Building a $300MM Real Estate Empire from Scratch with Multifamily Investor Chad Doty

Brandon: This is the BiggerPockets podcast Show 317.

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Brandon: What’s going on, everybody in BP Nation? This is Brandon Turner, host of the BiggerPockets podcast, here with my sniffly friend, Mr. David Greene. David Greene, do you have a cold or was that just a weird sniffle that you didn’t mean to do?

David: Nah, that was just a BiggerPockets sniffle. That’s just one of the ways I express my enthusiasm for being here, actually. I’m overwhelmed and it expresses itself through sniffles. I’m doing really good. Thanks for asking and not pointing out an awkward thing instead.

You and I just got back from Colorado not too long ago and the bad news is, I was overwhelmed with altitude sickness and nausea the entire time I was there. But the good news is, I spent a lot of time in my hotel room thinking about 2019, came up with some really good plans. I have an extreme amount of clarity about how I want 2019 to be different from 2018 and this is the most excited I’ve been in a really long time.

Brandon: Nice. So you’re going to finally pursue that clown college where you’ll learn how to travel the circus?

David: Yeah, it’s a mixture of clown college and slam poetry. I’m going to see if I can combine those two worlds together and create an act that nobody’s ever seen.

Brandon: This is the best idea I’ve ever heard. And with that, let’s get to today’s Quick Tip.

All right, today’s Quick Tip has nothing to do with what David just said but very shortly—today’s episode is a really, really, really good deep dive into the world of multifamily and commercial real estate investing. And as such, you’re going to hear some terms that you might not know what they mean. Because like, this is like a legit deep analysis of how to get into a multifamily and how wealth is built there.

So here’s what I want to do. For a Quick Tip today, it’s this. There’s a term you don’t understand. Jot it down. Go to the site, search it. Don’t go I don’t know what he’s talking about. I’m going to stop listening. But say hey, I’m going to use this as an indication of what I need to learn and how I can grow as an investor. So I’m just putting it out there.

Also, it’s kind of a cool little thing—did you know that if you’re on the BiggerPockets forums and there’s a word or an acronym that you’re not sure what it means? On a lot of them, we have like this cool little software where if you hover your mouse over an acronym, it will tell you what that phrase means. If you’re like, what’s BRRRR? You can hover over it and be like, Buy, Rehab, Rent, Refinance, Repeat. Anyway, kind of a cool little feature on the BiggerPockets forum, which of course you’re free to hang out on, so go hang out there.

David: I would highly recommend that you do that, especially for this episode. This guy is good, he is smart, but he is especially meaty. He is meatier than MissionMeat.Co. He is meatier than grandma’s Christmas jambalaya in Louisiana. This is a meaty, meaty show. You probably want to listen to it a few times and make sure you chew every bite 15 times on each side. You don’t want to choke.

Brandon: Was that an analogy? That was really good.

David: Yeah, that was a freestyle analogy. It’s another thing I’m moving up, like slam clown poetry. I’m fixing these two things together. I’m going to be the Eminem of analogies.

Brandon: That’s an analogyist.

David: That’s a good point. Analogy within an analogy. It’s like inception.

Brandon: Weird. All right, moving on. Let’s get to today’s show sponsor.

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Brandon: All right, thanks to our sponsors always and that’s really all I got so let’s jump into the show. So today’s guest is Chad Doty. Chad is a real estate Rockstar investor, buy lots of big multifamily. You guys are going to love this show. He goes everything from how to get started with a large, multifamily index like the Four Rocks, is I think what he said, about what you have to have in order to build any size real estate business.

Make sure you listen for that. And then I love his advice towards the end where he talks about how to know what market to go into. I’ll give you a hint. It has to do with your grandma’s money. So just stick around for that. Again, this show is deep, complex, and really, really important if you want to get into multifamily. So listen up. Without further ado, let’s get into today’s show.

All right, welcome to the show. Chad, good to have you here.

Chad: Thanks for having me, guys.

Brandon: Yeah, yeah. So let’s get into your story and go into your real estate journey, starting from the very beginning. How did you get into real estate? Let’s talk about your first deal.

Chad: Yeah, yeah. So I’m a recovering management consultant. I didn’t grow up in real estate. Yeah, exactly. I was with a small company called Arthur Anderson that got destroyed by Enron. Not on the audit tax side, it was in consulting and a bunch of really good people got spread into the wind and went from $9 billion revenues and like thousands of employees to 60 attorneys in Switzerland in like six months.

Anyways, I was maybe a year or so from partner in that, so I was close, so the hockey stick compensation model just went poof. And then, so I left that and I went to go work for a company and realized I’m chronically unemployable and I hate being a staff to someone else’s goals, worked in another consulting firm, then I decided to start my own consultancy.

Along the way, you might be billing a good rate, $200-$300 bucks an hour but you’re still just trading time for money. So it was this goal of how do I make it where I can scale lifestyle and financial security and then financial freedom in ways that are purely a function of I have to work harder and harder and harder.

So I actually started with, I did kind of an options fund for two years. I did S&P credit spread for like two years. I made money and I hated it. And then eventually, I went to real estate and what it was, I wanted to deconstruct the lifestyle I wanted. So I wanted it to be evergreen. I wanted it to be provide me cashflow on going. I wanted to have really good tax advantages and I wanted to make sure I didn’t hold its hand every single day. I didn’t want to slip. I didn’t want to own a job. I wanted to create a business.

So then I wanted to create a risk profile of all the different asset classes in multifamily in real estate. Retail, office hospitality, land storage, what have you. Multifamily to me was the most compelling because—and again, this is my preference. It’s not an absolute but for me, it was, I can make a little bit less money than every single deal depending on the market cycle but I can make money in every market cycle. I can have the best long-term track record of any of the asset classes, even giving up some long-term profitability.

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

Brandon: Okay, so before I go to that first deal, which I’m going to, there’s a couple of quick questions I have for you. First of all, I’ll just call out something kind of cool. You basically labelled four things that you found beneficial about real estate. You wanted something evergreen. And can you explain to me what you mean by evergreen?

Chad: Yeah, so recovering management consultant, military father, I can speak in acronyms the entire call. Please check me. So evergreen is a business model that will always be around and can’t be horse and buggy. It can’t be Blackberry. It can’t be Kodak. So can you think of anything that would disintermediate—two things, a place to sleep and a place for your stuff. No one yet has an answer.

Elon Musk might think one up but it’ll be on the Mars Rover or whatever. So until then, so that business model isn’t going away. And then inside multifamily, I didn’t mention this—we work in the middle of the bell curve. So median household income is $57,000-$58,000 a year. That’s also the bulk of that B-grade renter population. So for us, we work with 1985 to 2005 built assets that serve that client that is rent set of economic preference and economic need. So for us, okay, they are never going to go anywhere. How are we going to serve them as good or better than anyone else on the market?

Brandon: Yeah, I love that. I love that you said—a couple of things there. First of all, you were the vast majority of the people are in the U.S.—that’s not really changing. Yeah, that might change up to the $59,000 around to 55. But at the end of the day, Grant Cardone, the last time we had him on a podcast here, he mentioned how he specializes in $900 rents. Because $900 rents—he used them as an example but they aren’t going anywhere.

But I like that you said the bell curve because that’s what that is. It’s where the bulk of the people are. So if you want to call it that, that’s super. So you mentioned evergreen which is great cashflow. Extra money. Tax benefits. The fact that you ran a business, that you’re not beholden into trading time for dollars. Those four things led you to multifamily. Fantastic. And then you said something that I loved there.

You asked yourself the question, how do I get good at that? And then you said how do I become the best in my market, serving those people? It’s something that most people don’t think about. They just think, how do I get into it? Not how do I get good at that. Was that your consulting background that led you to that or is that just kind of how you think?

Chad: It’s a little bit of both but if you look at people—things your father tell you that creep in your life. Find someone who’s done what you want to do, do what they’ve done and look at what they’ve got. So very rarely are we modeling people who are just in something.

We’re modeling people who are successful at something. That’s your bar. Not doing it. And in real estate, there’s a couple of myths that we could eliminate from late night TV and horrible books that sit in garage sales around the United States. The first one is that if the deal is good enough, money will find you. It’s a lie. It’s not even a myth. Well, here’s an example. Do you have siblings?

Brandon: I do.

Chad: Brother or sister?

Brandon: Both.

Chad: Let’s assume you have an older brother who is a complete alcoholic and pick on siblings because that’s what we do. I’ve got a younger brother. And he came to you with an amazing deal. You looked good on paper but he was like, I’m the manager. Would you invest in that deal?

Brandon: Not at all.

Chad: Right. So money flows to people that know what they’re doing. Money flows with competency. Not to good deals.. Competency finds good deals but you need the competency first. So if you want to be successful, my belief or our belief, I think it’s proven nowadays—become that person first. Don’t go find a deal. Be good enough to be there.

Brandon: I like that.

Chad: And the other one is, you make your money when you buy, which isn’t true either. You establish your baseline profit and you buy below market but you make your money when you operate and sell.

Brandon: I like that. A little twist on how most people look at that. I think it could be a cop out on both of those. You’re like whatever, I got a really good deal. The money is going to magically appear and then it doesn’t appear and people get stuck and they’re like, I’m not sure why. So how would you answer the question—and I know we’re going to get into the deals here—which comes first? The deal or the money?

Think about a newbie trying to buy their first deal. Which comes first, the deal or the money, in your opinion?

Chad: I think you’ve got to back up a step and there is—so internally, we deconstruct our business a lot and there’s a term we use called your MAC profile, which is your market, approach, and capability. And you have to know what those are. What are you good at? How do you want to approach the market and where is that market?

Because you could be a ground up developer in a market with flat rents and you’re at equilibrium in supply and demand. You’re not really going to do very well. Or you could be someone who owes long-term and you’re in an accelerating market. You go in and you don’t have any value ad opportunity. You’ll do okay but you would do a lot better if you understand how to do value ad.

So you have to align what you’re good at first and then what markets you want to work in and then what approach is working in that market. So those are the things—so if you know that, you then can go to—when you talk to your money, it’s here’s what we’re doing. Here’s our business plan. Do you like this business plan? If so, I’m going to go find deals.

We believe that hot money is far better than a hot deal. Because a hot deal, you screw up and you’re killing your reputation and you’re wasting your brother’s time. You’re in the middle of all these professionals and multifamily space and you’re messing with our livelihood by you not being good enough to go raise the capital. Whereas if you raise the capital working with your investors, worst case scenario, they have an extra few months getting two percent.

David: There you go.

Chad: I mean, that’s our take.

David: So before we go on much further and ask you about your first deal, I have a few questions I want to ask you. The first is going to be, for those who say okay, it matters where I buy—can you give us some advice of where you go to get some of your information regarding census data, population growth, a job, employment, migratory patterns.

And then the second question is, you made a very good point that I wanted to highlight that you need to work on yourself and who you are before you just go find the deal. Brandon often says if you find the deal, the money will find you. And it will, because in real estate specifically, people are investing in a deal and if you screw it up, they can still get the deal, right?

But the fact remains, what you mention is true as well. If you’re the kind of person who’s not that great, you’re not going to get the deal in the first place. You’ve got to work on yourself in order to find those. After you answer, what are some of the ways people can look and see where they should be investing, as far as what part of the country, because I get asked that question a lot, too. Can you explain, what are some things that you found where he and you working on yourself or the other successful people that you’ve met that got it, what did they do right?

Chad: We could spend two hours on actually both those topics. So we are demographers. We definitely believe that, and it’s proven out that when you’re acting, you’re acting first at—there’s no national real estate market except in the finance space. Finance is national. Everything else is local. So psychographics are local. Policies at the state level, at the MSA level, at the neighborhood level, at the zip code flection level, at the site level, all of that stuff. It’s all local.

So there’s MSA stats, you obviously have to have. The employment growth and population growth, components of employment growth, components of population growth, all those trends are available from census, BLS, Texas A&M University. All those stuff you can get from those three sources. And if you don’t want to go there, you can also subscribe to Neighborhood Scout, which is a fantastic tool. If you have a relationship with a mortgage broker, you can get access to Axio data, CoStar data.

Like, we have CoStar and Axio subscriptions as well. But when we started, we didn’t. We were looking at stuff online up on our own and then getting corroborating data. It’s still a wildly inefficient market. And the data is out there but how you guys might interpret it—like, Brandon and David, you guys might look at the same set of data and have completely different conclusions based on your own opinion and your business plan. But we’re not big believers in ever buying in a market where we’re not buying at least at or above market—U.S. employment and at or above population growth, period.

But then you also need to go into that employment growth and go okay, where are those jobs going? Are they innovation jobs at north of $95K that will have a trickle down effect or are they core blue collar jobs that will immediately impact—both are valuable but in different ways. So you’ve got to go through all that stuff. But again, those three sources have most of that data and if you need to buttress it, again, go get CoStar or Axio or what have you.

David: Cool.

Chad: And there’s easily 17 on metrics at the MSA level that we go through but I’ll just touch on some of the big rocks. There’s also crime schools, local level. There is state policies, tax policies, landlord-tenant laws. I’d love to visit Portland but I never want to own in Oregon. It’s like little France when it comes to landlord-tenant laws. California is beautiful, similar rules.

There are websites that are dedicated to learn how to live rent-free and manage the system every six months. If you’re local to those markets and you understand them, that’s fine. But as someone like us who were based in Richmond, Virginia, all of our assets are in Texas and the Carolinas and what have you, we’re like, we need something we can trust a little better. Success metrics—commitment is the number one thing. Do you guys have kids?

Brandon: I do. Yeah, one.

Chad: Okay. So, David, do you have a dog? Or a cat? Or are you not a pet person?

David: I actually try to live my life as clean as possible. I have nothing at home. It would die if it were there. I am not home enough to take care of anything.

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

But you think about unconditional love, that commitment. So imagine you took the level of commitment of, this child will thrive, to I’m going to rock this business. And real estate, at least commercial multifamily is a high barrier to entry business. Once you’re in, you really have to try to screw up. Because there are so many good people wrapped around your team that are monetized and incentivized not to fail. But the trick is getting there and can you invest in yourself enough over a one to two to three year period to get through it. There are certain ways to get in.

So that number one thing is commitment. It’s not a I think it’d be fun. It’s more a, I’m going to do this. So that’s the number one. We break our business models in the four areas. Business architecture, deal development, capital development, and asset management. And you’ve kind of got to lead with one of those four to build your business to wrap around. And then at that point, you’re looking to find what you need to buttress with, external team for your own partnership.

David: Can you say those four again? I want to write that down.

Chad: Business architecture. So basically, the act of acting on your business. What are you doing to optimize the pieces that aren’t going as well as you want? If you think about business like a wheel that’s got spokes in it, let’s say a wheel bare minimum needs three or four spokes to roll. If you grow one spoke too far, it doesn’t roll anymore. If the spokes fall out, it doesn’t roll anymore. So you can only grow as much as all your spokes can.

The other one is capital development, so bringing in equity and debt. Deal development. Where are you sourcing the assets? What MSAs, what submarkets? What neighborhoods? What sites? How are you getting them? 96% of all the deal flows, flow through a broker inside the commercial multifamily space. If you’re a seller, you are wildly incentivizing not to. So what relationships do you need to create?

You very rarely as a letter campaign—I mean, like very rarely, is a letter campaign going to work in this space. It might in residential but not in multifamily. And then asset management. What are you doing to take over 90-day optimized, capex plan, budget out, implement all that stuff, measure your value ad, operate in that window, and then sell. Or refi and keep. Those are the four big rocks.

David: So to summarize all of that up, I’m going to use real simple terms here. You’ve got to have the money. You’ve got to have the deal. You’ve got to manage it right. And then you have to run your business correctly. I mean, is that a good summary?

Chad: Thank you for doing that for me because that would have taken me a while to do.

David: Brandon—I usually dumb things down to my level. These big words that you’re using are terrifying so we’re trying to rapidly convert them into something that isn’t intimidating to us so we can understand.

Chad: You guys have had enough podcast guests, yeah. I’m sure you’re probably frustrated with—it’s tough because you think that way, right?

David: No, we don’t have a problem with it. We do, too. We’re just making fun of ourselves right out. I mean, I think it’s brilliant what you’re describing. And what Brandon is about to do, which I know, is he’s about to explain this is the same way it works in single-family investing or flipping or any business, right? That’s where he was going. He’s got the three levers, right? The money, the deal, and managing it.

And then what you described was business architecture, which is a pretty cool way of saying like, running an actual business. That spoke analogy that you gave was so good because that’s the problem I’m having. I ran out and said, how can I be the best at everything? And I left my hub and I developed like nine different spokes that ended up at a wheel and was dominating it. And then I looked around and was like, I can’t handle this. I’m really far away from my hub. I need to be in all the spokes.

And my team was like, that’s scary. I don’t want to go out there with you. And I realized that I didn’t focus on business architecture nearly enough. If I just ran out there and got the money and the deals and managed the asset, so that’s a very good point to bring up is that don’t get caught up in the bright and shiny thing and chase after stuff you want if you don’t have the infrastructure to support you once you have it.

Chad: And whether it’s infrastructure or focus, there’s a lot of that. So at one point in time, we do multifamily owned right now, but at one point in time, we had over 100 capital homes. We thought, hey, if we have this, it will act like a multifamily. We made twice, three times as much money in half the time we do today because a portfolio of capital homes is hard to scale.

You either have to build a property management company or you’ve got to rely on very mom and pop local property management. There’s no good national. So you can make money, it’s just as you get bigger and bigger, your headaches start to exacerbate because of the control and non-localization of it. But still that, focusing is helpful. It’s also your corollaries, what do you say no to? You’re the bright, shiny object.

It’s in Buffetts, letters, basically the trick is pick your top five projects and everything else you just say no to forever. As long you finish those five, a new five will show up.

Brandon: Yeah, I remember hearing this story. I think it was a Buffett story. It’s kind of like every quote is Abe Lincoln. But I think it was Buffett where he said, they killed his pilot—make a list of the 20 things you want to do in life and then take your top five. Those are your most important things. And the next 15—and the guy says like, yeah, those are my next important things. And he goes, no, those never do. No matter what, don’t do those. They will kill your top five.

David: So I think what we should do is, we should write that quote and at the end of it, say Abe Lincoln, and at the end of it say, Brandon Turner. I just got that in the office one time.

Chad: It will show up on Brandon quotes in like six months.

David: Brandon quoting somebody else’s quote. So I agree with what you’re saying about single-family. I ran into the same thing. I get a lot of people that say, how many doors do you have? That’s not really a metric you use with single-family investing because it doesn’t matter. But what happens is you get wildly inefficient when you start stacking up single-family homes. It’s a great way to get into real estate. It’s a great way to build wealth for that.

The overwhelming majority of investors out there, this is your bread and butter and it’s what you’re going to do. If you get good at this or you commit to what you were saying a minute ago, Chad, to this whole thing, you do not want to stay in multifamily because it’s like having a herd of cats as opposed to a herd of cattle where you can kind of control and exercise some power over and hire a cowboy to run it, right?

Trying to herd cats is horrible and that’s what it feels like when I’ve got all these single-family homes with all these individual problems popping up and individuals’ property managers trying to talk to me. Yeah, it gets really difficult.

Chad: Yep.

Hey, it’s Brandon. I want to take a quick break from this week’s podcast to invite you to this week’s webinar, which is How to Buy Your First, Second, or Third Rental Property. Look, investing in real estate is like moving in a train, a big locomotive. The most difficult part is getting it started. It’s a lot of energy but once you get going, it’s kind of hard to stop, right?

That’s why in this free online class, I’m going to be walking you through exactly how to get that train moving—how to buy your first, second, and third rental property so you can get that going—a life of financial independence. So what are we going to be covering? Things like how to get funding for your first deal even though you don’t have a lot of cash. Three steps for finding a great deal. Three actionable strategies for finding deals that are hiding in plain sight and a very simple, step-by-step process that you need to be focusing on right now to get more deals.

Now, this is going to be awesome but it’s so limited. So go to BiggerPockets.com/123webinar to sign up and get your spot. See you there.

David: All right, enough of that. Let’s hear about your first deal. I’m very curious to hear about how your real estate experience started off.

Chad: You got it. So I was telling the story to a guy with multiple billions, which is not common for us to have in our boardroom, but he was there. And we talked about the fact that we started in 2008 and he is like—this was a year ago. He was like, you’re either really, really smart or really, really dumb to start then. And I was like, do I get to choose the answer or time will tell.

Brandon: It doesn’t have to be either/or. I can be a little bit of both.

Chad: Talk to me in ten years. But we started in ’08 with the idea of both, cashflow homes and multifamily. And then we ended up buying a multifamily deal in ’09. It was a $4.3 million dollar deal in College Station, Texas. We raised about $2 million or so. This one we bought, 1979 built. No environmental but sort of on edge of the 1979-1980.

Bought it very with the assumption because lending at that time was really hard. The capital markets had constrained already, so it was hard to get lending but you could still assume a non-recourse commercial multifamily loan. So that’s what you did.

Brandon: So you could take over and—

Chad: Yeah, absolutely. 55% LTV assumption. So $4.3 million dollar deal and we’re bringing north of $2 million dollars to close with a equity raise including reserves. So I did that deal, operated it, but it wasn’t really value ad at that time. We weren’t seeing really much in the way of rent growth. So you’re really managing occupancy and keeping your incentives low. And turnover. And it was a mile or so from Texas A&M. So not a small school, primarily a student population.

So we didn’t run it like a rent by the bed. It was still a rent by the door, but the difference in student housing is when you rent, you can lease out the bedroom. So you might have four people in there and four bedrooms, then you have four different leases and it lets you make more money in that but you deal with the constant, almost 100% turnover every single year and you’re not always occupied because you deal with a summer low.

So that’s rent by the bed student housing. We did rent by the door, normal. And we made money. I mean, that deal was spinning anywhere from 4-6% cash on cash. Overall return was single digits annualized in 8-9 range. So we made money on it but the business model could have been a lot better had we done a value ad play a few years later and accelerated it. So it did well, took care of the client and had a really good tax play on it, too. Sold it and moved into another project in Kentucky. So we did basically an exchange into another project. But that was the first one.

Brandon: Why did you sell that first property?

Chad: We’re, business model wise, we’re a long-term holder of cash-producing assets. That’s the core of who we are. So we want to get blended returns but at the end of the day, it must be consistently cash-producing in a market, we would put our last $100,000 in. So that one was doing well but we did not see it continuing to excel. Basically, it topped out borrowing any reskinning of it or rebranding of it, which we didn’t think the site justified. So we were like, hey, we don’t think we can do much more with this. Let’s go ahead and take it to market.

Brandon: Yeah, that makes sense. Sometimes, especially when you’re doing value add, but even with a regular one, if you get to that point where you’re not getting—what’s the phrase we use, oftentimes—not depreciate—

David: The law of diminishing returns.

Brandon: Yeah, diminishing returns but almost like you can keep holding onto it but at some point your returns will start dropping more and more. So in real estate, it’s a value add from time to time. So I’m wondering about that deal. You said in the beginning, you’re getting 4-6% cash on cash return. So in other words, those who are listening, it’s like the cashflow or the kind you get, like straight from the cashflow. And then 8-9% overall return, like per year average, correct? Like basically, for your investors.

I guess I’m wondering, did you give all of that to your investors? Was that what your investors got, like 8-9% or that was total and you guys are taking a piece as managers of the deal? How did that kind of structure work in the beginning?

Chad: Yeah, so all of our deals—and this is a pretty common model. You mentioned Cardone—he’s primarily—there’s always other syndicators in this space. But you’re typically going to see an acquisition fee when you buy a deal. It’s basically compensating you for all the time, effort, expertise it takes to put the deal together and get it funded and debted up and all that stuff.

So we had that piece already. Then we got an asset management along the way, and then we got a percentage of the profits at the disposition. And there was a supplemental refinance, too, in the middle, that let us put some cash back to the clients.

Brandon: Okay. How do you raise money on a first deal, especially when your first deal is a large thing. It’s not like you bought an $80,000 house in Texas. That’s right—you bought an apartment building. So how did you go and raise a couple of million dollars, just from your contacts from your past?

Chad: Yeah, the trick is when you go to do this, depending on there’s the regulatory environment you’re going to work in. So when you are doing commercial multifamily, it’s not real estate anymore unless they’re on the title. And typically not. It’s they’re a percentage interest owner of an LLC. That’s the 99% model. In that case, they are dependent on the asset manager or owner, the syndicator, whoever, to make it do well. So now you securitize the deal. And if you securitize the deal, you’ve got different models. Reg-A, 506B, 506C, and now crowdfunding. Which we’re not big fans of because of its limits.

But Reg-D 506B basically lets you work with an unlimited number of accredited and 35 non-accredited but they must be friends with some family. They must be people you know. So if you don’t know people that are able to invest $50,000-$100,000 or so in this, you know you have a gap. Not a limit, but you have a gap you have to fill, right? So how do I then become the person that would be interested in the product I have where I can develop relationships to create those licenses. I’m not going to be able to do that.

I’m not going to tell somebody, go talk to so-and-so because right now, it’s a little bit harder because 506C showed up which allowed you to advertise and it works only with accredited investors. You can advertise to create investors. You don’t have to worry about your friends and family but there is—can you get an accredited investors’ attention? Are you that person who is good enough to do it? So you’ve got to decide how you want to go to market with it.

But yeah, you have to have a business strategy you can bring to your clients to get what’s called an expression of interest. If I bring you a deal like X, would you be interested? If so, let me know. When a deal comes around, I’m planning on having one in the next six to nine months. Let’s sit down and talk if it makes sense to you, participate. If not, no big deal. So developing that first lets you go to market. And you’ve got to be the person who’s worth it and the net worth to get it. And then you can go.

David: And in a sense, isn’t that when you can find that deal, then they’re going to come?

Chad: Yeah, but realize but you’re qualified. You’re worth it.

David: I just married your two ideas. Brandon’s belief that a deal will bring it and your belief that it takes a very qualified person to get the deal and I brought it together. Just shut up, Brandon. I’m helping you.

Chad: But what I’m picking on is—we see it all the time, is the novice path, is when they get into multifamily, they get access to deals and they look at the offer and the memorandum from the broker. And in an offering Proforma, that from a broker should be Latin for a lie. And I’ve tons of broker friends who maybe listen to this and they’ll give me a hard time but at the same time, they’re taking T-1 on a projected income and T-12 expenses, which really isn’t going to work that way or a lot of assumptions baked in that you’re not going to experience so you’ll have to break it down yourself. So when you look at that, especially when you first start, it gets really sexy and romantic. I mean, a lot of money is sexy and romantic. You guys would agree, right? I mean, making $100,000-$200,000.

Brandon: Yeah, I did it.

David: That’s the only reason I’m Brandon’s friend.

Chad: Right. We’re all sluts at heart. So when you look at this, when you look at a Proforma, you get excited. You can’t not get emotionally invested and then at that point, you’re dead because observer bias is going to make you cherry pick the really good facts and not really look at the bad facts. They’re not really neutral. They’re bad. And then you’re in trouble.

Brandon: This is for everybody, whether you’re doing a huge deal or a small deal. So how do you prevent against that bias that we all tend to have? How do you fight against it? How can a newbie trying to buy their first single-family house fight against it?

Chad: You make sure that you’re only looking at deals where the things you don’t control are ruled out. So real estate’s a liquid. Right? So it’s not like you can buy it and go, this sucks. Ditch it. It can be a shotgun wedding, if you don’t do your due diligence. So if you don’t realize the family’s crazy, you’re kind of in trouble but it’s your fault for not checking out the family.

So what do you do? The MSA, the state, the submarket, the neighborhood, the zipcode collection, the 5, 3, and 1 mile. The actual site itself. You don’t look at a site or location until you understand your management. So in single-family, you might self-manage. In our world, it’s always third party or asset manager. So we only go to markets with those locations where we have an asset manager or a property manager that I trust with my kids.

And then we shop together so when I’m looking at a deal, I’m getting their opinion, I’m getting the mortgage broker’s opinion, I’m getting all these pieces of opinion, not just our own Kool-Aid in a market we already trust, so we’ve already ruled out those variables where you look at a deal.

David: This is very similar to how I invest in different markets across the country, in my book Long Distance Real Estate Investing. What I basically talk about is how I limit my own bias or my own ability to screw up a deal, right? Like I bring in different opinions. My Core Four, I call them. And they all have to be on the same page. What I do is, I align their interests with mine to the point where this is going to be a really rough neighborhood, my property manager needs to be so good and he’s like dude, I don’t want it.

Even if I am trying to talk myself into it, it’s that spreadsheet magic that looks so sexy like you said and you’re trying to convince yourself, this is a good person to date when it’s obviously not. You’ve got your mom that’s like no, David, that’s not the right girl for you. There’s other people invested in this.

And the other thing you said, but I’ll let you come in, in a second—you need to make like a beginner deal for newbies starter pack and all the things that new people talk themselves into a deal, they all do the same thing, right? Like they get a deal on LoopNet and they think that means they’re a broker because they’re on LoopNet and they are very interested in acquisition fees right away.

Like you said, their performance are horrible and they’re like, this is the complete upside it could possibly be and this is the ideal situation of expenses that it could never be. And they make a business card that says CEO before they’ve ever bought a deal and they don’t know what a title company is. There’s all these things that you’re like, I can see your face.

You’re like, yes, I can see this all the time and it drives me mad because there’s a lot of kind of wannabe investors and they all do the same things but it’s all based on I want to believe I’m doing this and feel like I’m doing it without actually having to know what I’m doing.

Chad: Yeah, and the thing is, you don’t get mad at someone doing that because at least they are trying. It’s far easier to direct a body in motion than to get it started in the first place. So they’re already better than 95% of the population who say, okay, I’ll be a meat puppet and do what I’m supposed to do and be a W-2 employee the rest of my life. So kudos for that.

But then it’s okay, I think the other test is, someone is going to give me $50,000 or $100,000, whatever the number is. They’re going to give me a slice of their hard-earned labor and time that they’ll never get back. It is my job to do well with it. How dare I do that if I don’t trust in my bones that I can do well with it. That’s the part where that person would make me angry.

Brandon: Yeah. That makes a lot of sense. So let’s fast forward to the end of your story real quick and then we’ll backtrack. Where are you at right now? What does your business look like? How many units do you have? Kind of talk about that for a minute and then we’ll pick up some of our questions.

Chad: Yeah, we’ve done $425 million in transaction in volume. Our goal is to get to—our preliminary goal is to get to $1 billion in asset on management. So the first one was $500 million. We’ll hit that. We’re currently acquiring it at about $100 million a year. We’ve been doing this for ten years. We deploy about $135 million in equity, about 3,000 doors. So that’s sort of our space right now. We’re currently pruning some of our smaller deals and everything. Now we’re buying in the $15-$35 million dollar range.

Brandon: So you said you’re still buying, I mean right now, like $100 million a year. I mean, the market is crazy right now. We all know that there’s a lot of competition. There’s a lot of people that are okay with getting a small return or almost no return, right? Especially foreign investors are happy getting zero percent because they’re not losing money. I hear those complaints a lot. How are you able to pull out deals then in today’s market when it’s that competitive or you need to try to earn something better.

Chad: Well, you might get zero percent if you’re in a core coastal market where the cap rates are like 3.5 or 4 or you’re putting 300% down to get a little bit out of it. Like if you’re still in a let’s say, 5 or 5.5 market, which is really low compared to where it was. But what’s a cap rate? It’s a measure of—it’s a market’s opinion of risk adjust return. So the way the levers work is the lower the cap rate, the more meaningful the value add is for every dollar [Inaudible][39:42].

It’s tough right now to just park money and wait for inflation to help. You’ll do okay but you’re not going to make a lot. But if you know how to add value whether you’re adding—it’s operational in nature and that’s pretty quick or whether it’s $2K a door, $4K a door, $10K a door—the cool thing about this asset is you can go look at all the other things around you in a five-mile market area and know exactly what your comps set is, what they do, what amenities they have, how they market, how they take care of the clients. And you can determine—you’re not beating them necessarily. You’re trying to find out what you can offer that is a gap in the marketplace and knowing that gap.

And then so there is a science to that. You’re not guessing. When you know you can do that with a value add program in a 5.5 cap market, you can still absolutely make money. Now are you making a little bit less than you did two years ago? Of course you are. Because interest rates have inched up a little bit. All those spreads have come down to help but you’ve got this cap rate cycle. But if you then compare it to other real estate asset classes, it’s still doing really, really well. Retail is struggling. Office is struggling.

Different components are—hospitality is doing great but when the market cycle turns, you’re going to get some of that back. Again, our opinion. Those guys in that asset class are like, you’re an idiot. You’re doing boring multifamily. But if you compare it to non-real estate assets, right? No one believes a stock market isn’t going to have some level of correction, right? Or they’re scared to death it is and they’re not putting new money in.

Even then, in long-term stock market, 7% with lots of volatility including one-half that is from dividends. Then you look at money markets, CDs, savings, bonds. So to the paper-based world, even though we’re a little bit lower than we were, it’s still better by comparison. And even if you’re buying safety, it’s still better by comparison. It’s just a little bit less.

David: So real estate is the cleanest shirt in the dirty laundry right now. I say that—it’s absolutely true in ways.

Chad: That’s not bad.

David: Can you give us some quick and easy wins? What are some things that you commonly look for like your first set of criteria that you’re scanning for that would catch your eye, like ooh there’s an opportunity we can add some value here. This is worth looking into. Because what you’re saying is basically, the deals aren’t just laying around for you to go pick up like they were in 2010. You actually have to know what you’re doing.

You have to see something other people don’t see, what you refer to as the gap. Find an opportunity and capitalize on it. So what are some things for people that are like, yeah I want to be a multifamily guy, what should I be looking for?

Chad: Let me only answer that in terms of a process. I think that might be as useful because I personally don’t think there’s any one thing. It’s not like we always put LED lighting in or we always change out the countertops. Sometimes we don’t. Or we always change from black to stainless or beige to black, or modify flooring. 80% of your potential renters are already living within five miles of the asset.

So you know where they live so you can look at those comps. It’s labor-intensive but that’s why you get paid. That’s what you should be doing. So when you can—let’s say you’ve got, an easy example is you’ve got two assets within a mile of your property that are renting at $150 a door or more than you. And it’s because they’ve got better flooring and granite versus Formica.

You’re like, okay, if I can install those at a level that we can monetize that, and not match them but fade them, draft them the marketplace but be a little bit lower but still offer them that kind of experience, that’s easy right there. Because you’re not trying to exceed them in the marketplace, you’re just trying to draft it so your marketing is yeah, we look the same inside. But guess what? We’re cheaper. But you’re already creating a lift in your value. So that process itself works all the time.

Brandon: I like that you said drafting, like the term where you’re drafting behind a semi on the freeway to try to get better gas mileage. You’re finding what those guys are doing and saying hey, I’m just going to do that. Maybe a little bit cheaper or maybe a little bit better. What’s the phrase we just learned in Go Abundance? Waterski in someone else’s wake.

Chad: Yeah, waterski in someone else’s wake.

Brandon: Yeah, because you don’t have to reinvent this whole thing. I mean, are you generally looking, and I know the answer is probably both, but are you generally thinking when you’re looking at value add, I’m going to add, increase rent or I’m going to decrease expenses? Which is your primary focus if you have one?

Chad: The simple answer is you do both but you’ve got far more elasticity in rent growth and other income growth than you do in op ex. Because there’s only so much you can constrain. Typically, your big levers are how much you can move rent and other income. Also, what you can do scale-wise on your capex plan. Being able to save an extra $200 per cabinet renovation across 200 units, it adds up. Or certain things like that.

The rule of thumb is you’re going to be spending between 45-49% of your gross income on op ex.

Brandon: Op ex is operating expenses.

Chad: Your operating expense. But in residential, it typically gets higher than that. But a general rule of thumb and depending on the property taxes in the state you’re in—

Brandon: Yeah, we often call that the 50% rule because it’s about 50%. You’re going to spend half of your income, give or take, goes to expenses not counting the mortgage.

Chad: And with some vacancy allocation. Right, right, right. So yeah, it’s mostly that growth. But there are ways to tack on other income, whether it’s through a renter insurance program or cable bundling. So their other income is kind of interesting because it’s a way to create consistent juice over time that when you can’t move market rents.

Brandon: So one thing I should have said earlier that we could have talked about earlier, but this is a little higher level show and I like that. I want the show to be a higher level show but for those listening who have no idea what we’re talking about, here’s a quick summary.

So multifamily commercial properties are valued and go ahead, Chad, if I say anything wrong here, let me know—multifamily are basically valued based on cap rates but you’re essentially saying, the more profit a business makes, the more profit an apartment complex gives you—or you could say NOI—

Chad: The net income, yeah.

Brandon: The more net income, the more the property is going to be worth. So in other words, if we can decrease expenses by saving money here or there or increase the income, that makes the value higher. So when we’re saying value add, we’re talking about that. Is that a good way of kind of trying to summarize it?

Chad: Perfect.

Brandon: Okay. So like, this works with primarily multifamily. Yeah, it works a little bit true with single-family, maybe, but in reality, single-family houses are worth what that single-family house over there is worth. You can compare them pretty good which is what agents like David here will do when you hire an agent. They’ll go and look at other houses and say, well that one had a little bigger garage. It’s probably worth a little bit more. But multifamily, it’s more that one had a more net operating income so it’s worth more.

Chad: That’s the thing we didn’t like is you can’t control your square foot comp. And when they got rid of income—we had a bunch of duplexes, tris, and quads, and then once they killed the income appraisal in the four units and down, you just killed that space.

Brandon: Yeah, because we can’t do anything to change it. If I go and increase rent a little bit, it doesn’t matter. It’s still worth what the other duplex is worth.

Chad: Or a single-family with the same square footage.

Brandon: Yeah, exactly. It’s like that sucks. I get why that’s why people get into multifamily. It’s a really powerful way to increase that. So okay, now I want to move over to—this is something I’m fascinating by is how you actually run your business.

So you’ve got thousands of units. You’re obviously raising money. We’ve got all those parts we talked about earlier. You’re managing the business, managing the money, managing the deal flow, managing the actual properties. So what does your structure look like and I want to dig into like, how much time are you spending on a spreadsheet running numbers? And how much time—in other words, does somebody in your team do that? What does your team look like, I guess, is where I’m getting at?

Chad: So, and by the way, I literally will have these conversations on an airplane. What do you do? I do this. Oh, really? Break it down for me. I get the juice of just deconstructing business models. So we’ve got 13 people. We’re in Richmond, Virginia. None of our assets are here. We love it here. It’s a great place to live. The problem is that the employment growth in Richmond is anemic compared to Texas, Carolinas, Atlanta.

Our name, The 37^th Parallel, it comes from two things. Funny enough, Richmond and San Francisco are basically on the 37^th parallel but on opposite coasts. And my first business partner was West Coast. I was East Coast. Another piece of it is two-thirds of net domestic migration occurs below that line.

David: What does that mean?

Chad: So when you look at where people are migrating from, the northern states to the southern states, that migratory path is a combination of environmental and chakra factors and it’s occurring primarily above that line. It’d be more than that if you took out Seattle. But think about what’s happening in New York, unless it’s Manhattan. Almost every single city in the state has declining population growth. Look at Ohio. Look at Indiana. I grew up in Kansas City. Similar scenarios. It’s just jobs aren’t flowing there and they are really below that line.

But when you’re putting a business together, we knew we were going to build a business that wasn’t going to be in our backyard. So assumption that we had a build-around. So right now, I’ll tell you where we are current-day. Basically, when we go into markets, we want to know that we can have a third-party property manager that we can treat like a member of our team.

So in property management, if you take a building, a building has an onsite manager that works 9 to 5 there and they’ll have one or more leasing agents that work with them, and one or more maintenance staff that works with them. Typical rule of thumb, one FTE for every 50 units. So one full-time equivalent. So if it’s 100-unit, you’ll have one in and one out. One manager and one maintenance. And that scales approximately over 50 units.

So those are staff of the property management firm. Then above them is a regional manager that controls anywhere from 5 to 10 properties and then above them will be a VP or relationship level person inside the property management company. And most of the companies we are working with have 20,000 or 30,000, or 50,000 units under management.

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

Some are like, we’ve got this. Leave us alone. And we’re like, for us, no. That won’t work. So you’ve got to find that right partner. So then we have asset managers on staff. I’ve got both of my folks, they’ve got multi, multi time with equity, multifamily, hunt, some really fantastic companies. They just want to be more of an entrepreneurial organization so we drew them over. They’ve got 50 years combined experience across these asset managers that run our portfolio.

But we didn’t have them day one. We had to be big enough to bring them on and show them the big picture. But we’ve also got an office manager, a controller, a technology financial analyst. And it’s myself and another guy, my business partner, Dan. We basically own 90% of the company. We’re both comanagers. I do platform development, capital development and a lot of our marketing and messaging and he does primarily acquisitions and asset management. We’re both prior Anderson Dods. I trust him with my kids and all that stuff. So that’s current.

And then we’ve got a registered rep who helps on the sales side and his partner in Austin, Texas, and they help us on deal raises and then we also have market and education, a gentleman who is a retired doctor named Dennis Bethel out in Fresno, California. That’s our team.

Brandon: That’s cool. I find that fascinating to dig into people because everyone’s business runs a little differently. That’s always a question I ask on planes, too. Like how does your business work? I mean like yeah, take me inside it. That’s cool.

All right, so you’ve got all these units and you’ve got all these people running different things. Where are you headed? Where do you see the future of your companies going, just keep more multifamily or do you want to scale up larger deals?

Chad: There are models in front of us. There are companies that are 5x, 10x, 100x our size that are still exclusively multifamily. So I mean, there’s a company out in San Diego that started 20 years before us. It’s been in business for 30 years, has $5 billion in assets and management. Have they done some mixed use, have they done a little bit of development? Sure. But it’s still been multifamily primarily.

So for us, you don’t know what the future—I’m not a big believer in 10-year plans. Stuff shifts, right? The evolution is those who can adapt. So for us, we know the asset class is not going anywhere but how do you be the best in that asset class? Well, there’s different ways to do it but it’s at a billion, which we think will hit in let’s say the next five to eight years, hopefully. But that requires us to get more equity so we’ve got to fund products coming out. We’re moving in the DSV, the 1031 Delaware Statutory Trust space that lets us take different equity sources and still own the same asset class and perform with an asset class.

David: Okay, so I want to ask you a question before you move onto the deal deep dive. You mentioned all the pieces that you put together to build your team. For somebody who wants to follow in your footsteps, can you give me the order that you would look for as far as the easiest way—where your foundation is or what you’ve built up from there as far as team members are concerned?

Chad: Yeah, so it’s back to your gap, those four rocks that I talked about. Business architecture, deal, capital, asset management? Asset management is one that early on, you can probably rely on third parties and you won’t make as much money as you could but you’re not just going to blow up.

But it’s really hard to outsource capital development. Or marketing in general. Most people are not comfortable in that space but sort of find someone that’s done what you want, do what they’ve done, get what they’ve got. That’s the price of admission, is you’ve got to be able to tell your story and put capital together. It’s the ultimate entrepreneurial skill. It’s capital formation.

So I think either you or whoever you bring in, you have to solve for capital and you have to solve for deal. And then between the two, you’ve got to then figure out that business architecture and then you can add asset management later. If you start with that, that’s great and all but if you can’t get the deals or you can’t get the money flow, it won’t matter. So I think it’s first identifying what you want to be best at, or are best at, and then how you augment the place you’re not and then go from there.

Like for us, it was two people and then we added an office manager because we just hated admin and we needed a lot of paper flow to move around. And then we added a deal analyst and an operations analyst skillset, and then we added client relationships and client management. We started in my library at my house. Then I built a back addition then we had five people stuffed here. And then we had one office space and now we’re in 9,000 square feet.

Brandon: It builds slowly. People might be looking at your story and go, wow, I want to be right where Chad is but like you took ten years to get here and you have a lot of deals and each deal adds more income and adds more ability to begin getting more people.

Chad: Knock on wood. 100% profitable track record so we want to keep that.

Brandon: Yeah, that’s awesome, dude. So let me go to one last question before Deep Dive. Everyone’s talking about the real estate market. Is it too late to get in? This ain’t 2012 or 2011 anymore. How are you looking at the market—obviously, you don’t have a crystal ball but what do you see for the future and how is your investing changing because of where we’re at in the cycle?

Chad: Yeah, that’s absolutely stuff we talk about all the time. For us, we first have to look at the tide, which is demand and when you look at components of demand growth in multifamily, the number one thing is really household formation. If you’re not working in a coastal market that has environmental nuances or a retirement market, it’s household formation.

So what’s household formation? Well, you’ve got people moving into the renter life cycle and psychographics. People just deciding to stay there or move in. So we still are—the population’s still growing, right? And it’s a mix of domestic and immigration. Even with all this talk of immigration, it’s still a huge driver of the economy and it’s never going to go away. And U.S. immigrants rent more than they own and in the whole U.S., it’s a right, not a privilege to own a home. It’s fading.

So when you’ve got the Echo Boomers that are the 18-30 range, rents at a 75% rate and the Baby Boomers that are renting at the fastest-growing rate, and they’re over 55. And they’re going to live until they’re 85. And once you rent, you never own again. Those populations are still solidly in that renter group. Then we’re adding more household formation.

There’s a great graph. It’s a census chart just at the 18-35 age range that NMHC puts out, National Multifamily Housing Council. And you look at that curve, we still have another five to seven years of increasing renter populations before it flattens out a little bit just in that group. But it doesn’t dip and then it goes up again in another 10-15 years.

So we’re not worried about demand. We worry about oversupply, so that’s really market location. And it doesn’t affect B-grade stuff as much but there is a trickle down effect. So we looked at acutely and then we do worry about the financing market, because at some point, as the market really gets frothy in terms of volatility, it will affect how much capital says yes, I want to buy a billion dollars of CNBS loans. And be like, I’m just going to stick it in a mattress. And it’s going to somewhere else.

It will be harder to buy but it will still exist. But when it does, other private liquidity comes up, a little bit more expensive but still there, but you’ve got to be ready for it. So for us, it’s a great analogy I saw at a conference. It’s not whether—some people think it’s the eight or ninth inning. What if it’s a double header? So when you look at economic cycles, we’re in a really long one and they do ebb and flow pretty consistently but demographic cycles, they last for 20, 30, 50, 70 years. So if you’re looking at those trends, we’re in a double-header. Economically, there’s going to be some bumps. Sure, the demographics aren’t going to go away.

Brandon: Okay, so you’re basically saying the fundamentals look good. Across the way, the fundamentals look good. What might happen is the market might get scared because something triggers it. But like fundamentally, there doesn’t look to be anything in the economy that’s scary like it was back in ’07. Would you agree?

Chad: Totally agree. And especially in the group that we serve, that light blue collar, they’re still going to have that. in fact, the group we don’t serve, the huge need is that underserved low-income group. It’s a massive opportunity in that there’s a need. It’s just really hard to monetize. It’s not sexy. It requires some government intervention to make those programs work. Light tech, low-income tax credit. There’s a huge need there. That’s the biggest part of the demand curve. It’s just that private money doesn’t want to flow there because rents are so capped.

Brandon: Yeah, I’ve actually said that quite a bit. I live out here in Hawaii now, in Maui, and prices are just crazy. A studio apartment is $2000 to rent. But I’m always thinking if somebody can—and maybe I’ll get into this, maybe not, but like, if somebody can figure out how to work low-income housing, there’s a lot of pressure from the top-level of government. We need more housing. We need more portable housing, so there should be opportunity there and no one really wants to work like you said. It’s not a sexy business.

Chad: But you can make a lot of money with the incentives that you create, but you’ve got to jump through so many hurdles to be in that space. The barriers, 2x, 3x, just normal multifamily to get into the light tech space.

Brandon: Yeah, we talked about that a couple of weeks ago on the podcast. Maybe it was last week or two weeks ago. Anyway, we talked about, with Graham, about this idea that you can make money in almost any kind of real estate. Just, are you willing to go invest in that thing? Opportunity zones or low-income housing or whatever. There’s a lot to do. To revisit the very beginning of this conversation today, you said, how do we get good at that?

So if I want to get into low-income housing, how do I go into that. I want to go into mobile home parks, how do I get good at that? If I want to get into whatever, how do I get good at that? And then modeling others is a good way to do it. Awesome. All right. It’s great.

So let’s move on a little bit and get a little bit deeper into one of your deals. This is the Deal Deep Dive.

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All right so this is the part of the show where we’re going to dive deep into one particular deal and you’ve got one in mind, correct?

Chad: Yeah.

Brandon: All right, so let’s just dive in and just kind of fire match you.

David: First of all, what kind of property is this thing and where was this located? Kind of give us an idea of the property before we get into the specifics.

Chad: First, we bought it—it was 163-unit in Louisville, Kentucky.

Brandon: Okay.

Chad: Not Louie-ville. Louisville. If you don’t say it right, they know you’re not from there.

David: Yeah, what is the right way to say it—I mess it up all the time. It’s Louis-ville. Clearly.

Chad: You’ve got to sound like you’re swallowing your tongue. It’s Louisville.

David: That’s a good plan. In order to be correct, you have to sound like you’re incorrect.

Chad: There’s going to be some Kentucky people pinging you on your show saying you and Chad screwed it up.

David: I’ll tell you what, BiggerPockets—all right. How did you find this deal?

Chad: We do some educational work and one of the people had found us the deal and brought it to us and said, hey, what do you think? And we were like, fantastic. And this is the only deal that’s happened like this. I don’t think we would have gotten it otherwise. It was broker-listed. It wasn’t like it was out in the middle of nowhere. It was being weirdly marketed, let’s just put it that way.

So I found the deal and then negotiated with the broker for a little bit and eventually said, we got this. And got permission to go direct to the seller and then we worked directly with the seller on it.

David: The broker let you do that?

Chad: Yeah, because he already had a commission agreement. He just wanted to get the deal done.

David: Did you have to shug-night the broker and hang him over the balcony and be like, get out of the way and let me do my own negotiating.

Chad: I’m actually pretty sure the seller was the one who drove it because he’s a deal guy. So he was like, hey, we got this.

Brandon: That’s funny. All right, so how much did you pay for the property?

Chad: It was $10.5 million.

Brandon: And was that what they were asking originally or did you negotiate that down?

Chad: They wanted north of $11 million and we’re like, it doesn’t pencil out. It was an assumption. It doesn’t pencil out at that. If you can get that, great. We’re not a buyer at that price. Then it was, okay, they wanted an equity carry in it so they would sell it to us at one price and get some equity later. And we’re like, what does that look like? Who has control? It’s really messy. Are you sure you want to do that? Went back and forth a couple of months and eventually we’re like, can you just buy it from this? And they were like, yeah. No problem. So eventually we landed on the price.

David: Do you think if you had offered that, can we just buy it for this number in the very beginning, that would have worked?

Chad: We did.

David: And it didn’t work. Right. So that’s the point I want to try to make out. People make decisions emotionally, even the really, really smart, logical, spreadsheet nerds who do things. You wear people down. People get worn down. Things change in life. In that original offer, they said no, don’t get discouraged because six months later, things could have changed.

They could emotionally be worn down. They could have another deal they want to go buy and they need to sell it at this price and it’s worth it because they’re going to make so much money on the next one with the 1031. So I love that you brought the same thing back to them and they ended up taking it. Okay, enough about me. How did you fund this deal?

Chad: We put together, it was $4.79 million in equity. And the way we do it is, I talked about the Mac profile and getting expressions of interest early on. We built a high investors network group where we’re educating them in how multifamily investments work. Here’s what we’re good at. Here’s why we do this. If you really believe the same things we believe, join us. If you don’t, no big deal. So we’re not trying to pitch anyone, we’re just more, here’s why we like it. Here’s all the same data. Do you have the same conclusions we do?

And if we’re aligned and they become part of our investment group, then when deals come up, we know—and this is a key thing for people listening is, you want to be able to pull your group of investors and understand, hey, where are you in terms of your min/max equity location of this? What’s comfortable for you? So you kind of know along the way, what is your available to buy? Is it $2 million? Is it $10 million? Is it $30 million? And is it a hard committed number inside a fund? No. But if you’re good at what you do and you take care of your client, your loss will never be that much.

So we knew going in, we had that ability to raise. So it wasn’t a scary raise for us at the time. So it was only—it was $3.18 million in equity to take the deal down, do assumption and all the prepays. They we add six months of rainy day reserves. We basically had six months of debt services going in. Never not do rainy day reserves that just sits there staring at us doing nothing. But it’s good business management.

Brandon: So then what did you do with the property? What ended up?

Chad: Refresh the office—we started a unit improvement program, we had to do repairs on deferred maintenance on roofs and stairwells and ducts. And we only held this property for two and a half years. And then along the way, we had a broker who said, hey, we’d love to list this for you. We were like, we’re fine. We’re in the middle of our path. We don’t need anything. And he kept bugging us and eventually we were like, what number makes him go away? So we were like, you’ve got to give us $14.6 million. And he said, we’ll take it.

David: Wow.

Chad: This will happen sometimes. We are a singles and doubles business. We’re Moneyball. But if you take care of the downside, you’ll get homeruns sometimes. So this one was, we bought it for $10.5 million. We were going to sell it for $14.6 million to a much, much, much bigger company that wanted to use this asset as an anchor play for their other lower-grade assets. So they were working within multiple levels of the renter profile.

This is an important piece, too. In the credit profile for people that are leasing apartments, this will be the same, I think, in residential, too. But you typically look for their income is three times their rent. The 3x Rule. So if you are looking at the 3x Rule, a median household income in your zip code collection is $57,000. Okay, where’s the rent range? What about those that are at $45,000? Where’s our rent range? What about those that are at $67,000? What’s their rent range?

So a bigger player sometimes will go into a location and buy a portfolio and cover as much of that rental range as they can. Because they’re not going to go to one asset when they can manage, brand, and comarketing across those assets based on different median household income.

Brandon: Fascinating. I’ve never heard that talked about. So if somebody comes in, I mean like, from a specific example, if somebody comes into the $1000 a month rental place and says hey, I want to rent this. And you guy, oh, your income is not high enough. You can only qualify for $800. Well, we’ve got this other product right here that’s going to work for you. So now we’ve got that cobranding.

Chad: Bingo.

Brandon: Very cool. All right, so what was the outcome—you sold it for $14.6 million. I mean, without me having to spend too much time doing math, do you remember about, if you had to guess, how much money you made off of this property in profit?

Chad: Yeah, I mean. Let me look at it this way. It was enough to take that money and reinvest it via 1031 Exchange into a 419-unit building that was a lower cap rate just south of UT Dallas in Texas. So we put together—I mean, the chunk that went over was about $3.5 to $3.7 million of those proceeds.

Brandon: That’s cool. Hey, one question on that note that I should have asked you earlier but we’ll do it here in the Fire Round. So one thing, when I’m looking—I mean, I haven’t really started raising much money for anything yet but maybe I’ll get into it. I’m sure I will at some point.

But one thing that—if you offer people a 5% cash in, and you’re estimating let’s say 5-6% cash in cash return but hey, at the end of the day, your IRR is going to be, I don’t know, 13, 14, 15. Do your investors bulk at the, I want to get more than 5% cash in cash return or are they really just looking at the end of the day, either the IRR or the average return? Is there a number where people are like, no, I won’t do it. It’s high enough cash on cash.

Chad: It wildly depends on the person. It does. Do you hear that? Hey, that’s too low. No problem. What are you looking to get and then are you looking to get into this asset class? Because some people are like hey, I want 8%. Well, that’s going to take a higher cap rate in a market with more risk. And are you okay with that? Nothing wrong with that but it’s like the old school financial advisor questions—what’s your risk/reward profile?

And then for us, it’s like would you rather have an asset class that’s been historically really profitable with a manager who’s got 100% profitable track record who is as efficient as possible in this asset class and will automatically reinvest in these deals and greater cashflow? And then by the way, it’s a legacy company. We’re not going to flip the company.

We’re going to be here until we’re dead and that’s 40 years from now. What do you want to do with the money? So if you want to make it a legacy play in a wealth building platform, we’re pretty damn good at it. If you want different things, that’s fine. We’re just not going to fit.

Brandon: I like that. All right, last question, and I’ll just steal it from David because I’m already on a roll—what lessons did you learn from this deal?

Chad: That it absolutely pays to give people sometimes ridiculous numbers to see if they’ll take it. Because the reason why we sold it is the number we gave them was basically what our planned profit would have been three years later. So we basically sold it at our five year and a half price at two and a half. So that IRR acceleration, our investors would have looked at us like we’re stupid had we not done it. And honestly, buy good dirt. If you buy in a location where you put your grandma’s last $100,000, odds are you’re never going to lose money.

Brandon: That’s a great rule of thumb.

Chad: It sounds really trite, like duh. But if you’re literally taking that task to heart, you would avoid a lot of sort of, if I sell it fast enough, I’ll be okay.

Brandon: Yeah, and that’s where that emotion can start playing in and that bias that I just want to make a deal work. I like that. If you’re going to put your grandma’s last $100,000—I love that.

Chad: Because if emotions are going to be out there, use it to your benefit.

Brandon: All right, very, very cool. So let’s shift gears one more time and head over to the world famous Fire Round.

It’s Time for the Fire Round.

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All right, let’s get to it. These are the questions that come direct out of the BiggerPockets forums. We’re going to fire them at you right now. Number one, from Jonathan from Santa Barbara, says, hey guys, I’m looking to buy an investment property out of state. I’m in Southern California and I’ve heard you can get better returns elsewhere. I’m curious if anybody has any advice on a good city to get started in.

What would you say to a guy like Jonathan who just wants to know what city to go to?

Chad: By returns, if he’s talking about cash flows, he’s absolutely right. But from an equity growth, if you can do a value add deal in California, you’ll make a ton of money. You’ll make more money than God. It’s—you’ve got to do it right. Good, stable markets, I would look at, Denver is a little bit less expensive than California but still pricey, but it’s solid. It’s never going to go anywhere. Dallas, San Antonio, Houston.

I would say in the big three. 50% of the Texas population is going to live in that triangle in the next 20 years. Austin and San Antonio are kind of growing together. The Carolinas. There’s really not a bad city there as long as the population’s over a half million and Atlanta, we like. From the Louisiana, Mississippi, Alabama corridor, not huge fans just because the school systems are so bad.

And crime is off the charts just from a state and local perspective. So blue collar is hard there. It’s doable, just not our place. But those are actually some good places to start. And those are good. All those, while getting pricier are still good at blended cash and growth markets.

Brandon: Awesome.

David: Great. Okay, next question from Derek. I am looking to start investing in multifamily properties. I have set up my Proforma spreadsheet and I am pretty sure I’m accounting for all the expenses but I don’t want to leave anything out. What are some expenses people forget about that come back to bite them?

Chad: A lot of people—what you should do when you go to buy is you need to underrepresent your going in occupancy to give yourself about a 2-3 point buffer. Because you’re going to deal with some level of changeover from one property manager to another. And just, it’s far better to overestimate expenses than under.

So one way to do that is also just have a buffer on your occupancy. That’ll give you automatically some room on your Proforma. And then only allow yourself to catch up to market after the second or third year. So do that and you’ll give yourself a lift. Really understand property taxes. It’s your biggest expense. That’s where most people get hosed.

A broker might say, well, let’s just assume 80-85% of the sales price is where you get pegged at for your value. It wildly depends on the market. What happens when they go to 95% and you have to beat it down via a tax protest?

Brandon: That’s incredible advice. Again, whether you’re buying your first deal or your hundredth, whether it’s 100 or one unit, give yourself that buffer. That’s perfect.

All right, number three. We’ll call this the last one of the Fire Round. Deepa from Auburn, Washington says I’ve been looking for my first multifamily deal after listening to a lot of BP podcasts. I’m convinced the only way to find those deals is going to be through a broker. But I’m not sure how to approach a broker without any deals under my belt. Any suggestions on how to approach one that will actually want to work with a newbie like me?

Chad: Staple hundred-dollar bills to your entire body. No, so how are brokers paid? Brokers are paid when deals close. So they are going to want to know are you real? Are you competent? And do you have the ability to close? And then, they’re going to ask you questions like, what’s your equity? Where are you looking to buy? Who’s your management? Who’s your closing counsel? Because the team that associates with you creates transit of trust. Transit of property, A equals B and B equals C and A equals C, right?

And so there’s a fantastic book called The Speed of Trust. But the transit of trust—if you’ve got to be good enough to get there, time as well. So the rule is, if you have the money—and I’m assuming this person has the capital. Otherwise, they have no business looking right now. Full stop now. Work on that. And then work on management in that market. Who are the property managers that can provide you intel and work with you that can also help you validate and work with where you want to be?

Then when you have those two things, then maybe understand who might your closing/title be in that location? Then go to talk to brokers. Because until then, you’re wasting the broker’s time and your time and you’re screwing up your first intro. It’s far better to start with the higher level than to be a total newbie and them always have that opinion with you. Because you only get what, five to 15 seconds?

David: Yeah, Brandon always talks about borrowing credibility. That’s another way your time of transit of trust—well, you’ve got this really good team around you. They are speaking towards your credibility. And then I say rock stars know rock stars, right? So if you want a good team to work with you and you want rock stars to work with you, well you’ve got to show yourself as one.

What I notice a lot of people do is they don’t want to put the work in to learn the business. They don’t want to figure it out. They want someone else to make it easier for them. So they go to these people that should be on their team, that they should be partnering with, and they basically without realizing it, subconsciously annoy that person by saying teach me everything I need to know. Make me feel better. Take away my fear, right? Which is the easiest way to propel a rock star in front of me.

Like if you come to me and you say you want to buy a house and I put in all this time into you and it turns out you can’t even get pre-approved and you can’t get a loan, I’m not going to be very appreciative of the fact that you just took all my time to learn basics of buying a house. Unless you told me that in the beginning. So that’s really good advice for people. You need to build that trust. You want to borrow the credibility of a team and in order to do that, you’ve got to make sure you’re acting like a rock star and you’ll draw the right people to you.

Chad: Yeah, be that rock star. Embrace the suck required to get good. But once you do that, the world is your oyster. But until then, it’s not.

David: You mentioned your military dad. Were you a Marine by chance?

Chad: Navy. So close to it, yeah.

David: Okay, so you’ve got to have heard the ‘embrace the suck’. All right. Next segment of the show is our Famous Four. We are going to ask you the same four questions we ask every guest and I’m going to let Brandon ask the first one.

Brandon: Question number one, what is your favorite real estate related book, if you have one?

Chad: It’s hard in multifamily. I don’t think there’s any one book where I’ve been like, ahh. So I defaulted to a book that I think does a fantastic job at forcing someone to think about demographics and that’s Gary Keller’s Millionaire Real Estate Investor. It came out, what, 10 years ago? Maybe longer?

Brandon: Yeah, probably longer.

Chad: But it’s still a fantastic book on building a business around real estate and looking at market and submarket for that particular asset class. But then if you want to get into the bigger stuff in our space, you’re getting commercial multifamily psych planning books and you’re getting down in the weeds. These aren’t Amazon bios at that level. But that book is still fantastic for real estate.

David: Very good book. I believe Jay Pappasan helped him write it and we’ve had Jay on the show as well.

Chad: Yeah, it’s good.

David: What is your favorite business book?

Chad: Bar none, I answer it every single time the same way and give it out, and it’s The Goal by Eli Goldrath.

Brandon: I have not read that yet.

Chad: The Goal.

Brandon: I’ve seen it. It’s been on my list on Amazon forever and I have not read it.

Chad: You’re doing yourself a disservice, sir. Especially as a business owner, right? It’s the concept of the theory of constraint. We’ve all heard that but it’s done like a business fable. So it tells a story of a guy who gets dropped in to improve a manufacturing location that’s failing. That consistent, that can I? That constant never-ending improvement that ties in process around constraint in management can improve any business. And that book is just a fantastic intro, too.

Brandon: Cool.

David: Okay, what are some of your hobbies?

Chad: I’ve got a pretty active 13-year-old that plays soccer everywhere. So I travel both intentionally and unintentionally because of that. We also travel a bunch to Europe, sail. I like to kiteboard, don’t do it enough. I stay pretty active. Kind of boring stuff but that’s what we do.

Brandon: I don’t think that sounds boring. Kiteboarding, that’s intense. Very cool though. All right, what do you think sets apart successful real estate investors from those who give up, fail, or never get started?

Chad: I talked about it earlier. It’s that commit. I’ve seen so many people that were—could have been, have Mensa apps thrown at them but they find a way to rationalize some things better and they’re consistent starters and restarters, instead of just finding something that works and then doing it. But if you were to sit there and just really embrace that feeling of, you’re going to take care of that kid, right?

That commitment level. That 100% commitment to something? If you embrace that and apply that to your goal, you at that point would know you’re unstoppable. It’s not if, it’s just when. So that’s—I don’t want to be overly Tony Robbins, woowoo about it. But it’s true.

David: Thank you for sharing this, Chad. This has been very good. The last question for me of the day is, I just want to know where can people find out more about you?

Chad: You got it. We’re at 37parallel.com. That’s the number 37parallel.com. We have a ton of educational stuff and articles and webinars section, but we made our director of education—he’s a doctor and in medicine, they have this thing called evidence-based medicine, basically. What are those outcomes that are clinically proven to be better than others?

Well, he wrote a book called Evidence-Based Investing. And it’s basically, what is the third party data and the activities that are proven to create better investment results? So that book, you can get at 37parallel.com/EBI. It’s just a collection of third party data. It’s not a rah-rah about 37^th Parallel but it is about multifamily. It’s a great little asset.

Brandon: Very cool. I’ll have to check that out. Well, thank you again, Chad. Very much. This has been fantastic. Really, really appreciate you being here.

Chad: My pleasure, guys. Thanks for having me very much.

Brandon: All right, so that’s our show today so thank you guys for coming, for listening, for watching. That’s all we got. So again, check out Chad’s stuff and we will see ya’ll around on the next episode of the podcast. And of course, if you like the show, rate and review it in iTunes and head over to the Show Notes at BiggerPockets.com/Show317 if you have any questions for Chad.

And with that, I’ll let David Greene take us out.

David: Yeah, thank you very much, Chad. We had a great time today. This is David for Brandon ‘Handsome Shirt’ Turner, signing off.

Brandon: I think you did that one before.

David: I had to, I couldn’t think of anything. I didn’t let you talk enough this time to give you enough ammo to help myself.

Brandon: Oh, good.

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