Ep #235 – Chad Doty – 12 Years Multifamily Experience – $325M in Real Estate Transactions

What you will learn:

Understand Legacy Companies
How to identify Strengths and Weaknesses
How to put your team together
What top look for in a real estate asset
Understanding the Rent to Amenity match
Why Workforce Housing is the preferred asset
When to bring your property management company into a deal
How to vet potential partners
Why investment companies fail
Developing a MAC profile
Understanding the value formula
Understanding your leadership style
What to focus on your first 90 days in real estate investing
How to stress test for a market downturn
The main difference between a small deal and a big deal

To find out more about our guest, please visit:  click here

Join us at a Multifamily Bootcamp, visit MultifamilyBootcamp.com

Full Transcript Below:

Ep #235 – Chad Doty – 12 Years Multifamily Experience – $325M in Real Estate Transactions

Rod Khleif: Welcome to another edition of How to Build Lifetime Cash Flow Through Real Estate Investing. I’m Rod Khleif and I am absolutely thrilled you’re here. I know you’re gonna enjoy the gentleman were interviewing today.

His name is Chad Doty. Chad’s group is presently owning over 3,100 units, at $250 million portfolio, so we’re gonna dig in to how he got started and how he got to where he’s at right now. Chad welcome to the show, buddy.

Chad Doty: Thanks so much for having me. You guys do phenomenal work. Really glad to be on your show.

Rod Khleif: Thank you. I appreciate that… As I do with all my guests, give us an idea of how you got started. Why real estate? Maybe where you came from, and how you got to your spectacular success today.

Chad Doty: Yeah. My first experience on real estate was awful. My dad owned a duplex when I was… I took a break from college, he bought it, and my job was to live rent-free on one side and fix it up. Then do the same on the other side. I learned to hate that process very quickly, and never wanted to own real estate at all.

That changed though when I got into my mid-30s. I was a management consultant for a Big 5 Firm, and I had to around to make companies run better. While it was profitable, it was being a road warrior, and just trading time for money. As my first son was being born, I didn’t wanna be a road warrior. So it’s, “How do I find ways to get that time back.”

I first went into the options market. I ran a like a two-year fund of doing OEX credit spreads to generate cash flow. And it was great. But I hated it, and opted out, got rid of that. And then moved in to real estate from the perspective that I didn’t want to be a landlord. I didn’t wanna do management. I didn’t want to get my hands dirty, I just wanna run it as a business, ‘cause that I knew.

So I bought a six-unit historic building in Richmond, Virginia with a partner who decided to spend the entire renovation budget for the building, on one kitchen.

Rod Khleif: [chuckle] I had one that put the budget up his nose, so at least you got a kitchen out of it. [chuckle]

Chad Doty: Yeah, one, one phenomenally pristine kitchen that would belong in a million dollar home.

Rod Khleif: [chuckles]

Chad Doty: He bought me out and I broke even and learned a relatively inexpensive lesson. Pride was hurt but the plans got real and I went after a 12-unit building on my own. That went better.

Then as I was looking at scaling, you can do that. You can scale from smaller and up, but there’s faster ways to do it. The faster way was to learn how to raise capital and apply value to bigger buildings. I went from a six to a 12, to 112…

Rod Khleif: Nice.

Chad Doty: And then I build a company, on how to do that.

Rod Khleif: So that 112, what year was that?

Chad Doty: 2009.

Rod Khleif: Uh, God… Your timing is impeccable. It’s so funny, the same similar story. I had someone on the show with thousands of units and they got rolling in ‘9, 10, and ’11, and I was hiding under a rock at that time from my butt being kicked.

Awesome. So let’s talk about that 112-unit. Can we dissect that one?

Chad Doty: Sure.

Rod Khleif: Where was it? How’d you find it? How’d you put it together?

Chad Doty: It was in College Station, Texas.

Rod Khleif: Okay.

Chad Doty: We found it, kinda just through relationship. I don’t know at that point we had a relatively robust demographic model. We sort of knew what it needed to look like, but it was more a little bit, bird in hand and some trust with the broker relationship, and a prior partner who is now out with the firm.

We got in the deal. We raise… It was an assumption because lending had completely drained out at that point.

Rod Khleif: Right.

Chad Doty: So you’re saying, “Oh, you’re lucky you started then…” At the time you’re doing it though, people think you’re just dumb… [overlap talk]

Rod Khleif: But it’s a harder sale for sure. Yeah, no question… It was an assumption. How much money did you have to raise?

Chad Doty: 4.3 million.

Rod Khleif: Wow, that’s quite a bit.

Chad Doty: I’m sorry. It’s $4.3 million purchase, we raised 2.1.

Rod Khleif: Okay.

Chad Doty: It was basically a 50% LTV assumption.

Rod Khleif : Okay. Alright, fair enough. So that got you rolling. Tell me how you grew from that to where you are now. Was this a gradual evolution? Did you put a team together right out of the gate? Let’s talk about team for a minute. What sort of a team did you put together to accomplish this?

Chad Doty: In the beginning, we knew we wanted to grow a legacy company. It was never a ‘invest here, get to some door count, sell, or some necessary cash flow target and retire.

Rod Khleif: Let me interrupt you just for one second. So those of you listening, guys, what he means by that legacy company, means buy-and-hold. Not buy-hold-and-sell. Not buy-and-sell. It means build a cash flow machine for your children, your grandchildren, their grandchildren.

Chad Doty: Exactly.

Rod Khleif: Okay, please continue.

Chad Doty: Yeah, you got it… Curse of knowledge you think everyone knows the terms already.

Rod Khleif: Yeah, I only get hate mail for interrupting people but it’s usually, there’s a method to it, ‘cause not everybody understands the nomenclature.

Chad Doty: You’ll have more of those with me probably, so I’ll call at that [overlap talk]

Rod Khleif: [chuckles]

Chad Doty: We wanted to build a business that had 500 million in AUM, and that’s asset under management. That would drive asset management fees in to three to four and a half million-dollar mark. That would be more than 3x the nut of the business, as a business architecture.

At that point, you really have a self-sustaining company, whether you acquire that year or not. That was the goal back in 2010.

Rod Khleif: Wow. You draw that line in the sand back that far.

Chad Doty: Yeah. And that’s the benefit, I think of doing the management consulting stuff, is you get dropped into good and bad companies four or five times a year, 10 years. You kinda see what works and what doesn’t, really quickly.

Rod Khleif: Sure.

Chad Doty: Did we know how to do it then? No. We just knew we wanted to do it then.

Rod Khleif: Got it. The how comes afterwards.

Chad Doty: Yeah.

Rod Khleif: I love this. This is great, great information for my listeners. You make a decision. It first starts with a decision… The Latin root of the word decision means to cut off. It is done. It’s gonna happen. Now, we’ll work on the how. Awesome.

Chad Doty: Right. Then team-wise it was… I mean, when you first own a business, you’re doing everything.

Rod Khleif: Right.

Chad Doty: And then all you’re doing is you’re finding out what your best at, what you’re not best at. Hold on the things that you’re not best at, and then you progressively slice and dice that up.

We first had two partners, then we added an office manager ‘cause we none of us… we hated admin. She was employee number one. We were owners, we had another partner who was very, very good at analytics.

Then we started building around that so you had acquisitions, asset managements, fractional controller, some few admin for certain layers, client service…

Rod Khleif: Let me stop you for one second. I want to draw attention to couple of things you just said, which are critical. You said you discovered what your strengths were, and you look to shore up the weaknesses either by partnering, hiring, leveraging, whatever. Guys, that’s a huge clue here, play to your strengths. You’re gonna get further faster. Awesome. Of course, when you start you’re wearing multiple hats.

Now, another thing you just said, fractional controller, was that like a contract situation? Is that what you meant by that?

Chad Doty: Yeah. A lot of people believe and we get this from the folks who are starting on the active side is… Do I have to hire all these folks at once?

Rod Khleif: Right. Okay.

Chad Doty: You don’t, so for our entire… Most of the accounting work is done at the asset level, and there you have a dual CPA property manager. You have your own tax guys reviewing the stuff, and then you have your own controller, but they’re not doing work there. They’re just verifying.

Rod Khleif: Just reviewing.

Chad Doty: Yeah. An asset management company isn’t that complex financially, it really isn’t. So for us… Unless you’re hiding money in the Cayman’s… [chuckle]

Rod Khleif: Right.

Chad Doty: Perhaps, yes, we just had a really good resource that did that and a couple of things.

Rod Khleif: Guys, those of you, so you understand the whole asset management discussion, when you do a syndication, it’s typical for the syndicator charging asset management fee to the group to manage that asset, and manage the third party management. That’s standard.

It’s typically a percentage of the gross, and it’s expected. That’s what we’re talking about here. It’s that ongoing asset management. Okay, so you put this team together. You grew. You hired an office manager… Nobody loves admin… Well, I shouldn’t say that. I’ll get hate mail for that… And you’ve grown, and tell me what the organization looks like now.

Chad Doty: Now, we’ve got 14 people, most of them in Richmond, Virginia. We have two-three folks in California and they primarily do either marketing, or outside sales, so it’s fine for them to be there.

Rod Khleif: What does outside sales look like in your organization?

Chad Doty: For… and really, I wouldn’t say outside sales, it’s more, primarily, phone work but also some presentation work. We built an engine where we can market and educate to clients… All of our offerings are Reg D 506 C offerings.

Rod Khleif: Okay, so all accredited. Okay.

Chad Doty: Right all accredited. We can advertise. [overlap talk]

Rod Khleif: It’s attracting investors, that’s what we’re talking about here. It’s how do you bring investors into the fold; I know you do that through an educational framework.

Guys, his website is 37thParallel.com. He’s got a lot of educational content there. That’s what threw me, the outside sales piece.


Rod Khleif: You have a regular office situation, you’re not virtualized; anything like that. You’re… Okay.

Chad Doty: We started that way. It was first in the room off my kitchen, then it was in a mother-in-law suite above my garage, and then it was in like 3000 square feet of suburban office space. And now, we’re on 8500 square feet, in an urban renovation zone that we love. But yes.

Rod Khleif: Nice… What are your… I forgot. You mentioned your target markets. Where’s most of your portfolio?

Chad Doty: We’re primarily in the Texas Triangle, which is Dallas to San Antonio to Houston.

Rod Khleif: Nice.

Chad Doty: We’ve got assets in all three of those locations. We have had deals in Austin and College Station, but we’re no longer there right now. We also have a few deals in the Mid-Atlantic, let’s say the Carolinas; that are … [overlap talk]

Rod Khleif: Okay. Let’s talk about for a minute what you look for, when you’re analyzing a market or a sub-market, demographically. Just educate my listeners. I’ve got people that listen that haven’t picked a market yet, they haven’t selected. Maybe they’re in LA or Manhattan and they know they’re not gonna be able to buy in their backyard.

What sorts of things do you look for, Chad?

Chad Doty: That’s a long list but… [overlap talk]

Rod Khleif: Yeah… Just 50,000-foot then.

Chad Doty: Yeah. The major things we look for are, we wanna see population growth, and job growth that are all better than the national average, have been for a long time, that are expected to be for a long time.

That’s sort of the big rock. If you don’t have that, you’re absolutely swimming upstream. I don’t wanna pick on the markets but if you just look at population growth, any market that’s growing at national average or below national average is gonna be a hard sell, long-term. You can flip there, but it’s really hard to own long-term there.

We also look at landlord-tenant laws. Texas is great but the West Coast is tough.

Rod Khleif: Yeah. Those are tough markets; West Coast, East Coast [chuckle]

Chad Doty: There are websites dedicated to teach people how the game the system and not pay rent, and not get evicted. We’re big believers… We do 1980 to early 2000 built assets, so B minus to A minus. That’s blue-collar renter so you want decent credit but it’s not gonna be the best. They’re renting out of economic preference or economic need. That’s our client.

We wanna go where they’re going to be, and then when we go to look in the market, we wanna make sure that we can own a particular segment of the rental amenity match that the client might want. I’ll explain that.

When residents rent, kind of like a homeowner, a little bit different. They pick, where they wanna live first, in terms of schools and jobs. Then they find what’s the best place they can live in for a certain amount of money. That’s how that thinking process works.

Rod Khleif: And you wanna be at the top of that second decision.

Chad Doty: Right.

Rod Khleif: Right.

Chad Doty: Well, for that group. So there’s them, and… [overlap talk]

Rod Khleif: Right.

Chad Doty: You need to know who you’re drafting ahead of you… [overlap talk]

Rod Khleif: You got to know who your competitors are.

Chad Doty: Exactly, and how you… [overlap talk]

Rod Khleif: And how you set yourself apart.

Chad Doty: Yeah.

Rod Khleif: Okay. This is good stuff. This is good stuff, guys. I hope you’re taking notes. Okay. Fantastic. And the fact that you’re going after workforce housing… The biggest players I’ve had on my show, that’s their niche, because it’s not going anywhere.

Chad Doty: Right.

Rod Khleif: That’s why the most critical component of your demographical research is jobs. There’s got to be jobs. Jobs have to be growing. Like you said, population has to be growing. Okay. I love it.

Now, you use third-party management. Correct? You have an asset manager on staff, and you use third-party management in your properties.

Chad Doty: Correct.

Rod Khleif: You develop long-term, comprehensive, very carefully screened relationships with these property management companies.

Chad Doty: Correct.

Rod Khleif: Okay… Do you utilize them in your due diligence process? Do you bring them in right out of the gate when you find/ identify a property?

Chad Doty: Yes, so the way it works when we’re going into a market is, we’ll look to have at least two, if not three viable property management partners in that market. We walk them through what we call our overlay process. Meaning that, “Here’s the reporting we want. Here’s the way we manage. Can you work that way?”

It’ll almost feel like we’re part of their regional team, the way we interact with their regionals, and the on-site property managers. When we go to do a deal, when we first start with them, we will pay them to be upfront with us not only in due diligence but also in underwriting.

By the time we go to LOI a deal, put a letter of intent down, we have an underwrite from the lender, we’ve an underwrite from the property manager, and our own.

Rod Khleif: Oh, I love it. Wow.

Chad Doty: So we’re not [overlap talk]

Rod Khleif: Okay. When you identify a property that has merit you bring them in even before the LOI stage. You’re gonna have an expense related to that but that’s pretty impressive when you submit that with an LOI. You’ve got it underwritten from all three components.

That’s a tip guys. Write that one down. That’s a good one. Of course, it’s expensive and you got to be able to afford that but… I love the way you define them as partners. That’s also awesome.

Wow… That’s a woodpecker on my roof. Right? Can you hear that?

Chad Doty: I can.

Rod Khleif: He’s hitting my gutter.

Chad Doty: [laughter]

Rod Khleif: Good Lord. Hang on a second… Hopefully we can… Hopefully it flew away. [chuckle] They’re not the brightest animals in the planet, those woodpeckers hitting my gutter. Anyway… So little comic relief…

Let’s talk about, you talked early on where you had some setbacks. Everybody thinks this path is to success is an easy road. They think it’s just, you just make a decision, you push forward. Talk about some of the hurdles that you had to overcome. Maybe some roadblocks, or maybe when you really got your butt kicked and what you learn from it.

Chad Doty: Right. The very first one was my very first deal.

Rod Khleif: Right.

Chad Doty: If you look at my first two deals, one in my 20s when I was just a laborer and one when I was in my 30s buying it. The first one I learned the things I didn’t wanna do again. I didn’t wanna be doing the… I don’t mind, I build stuff at home all the time. I just don’t wanna do it on these deals, on money, it’s just inefficient for my business building perspective.

Rod Khleif: It’s a time-money component.

Chad Doty: Yeah.

Rod Khleif: I mean, what are you best at? Like I shouldn’t be out there mowing my lawn. I don’t mind it but it’s not the best use of my time.

Chad Doty: Yeah.

Rod Khleif: So you were blessed that that happened on the first deal. If you’d had a different experience, then you might have gone down a different path. That was a blessing. Okay, fair enough.

Chad Doty: And then the second one was just partnering. Be very cautious about people like, “Hey, I wanna partner in this deal. Do this…” Do you know that person’s spouse, their family, what they do for fun. If you can’t trust them, with your last $100,000, and your kids, you have no… ‘Cause you’re basically investing in and owning a member of your family ‘cause you’ll invest that amount of time, it’ll keep you up at night if something goes wrong, and it’s not like you can get out of it easy. Real estate is like…[overlap talk]

Rod Khleif: It’s a marriage.

Chad Doty: Yeah.

Rod Khleif: It’s a marriage.

Chad Doty: Absolutely.

Rod Khleif: In my coaching program, we’ve got a… I think it’s about a 30-page list of questions, and things that you need to ask, and think about if you’re even considering a partnership.

Chad Doty: Yeah.

Rod Khleif: The first question is, do you really need this partnership? And then on and on from there. The other thing is you must trust your intuition. Like you mentioned, the family.

If I’m getting into a heavy duty relationship, even a C level or higher, CEO, COO, we go to dinner and I bring my wife. I trust her intuition. We have a drink or two, then I trust my intuition.

People think it’s not a big deal, but frankly, I’ve changed my mind where I was ready to make an offer based on what I witnessed; how the prospective hire treated the wait staff or, you know little nuances that you don’t pick up on, just in conversation. You really have to break bread with someone. Okay.

Chad Doty: Yeah.

Rod Khleif: Let me ask you this, why do you think most people fail in this business, in this real estate game? What do you think contributes to that?

Chad Doty: We’ve actually looked at it. We studied it.

Rod Khleif: Okay.

Chad Doty: ‘Cause we’re business engineers. Generally, three failure points, basically, the biggest ones, probably 80-90% of it.. The first one is we talk about something we call, a MAC profile. That’s market approach and capability.

Rod Khleif: Okay.

Chad Doty: They have to match. To break that down, let’s say, you’re capability is you’re a builder. You like to build, rezone, build from the ground up, get it leased up and sell. That’s great but you got to be in a market that has the demand to accept that new supply, and a lending market that wants to give you the money without constraining or holding your hands behind your back.

And [bad audio] people, if all they know is building and they’re in a market where they look to it and that approach is not profitable but they try to put a square peg in a round hole. That’s a problem. Or they’re a long-term holder and they’re out there in a market with negative population growth. That’s a problem.

Rod Khleif: Single employers or one big major employer, or something, other risk factor.

Chad Doty: Right. Or they’re right next to a military base that has BRAC exposure. There’s all that stuff. That’s the biggest ones, if they’re a match to that market approach… [overlap talk]


Rod Khleif: What was that acronym again, and what did it stand for? Forgive me.

Chad Doty: MAC profile?

Rod Khleif: Okay.

Chad Doty: Markets, Approach, and Capability.

Rod Khleif: Okay.

Chad Doty: The market you’re in… [overlap talk]

Rod Khleif: Okay. And you can apply that to any business, really, but I like the way you’ve… Capability involves the lending environment. I like it. I like the way you positioned that. That’s really interesting… Please continue.

Chad Doty: Then the other one is the management, ‘cause no matter what… ‘cause we joke that pro forma’s Latin for lie.


Rod Khleif: I call it toilet paper myself…

Chad Doty: Right.


Chad Doty: What makes that happen, what you… You got to make sure you’re not eating your dog food, you got to have your operators in while you’re going through that process, but what makes it happen is the operator.

So it doesn’t matter how good your numbers are, how good your financing is, or how good the deal is. It’s [bad audio] as an asset manager, and who is the property manager because that myth in real estate is that if the deal is good enough, people will find you. That’s not true at all.

Find a great deal and give it to your crazy brother and see if he actually gets the money. It’s not true.

Rod Khleif: Right.

Chad Doty: People invest with people [bad audio] that know what they’re doing.

Rod Khleif: True.

Chad Doty: That management pairing of asset and property is critical, and if there’s a mismatch, in one or the other, it can impact returns.

Rod Khleif: Now, I like that. Very simplistic way to look at it from 50,000 feet. Awesome…. What’s the best advice you’ve ever received, around this business or life in general?

Chad Doty: Ask yourself why you’re worth the money. What value are you providing? When I was in consulting, I’d ask my… “Hey, what can I do better?” He’s like, “Don’t over complicate it. Sell it. Do it. Collect the bill, and never screw up.” [chuckle] It sounds… but at the end of the day, you’re providing value.

Are you serving… And always asking yourself, “What are you doing?” So is you client your resident? Is your client your investor? Is your client your lender? And all those relationships, if the value is only coming your way, from that partner, then I think it’s not a good sign of a long-term relationship.

Rod Khleif: If you wanna be a success, add more value. Period.

Chad Doty: Yep.

Rod Khleif: I live by that motto… Okay. Any bad advice you’ve gotten about this business that you might share. Misconception.

Chad Doty: It’s always a deal at some price. That I think is the biggest lie in real estate.

Rod Khleif: I like that.

Chad Doty: ‘Cause if it’s at that price level, and a lot of people smarter than you have walked away from the deal, or not even looked at it, you’re eventually gonna pay what the market requires, it’s just that you’re gonna pay after you bought it.

Rod Khleif: Yeah. Now, I like that. That’s very powerful… What did you have to sacrifice to get where you are today? What did you have to give up?… Like I’ve got on my wall here, “Grind now, play later.” What did you have to do to get to… What did you have to give up, if anything?

Chad Doty: On that quote, “Grind now, play later”, my dad, I think it’s a Longfellow quote, “The hikes by great men reached and kept were not attained by sudden flights, but they, while their companions slept, were toiling upward in the night.”

Rod Khleif: I like it.

Chad Doty: So there’s that. I took a pay cut when I left consulting, by half, to go after this. I still was holding on with both branches but I knew I could take care of my family. I didn’t just jump`. But at the end of the day, took a pay cut and it lasted five years but now we’re well past where we were.

A lot of lo

ng hours. It’s your baby. It’s not… when you do this you’re not really an investor, you’re an entrepreneur. You’re a business owner that happens to be in a real estate business. You have to be able to understand the difference of being an investor versus being a business owner that invests.

Rod Khleif: Right, and you have to be a leader as well if you’re the one starting this thing… What do you think is the greatest characteristic a leader should have?

Chad Doty: There are different leadership models.

Rod Khleif: Right.

Chad Doty: In my experience… [overlap talk]

Rod Khleif: Now this is your domain too, with the business development stuff.

Chad Doty: Right. My… [overlap talk]

Rod Khleif: That’s why I’m asking. It’s a question I don’t typically ask.

Chad Doty: It’s style based. Me, I’m more of a servant leader. I’m happy to do what everyone else does. I’m more looking, “What do you need? What do you need? What do you need?… What do you need from me?” I’m very rarely, “Let’s go take this hill”, sort of guy.

I find it doesn’t work with really smart, really capable people. They’re like, “Okay. Great.” It’s more like you tell them what to do, and empower them, then get out of the way.

Rod Khleif: Right.

Chad Doty: Now, it takes a level of maturity of the business to get to that level. Day one, you can’t do that. Day one is, “Here’s what I want. Who can help me get that?” and you cobble it all together.

Rod Khleif: Sure.

Chad Doty: But as you really hit your stride, it…

Rod Khleif: It takes a level of confidence as well. Self-confidence, and yes, a level of maturity, the two equate to each other. I totally agree. Okay.

Tell us about the time you stretched yourself the most. The most courageous thing you did in this… Was it going from the 12-unit to the 100 and, or whatever it was unit? When did you really push yourself and get outside comfort to take action?

Chad Doty: [chuckle] We were closing a deal that had two really rough things happen to it. It was in Houston, Texas, and at the literally two weeks prior to close, it was only a $4 million raise but a half million dollar investor backed out, and LTV on the loan went from 75 to 65.

Rod Khleif: Oh, God.

Chad Doty: Right. So we [overlap talk]

Rod Khleif: Double whammy. You have to raise more money and you lost one of you biggest investors. Wow.

Chad Doty: Right. So we had to raise… [overlap talk]

Rod Khleif: Two weeks before the close.

Chad Doty: Right. So we had to raise an extra million dollar, and we didn’t get it prior to close. What we did is we short-term funded it our self and then backfilled the raise afterwards… [overlap talk]

Rod Khleif: Great that you had the ability to do that. Sometimes, people don’t have the ability; they don’t have that kind of a chunk of cash laying around.

Chad Doty: Oh, no, it wasn’t like it was a big chunk. It was little chunks from a group of us and maybe a couple other investors.

Rod Khleif: Okay. So you had to go out there and beat the bushes and beg, borrowed and steal to put that together for the last… And then you backfilled.

Chad Doty: Yes.

Rod Khleif: Well, you made it happen. Okay.

Chad Doty: We didn’t come from money. My family lived in duplexes that we rented until I was 16. It’s just a lot of stuff. It’s just you figure out what you wanna do, and don’t stop until you do.

Rod Khleif: What’s your favorite quote?

Chad Doty: The one I mentioned to you is one.

Rod Khleif: I love that one. That’s… yeah.

Chad Doty: I don’t… It’s too long to read. It’s not a quote.

Rod Khleif: Fair enough, so it’s not a one-liner. Okay. Fair enough. No problem.

Chad Doty: But I wanna paraphrase it. It’s actually Roosevelt’s speech at the [bad audio] about the critic. I don’t know if you’ve ever heard of it…

Rod Khleif: No.

Chad Doty: It basically talks about, it’s not the critic that counts, it’s the one who is out on the field playing, getting sweaty, bloody and muddy who participates. The one who just watches and comments, their opinion is of no value. It’s less than no value. It’s noise.

Rod Khleif: I love it.

Chad Doty: It’s [bad audio] actually, attempts to fight and fail, and fight again.

Rod Khleif: Love it. It’s the haters, the critics that the… I love it… If you were coaching somebody that you really cared about, what would you make sure they learned? The first 90 days to six months, about this business? What would you tell him? ‘Cause I have people that are listening that are in regular jobs. They wanna do this. They wanna change their lives for their family. Maybe they’ll start with a duplex, a10-unit, whatever. What would you say to them?


Chad Doty: I think, again, a lot of this is stylistic but I’ve never seen it fail, but some people can jump up without it. But I think knowing in your bones the, “How a deal works”. So some people like… Well, I’m not good with numbers, then you have no business in this business.

You either decide to get good, or get out.

Rod Khleif: Or you align with somebody that is. Period.

Chad Doty: See, that I disagree with.

Rod Khleif: Okay.

Chad Doty: I’m like, if you are going to do this, and you’re gonna look at someone, and I’m gonna look you in the eye and say, “yes, I trust my grandma’s last $100,000 in this deal, and I know in my bones how well it can go.” If you can’t answer yes, and if you’re gonna deflect a look at someone else… You don’t… [overlap talk]

Rod Khleif: Okay. Agreed… You need to understand it. You need to absolutely understand the deal as well as anybody that’s looked at it. You need to be able to. Got it. Okay. Fair enough.

One of the questions that I had listed for you, now you started in 09, you didn’t go through the 08 debacle but what do you know about how apartment investments perform historically through a downturn? I’m sure you’ve done your study and so that you can do stress testing on a deal to make sure you’ll be ok through the next one. What sorts of things, can you speak to that a little bit?

Chad Doty: Yeah. We’ve looked at it all the way back to the Great Depression.

Rod Khleif: Okay.

Chad Doty: You look at… There’s a ton of failure points we look at, but there’s two… First of all, market selection-wise that’s a tremendous helper but also being in great multifamily and workforce, it’s the most insulated, love them. They’re not credit compared with C’s and they’re not tip of the spear on A’s with regards to… ‘cause that’s… It’s a wildly elastic rent profile in an A renter…

Rod Khleif: Sure.

Chad Doty: To get on the lazy river and the outside movie theater but they’re also the quickest ones to get hammered when an economic cycle turns.

Where B-grade stuff, they typically don’t dip unless they’re in coastal markets. They just flatten out. So maybe your rent growth might not be as much in a downturn, and it wasn’t, but in B-grade, they still make money.

Rod Khleif: Sure.


Chad Doty: Now, if you were [overlap talk]

Rod Khleif: There was a pullback but not as significant as like you’d seen in the A market.

Chad Doty: And the new construction and hospitality, basically, gave all their prior three years of profits back.

Rod Khleif: Right.

Chad Doty: B just kind of drifted along.

Rod Khleif: Right. Okay.

Chad Doty: In that, and we also measure something… We also have a bi-stress test called breakeven occupancy. We wanna know if we can own an asset that could take double market vacancy at the time we buy it. Because in most markets we’re in, they never experienced a double market vacancy dip. So if we know we’re buying an asset that can take greater than a historical prior result, that’s a pretty good safety measure.

Rod Khleif: Sure. Double the current vacancy rate, whatever that is, you double that and that’s one of your stress test.

Chad Doty: Yeah.

Rod Khleif: What do you do as far as operational… Do you raise any operational funds when you raise equity for a deal? Is there any additional funds that you are doing in this marketplace?

Chad Doty: We do it all upfront, except in pretty rare cases. It lowers the return a little bit, ‘cause you have lazy cash waiting but it’s more convenient for the investor. The way we work is most of our clients are, “I wanna get a quarterly check. I wanna not have to really talk to you. I want all the tax advantages I can get.”

By loading it upfront, we get to optimize that. Maybe we take 50 BPS off thereturn, but that is, just it makes it easier to fill up parties. And we’ll also…[overlap talk]

Rod Khleif: By the way guys, 50 BPS is half of a percentage point. Okay.

Chad Doty: Yep. Thank you. Let’s say whatever the target return is will be 50 BPS.

Rod Khleif: Right. You offered 12% returns, it’s really gonna be 11 and a half percent return. But you’ve put some money aside for a rainy day, in case of a contraction, in case of an issue.

Chad Doty: Yeah.

Rod Khleif: There’s never a problem. Okay.

Chad Doty: And we always have a rainy day reserve that’s six months of debt service. Then we have the capex reserve for what we’re gonna do for the first five years of… [overlap talk]

Rod Khleif: Sure. You raise all that upfront. You have six months worth of debt service, which is fairly conservative, and very impressive. Let me ask you this, if you were gonna go back, and tell your 21-year old self something, what might you do differently based on what you know now with your high level of experience and track record? Is there anything you would do differently?… Or tell that 21-year old self.

Chad Doty: 21-year old self, doing the say is a great question. Get bigger sooner. It takes the same amount of work to do that bigger deal than it does a smaller deal. It’s just fear, and capital.

Rod Khleif: Yep.

Chad Doty: So the capital, yeah, you got to figure that out but I think it’d be better to take longer, and go bigger than to go sooner and go smaller, knowing what I know now.

Rod Khleif: Right.

Chad Doty: At the time, I had to start at six to a 12 to 112, but some people do duplex, duplex, duplex think that it would come into a merge 1031, all of a sudden, you have a 100-unit deal, and it so very rarely works that ways… [overlap talk]

Rod Khleif: Yeah, and it’s a lot of brain damage to try it that way if you really do wanna go big.

Chad Doty: Yeah.

Rod Khleif: Okay. Well listen, you added a ton of value. I really appreciate having you on the show, Chad. You guys can check him out at 37thParallel.com. I’m very grateful for you spending your valuable time with us my friend.

Chad Doty: Thank you. It’s my pleasure. And one thing on the URL, it’s 37Parallel, there’s no T-H, so please… [overlap talk]

Rod Khleif: Okay. Got it, 37Parallel, thank you for clarifying that. Alright, Chad, thank you so much my friend. Take care.

Chad Doty: Thanks, Rod. Bye.

Rod Khleif: Bye.


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