dave:
It pisses me off.

Pace:
It’s really tough because like the only person I really watch is Dave, you, Dave, because you go through-

Dave:
[inaudible 01:02:35].

Pace:
… and it’s based on numbers. You actually go through. You analyze software. You look at what’s going on. There’s a couple of other people I really respect as well. Kenny McElroy, you guys have had him on your show. He’s epic. Outside of that, everybody else is just on YouTube trying to get YouTube to pay them Google AdSense, whatever it is.
Here’s what I look at. Interest rates change things dramatically. Jamil said something to me the other day. He says, “Pace, if I walk over to a thermostat and I turn that thermostat from 75 down to 68 degrees, wouldn’t I be crazy to think that that room was not going to cool off?” Like, “Well, yeah, of course, unless the air conditioning unit’s broken.” He’s like, “That’s the thing. The market is going to cool off because of interest rates.” It’s going to happen and it has happened. It’s slowed down our fix and flips. It’s slowed down a lot of things, but that’s a great thing. It resettles the sellers because really, where do deals come from? They come from sellers. The seller is the beginning of a real estate transaction.
When you settle down what their expectations are like, “I’m going to go sell the house on the market in 14 minutes,” then that gives us an opportunity to jump in and buy these types of deals. I’m happy about it. I know that the Fed is meeting again on I believe September 20th or September 21st. They’re 100% without a doubt raising rates again.

Dave:
Of course, yeah.

Pace:
Right. We saw what a rate hike did or a couple of rate hikes did to us this year. It doubled and tripled the days on the market, and I think that right now because lenders, they’ve basically hedged against that and they raised their rates a little bit higher than the Fed did. We’ve been actually seeing the lenders shrink down a little bit to accommodate that overexaggeration essentially. Right now, I think for like a month and a half, I think activity’s going to come back up a little bit, but on September 20th and 21st, we’re going to see another rate hike. It’s going to slow down. The last quarter of this year, if you’re in traditional real estate, strap in for a fun ride, but you’re not going to be priced out of the market. Your people are still going to be buying, it’s just that you got to be reasonable on your sales price.
For us in the fix and flip game, forget about creative finance, forget about wholesale. In the fix and flip game, what all of us have done is we have all been aggressive for the last two or three years. We know the ARV’s 300 grand and we still list the property for $350,000 because we now the market was hot the last couple of years. When we say, “Oh my gosh, our listing only sold for $310,000. We had to take a $40,000 price haircut.” It’s like, “No you didn’t, knucklehead. You sold it for 10 grand still over what it was worth.

Jamil:
Yeah. People are always like, “I’m losing money.” It’s like, “No, you’re not. You just made all this money. You just made slightly less than your dream pie in the sky amount that you were going to ask for was going to make you.

Pace:
I just think the rocket boosters are just slowing down. I still think that we’ve got a lot of growth. I think this is the greatest time to get into real estate personally, not just creative finance, but other stuff. I love the market. Somebody comes to me the other day, Dave, and they give me this alternative real estate investment, or not real estate investment, a different type of investment. I go, “Dude, all day long, the only thing I will ever invest my money in is real estate,” and I’m not wasting my time and energy anywhere else. It’s the safest, best, and this market, I’m excited about it.

Dave:
All right. I love it, and just to continue your analogy there, it’s like you turn it down from 75 to 68, 68’s still pretty warm, you know? It’s like it’s not-

Pace:
Yeah.

Dave:
… like it’s crashing. It’s not like it’s going to 32 degrees, and I completely agree with you. I think cooling is good. It’s good for everyone. It’s good for home buyers, it’s good for home sellers, it’s good for investors. I know there’s a lot of headlines out there, people are freaking out, but take it from Pace, Jamil. These guys are doing just dozens of deals every single week or every single month, and if they’re investing, it should give the rest of us who aren’t as active a lot of confidence and perspective about how to take advantage of this market.

Pace:
Love it.

Dave:
Pace, thank you so much for being here. I know you have so many different social medias and things, but if people want to learn more from you or connect with you, where should they do that?

Pace:
Go to YouTube and type in “BiggerPockets Pace Morby.” Go watch my BiggerPockets episode that I was interviewed last November. It’s a very, very popular episode.

Dave:
I listen to it. It was extremely good, and you really get into like the details of how to pull these strategies off, so that definitely… listen to that. I should have asked you this off the air, but you’re writing a book for BiggerPockets?

Pace:
Yeah, we are. We’re currently in the first round of editing right now. They’re cleaning up all my foul language and making it nice.

Dave:
Nice. We got two shameless book plugs into this podcast episode, which is great. Jamil, we’re going to have to get you to write one next.

Jamil:
I’m in the process.

Dave:
Oh, really? Excellent.

Jamil:
Yeah, The BiggerPockets First Wholesaling Book.

Dave:
Ooh, yeah.

Pace:
All right.

Jamil:
Yes, yes.

Dave:
We should start a little book club here. We’re all BiggerPockets authors now. All right. Well, Pace, Jamil, thank you guys both for being here. We really appreciate it.
Man, Jamil, that was awesome. Man, you get to listen to Pace talk every day, I guess, but, man, he’s-

Jamil:
All the time, man.

Dave:
… got incredible stories and he’s such a good storyteller. It is so fascinating to listen to him, and just one of the most unique approaches to real estate that I’ve ever heard.

Jamil:
Honest to God, and really guys, if you did not pick up a million dollars worth of game in this episode, listen again.

Dave:
Dude, I was just sitting here the whole time thinking like, “How do I get a sub-to deal? I got to start thinking about-

Jamil:
That’s it.

Dave:
… “seller financing.” It’s inspiring, honestly.

Jamil:
The best. He’s the best. Love him.

Dave:
It’s great, and I loved hearing the story of how you guys met. You know, you guys are such a duo. I was envisioning you had this like meet cute one time where you’re competing over a wholesale deal and your eyes locked and it was love-

Jamil:
Oh, it was-

Dave:
… at first sight, but-

Jamil:
… hearts and all the things.

Dave:
Yeah, yeah, exactly. The romantic music started playing in the background, but-

Jamil:
It’s truly one of those friendships that’s so easy for me. I love traveling around the country with him. I’m godfather to his two daughters. You know, like-

Dave:
Wow.

Jamil:
… it’s… This is a real friendship, and it’s a friendship of my life. There’s nobody in the world that I’d rather be doing this with.

Dave:
Dude, I love hearing that because we talk, obviously, about economics and making money and all of this stuff here, but you want to have fun with your life. You want real estate investing not to be stressful or to this thing that you’re always worried about. You want us to have a good time, and I think you and Pace are such a good model of what a good business partnership/friendship can be and something we all-

Jamil:
Or-

Dave:
… probably aspire to.

Jamil:
… business competition because-

Dave:
I know, it’s so crazy.

Jamil:
… we compete so much. You know, we’re really not partners. We really compete. It’s just like, how do you love the guy you deck?

Dave:
Yeah, yeah. It is great, and I think it’s a good lesson for people because there’s you and Pace are such a good example of people who share so much information and you’re not afraid of competition. You’re not-

Jamil:
No.

Dave:
… withholding information or talking about your failures or successes because you’re worried someone’s going to compete with you. You can obviously… You gain more, you learn more by engaging with your competition and just engaging with the community in general, just like being a part of the larger real estate investment community has so much to offer. Thank you, everyone, for listening. We’ll see you all next time.
On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Speaker 4:
Come on.

David:
This is the BiggerPockets podcast show 654.

Amy:
I’m getting the commitment, but I’m still building rapport and trust. I’ll explain to you how the flow of money works. But right now, don’t even worry about it. We’ll cross that bridge when or if we get there. Once somebody invests with you, and they process the wire, that’s a step for the FACT framework, the transactions piece, then we really want to take a step back and look at how we nurture our network. How do we follow up with our private money lenders so that two things happen? Number one, they reinvest, and number two, they increase their investment amount.

David:
What’s going on, everyone? This is David Greene live from the Smokey Mountains. Actually, it’s not live to you, but it’s live to me. I’m here looking at cabins, and checking on some of the ones that I just bought, and getting to do a BiggerPockets podcast from the area. I’m joined by fellow Smokey Mountain investor and my co-host for the podcast, Rob Abasolo. Rob, how’s it going today?

Rob:
Hey, man. I am barely making it through the day. You know what I mean?

David:
I totally understand. I made a joke on Instagram the other day about this is a bear market, and it got quite the response. Apparently, dad jokes are making a comeback here.

Rob:
Oh yeah. They’ve been popular since 1972. I don’t know why that was the invention of them, but they’ve been big for a while. I actually done some research on this topic now that I’m a father.

David:
I just didn’t know they were big outside of dads. People that are not dads are really liking dad jokes these days.

Rob:
You know what, it’s cool to be a dad, man. It is so cool. You should try it sometime.

David:
You got dad bods. You got dad jokes.

Rob:
I will hopefully not have a dad bod in the next couple of months, man. I’ve been hitting the bike every single day. Little by little, I’m chipping away. I’m going from dad bod to-

David:
Hard to make something to rhyme with that on the spot, isn’t it?

Rob:
It is. I didn’t really think that out.

David:
Dad bod.

Rob:
I usually practice my jokes in the mirror.

David:
From dad bod to rad bod.

Rob:
There we go, rad bod. Rob bod, how about that?

David:
Thank you, Producer Eric. Eric’s one of those guys, our producer for this show, that you never would think is in the hip hop. Then you’re at a karaoke night one day, and he steps up, and he just starts freestyle rapping, and knows every single word to some KRS-One song that most people who just heard me say that have no idea who I’m talking about. He’s that guy that always surprises you, so thank you for that, Eric. Let’s get to today’s show. Thank you guys for hanging out through that semi-ridiculous intro we just had.
In today’s show, Rob and I are going to be interviewing Amy Mahjoory. Amy has a four-part system that helps raise money in a very simple way that is very effective. We’re going to start off today’s show with a treat for you guys. Josiah listened to the first interview that we did with Amy, put her system into practice, and found himself with someone that was willing to let him borrow money right off the bat. He explains what he did, how he did it, and how it worked out.
Then Rob and Amy asked him some question about what’s going on. It is a fantastic example of how simple this system is when you work it. Rob, what are some of your favorite parts of today’s show?

Rob:
I raised a decent amount of money. I’m raising money now for a fund that I’m putting together on a motel. Honestly, I don’t think that you can ever stop improving on how you raise capital. I’ve been raising capital now for probably two or three years. My style to do that has really evolved over the years. Even listening to this episode today, I’m like, “Oh, I can really see how it affects my fundraising game for the better to really just start putting an actual system so that you can think of fundraising a little bit more in a linear progression.”
Because for me, my thoughts are always in the ether. I’m always the ad lib guy that’s like, “Let’s go with the flow.” But having the direct system on how to approach getting money from investors, I think, is going to be super valuable for everyone listening at home.

David:
My two cents, the real estate investing space is changing rapidly every year. I mean, if you just look in the last 10 years how much it’s changed, it’s wildly different. There’s a lot of reasons why, but I think the biggest reason is that real state investing used to be a good old boys club. You needed to have a mentor in the city you worked at that knew how to be an investor that could teach you the ropes. This was… It was like jujitsu before the Gracie’s made it popular. If you didn’t know Gracie, you weren’t learning jujitsu.
Well, it’s different now. This is one of the biggest podcasts on all of iTunes. There’s tons of people on social media that are sharing all the information. Real estate investors like to talk. This is not a place where everyone keeps their secrets. Information is everywhere. That increases competition after these assets, and it’s one of the reasons that even though the market is slowing down, we’re entering into a bear market, as you guys will hear about later in today’s show, there’s still a lot of competition for the best assets.
That’s because it’s much easier to own them than it ever was before. You need to get into the private money game, whether you are actually raising money to buy these assets, or you are lending your money to someone else to make a passive return. There is a space for both people. My opinion, the next evolution of real estate investing is going to be crowdfunding made easy. NFTs are going to play a role in this. We interviewed Ryan Pineda, and he talked about that on the episode that we did with him.
I’m raising more money. Rob’s raising money also, but we’re doing it in 100% different ways, so we’re appealing to a different type of investor, who’s looking for a different risk reward profile. I would highly recommend if you’re someone who knows real estate investing is going to be a part of your future that you listen to episodes like this, want to pay a lot of attention, because these skills will be huge in helping you scale your portfolio faster.
Before we get into the show with Amy, today’s quick tip is head over to biggerpockets.com/reshow, where Amy, our guest today, has some free information that you can claim for yourself. That’s biggerpockets.com/reshow. The RE is for real estate, but it would spell reshow, and claim your free stuff today. Rob, any last words before we get to the show?

Rob:
If you have ever been interested in learning how to defend yourself against a bear, then I would definitely stick around until the very end of the episode, because we give some very tactical tips on that one.

David:
Little known fact, the B in BJJ actually stands for bear. It’s a misnomer that it’s Brazilian, but that’s not true. It was developed in the rainforest of Brazil, where people were being killed every single day, and the Russians actually copied it. Now, they have their kids wrestling bears for skills. We get into that at the end of the show, so it’s not enough to make a lot of money. In real estate, you’ve also got to be able to protect that money, especially from hungry bears.

Rob:
And pretend like you know about bears, so that’s always important.

David:
Amy Mahjoory, welcome back to the BiggerPockets podcast. So lovely to have you today. How have you been?

Amy:
I’ve been great. Thank you for having me. Excited to catch up with you guys today.

David:
Yes. Now, I’m going to have you recap what we talked about in the first two episodes where we interviewed you. But before we do that, we actually have a guest who heard the episode, and put your advice into practice, and it worked out very well. Josiah, welcome to the show.

Josiah:
Thank you, David. I am a small business owner out of Southern Oregon. I have a pool and spa cleaning and repair business. This business gives me the unique opportunity to get in with people I might not otherwise have access to. Then lately, I’ve been trying to work that into possibly people to partner with or invest with. So basically, lately, I started implementing the four-second power pitch. I did this by building rapport over time with my clients. I would talk to them about being in real estate.
A little backstory with our real estate, my wife and I, she’s my partner. We have our first home that we bought that we turned into our first rental. That was in 2021, or no, sorry, 2020. Then in 2021, we cashed out, refinanced that. Then the beginning of this year, we’ve done two deals so far. We’re definitely rookie investors, but we’re starting to see some momentum. Our second deal was actually an out-of-state property that my wife and I did after reading your book on Out of State Investing. Then we ended up buying that one, all cash, refinancing it, and then using that money into a tiny home Airbnb that we did on our property that we own, that we live on here in Southern Oregon.
Obviously, I got that inspiration from Rob, and following him on his Robuilt channel. We just finished that project May 18th. All along the way, I’ve been talking with my clients about what it is we’re doing, and just building rapport with them, and building myself up as not just a pool guy, but also a real estate investor who is implementing different strategies, and growing consistently. When I’m building rapport with my clients and stuff, most of them have… On their pool guy, they have big houses.
Basically, when I meet these clients initially, they’re clients with big houses and pools most of the time. I’ll try to build rapport with them by complimenting their house first. I’ll say, “Hey, this is a beautiful house you got, and a lovely pool. What is it that you do that lets you afford a house like this?” I’ll ask them questions about themselves, and what it is they do. That also gives me information on, what their interests are, or if they’re business owners as well, and then helps qualify them in my mind while I’m also trying to build rapport with them.
I would say, “Hey, how do you afford such a lovely house and pool?” This process takes a long time. It’s not like it’s something that happens overnight when I’m building rapport with them. I’ll often see them intermittently. It could be due, and so when they do that, it helps me build rapport with them and a relationship, but it also at the same time helps qualify them as a potential partner in the future, and if there’s someone, I think, that I’d be able to work with or not. So, whenever I see them, I always try to update them on what it is I’m doing or what it was we last talked about, and then jump ahead to where we’re at now with those projects.
The tiny home has been the biggest thing for us. A lot of people have been super interested in that. Obviously, they’re really trendy and stuff, but we’ve had phenomenal success with that. We’ve set it up to the highest level we possibly could, and because of that, it’s been booked out about 95% to 99% of the time since when we first launched it on May 18th. When I tell them stuff like that, I mean, we’re getting about a 60% return on our investment right now, and they’re just blown away by that fact. So, lately when I talk about that, I was able to caveat it into possibly getting partners or private money investors lately.
I did that simply by asking them. They would say, “Hey, that’s phenomenal what you’re doing.” I’d just be like, “Hey, we’re working on another project right now where I might be taking on private investors. Is just sitting back and collecting income from real estate something that you might be interested in? You wouldn’t have to manage it at all, or do any extra work. We’d do all the leg work for you.” I’ve done that with four or five of my clients now, and I’ve had really good success.

Rob:
That’s amazing. I was wondering what your parlay was, because I know for Amy, she talks about going out, and you meet someone. You say, “I helped someone get double digit returns in real estate,” because you’re introducing each other, and you’re like, “I don’t know what you do. What do you do? I do this and that.” Obviously, if you’re the owner of this company, that part is that they know what you do. So, how have you worked on your transitions? Does it change from client to client, or do you think you have a pretty streamlined pitch at this point?

Josiah:
I mean, I’m new to implementing the strategy, so it’s definitely not streamlined. I work on it as I go, but it definitely changes a little bit client to client depending on what their exact scenario is. This has been such a great strategy though, because it is something to get your foot in the door, and open up people to conversations in the future. Then it just opens their mind a little bit. Then later on, I hope to be able to meet with them, go through and dive in a little bit deeper.
I guess that’s what I’m looking for help with next. Like, what are the next steps? Amy, maybe you could help me with this, but as I try to transition them from just opening their mind up to this idea, and them liking it to actually guiding them.

Amy:
Josiah is the perfect investor who he said earlier is a part-time investor. He’s a great example of someone who just he trusts in the system. He’s just following a script. He implemented it. Even if he had any fears of how to follow up, he’s like, “I got this. I’ll figure that out later.” You guys saw him commenting in the chat box earlier for what do I say next. This is what I keep telling people. You guys, this really does work. It’s been test and measured for 10 years. It’s a great strategy to just get your foot in the door, and then see where the conversation leads you.

Rob:
You’re just getting started. You start putting yourself out there. You’re practicing and perfecting and still ironing out your pitch here. You actually had some success, and you had someone that actually they wanted to work with you. Tell us about the deal that you’re going to be putting together, and how you’re going to be using the funding to make that deal come to life.

Josiah:
I’m actually looking at a deal local to me in Shady Cove, Oregon. It’s a Kenny property. It’s on about four and a half acres right on the edge of town here. It’s a pretty forested area, but it’s got two tax lots and three little cottages on the property right now. What I’m trying to do is remodel these cottages, get them up to rent specs for short-term rentals, and then we add a couple of RV pads, and do a couple more of the tiny homes with the decks around it, and make it just like this little camping community of tiny homes in RV or cottages.
Then maybe because it is four and a half acres, and there’s a nice, lightly sloped hillside do a glamping setup up on the hillside with decks and stuff that come off of it in the future. That’s the ultimate dream. Luckily, this property is off market right now, and so the seller is open to seller financing as well, which is phenomenal. So, it’s just trying the pieces together with everything, and try to figure out basically what the next steps are. I mean, should I focus on maybe finding money for the deal, or trying to get it more structured before I try to raise money for it, and where should I go from here?

Rob:
Awesome, man. Well, it sounds like you hit a home run on your first set of pitches here, not only because you actually were able to secure financing from a private investor, but because it’s a seller finance deal, which these days, I mean, that’s going to be the best interest rate you’re probably going to find on the market. But I’m curious, Amy, since you are the fundraising royalty here on the pod, well, how would you approach this situation?

Amy:
This is a great problem to have. You’re putting together this deal. Definitely don’t wait until you have finalized the deal. We always want to be proactively raising capital as we are looking for leads. So Josiah, you’re off to a great start. Continue those conversations. At this point, you’ll want to follow up, even if it’s just a high-level overview about the deal, but start educating your audience on, “This is what’s in it for me. This is what’s in it for you, and I can help you with this. Here’s what it looks like to invest with us.”
Everyone is so into the short-term rental game now. They love it, the creative ways of basically vacationing, so I think your audience will love that strategy as well.

Josiah:
That’s great. As far as structuring the deal goes, do you think I should look at, because it is my first deal with partners, maybe trying to make it a little higher incentivization to get people to work with me until I have a more solid track record, or do you think my track record that I have so far just personally is probably good enough?

Amy:
I think it’s the latter of the two. This is such a common question. A lot of people will want to increase what they’re offering, because of their lack of experience or limited experience, or maybe because of the fear of the unknown. I’m going to go straight into coaching mode and say, “Hey, you don’t need to offer more.” We can talk about what that offer looks like. You’ve already got a great amount of experience. I mean, you have a portfolio you’re starting to build at your clientele.
I mean, technically, you’re in the real estate industry anyways, because of the service that you provide from a pooling aspect. I think as long as you are able to convey your message clearly, and you have a solid deal, and you know your numbers, you’ll be fine with your current offer.

Rob:
I agree with that. I would say don’t negotiate against yourself unless you have to. That’s honestly the biggest mistake I’ve ever made with partnerships or investors is negotiating myself with some really juicy terms. I think, you go in with the terms that you want, and have in your back pocket what you’re actually willing to do. I actually do believe that you should have some flexibility, because whether or not you make money on your first deal with an investor from your end, I think, the experience is a lot more valuable working with an investor, understanding how to manage timelines and budgets.
Don’t give it away for free, but be flexible if they push back a little bit. I would even just make sure that you have answers to all the different questions that they’re going to ask, because with the type of property and the projects that you have going on, there will be some possible roadblocks with permitting and making sure that everything is head to toe completely legit from a permitting and a conditional use permit and all that stuff standpoint. Make sure that you know your stuff, because the more you know, and the more of an expert that you can present yourself as to the investor, the easier it will be to talk them down the ledge a bit, and get the terms that you want.

Josiah:
Thank you very much for all your help in answering my questions, and explaining this to me. I’ll keep you guys updated on how it goes. I hope to see you around.

Rob:
Awesome, man. Good luck with everything.

David:
All right. We wanted to bring Josiah in so that you guys could see that this works. If you work, it wasn’t too long after hearing this information that he put it into play, and now he’s got himself a pretty cool opportunity that it’s safe to say wouldn’t have if he wouldn’t have done this. Amy, first off, thank you very much for your help to our community, and helping Josiah. If you wouldn’t mind, could you just give us a recap on what we talked about on the first two episodes where we discussed your system?

Amy:
Sure. Absolutely. We kicked it off with common fears and objections when it comes to raising capital, which are all very common, whether it’s we don’t have the time, or we don’t have the experience. Even Josiah touched on that, right? We talked about the importance of as you get out there and build your foundation, you want to be very confident in who you are and what you’re doing, because if our audience, in this case, private money lenders, sense any timidness or uncertainty in our voice, they’re not going to invest with us. That really led us into taking action.
What does that four-second power pitch look like, and who do we start to connect with? Really, the answer there was anyone. The minute we leave our house, everyone we encounter is a prospective private money lender, so what does that script look like? Step one from here on out is targeting anyone and everyone with cash or assets collecting dust, and dropping that four-second power pitch on them. If they don’t ask you what you do, so you can drop the four-second power pitch, then why don’t we ask them what they do, so the law of reciprocity finds its way back to us, and we can continue with that conversation.

Rob:
Yes. Basically, you are asking them, “Hey, what do you do?” Just in hopes that from a general, what’s it called, courtesy that they’ll at least pretend to be interested in what you do, and then you actually hit them with the pitch, and then they are actually interested, right? Is that the idea, or if you have a good connection with them at the very beginning, then you can just really lead with that?

Amy:
Absolutely, and it’s all of the above. Now, there are going to be people that we’re going to choose to target who we have a preexisting relationship with. Those conversations will be a little less scripted and more casual. We’re still going to treat it like a business though, whereas those who we don’t have a relationship with, on the last episode, we talked about converting our Uber drivers into private money lenders or people at airports or on airplanes or sporting events.
In that case, we want to target them, and be strategic, and hope that if they don’t ask us what we do, that when we start that conversation, it ends up leading down that direction.

Rob:
Definitely. This is like at the end of every episode, when I’m like, “Dave, where can people find you on social media?” Because I want him to ask me that back, so I can plug my social medias, but then he forgets half the time, and I’m like, “Come on, man.”

David:
Or did I forget? Perhaps I know what you’re doing.

Rob:
Exactly. Amy, can you clarify for us really quickly what is the F, and then what is the A specifically? I know we’ve got an acronym going here.

Amy:
Sure. The FACT framework, the F is for foundation, so how do we build our foundation? Make sure we understand who we are, what we’re doing. We want to know our role. Why are we doing this? What’s in it for us? What’s in it for them, our audience? The A is for action. Now that we’ve built our foundation, we’re confident in what we’re doing, and why we’re doing it. We’re going to get out there and start taking action, and start building rapport with anyone and everyone. It starts with that four-second power pitch.

Rob:
Awesome. Can you take us through what we’re going to be talking about today, because we’re going to be talking about basically the second half of this, and then how we can actually close these investors using the rest of the framework, right?

Amy:
Absolutely. There are a lot of strategies that we can implement when it comes to building rapport and trust with people above and beyond the four-second power pitch. I’ll share a few of those. I think we actually went through several of them on the last episode, the meet-up strategy, the high ticket event strategy. We can touch on more of those if you would like. It’s really step three of the FACT framework, which is the credibility piece. Now that we’re out there 24/7, we’re taking action. We’re building trust and rapport with everyone.
We’re planting that seed with everyone. We want to start to lock up coffee talks, whether they’re in person or virtually. During those 30-minute coffee talks, we want to be able to introduce a different credibility piece to our audience, because over time, these credibility pieces will increase their confidence in who we are and what we’re doing, which will eventually get us to invest with us. That’s what we’ll focus on today is the credibility piece.

Rob:
Awesome. Just so that I’m understanding, because I want to make sure that we’re really clear on all the different steps here. When you say taking action, we did talk about doing the meetups, for example, because that will establish you as a local authority. That is step… That is in the A aspect of it, right, taking action, or is that in the credibility, or is that in this limbo in between?

Amy:
It’s going to be in step two, taking action. The five strategies we discussed on episode two about taking action, there are many more that we can implement if we had the time. Anytime we’re out there building our list, if you will, or building our Rolodex, or connecting with people, that’s all going to be a part of taking action.

Rob:
Awesome. Well, let’s dive in to see the credibility aspect of this, and how we basically transition from taking action to actually posing ourselves as experts, and giving ourselves credibility so that people want to invest with us.

Amy:
Sure. I was just going through… I actually just completed a capital raise for a project here in Austin, Texas. Earlier, I’d mentioned that we’re going to come across all sorts of private money lenders, people who have never done this before, and then very seasoned private money lenders. In this case, the individual I was talking to was an expert private money lender. So, I explained to him, “Hey, in my business, I have over 16 different credibility pieces. I know you understand the business, so you just tell me what you want to see, and I will show it to you.”
In this case, he wanted to see my deal analyzer, which is my very detailed cost-benefit analysis, which takes into account every cost variable, including profits. I’m an open book. I will show everyone my personal financial situation. I will show them potential profits, because I want them to see how much is there in case we don’t hit our numbers, right? He wanted to see the deal analyzer. He wanted to see my list of frequently asked questions, which is simply a six-page PDF of every question I have received over the last 10 years packaged into a nice brochure.
Then he wanted to see my experienced private money presentation. These three things I just emailed to him. Normally, I would schedule a Zoom. I would say, “Hey, let me take you through each piece.” I would actually only start with a generic private money presentation if the individual was not experienced. So above and beyond the list of frequently asked questions, and my property analysis template, my deal analyzer, my private money presentation, which I’ll take most people through on step one, it’s really just a high-level overview. Again, I’m not dropping any details on, “This is who I am. This is my background. Here’s why I raise capital, right?”
“Here’s what’s in it for me. Here are all the reasons why my private money lenders love me. Here’s what’s in it for our private money lenders, and then here’s an example of what a deal looks like very high level.” Then I give them a call to action. “Hey, if you’re interested in learning more about the different investment opportunities we have, let me know. We’ll schedule a follow-up meeting. I’ll introduce you to my team, so on and so forth,” but there’s still no call to action as far as investing is concerned. That’s going to come later. That’s the generic private money presentation.
For those of you who are talking to somebody who has done this before, and they’ve lent on deals, my experienced private money presentation, it’s going to have more strategies in there. It’s going to talk about what it looks like to leverage out of retirement accounts. It’s going to go into a more detailed overview of what different investment opportunities look like, so the financial acumen’s going to be a little bit higher in this case. This is a great example of why I’ve got 16 different credibility pieces. We’ve got contracts. We’ve got org charts. We’ve got our business plans, and I just pick and choose depending on who I’m talking to.

Rob:
This is really interesting, because I came into thinking about the credibility aspect of this a little bit differently, just so that I am getting this because I want to use this myself. Obviously, I use components of this, but having a more linear progression, I think, is going to be very helpful for everyone listening at home. So when you’re taking action, for example, in the meetup aspect of it, and you talked about establishing yourself as a local authority, I was thinking of that as establishing credibility, which of course it does.
You’re actually talking about the credibility of you as someone who handles someone’s money. As an investor, if I’m going to give you my money, I want to feel that you are a credible financial savvy person that can actually deploy that, and perform fiduciary duty versus the credibility component of, “Hey, I build a lot of houses. Look, I’m successful. I have good returns.” I know that they’re similar, but I think one seems more financially focused when you’re establishing the credibility, versus I was thinking it was more like, “Hey, look at me. I’m pretty legit from the real estate side.” Is there much of a difference in these two camps?

Amy:
There is a difference, and it’ll be a combination of the two, because we really need to know our numbers, right? I always tell people, “Your experience doesn’t matter. What matters is the deal.” Sure, we have to be able to articulate things clearly and concisely, and know how to build our power team of experts, because if you lack experience, as long as you know how to bring together contractors, designers, architects, your experience doesn’t matter. What matters is the equity and the deal. That’s where our financial acumen comes into play, and so we want to be able to explain both sides of that to our private money lenders.

Rob:
This is very helpful. This is actually one of the… This is what I needed when I was first embarking in my raising money journey many years ago. When I was just a tiny little Robuilt, I remember I was thinking, “Oh, I build houses. I do Airbnb. I make great money on Airbnb. It shouldn’t be very hard to raise money,” and I went to my father-in-law’s brother, I guess. Was it my uncle in-law? He was like, “I’d be interested in investing. What you got?” So, I put a presentation together that was so focused on the nuts and bolts of Airbnb.
I was like, “All right, here’s what I’ve done. Here’s how much money I make. Here’s what the cash flow is going to be.” Then he hit me with the wild what I thought at the time, because I wasn’t really into this yet, but he hit me with a wild list of very investment and financial specific questions like IRRs. If this, then what? What about capital contributions? Who gets paid back first in the investment? Does your equity vest before or after you’ve paid back my investment?
To all of those questions, I felt so blindsided. I was like, “I don’t know. I mean, it’s going to make money, man. What’s the problem?” Then he was like, “This is not for me.” I was like, “Wow, this guy, he doesn’t get it. He doesn’t get Airbnb, man.” But in retrospect, I see how I failed on the second half of this. Building the credibility here definitely is important.

Amy:
That’s such a great example. Thank you for sharing of why we have to know our numbers because… This is why I created six pages of FAQs that we don’t want to only memorize them. We really want to understand them, because the private money lenders out there who have done this before, and who know what they’re doing, you will come across PMLs who will purposely ask you the same question five different ways just to test your knowledge on the logistics, but also on the financials, right? We really have to know how our process works. If we don’t, we should not be out there ethically raising capital for deals.

Rob:
100%. When you say that you put together this list of FAQs and your presentations, I know for me, we have a pretty dialed presentation. We have our own internal list of FAQs, but it’s not like we just discovered that overnight. We discovered that through failure of raising money time and time again, because every investor would ask the same question, or, like you said, a different version of the same question. So, every single time we got out of an investment meeting where we didn’t secure the capital, we were like, “Oh, we should probably think this through. What happens when partner A wants to exit the business? Do we want to have a vesting period, and all this type of stuff?”
For sure, I think as you continue to develop your pitch and your power pitch and your power presentation, just know it’s not going to be perfect when you’re getting started. You’re probably going to have a few bumps and bruises. Not everyone is going to have the wonderful Josiah story, obviously, where he’s able to lock it down super fast. I know for me, at this point, and obviously I have more of a platform, but even outside of that, I actually still don’t even talk about the platform necessarily when I’m approaching new investors, just because I want them to know that I know my stuff. I want to prove that I actually do know a lot of the financial acumen that you talked about.

David:
Amy, what do you think about the credibility being a spectrum where when you have less credibility as far as track record or knowledge, you have to put more work up front in the deal itself, like Rob talking to his uncle in-law who probably knew more about real estate than Rob did? He’s asking all these questions and stuff I wouldn’t be asking unless they were a little experienced, versus somebody later in their career, who’s got an established track record. I was trying to avoid using me as an example, but that’s the easiest way, where I bought real estate for 10 or 15 years before I ever talk to someone about raising money.
I don’t have to put as much effort into explaining all these intricate details. It’s like, “Well, it’s David. I trust him.” How do you see that progressing?

Amy:
I always respond the same way, and I get this question all the time, which is if you don’t have a lot of experience as an investor, then lean on your team of experts, because you’re not going to be the one grouting the tile, right? So as the business owner and entrepreneur, as long as you know how to analyze a deal, and you know how to build a power team, then what I do is I bring my team into these conversations. I’ll say, “Hey, even though I’ve only been doing this for a year, or I’ve never done a deal before, this is my general contractor. He’s been doing this for 25 years. This is why we picked this neighborhood, specifically these three blocks.”
“This is my designer. She owns her own design firm. This is my real estate attorney. It’s his law firm. We’ve been working together collectively, and building our strategy for the last 12 months. If you would like, I’d be more than happy to schedule a call so that you can talk to my general contractor directly.” It really is… You want to create this team that feels empowered, because I always tell people, “I’m not successful because of the things I’ve done. I’m successful because of my team, and it’s my team that helps me shine.” That’s how I overcome that objection.

David:
How about if you walk us through a deal you’ve done, and maybe hit on how you covered all four of these steps in your deal so we can see what it looks like in a real-life application?

Amy:
Sure. Absolutely. You know what, before I forget, if you would like, because I’m sure there are going to be a lot of questions about how do I create a private money presentation? What are all the details that go into it? I’ll just give you, guys, a copy, and if you want to share it with everyone, feel free to do so. Take it. Implement it. I’ll script it out for you, so those of you listening can read it and even practice at home, and then get out there and start implementing it.

Rob:
Sure. That sounds amazing. Thank you.

Amy:
As I mentioned earlier, there was a deal. Why don’t we start with my very first deal that I raised capital on, because I had only done one deal prior to that? On my very first deal, we often talk about mistakes or lessons learned. On the very first deal that I completed in downtown Chicago, I did not use private money. I was working my full-time job. I was trying to build my power team, and so I had the gap funding in the bank, and I ended up putting that into the deal. Well, two weeks later, my acquisitions manager, which is just a fancy way, you guys, of saying realtor brought me two passive income properties.
All I needed for each rental property, they were small single family homes, it was either $20,000 or $25,000 each. Each property would have cash flowed $300 a month, so we’re talking about $600 in positive cash flow every single month that I wasn’t able to pull the trigger on, because I had put my own money into my fix and flip, and I had not prioritized the art of raising capital, so I couldn’t just raise the capital today for the down payment. For me, that was a really hard lesson to learn. I always say, “Look, is $600 a month going to retire us?” No, but that’s one example of one missed opportunity, and think about how quickly that can start to add up.
I really hustled. I reprioritized. I shifted my focus in my business, and on the very next deal, I ended up raising from a complete stranger to begin with $390,000 in 21 days. Now, I hustled. I was on the phone every day. So when it came to building my foundation, before I had started actually picking up the phone to call people, and requesting referral, after referral, after referral, which we talked about on previous episodes, I made sure as a part of building my foundation, I had my online presence completed, so I had a website. I had social media profiles.
I didn’t have huge followers. Nobody knew me back then, but I made sure I had LinkedIn, Facebook, and Instagram, and it said I’m a real estate investor. For those of you who don’t have a social media presence yet, go copy mine. I’m giving you permission right now. Copy my social media. Have at it. There’s your online presence for your website. Create a landing page. You don’t need anything fancy. Just have something, because whether we like it or not, private money lenders are going to Google us and go to our website.
I practiced my scripts. I recorded myself on my phone to make sure that I was very smooth when I was chatting over the phone, because I was still reading some of the scripts I had created 10 years ago. Then I felt comfortable getting out there, and picking up the phone to call people. That was how I built my foundation. I would call people through referrals. The first thing I would do is drop that four-second power pitch on them. Then when they wanted to learn more, now that I’m taking action, and connecting with them, I’d schedule a coffee talk. I would take them through my general basic private money presentation, which I’m going to give you guys a copy of.
I remember the gentleman during that three-week time period that I was hustling, and I was on the phone every day. So to those of you listening, this doesn’t mean in three weeks, I raised almost $400,000 through an email automation or a social media post. I’m hustling. I’m finding every single credibility piece that I can, and sharing it with as many prospective private money lenders as I can all through the four-second power pitch on all through requesting referrals, the meetup strategy, the fundraising strategy, so on and so forth.
I would hop as a part of the credibility piece, step three, in my FACT framework. During these 30-minute coffee talks, I would take them through their private money presentation. Then before I would end that coffee talk, which by the way, in a perfect world, you want to get through your presentation in 15 minutes. In the beginning, you’re going to take 45. That’s normal. It’s all a part of the process, and the learning curve, and in a perfect world, which I know we don’t live in. During these 30-minute coffee talks, you want to give your audience time to talk about who they are as well, and their experience investing, what their expectations are.
But before we would end up the conversation, I would ask, “So what do you think? Do you have any questions? Are you interested in knowing more?” I didn’t say, “Do you want to invest in that deal?” I was $400,000 for. I was looking for a private money. I never said, “All right, so do you want to wire the 400,000?” Even though internally I knew it was crunch time, right? I would get the commitment, and they would, most of the time, want to know more. Because I’d practice my presentation, they could sense the confidence in my voice. They could sense the energy.
Then that would lead into multiple coffee talks, again, where I’m introducing them through other credibility pieces, such as the contracts I use in my deals, or the design piece, or I’d share architectural renderings. I would show them what it would look like to leverage out of their retirement accounts. Once they committed, then step four, the transactional piece is I would take them through before they process any wire. This is where I’m at right now on a new raise I’m doing here in Austin, Texas. I would say, “Hey, let me know.”
So, this gentleman’s going to let me know within the next 24 hours if he wants to invest $300,000. I said to him, “Hey, once you decide whether or not you want to invest, then let’s hop on another zoom.” I’m getting the commitment, but I’m still building rapport and trust. I’ll explain to you how the flow of money works, but right now, don’t even worry about it. We’ll cross that bridge when or if we get there. Once somebody invests with you, and they process the wire, that’s a step for the FACT framework, the transactions piece.
Then we really want to take a step back, and look at how we nurture our network. How do we follow up with our private money lenders so that two things happen? Number one, they reinvest. Number two, they increase their investment amount. That’s going to go into our nurture system, but that’s at a very high level how I raised the first 400. I parlay that into how I’m working on the next 300 on my current deal.

Rob:
Awesome. Let me clarify on the C on the credibility aspect of it. When you end that power pitch or not the, sorry, the coffee talk, you’re going to say, “Do you want to know more?” I got to imagine that a large percentage of those people are like, “Keep going.” Do you try to cram it all in that meeting, or because you can, I don’t want to say close them while they’re warm, or do you schedule another… I know you said you do multiple coffee talks. How does this play out for you usually?

Amy:
I don’t want to cram it as much as I can into one meeting, even if the investor is a seasoned investor, like the gentleman I’m talking to right now, because it can still be overwhelming. It’s a lot of content. Even if you guys email me an executive summary before we even talk about the deal, I’m going to be like, “What is this? What are all these numbers? What are they doing?” I probably will either delete or not read it, actually not if it came from you guys, but that’s a whole nother conversation.
Whether it was 10 years ago or today, I still approach it in the four-step process, and I will still offer to take my private money lenders through all the credibility pieces. Similar to what David said earlier, sure. Now through social media, now through these interviews, now through my experience, I have people who reach out to me saying, “I want to invest with you.” There are going to be times where a lot of people don’t even know who I am, but whether they know me or not, I still offer to take them through the four-step process.

Rob:
That’s really cool. So then at the end of the transaction side, you talk about the nurturing. I imagine that at the same time, you do want to be a little high touch probably for at least the couple of days or the week after. That way, someone doesn’t wire you $100,000, and then you stop talking to them, and they’re like, “Well, what happened here?” Is there a little bit extra communication that happens directly after just to cure any buyer’s remorse that might be setting in for an investor?

Amy:
Yes. I always take care of my private money lenders, and I like to over communicate, but in a respectful way. For example, the gentleman I was just talking to to today about this Austin raise. He said, “All right.” He goes, “I’ll send you an email, and then you’re just going to email me wire instructions if I decide to move forward.” I said, “No. Even now 10 years later, I’m still not going to raise capital through an email blast. I’m going to pick up the phone, and call my top 10. I’ve got 10 private money lenders who I go to first. I’m not going to text them.”
This gentleman asked, “Do you have an opt-in page, so I can learn more about future investment opportunities?” I laughed, because I was like, “Oh my God, no. I’ve been doing this for 10 years, and I don’t. I don’t have an opt-in page. A lot of investors do, but that’s because I really focus on building and sustaining that relationship with my private money lenders through old school strategies, picking up the phone and talking, or going out for lunch or coffee.” That’s how I will… That’s a part of how I nurture those relationships.

Rob:
That’s awesome. I can really see, even for me, how this is going to play out, because I’m currently doing a raise right now for a $7 million 23-unit motel, and a lot of the times, there’s the platform, right? That helps me establish, I guess, the foundation where I can talk about it, and get people interested in that project. But I haven’t really… I had a marketing plan in mind, but now I think I’m going to adjust it based on what we talked about today, which is I talk about it. I gather the interested leads. Then I was going to… I plan on now hosting meetups, or I guess virtual workshops, if you will, or virtual meetups with people. That way, I can reach the entire country.
That would be a taking action, getting people in a room, telling them about what I do, telling them about the deal, and then going to credibility at that point, taking it from the group setting down to individual, as you call it, coffee talks where we actually start taking those calls with investors to actually walk them through the specifics of the deal, not just the actual real estate side of it, but talking through the actual nuts and bolts of a syndication, limited partnerships, the general partners, and everything like that, and then finally the transaction side where we then have to get them through all the nuts and bolts of that too.
Make sure that they’re accredited. Make sure that they actually are able to sign up online, get them into the portal, and then as we just talked about, keeping it high touch there for the next couple of weeks, so just to make sure that everybody’s updated. You have already influenced my raising strategy on what I’m doing right now. Thank you.

Amy:
Thank you, sir. I’d love to hear both your thoughts on this, because to me, raising capital is fun. Talking to people and networking, it’s fun. I always tell investors, “It ends up turning into not so much a game,” but you don’t even realize eventually once you get good at raising capital, you don’t even realize that it’s happening. You’ll be out there every day raising capital. For me, I like spending time with my private money lenders. My private money lenders have become my friends. We take vacations together. We go on masterminds together.
So in my business, and everyone’s process may be different, once a private money lender has invested a million dollars with me, it can either be in one lump sum or across multiple deals. I will pay to fly them out to the job site, give them this VIP experience, take them out to dinner, sit down with my team, walk through properties. They love that. It’s another great way to continue to develop that long-term relationship. So now, not only are they reinvesting with us, and reinvesting greater amounts, but now they’re starting to introduce us to our network of prospective investors.
But what do you guys think? What has your experience been there?

Rob:
I think that’s really great. I wanted… When we were going to originally launch our fund, where we were going to build a few houses or 23 houses in Joshua tree, we actually had intended to allow the different investors to stay at those properties at short-term rentals. We’re building a short-term rental portfolio. Come and actually stay there a few nights once it’s all done, which is great, but it’s not instant gratification, right? I definitely think that there’s a level of credibility even that’s added when you say, “Hey, thanks so much for investing. Come out. We’ll meet you out there. We’ll fly you out there, and we’ll actually take you through the project,” because I mean, I’m sure you know.
Actually walking a project is completely different than seeing it online. David and I hadn’t seen the Spanish mansion that we bought in Scottsdale in person previous to buying it, and then we showed up, and we were like, “Whoa, this was worth it. This was worth the massive investment that we just made.” It’s a little magical, especially as an investor to actually walk through something that you purchased in, that you participated in, and it’s very surreal. I think as long as you can keep that up, and keep an investor very, I don’t want to say enchanted, but very excited about the opportunity, then, I think, the funds there open up, because we have investors that we work with now.
We are relatively high touch. We definitely communicate with them and everything. But the more you can do that, and the more you can nurture that relationship like you’re talking about, they tend to want to invest again and again and again. It definitely is a strategy worth pursuing to get someone out there to actually see the property. But I don’t know. That’s me. What about you, Dave?

David:
I have a lot of thoughts on this topic, and I don’t want to make this a two-hour episode, so why don’t we do this? We will let Amy have the last word on this show, wrap up what she was describing. I will save my thoughts for the follow-up episode to this episode, which will be putting a button in it, as you might say, Rob. We’ll get into what do you do once you’ve got someone who’s like, “I’ve got some money to lend?” You work the FACT process. It works out. How do you invest that money?
There’s debt. There’s equity. There’s combinations of the two. There’s all kinds of creative ways, so I think that this would be a good thing to get into once we’ve finished the four-part system. So if you want to hear my advice or my feedback on what I do when I’m raising money, or different ways to do it, you’re going to have to listen to the next episode. Before we get out of here, Amy, do you have any final thoughts that you’d like to leave us with?

Amy:
Sure. Just as we wrap step four, the FACT framework, and those transactions are coming in, we talked briefly about the VIP experience, and defining what our follow-up system looks like, and how we’re going to nurture our network moving forward. I always like to be clear with my private money lenders, and let them know, “Hey, you are an investor in this deal. So as far as I’m concerned, this project is just as much yours as it is mine.” Use this in your portfolio. Put this on your website as one of your properties that’s coming soon.
Blast on all over social media. Tell your friends and family members about this amazing new build that’s coming up in Austin, Texas, and just be comfortable sharing this project as a part of your own, because I really believe that this is yours just as much as it is mine.

David:
That’s awesome. Robin, what do you think about the show so far? Any last words for us before we get out of here?

Rob:
No, I was just going to say that the reason I say put a button on it is because you’re cute as a button when you talk about real estate, David. That’s all.

David:
Speaking of cute as a button, there are so many bears. I’m out here in the Smokey Mountains right now looking at more cabins. I’ve seen about seven bears in two days. They’re everywhere. I mean, I just thought it was every once in a while, you might see a bear, but no, they’re walking down the street. They’re going into people’s front yards. I was literally looking at a house, and a bear came walking up on the porch as I was stepping outside to open the door, and see the view out of the corner of my eye. What I thought was a black lab was actually a very big black bear.
Well, I guess it would be very big for a lab. It was small for a bear, but still, it just comes sauntering up, looks right at you, cruises around, sniffs around for food, walks away. It’s amazing how they’re everywhere out here. I keep hearing people call them cute. It’s like, “That’s not what I think of when I see a bear.” I see that’s an apex predator. That is not afraid of anything. That is competition for me. I don’t see them cute at all. Amy, what’s your thoughts on that? Are bears cute, or are they scary?

Amy:
They are not cute. Even in giant black lab, I love dogs, but no, I’m like, “I don’t know.” I haven’t even been to Yosemite. I don’t jive well with bears.

David:
Rob, you were going to say?

Rob:
I had a bear walk up to me at my chalet in Gatlinburg when I bought it. It was probably about four or five feet away. Like you said, just casual. I was right next to someone, and I got… I was tying my shoe, and I got up, and I was like… I just started… Basically me and the person I was next to, we realized it at the same time. She was like, “Bear!” We did what you’re supposed to do, which is just run as fast as you can away from the bear. We made it out alive. We’re okay.
I’m glad she did, because I was out of words. I later found out that what you’re supposed to do is instead of running, you’re just supposed to point at it, and shout out its insecurities to its face, but I didn’t know that tidbit at the time. I could go back [inaudible 00:51:31].

David:
Your partner never approved of you, and the bear will just turn around and run away.

Rob:
That’s right. I guess I wish I had known that, but it’s okay. We made it out alive.

David:
You have really small pause for a bear your size.

Rob:
You call those bear pause.

David:
Barely pause at all. On our final episode, you will get to hear Amy’s insults towards a bear that she uses to keep herself safe when she does encounter a bear as well. Don’t miss it. Rob, if people want to find out more about you, where can they go?

Rob:
Oh my gosh. You asked, dude. You pick up quick, man. You can find me on YouTube over at Robuilt. That’s R-O-B-U-I-L-T. You can find me on Instagram at Robuilt as well, and TikTok at Robuilto. What about you, David?

David:
I’m DavidGreene24. I’m now doing YouTube lives at youtube.com/davidgreenerealestate. If you guys want to come in and ask me questions, feel free. But most importantly, Amy, if someone wants to give you money, or they want to learn more about your FACT system, where can they find out more about you?

Amy:
Sure. You guys can catch me on Instagram at AmyMahjoory, or just come join us in October. I’m doing a live event in Long Beach, California. We’ll have a two-day conference all about real estate and money, and it’s going to be a lot of fun.

David:
All right. Most importantly, you can follow BiggerPockets for more than just the podcast. We have a YouTube channel where I interview different people. Other people are interviewed about different things. If there’s a specific topic, short-term rentals, finding on-market deals, finding off-market deals, commercial real estate, whatever your flavor is, head over to YouTube, and check out the BiggerPockets YouTube channel, because there’s a ton of content, much of it shorter than this, but more specific in nature.
You can get lost in there, and I hope you do because it’s good to spend your time watching real estate videos instead of cat videos or on TikTok. BiggerPockets is much better for your financial future. All right, Amy, thank you so much. If you guys would like to hear Amy again, all you got to do is check out the next episode. Please like, share, and subscribe this episode on the podcast. We love you, and we’ll see you on the next one. This is David Greene for Rob “the bear cub” Abasolo signing off.

Ken Leon, director of equity research at CFRA, joins ‘Power Lunch’ to discuss the homebuilder sell-off as the housing economy braces for a rise in mortgage rates.