Ep 536: Understanding Debt vs Equity in Real Estate

Transcript

so welcome to this Tuesday in June first week of Tuesday we we're looking at me

and Anthony we spoke a little earlier today and uh we're looking at our numbers for the projected closings for

this month and this may be another big month for us this month so we're excited

to kind of say it bro say it say how big we're looking we're looking at another seven figure month in Acquisitions and

sales this this month we had one in February and we're looking to have another one this month in June but as

far as this year looks out we might have a couple this year so number two isn't a big thing but it's number two for us but

it's exciting exciting to hear but I know there's a lot of people out there that are making way more money right you

know there's some guys out that are doing oil and we might have a property with oil on it right now we're still getting some tests done yeah man I know

there's a lot of people doing big numbers but a lot of the gurus that you guys follow online they they they'll brag like oh six figure month had

$100,000 month we're trying to have our second million dollar month this year so

I I just say I hate the the guru part of it like the numbers even talking about the numbers because I just I don't like

talking about big numbers it just sounds cheesy but it is what it is right it's the only scoreboard that we have that we

can share with you guys to say hey is what you guys are doing is it working yes or no right because you could be following a fake Guru right how would

you know right everybody's talking everybody's talking everybody's making money selling courses they're not even doing deals but what we're doing

it's working it's working in a terrible effing economy and it's going amazing and it's only compounding and getting better right we can't tell you that hey

you know it's been a little slower this year and and uh you know things they're just not as hot as it was last year like no we're freaking smoking this year this

year has been terrible financially for like the whole planet so just want to let you guys know like what we're doing is working so please don't deviate from

what we talk about on these calls and we're trying just so you guys know we're trying to negotiate at least

Kyle is trying to negotiate a $10 million deal so that Kyle guy he he's

responsible for about $4 million in contracts in the last couple months and uh yeah now him and who brought who

brought it who who's he working it with uh Tanisha yeah I own tiisha again uh1

million doll deal we don't have it so you know you want to cap on something that that that we haven't even accomplished yet but it see the buyers

get pretty damn close it sounds like it might go down $10 million deal creative Finance um you want to talk a little bit

about the structure Daniel it's like three minutes just to kind of give everybody a brief overview because I know when we're out there making offers on these big ranches and we're getting

shot down we're like oh man you know maybe it's not going to happen it's not working this strategy he not working but

I think this this deal structure is just sick I can't believe that somebody would give you a $10 million property with this with this structure yeah so we'll

do maybe the deal breakdown on this deal uh once we get another call right yeah another call okay okay yeah once we get

it contracted or what yeah I mean we show what the structure is but essentially it's like a 18% down deal uh

with um 18% down is what 1.8 million 1.8 million um it's a year to close so we

ask for a year timeline to close and then we ask for no payments for 12 months and then we have uh five years of

seller financing technically but one of those years is no payments so that's where we're at right

now but I think we need to rewind that right now so we're looking at putting 18% down 1.8 million right so everybody

on this phone call you're like man Daniel anthy you just have $2 million laying around no that's not how it works nobody has $2 million laying around you

borrow it right we we always leverage when you're going into a new deal but the magic here is that we have one whole

year to close so we don't have to put 1.8 million down we have we're going to be marketing the land for a year

whatever we don't have sold that's short of that 1.8 that's what we're going to put down so we sell 600,000 or a Million worth of land in a year then we only

need to bring 800,000 on the closing table that's crazy leverage right so that brings us bringing less than 10%

down of our own money to the closing table super easy and then no payments for a year on top of that a year no

payments so I just want to let you guys know yeah does that deal structure right there insane no interest on this one no

interest oh my God this is crazy absolutely crazy guys I mean and I guess

unless you've been doing this for six years you don't understand the gravity of that but we're it's a debt play so we're we're

creating uh we're not getting into there yet not getting into there KY wants to take them deep Kyle's

trying to take them to deep Waters no we're not going to deep Waters we're going to jump into today's call though so any deal pretty much will be a home

run deal if you get five years slow of financing with 10 to 20% down and you have some type of timeline to sell Lots

any deal so and these crazy offers that we're asking you guys to make it freaking Works guys and is it

frustrating yeah is it a lot of hours yeah is it a lot of nose yeah but how in the hell else are you going to come up with a deal where you can make

$125,000 a month cash flow all right you ain't gonna you ain't

gonna do that in single family promise you not even in multif family all right here we go we're going

to Jump Right In into it this is speaking speaking of deep Waters this is uh this is g to be a

Chapter 2: Understanding Debt and Equity.)

little high level if you understand what's going on today you should have uh a good understanding but I

wasna even if it seems like it goes over your head the more times you hear stuff like this then uh the easier it's going

to be for you to remember it and talk about it later so you have to put it on your ears sooner or later to be able to get to stage one and then when you start

to understand it then this is exactly how we fund the back end of these deals this is where the magic happens and I

think we're pretty much selftaught in this department aren't we Danny we didn't learn this from anybody right no we didn't learn this all self taught

yeah this this is just Blood Sweat and Tears guys so this is super high level game we all the high level conversations

and meetings we've ever been to I've never heard anybody talk about this so I'll let you take it away Daniel shut up

yeah so um I got my chat open if you guys have any questions I'll address it Anthony's gonna come on here and help

with any stuff here too but a lot of the stuff we learned just by doing this stuff Angie is excited about this call

like I said we're we if if you hear it over and over again you become better at it and this become makes you a better well-rounded investor so just one if you

you understand key terms and key key phrases you get really dangerous in the game all right we're going to jump right

into it so this is understanding debt versus equity and real estate a comprehensive

guide all right here we go so um a lot of people don't understand what debt and

Equity means and what are what's at stake whenever you are having that conversation with somebody so they do do

they do hold different weights depending on where they are in real estate so this

is kind of generalized to all asset classes but since we're land guys we're going to cover land um and how we use it

in land so uh we're going to cover real estate notes debt in equity Cas tricks of debt

in equity uh how to use investment strategies and debt and Equity investment kind of C in a nutshell what

is debt real estate real estate refers to borrowed money that it utilized to finance the purchase development or

Improvement of a property involves obtaining funds from lenders or financial institutions with agreement to

repay now a lot of debt this might be this is going to be like your hard money

lender he's going to be your mortgager on a flip it could be a bank it could be Chase it could be Wells Fargo they're

going to be your mortgager so they're going to be debt on whatever asset class so if it's houses multif family Storage

Land and they're going to be your debt so they're kind of in a position on the

property not a tax the owner of the property but they're secured by the property it's kind of debt in a nutshell

now Equity is a little different because this is where us as investors we play a

lot in the equity side and as you grow as an investor you should end up on the debt side which is kind of where some of

our lenders come up a lot of our lenders have a lot of realistic experience and try to transition from Equity investing

to debt investing and that's where that's where we find a lot of private money lenders um so Equity Equity set in real

estate refers to ownership interests or value that individual or entity holds in a property after accounting now this is

direct ownership this could be a re this could be a fund this could be a syndication whenever somebody raises

money for some type of uh fund structure they're actually offering shares um and

just did a podcast with Corey Thompson and he was talking about how people that buy into Deals they have Equity

ownership it's not debt debt is tied to the property through a mortgage or a lean ownership if they buy and as Equity

Partners they get ownership they get shares so a lot of people they get that mixed up of what is actually debt and

Equity whenever you're trying to raise money when you're offering Equity as an investment you're offering shares of

ownership I really want to get that stuck in your head because it took us a while ought to learn this right

Anthony e Equity equity and Deb took a little while yeah it took us a little

while so we're we're we're having our own little conversation here and like I said a lot of the stuff we learned over

time and distance but it's uh Equity is

ownership all right here we go next slide is the characters of debt usually

debt has fixed payments and they have priority and payment over equity which is very important so usually and this is

so funny because we've worked with investors on our deals where we give them priority over payment in uh an

equity technically if you have debt debt is supposed to get paid off first in

most cases so a lot of times like we're thinking of our first uh sub we did we

purchased a million dollars 107 Acres we paid off that debt because that seller

seller financed 100 acres with 200,000 with $200,000 down he positioned himself from owner into

debt so we had to pay him off first for many sales of the property especially when we subdivide we can't get a full uh

release of lean on all the property till we pay off that initial debt obligation so when you convince a seller to go into

debt you have to pay them off first in most cases unless you negotiate but

secured by the collateral of the property in most cases it's usually fixed payments I think that first big

creative Finance deal we did we negotiated 2500 a month so we convinced a seller to go from ownership to debt so

you have to understand uh what position that goes in and who gets priority

whenever you're raising money and pitching sellers to be a certain position on debt Equity so you have to

really know what you're talking about when you're asking the position because a lot of times you're going to talk to their attorney next you're going to have

that conversation with the attorney and the the attorney is going to ask you about if they debt or equity and

sometimes we might do an equity partnership with that seller and what does that mean Equity partnership is means they're they're getting paid last

they're waiting till the deal is done to get paid whereas a debt you might have to make some type of payments and if you

do sell some type property you have to pay them off in that certain amount uh care SS of equity um it

usually has uh variable returns ownership stake and it's last in line for payment Anthony how many deals have

we done that we got paid last almost all of them up to this point

so we got a little bit more creative almost all of them so a lot of times a lot of times it's like oh when am I

going to get paid like well they're GNA pay if you're doing what we do you get paid last sometimes a year later six

months later six months later it is what it is but it's one of those things where uh you when you when you take on Equity

when you be the equity partner in a deal you sometimes you don't get paid never somebody steals a deal somebody steals

your Equity sometimes you got to sue somebody for $350,000 because they didn't send it

to you yeah so it's one of those things where you have the most risk when you are

Equity um and you take on the most risk because you're not secured um whether this your your Sweat Equity your

personal Equity or your cash Equity like all these things are it's variable you

can you can make 100% returns or you can make 0% return or you can use negative return and lose your Equity at 100% use

have ownership stake and you're last in line so it's a

eventually as you go down this equity and Investments investments in real estate you should want to become debt

because debt is always secured debt always gets paid that's one thing I want you guys to understand about this debt

always gets paid Equity gets more Roi but that always gets

paid all right real estate notes there you go dead always gets paid

there you go J Jose all right um real estate not is a a

type of debt instrument that represents a legal Promise by a borrow to repay A lender a specific amount of money

typically used to finance the purchase of real estate um there's performing and not performing so real estate notes a

lot of what gives us uh an advantage in the marketplace for what we do is we seller our finance now a lot of

investors especially a lot of land investors they buy cash sell for cash

they buy on terms and they're always trying to uh sell whatever way they can one of our biggest advantages is we

create real estate notes so if you're diving into that space of creating real estate notes you have to understand what

real estate's notes what's their what's their equity and what what do they what do they mean what do they hold what's

their weight you know a lot of a lot of like we learned about real estates notes after we got probably about two three

years ago we learned about real estate notes and the power they have especially in our space because we're actually

creating that instrument we're creating that financing so one of the big ad of

that we have in land especially land flipping is that there's no access to

debt you can't go to Wells Fargo and get a bank loan most people can't so if we create that debt instrument which is a

real estate note to service that seller we have the advantage over the marketplace because we're creating that

value with that debt instrument hey guys think think about how powerful that is right so you have

these big companies multi-billion probably trillion dollar Banks right Chase Wells Fargo all the guys that

everybody like thinks are icons they won't even give you a loan for L unless you have excellent credit and like 30%

down or more right so there's no there's nobody servicing this piece of the

market so there's a obviously there's a big crowd of people out there that want Len and they want they can't afford to

pay cash so they're willing to take a loan on it nobody's willing to service those people so there's a whole like

Bank missing like there should be one master bank that does all that and there's not one so think about what

we're creating here here you know that's what we're up against and opportunities made where there's no service think about the

electric vehical space or think about like movers and shakers that were first to Market there's no Finance there's no

financing in this whole real estate landspace as a whole like nowhere um no

one that do no one's doing it mainstream at a high level so if you can if you can offer that as a service you're you're

already Above the Rest you have over hand so I have quick question so so you

guys so the way you guys act is um in a way kind of like land Banks or

or like helping people get into land easier right yeah absolutely absolutely

that that's why that's why we sell a lot of land that's what gives us the advantage is we provide financing to

these owners or to these buyers Bank we essentially provide Bank financing to

these through seller financing yes we can acquire through seller financing and have the seller be

a bank for us but we can also if you acquire seller finan or if you have a big enough spread of Arbitrage you can

actually offer seller financing to your end end user

that's yeah it sounds really really good good hey like so what

do you end up with right you get a million dollar wrench we think we're going to be able to sell it for like5 eight we're going to try to make five or

800 Grand on it that's probably not all going to be in cash right it might be like half in cash and then half on credit so instead of us making 800,000

we end up with 400 grand in cash and then 400,000 in notes at 12% interest which is obnoxious 12% interest people

are crying like losing their houses over 8% interest and 9% interest right now we're charging 12 so think about that

you don't have to take all the cash what if we did that same deal we made zero cash and we only end up with 400,000 in

notes so all we're doing is taking de Equity from this land and then just recycling it back into the marketplace

for cash and debt and that's it I think I'm muted am I can you guys hear me yeah

I can hear you okay trying to find the mute button I was muted okay so one of the advantages too is if even and if if

you do find Bank financing it's even to more to your benefit because if if I

have $100,000 property and I have a bank that's going to lend on it I can get 100% of the value just like imagine you

think of Like Houses people people that buying some houses every day they have a $100,000 house they get a FHA loan they

put three and a half% down the mortgager will bring 975,000 at closing to cover

the full purchase prod so if you have if you have the ability to find a loan or a

loan person that can write the loans you can essentially get paid in cash but it's just loan you have to wait for the

loan process to go through which is another reason why when we're doing land deals we asked for extended closings we

sold a couple deals where they they went and got Bank financing CU they put a large down or they they had some special

Bank whatever not everybody has access to that so we always account for it whenever we're getting due diligence

periods on the front end because if we if they can bring in if they can find their own lender that they qualify for

we get paid 100% just like if it was a cash buyer so I'm all for it but if they

don't have that ability I'm provide I'm GNA provide my own financing to them through a real estate note all right

moving on all right advantages of debt in real estate it's predictable income it's

lower risk and it's secured by the property this is what we tell sellers we tell sellers about this advantages of

real estate debt so the reason why we're talking about this as a whole is because you might position a seller to be the

debt you might have you might need some type of debt instrument to get a buyer on the thing so all this like oh this is

over my head you need to learn this stuff eventually because it helps you do more business in the real estate

business as a whole if you can get more sellers to become de hey you can get predictable income it's

lower risk you're secured by your property like a lot of times we have that the um that thing that comes up

like oh how did I know you're G to pay me back well one I'm gonna put a large down payment two it's secured by your

property is your prop you think your property is not worth that much well yeah it's worth that much okay then it's

secured by your property you're always secure you as a seller you get a large down payment and you're secured by the

property what's what's the what's the what's the risk you know so it's it's having that conversation with the seller

and tell them the tax advantages of this what books do you recommend that goes into this further invest in debt by

Jimmy Napier is a great book 100% uh Victor I recommend that book all the

time but yeah this is one of those things where you con convince a seller to become a Deb instrument on on that on

their own property all right can I do a can I do a real world example Daniel to make this real absolutely absolutely hop

in okay so think about this guys let's say you go to Chase bank right you go to

Chapter 3: Advantages and Disadvantages of Debt and Equity.)

Wells Fargo you go to one of the big boys and you say hey I need to borrow $100,000 right they're like okay hell no

ain't gonna happen right unless you have excellent credit crazy financials they want to just like they want to know what you eat for breakfast right so you're

probably not going to get that loan for starters so if you if you don't have cash on hand

right and you're trying to borrow some you're not going to get it from a traditional institution it's just not going to happen right but you you find

this listing that's listed on the south side of San Antonio for six months that nobody's hit up you go in there you set

up a deal with this with sellers where you're going to give them a down payment and they're going to release a certain amount of the land to you and you take

out $1.3 million out of the property in 60 days right so when you're out there

getting these loans what what what how does that benefit you like who cares I got I got some debt on the property lady

Finance it to me great but now you just gave yourself a $2 million loan or a $10

million loan that you can share the equity with right you can actually pull some of that live Equity out of that

property now so that's what we're doing here you're going out and you're giving yourself multi-million dollar loans and

then uh taking some cash out of that loan so let's say one of your Rich homies goes and takes out a $10 million

loan from the bank you help facilitate it and they're like here let me kick you down a million for taking that 10 out for me so that's what we're doing we're

asking you guys to go out there get millions and millions of dollars worth debt so we can take the cash out of that

debt another another way to put it to is is think of like a cash think about the Burr method you buy you rehab you

refinance repeat imagine essentially we're doing a refinance on land that has

Equity at 0 per. we're doing a refinance on Equity at 0% on Equity we create

through subdivision if you need to listen to this again you need to listen to it again that's the

power it's huge all right disadvantages to of debt

in real estate uh limited upside potential for closure risk and fixed return so a lot of times you have a

limited upside but it's less risk I think the next slide is coming do you want a guaranteed return I say

guaranteed I don't say guaranteed do you want do you want a do

you want a a a a steady return or do you want a higher return with with more risk

when you are as a debt you have foreclosure risk when you borrow when you have debt and you borrow you have

thatb against your property you have forclosure risk if you don't make the payments we sell this 2008 they got underwater foreclosure boom boom boom

thousands forecloses everywhere uh fixed return and a lot of times you cannot change your Roi if you are the debt like

the bank can't change the return the only way debt they get a higher return or lower rate return is if they're

always secured by the property but if they pay back sooner I did a whole thread on this on Twitter there's a whole like Dave Ramsey people were like

hey if I if I pay extra payments towards my loan I'll knock out my loan in in 10

years versus 30 right you hear that all the time right what you don't understand

and it's it's it depends on who you are not not going to who whatever whoever teaches that or whatever it is but whenever you pay back that loan quicker

you're actually accelerating the ROI to the debt and you're actually paying a higher effective interest rate so on

Twitter I did a whole I did the math of like a 10% interest loan essentially if somebody paid off that loan in 15 years

by making extra payments they effectively paid like a 15% Roi to the loan because they paid back sooner so

when you get a 30-year loan at at 5% that 5% loan is across 30 years so if

you shorten that loan and pay it back whether you move your ref Finance you sell the bank gets a higher yield which

is Roi on their money invested which is why Banks like when you sell they like when you refinance they like when you do

all those things because it just recycles their money and they get a higher yield on that debt

so that's the that's you can only increase the ROI when son pays back

sooner all right I think okay uh disadvantages of equity in real estate

or the advantages sorry advantages of of equity in real estate you can get really

great returns I think me and Anthony have done really great returns we get to property appreciation of whatever div uh

subdivision value ad we we we increase and then if you if you doing like some type of fund you get dividends so I kind

of generalize this for a lot of different type of real estate transactions but you do get a lot of advantages to equity for being an equity

position on real estate all right let next slide

disadvantages of equity in real estate all right so this is the disadvantages we kind of talked a little bit earlier

but attire risk you might have Market volatility I I I so many gurus that were

in houses they all had a bad year last year all of them so your your Equity is

whatever Equity you might think you have is subject to the market we saw a bunch of the equity go

away we saw people lose houses I have an Amigo that lost that lost two apartment complexes so I don't know you I don't

know which asset class is the best but we haven't had any losses anything like that at all so this is a pretty safe

game that we're playing you're last in line for payment like you're not going to get paid if you got a bunch of leans

on your property whether that's a a mortgage HOA lean you got private money

hard money lender private money lender like you're last in line if your Equity disappears you're you're out there goes

your potential Roi all your effort that you did so this is what I was talking about now higher risk return high

potential low risk return it's low risk so you have to figure out where you are

in life based off of how much money you want to invest and this is something you you maybe pitched like once you

understand this part of it you can pitch sellers you can pitch private money you can pitch you and your in your own

investing career you can choose what you want to do so a lot of times people that

have more money they're willing to do they they want low risk low returns

because they just want to beat inflation when you're broke and you're trying to turn a nickel into a dollar you ought to

do highrisk high return things this is this is how this is how me and Anthony got out of out of the gutter like we

we're doing high risk higher potential returns of doing we we're putting our equity on the line to make more money as

a whole as as an investment company on our side but we might tell a seller like hey instead of holding on to this for

whatever I can give you a low risk low low rate return on your property so you can kind of formulate this whatever you

are in your position some of our lenders they're they have a higher net worth and

they want to double it up so they're willing to put high risk for higher return on riskier stuff so it depends on

you're where you're at in life and your risk tolerance and your of course your current capital position but if you're

broke you gotta you got to turn a nickel into a dollar as fast as you can and this is one of the things where you got

to understand your position and this is why I think wholesaling is great this is why I think I think H like any type of

basic real estate investment I love wholesaling me and Anthony are product of wholesaling because we understand we

had to turn a nickel into a dollar as quick as possible so as so for someone

who doesn't have a lot of starting capital and you know they want to turn nickel into a dollar like because I know

large acre usually you know you're looking for the long run you're looking because you I heard like it you guys

were talking about how the closings usually last like six months to a year so then how would uh like what

would be like another advantage of you know going through land or large Acres if you're looking to like maybe close

within two months or maybe a month right if there it depends on where where

you're at like all this all this stuff is very subjective we we like big land because it's faster than Apartments we

like big land because it's it's more value than houses so you kind of have kind of take on different

valuation risk and exit potential so like think about this you can you can

contract the house and wholesale a house in a week you can do it under 30 days you can do a land deal a small land deal

in under 30 days I've seen people do info lots and they contracted one day and sold the next day so you can do

smaller stuff to accelerate that Capital but when you do when you start doing bigger stuff you got a longer time

Horizon we're buying a deal from we're buying 60 Acres next week that deal took

90 days to close it just took 90 days to close we had to wait for surveys we had wait for T commitment we had to wait for

like finalizing surveys at the end cuz we're a subdivide on it like there's just a lot of time that happens in land

deals when you're doing bigger stuff so was to say Daniel go ahead we we have the Ten Commandments for this group

though that addresses that right away so that's kind of one of the rules for our group it's just don't only do big land deals like of course that's the the

biggest best money that you're going to make but if you're only well hunting like anything else and you're only getting paid twice a year you know it's

going to be a it's going to be a long year so we encourage you yeah go out and get little stuff and then I was going to uh add one more thing if you do have

some amounts of capital to invest like a grand two grand five grand I mean you can do like gator lending with us so

that's something that's very simple to place small amounts of capital into deals so we had a lot of deal flow but there there's a lot of different ways to

cut this thing up but I would recommend that everybody stay focused on what you're going to focus on if you're going to do Apartments do Apartments if you're

G to do storage do storage but if you're trying to do land and houses and storage and all this other crap you're always gonna be chasing your tail because

you're not going to get momentum so the the recommendation that we have for this group it's commandment it's not a recommendation is uh do big deals and

small deals yeah all the time the small deals have a shorter time Horizon to make money the big deals have a larger

Capital outlay but they have a longer time Horizon so our whole thing is we

switched to doing larger deals about a year and a half ago and we didn't close very many deals for like six months just

because we had that long time Horizon now that we're in a year and a half closing closing closing closing closing

we're having a lot of closings line up and we're stacking them all up in a month we're having million dollar months like there's a lot of things happening

right now just because we built up that momentum months ago so I I think 100%

you need to start small depending on where you're at but keep an out for bigger stuff this is why we teach about bigger stuff because we're looking for

bigger stuff so if you if you see something a lot of times you can't see what's out there if you don't even know

it exists so we're trying to educate right like what the big stuff looks like and you just you kind of keep your eyes

open's a perfect example he sent us a bunch of deals that we shot down because he didn't know what a deal look like and

now he's bringing some of the best deals we've ever seen before yep and he did it quit a few yep absolutely knowing how to

identify a deal in this business is everything and then once you get better at it it's a superpower I mean it's magic I was with my friend at lunch and

we were just talking we to barbecue place and uh he's like yeah I know where there's a little track over here it's a couple acres and he told me the area the

price and I'm like man that doesn't sound like a deal let me check it out so at the table I opened up land Glide and it was cut into two pieces I drove

straight from uh the restaurant by the Dominion by Bernie all the way down there towards Pleasanton like an hour and 10minute

drive as soon as I saw what it was I didn't even have that on my radar but that's how what it feels like you can

identify a deal then you can go from nope that price isn't going to work and then you take a look at the property and like okay this is a deal I'm on the way

right now we're coming out with more education here in a little bit to to train you

guys better on what to look for like I said the the whole point of this call is

to kind of understand just like a lot of key terms and where you position sellers where you talk to lenders and you have

to understand these things to most of the time to get a seller to take on a debt position or to get a lender to lend

on your deal like you have to understand this stuff next combining debt and Equity so

this is I think this is a huge Advantage It's a combination dedic used by company

to finance silver operations and growth uh balance portfolio use of Leverage and examples of M Investments the and

Anthony are big components of Comin combining debt and what do I mean by that so what's the

term you use the I forg I can't what the term you use Anthony Blended Capital no

it's the yeah Blended Capital that is right yeah Anthony calls it Blended Capital now what is Blended Capital so

Blended capital and somebody asked what Gator lending is a little while ago but Blended capital is using every and every

type of of capital so let's do an example so let's say we're contract ing

we're buying 100 acres from 10,000 an acre and it's a $100,000 down well you

need EMD usually 1% you're going need 10 grand who's going to put up 10 grand

well if it's you that's your Capital if you use a lender that's

private Capital if you uh if you put it into your purchase price that's seller

financing so you can use different types of capital for different things wholesalers use Blended Capital when

they're wholesaling they contract the property for $1,000 EMD and then they'll make the wholesale buyer put 5,000

they're using wholesale Blended capital in that transaction so it's Blended

Capital so you can use different types of different types of capital so if you have hard money you have hard money

private money seller financing uh Gator lending Gator lending for somebody asked a second ago is about like lending on

like EMD it's usually two to 20,000 maybe it's uh putting up surveys

maybe it's putting up a water study cost like it's it's something we need $5,000

for and we can give somebody an Roi it and we don't have to use our own money like you can use Blended Capital so you

have your seller financing Kyle's deal he's negotiating seller financing as a

form of of debt and Equity now when you value the property you have your own Equity you're putting into the property

so you have private capital like hard money Gator Gator lending seller

financing you got we use as many capital resources on every deal that we

can and one of the big one of the big components of of Blended capital is every deal we're trying to buy hopefully

has some type of seller financing on it especially the bigger properties because we want to leverage that seller

financing because we cannot get Bank capital or hard money Capital it's a lot harder because they're fighting over

first second position so you have to understand the capital stack we're going to cover Capital Stacks I think it's the next slide coming up but you have to

Chapter 4: Real Estate Notes and Capital Stack.)

understand what type of capital position you can provide based off of where you're raising the money on the capital

stack we'll cover that in a second but Blended capital is important

um I think it's a slide after this all right real estate notes and a note would be some type of capital as well Blended

Capital uh real estate notes investing can be profitable and valuable in addition to your Investment Portfolio by investing in estate mortgage notes you s

should become the lender and receive payments from the borrow over the life of the loan and it's a it's a role of

diversification balance risk and return with notes so one of the biggest reasons why we're doing this type of call is

because we're trying to educate people on investing in notes if we get one one

of the big reasons we're raising a lot of capital we're raising capital for we're raising capital for we're

raising capital for Gator lending we're raising capital for priv private lending who's going to be maybe put help us put

two like we raised $200,000 for a for figer deal that was Private Capital we rais money for that we ask for seller

financing we got seller financing a lot on deals where that's that's asking for it and then whenever we create those

notes because about creating notes a little bit earlier sometimes we'll sell those notes to end buyers when you when

you create a note and you sell it you have a very you have a very big cash

burn problem so let's say hypothetically you create $1,000 note at 10% and for

for 10 years right if I create that debt when you do that with a bank FHA

comes and buys that loan and knocks out they repay back that lender when we do it we have to find a note buyer to buy

that note and now they put $100,000 into this this debt instrument and now they

receive payments from that that buyer so we're always looking for

different types of cap Blended Capital based off of different things so like a lot of our private Capital they want big

portions of equity this is all coming together throughout this whole call so if you need to listen to this again

we'll release it live and you can listen to it again but we're looking for all different types of capital so we have

private Capital investors not that they're sharks but they they want a big portion of our equity and we give them a big portion of

equity give them big portion of upside but it's a lot more risk right we whereas there's my people that don't

want to take on that risk they want to saay for investment I had a conversation with one of our lenders he might be interested in notes because it's secured

by the asset there's it's very passive compared to active actively investing on

on a private and there's a lot more risk he gets a flat rate of return monthly cash flow and it just kind of comes in

so there's different appetites based off of your risk tolerance and your current

capital position and everybody's different completely different you might know an aunt that has a million dollars

sitting in the bank account she would love an investment like a note you might have a your cousin that has 100 Grand

and he's like I want I want to retire in five years I need to flip this 100 Grand as many times as possible boom we'll put

him in a private money lending situation so you have different positions for people in different phases of their life

and notes is just one of those things so it's a way to kind of spread out spread out your your Capital risk and your

folio anything for this

Anthony yeah I don't know what you're going to cover on the presentation but I wanted to talk about how it's pertinent right because you have lenders that

don't want to be into a deal for two years or three years and then so how we use this strategy to uh to to work with

different lenders for different time frames yep you want me to cover that or you g

to cover that I don't know if that was part of your presentation I could just briefly mention go ahead and mention it

okay okay y So Daniel was talking about the different types of lenders that we have um so just take a a prime deal

right like the one that we have the 243 Acres down there and a South of San Antonio so we've got 1.6 in debt from

the from the property owner themselves at 0% interest then we borrowed a million in private money right and now

that that private money he wants to be out in 12 months and uh so we we told him that give us 18 Max and we'll get

them out right so we have somewhere between 12 and 18 he's fine with 18 month that's what he signed up for by

the way but at at that point we're GNA we have a lot of lots sold right so to pay off most of what we owe him but at

at that point we can look at bringing in hard money right to pay the property off and possibly even the property owner we

could bring in somebody else some other private money from somebody else to get everybody out of the deal and a fresh

lender yeah we can bring in a bank so there's a million different ways that you can you can use these different

types of capital and uh you know and I think most of us think hey hey I'm just going to borrow private

I'm just going to go to a bank I'm going to go to a lender right or I'm going to get seller finan but what we've been doing is we've been combining all of

these and it's been easier to raise Capital again because of the ask right the size of the ask hand b a million dollars three years and most private

lenders are gonna say hell no I could just flip it faster myself I'm good so what we're doing now is we're able to swap lenders out to to navigate a deal

like this so Kyle has one South of San Antonio we're probably going to need about a million dollars for engineering

costs right soft cost um so you know from London one

about to 350 um they'll handle the engineering right so let's say after all the approvals are done 12 months from

now now we have a subdivision we don't have raw land anymore we have an entitled subdivision that's ready to go ready to break ground so we can bring in

a fresh lender at that time from a different Capital source to keep the deal moving lender one gets out he's

happy he got his profit lender two comes in he's fresh he's ready to go so we don't have to we don't have to have one lender waiting for years and years to

get paid on a deal which I think is tremendous so think about this now we've recently learned about this recently but

imagine think about all these people that they're investing in storage they they they buy unstabilized storage or

multif family and then they stabilize it they hold it for 3 to five years in the exit imagine if you raised another

entity that was just a holding company like they want passive low rate low risk

low returns like when you value out a property it's a lot of risk entitlement

flipping subdividing all that stuff you you add units you rem model units on of multifam storage like that's a lot of

risk but if you have a lender that would uh not a lender if you had another

entity that you created yourself to buy your entity you can wash your hands with

your left and right hand to the next entity so you have Capital One actually

entitles the property Capital 2 might be the one that actually builds the property this this is what we're trying

to do with potit so we have entitlement Capital that's entitling the land and most people just sell it to a builder

we're actually trying to raise money to entity two that's us again that's actually going to build the

property versus selling it to another person so we can make money from our own

deal in multiple stages by bringing in this Blended Capital this is high level for you I

understand I'm in the weeds a little bit listen to it again listen over and over again this call alone will cover a lot

of your real estate invested thesis and once you understand it you get a better

picture to pitch investors pitch sellers pitch buyers like one I had a guy in the

podcast one of his lenders one of his buyers out of his property end up becoming one of his best lenders like

this stuff happens and people switch positions not everybody fits in one box and that's all they do they eventually

move in migrate into different Equity positions and they might turn into different other forms of

capital all right uh next slide all right uh dead

investing you have real estate notes Roi and you get a a fixed interest

periodically Equity you get dividends it's uh funds you get a lot of different

stuff I think we covered a lot of this slide is you have different types of setups for different types of positions

and you can have sellers or buyers or or even lenders move to different positions

based off of uh when you're move the way you're moving the deal so I think the

next slide is when I get to okay this is the slide I wanted to get to this is the slide I wanted to get to okay so this is

the capital stack we talked about Capital stack a couple weeks ago this is so important when you understand your

position based off of your uh when you're raising with sellers this is kind

of the Perfect Graphic on the right here so let me go through the points here and then we'll kind of cover the

graphic so the position of capital stack s finding sell financing typically sits behind senior debt but before equity and

the repayment hierarchy so this is kind of like for multif family syndications we might not have senior debt or

mezanine debt preferred Equity like those are like high Lev terms we'll cover that in a second character de

access secured loan with the fixed rep payment terms and interest providing income streams for the seller

and uh for buyers it's easier to access to financing reduce upfront Equity

requirement and for sellers it attracts more buyers and generates interest income the risk comparison seller

financing lower risk than Equity but higher risk than senior debt due to subordinate position so the debt

position is very very important when you're talking about seller financing when you're talking about hard money

loans you're talking about partial seller financing when you're raising money for a partial Equity position on a

deal you have different positions um an equity is higher potential returns but

stands last line for payment so let's talk about what that left means and we'll talk about the right just pay attention to the right

so senior debt is let's say let's say you have a multif family deal multif

family deals I was talking to a guy I think yesterday or two days ago he said he usually buys uh

6535 um so you have 100% of a property that say it's a million dollars the bank will fund 6 5% of it he has to come up

with 35% so if it's a million dollars he has to come up with 350 the bank will come up with 650 and that's how you kind

of get your purchase of that property so think of the this little stack on the

right as your different positions so senior debt could be your first position

loan it could be seller financing it could be the the person that's putting on the biggest tranch on your on your

rays they have higher hierarchy in that position preferred equity might be your private money lender that

gives you 200 Grand to untitle a deal he might be the person that puts up uh EMD he might be the person that puts up a

lot of that uh due diligence cost so usually for us we give a lot higher

Equity position even for small amounts just because we know the risk get in in the transaction so you have to

understand where you're positioning sellers like one thing we always try and do is we always try and make sure

sellers aren we we sometime pitch second position but we usually get Flack because they're in second position so we

found if you don't get anything off of this call we'll give you a little sauce here on this but if you have a deed

let's say a Deeds on the left and you have your mortgage the mortgage in theid are connected through Aida trust so if

you ask a seller from become who has who owner to become a mortgager how do you

offer positions so if you need to raise a lot of money usually what happens is the money let say you raise 50% of a

deal and they want first position you can't you can't ask the seller to be

second but most time they're going to give you push back because now they're in a lower position than the equity and they have potential to lose that that

Equity position on the debt side right because they're in a lower position so one thing we've learned is you can

actually keep them on as an owner just not a ownership position that way

they're still in common common Equity side on the deed and you still can get a

first position loan on the debt side if that makes

sense I know I'm into the weeds I apologize but I tell I'm telling you there some people eating this

up Anthony any any any anything from that I know I'm in the weeds you have to listen to that again

sorry okay so your if you you if you understand real estate you have the deed

which is has ownership of the property and then you have your mortgage or your

debt right you have different positions on your debt you might have your bank loan Chase Chase Chase bank and then you

might have a HELOC which is Chase Bank again and you might have this is might be leans so you might have a HOA lean

you might have a child support lean like anybody that's deal with like dirty title problems they got all these leans

that stack up under this Equity under this Equity stack on the debt side right

so if you ask a seller for seller financing you're bringing a significant amount to cover the deed you can leave

them on as an owner that way they still have ownership but you can put them in second position so they still have

ownership Equity stake but they're a lower tier debt on the debt

side yeah I know crickets what what can can you repeat the benefit of that

please the benefit of that is you're putting when you're getting seller financing you can put them in a lower

tier debt position but they still have hierarchy on your ownership position so

you can you can solve you can uh hit two birds with one

stone because no one wants to be second position debt behind a bank or a hard money lender no one does but if you give

them ownership stake essentially shares remember we talked about ownership shares you can give them ownership

shares to cure their second position debt that's how you can get first

position debt hard money Bank financing and still have them seller finance in

second position I'm still confused but thank

you yes uh the lower position leans have more risk

Jose so I know it's a lot I apologize I knew was going of the Weeds on that one

but it's it's once you understand this it gives you perspective and you can negotiate better

Chapter 5: Practical Application and Q&A.End)

when you have perspective when you're actually doing Acquisitions so Kyle do you have any two

cents on this because Kyle's learned a lot about this in the last 120

days and it helps to become a better negotiator now you just got to keep an open minded uh and be a sponge that's

really rewatch this recording a couple times and um just start to think about it then

you'll come across scenarios and then that's really how you learn is just through the action but just keep an open

mind and and and keep it in mind when you're negotiating and and as you keep hearing it and as you listen to this

recording over and over again you'll look at something you be like this is when I can use

it yeah all right yeah that's I was going

to say no say no no matter how high level this is even if you only grab 2% of it or 5% of it that's a lot and then

you know a lot of people have asked us since we started this whole company why don't you guys have a script why don't you guys have this why don't you guys

have that because my philosophy has always been I don't want anybody sitting down reading a script I want you making

phone calls because that's how you learn this this stuff by putting it to use and that's what Kyle just said again he said

you know when when you see the opportunity pop up when you're negotiating when you're in the middle of a conversation that's when that that

muscle memory is going to come in you're going to remember oh this is what Daniel was talking about on the call right or at least you'll have a way to make

multiple offers uh we refer to it as a pushing all the buttons on the elevator right you get in with a kid and he

pushes all 40 buttons that's what we do to the sellers right we talk to them and we mention a lot of different things and

see what they bite on right so you don't need to learn all this tonight but just at least being introduced to the

vocabulary and the ideas it's going to help you in the long run big time is your Capital stack laid out in

each contract a lot of times we don't lay out the Capital stack but we try we

we have we've had had conversations with their attorneys just to have them understand where they lay out in the capital stack and that's a conversation

we're willing to we have with attorneys like you have to learn this stuff when you do this at a high level because if

an attorney asks you a high level question and you don't have the answer like the better you can answer that

question the more credibility you have so this is why me and Anthony are really good at this type of stuff

because we can answer these questions like you got you got to deal with the the objections you're going to get when

you're asking for seller financing on a $10 million deal you got to deal with that and if you don't know how to answer

that you're never going to get it so a lot of the stuff it's technically defined B it's in the it's in the

purchase and sale agreement but it's not necessarily signed in like a capital stack format if we're asking for seller financing hey you're going to be in

first position usually in most cases we're trying to get give them first position but in some cases we've had

negotiated them to be second and give them ownership shares essentially it's a JV and secure their ownership Equity is

secured by their own position in second position because we've had to a lot of times sellers don't have half a million

dollars or a million dollars to Value add their property to a $5 million

valuation so that's that's where you kind of have that conversation hey I can raise the money half a million dollars

or a million needed to make this property worth $5 million are you okay

being in a lower position and be on this ride with me to make this

into a $5 million property and a lot of times we're having conversations with sellers is hey if we're doing s seller

financing me and Anthony are like hey we we need me and you need to Vibe because we're going to be in this transaction

for a long time and me and you need to get along this isn't a buyer seller relationship this is almost like a

partnership because now I'm bringing in my capital and my resources to Value add your property and if if you really want

that high number you're going to have to work with

me and that's where we get seller financing is we're we're bringing in our

negotiation expertise and our Capital that we raise to value of the property

and we're willing to pay their price hey Kyle want to throw in a curveball how much was that listing for

don't do the exact number because it's it's still out there but how much did we raise the price

um like 550 or 600 or something like that okay so there was a $9 million deal

on listed on the MLS we offered $10 million so we actually raised the price

of the purchase price just in just in turn to get our terms so the bigger the

value we can actually increase the price of what we're willing to pay for it so a lot of times these sellers like oh I

want 30,000 an acre 30,000 an acre is pretty crazy for cash like it's just

crazy but I can give you that 30,000 if you let me value at it okay what does

that look like well it's going to take AB andc it's going to take me entitlement it's going to take me to subdivide it it's going to take me six

months it's going to take me 12 months and I'll get you your 30,000 an acre but it's it's not worth 30,000 acre cash

okay what what do you what do you exactly bring to the table well I'm gonna raise my own money or put in my own money I'm going to value out your

property to 50,000 an acre and I'll give you 30 oh that makes sense how much time you

need it's a totally different conversation so a lot of times on the bigger properties we're not even

negotiating on price we always and most of our most of our properties we're making full price offers this is why

we're picking up properties off the MLS um two Kyle let me think about this the

three properties you contracted are full price right every single one yeah their

full price offers I'm the MLS think about that guys actually 99 invest out

of 100 out there are out there making lowball insulting offers and then you come in and you offer 600,000 over

asking I mean on on the one I locked up the uh the agent didn't even think the seller would be open till took terms and

then he said he talked to the talk to the seller and and the seller was open to terms so a lot of times the the

agents don't even know either that the sellers will be into it so this this is the value if you're

still here right now that's the value TI's $4 million he locked up were

all full price offers all full price offers it was just asking for the term and timelines that

we need to Value ad the property that's it I don't care what the seller wants as

long as it give me the timeline to value at it that's where I make my money that's where I make my money hey I think

that's about a wrap right there and I think Kyle wanted to have a quick announcement too boom good job thank you

man I think have this conversation a lot more often too guys I know there was a lot

and if you were on this call we will send you the recording but U you got to hear it over and over again and then

ultimately guys you got to play the game so if you're just on these calls just listening listening listening and not taking any action that's G that's going

to be hurtful because you can be like stuck in analysis paralysis forever Years grab somebody else on this team

there's PE the people in this room are willing to help you there's a lot of people in this room that are having success and they're willing to help you I don't know where else there's not that

many other places where people are willing to just give you their secrets and their time to help make you money and this environment is perfect for that

what we cultivated it for so take advantage and and you know make make friends and you know talk to other

people in the group are here to help you so one thing I want to say too is that we're doing we're having our event July 31st we're actually going to dedicate

some time to kind of cover our organization and setup and Acquisitions so you can actually act our acquisition

you can ask our conjection coordinator you can ask our underwriting questions live on our panel

so we're going to dedicate a good 30 minutes to an hour to a panel uh to ask our our live team about anything and

these are like I said this is we're going to have our we're projected to do our seven figure month in June uh second

for the Year and hope I think we have we have many more lined up for the rest of the year so I hope you all can make it

we'll hopefully see you there it is the hive is live.com event and that's the where you

go to get the URL this will be put as a as a podcast episode so this episode

will be out there and if you need to watch it again it's okay like I said it took me a long time to learn all this which is really I want I want to do get

it to you guys like in this format and I wanted to release it on YouTube and put it on as a podcast and all that stuff

because I know it's valuable information this is the information that we use currently every day to do big deals and

this a lot of this educational stuff that a lot of people aren't willing to learn this is what separates you from

doing bigger transactions as a whole is knowing this type of frame framework

terminology negotiations you can negotiate big deals so I have a I have a

two questions just regarding like what do

what do you mean by value ad when you were talking about like uh the seller

how how does that work or what is that what does that mean so value ad is a as

throwing in money into a property to increase the valuation so uh storage

people might add more units apartment people might remodel units fix up the roofing fix the AC put a driveway and

fix the paint in the in the in the in the parking spaces put a signage out that's how they increase value to

increase their rents we do it by adding paperwork so we subdivide we entitle

that's how we value add land so different things it kind of reminds me

of like a Novation in a way um you know you remember what that

was yeah we're we're doing we're doing a form of inovation by leveraging

financing yeah okay that makes sense okay and then the second question was

regarding um what was the second question again

wait okay oh yeah it was regarding this recording so like do you are you guys

going to need like our emails if you're going to send the recording to us or we'll post we'll post it in the group oh

okay okay got okay hey guys we hope you're enjoying this content if if you

have leads that you need to dispo anywhere in the country please visit Hive bc. like Hive buyers club. and

we'll help you move those deals that you need to get into the marketplace [Music]

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Ep 536: Understanding Debt vs Equity in Real Estate

Daniel Esteban Martinez

Anthony Gaona