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Aug. 30, 2022

Raising Private Capital: How To Build Your Real Estate Empire Using Other People's Money w/ Matt Faircloth

Raising Private Capital: How To Build Your Real Estate Empire Using Other People's Money w/ Matt Faircloth

Matt Faircloth is the go-to resource on raising private capital for multifamily apartment investing. Today we discuss his outlook on the market, what deals to avoid, and what he would do if he had to start all over again.

Matt Faircloth has been a full-time investor since 2005. In that time, he has successfully completed projects involving dozens of fix and flips, office buildings, single family homes, and apartment buildings. He controls thousands of units in multifamily in partnership with tens of millions of passive investor equity. He is a regular contributor and podcast guest on Bigger Pockets.com, has an active YouTube Channel dedicated to educating investors, and the author of the Amazon Best Seller, Raising Private Capital, how to Build your Real Estate Empire with Other People's Money.

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Transcript
brian:

Matt. Fair cloth. Finally. Hey buddy.

matt:

What's up, Brian? It's good to be with you, man. I just wish I was sitting in Corsey with you. That's all. That's what, that's my only regret in life is that I didn't just get on an airplane and then go and do this face to face and then go do something fun after, but maybe next time you interview me, I'll be, I'll do it face to face.

brian:

Dude that's why we're doing this. I thought this was a application for my travel buddy. Like I thought that's what

matt:

we were doing. As long as you don't mind, a five year old, eight year old coming along with you, I'll be there, oh man. Oh man.

brian:

The price just went up, I'm so excited to have you on the show. And before we get into your intro which is long. No,

matt:

I forbid you from reading my introduction. You have to introduce me in your own words. You're not allowed to read that introduction that we always use, man. You and I are gonna keep you. You told me we wanna get real, so we're gonna get real. So

brian:

Some guys, this is Matt. He raises. Other people's money to do fun things. Boom. Not fair. Welcome to this show. Let's talk about capital buddy. . Let's time. Our capital let's dive in. Let's dive in here. So you and I were talking about passive income. Yes. Which 99% of the time is not passive. People are full of shit. There's always something. So there's degrees of passivity. So right now I am in Croatia, as you said, and people know and I've got passive income. Passive. Income's fun. It is, but. I think people need to go live their lives with the passive income with also active income on top of it, because yes, that's what adds the spice. That's what adds the fun. And that's what adds that variable income. Whenever you get a large capital check. That's what gets the adrenaline flowing? You know what I mean? Talk a little bit about this and what your thoughts are on this. And then also you are about to mention a certain board game for

matt:

people we'll get there. But I think it's interesting, there is a misconception of passive income and I love that. I, I. Might borrow that term passivity of income. Like how passive is it a little bit passive, whatever. There is a misconception for passive income. And I think there is a desire for some folks for life. I have some friends that have participated in the fire movement and they figured out, what is it? Geez. The 4%

brian:

withdrawal or

matt:

no retire early part, the financial independence retire early. Yeah. Okay. There are, there is a misconception with that that the desire is to not work. To, to not have a vocation or to not have a directive or a purpose, that's really what it all goes down to. And those that I know that have been able to achieve that level of passive income for themselves, where there's no active thing they're putting themselves into. It's really easy to get bored real quick. And I make a joke I don't know any happy, retired people. I don't. That's fair. It's a fact, man. Those that I know that are really truly retired talk, all they wanna do is talk about battle stories from when they used to work or from when they used to have something going on. The point of passive income is to disconnect your time from money so that I can choose to put myself into things I can choose to travel as you are. I can choose to do good as I'm sure you do. I can choose to do what I want. It's really just giving me that time, freedom and I wanna pull off and go skiing in Jackson hole for two weeks or go and do whatever it is I wanna do. I can, but I still have that thing. That's a purpose that I put myself into and I think that. People that's, there's a disconnection there in losing a purpose, losing connection to what am I put on this earth to do? And passive income enables you to put some time into that. And maybe it's produced checks or to run a business like you. And I do that has this capital infusions in that. But I that's, I think that. Misunderstanding of passive income, is that the goal and becoming functionally free is to not work. The goal should be, I believe, is to disconnect time from money so I can do what I wanna do. And that may mean work, but on my own terms, Yeah. And

brian:

I love that you say that because people have this misconception and I feel like we've got this book. That's what we're talk about on the show is we have this book of financial independence and, you had a couple first chapters were of started by bigger pockets that brought it into the mainstream. Let's call it what it is. Robert Kiyosaki as well, rich dad, port ad. Yep. People get to chapter one and two and three of the book, which is here's how you do. X Y Z to earn financial freedom, right? And your financial freedoms. When you have enough money coming in passively, quote, unquote, like we just talked about to where it covers your expenses. So you don't have to technically work anymore. Yes. And I feel that we've come as a society to that point in the book where. A lot of people are achieving this, but there's no book for what the hell happens

matt:

after there's no, so no, there's no. So now what maybe, I don't know. Maybe you can write that maybe I'll contribute a chapter to it as well, but it's well, you read the forward. Done on the air now? Yes, you're right. Oh my God. Absolutely. I'd love to I'd be honored to, because I think that it's really a good question about you could call here's your name? You should trademark this right after the show financial freedom. So now what? Oh no,

brian:

Matt, I've got the name of, I've got the name right now. You ready for it? Yeah. What do you got? Why have an color? I'm a, I'm gonna file the trademark for it right here, because this is the first line that I've thought. Originally cuz you know, you have all these good ideas and then you're like, okay, what other 300 people have said this? I've got one. You ready for it? The goal is to go from passive income to passionate.

matt:

Oh, no. Wow. Goose bump its goosebumps. That's it. There it is. Passionate income, passion, income, passion, income shade mark. All that before the show goes live. If y'all like what he's talking about, you can go to those websites cuz Brian will have 'em up by now. And all that. So don't go trying to buy the domain on GoDaddy cuz Brian already owns it.

brian:

I love it. Yeah. Also own W2 to world travel. . But anyways, man, so seriously, it comes down to now what, what do we do now? Because now that we have the internet, now that we have access to more information than anybody's ever had access to, like the average teenager now has access to more information than the president of the United States had in 2000 So it's insane. So now what do you do? How do you find achievement and fulfillment in life? And move forward. What's been your answer to this before we back it up a bit and get into what your bread

matt:

and butter is here. Yeah. It's lucky. I'm lucky enough, Brian, that when Liz and I started the Darosa group that's the name of our company and that's also, that's her mother's maiden name, by the way. That's where OSA's name comes from. I was gonna ask family Italiano shout out. It sound like that Tony soprano, like Piza don't mess with us like it's the roaster group, which, so that's what we came up with it. The the mission for OSA is to transform lives through real estate. And I believe in another concept, which is another book you and I can write which is about like social capitalism, meaning like capitalism and it's good. It's okay. Capitalism's okay. It's okay. To wanna make a profit, but the question is what are you gonna do with that profit once you make it? I believe that. It is possible and it is good and it is even lucrative to make money while you make a difference. And that means finding things that I can invest investor passive capital into that are intentionally aimed at making the world a better place. So in, in real estate, in what we do today, and there is a lot more Diosa will be doing tomorrow. But today what we do is we buy apartment communities and we get out the folks that are neared to Wells and bad actors and drug dealers and stuff like that. I I've bought properties and had the SWAT team out and that to get the knuckle heads out because you can't be doing that in a Darosa property. So we. Vacate that. And then we elevate the community by dropping in playgrounds and things that make people proud by community gardens, those kinds of assets and things that people call it home and they go it transitions from them becoming a tenant, living in a place that they have to stay in to them eventually becoming a resident in a community that they call home. Wow. And so that's what a frame. Yeah, man. And that's we that's, and that's why we do that because we wanna, I want to transform lives through real estate. And I, we like that phrase so much. I'm pulling out of, just like you, if I, if a brand is so good that it's so good, it stands for what we stand for. I wanna put a trademark on it. So we now have a registered trademark on transforming lives through real estate because. It is such a Testament to what we do that I wanna own that. And I do now. And you can see the

brian:

forest over the trees, not through the trees now. Because you have achieved that amount of passivity to where now you're like, okay, cool. I've got the science of achievement dialed down. Yes. Now let's work on the art of fulfillment. So how can I bake what I do to be a strong enough why to continue doing it?

matt:

Yeah. Yeah. It's gotta be a why it's gotta be. Beyond, I wanna make money, whatever you gotta get into that wide to the point where it gets into your soul, it gives you goosebumps as your as your phrase did earlier. It, it's gotta be something that, that you wake up and it's this is why I was put on this earth to do. And I was put on this earth to make things better and to make people think better than themselves and to make people just live better lives through the efforts that my company does and realize their full potential. So that's it. And if I can do. By helping my investors ti like two ends of Maslow's hierarchy of needs, right? If I can help my investors have their money, do the, they know their money's doing good. They're sleeping a little bit better at night, knowing they're making a great rate of return to the OSA group. And they're also, money's also doing good. And the other side of it, I'm helping stabilize the bottom foundation of Maslow's hierarchy, which is one step above food is housing. And if I can give people a good, safe, secure community feeling place to live, that their families can thrive and they can raise their kids in, and things can be a little bit better because the efforts DERO is doing, then that's what we're all about. And eventually we're gonna fill in the middle. We're gonna start doing thriving workplaces. I already own an office building that we do that in as well, but we're gonna be doing more of just how can I take real estate and make the world a better place with.

brian:

I love it. Especially with the current sentiment in the marketplace, landlords are leeches eat the rich, all that stuff. I had Nigel Geisinger on the show and he went off on his patriotic ran cuz we're good buddies. And he was like, all right, man, I'm just gonna let it rip. I don't care. Okay. They're listening to me. And he was saying, if you were the guy in the. There's certain guys that come along, like in your, in generations of families. Yeah. There's one person to quote ed Mylet that changes the family. Like you are the one that changes the course of your family treat forever. And he's saying he's I'm the one when it comes to solving this freaking problem. Yes. He goes, if you're sitting in a room and you have the knowledge hustle and know how and capital behind you to fix this housing problem, and you don't do it, he goes, then who are you?

matt:

What are you? You just said, cogging the wheel, man. You're just contributing to the problem. Like you're no better than the person that's sucking the sucking resources out. If you have the resources and the time through passive income, which is going all the way back to our conversation before that, if it's able to open up that time for you, you've disconnect yourself from time to to income. You get to that. So now what part, and you don't do anything with it then what? You're know that, what was Better than somebody sucking down the system, then you're better than a Lech because you got to potential, you are a bowling ball sitting at the top of Mount Everest that never started moving. You could have picked up all that energy and started rolling and started moving. You started producing, but you didn't do shit. You sat there. Yeah. And you died a bowling ball on the top of Mount Everest, you know?

brian:

all right. So everybody let's get the Bess rolling down. Everest. Let's go. So I missed a fair cloth. Let's talk capital. Let's talk capital because you are the author of the bigger pockets, bestselling book, raising private capital. Yes, exactly. So I am what, so let's go ahead and get a baseline established to yes. What do you see when it comes? Cuz I'm sure you've done the extensive research on it and look behind the curtain and what is the current sentiment on capital? And where do you come in to be able to help people achieve what they're trying to achieve

matt:

faster? Current sentiments changed a lot as getting capital was one of these things where You just shoot fish in a barrel, you'd see together the point where guys just do one Facebook post and be like, I'm buying an apartment building, and all of a sudden the next Facebook post is thanks to all my investors we're fully funded or whatever. And I'm like, and they do one webinar and be oversubscribed after the one webinar that they did and everything like that. Equity was looking for a place to live for a long time. And I attribute that to you said way earlier in this conversation that access to data. We live in a data filled environment, whether you want it or not, I can pick up my handy Dany cell phone and get whatever data I want. And because of that, people are way more informed. And because of that, people don't wanna do things the way they used to meaning like they don't wanna just build wealth on wall street. The, a Gallop poll that I saw, and this is before the correct the correction from inflation and all that stuff about a year ago. Sure. Before all. The America's affinity for wall street and trust of wall street of helping them achieve their financial goals. Gallop did a poll on this. It was 50% and this is after wall Street's after the stock markets run up and up and up and up and up, it has to be lower now. Yeah. Yeah, it does because of Joel shit, now I, I just lost 10% of my portfolio, 15% of my portfolio. So I think that America's realized. Wall. Street's not the only place to go to build their wealth. And I am not a anti wall street guy. I am anti one solution to anything. There's plenty of money to be made on wall street. And it's not gonna go away. We're not, you guys are good and me, aren't gonna replace it anytime soon, but we should certainly be an alternative or a diversification piece. So I believe that a lot of America has opened their eyes and are looking for something else are looking for an alternative. To, have a little bit, have some other ingredient in their stew of financial wealth. Like they, they want some potatoes and some meat and some carrots in there, not just one thing. That has benefited us quite a bit. What's happened recently, unfortunately is because of the newspapers because of of the media and that there's, and because the world's changing, inflation and interest rates, all those kinds of things because of that, we are seeing a lot more skittish equity. That is I've had investors back out on deals that were, they were committed to get into a deal that we do in last second, whatever they get cold feet because wow, I'm reading all these articles about inflation and I'm not sure where we're gonna go with gas prices. So there is more uncertainty than I've seen since. And I was investing in 2008 and 2 8 9, 2008, nine, 2010. I was active then. And the level of uncertainty now. There is in the market. A hundred percent not sure what tomorrow's gonna bring from the debt market and from equity. I see. And feel the same thing as eight, nine and 10. I don't think we're gonna see the same result that we saw then. But I think that there is a large level of uncertainty, which is interesting. And and it's changing very quickly because there's crazy things happen coming on the media pipeline every week, these days. Yeah. I think it's changing a. And

brian:

before we get into the notes of bolts about your core principles and philosophies behind all of this and capital raising and acquisition what do you see as potential, like sticking points, friction points in areas of opportunity moving into this next climate and part of this cycle, because I think that we're finally, we're going down into. An area where I'm actually excited to be where we are in a recession. The government keeps trying to change the definition now, which I think is laughable, but we're in a recession. We have had two quarters of negative growth. And now the depth of it, none of us know, but what are some areas of friction and opportunity that you see moving in this next cycle? Yeah.

matt:

Friction is going to be is going to maintain to be uncertainty equities. Yeah. And equities and debt, right? Yep. The debt markets are getting more uncertain. I used to be able to get, back in the day, man, I could get 80, 85% loan to value on properties and that kind of stuff. Now regularly lenders are quoting us at 60 to 65% loan to value. So wow. Debt. Yeah, debt has gotten way more conservative. And and then of course rates have gone up. And so that makes the deals more sensitive to the DSCR the debt service coverage ratio, because it makes the debt more expensive. And that's part of the reason why LTVs have dropped, but also lenders have gotten more conservative. So they're pulling back on LTV, they're willing to get into deals. So the debt market uncertainty and conservatism will be the future for debt and equity. On the equity side, I think that this is a plus for us, which is an opportunity. If a operator like you and me can present levels of security and levels of it's okay. We've mitigated this risk. Perhaps you're gonna buy a property with fixed rate debt. Perhaps we're going to maybe not do this aggressive, turn this property upside down and drop occupancy down 15% and then turn it all the way back around. Maybe I can give you a conservative investment in an exchange for that conservatism. You might be dropping your rate of return. So instead of getting 17, 18, 19, 20% rate of return on your investment, maybe I can give you 12, but it's gonna be way more secure and it's gonna be way less risk, but you go to that guy. You go to that guy

brian:

10 times outta. yeah, that, I think that right there is, I think that's a masterclass right there about what you're looking for when you're looking for an operator to partner with as an LP.

matt:

Yeah. Yeah. I, you're gonna see more than this is just begun. And that's the only thing people need to hear. This is just begun. People need to understand this. And I think we live in this such a right now economy that they expect the market to. Correct. And they expect debt to correct and equity to correct immediately. No, like real estate is like a Python swallowing, a Buffalo, it takes a while to work its way through this thing. And that's why, and it's always a loss. It's always a lag. To what's happens in wall street always is ahead of real estate, cuz it takes a while for real estate to respond to things. And so we've yet to see the real response in the real estate market to the changes in the economy. And that goes to the opportunities. The second half of your question, right? You're going to see, I think, equity being willing to get a little more conservative in exchange for conservative underwriting and exchange for. Some sort of collateralization, like, meaning, if you're willing to just borrow the money from investors at 8% and put a lien on the property, they might be open to that. And if interest rates are going up and equity's getting down, you might actually find a correlation between it might make sense for your equity to actually become a lender on the property versus going to agencies on this that may, that, all rates just have to creep up a little bit more before an investor says we're paying the bank six and a half percent. Shit, I'll take six and a half. Pay me instead of the bank, interesting. So I think that we might see. Correlate happen as an opportunity in the future. So I think the debt and equity structures might be able to get a little more creative. That's an opportunity. The next thing that's gonna happen is those that over bought and that paid a maybe overpaid for properties in the last couple of years and put in super aggressive finance plans debt that's, bridge loans. I have bridge loans. I do and I know, but I know how to use. But there can be weapons of mass destruction if you over-leverage them. So I don't, I'm not anti bridge, but there are those that misused bridged at and that did a deal that weren't a hundred percent sure how the operations were gonna go and just did a real estate deal to get the acquisition fee and just decide just to get it over the finish line. Yeah. Figure they cross their fingers and hope the market carries 'em through. Op good operations is going to be what carries the market forward. And if you don't have that, you're gonna see opportunities come up. But unfortunately the market hasn't quite come back to that yet. And I think that eventually you see sellers either get real on the numbers that they wanna get for their properties. And you'll also see some properties that need to get sold at discount prices like heavy bargain basement discount prices for people that just need to get out now. That it's not gonna be 2008. It's not gonna be, everything gets cut in half. It's just not cause there's plenty of properties out there that were bought, that were financed, or people that have owned them through legacy assets. And they're just gonna say, fuck it. I'm not gonna sell. I'll just hold it and wait for the market to come back. So you're not gonna see bargain basement prices. If you're waiting for that, you're gonna be waiting for a while. You might be waiting forever. So the opportunity, as I said is. Bit of a correction in the market and then getting more creative on debt and equity is where I think the world's gonna go. But it's gonna

brian:

take a lot there, plus, and plus you have a recency bias. In context to 2008 to the positive and to the negative. So to the negative, everybody's expecting that as a normal recession, that you have the worst recession since the stock market crashed at the twenties in a century. So that was our crash of our lifetime that happened. So people have a recency bias that is what a crash looks like. Also, there's a positive correlation to the recency bias in that when you have the investors. Weathered that, and that went through that and you've seen so much wealth being created from that, that people now are tighter. I feel with their assets, with their real estate and with their even their single family homes to where they're saying, Hey, I know what happens from a recession. And it changed my. Family for generations and it made

matt:

me the loan, but the debt markets aren't that anymore. And, but, and I should. Exactly

brian:

because they were so loose. Yeah. Yeah. The ninja

matt:

loans it were. Yeah, I know it was insane. I was I could tell you some crazy stories about some of the loans that got pre oh eight, right? I wanna put out one just caveat, right? Everything. I just said with regards to debt equity, all those things are all in relation to the world that I'm in, which is multifamily, there is a whole nother world. That's a single family, real estate world. And the residential class, single family real estate world. So if those are listening, are flippers or wholesalers or are. Air quote, and I don't judge you, cuz I guess this is how I got started too small residential landlords like single families, but I got started my first, like my first investment was a single family home that I lived in. Like we, we control thousands of units now, but that's not how I got started. So if you're listening and you're in small real estate air quote, but I still love you. That then you may see a deeper correction than what the multifamily world will. That's just, again Matt's 2 cents Matt's opinion. The, and opinions expressed by Matt fairl are not necessarily the views and opinions of everybody else. This is what I think. Yeah.

brian:

so let's use that as a pivot. That's a perfect pivot to take right there. Right at the 30 minute, mark, this man's a professional podcast guest. I love it. Respect it, know it and trust it. Thank you. Matt. Let's talk it to that person right now. That's a residential landlord. , so it's a person that has maybe a high paying job. They got a couple rentals under their belt.

matt:

Avatars let's paint, some avatars you got.

brian:

Yeah. So they've been generating income. They save up that money. They buy, they spend it on the down payment and they save up that money. They spend on the down payment and then they save and spend and save and spend . But Matt, there's another way.

matt:

Let's talk to 'em whisper in their ear. Okay. Let's talk about, let's talk to full-time job, full-time Freddy. Okay. That's avatar. That's that avatar. If I were full-time Freddy, what I would do is I actually would try and find a way to get as much passive going as I can into in, into as many vehicles and diversifications as I can. I don't know. If I would necessarily quit this second, I would wait a little bit, unless you got a passion project or a vehicle built. I wouldn't just quit and figure it out. If you're going to quit, you gotta have your roadmap laid down about exactly where you want to go quitting and figuring it out. What a lot of people did five years ago. And luckily they got, they, they did well with that. I would have a plan that I'm gonna get myself into because things are gonna change so quickly. Just quitting your job. You might have to be more dynamic than you're gonna be prepared to be. You might have to, you might have to pivot and change a lot as the mark continues to pivot and change, cuz they were gonna be facing a lot of change, whether it's good or bad in the next five years. That's one prediction I have is things will change a lot in the next five years. And so if you're full time, Freddy, I any, if you can tolerate or if you actually like your job, I would do as much passive and I would get educat. And I do as much passive hands off investing as I can. In, in two things as the world continues to change, just make sure you invest with people that see where the that you believe have an idea where the puck is gonna go, meaning like that, that are on top of the change happening in the world.

brian:

Yeah, I love it. So let's talk to that person right now about the concepts of raising private capital and taking on private capital. And then at what point also here's a strong question. At what point is it? To take on private capital. At what point are you ready? Because we talked to a bunch of different people and this juicy contradiction that keeps getting brought up is people will say, Hey, and you made a joke about it as well earlier, which I completely agree with, but people will say, Hey, until you have that experience, don't trust. Anybody with money until they have experience. But then the question's also brought up to me. It's okay man I get that, but then how the hell do I get the experience? Yeah. Of raising the money. If I don't try to raise the money and do the deal,

matt:

it's a catch 22, right? Exactly. Let me highlight one thing to answer your question first, the, in raising private capital, I talk about two different people. There are deal providers and there are cash providers. The cash provider is someone who's passive and the deal, and they are putting in money. The deal provider is someone who's putting in. Time resources, relationships, knowhow and the the deal provider is likely someone who ought to at some point have a goal to do the, to work in this business full time to build themselves a, to, to make a business, build a company, or build an initiative around finding deals and putting private capital to work in their deals in that, so there. Two different people we're talking about it. And if you're a cash provider, the opportunity is to, find out where the resources of your cash are, whether it's IRA your own personal cash that you got sitting or real estate equity. Raising private capital talks about where and why to those three things can get applied into real estate. But if you're a deal provider and you're currently working a full-time job, then it's really about working with people like Brian to build a business plan, to quit that job X to the w two. And become a operator and trade one job technically for another, but at least you're owning your financial freedom and building and helping other people and making the world better place and everything we talked about already that you're building a brand and building that on top, but it's really the how to, if you're a deal provider and you're gonna find opportunities for the cash providers to step into it's really. Maintaining your brand, getting your word out, making sure people are aware that you're sitting over here and you're ready to put capital to work in deals and. To answer your question even further, where you get started, where I got started was small, right? And there's two choices you have, you can either do really small deals and scale up quickly. So do the duplex, do the, quadplex do the 10 unit, whatever it is, whatever you have the capacity to do. Do that and invest with people that love and that and respect you because you're you, instead of being this real estate juggernaut, do those small deals and scale up double your portfolio. Every time you do a deal. So do a 10 unit then do a 20, then do a 40, then do a 80, or. You can work with a larger house that has a deeper pipeline that can show you the ropes and give you exposure to larger deals. And maybe you just help raise capital for a hundred, 200 unit apartment building deal. And you can point to that deal as something you are contributed to that you're a part of, right? I love that. And as you scale, you can point to larger assets to learn the ropes. Those are the two ways to get into raising capital start small, or join somebody who has scale in a.

brian:

I love that. And then also participating as an LP yourself so that you can see the cash provider side of the coin.

. matt:

Many folks have invested with us as LPs and eventually scaled out and became GPS on their own. And I'm, I'm fine with that. You gonna, if you're gonna LP invest with someone who's gonna open the kimono and show you exactly how things operate. I would never passively invest with somebody who was not clearly willing to let me walk the sites that I'm invested in. Some GPS don't, but I would ask that question if you're gonna passively invest as a tip to full-time Freddy, to someone with a full-time job, if you wanna learn the way this business goes, make that one of your onboarding questions. And that's not something people ask. I rarely get asked that and I welcome it when they do is can I walk the property anytime I want, can I through scheduling it through you? Get a tour from the property manager so I can learn the way things go. Are you open and transparent on your financials? Can I look, cause I wanna learn how to do what you do and some syndicators may not give you an answer you like to that question.

brian:

What are the red flags to look for? Let's hit on this a bit. So if you are someone that has maybe that 50,000 to deploy a hundred thousand dollars to deploy, which is a lot of people now sure. People have it sitting in equity. People have it sitting everywhere. So if you are that person and maybe you're new to being the cash provider here, mm-hmm what are are some red flags people can look out for to know to be able to separate the good operators

matt:

from. Aside from lack of transparency, there are a few levers that people pull to make their deal look like an absolute shining star. And if the deal sounds too good to be true, I saw somebody post on social the other day that he had a deal that was gonna produce 30% IRR. And I was like, listen, and unless you're investing in something like. It's we got this roulette wheel and you can go put money on it and it might hit 30% IR it might not. 30% IR sounds like you're drastically outperforming the market. And so I would be very skeptical of something that seems too good to be true. Because there are a ton of levers that a syndicator can pull to make their deal out, look like it's outperforming. And those levers typically are things like. Rent growth. Hey, my market grew 15%. Last year. There is a ceiling on how much tenants can pay. Do not forget that. And so just cuz your market grew 15% last year does not mean it doesn't mean it's gonna anywhere near that, right? That they that's a lever that gets pulled. Second one is that things. I'll bottom line. It, the biggest assumption that a syndicated will make is that the world will continue to perform the way that it did and that change is not going to happen. And that things stay static and they don't cap rates don't stay the same and rents don't stay the same rent growth doesn't stay the same rent actually tends to not go down, but rent tends to not straight line skyrocket up. Yeah. It's not gonna interest rates. Don't interest rates change all the time daily. They change. The biggest mistake a syndicator can make. If you see a syndicator, assuming today's conditions will be the same throughout the life cycle of the deal, the favorable conditions will remain and that the unfavorable conditions will go away. And that magically the cap rate, their cell, they will sell the property at five years from now will be what the cap rate is today. Those are the big, the biggest red flags is they don't bake in some conservatism's AKA the world changing and it's going. Yeah,

brian:

it was funny. Cause sorry. It was just funny as hell this morning. Cuz Kushman Andrew Kushman. He's one of our buddies both of our buddies and he's a massive operator in GoBundance too. And yeah. And that guy is like the Mr. Conservative so that he's just, he will he's rocket scientist. He's a rocket scientist. And he he will underwrite for everything. And he posted a Facebook post today about he's the school season is starting off strong when your kid's principal comes up to you and says, Hey, sorry about the squirrel attack. And I said, buddy, you didn't underwrite for squirrel attacks. . I was like, what

matt:

are you doing? Are you kidding? Yeah. You to be diligent, but no, I love him.

brian:

Yeah, he's avoid. So I love where this is going. So let's go back to the opportunities part, because now people have a general understanding about the different. Relationships and roles to play in this. So I think one of the areas to look for are gonna be the operators that have no idea what they're doing. And they're fantastic. Yeah. Obviously, duh, but people are raising money. People are good at raising money. When when the sun's shining, but now the tide's starting to go out and then we're gonna have people that can't control. So

matt:

what they have no skin in the game, Brian, like they like be careful, these folks that are out there doing deals that are done 90 10 split, right? I mean like the investors get 90% of the deal and the syndicator gets 10. That sounds good. And if you are a novice investor, man, he's giving me 90%. Let me tell you something. He's got no fricking skin in the game and he can easily walk if he wants to, he can just follow, just fuck it. I'm just gonna fall bankruptcy and walk away and control hit control out. Delete cuz I have my acquisition fee already. So the novice syndicator will give too much away to their investors and not to have some sort of a means to provide a ride along. If your syndicator's making more money on the acquisition few than they are making on the back end of the deal, why would they stay? You know why they might as well, just can hit control lot, delete and go sell cars, or go sell something else go invest in Bitcoin or something like that.

brian:

fair cloth bomb. I love that. What equity split? What equity split do you think would be favorable to look for somebody that's unfamiliar?

matt:

We do a 70, 30, most of the time, and I've done 80 20 with a waterfall. Meaning it's just, if it, if I need to give my investors a little bit more to make the deal work and make it palatable for them, then we've gone 80, 20, but it's gotta be win-win, that's the thing is it's gotta be something that. That investors should want to see me win, because why there's gotta be a big fat, juicy carrot at the end of the stick for me to get, if the deal performs, and we typically roll in at 70 30, but we'll also go to 80 20 if we can increase that through the deal being more and more profitable than that. So I I think that's something you wanna see is a win-win and be careful of aggressive acquisition fees. Cuz if that, again, look at. It's okay to ask the GP, how much money are you gonna make and model it out for me cuz you know, they already have done that. And if you look at their acquisition fee and it's very similar to what they make on the back end of the deal, they might just say, fuck it. I'm not gonna stick around for that. I might as well just, go find something else to do. So if you're a syndicate if you're looking to invest, it's okay to ask the GP, show me all your fee structures and show me what your car outs look like and show me how much money you're gonna make. If the deal perform.

brian:

Yeah, because anybody worth their assault, it's just gonna be like, absolutely. Because if they win, if it's structured correctly, if they win, you win,

matt:

you should wanna see win, man. That's the thing. That's seven ha the seven habits of highly affected people. One on one, right there. If you're investing with a syndicator, the only win is the acquisition fee. Then as soon as they close the deal, they won, and again, acquisition fees are good. They help everybody keep their lights on. They're not a bad thing, but make sure that your syndicated is winning throughout the cycle of the deal. And I've had people try and beat me up on our asset management fees or on what our carve outs look like or whatever. It's man, don't you wanna see me make money too? Or do you wanna make all the money? Cuz if that's the case, if you wanna make, all the money and have the GP just be here as a servant to the LP, then you're not a good investor for the Josa group. We're a win-win operator and we win. And we want to get a big fat, juicy reward for making the property. Do what we said it was gonna. Yeah,

brian:

so people are listening to this right now. There's a lot of people that listen to this show that are go bonus or people that have some money sitting on the sidelines. So we got a lot of lions right now that are pacing around and they're looking for that, looking that for that gazelle to take down. And they're just waiting. And waiting and wait. And we had that GoBundance wide call where we were all sitting there and we're like, okay, cool. So let's sit on as much capital as possible to make this thing happen. What are some signs if we're looking at these Gazelle's, if we're looking at these multifamily properties that are not for sale right now, but they're being operated by these partners, what are some signs of weakness to, to pay attention, to, to see if this is gonna be something that's gonna pop out when the tide starts going.

matt:

Yeah. I don't think that you're again, I don't think you're gonna see like an enormous explosion of deals hit the market, or like an enormous, like a bottom fallout, unless it's something, unless there's a factor that's propping this thing up that is gonna drop and just all of a sudden it hits the it fully tide comes out. I think you're gonna see tide go out on a, on specific assets. I've those short term rentals. Yeah, that's possible. That, that's the thing here. Let's talk about that for a second. I think you're right. And I think that short term rentals are a perfect sign of people using discretionary income to enjoy life. And if things get tight, if the stock market takes a big hit, cuz I think it just hiccup, but it hasn't burped yet. And so I, I think that if the stock market, if the Dow drops below 30,000 or something like that, I think that you might see a major fallout. And I think a lot of people are going to, like if the recession gets deep and you see a lot of layoffs and and people have less discretionary. Then yeah, Airbnb and STR are the first domino that's gonna fall because it's where people, I use Airbnbs. I'm sure you do too. They are, they're great assets, but you are relying on people having extra cash to go and spend to take their kids to Disney or go to the beach or to go live in the, go hang in the mountains for a week or two. And if the world gets. That's the first thing that people look at, people are going to drop back, so I think,

brian:

and I don't even think it's as much. I don't even think it. Yeah. I agree, but I don't even think it's as much a demand issue as it is an underwriting issue. feel like people are underwriting these deals where they're like, Hey, this isn't something I could keep as a rental. But if I'm bringing in $15,000 a month, yeah. This deal works. It's fantastic.

matt:

But then all of a sudden, you Don. Then, yeah. Then Joe and Susie vacationer don't wanna rent or don't have the money to rent your your Airbnb anymore. And you don't, and you didn't buy the property to where you could say, okay, let me just pull back and pull up anchor and lease it to a long term tenant and at least maintain expenses. And just keep my boat afloat to get through a downturn until I can make it pop again. And that, so I think people don't talk about worst case scenario. And that's where I think sensitivity analysis. That's another thing you should be asking your GPS for is a sensitivity analysis to say, okay what if rent growth? Doesn't stay at 10% Mr. Syndicator, cuz I see, you've assume that rent growth is gonna stay at 10% throughout the entire life cycle of your deal. What if it doesn't, show me a sensitivity analysis that shows that it's gonna drop down that plays for Airbnb is a place for multifamily to just start running the numbers in the worst case scenario. And if you're gonna invest in an Airbnb what if I had to rent at market? Would I be upside down? Would I at least cover overhead and cover like my mortgage and and real estate taxes? Cause maybe you might need to do that. If things get tough, I'd sleep a lot better at night knowing that my Airbnb could get rented to a long term tenant if I needed to. And until things got more solid again.

brian:

Yeah. And let's make a case for multi-family cash flow and multi-family assets during a recessionary environment. Make a case for that because that's where I see everyone going towards is multi-family assets and appreciating markets. I know David Osborne still loves his single family just because they've been cash cows for him. But talk a little bit about this as an asset, going into a period of unrest and indecisiveness.

matt:

Yeah. Cash cows are. And I don't slide David, cuz it will, David OBO, David, Osborne's able to scale given his resources. Sure. So buying like one or two single families might not make a whole lot of sense, but buying one or 2000 of them might make sense, for him. Which is what he did. And so I don't slide him for that. What I think about for multifamily again, and I'm not an, a class operator, I'm a, B we buy B and C class properties. But I think that's

brian:

where that's good. I think that's where the opportunity is workforce

matt:

housing, right? Low, lower per door barrier to entry and it's not. And the profit plan for the property is not based as much on appreci as. Is based on appreciation as it is on cash flow. And I was investing in 2008 and that's that, that, downturn in the market taught me some hard lessons, but the biggest lesson it taught me is that cash flow is king. And as Robert Kiyosaki talks about cash flows been great, but what people have relied on more than they should, I think over the last five years is appreciation. Then if you look at a syndicated deal, and one third of the profit going to investors comes from cash flow. And two thirds comes from appreciation that deal could, the market could sneeze the wrong way and that deal crashes because especially when that

brian:

branch comes up. What's that, especially when the bridge ends.

matt:

Yeah. We're relying on appreciation to, to pay investors to keep things healthy. Good old fashioned cash flow is gonna come back into fashion. And I think that's what I was talking about before about deals that maybe are lower rates of return. But if you can show an investor a deal where 60 to 70% of the profit comes from cash flow, then. That, that I think you've got something more interesting and there's still people trying to fit, trying to force the square peg into a round hole, trying to do deal. That are, appreciation based still like they're buying a property for 140 K a door and they're gonna cross their fingers and hope that the market goes up to 183 years from now. So they can flip it and make everybody a bunch of money and do very little to the property. Maybe they will, but that's, but I think you're more like likely gonna see a more cash flow deals come outta the market. And I think that's, what's gonna survive. So my two.

brian:

What advice would you give to what did we call him? Full-time Freddy. So what full time, Freddy, what advice? Yeah. Full time. Freddy. So what advice would you give full-time Fred over here? In this market right now. So you'd say, just keep where you're at. So you said keep the stability in the job if you, unless relatively enjoy it. Yeah. Yeah. And so what would that plan if you were in that position right now, what would your plan look like to.

matt:

If I were full-time Friday in trying to exit, I probably would exit and go. Again, I, it was funny. I just you mentioned Andrew Christman, me and Andrew were just on the bigger pockets podcast. Small show. You already might heard of it. We were on it last night. We recorded this show. I don't think it'll release in a couple weeks and we're talking about what we would do if we had to start over at zero. And one thing that came up little sneak peek, right to that show was it's okay. We could drop. It does well. Yeah, I know, right? I'll let it out here. If I were to start over again if it all went away and I had to hit control out lead, and I was walking into the market as a new investor and I was full-time Freddy and I wanted to build a multi-family or a syndication operation. I would target not the super small assets the 2, 3, 4 unit buildings that may get pulled down a little bit. If the owner occupied market takes a hiccup. That's gonna pull down, say the five to, five to one unit assets. So I would target the 10 to say 60 units cause above 60. I can't scale. I, it's hard for an operator like me than wants to pan parachute in third party management. It's hard for me to take down a 67 and we own those, but you gotta figure out how management's gonna work on a 30, 40, 50 unit. And it is a question. So if you can figure out management strategies or even be willing to do it yourself, and I've managed myself for, for many years, if you're willing to manage yourself, if you're full time, Freddy. I would go and find a few investors to get into a 30, 40, 50 unit because the big operators are going to overlook it. And the small operators can't afford. So there's a little sweet spot and you see those deals get overlooked. I've seen 'em sitting on the market for weeks. I'm like, man, how come nobody scooped this deal up yet. It's got, it meets the 1% rule. Got good cash on cash return looks like you probably make money day one. And you have that realization. It's because nobody knows how to operate that. The big boys don't want it cuz they. Scale that on operations. So if you're willing to roll your sleeves up and do some, self management, I'd be all over between say 10 to 60 units all day long. And it just, there's not as much competition. And a lot of multifamily assets are in that range, they just, they don't have a leasing office on site. So you can, you can't parachute in third.

brian:

I love it. There we go. Fair cloth bomb too. Mike, Bob,

matt:

Mike drop. . I love Bella.

brian:

Yeah. Where can people go to find you and where can people buy the book to get more information

matt:

like this? Croatia next week. No, I'm kidding. See you're there buddy? Come join. And Brian no, they can go to bigger pocket, put up bigger pockets. Excuse I get it in my head. They can go to Darosa group.com. My website, D E R Ossa Darosa group.com to sign up for newsletter to hear about the passive stuff we do. We've got some education outlets there as well. They can follow me on social. Instagram is the Matt Farrick love easy.

brian:

Love it, brother. . Thank you for everything that you do. Oh, and your

matt:

YouTube channel. Yeah. Just to look up Darosa group on on YouTube we're lucky enough to have a big following on on YouTube as well. And and you can access those things that there's, you gotta crosslink stuff, right? So there's links to all that on my website, you can access our YouTube channel as well. Our website's probably a good place to start. DERO group.com has all that stuff got, and you can see guys,

brian:

if Matt brought you value today, give his website a. Give him the traffic go to the Darosa group.com. I'm not even brother gonna, I'm not even gonna post his Instagram. I'm not posting his other links. This is the 20 brother out. Yeah. Help the brother out. Get that EO, Google him. look up his website, man. I appreciate all of this, man. This has been fantastic. It's

matt:

been a long time. I would acknowledge you for a second man and give you little kudos, man. Not everybody is encouraged to put their fricking life out on social like that. And I commend you and your girlfriend like a ton. And I get a lot of it's like, Hey, look at the amazingness. I'm able to manifest and you can do this too. Cause I think a lot of the message you say is. This is an amazing life. I'm blessed to lead, and you can do this too, if you X, Y, Z, right? . But there is a certain level of vulnerability that it takes to be willing to put yourself out there like that. And I commend you for doing it because it's inspiring. I watch it every post make, oh, where's this guy at today. Where's this cat at. He is in Croatia. He is done. And, and doing over all this stuff over here in Greece or whatever. So keep it up, man, because I'm sure you're inspiring. Tons of people including me for what you're up to. I appreciate

brian:

that man, a lot. Cause there are times where you're like, what the hell am I doing? , and because you're leaving like it's paradise now. And this is the end result that a lot of people are aiming towards, but it's like also. There's a lot that you just don't know what you don't know. And I know you're leaving your gym, your grocery store, your routine to just a bunch of chaos, but it's all organized and I appreciate you can't even

matt:

see, I bet you can't even see your comfort zone from where you're standing. There is no more comfort

brian:

zone.

matt:

It's, that's a mile and a half back. I left that back in America, and all that, but that's okay. Cuz I think that too many Americans there's, people's say. Live in their comfort zone. And you're a good example for someone, for what life can look like when you decide to dissolve that boundary between, letting fear hold you back and keeping you inside your comfort zone for what's possible. If you dissolve that, if you dissolve that fear, exit the comfort zone and see how far you wanna go.

brian:

Yeah. And we also try to do a good job. Hopefully we do of posting the losses like posting what went wrong, because like I had, I came here, my Touro car got impounded and I come here, I've got a vacancy at the unit that I left that I was supposed to have full. And the guy just randomly backed out. Yeah. And then we get into a car accident. We almost go to Creek jail. I'm like, oh my God.

matt:

Keep that up there. Keep that doing that because I read this stuff too, because. You don't wanna be that guy. That's just there's so much of that bullshit on social, but amazing how man. Look at me. Look, I'm amazing. Look, I'm amazing. Look, I'm amazing. Fuck that. Fuck that. Put the real life out there and all that. Put how they left your luggage in grease and you're non Croatia and you're wearing three day old underwear, then all that dude. That's all good.

brian:

That's. That sucked. Yeah. In Santer Raine. Oh my God. Yeah. Yeah. We were wearing three day old underwear. Don't PTSD, man. Oh my God. . So with that, this has been Brian Lubin and Matt has to go to his next appointment here in two minutes. Fair cloth. signing off.