You're listening to the Master Passive Income Podcast Network.

Hey guys.

Welcome to the Master Passive Income Multifamily Podcast.

Charles Seaman here with Erica McNew.

Hey guys.

Today we're going to be talking about finding, underwriting and funding multifamily deals.

Welcome to the Master Passive Income Multifamily.

Podcast where we guide you to invest.

In commercial real estate with a special focus on raising money from others to buy bigger and better deals.

And now, here are your hosts, Charles seaman and Erica McNew.

Erica, I'll turn it over to you because you have the resident real estate agent in the room so you can talk about finding deals.

Absolutely.

First and foremost, you want a really great real estate broker like myself.

And again, it just goes back to relationships.

And these are relationships with people in the market that I've built for the last nine years.

And so the difference is actually getting deals done.

I can call someone and I know they're going to answer the phone and they're going to give me the information I need.

And that's not always the case for just anybody, especially for like buyer investors.

So finding a really great broker that's very plugged in with the right relationships is critical.

I actually call, I have a list of about 10 different brokers in the Carolinas and in Florida that I call consistently and I say what off market properties do you have right now?

And they go fast, so I have to be ready to take notes and they will ramble off all of the off market properties they're currently sitting on.

So my knowledge of who to call and when to collect those properties, that's what allows me to always have off market lead flow through those relationships.

We talked a little bit about the distress tickers, distressed properties.

I'm always looking for properties through data, going through CoStar, looking at maturity dates that are coming due on loans soon, tracing due to picking up the tax foreclosures in Central Florida, pretty decent at finding owner information or the sister or the brother or the cousin and their business.

So getting in contact with the owner can sometimes be the hardest part if it's direct to owner, but you have your broker relationships, your direct to owner, and then you have your fellow commercial firms, the vertically integrated commercial firms.

What I typically find is they are vertically integrated, they build it, develop it, property, manage it.

If they sell it, they sell it internally.

Getting your hands on that asset is very difficult.

At one point I had even set up AI to scrape all of their website websites on a daily basis.

So if there were more than like say a 20% change to their website, I immediately was notified.

And that helped me catch properties that they were listing only on their website and nowhere else.

Now keep in mind, if you have, if you're a broker, you have buyer investors.

They could be on the email list, so they could be receiving the same properties at the same time you do.

But setting up AI to scrape their websites was one way that I made sure to get to the properties first and those distressed and going through data acquisitions I think is important.

Really though, broker relationships is the key.

A lot of deals that get brought to me are brought to me by other brokers.

So here's a question for you, Erica.

So somebody brand new, just starting out, how do they find the right broker?

Who's, how do they know who that person is and how do they go about building a relationship with them?

Yes, really good question.

So relationships are just volume of touch points, so and quality of those touch points.

That's what makes up a relationship.

So when I first started, it was very important to me that I called through all of the top KW commercial agents in the entire company.

Many of them I'd already connected with through networking events.

And I called through to let them know, hey, I specialize in large multifamily in Charlotte.

If you have anything in this area, please let me know.

And so just reaching out to my networking event people that I had met through that was important immediately.

That's how I picked up my institutional investor looking for the apartment complexes.

That was referred to me from somebody within my network over in la, a fellow agent.

So as far as the, the properties themselves, a lot of that for me has been direct to owner.

And the reason is these people that own these properties, for instance, 120 unit that I'm raising the capital for in Florida, that was a guy that was self managing 120 units and just wanted dinners with his family again.

So you would be amazed at how large an asset can be and somebody could be self managing.

And this is just a good old boy, right?

These are easy conversations to have.

So going direct to owner is I think critical.

And I get to direct to owner properties through those networking events that I go to.

So I look at high net worth individuals and what they enjoy in life, right?

They enjoy cars, really nice cars and they enjoy golf.

And so I go to as many networking events, investor meetups, but also meetups for cars, car meetups and also like golf tournaments and that kind of thing.

So getting in contact with those people, networking with those people to get direct to owner, I Think that's also been really, really helpful for me.

Awesome.

So let me ask you another question.

And this is kind of from my experience, but it might be helpful for somebody starting out who's listening to this for the first time.

So oftentimes in the commercial space, I find that track record and credibility is really key with getting a broker to take you seriously.

So for somebody who already has that, that's great because they kind of have an easy path in the door.

Somebody who doesn't, how do they get that?

And what would make you, as a broker, take them seriously?

Absolutely.

And this is where sometimes you have to be creative on your pitch and you have to be confident in when you pitch it.

So for me, just starting.

And when I just started in real estate, I had come from a server background.

I had no business experience, no sales background, nothing.

Right.

And I did my unique value proposition at that time.

And what I had determined is I worked in an industry where it allowed me to get really good with people.

And so my unique value proposition became.

I've worked in the hospitality industry for about 10 years, very good with people and therefore pretty good with negotiation.

And that was a unique value proposition that stuck with people.

And that was based off me utilizing my server experience in restaurants.

When I got started specializing with large multifamily.

March of last year, I had only been under contract on six units in Florida.

From the buyer investor side, we had to back out because misrepresentations.

I did go through the entire underwriting and due diligence process on the six units, which was a great experience.

Again, very small minute experience that I was able to create a unique value proposition off of.

How many brokers do you know have personally been under contract on multifamily with an SBA loan?

So right there, no, we didn't close it.

That was the only experience I had to go off of.

But I was able to utilize that to show that I had some type of track record and with the confidence.

Right.

And so immediately I picked up the institutional investor.

I have a walkthrough on 110 units scheduled for next week, direct to owner.

So one of the keys in that too, in pulling data, was not only did I make sure to get really well in contact with the relationships, I made sure to know my inventory.

If there was something being built two miles down the road, and I don't know about it, that's a problem.

So I made sure to pull all of the inventory in the entire Charlotte area, 100 to 200 apartment complexes.

And I Went through the entire list and skip trace the entire list.

So I Now know every 100 to 200 door apartment complex in all of Charlotte.

I know where it's located.

I have an idea of even when it's cash flowing.

So that kind of knowledge around the data, I also utilize that to go say he see here investor, I know the inventory that you're trying to purchase.

I have the owner information skip traced.

And now it's just a matter of me cold calling and getting to it.

So knowing my inventory, knowing my numbers, I think that was just as important.

So keep that in mind guys.

You know what she's saying is you want to be treating yourself like a professional because if you treat yourself in that manner, other people start treating you that way as well.

Absolutely.

Okay, so and if somebody wants to go direct to seller, what do you recommend there?

What do you find effective?

You know, so for somebody who's an investor, if they wanted to do something and get in contact with the shell or how do they do that?

I always, always recommend that everybody within the investment world stay in their lane.

And what happens when people try to save money and get out of their lane and go and take on another full time job is it typically doesn't end well for them.

And so staying in your lane is something that is really important in this.

I think that's why, you know, there are plenty of general partner syndicators, there's plenty of investors that want to go direct to owner and just do an off market sale direct to owner with no brokers.

However, you're taking on a full time job to do proper due diligence of that asset while you're trying to do the underwriting for the loan, which is your investment side, you know, your investor side.

So I think finding a really good broker, even if you have a potential property that's an off market direct to owner, that's awesome.

Allow a really great broker to go in and actually get the T12 and the rental financial information and extract all of this information, ensuring that you're extracting everything and that it looks accurate.

Allow them to help mitigate some of the transaction and especially and allow them to be in that lane while you are in yours.

So I'm a big advocate for even as an investor, if you find something.

I personally am a broker and I have referred out many of my own transactions because it makes sense for me to stay in my lane as the investor and allow another broker to facilitate that.

That's very valuable advice and I agree with you because you're right.

You have to know what you're good at in life.

You know, you can only be good at so many things and there's so much time in the day, so you got to stay focused.

Yeah, absolutely.

Know where your highest invest use is not just for the property, but for yourself.

Right.

You gotta figure out how's my time best spent and what's gonna make me the most money in the least amount of time.

That's right.

And when you have a great work network, like what you were mentioning about having these relationships in the different buckets, when you have great people, you're pretty confident, like they can do the job better than you could anyway.

So.

And if you don't feel like that, perhaps you need to top grade your work network and you need to continue to look for better relationships for that particular category.

So you should have a people around you, your vendor, partners and everything that you're confident in what they can deliver and the quality of what they're delivering.

Yeah, totally.

Totally right about that.

So then I guess we go from finding deals.

Next step, I guess after that is underwriting, because you have to know if they're a good deal or not.

Yep.

So what are you looking for there?

Well, for anybody who's not familiar with the term underwriting, it's basically analyzing.

That's the term we use here in the commercial real estate world.

What you're doing is you're taking the financials to really see if the deal makes financial sense and to figure out what price you can pay for it.

So one of the mistakes that we discussed in previous episodes is it's very easy to overpay for a deal.

And if you overpay for a deal, it will usually wind up helping you win that deal.

But it may not produce the success or result you were hoping for if you wind up paying too much, especially if it's by your gross margin.

So you got to feel confident in your numbers.

And it goes back to what Erica was saying.

It's just taking this seriously and treating yourself like a professional and treating it like a business.

So you have to take some time and invest time and effort into yourself and your business to feel confident that you, you know what the numbers are telling you.

And when people are looking at these deals, there's usually a handful of things they're looking for.

One is cash flow.

And a lot of times that's going to be measured with a cash on cash return.

That's the metric you're looking at in the syndication space.

You'll often Hear the terms average hour return and IRR internal rate of return.

Those are some pretty common terms that you'll hear.

Cap rate.

Now, for me, I probably look at cap rate a little bit differently than many.

I don't look at that as a return metric as much as I do a barometer.

I use that as something that tells me what's going on in the area, and it lets me know if I'm kind of in the right ballpark with my pricing.

But the truth is, unless you're paying more cash, it's not really going to be a return metric.

However, as a general rule of thumb, you do want it to be higher than your interest rate.

A mistake that many people made in the last couple of years.

Yeah, absolutely.

And I would say there's this initial underwriting analysis.

A property, you see a property, you do your initial underwriting.

Some people call it what, your napkin math.

And then you're.

Then you get into the deeper details of underwriting.

And boy, Charles, I've learned a lot from you on some of those deeper details.

Well, you know, listen, with anything, it's always diving into it, right?

So, you know, there's a few things I would tell you that commonly stand out mistakes that I see people make in underwriting.

One is that they get maybe too aggressive on the rent growth.

And if you feel really confident in it and you know the submarket very well and you've executed or seen it executed many times, then you know, maybe there's a reason to be confident.

But you have to be very discerning to make sure you're not being too confident just to win a deal versus, you know, confident because it's actually practical.

So make sure you're accounting for that.

Another thing is vacancy rates.

And this is something that definitely varies from person to person based on how they underwrite.

You know, so I've seen a lot of people get very aggressive with low vacancy rates.

And that's great if you can run a property that way.

But in general, if you're buying C class or even B class properties, a lot of times, you know, running a property less than 7 or 8% is very unlikely.

And that's between both the physical and the economic vacancy.

But a lot of times, you know, those are best case scenarios.

Right now I'm not seeing too many best case scenarios.

I'm seeing scenarios that usually are a little worse than that.

So you got to be.

You got to be realistic with your numbers.

You know, the key with the underwriting, keep in mind is you want to Be you want to be conservative enough that you're not getting into bad deals, but aggressive enough that you're getting into good deals.

So keep that in mind.

It's kind of a balancing act.

Yeah, very much so.

And I one of the things about leases, two things I've learned on that I had a property that was a 36 unit new construction where the partner had backed out and they were up against a financing deadline.

And you know, in those situations they can bring another 100k to the table and you know, financing can get pushed out and everything's okay.

But they were on pretty tight time frames for that one.

And so thank goodness it was only 36 units if it's at 100% occupancy or 100% vacancy.

Right.

I, my investor that was looking at that, I said, we're going to want to tier in the leases, right?

Because one of the things is when you're looking at the actual dates on the leases and gosh, you would be amazed how many times I get the lease documentation and they're expired and this person's on a, you know, a default month to month, you know, so getting the actual lease documentation and looking through the dates and that I was suggesting that we tier those leases because you'll have them all coming due at the same time and then your vacancy rate can shoot up in that one time frame if you're not very careful.

So in looking through that documentation, there was one property, I was not the broker on it, they had purchased the property.

They did not look at the lease documentation in the detail that they should have.

And a lot of the, like half of the building leases came up all in June and July.

So their vacancy rates shot up right after purchasing.

And the commercial lender did not like that very much.

And so they had a lot of conflict with the lender of being like, no, we've got that.

But it's like, obviously you should have done a little bit deeper due diligence on the actual lease documentation.

So getting into the weeds with it and really into the details of like, what is the documentation say, what are the dates on everything, who are the tenants and how do they qualify them?

That's a really big one.

Sometimes they, the owner of these properties intentionally is just getting anybody they can in to make the net operating income look better, but they have, they're not doing a proper qualification process and all they're doing is getting a bunch of problems and you're about to inherit those problems.

So really looking at the details of the lease Documentation, the process of how they qualify tenants, all that stuff is really important.

You know, there's a lot of truth to that, and it's something I've seen time and time again, especially more common as the market's softening.

Unfortunately, you're not going to know a lot of that until you get in the contract, which by that point you're spending money already.

But that's.

That's absolutely incredible information.

Because the thing is, if you're inheriting the problem, you want to at least know that.

Don't be surprised, and make sure you're paying for it.

You know, some people don't want the problem, so they'll stay away from it.

Maybe that's not the type of property they want.

Other people will say they're fine with it, they just got to pay the right price.

So that way it reflects that.

So always keep that in mind.

And these are opportunities for renegotiation.

So you've submitted a letter of intent, you're now under contract, a certain price, you know, you're going through, and you're doing your due diligence and you're finding these things, and you go, this doesn't look right.

And these are points for renegotiation, potentially.

So it's something to take serious because it could ultimately save you money on the asset value of the price that you're paying, too.

And I always love renegotiation points in a transaction.

You know, they can definitely be a good thing if you're on the winning side of that.

That equation.

Right?

Yeah.

Well, let's talk about something else.

Let's talk about funding Meals, always an important piece here, right?

So.

So probably the most important piece, you know, finding the deals, one, one part of the puzzle, but then you got the funding, which arguably is the bigger part.

Right?

Exactly.

And I always tell people like, this is why investors that are wanting to jump straight into commercial and like, the reason you want to be careful of jumping straight into commercial rather than working your way in residential and working your way up is because of the lending and the funding and how different it is and how different you need to be in order to pull off commercial funding at a high level.

I think I told you, Dave Ramsey and Grant Cardone, both of them are the way they are, and their financial beliefs are that way based on commercial lending.

So, you know, Dave Ramsey, his loans got recalled, he couldn't make it work.

He lost a lot.

That's Mr.

No Debt.

Dave Ramsey.

Grant Cardone, on the other hand, had $30 million worth of loans get recalled.

He went and got an attorney and fought it tooth and nail, kept all his assets and that's why he's all the leverage in the world.

Mr.

Grant Card.

So commercial lending is no joke and it's something to definitely make sure you're prepared before you get into it.

Yeah.

So one thing I think that's really important to understand, especially for anybody listening this, who comes from a single family background.

The loan programs that you're going to get are very different on the commercial side.

And the biggest difference is the length of time that they're for.

So when you're going out and you're buying a single family property, you're getting a loan with a 15 or 30 year term.

That gives you a lot of time.

You can ride out swings in market cycles.

But in the multifamily side, most times your loans are if you're on the short term side, probably two to three years and if you're on the long term side, five to 12 years.

So what's the risk with that?

Well, the risk is that market conditions change while you're in that same loan.

And as long as you're paying the debt service, that's okay until the loan matures.

But you can get caught at a time where the property may not be quite as valuable as you would hope.

And because of that, it's not as simple to refinance as you as you were expecting.

So you know, there's people I know who actually had that happen in like 2009, 2010 with like a Fannie Mae or Freddie Mac loan.

They were paying the debt service every month, but their maturity date came due.

The property was only worth a fraction of what it was when they first took that loan out and they actually gave those properties back to the lender.

So that's a very serious thing, something you can't take lightly.

But you have to just really assess your risk.

And again, it comes back to knowing your numbers and being confident in what you're putting forth and also not paying on pro forma.

Yeah, right.

On our industrial building we finally.

Right.

We bought that in 2020.

October 2020 is when we closed.

We finally were just able to refinance out of that arm and into something that's a long term funding option.

The bank, we had to actually negotiate with the bank for them to take a slight loss on the value of the property.

So they were willing to do that.

And the only reason they're willing to do that is because we have a great relationship with them and we've been, you know, very solid with them.

It's sba.

So, you know, once you get your first SBA loan, they're like a long term partner with you, which we're grateful for.

That's why it's so difficult to get in the first place, though.

So they were willing to negotiate a slight loss in order for us to refinance out and thank goodness.

So they're partners for sure.

Oh yeah, that's the truth of it.

So aside from debt, you also have equity.

So keep in mind that that's going to be the loan.

That's what you're getting from.

You know, it could be a conventional lender, it could be a creative lender.

You know, maybe it's a private lender, maybe it's a, it's a seller who's going to give you seller financing.

So there's all different scenarios you can use for either debt or equity.

And sometimes you're only limited by your imagination.

So you got to keep that in mind.

Right.

So on the, on the debt side, most deals are going to have that as the larger piece of what they call the capital stack.

And then the equity is usually going to be the difference between whatever your purchase price is and your loan amount.

So, you know, there's different ways you can fund it.

Some people have their own money.

They're going to go out and buy properties and they're going to use their own, their own capital.

That's okay.

That's actually a great way to do it, probably a safer way.

There's going to be some people who maybe they don't have, you know, two or three or $10 million to go out and put in one of these properties, but they have 50 or 100 or $200,000 and they want to invest passively in a syndication.

That's another way.

So in that example, you're getting a lot of investors to put a smaller amount in and the sum of all the parts gives you the amount of capital you need to do the deal.

In other cases it could be, you know, finding larger partners.

You know, it could be somebody who has access to money.

It could be, you know, a more seasoned group like a family office.

Now if you're just starting out, having access to something like a family office probably isn't going to be a viable option.

You know, if you're established and you've done a couple of deals and you have track record, that's when you get access to some of those bigger, bigger players that are out there.

All different ways, but you know, you want to make sure that you feel confident having the capital before you do these deals for a few reasons.

One, your reputation gets ruined if you get under contract and you can't close.

You know, it's not to say that you can't recover it, but it takes time and effort and it's definitely going to set you back.

And it's a small world.

It's much smaller in this world than you think.

Everyone knows everyone, right?

So, like, in comparison.

And this is just a random, you know, a random example I'm going to give.

I don't know the exact number.

Erica might, but we're both in the Charlotte area, so there's probably.

Would you say there's thousands of residential real estate agents in Charlotte?

16,000.

According to now, if you do more than two deals a year, you're in the top 50%, though.

So, okay, so we'll go with 16,000.

So 16,000 residential real estate agents.

So to put in comparison for multifamily, and this is for like any market in the country, there's probably 20 to 50 people that control the multifamily space.

So.

And usually it's a handful of brokerages.

Most brokerages have, you know, anywhere from one to five people in them that are actively working on multifamily.

And it's a small space.

And as Erica said, everybody knows everybody.

So when you see each other at an industry event, word spreads, you know, you have a drink or two, you're talking, and all of a sudden, you know, you tell them more stories about who had what experience with what person and it spread.

So keep that in mind just like any other industry.

Yep, absolutely.

And just from a funding perspective also of like, what broker you're choosing to work with, a lot of these commercial firms are vertically integrated, and so they work on teams.

And what that means is their net profit at the end of the deal is really low compared to somebody that is on a cap system with their commissions like I am, and more independent business owner.

So that's something to keep in mind when you are looking at what broker you should be using.

Like a broker that's running an independent business instead of being with one of the bigger shops, is going to have more ability to get creative for you.

And so that's just something to keep in mind.

And getting creative is important in certain economic shifts.

Right.

So like, for instance, I found a commercial lender who would allow my sellers to get in or allow my buyers to get in.

The seller would finance the down payment for the buyer.

It would Be a second note on the property and then his investor group comes in and buys up the seller financing note afterwards so the seller can get out of the deal completely.

There's a lot of people that are in the market of hard money lending.

That's a very, very popular investment strategy because you don't have to own the real estate, you can just own the note that collateralizes it.

So.

But the ability to get creative with funding it also, like the relationships you have within your work network, matter a lot for that.

And it is a competitive industry.

My lenders, they all know that they compete for my investors, businesses.

Right.

So keep in mind, you know, on the, on the conventional financing side, a lot of times you got to have a net worth that's going to be equivalent to or greater than whatever amount you're borrowing.

You got to have liquidity and you got to have experience.

So those are the three things that conventional lenders are looking for.

If you're lacking any one of those things, you need to go out and find a partner that can help you fill the gaps.

Or you have to be willing to get creative and maybe not go the conventional route.

And I will say, when you need the route of finding a partner, one of the most important things.

Well, first is their core value system, their belief system and their core values.

Do they have integrity?

And number two is do they have liquid cash?

And I think that there's a lot of partners out here who are phenomenal partners on paper, yet all of their cash capital, cash is deployed and they don't actually have a lot liquid.

And so if you get into a situation with that partner where liquid capital is needed, you could have just taken on somebody that you think is going to look great.

On paper, of course they're going to be a great partner.

But if you're bringing them on for them to have liquidity, that's something you definitely want to double check beforehand.

So picking good partners is an art.

It's something you get better at over time.

I think it totally is.

One thing people don't realize.

They don't realize how important that liquidity is until they have a problem.

So when you have a problem in this business, it's usually cash that solves those problems.

So there's a reason Eric is saying that very important.

Yeah, absolutely.

Because you'll have a lot of different options at these networking events and investor meetups.

And it's important to find people that, that not just know what they're doing, but also, you know, have, have the something to back it up in case anything goes wrong.

So a lot of good partners that you can pick up for better funding options, and like I said, it's a competitive industry, make them compete with commercial lending in particular.

I tell people it's kind of funny, but it's really honestly based on how well you can button yourself up and how presentable you can be.

And if you do your underwriting at a very high level and you are in depth on your underwriting when you go to submit that to a commercial lender, that right there could be the difference of them having a variety of different questions that now need to be answered or you look good to go.

And let's move to the next step so how presentable you are with the package that you're giving to the lending partners.

On my company, I did a score business plan.

The score business plan is like 30, 40 pages.

It is in depth.

However, by the time I went to do the SBA business plan to submit for SBA funding, it was simple because I had already done a score business plan, 30 to 40 pages of everything that the company was going to do for the next 10 years.

So being really well buttoned up and presentable for commercial lending makes it so much easier because it is much more relationship based.