Chad is one of five Managing Partners at Quattro Capital, a real estate investor and host of the Real Estate Runway Podcast. With a background in spaceflight and aircraft with NASA and GE, Chad transitioned to become a passionate real estate investor. As the Director of Acquisitions, his expertise in deal analysis and underwriting strategies has led to five successful acquisitions, with three more planned for this year, all aimed at creating quality communities for residents. A devoted family man, Chad prioritizes building a time-quality lifestyle.
Here’s some of the topics we covered:
- Leaving Aircraft Engine Design For Multifamily Real Estate
- Lessons From Working With Family In Business
- Creating Community & Culture In Your Businesses
- An Example Of An Incredibly Run Company: GE
- When Lenders Are More Apt To Renegotiate Loans
- Chad’s Multifamily Bridge Loan Experience
- The State Of The 2023 Real Estate Market
To find out more about partnering or investing in a multifamily deal: Text Partner to 72345 or email Partner@RodKhleif.com
Full Transcript Below
00:00:00:00 – 00:00:17:16
Rod
Welcome to another edition of Lifetime Cashflow. I’m Rod Cliff and I am thrilled you’re here and I know you’re going to get tremendous value from the gentleman I’m interviewing today. He’s someone I met at an industry conference. You know, anybody in the business knows you have to go to industry conferences. This is how, you know, this business is really not as much what you know as the who.
00:00:17:17 – 00:00:40:18
Rod
You know, candidly. And I tell my students, my warriors this all the time, focus more on the relationships even than learning the business, because it is that freaking important. And his name is Chad Sutton. He’s the one of the managing partners of Quattro Capital. They’ve been involved in 2300 doors. Really sharp guy. And I’m excited. Oh, and also, I was on his podcast called Real Estate Runway.
00:00:40:20 – 00:00:52:22
Rod
Just affected, just dropped a day or two ago or it’s about to drop or something. But anyway, we’re going to have a wide ranging very much more deep conversation than I think you’re used to. So buckle up. Welcome, brother.
00:00:53:01 – 00:00:53:21
Chad
Hey, good to see you again.
00:00:53:21 – 00:01:04:14
Rod
Yeah, likewise, my friend. Likewise. So, you know, let’s start the way we normally do. Just having you tell a little bit of your background and you know why Real estate, where you came from and all of that.
00:01:04:17 – 00:01:08:04
Chad
Yeah. You know, I love going through this. And, I mean, how much time do you have as the real quick.
00:01:08:07 – 00:01:21:00
Rod
Right. Yeah. No more high level. But but maybe you could speak to when you’re giving us your your bio here. Just maybe speak to at what point you had the epiphany, you know. Okay. All right.
00:01:21:01 – 00:01:37:16
Chad
I remember the day and the time. So, look, you know, I didn’t grow up in any major means or anything like that. I didn’t go to Harvard. I wasn’t a Wall Street guy. You know, I grew up just like everybody else. I was a, you know, middle income child. I was parenthood by a single mother for a long time until she met my father at age five.
00:01:37:16 – 00:01:52:19
Chad
So I live with my grandparents, got a very special relationship with them. But look, I was always the kid tinkering with Erector sets and K’NEX and Legos and stuff like that. And so, you know, and I show to be pretty good with numbers in school. So the world told me I should be an engineer. And guess what? I listened.
00:01:52:21 – 00:02:09:12
Chad
I went to college, got a great engineering degree. I went to work for NASA for a little bit when the space shuttle was still flying, dated myself a little bit cool and, you know, spent the rest of my career with General Electric in, you know, in aircraft engine design. So I did a lot of really cool stuff. I design smoke and fire combustion.
00:02:09:12 – 00:02:29:01
Chad
I have patents. I put us in billion dollar technology arenas. I mean, it was it was amazing. You know, until I look to my left one day and I look to my right one day, I looked at my my senior engineer on my left, my principal engineer on my right, and I was like, you know what? I am so specialized that I can work for literally one of three companies in the world, and I already work for one of them.
00:02:29:03 – 00:02:41:06
Chad
And it was it was a very rude awakening that I’m you know, I’m kind of pigeonholed here and around the same time, you know, I remember you might remember GE went into an interesting time where, oh, I.
00:02:41:06 – 00:02:48:14
Rod
Love the stories about GE with with microwaves as Neutron, you know, I’m talking about the CEO that that fire.
00:02:48:15 – 00:02:50:03
Chad
Fired everything from Jack Welch.
00:02:50:04 – 00:02:54:09
Rod
Oh, Jack Welch to Neutron Jack. Yeah, Yeah. That’s what I was talking about. His books are fantastic.
00:02:54:09 – 00:03:07:17
Chad
They are. But this was past the neutron oak phase, and this is in the melt phase when we really experienced the $50 stock price share down to a five in about a year timeframe. So it was a it was a rough time. I got plucked, you know, and I went into.
00:03:07:17 – 00:03:08:11
Rod
What do you mean?
00:03:08:13 – 00:03:09:23
Chad
I got plucked from my engineering.
00:03:09:23 – 00:03:10:13
Rod
Desk.
00:03:10:17 – 00:03:19:06
Chad
And they put this team in place and it was it was a fantastic opportunity. Global consulting like basically think about a KPMG or a.
00:03:19:07 – 00:03:21:14
Rod
Yeah, got it. You know, like a big accounting firm.
00:03:21:19 – 00:03:29:11
Chad
But we made an internal team and the credentials where you had to know how to design product, manufacture, product and know a little bit about business. And so I got to.
00:03:29:14 – 00:03:31:13
Rod
What was the outcome for this team.
00:03:31:15 – 00:03:56:13
Chad
Variable cost productivity. The whole idea was how do we make our big industrial products slightly cheaper but still have the same outcome? Okay, so it was balance sheet, it was how do we lower variable cost across price? Gotcha. So the reason this is relevant, Rod, as I flew around the world on the company’s AMEX for three years, going to every GE facility, you can imagine it, like everything from Ziff, Austria to Shenyang, China to Oslo, Norway.
00:03:56:13 – 00:04:18:10
Chad
I mean, it was amazing. So I really I got a couple of things out of this. I learned how to manage a PNL at very large levels, right? I learned how to negotiate and initiate culture change internationally. Imagine a 20 something year old kid coming into a factory in Oslo, Norway, and telling a bunch of guys have been doing something one way for 50 years how to change it, right?
00:04:18:12 – 00:04:23:17
Rod
I want to dig into that a little bit more, but yeah, that’s a topic I enjoy, but keep going, please.
00:04:23:21 – 00:04:52:16
Chad
So got some CEOs out of that. Well, that led to an executive role where I was. I was in charge of, you know, national supply chain purchase for the renewals of neural renewables business for a long time. And why is this relevant? Let’s pause that story. So now I’m an executive, a guy. I am you know, my whole job is to take everything from my suppliers and as the big spend to get get the cost out margins.
00:04:52:18 – 00:04:54:00
Rod
Beat them up as much as can.
00:04:54:02 – 00:05:12:15
Chad
Right at it. Right, right. Really good at okay. So I started to feel a little bit despicable. Meanwhile, I’ve seen that. I’ve created technologies, I’ve got patents, and all I got every year was an attaboy smack on the butt and a, you know, 3 to 5% raise. Right. So I’m doing all this amazing stuff making about a buck 50 a year.
00:05:12:20 – 00:05:21:05
Chad
Think you’re on top of the world, right? You’re starting to realize, when was this? This was in I actually officially left the company in 2020. So this was from.
00:05:21:05 – 00:05:26:15
Rod
Oh, wow. This is recent. Wow. So you did all this real estate stuff and really the last three years?
00:05:26:16 – 00:05:28:04
Chad
Well, concurrently, there was some overlap.
00:05:28:05 – 00:05:29:19
Rod
Okay. Okay, fair enough. So.
00:05:29:19 – 00:05:45:03
Chad
So let’s let’s let’s back the story up to 2016 for a second because, I mean, we’re going to get to the end of these parallel pass where they culminate 2016. I mentioned that I live with my grandparents growing up, very impressionable on my life. My grandfather falls ill. Okay? And I’m not going to go into the.
00:05:45:04 – 00:05:45:11
Rod
20.
00:05:45:11 – 00:06:03:07
Chad
16 and 2016. It was horrible the way he died. I was at the bedside not as much as I wanted to because of my job, but I was there. And, you know, it’s hard not to get choked up in that because it was a massive, massive influence on my life. But he passes away. Grandpa. It’s had a big real estate portfolio.
00:06:03:07 – 00:06:20:20
Chad
Oh, really? Seven single family homes. Wow. Waco, Texas. So if you remember the chip and Joanna Gaines fixer upper show, my family was there before Waco was cool, you know, but thanks, Chip and Joanna, they did a lot of good things for the property value. So I get involved with the business with my now business partner, who is my aunt.
00:06:20:20 – 00:06:22:05
Rod
So your aunt?
00:06:22:07 – 00:06:26:00
Chad
Yes, a little spoiler alert. Three out of five partners in Quatro, our family.
00:06:26:01 – 00:06:26:15
Rod
Oh, no kidding.
00:06:26:20 – 00:06:39:12
Chad
My mother and Kim, who is her sister, and my aunt, and I am the third generation investor. So we have kind of three generations of real estate. And my family didn’t know that until. Oh, wow, I was 30. Right?
00:06:39:14 – 00:06:41:14
Rod
Wow. I want to talk about that, too. Okay.
00:06:41:14 – 00:06:57:20
Chad
I want you to go into there. But now let’s culminate the stories together in how I got to where I am and why this matters. You know, I was still working and Kim took over the family portfolio, sold about half of it, put money into the other half, and all of a sudden we, like, tripled the value in 12 months.
00:06:57:22 – 00:07:24:21
Chad
Cash flow is up, value is up for like holy smokes, there’s something to this right now. Kim is a brilliant woman, you know, billion dollar it project manager from Northrop Grumman. And this really Texas like brilliant woman. So did a lot of work there and then I go try to replicate this in the state of Tennessee. Right And so remember, I’m also at the point in my career where I’m like, I’m only look, look, Earl Nightingale says it best.
00:07:24:23 – 00:07:36:02
Chad
Your rewards in life are only as high as the degree of difficulty of what you do and how hard it is to replace you. And I was starting to feel just that because, like, as valuable as I thought.
00:07:36:02 – 00:07:37:11
Rod
You mean replace you in your job?
00:07:37:11 – 00:07:37:20
Chad
Yes.
00:07:37:20 – 00:07:38:05
Rod
Got you.
00:07:38:08 – 00:07:41:05
Chad
I could be replaced tomorrow. You know. Really how good I was.
00:07:41:07 – 00:07:46:05
Rod
You know, I disagree based on what little I know about you. But anyway, continue. Right, right, right.
00:07:46:05 – 00:08:08:12
Chad
Let’s say, I mean, as smart as I was as an engineer, there’s 100 other guys like me who could do it. Okay? You know? Okay, so with the resources of a company behind you, so that so that’s just something to remember. So I’m realizing that. And now I see there’s this path in real estate. So we’re talking massive net worth, passive income, you know, more money than I’ve ever made in my job.
00:08:08:14 – 00:08:28:12
Chad
I go try to replicate it and it falls on its face because we realize what single family rentals, real estate isn’t scalable. You can’t go to do that. We’ll talk about that. I’m sure you talk about that a lot. And, you know, we couldn’t quite make the rent ratios work in the state of Tennessee. So then we start researching asset classes and I’ll pause it here that yeah.
00:08:28:12 – 00:08:48:16
Rod
Let’s pause because I actually want to dig in on a couple of these things. Yeah. Don’t let me forget to circle back to this though, but you talked about single families. Elaborate on that because I want them to hear it from you instead of me because their life single families are great. Yeah, well, the problem is they really don’t cashflow nearly as well as multifamily and you want to elaborate on on that a little bit.
00:08:48:18 – 00:08:49:03
Rod
Yeah.
00:08:49:03 – 00:09:08:00
Chad
And it doesn’t take long to do it, folks. I mean, in commercial real estate, you’re valued on the income approach. In single family, you’re primarily valued by sales cops. So it doesn’t matter. How will you cash flow if someone down the street is willing to pay two X for a place to live, that’s going to set the market comps for your place, which means to buy an income property.
00:09:08:02 – 00:09:13:15
Chad
It makes it that much harder to buy it, you know, below value and do some good work to it. So let’s just put that to the side.
00:09:13:15 – 00:09:14:19
Rod
So that’s just one piece.
00:09:14:19 – 00:09:19:16
Chad
One piece, right. Let’s talk about Operation. Okay.
00:09:19:18 – 00:09:38:13
Chad
At best. And this is with 70 single family homes, 70 at best, you’re going to get the best in class, Mom and pop property management company. Why? Because the best in class folks who know how to market stuff know how to turn stuff efficiently, know how to handle work orders, create a community, all that kind of stuff. They don’t fool with stuff.
00:09:38:13 – 00:09:39:04
Chad
That is, they.
00:09:39:04 – 00:09:47:10
Rod
Don’t mess with single family. No, you’re going to get a broker that does it on the side. Yes. Or something else you have you’re going have horrible management. Number one, horrible management.
00:09:47:12 – 00:09:59:23
Chad
It’s going to cost you three X is much to take care of the place because think about it on a on 100 unit complex, you have a maintenance shop and two guys, or at least one guy who’s there all the time. Right. Well, you got to do is go on golf cart one over the maintenance shed, get something.
00:10:00:02 – 00:10:02:13
Rod
Get the parts you need because you stockpile parts, but.
00:10:02:13 – 00:10:20:10
Chad
Every house you own is different. So what’s the what’s to say? You’re even going to have the part you need. So you probably have to call a part time guy out there or a service vendor, which is going to charge you 30%. They’re going to come out, diagnose the problem, go to Home Depot, find it, come back, probably forget something, go back and do it again, and then come back and fix the problem.
00:10:20:10 – 00:10:22:21
Chad
So you’re down a day to fix a toilet, right?
00:10:22:23 – 00:10:38:23
Rod
Yeah. You’ve heard this before, haven’t you? Yeah, I’m looking at this exact same thing. This is what I. You know, I don’t know if you remember, my story had 800 houses when the market here crashed. Okay? 2 hours north of me, 2 hours south of me, everywhere in between. And you know, the other thing you haven’t mentioned is, is, you know, of course, the maintenance kills you.
00:10:38:23 – 00:10:56:01
Rod
And these were C-class houses in my case, you know, So they’re older, tougher demographic, they’re harder on it, mate. So we really have never really cash flowed much of anything, you know. And the other pieces, you know, in my case here, taxes in Florida are higher property taxes because, you know, state income tax. So they’ve got to make it up somewhere.
00:10:56:01 – 00:10:56:19
Chad
Taxes the same way.
00:10:56:19 – 00:11:15:20
Rod
Yeah, and that’s right. That’s right. And and then, you know, I had properties in wind and flood zone so we’d have higher insurance. But you know, the other thing people don’t think about is every one of these houses has to have its own insurance policy, has its own tax bill, you know, And, you know, comparatively, it’s much less money on a multifamily asset.
00:11:15:22 – 00:11:33:20
Rod
And so, you know, they just don’t cashflow well. They just don’t. And so, you know, and I get in arguments with with with with single family operators online and sometimes and we actually did a some guy had us do a like a debate between a couple of single family operators and me and another guy on the multifamily. So we kick their asses.
00:11:33:20 – 00:11:36:17
Rod
But, but you know it was because it just is no comparison.
00:11:36:17 – 00:11:39:18
Chad
But it is three words, folks. It’s economies of scale.
00:11:39:18 – 00:11:56:10
Rod
Yeah, that’s it. That’s it, That’s it. Bottom line. Bottom line. So I want to circle back to a couple other things you said. So you talked about family. You know, have you ever had any setbacks in your operations? Just curious with your family operation, any any big setbacks?
00:11:56:10 – 00:12:02:11
Chad
Family and I have and and I’ll tell you, partnering with family is not for everyone. And I’ll tell you this, it’s very.
00:12:02:13 – 00:12:03:22
Rod
It’s very dangerous.
00:12:03:22 – 00:12:26:18
Chad
It’s dangerous. But there are members of my family that I would not partner with from an intellectual level, from a get along this level, from a problem solving level. I felt that when we started it was just Kim and I. Tami joined later. My mother and I was apprehensive to let my mother join the business when we talked about bringing her over from the family portfolio to the multifamily business, I was very hesitant.
00:12:26:20 – 00:12:38:06
Chad
So Kim and I, we we worked very well together. We’re both very type-A, very analytical, very strategic thinking. And when we fight, we do, we do argue, but it’s more like challenging each other. It’s not personal digs.
00:12:38:08 – 00:12:56:16
Rod
But, you know, so you have you have a healthy respect for each other. Respect? Yeah. That’s that’s critical. You know, the thing that that that the reason I brought it up is, you know, when everything crashed in 2008 nine, I had some my a couple of my brothers involved and it sucked. I mean, you know, and I don’t think there was a real blame game.
00:12:56:16 – 00:13:24:07
Rod
I mean, shoot companies. I mean, I’m sorry, countries went bankrupt in 2009, Iceland, you know. And so, you know, it was but but, you know, there was still animosity. And, you know, I don’t remember. I’m big into watches. I’d gifted my brother a Rolex. We got master like $40,000 watch. And and I found out and I bought my cell phone I gave it to him as a gift when things were really rolling and I found out he had to sell it just to, you know, get by.
00:13:24:07 – 00:13:31:21
Rod
And I felt horrible. So I gave him mine. And and I finally bought myself a new one, like, literally six months ago. So anyway, I digress. But but.
00:13:31:23 – 00:13:39:13
Chad
You know, I have to finish the comment. Yeah, please. So then I brought my mother into the business and it was great. We now have high respect for each other, but there is an innate risk in that.
00:13:39:13 – 00:13:40:00
Rod
Sure, you.
00:13:40:00 – 00:13:45:20
Chad
Have to make sure you have a respectful relationship and you can separate business and work. And we go to family events. We don’t talk.
00:13:45:22 – 00:14:12:14
Rod
You don’t? Oh, okay. Well, that’s really good, too. Well, I want to circle back to one other thing. Just because it for my own personal edification, because it’s fascinates me, because I love anything around entrepreneurship and business development. So you, you, you said you went to these factories as a young, you know, punk, wet behind years and and, and, and what did you have to do culturally with those groups of whatever it was, inventors, factory workers, whatever it was.
00:14:12:14 – 00:14:18:16
Rod
And and you know at a high level. How did you accomplish any changes in culture? I’m just curious because.
00:14:18:18 – 00:14:25:01
Chad
Oh yeah well, this is an easy one. And folks, I never knew this was a strategy until I read a book called Flip the Script by Oren Clark.
00:14:25:01 – 00:14:25:20
Rod
Oh, that’s a good book.
00:14:25:20 – 00:14:41:01
Chad
He was describing stuff I used to do, and I never knew this, but so read the book if you want to get some tactical is on this. But here, here’s an example. You walk in is an American kid, not just a kid, an American kid, two countries who for the most part think Americans are entitled and bossy and pushy.
00:14:41:01 – 00:14:43:21
Rod
Loud, noisy, you know, irritating. Right.
00:14:43:23 – 00:14:45:13
Chad
And he’s right in our case. Well.
00:14:45:15 – 00:14:47:12
Rod
Very often, yes.
00:14:47:14 – 00:15:04:19
Chad
So, you know, the number one thing you have to do is create status alignment. And that kid like you, what does that mean? I’m going to explain it. You have to know how to come to a problem. So if if the person you need to talk to is here, do you come to them head on? Right. You come to them from a superior position or an inferior position, You got to figure that out.
00:15:04:21 – 00:15:29:23
Chad
And so let’s say we’re talking about, you know, 40 or 50 something factory workers in a different country. Gotcha. 20 something kid. Right. Initially, I cannot come. Is the corporate guy in a suit, you know, and come from above, right. Shut me out right. I had to come from inferior and show them respect. And so once I did that, I came in, you know, respectful, revering them and and I kind of got let in a little bit.
00:15:29:23 – 00:15:50:19
Chad
But then I have a very small window to achieve status alignment. And so from there you have to do a little bit of research. You got to understand the culture that you’re walking into. You got to understand what they care about, what they like, and the first little bits of conversations that I had with them, you know, I would spout off a 1 to 2 minute, you know, just shoot in the BS of something that I knew that was relevant to them.
00:15:50:19 – 00:16:00:21
Chad
And all of a sudden walls would come down like, Oh, you’re not an outsider. And they start talking to me. And so like when someone when someone fears pain, they recuse. Sure.
00:16:00:23 – 00:16:02:06
Rod
And they block themselves off.
00:16:02:06 – 00:16:06:16
Chad
Yeah, right. But as soon as they can exhale and put their hands down and just have a conversation.
00:16:06:16 – 00:16:07:07
Rod
You have a window.
00:16:07:11 – 00:16:15:06
Chad
You have a window. Yeah. And then you can get to know like, and trust. Gotcha. So only then can you start to know like, and trust process once you’ve achieved status alignment.
00:16:15:09 – 00:16:22:17
Rod
Nice. Now, did you actually work to change the culture in that environment, or was it just one on one relationships?
00:16:22:17 – 00:16:29:09
Chad
Sometimes it was culture change in the environment. Sometimes it was major process change which which to get people to buy in is a culture change.
00:16:29:10 – 00:16:49:10
Rod
Gotcha. Oh, now that makes sense. Okay, now I get it. Now I get why you were doing it. Okay. Yeah. I love this because I’m, you know, I’ve had some large companies that I’ve owned and managed and now, remember, had 60 employees doing litigation support after the after the crash, you know, foreclosure defense work and and we did all sorts of things to try to generate a community culture.
00:16:49:12 – 00:17:05:08
Rod
Remember that ice bucket challenge where people yeah, we got an we got a dunking booth, we filled it up with ice water. And my happy ass was sitting up there first for people to dunk me in the ice water. And, you know, we did all kinds of fun stuff to try to create community and culture, and it’s just a topic I’m fascinated with.
00:17:05:08 – 00:17:06:12
Rod
So please continue your story.
00:17:06:13 – 00:17:10:13
Chad
Yeah, Yeah. So first of all, was you team athletic? Did you actually get dumped a few times with them?
00:17:10:13 – 00:17:16:07
Rod
Oh yeah. Oh yeah. Like literally the first throw, if I recall. I’m not kidding. It was like the first. I’m like, really? Yes.
00:17:16:11 – 00:17:29:15
Chad
Okay. So we’re picking back up where, you know, I’ve kind of realized that, you know, what my worth is versus what the world views my work go to. And I realized that my family has had this real estate thing going on. And then when my grandfather.
00:17:29:15 – 00:17:30:05
Rod
What a blessing.
00:17:30:07 – 00:17:36:13
Chad
My aunt came in and really just like discovered value add, if you will, didn’t know she discovered value add but discovered value.
00:17:36:13 – 00:17:42:11
Rod
Add in the single family space or. Okay. So she was she was this is still maybe some flipping or wholesaling or something.
00:17:42:13 – 00:17:53:02
Chad
Okay, not really wholesaling. So we had the portfolios, right? We, we sort, we diagnosed the portfolio, sold the trash, reinvested in the good stuff, increased revenues. And so it was that kind of thing.
00:17:53:02 – 00:17:54:01
Rod
Gotcha, gotcha.
00:17:54:05 – 00:17:57:21
Chad
And the net result was about a3x improvement in the value. And no.
00:17:57:21 – 00:17:58:04
Rod
Kidding.
00:17:58:04 – 00:18:15:23
Chad
Well, over over a year it was pretty fantastic. So we start researching asset classes, go to every seminar we can imagine, you know, and it’s just a lot. I mean, look, success leaves clues like I’m not scared to pay for education and you shouldn’t be and you’re going to pay for it. One way or another. You call them seminars as well.
00:18:16:04 – 00:18:22:05
Chad
You’re either going to have your own seminars or you’re going to go to some seminars, but at least you can learn things that will not end you in the business.
00:18:22:05 – 00:18:39:21
Rod
Okay, well, I have to say something with that comment. Thank you. And I didn’t pay him to say that, but you guys know I got my frickin bootcamp coming up in September. DM me on any social channel, I’ll let you come for $197. It’s not a big sales pitch. It’s a freaking no brainer. If you’re thinking about that, you’re crazy not to come.
00:18:39:21 – 00:18:50:19
Rod
Frankly, respectfully, if you’re thinking about multifamily, it’s three full days of training. You know, I talk about my coaching for 30 minutes. That’s the sales pitch. Not even a sales pitch. I don’t try to get your money on the spot or anything.
00:18:50:19 – 00:19:03:01
Chad
I do one better. Yeah, the first three people that do it send me the bill. All right. Really, I believe in education that much. The three people that DM you and do it, send me the bill for it. Well, if you are that quick to get off your butt and get some education.
00:19:03:03 – 00:19:16:23
Rod
There you go. There you go. There you go. Okay. Wow. That’s that’s kind of you, buddy. Well, anyway, so. So yeah, you’re absolutely right. You know, and can you do it without the formal education? Yes. But you’re going to have the seminars. Have seminars, no question.
00:19:16:23 – 00:19:17:19
Chad
And seminars.
00:19:17:19 – 00:19:33:06
Rod
Either. And if you have a big one on the first deal, you know, there may not be a second deal. And that’s that’s what you avoid. And and in this business, correct me if I’m wrong, I mean, I know I’m not wrong, but I want you I want them to hear it from you. It’s a team sport and you do it together and you grow together.
00:19:33:06 – 00:19:39:18
Rod
You build together. You you you play to each other’s strengths. And that’s how you create something magnificent. Yes.
00:19:39:22 – 00:19:43:07
Chad
Well, that’s right. Yeah, it is a team sport. And whether you hire the team partner.
00:19:43:07 – 00:19:46:04
Rod
With the right or align whatever. Yeah. Yeah. Correct. Correct.
00:19:46:04 – 00:19:47:02
Chad
It is a team sport.
00:19:47:02 – 00:19:48:12
Rod
Right.
00:19:48:14 – 00:20:11:19
Chad
And so, you know, back to complete the story. Right. Of how we got to where we are, we figure out through research and education and all that, that wow, there’s a big imbalance in housing, supply and demand. We need to focus on housing, you know, by the way, food, water, shelter. So that’s a basic need. MARZLUFF Jeff Bezos is kicking everybody’s butt on on on food and water, right about focus on shelter.
00:20:11:21 – 00:20:15:05
Chad
So we decided to go into multifamily, didn’t know what.
00:20:15:05 – 00:20:17:17
Rod
Syndication and when was and this was in 20 or when.
00:20:17:19 – 00:20:20:02
Chad
I bought my first property in 2019.
00:20:20:04 – 00:20:20:18
Rod
2019.
00:20:20:20 – 00:20:26:19
Chad
Every one of my four partners has been in real estate long before me. I’m the young buck. I was first involved with a piece of real estate.
00:20:26:19 – 00:20:28:08
Rod
Where’d you buy it? How big? What was it?
00:20:28:10 – 00:20:43:15
Chad
Knoxville, Tennessee. Knoxville Love knocks 35 Union. Nice. It was built. It was a it was a unique story. An architect live up on a hill. He had a nice house and so it was 35 units. That was one of the units. Oh, and he built an eight plex about every couple of years.
00:20:43:15 – 00:20:44:12
Rod
Oh, no kidding.
00:20:44:14 – 00:20:50:04
Chad
It was like his his retirement plan. So it was this beautifully arcade, like an architect designed it for himself.
00:20:50:05 – 00:20:50:21
Rod
Wow.
00:20:50:23 – 00:21:02:19
Chad
Very cool. So it was a maintenance dream, you know, like, we were designed for being taken care of. And, yeah, we bought the place with our own money, because at that time, we’re just thinking about growing the family. Sure, sure, sure.
00:21:02:21 – 00:21:05:13
Rod
Same here. Our first one was an 88 unit with my own money too.
00:21:05:13 – 00:21:11:22
Chad
Yeah. Yeah. And I would never. I would never. And unless you can’t, I would never encourage you to. To start with someone else’s money. Learn first.
00:21:12:01 – 00:21:12:17
Rod
Exactly.
00:21:12:17 – 00:21:16:03
Chad
Even if you go through all the seminars, folks, you’re still going to have your own seminars.
00:21:16:06 – 00:21:17:05
Rod
You bet.
00:21:17:07 – 00:21:17:14
Chad
With your own.
00:21:17:14 – 00:21:18:05
Rod
Money. Right?
00:21:18:09 – 00:21:35:20
Chad
So we do that. And then to get to the point where we make history is, you know, I have partnered with two people to do this, Cam and I did. That was Aaron and Maurice. We bought it, decided we like working together. So very quickly, you know, thanks to Aaron’s tenacity, we quickly had three other properties under contract in Knoxville.
00:21:35:20 – 00:21:46:14
Chad
Milk And the good thing about Knoxville is there was a lot of small multifamily mom and pop stuff there. We bought seven deals in the first year in Knoxville, so within a year we had 255 units. Nice. Then we went bigger.
00:21:46:15 – 00:21:54:00
Rod
Knight Well, hold on. It may be obvious, but let’s pretend it’s not obvious. Why is that a big deal? What’s what’s, what’s great about what you just said?
00:21:54:00 – 00:22:15:22
Chad
So, so what I just said, we we recognized that brokers weren’t taking us seriously. That’s one piece bid for 120 unit building. But we never bought anything other than a single family home. Right. They wouldn’t take a serious right. And the competition was stiff and we weren’t ready to run after something. Right? So we went after mom and pop buildings where it was like it was a lot less of a stretch.
00:22:15:22 – 00:22:23:06
Rod
Right? Well, that’s actually not what I was looking for, but. But what I was looking for and I’ll just say it. You, you, you created economies of scale.
00:22:23:06 – 00:22:24:06
Chad
That’s where I was going. Okay?
00:22:24:06 – 00:22:25:04
Rod
You were going there. Okay.
00:22:25:04 – 00:22:36:23
Chad
You started. Okay, Right. And then we we bought it, but we knew 35 units is inefficient, right? So we then bought seven more, right? You know, everything from 12 units to 35 units all within.
00:22:37:05 – 00:22:40:21
Rod
Did you manage them or did did you vertically integrate or were you using third party?
00:22:41:00 – 00:22:44:22
Chad
That third party did it by definition and intentionally. We will never vertically integrated.
00:22:44:23 – 00:22:49:12
Rod
Gotcha. Okay. All right. Fair enough. Fair enough. But same management company for all all the units then.
00:22:49:13 – 00:22:53:09
Chad
Operated out of an office in the basement of the architect’s house on the first floor.
00:22:53:10 – 00:23:12:14
Rod
No kidding. Yeah. And what’s great about that, you know, you hear about these people that will buy a turnkey house or a turn for Plex or whatever. You have absolutely no leverage. If they do a shitty job, you’re you’re screwed. I’ve heard about it time and time again from people that have bought a house that’s a thousand miles away turnkey.
00:23:12:16 – 00:23:31:05
Rod
But if you if you’ve got, you know 100 plus units, you know, it’s very significant to that management company and you are able to leverage and and get good pricing and get, you know, quality service and everything else and that that Yeah. So that’s where I was going is that you, you were able to create economies of scale.
00:23:31:05 – 00:23:39:23
Chad
Yeah that’s exactly it. And then the last sentence to the story, Rod is the beautiful thing. Everything we just talked about and learned, all you have to do is add a zero to it to.
00:23:39:23 – 00:23:40:22
Rod
Scale, let’s say.
00:23:41:00 – 00:23:44:22
Chad
And so from there we just started buying bigger assets and we started in.
00:23:44:22 – 00:23:46:18
Rod
Syndicating and raising money, right?
00:23:46:18 – 00:24:03:08
Chad
We didn’t discover that the Southeastern or the SEC is not the Southeastern Conference. We had a lot of that. Right? That’s funny coming from SCC country and so, you know, look, that was the history. We grew from there. We’ve operated over 2300 doors at this point, sold about four or 500 of them at this point.
00:24:03:09 – 00:24:04:06
Rod
All in Tennessee.
00:24:04:07 – 00:24:08:19
Chad
No, everywhere from Texas to North Carolina and all the way is north is Indiana.
00:24:08:19 – 00:24:32:08
Rod
So no kidding. Okay, You spread out quite a bit. Okay. Yeah. I’ve got assets in all those states as well. And just just for my own edification, I’m going to circle back to something for one more second. Just because I can’t believe you had a fairly high level position at. Gee, I will tell you, if you’ve ever want to research an incredibly run company, it’s G.E..
00:24:32:10 – 00:25:03:21
Rod
I mean, you know, and I’ll give you some examples of this. They Welch wrote a book called Topgrading where they would eliminate the bottom 10% of the people in the organization, almost, I think, on an annual basis and hire better. And I mean, when when when he was running at that company was like ink. I mean, one of the highest valued companies on the planet and and you know, and they would do I think he implemented the 360 reviews where, you know, you subordinates review you, your superiors review you, your peers review you.
00:25:04:02 – 00:25:22:10
Rod
And that’s how they would come up with the you know, who they who who they’d eliminate. Now he was always one of my one of my heroes from a business standpoint, because it’s just such a brilliant strategist and an implementer. And and and he really and even for a while after him, the CEOs were extraordinary. So I don’t know.
00:25:22:13 – 00:25:42:02
Rod
I didn’t follow it after, you know, when when when things really crashed stock wise for G.E., I wasn’t really that involved because that was more recently. But but I just remember as I was learning business and everything, man, he was one of my heroes. I just want to throw that out there. If you ever if you ever read a Jack Welch book, you will leave that book a better person and a smarter person as it relates to entrepreneurship in.
00:25:42:02 – 00:25:43:00
Chad
Business with that heart.
00:25:43:03 – 00:26:06:17
Rod
Yeah. Yeah. So so let’s talk about first, let’s talk about where you feel we are economically in this country. I don’t know if you’re bearish or bullish and and, or even if you know, if you’re bearish, what that means to you. And I don’t want to put my influence on it. So I want to hear from you what you think.
00:26:06:19 – 00:26:17:07
Chad
Absolutely. So that’s that’s a good conversation. I mean, look, the first thing I’ll say is if you have courage and capital in a time when no one else does, you’re going to do well at the time when it scares.
00:26:17:07 – 00:26:28:03
Rod
Warren Buffett, be fearful when others are greedy, then a lot of greed. The last couple of years. But the other side of that is be greedy when others are fearful and fear is coming. Yes, fear is coming.
00:26:28:04 – 00:26:28:22
Chad
It’s already here.
00:26:28:22 – 00:26:29:13
Rod
It’s already here.
00:26:29:13 – 00:26:44:04
Chad
Pain isn’t all the way here. You’re right. Pain. I heard a great analogy, actually. My partner said this. The economic turmoil we’re in is it’s been coming like a slow moving iceberg. It’s been slow. That’s noticeable. Oh, that’s good. It starts to hit. It is devastating.
00:26:44:10 – 00:27:05:22
Rod
That’s really good. And I will tell you, like we wrote in Delaware yesterday on a deal and I had a conversation with my team and I’m like, why are they selling? This is the worst possible time to sell. And sure as shit, they got three months before their loan resets and they’re in deep doo doo. And I told my team right now, surety of close.
00:27:05:22 – 00:27:24:10
Rod
Is everything okay? Price is not as important as your ability to close, and so I don’t know what that looks like, but that’s something we’re evaluating heavily because I, you know, it’s very dangerous right now not to have a financing contingency in your in your contract and so, you know, and it raising money is much harder right now.
00:27:24:10 – 00:27:44:09
Rod
Investors are scared they shouldn’t be because there’s going to be incredible opportunity. But they are okay. And, you know, the banks are paying decent some decent interest rates right now. So so there’s you know, there’s headwinds for acquiring property. So speak to how you plan to navigate this environment and what you think may be coming. I’m sorry, I kind of stole your thunder.
00:27:44:09 – 00:28:00:16
Chad
No, no. Oh, that’s the great conversation. And look, I mean, we’ve been talking about inflation. We’ve been talking about rising interest rates. We’ve been talking about why that is. I’m not going to go into that. And, you know, simply put, you inject, you know, however many trillion dollars into the into the money system. Of course, you know, it’s going to eventually come back.
00:28:00:16 – 00:28:13:05
Chad
So we’re all we’re having as economic long-covid. Right. Well, the results of what we did in 2020 are happening now. So here we are, interest rates have risen at a rate faster than they have since the 20.
00:28:13:05 – 00:28:17:19
Rod
Two year high as of yesterday. Yep, 28 highest interest rate in 22 years As of yesterday.
00:28:17:19 – 00:28:20:07
Chad
By the way, in the history of interest rates is still not.
00:28:20:07 – 00:28:36:08
Rod
That. Oh, it’s not up, dude. When I started in when I started in this business, interest rates were 18%. Yeah, I remember freaking out when they hit 7%. Mike Holy shit, there’s 7%, you know, And so, so yeah, you’re right. Historically, they’re, they’re, they’re not high.
00:28:36:08 – 00:28:58:14
Chad
And I remember originating a loan at 4.75% and being pissed to high heaven. Oh, yeah. You know, so it’s like it’s all perspective, right? But look, here’s what’s happening, okay? Lenders are not, they have not forgotten 2008 and so what you’re seeing, especially regulated lenders like banks, they’re not being so quick. They’ll be really hard on you until you try to hand the keys back and just watch the office sector.
00:28:58:20 – 00:29:06:02
Chad
They’ve been really hard on people trying to get the money to be paid, You know, even though these things are negative cash flowing, there’s been some big organizations have finally said.
00:29:06:04 – 00:29:08:16
Rod
Here’s the keys, big hotel chains, big bingo.
00:29:08:16 – 00:29:17:14
Chad
Wait a minute, we don’t want keys back. Right? So it’s like it’s that kind of situation. Lenders are going to be more apt to renegotiate loans and do work if they can.
00:29:17:14 – 00:29:36:18
Rod
If they can. And depending upon, you know, the wherewithal of the borrowers. In fact, the Fed just put out a I don’t know if is the Fed some. It was the Fed. They put out an announcement to lending institutions saying work with borrowers if they’re still creditworthy. And but that said, a third of all commercial debt is with small and regional banks.
00:29:36:18 – 00:29:43:09
Rod
Yes. And I got to tell you, I think we’re going to see some bank failures due to what’s already happened. Yeah, I mean, we have. But I mean, more I think it’s.
00:29:43:10 – 00:30:01:11
Chad
It’s already happening. Yeah. And remember, the banks are in a really bad place. We try to we try to think about and focus on what the news talks about, and that’s interest rates. That’s only half the equation. Right? Liquidity is the other part of the equation. And the Fed has been not only raising interest rates but sucking liquidity out of the market, which means banks don’t have the liquidity right.
00:30:01:13 – 00:30:05:00
Rod
It’s called quantitative quantitative tightening or tightening tightening, right.
00:30:05:00 – 00:30:18:18
Chad
Opposite of easing. Right. And so so where are we today? Look, if you’re highly leveraged on on an asset or you have a bridge loan coming to be proactive because the number one thing that you are the worst thing you can do is just hope the situation works out, hope.
00:30:18:18 – 00:30:39:00
Rod
The interest rate gets lower, hope somebody buys your asset and pays you top dollar. I’m we’re seeing that the you know there’s still that price you know discussion of yeah there’s this will well yeah discover they call it price discovery when they try to find out what they can get for an asset and even the brokers are still unrealistic and you know I think it’s all going to change.
00:30:39:02 – 00:30:54:15
Rod
But but like you said, the big thing is going to be the capital stack. It’s going to be it’s going to be the it’s going to be the debt and the equity. And like right now, we’re looking at an asset that’s a screaming deal. But the debt is 50%. That’s all we can get, 50% debt.
00:30:54:17 – 00:30:56:19
Chad
And in floating rate stuff is out right now.
00:30:57:00 – 00:31:00:20
Rod
Oh yeah. Do not do floating rate. Jesus. I mean, you know, I.
00:31:00:20 – 00:31:01:14
Chad
Can’t even cap it.
00:31:01:14 – 00:31:15:16
Rod
It’s like no, no I when we were at the was it I am in where we ran away. Yeah. So I in mid-market and you know there were lenders there and they’re like yeah we can do a fixed rate bridge for you. Really. What rate. 9:00.
00:31:15:18 – 00:31:19:02
Chad
Come on by the way folks, all that means is they bake in the hedging products.
00:31:19:02 – 00:31:37:15
Rod
Oh, sure, sure. They’re already baked in the the interest rate rises. You know, I, I tell the story. I read an article, I forgot where it was, and it’s been like four or five months ago where in 2020 you could get a recap of 1,000,100 million, three years, 3% rate cap. Okay. So that means the rate’s not going to go up more than 3% over a three year period.
00:31:37:17 – 00:31:41:01
Rod
100 million was $23,000. Yeah, that same rate.
00:31:41:03 – 00:31:42:04
Chad
I never thought.
00:31:42:04 – 00:32:02:00
Rod
About. Yeah, that same rate cap. I mean this is four or five months ago. I think it’s more than that now. For one year. Forget three years you’d never get three years was 2.3 million. Yeah. And I’m like, you know, these guys like this, this deal that we’re looking at where the loans resetting, not only do they have to deal with that rate cap, but I’m sure that their debt service coverage ratio is not sufficient either.
00:32:02:02 – 00:32:23:07
Rod
So guys, you know, in the commercial real estate space, the lenders looking at the properties ability to service the debt, it’s called a debt service coverage ratio. And, you know, and I’ll give you just a quick example of this. If you’ve never heard this, let me give you an example. It’s an annual calculation. Let’s say the the net income on a property, the NOI net operating income is 125,000 for the year.
00:32:23:09 – 00:32:45:15
Rod
Let’s say the debt annualized for the whole year is 100,000. So 125,000 income, 100,000 debt, that’s a 1.25% debt service coverage ratio. And that’s fairly pretty much a minimum for most for most lending institutions. Well, if the interest rates gone up, I mean, I’ve seen some of these bridge deals where they’re they’re negative. I mean, they’re under 1%, many of them.
00:32:45:17 – 00:33:10:18
Rod
And so they’re going to have to funnel money into the deal to get the to get that debt service coverage reasonable and pay the rate cap. You know, I was talking to my SEC attorney, the one I use the most brilliant, smart guy, big firm out of Dallas. And and he told me half his business now is is capital calls to investors forbearances and foreclosures half his business right now.
00:33:10:18 – 00:33:12:16
Rod
Yeah and it’s come it’s this just the two.
00:33:12:22 – 00:33:27:16
Chad
Folks I want to give you a seminar real quick You use your language so let’s talk this is talk about bridge debt for a sec. Right. All right. Because I’m going to tell you what I felt. If you know Quatre, we do not do risky deals. We don’t do high leverage deals. Yeah, same here on a bridge loan.
00:33:27:16 – 00:33:29:19
Chad
I’m leverage 70% loan cost at most.
00:33:30:00 – 00:33:31:22
Rod
You have some bridge debt right now. Oh, you do? But.
00:33:31:23 – 00:33:49:18
Chad
But here’s the deal. Yeah. So we were we were smart when we took it. Okay? And I was buying 1% rate caps before. It was cool. People thought I was an idiot, you know? But who’s laughing now? My rate could only go above the spread 1%, 1%. The way they do bridge loans, folks, is you have a spread over an index and that index moves.
00:33:49:20 – 00:34:10:08
Chad
So maybe it’s sofr used to be LIBOR. But what? It doesn’t matter. Just know that there’s an index that moves and you’re going to pay a spread over that index. It moves well, you can sense that index since maybe two years ago, that index was almost zero. Well, now it’s like 5.3 at the peak. So if you didn’t cap your loan and you had, let’s say, a 300 point spread, you’re not paying 8%.
00:34:10:10 – 00:34:11:07
Chad
You thought you were paying.
00:34:11:09 – 00:34:17:02
Rod
300 points would be three at 300. What he’s talking about basis points would be 3% interest. Okay.
00:34:17:02 – 00:34:36:00
Chad
So for that and so here’s the seminar. You know, we cap that rate. So I bought a 1% rate cap, which means if I had a 300 basis point spread, 3% and you know, I’m only paying for fine, that’s great. Well, here’s here’s the deal. When the banks get into trouble and oh, by the way, these bridge lenders and debt funds, they’ve all got banks behind them.
00:34:36:05 – 00:34:53:16
Chad
They don’t have all the money sitting right there. Well, when Signature Bank got in trouble, for example, they started scrutinizing everything the bridge lenders were doing. And guess what? You have covenants in that loan. Even if you can service the debt, fine with your rate cap. They’re still checking debt service coverage ratio and they’re looking at exit valuations periodically.
00:34:53:21 – 00:35:08:02
Chad
So if they believe this could have nothing to do with what you’re doing on the property. Right, They believe that they don’t want to put more money into that loan. They have ways to stop funding your draws. And here’s a big a seminar that I’ve learned which has put me into about a $5 million problem I’ve had to solve.
00:35:08:02 – 00:35:21:03
Chad
Well solved. But the problem is, if you’re counting on construction money coming from a lender in a time like this, they used to take 1 to 2 weeks to fund those. Now they’re taking 2 to 4 months. You know, they fund.
00:35:21:03 – 00:35:21:17
Rod
No kidding.
00:35:21:18 – 00:35:30:00
Chad
Okay. And so you have to remember that, you know, in the bridge debt world, there are so many things out of your control. It’s just not the lending.
00:35:30:03 – 00:35:57:00
Rod
The lending documents for bridge loans are very onerous and and, you know, not at all. And and, you know, they also look at performance, not just performance on the debt service coverage piece, but on your occupancy, on your ability to do your renovations in the in on schedule as you as you as you agreed to. And, you know, I will tell you, it’s it’s a it’s a nefarious tightrope in some cases.
00:35:57:00 – 00:36:15:02
Rod
And there’s a nefarious component. Some cases. I mean, I like to equate bridge that to the hard money lenders of the residential space. I think there’s a comparison there. I’ll give you a crazy example. One of my students, one of my warriors, he had gotten approved for a bridge loan and like a day or two before closing, they backed out.
00:36:15:04 – 00:36:15:19
Chad
It sounds about right.
00:36:15:19 – 00:36:33:08
Rod
Well, now listen to that. It gets better that bridge lender bought that asset. Oh, yeah. Now he took him to court and won. But but, but that’s you know, that’s the kind of stuff that can happen. And now there are a lot of big very reputable bridge lenders. But I’ll tell you, you know, by the way, when is your debt coming due?
00:36:33:09 – 00:36:34:17
Chad
I still got years on. Oh, you.
00:36:34:17 – 00:36:37:03
Rod
Do? Okay. All right. Good, good, good, good. Because.
00:36:37:07 – 00:36:51:09
Chad
But here’s the problem. Yeah. So, like, the only way we agreed to do bridge debt was you only get in trouble in real estate if you have two things happen. Just two. It all boils down to two. You run out of time or you run out of money. Yeah, okay. And so we wanted to make sure we’re not going to run out of time.
00:36:51:09 – 00:36:54:11
Chad
So these bridge loans are five years good. And we’re three.
00:36:54:11 – 00:36:55:05
Rod
One one.
00:36:55:07 – 00:36:58:18
Chad
311. And we, we negotiated the extensions heavily, so they.
00:36:58:19 – 00:36:59:09
Rod
Oh, you didn’t take.
00:36:59:09 – 00:36:59:22
Chad
Much to get.
00:36:59:22 – 00:37:06:03
Rod
Into. Oh, that’s good. So. So what I’m, what I, what I meant by 311 is you get a three year term and then you get to one year extension.
00:37:06:03 – 00:37:07:08
Chad
So you have to qualify.
00:37:07:12 – 00:37:28:20
Rod
And you have to qualify for those extensions and you likely are going to pay additional fees to get those extensions. So you negotiated those in advance. Okay. Well, that’s great. Yeah, we’ve got we’ve got a couple of bridge loans with my ex partner and we’re good friends and all that, and we’re monitoring it literally on a monthly basis, but we’re going to be fine.
00:37:28:22 – 00:37:46:08
Rod
But, you know, these two, two most two most recent deals I’ve done in the last I’ve only done two deals in last 18 months, you know 296 unit and that 145 in Nashville, ten year fixed rate debt. I mean and these were both 60% loan to value and they were 5050 deals on the back end. That’s how good they were.
00:37:46:08 – 00:38:05:08
Rod
Okay. They weren’t like, you know, guys, when when you do it, when you do a multifamily deal, you’re going to offer a preferred return to the investors. And we do like an eight pref. It’s called a pref. And then you split anything over and above that and you’ll see splits from 5050 to 8020 and even in some extreme examples, 9010 from a competitor of mine, I couldn’t believe he allowed his students to do that.
00:38:05:08 – 00:38:27:10
Rod
But, but the higher that split, the skinnier the deal because the operator has to has to adjust the split to get the returns that his investors need to have the deals make sense. And like I said, you know, the average is probably 7030. But these last two deals we did were 5050 because they were that good. Now, I will tell you, the deal we’re looking at right now is a 7030 as well.
00:38:27:10 – 00:38:29:21
Rod
But it’s an A-class class asset. And, you know, so, you know.
00:38:29:21 – 00:38:30:10
Chad
That’s a standard.
00:38:30:11 – 00:38:45:22
Rod
Yeah, that’s a standard split. But but, you know, you know, debt is a big deal right now. And it’s an it’s challenging right now. And that’s why, you know, we talked about a financing contingency. I mean, I think you’d be crazy to let money go hard with that one. Are you are we in agreement? Yeah.
00:38:45:22 – 00:38:47:14
Chad
Okay. And I’ve been there. Ask me. Right.
00:38:47:16 – 00:39:01:22
Rod
Right. Ask me how. That’s What do you say that And I did I tell you that on my interview with you? Okay, So at my boot camp, I say, don’t do that. Ask me how I know. And so on. My students actually got me a hashtag. Ask me how I know t shirt, true story. And now we have them printed.
00:39:01:22 – 00:39:09:03
Rod
We give them away They’re it’s a riot. But it’s just funny you said that. So. So how are you looking to structure deals today?
00:39:09:05 – 00:39:14:20
Chad
Yeah. So the way I’m doing it today, as you mentioned, I’m not touching anything with a floater on it. Forget it. It’s this cost.
00:39:14:20 – 00:39:15:11
Rod
But in.
00:39:15:13 – 00:39:21:11
Chad
It’s right. And oh, by the way, I had to hire for people to do draw requests. So it’s it’s a wait. You’re not really saving any money.
00:39:21:11 – 00:39:24:19
Rod
Wow No kidding That’s how detailed in the. Yes. Wow.
00:39:24:23 – 00:39:39:09
Chad
So anyway, pain in the neck. Don’t do bridge debt. I love credit unions. If you can get down with recourse or partial recourse, credit unions offer a very great structured ten year term. No prepay a couple of years I oh and it it rolls to perm.
00:39:39:11 – 00:39:42:12
Rod
What debts I what loan size.
00:39:42:14 – 00:39:52:01
Chad
I’d say up to 15 million not on anything much bigger than that. Okay wow they will syndicate amongst themselves of it’s bigger okay the main tool that I’m using.
00:39:52:01 – 00:39:53:06
Rod
And what what loan to value.
00:39:53:06 – 00:39:56:16
Chad
Typically they’re probably going to get you to 70%. Best case.
00:39:56:21 – 00:40:00:21
Rod
Yeah. Yeah. Best case. It will be 60. 65. Oh, 50 to 60.
00:40:00:21 – 00:40:09:07
Chad
Okay, folks, everything is DCR constrained right now, right? It doesn’t matter if they say they’ll do 70%, 75% LTV, nothing pencils.
00:40:09:07 – 00:40:14:15
Rod
Their DCR again is that debt service coverage ratio that we talked about that one 21.25. You know.
00:40:14:15 – 00:40:23:17
Chad
Everything is getting so they always test LTV based on appraisal loan to value or they’ll test coverage ratio and whichever one you bought up against, that’s what limit.
00:40:23:21 – 00:40:24:19
Rod
The lower of the two.
00:40:24:20 – 00:40:35:10
Chad
Lower of the two correct debt coverage ratio. Correct. Correct. Look, the best product, in my opinion right now and this is subjective, so take it for what it’s worth, I love agency debt.
00:40:35:15 – 00:40:36:12
Rod
All right?
00:40:36:14 – 00:40:55:08
Chad
What I am doing is I’m using it as much as I can, five year fixed rate debt. And here’s why I’m doing that in over ten there for a couple of months. The five, seven and ten year treasuries are all on top of each other. So this really made sense. Now they spread out. So you have to think about it a little bit because the ten year yield is usually lower, meaning get a lower rate.
00:40:55:09 – 00:41:04:07
Chad
But what I like about the five year fixed product is I don’t do small balance loans because you usually can’t put supplementals on those later stuff.
00:41:04:09 – 00:41:30:06
Rod
So what he’s talking about with Fannie and Freddie, you can do what’s called a supplemental loan and it’s a second mortgage. But but it’s it’s it’s unique in the fact that it really ties into the first mortgage and and they match the term and in it’s how you know seasoned operators will pull money out of a deal rather than refinancing the entire underlying debt because when you get Fannie and Freddie debt, you’ve got stiff prepayment penalties.
00:41:30:09 – 00:41:46:11
Rod
They’re called yield maintenance and and defeasance. Thank you. And Defeasance. And and so you know what you do so you don’t pay off that and that underlying loan and pay those heavy fees as you get a supplemental loan. So I just wanted to describe that real quick.
00:41:46:11 – 00:42:09:13
Chad
Yeah. Because if any time when you have a Segway like that and so. So and here’s the thing is if you get the opportunity for a supplemental, then you don’t have to worry about the prepayment. If you want to keep the asset. And what I don’t know much, but what I do know is if you study the history of the Federal Reserve, just go pull up on Fred dot com and plot the Treasury rates since the beginning of time.
00:42:09:14 – 00:42:29:20
Chad
Okay. You’re going to see and you can overlay recessions with it. Whether you guys think we are or not, we’re in 100. You’re feeling so we’re all in a recession from the history shows from the first rate hike is two years average. The first rate cut comes we’re on the clock since beginning of 22. Okay. We’re now in mid 20, 2023.
00:42:29:22 – 00:42:32:13
Rod
So the average has been two years. When they start dropping the rates again.
00:42:32:13 – 00:42:35:02
Chad
Two years max of three. Okay. So it could.
00:42:35:02 – 00:42:35:12
Rod
Be three.
00:42:35:12 – 00:42:36:02
Chad
Years, could be.
00:42:36:02 – 00:42:37:11
Rod
Three. So that would be when.
00:42:37:11 – 00:42:40:08
Chad
24 to 25. Right. Is really when we’re expecting.
00:42:40:11 – 00:42:42:23
Rod
Yeah. I don’t think we’re going to see rate drops before 24.
00:42:42:23 – 00:42:55:20
Chad
I don’t think we can this Right. But, but here’s, here’s the problem if go locking in let’s just say rates are 7% right now actually on a ten year Treasury based rate for Fannie and Freddie, an agency that it is about six and a quarter, give or take.
00:42:55:20 – 00:42:57:23
Rod
Yeah, we did our last one of 5.4.
00:42:57:23 – 00:43:02:16
Chad
Yeah. Is up now. So if you lock that in right now for ten years, you’re going to be kicking yourself.
00:43:02:18 – 00:43:04:09
Rod
If it drops back to three or four.
00:43:04:09 – 00:43:09:22
Chad
Sure. Five years from now. Right. It is it will drop some. It probably won’t go to three, but it will drop some.
00:43:09:22 – 00:43:15:08
Rod
You know, I’m just such a bear. I’m worried that it could be bigger than we think it could be. But, you know, and.
00:43:15:08 – 00:43:18:20
Chad
That’s your experience. Yeah, it’s perspective. You know, back in your day, you’ve seen it.
00:43:19:00 – 00:43:28:00
Rod
Yeah, I did. And that’s why, you know, five year debt scares me right now. I’ll be candid and I hope I’m wrong and I probably am. My kids love to tell me you’re tired of being wrong.
00:43:28:02 – 00:43:31:04
Chad
A long time. Yeah, but. But and these are opinions we’re talking, right?
00:43:31:04 – 00:43:31:11
Rod
Right.
00:43:31:11 – 00:43:38:00
Chad
I’m I’m bullish on the rates, resetting the other direction. Yeah, but just remember, do not just remember.
00:43:38:00 – 00:43:56:01
Rod
At one point they went to 18. They did. Okay, God help us. But. But, you know, I, you know, we won’t. We won’t go political. We won’t go political. But I will say this. I will say this. Love him or hate him, Trump said it could be as bad as a Great Depression. That’s a quote, a direct quote from a speech he gave Elon Musk said, They’re lying to you.
00:43:56:01 – 00:44:01:01
Rod
It’s going to be a much bigger crash. Both pretty smart guys. Musk, I mean, even.
00:44:01:01 – 00:44:02:13
Chad
A soft landing is out of the question.
00:44:02:13 – 00:44:09:09
Rod
I agree. I agree, man. I think it’s going to be ugly and there’s going to be incredible freaking opportunity. So don’t get.
00:44:09:09 – 00:44:12:17
Chad
Scared. Remember why they why do they raise rates.
00:44:12:19 – 00:44:18:17
Rod
Right. Well, they think they’re stopping inflation, but the inflation is because the morons printed so much frickin money.
00:44:18:17 – 00:44:31:16
Chad
Think about this. We’re exactly right. Already breaking glass in the banking system. Right. So if we if we punch through and go to 10%, we’re going to shatter it. All right. So what here’s what’s likely to happen. I mean, and I’m I’m not scared to predict and be wrong, but.
00:44:31:16 – 00:44:32:03
Rod
Right, right.
00:44:32:03 – 00:44:48:17
Chad
Right. Thing to happen is we’re going to push a little too far. We’re going to break more glass and we’re going to have to cut rates, in which case we’re going to be having the same damn conversation four years from now when inflation picks back up. So we printed more money to stimulate. Oh, I think we’re in for a ride the next.
00:44:48:17 – 00:45:08:20
Rod
Yeah, but here’s some of the things that I’ve talked about previously, so forgive me if you guys have heard it already. There are this is like six months ago I saw an article. There are 20 million families behind on their utility bills right now. 20 million families. I’ve got I’ve got it right here behind me. Hold on. Yeah, I’ve got it on the floor here.
00:45:08:22 – 00:45:30:06
Rod
Forbes I don’t have the data on this. Expect layoffs at 51% of the US companies, according to new survey. Okay, hold on, hold on. Warren Buffett preparing for a market downturn. Not a nice thing. Here we go. This was from I don’t want the economy something economy, either magazine or website. More than 20 million U.S. households behind on their utility bills.
00:45:30:10 – 00:45:32:01
Chad
That’s a stat I had not seen. Yeah, here.
00:45:32:01 – 00:45:34:20
Rod
Is Elon Musk. Everyone’s lying. A bigger crash is coming.
00:45:34:20 – 00:45:35:15
Chad
Yes, I’ve seen that one.
00:45:35:15 – 00:45:53:00
Rod
Yeah, but even like like in this Forbes, you know, the top office markets from San Francisco to New York to Phenix to Dallas are at the low 70% occupancy. Yeah, they aren’t breaking even.
00:45:53:02 – 00:45:53:12
Chad
That’s right.
00:45:53:17 – 00:45:54:12
Rod
And so a.
00:45:54:12 – 00:45:55:12
Chad
Fundamental change in the.
00:45:55:12 – 00:46:15:11
Rod
Supply. Right. But but but you know that debt is in default and we’re and we’re talking almost all of it in these in these off and most of these offices and that debt is prime is a third of it’s with small and regional banks and that’s my concern. I think the bank failures are coming and I think they could be the catalyst for something bigger.
00:46:15:13 – 00:46:23:14
Rod
Again, I’m not to scare you. I’m just trying to tell you, you know, I believe everything is going on sale. I think there’s going to be incredible opportunities. I think there’s.
00:46:23:14 – 00:46:24:13
Chad
Going to be starting to happen.
00:46:24:13 – 00:46:41:12
Rod
Right. Right. And we’re going to see businesses go on sale. You know, there’s 80 million baby boomers. A lot of them have businesses they want to sell. There’s going to be opportunity there. Something I’m interested in as well. But asset classes in real estate, I think they’re all going to have opportunity, single family. You know, you can buy deals if you want.
00:46:41:12 – 00:46:54:21
Rod
I highly encourage you to do multi instead. But but even, you know, other asset classes stay the hell away from office. Maybe even stay away from retail, candidly. But I don’t know what your thoughts are on other asset classes. Do you even mess with them at all?
00:46:55:01 – 00:47:12:02
Chad
I do everything okay. And I’m going to quote the Leatherman letter here. This is economist Dr. Peter Lynham and I love to follow. He has a very pragmatic approach to the economic things here. And so, you know, one thing that comes out of that is it’s interesting. I want to research that stat a little bit because the numbers I’ve seen as oh.
00:47:12:04 – 00:47:16:19
Rod
Sorry, I remember what the other thing was. Forgive me, but finish your thought and then I’ll tell you what it was. Okay.
00:47:17:00 – 00:47:32:12
Chad
The numbers that I’ve seen are the consumer on average is actually in a much stronger position than they’ve ever been. And think about why. Oh, about 60% of consumers own a home. About 45% of that has actually locked in a sub 3% interest. Oh, yeah.
00:47:32:13 – 00:47:37:01
Rod
No, I read that today. Actually. I read that I’m sorry connect today.
00:47:37:03 – 00:47:40:10
Chad
About rates to about $7,000 a year more spending power in their.
00:47:40:14 – 00:48:00:03
Rod
Right right right. I literally just read that today because these these a lot of these people got these these very low interest rate loans so they have more purchasing power. But here’s the thing. I think it’s it’s really the demographic. Okay. This is why I’m not going to touch a C-class asset right now because there is a demographic that is getting their asses handed to them right now.
00:48:00:03 – 00:48:00:11
Rod
And that.
00:48:00:11 – 00:48:00:23
Chad
Is that.
00:48:00:23 – 00:48:07:00
Rod
Is I think that’s the 20 million households that are in trouble. The other statistic, and I kind of find the article is that that’s.
00:48:07:00 – 00:48:07:21
Chad
The behind on utility.
00:48:07:21 – 00:48:29:04
Rod
Bills. That’s correct. That’s, that’s what I’m talking about. Yeah. And and the and a lot of people are using credit cards to pay ordinary expenses. What’s wrong with that picture? Right. And so, you know. Thank you. Thank you. And so, you know, I, you know, I want to be an optimist, but I’m being an optimist, honestly. My rose colored glasses are looking for opportunity.
00:48:29:04 – 00:48:35:19
Rod
You know, 28, nine. I got my ass handed to me this time. I’m you know, I like to say I got crushed by that wave. I’m surfing this wave.
00:48:35:19 – 00:48:52:12
Chad
And let’s talk about how to capitalize on that. Just let’s do it. Let’s talk about the different asset classes. Okay. So I think, you know, if you’re if you’re a developer at all and you’re developing apartments, I think, you know, there’s a big wave of deliveries right now that started in 2020, but there’s still that imbalance. You still have opportunity to build.
00:48:52:12 – 00:49:05:08
Chad
And by the time you start and start drawing on your loan, you’re probably going to be in pretty good shape. I still, I think, like you, there’s a lot of dumb money and acquisitions were done in the last couple of years and that reckoning is coming so wet.
00:49:05:08 – 00:49:27:15
Rod
Behind the ears. Operators have never been through a downturn. They don’t know how to effectively asset manage. They don’t they’re terrified. They’ve got adjustable rate debt or, you know, I just saw you know, of course, you you saw the big foreclosure article in Houston. One of my competitors students got creamed 3300 foreclosure units, 100. You know how like 100 million in lost investor equity.
00:49:27:15 – 00:49:49:05
Rod
But they just did another article in RealPage about some big investors. One of them even attended my mastermind with 20,000 units, and he’s in big trouble. And another kid I went to his meet up in Phenix. He’s in big trouble. They of these adjustable rate debt loans that aren’t breaking even. And so you know I like I say I think but anyway for.
00:49:49:05 – 00:50:10:18
Chad
Continue you know the terrified nature of this I mean I’m very grateful that I have veterans on my team who’ve seen this been through a downturn. As I said, I would be terrified as well had I not seen this right. And I’m not going to last a little scary. Right. But looking at other asset classes, I mean, you know, if you’re the type who can repurpose and like, here’s what’s going to happen when we re normalize the office occupancy, it’s not going to be where it was.
00:50:10:18 – 00:50:14:15
Rod
Oh, no. People, people who stay at home. So, yeah, if you can figure out how to repurpose.
00:50:14:15 – 00:50:19:13
Chad
Office stuff because the class office is what it will succeed, write stuff is not. So if you’ve got.
00:50:19:15 – 00:50:22:15
Rod
Self-Storage multifamily.
00:50:22:15 – 00:50:23:16
Chad
Stay away from right now.
00:50:23:16 – 00:50:35:04
Rod
No, I’m saying you could repurpose two self-storage smaller office buildings, but but you know repurposing to multi it has to be there has to be some pieces. It’s huge. You have to be some pieces in place what you’re doing Right Right.
00:50:35:09 – 00:50:40:03
Chad
But the the other asset classes self-storage, the rates are so fluctuating.
00:50:40:03 – 00:50:43:15
Rod
Yeah they’re dropping right now I’m hearing some I’m hearing some pain in that in that environment.
00:50:43:15 – 00:50:49:02
Chad
On the phone with they were asking 285 this time last year they’re down to 125. Okay, you bought this thing for.
00:50:49:04 – 00:50:54:14
Rod
The guy I’m interviewing right after you is in self-storage. So I’m going to I’m going to hold his feet to the fire, find out what’s going on. Yeah.
00:50:54:14 – 00:51:04:15
Chad
You know, I still think mobile home parks are great. But, yeah, if you if you have a position in retail, I’d hold it. I wouldn’t buy more right now because, I mean, if we’re going into what we think we’re going into, retail.
00:51:04:17 – 00:51:16:18
Rod
Retail will get hit. And then that that doesn’t even take into account the Amazon dynamic, which is not just Amazon anymore. I mean, you buy buy stuff from Wal Mart. I bought safes from Wal Mart and Home Depot and all online.
00:51:16:18 – 00:51:21:01
Chad
And so tell me why you guys think Bed, Bath and Beyond and thank you babies R us.
00:51:21:03 – 00:51:22:15
Rod
And RadioShack and.
00:51:22:17 – 00:51:28:18
Chad
Yeah what happened was their their suppliers went straight to market right and sell it online right undercut the store. Thank you.
00:51:28:19 – 00:51:48:21
Rod
What happened right and I mean there will still be some retail fitness centers and things that hair care salons and restaurants and things that will be okay. But but you know, the people that are selling goods, that’s where it is challenging. You know, that’s when the even the pet supply stores could could face challenges. So, you know, I’d be very, very careful with retail right now.
00:51:48:21 – 00:52:00:14
Rod
But I love mobile home parks. I freaking love them. I mean, because they won’t make any more of them. It’s the lowest, you know, cost to a to a resident. So, yeah.
00:52:00:16 – 00:52:05:19
Chad
I can end it there. I mean, personally, I’m not a big square footage guy, so I don’t I don’t really do, you know.
00:52:05:20 – 00:52:24:22
Rod
Industrial Warehouse. Yeah. Yeah. I mean, that that market’s done really well because of the, the Amazon, the Amazon dynamic. Correct. With what’s coming. You know, we know there’s pain coming. We know there’s incredible opportunity coming. I could be exponential opportunity could be the greatest transfer of wealth, literally, we see in our lifetimes. Who knows? We’ll see. You know, Grant cardinals calls it Armageddon.
00:52:24:22 – 00:52:32:01
Rod
Okay. I think it’s going to be bad as well. So how do you capitalize? How do you take advantage of what’s coming?
00:52:32:05 – 00:52:46:03
Chad
Folks, you have to be ready. I mean, what I mean by ready is you like, okay, luck is where preparation meets opportunity. So if you’re if you’re not prepared, you’re not educated, then make it happen. Get it done because you need to be ready to capitalize on your bootcamp.
00:52:46:05 – 00:52:48:06
Rod
Knock.
00:52:48:08 – 00:53:04:06
Chad
Yes, exactly. And so the second part of that is and I said it earlier, to capitalize in a market where everyone else is scared, you have to have courage and capital when others are fearful. And the big part of that is capital. So how do you do that if you think you’re going to go put something under contract and raise money in a hurry?
00:53:04:06 – 00:53:33:04
Chad
You may do that, but it’s going to be hard. I would recommend get your tail into a fund, figure out how to launch some kind of a distressed asset fund, get the money raised. Okay. Make it very clear, folks, we’re preparing for Armageddon. Yeah, You know, and we need to be ready to scoop it up. You’re not. We’re not going to start cash flowing in two months, so don’t even ask the question, you know, But if you can if you’re in a position with your investors to get that fund in place and be ready to jump, because what’s going to happen, you said it earlier, the way you’re going to get these deals for 40
00:53:33:04 – 00:53:45:05
Chad
and $0.50 on the dollar a bottom this way, right? You have to have certainty of close, which means you show cash in the bank. Right. The negotiating power will be through the roof. And when you buy that, the market will normalize. Sure it will. And you’re going to be sure.
00:53:45:05 – 00:54:02:16
Rod
Well, yeah, we’re doing it literally. I know you’re doing a fund. We’re doing a fund right now. We’re going to launch it here in a week as well. I think yours is coming up in a week. And we’re getting ready and preparation meets opportunity. I love it. I’d forgotten that quote. It’s an awesome quote. And that is going to be what what happens.
00:54:02:18 – 00:54:24:15
Rod
So let me ask you a question. I’ll let me ask you a couple of questions that are a little more mindset related. You know, you’re you’re a real motivated guy. You’re into Tony like I am and love, you know, love, self-actualization and becoming everything you can possibly be. What’s your why what makes you jump out of bed and make make this happen and fly down here just to sit and suffer through an interview with me?
00:54:24:21 – 00:54:43:19
Chad
You know, I have two things. Once I discovered that I was worth more than I was being paid, folks, I made sure that I’d be in control of my own destiny. You think you’re safe at that job? You’re only two weeks away from termination. Yeah, two week notice period. And I like being in control. And I love what the five freedoms that I live by.
00:54:43:21 – 00:55:04:04
Chad
You know, Let’s see if I can get this right. I miss them sometimes. Time. But it’s the first. It’s freedom of finance. Finance gives you freedom of time, which leads to freedom of relationship, freedom of passion and freedom of geography. Okay. Like those five freedoms I live for. And I want that balance in my life. And so that’s why I do this, because now, like you said, I travel down here for this.
00:55:04:04 – 00:55:08:16
Chad
All I have to have is my iPhone and my and my MacBook, and I can run my enterprise from anywhere in the world.
00:55:08:18 – 00:55:10:11
Rod
It’s a beautiful thing about this business, man.
00:55:10:11 – 00:55:31:01
Chad
It’s wonderful. You know what I am? I’m present for every childhood event my kids have. I’m present with my family like that. That is why I do this personally. But here’s the other side. This developed as I was starting this. I have taken over some of the saddest buildings that you have seen early in my career and the things that some of these families are living in.
00:55:31:01 – 00:55:32:01
Chad
It pisses me off.
00:55:32:02 – 00:55:32:15
Rod
Yeah, same here.
00:55:32:15 – 00:55:40:16
Chad
This is allowed. Same here. So not only do we fix that, but I have set out on a mission to eradicate generational poverty from this world and that whole thing.
00:55:40:16 – 00:55:41:07
Rod
Oh, that’s cool.
00:55:41:12 – 00:56:01:12
Chad
And here, here’s how we’re going to do it. It’s still unfolding. We’ve got the Quattro Giving Fund, live sports, where we actually put money to work in this in Rena. But look, the nexus of it is it has to skip a generation rod. Sometimes you can you can stabilize a household, provide food, provide water, provide shelter, provide opportunity and education.
00:56:01:18 – 00:56:16:23
Chad
You can’t always change old. It’s hard to teach an old dog new tricks, right? But if you can provide that for a child, you know, and stabilize the family to benefit the child, as long as you can look at it as long term return, I really think more is possible. And I like it. I like that. I love it.
00:56:16:23 – 00:56:35:08
Rod
I love it. Yeah. We’re doing, you know, my my charity, we’re doing 17 or 1800 backpacks in two weeks. Yeah. We’ve done school, like, tens of thousands. Yeah. And we feed families for the holidays as well. It’s somewhere between 130 hundred and 40,000 kids in the last 23 years. Got that from Tony. Actually, you know, his mascot brigade.
00:56:35:10 – 00:56:43:00
Chad
I have a vision at some point to actually buy buildings that are purpose for this. They’re not profit centers. They’re call centers. Nice. They’re just for, you know, stabilizing families.
00:56:43:00 – 00:56:59:18
Rod
Oh, I love it. Oh, I love it. I love it. Yeah. I my ultimate vision is to build schools, self-sustaining schools where there’s a there’s a, you know, maybe an agricultural infrastructure. You buy enough land to have an aggregate ag or a tech infrastructure you put in a computer room. And and it’s able to actually sustain itself. It doesn’t need to be fed.
00:56:59:19 – 00:57:11:07
Rod
You know, that’s a dream of mine. But well, listen, brother, this has been a lot of fun. It’s great to see you again. And guys, check out his podcast, Real Estate Runway. And I appreciate you coming in, my friend.
00:57:11:09 – 00:57:16:02
Chad
Yeah, folks. And look, if you want to reach out, talk to me more. I’m happy to happy to share. Chad Sutton Dot info.
00:57:16:02 – 00:57:20:19
Rod
That’s Chad Sutton Dot info. Okay. Got it. Thank you. It’s good to see you. But thank you as well.
