PLP-083 Investing And Private Lending with Corey Peterson
Sometimes it’s in the things that go wrong where we get the best lessons in life. In this episode, let Corey Peterson, the owner of Kahuna Investments, inspire you with his rags-to-riches story. When a day of disappointing his son made him realize that he was not living life on his terms, Corey set out on a bold journey to learn how to raise capital to achieve financial freedom. This once car salesman went on to become a real estate expert, raising capital in the millions and finally getting his piece of “sunsets and palm trees.” He talks about how his eagerness to learn and to adapt to changing trends led him to investing and private lending and to the success he is today.
Listen to the podcast here:
Investing And Private Lending with Corey Peterson
I’d like to thank you for stopping by. The other thing I’d like to thank you for is lending me your time. If you’re looking for practical tips and advice on mitigating and eliminating risks with your private mortgage lending, then you are in the right place. If you’re going to learn from my mistakes so that you can avoid them, then pull up a chair because I created this show for those select individuals who are looking to take control of their financial future by doing what it takes to create wealth in the marathon of life with old-world techniques and values.
I’m looking to create a tribe of lenders that will disrupt the way we think about money and how we can grow wealth. I also want to change the way we teach our kids about money. I think it’s antiquated to say the least. Before I get in our episode, I wanted to invite you out to the Quest Trust Company Self-Directed IRA Expo, which is going to happen in August 23rd through the 25th, 2019 at the Royal Sonesta Hotel in Houston. I believe there are tickets still available. I know the VIPs have sold out, but the general admission, which are still a good deal are available. Go to PrivateLenderPodcast.com/expo for the link there for tickets and use the promo code, PLPodcast, for your 25% discount.
For this show, I had a gentleman reached out to me and said, “I’d like to be on your show.” I said, “What do you do?” “I do apartments.” I was like, “Perfect,” because my idea for the show, the first year it would be all single-family. The second year, we would move into some multifamily. However, this is a fluid dynamic podcast as all things in this life. I’ll have some multifamily experts to come on. Our guest, Corey Peterson, I believe he’s out in Arizona. He reached out and I got in contact with him. I like him enough. I’ll put him on the show because I want someone to start scratching the surface on multifamily.
I’m not saying I’ll do it every month, but I would definitely at least a couple of times a year in 2019 to touch on multifamily and how private lenders can fit into the syndications and other things. I like Corey. He’s letting people know what he does and they can reach out to him, which is the right way to do it. He can explain and build that rapport, build that relationship so he can invest under the auspices of the SEC. I want to put it out there for the Lender Nation because I know some of you have inquired about multifamily and other things besides just single-family. This is my first foray into multifamily. Let’s go ahead and get down to the brass tacks and to the interview with Corey Peterson.
I am honored to have Corey Peterson on the show. Corey is the Owner of Kahuna Investments and he strives to provide his investors with stable cashflow returns and long-term capital appreciation by buying multifamily apartments. Corey has managed to acquire over $95 million in real estate across the country and he’s the first multifamily investor on the show. Corey, welcome. Thanks for coming on.
Thanks for having me.
Let’s hear the hero story. Let’s hear the origin story. How did you fall into real estate?
The truth is you fall into real estate. I grew up as a small-town country farm boy, and let’s say that I didn’t get the download from the mothership until I was 32. I barely made it out of high school. I didn’t have a degree. When you don’t have a degree, you’ve got to manage some crap or you’ve got to sell some crap. I sold used cars until I met my wife or my girlfriend, and she became my wife for seventeen years by the way. She told me that she couldn’t marry a car salesman. I became a restaurant manager and then she didn’t see me, because I worked a lot of hours in the car business. Almost eighteen years ago, something radically happened that changed my life. I went to Hawaii. My mom was married to this guy. His name is Bruce. I call him Bruce Wayne. He wasn’t Batman, but he was loaded.
He had a house right on the beach in Hawaii. My girlfriend, now my wife of several years, we got to go there for a vacation and it was magical. I remember waking up early in the morning going across the barn with toes in the water. The waves were crashing, it’s on a cove. We walk the cove and all of a sudden, the sun decides to start rising. As it was rising, the mist from the waves was creating a magical light. My wife and I, we stood hand in hand, transfixed for about fifteen or twenty minutes and watched it all happened. It was like a rebirth had happened. I remember looking over on the other side of Bruce’s house and I’m like, “What does this guy do? He’s got time, he’s got money, he’s got fine art, nice cars.” He has it going on and his phone was not ringing. I finally got the guts to ask him. He owns apartments and he’s in real estate. I wish the story got better because Bruce was a prick.
He was a grumpy, old man. He wasn’t going to help teach me real estate, but he did give me what I call the perfect vision of what I call now as the cashflow life should look like, sunsets and palm trees on your terms. He gave me what it should look like. About six months later, I read that book, Rich Dad, Poor Dad. When I read it, I was like, “That’s Bruce.” It made it very real for me. I started my company in 2005. I named it Kahuna Investments because I looked at Bruce and Bruce was the big Kahuna and I wanted to be the same thing.
I went on a journey as everybody else does. I started off as a wholesaler because I had no money, no credit, no idea what to do. I went to the local REIAs. I’m a smart cat. I barely made it out of high school, but I’m resourceful as hell and I got a lot of common sense. I would ask the guy that runs the REIA, “Who are the guys that are doing deals?” He’d be like, “This guy.” I sat next to all the guys that were doing the deals. I’d be like, “What does your deal look like? Where do you find them? What’s your average profit?” I’m just taking orders. I’m like, “I’ll find deals like that.” Whether I did or not it didn’t matter.
I started wholesaling to these guys and then something that I got good at, it happened by accident. I learned how to raise private money. These are for single-family deals because you always make a $3,000 $4,000 wholesaling fee. This is back when you found these on the MLS, REO’s and short-sales. I was making $3,000, $4,000. The guys that I was trying the rehabs for, they were obviously investors who were making $25,000 or $30,000. I was like, “I’ve got to flip the script.” I was asking a retired guy that I played racquetball with for his help because he lived in a retirement community and I didn’t think he had any extra money. As long as I was asking him as a friend, I’m like, “Carl, you’re watching what I’m doing, wholesaling. I’m making $3,000. The guys are making $25,000. Surely, I can just pay an interest, give someone a note, deed and trust. Let me know if you know anybody in that neighborhood.”
The next day, Carl called me, “Corey, you don’t know this but my home is totally paid for. I can borrow money at 3% and give you 12%. I can make a spread. How much money do you need?” This is when I got to breathe deep for a couple of minutes. I was like, “Carl, I need $85,000.” He was like, “When do you want me to send it?” It was just like that. My chin hit the floor. I equate it to this. I went into a telephone booth as Clark Kent and I came out of that thing as Superman.
Investing And Private Lending: Identify your limiting beliefs and break them.
That is your superhero story.
Once I figured out private money and seen a lot of people out there, you probably have a lot of limiting beliefs. I know I did. I bought myself. Was I good enough for private money? Would people give it to me? What if they knew that I had filed bankruptcy? What if they knew? All the things, all the baggage that I had? What I found is it doesn’t matter. When I raised that first piece, it broke every limiting belief that I had. My eyes were wide open and I realized that there’s a process to raising money. I mastered the process and I found good mentors. I’m averaging $3 million to $4 million free within a year to do single-family fix and flips. In 2011, I was running probably about $4 million or $5 million of capital doing single-family fix and flips.
The market started to change. It was getting harder to find deals. I am the person of the least resistance. All I knew how to do at this point in time was find deals on the MLS, short sales and REO’s. I have $4 million behind me saying, “Corey, put me to work.” I stumbled on apartments. I was like, “I’ve got to figure out a place to put this money.” It’s actually a longer pain story, honestly, because I was really screwing up and the epitome of doing all these fix and flips, I actually was becoming a bad debt. What happened is my son looks at me one day and he said, “Dad, are you going to be at my game tomorrow?” I’m like, “Yeah, no problem, son. You tell me.” Inside I was like, “I’ve got to look at three properties. I hadn’t sold those up.”
I woke up early in the morning and I’m going to get to these properties and I’ll be back in time for the game. Long story short, I got at the end of the game and did my son came off the soccer field and cried and just said, “Dad, you promised.” I’m telling you, it broke me, the pursuit of money and all that because out to the world, I would look super successful. I was dying inside because I didn’t have a fold in my business. I wasn’t living Bruce’s cashflow life. I was a damn train wreck. Kids are resilient and even though I’m hurting him, he still wants to get in my truck and drive home.
That was even worse because as I’m driving, he was crying the whole time and it’s killing me. I dropped him off and my wife gives me this look like, “You better fix this.” I get in my car, I go drive and I’m beating myself like, “You’re an idiot, Corey. Why would you think about putting everything first besides your family?” I’m crying out to God for forgiveness and in that solitude, I finally forgive myself and asked God for forgiveness. I’m driving in a very empty state of mind. I drive by an apartment complex and I’ve driven by it a million times. I used to say, I wish I can order an apartment complex, but that day and that moment I said, “How can I own an apartment complex?” That changed everything.
My life totally went on a different fork. It took about a year and a half to figure out how to buy apartments and how to underwrite them and all that stuff. I bought my first apartment complex in 2011. I sold it a couple of years ago. I bought it for $3.2 million. I sold it for $8.8 million. That’s a pretty good payday. That’s a good catch for a long way. Now we own $95 million worth of capital. We closed $25 million last year, raised $12 million. I am now living that life that Bruce talks about. I have tranquility in my business.
That’s my rags to riches story. It’s a journey. It still is, but what I would say the one thing that I’ve learned how to do more than the other guys that started at the same time that were doing single-family, fix and flip or wholesale or any of that is the ability to raise capital. That one thing, me being able to talk with people and get people’s money and then direct it to where I tell them they need to give it to or spend it or give to me so I can spend it. That one thing is why I’m a multi-millionaire and some of my friends are still just trying and stuck in that hustle and grind mode. Learning how to raise capital is the key if you asked me.
There are two things I want to touch on. One is raising capital. The whole reason I have this show is to help people. You can become a private lender, you can do this. It’s legal, it’s allowed by the IRS, it’s all these things. Most of us, we start with single-family and we move in and I took into the multifamily. I’m trying to switch my gears slowly but surely out of that single-family. I’m not doing as many deals going into apartments, but also being mindful that places like Dallas Fort Worth are just on fire and at some point, they’re not going to be.
I’m putting my toes in the water and slowly finding everything out about multifamily. I had a mentor at a mastermind actually. It’s episode one, Steven Kaufman who owns the Zeus Mortgage Bank. I took his mastermind and he did this great example of a $200,000 home. You’re going to buy it for this, you’re going to put this much into it. At the end of it, you’re going to rent for this or you’re going to sell it. He drew a line down the side and on the right side of that number he goes, “Just add another zero.” That’s it. That’s all you have to do for commercial. There’s environmental, there are a few tweaks of due diligence that are obviously different. By and large, you’re talking about that mindset and limiting beliefs. Don’t let the extra zero run away.
In a world of constant change, be a person of the least resistance. Click To Tweet
My net worth grew substantially when I was not afraid to add another zero. It’s the same amount of work. Actually, it’s a lot less work. Last year we did three projects, three deals, that’s it. Not 120, not 50, just three. It’s $25 million worth of deals though. You look at that scaling of that process, and the truth is there is so much money out there and it’s looking for people like me, for dealmakers. What you’re teaching us is great because we compete. Let’s talk about money. When I’m raising capital for my projects, I say, “What’s my avatar?” Who am I looking to get money from and who am I not? I typically am not looking for what I call the smart money. It’s Wall Street, hedge funds, all that stuff because they want a ridiculous amount of a return for their money. What I focused on is the main street, my main street investor. It’s not Wall Street. These are the guys that have money, million dollars or accredited and non-accredited. We do both, but these are the typical people that are in the stock market and they have mutual funds and bonds or a 401(k) or something like that.
When I compete against the stock market, I can win 90% of the time. I really can because what we offer in our product gives a better return than most alternatives without the craziness, the rollercoaster ride that most people aren’t currently on. That’s the avatar. What I focus on is how do I talk to you more mom and pops, normal people that are looking for alternatives to the stock market? There is a crazy number of people that are out there and a lot of them don’t even know they can do real estate in their retirement accounts. Our biggest thing is educating people because most people don’t have lots of money in cash. It’s in their IRAs. Once you can educate them on that process, then they’re like, “I can use my retirement money to fund an apartment. Syndication, how does that work?”
Once you say the word syndication, that’s a goal. “What’s going up?” It’s not as difficult as most people think. What is syndication? When Corey does a deal, he hires a syndication lawyer. He puts together this a hundred-page document that costs about $10,000 to $15,000 we’re not wired to do. In that document, it gives all the risks of my deal, the waterflow, who gets paid first, who gets paid second. It really becomes my operating bible on how I’m supposed to work. Because it’s federally mandated, if I don’t follow the rules, I can go, I don’t look good in stripes. Do you think I’m going to follow the rules? Yes. It gives me how I’m supposed to pay what I’m supposed to pay.
In my mind, that’s a good thing to share with your investors. It is just a matter of what kind of return do we do. With most single-family notes, let’s say you’re going to do a house and someone says, “I need a $150,000,” and you give someone a note and deed of trust. Typically, that’s how it works. That’s pretty clean and clear and I understand that. In the multifamily world, we give someone an ownership piece, a piece of equity in our property. We typically give a pref and then something on the back end of split of profit upon seller refi. We typically pay a 6% pref.
It’s for the preferred rate return.
That’s usually first dips out of any profits on the deal. We typically do that through our cashflow. We have a hundred and something doors, everybody pays rent, we pay all our bills and what’s left over, we have enough profit to pay our investors. We pay a quarterly payment and with a pref. Usually our pref is 6%. Why does that work? It’s not 12%. Everybody’s lending different money. I know that right now with single-families, I want to say the rate’s closer to 8% for a lot of private money guys. Maybe it was 10% or 2% or whatever, but I know there’s a lot of money chasing that asset class, and so it tends to be a little bit less not like it used to be. It’s getting constricted. It’s the same thing with a little bit of the multifamily space too, but not as much. We pay that 6% pref and you look at it this way. Most people are in the stock market and I always say, in that space, what do you think the average return most people are making in their IRA accounts?
Probably about 5% to 6%.
You’re probably more correct, but most people will tell you 6% to 8%. That’s the return that they’re experiencing with the emotions of the market. I don’t know if I told you this, but my background before I got into real estate, after I was in the restaurant business, I actually got a real job and became a financial advisor. It’s the only test that I studied for. I passed with a 73. You need a 70 to get your license. I know this firsthand that most people do the opposite of what you’re going through. They sell when it’s low and then buy when it’s high because the emotion plays a lot of what’s going on even though it’s not supposed to.
That’s the reality of what people do. If you look at Wall Street as a payment vehicle, so I would say Wall Street can help you grow money. People do it all the time in their IRA accounts. They get where they have $1 million or $500,000, whatever it is they have in their funds. Now they’re getting closer to retirement and they need to turn that money into a paycheck. I’ll just ask you this. At that point, when you’re closer to retirement, you don’t want to have volatility in the market anymore. Would you agree?
No, absolutely not.
You just want to live off your interest. What products are out there? What does a CD pay? You have treasuries, CDS and then you have bonds. Bonds, you have like corporate bonds. Those are like Coca-Cola or how they financed their debt or even cities. Municipal bonds, which are usually tax-free. What do you think an average bond pays?
Investing And Private Lending: To raise capital, learn to talk with people, get their money, and then direct it to where you tell them.
Around the 4% or 5%.
It’s closer to 3% to 4%, sometimes 5%. If they’re high, what kind of bonds are they called?
Junk bonds. That comes with volatility. When you look at that, if the average is 3%, most financial advisors will tell you, “If you need to plan on living off of 3% of your money, if you had $1 million, 3% is $30,000 a year. That’s not a lot of money. People’s worst fear, by the way, is running out of money. It keeps them up at night, especially when they have to have that money to live. If we can pay a 6% pref and most people are getting 3%, we took $30,000 and made it into $60,000 doubling their income. That’s the story. I’m teaching you how I sell this process when I’m talking to capital, because I really tell the story just like I’m telling it now with you. They start shaking their head because they know this to be true. They understand what this is because this is the stuff that all financial advisors say and they get it. They’re shaking their head, they’re nodding. I don’t get the buy in.
I say, “With us, there’s more. We’re basing that 6% pref on cashflow. You will pay rental over time. Our tenants rent to go up each and every year and we never disappoint them. We will always make a rent increase even if it’s $10. As we raise rents, we increase the profitability of the property. We increase the value of the property. Eventually, usually our average hold deal is five years. Why five years, six-year fixing all the broken stuff? You’re going to fix all the broken tenants. We want better credit scoring tenants and make more money and then we have three years to maximize operations. In other words, we raise rents as high as possible and keep our expenses as low. That makes a very profitable deal. When we sell it, we give our investors another 6% annualized for the amount of time they’ve had it. If somebody gives $100,000, we’re going to get $6,000 each and every year and with quarterly payments. It’s $1,500 every quarter.
People can budget. People that are retirement, they can budget if they know that money is coming. To be consistent is key and then at the end, they get a big dump truck of money, which would be like another $30,000 if you had $100,000 invested in one of our deals. That money at the end is like a garnish. They weren’t expecting that because they’re budgeting the money that they have on the first 6%. When I talk about it, that’s extra. That’s like the carrot. In that five years, if you were to take that money, it will say you used all the rest of the money and you spent it. That was your income, but now you still have your $100,000 plus this other $30,000 and you reinvest it in another deal. Now you have a COLA.
I like that.
A COLA is your Cost of Living Adjustment. The older people understand COLA because it’s annuities and things like that. They understand COLA and they’re going to get an increase in their paycheck. It’s because things go up, milk, eggs, all that stuff goes up each and every year. When we show them this, they’re like, “Now you have a rising income.” They can keep up with inflation or they can just go out and go on a big ass vacation, whatever they want to do. Invest in whatever you want to do. People understand that. 12% year-over-year, that’s a phenomenal return. The one thing I love about the syndication model is that we keep people’s money engaged 365 days in a row. A lot of people doing private lending sometimes if they don’t have good guys who are procuring new deals, their money could sit dormant for a while. They fund a deal for six months and then it sits there for another three or four months not working. They may say, “We’re getting 15% return,” but if you look at their real return of the whole year, it’s probably a lot less.
Oftentimes it isn’t. That’s one of the bigger complaints. I tell people when they say, “I want to fund flips,” I’m like, “Great,” but your timing has got to be good because you’re going to get a higher interest rate, but you’re going to be more apt to have some idle money. If you wanted to be the private lender on a house that’s being sold with owner financing, you’re right, you’re going to be in that 8% range, but you’re going to tie it up for three years.
The biggest thing is educating people on how they can raise money to start in real estate. Click To Tweet
That’s how I sell it on the apartment world. I’ve got two private money lenders. They were out of Utah and that’s their main piece of business. They’re older, one is an older lady. She’s great. The truth is she was getting tired of having to do all the transactions and to keep up with it. She’s in her late 70s. She just wants to be done. The first investment, she gave us $100,000 to test the waters. Once you started getting her checks, it’s like, “Corey, I’ve got another couple hundred thousand. Can you work it?” She was like, “This is easy. Set it and forget it.” As long as she was making her checks, that’s all she wanted. I feel like that’s what we’ve learned how to do is tap into main street money, the people that most people forget about. They’ve got real money too and what they want is something that’s consistent now.
I love that. The tenth of everything I make is mine to keep.
10% and then you make your mind, take that 10%, grow it and then you give it to somebody who knows what they’re doing in that line of work to grow your money for you.
That’s a great book by the way. There are a lot of lessons. That’s one of my favorite books of all time. The guy that was going through the journey, he’s like, “Why would I ever give you my money until you can show me that you know how to make it grow? I’m giving you tasks to teach you.” Once you became the master, once you understood the lessons that you learned how to master, how to make money grow. That’s when it was like, “Here’s the whole thing.” Once you learn some stuff, if you don’t give it back out into the world, to me the best part of what I do is to give back.
Nobody’s teaching private money just to create private lenders. It’s somebody like yourself. It’s an investor who has a need and has an ability. They come together and then I started getting questions at the REIA about, “Why do you do private lending?” I actually have a full-time job that I like but I travel at the last second and so I’ve tried to handle landlording. It didn’t work so I’ll get a property manager. You’ve got to manage the manager. For me, private lending was a better fit for what I do.
Usually, it’s the safest because you’re usually leveraged the correct way. You are playing the bank. If you look at any building in any city, the biggest buildings that have the name on top is usually a bank because banks are not stupid. They know how to make money and they do it with the less risk.
We can play the same game as them with the same rules as them. I don’t ask this question enough of my guests, it’s a joke but it brings it home. Who do you think or who do you consider is the bigger criminal? The man who robs the bank or the man who owns it? One is illegal. You’re going to go to prison and the other one can do all he wants.
You can print money. If you own a bank, you have a license to print money. For every dollar you take in, there is a multiplier that you could go to lend out. How does that work?
Investing And Private Lending: Looking successful on the outside but dying on the inside is not the way to live.
It doesn’t work with my checkbook. I don’t have $9 for every dollar. I have a dollar. At the same time by creating notes and private lending, you can follow along The Richest Man In Babylon. You can follow along with the Kiyosaki thing and be active in the most passive form of real estate investing on private lending.
The little other little caveats that I feel in the syndication department world that is a little bit different. We don’t have lenders, we have quarters or we have K1’s, but because they’re owners, they get something magical that they’re not getting in most other endeavors, which is depreciation. That used to not be that big of a deal, but now with the new laws that are on the books, if you do what’s called a cost segregation study, which we do on every property. I’ll give you an example. We just did a $10 million deal and we have a $3 million concept study done that was in year one. That’s the loss that we get to record. Half of that goes to my investor pool. The average number was for every $100,000 invested in our deal, our investors got $42,000 worth of depreciation that they can use to offset. If they’re not real estate professionals, they can offset all their other passive money.
If they’re lending money, that’s passive money, they can offset all their profits. That’s huge. Your biggest partner in life is Uncle Sam. There is some recapture when you sell, but more importantly a dollar saved now is worth more than a dollar tomorrow. That’s how the wealthy play the game, by the way. There’s a reason Donald Trump’s not showing his tax returns because he doesn’t pay any. He has buildings and assets that the government, even though it doesn’t matter that he’s done it legally.
The tax game is real. In a political world, you can’t find it. As normal people like us, I don’t know a person out there that doesn’t want to try to get rid of any tax that they can legally. The rules are made. Our elected politicians are elected by people who have money. The game is always slanted for people that have money. If you play the game like rich people play, which is being a lender, playing monopoly at the bigger level, it only gets good. It’s because all the rules are set for people that have wealth.
I’d like to add a little bit. You’re absolutely right. I’ll add one thing to that, the people with the wealth and the people that are willing to learn and risk and do something with it.
I started broke.
If you’re broke or Donald Trump, the same rules apply. It doesn’t matter.
You’re choosing to educate yourself. I’ve always said there are two hands. One should always be reached up. You should be looking at someone above you and saying, “How can I learn?” Your other hand should be down pulling someone up that’s a little farther down below than when you are and raising them up. It’s both ways, one you’re getting pulled, the other one you’re doing the pulling. That should be the journey your entire life if you ask me.
We could go down that path for a long time, but I do want to touch on a couple of things. In a relatively short amount of time, you’ve analyzed the single-family residents deal. From a lending perspective, how was your job as an apartment investor? How is it different? When you go in and put together the deal, you mentioned that you add value. I’m assuming you’re looking for apartments that are distressed and somehow either the property’s distressed or hopefully it’s just really bad management has let it go and that it has good bones. For someone who’s in the single-family world, give them a few first steps into how you look at a deal and put that together.
We don’t buy rundown shacks. We usually look for what we call stabilized assets and stabilized are 85% or better occupancy. We look forward to things, deferred maintenance and bad management. They always come together in pairs. How do we fix deferred maintenance? These are things that are not fixed. We fix it with capital, with new fresh money. Fix the broken stuff. How do you fix bad management? You spend more time trying to find the right management company. I don’t manage these properties. I use a third party but I spent a tremendous amount of time interviewing to find the right management company that understands my values and has the right systems and procedures. You’re buying from a management company, systems and procedures and the ability to transfer those in a region or a geographical area. They can do it consistently.
Once you get that set up, it’s really just a matter of the deals we look at. We already have renters that have a tenant base and then we look at the financing and say, “How much is it going to cost you to get us the loan? How much private money do we need? We usually get a combination of debt from usually 70%, 75% LTV. The money we got to put down and the capital that we need to fix it is what we raised from investors. We put those two together and then we say, “Here’s a very conservative pace that we are going to raise the rent once we fixed all the broken stuff. We should be able to get $50 more if we do this and this.”
We put it in a formula. The great thing about commercial that I love about it is it’s all about numbers. Even we have our own underwriting template that we’ve created called the Kahuna Cashflow Calculator, but it’s an underwriting tool to help disseminate if it’s a deal or if it’s not a deal. It’s not even emotional. It takes all the emotion out. It’s about the numbers. You don’t follow up a deal. You’re just following up the number. When the numbers look good you’re like, “That’s the deal. I should make an offer.”
The down payment is the money that you raise privately and then you get some debt from a banker, something else at the 70% LTV.
We’re at 100% leverage. That’s really what we’re doing, is getting 100% sometimes 100%-plus because we’re financing our CapEx too. If you look at the way rents work and how all that stuff works, usually you’re going to be very profitable within the first two years. Once you get that level, it’s exponential what you can do to raise the value of the property. Once you’re able to command higher rents, $50 more in rents is a lot because we’re doing it at a cap rate. I’ll give you an example. Assuming we had a hundred doors. One hundred doors times $50 is $5,000 times twelve months, that’s $60,000 more in income. If we’re to divide it by a six cap, that’s $1 million in value. That’s what raising the rents for $50 a property could do. It’s $1 million or more depending on the cap rate in value.
Let’s touch on the capitalization rate. We don’t deal with that much in the single-family world. It’s multifamily and commercial. Talk to us on how you took that $60,000 and came up with a 6% cap rate to get the $1 million.
The 6%, think of cap rate as what’s the market’s willing to bear. The cap rates go up and down, but it’s a big swing when you change it from 5% to 7%. Currently in most markets, we’re buying ‘70s and ‘80s properties at a 7% to 7.5% cap rate. That’s what the market is willing to pay. It’s 7.5% for money. On newer products you can usually get a lower cap rate. On the new builds, they’re getting 5%, maybe 4%. It’s a function of what the market’s willing to bend. I took that $60,000 of revenue that we created that I just use an example of and I divided it by 6% cap rate. That’s where I get that $1 million.
If I was to say $60,000 and then divide it by a five cap, it’s $1.2 million. If you could buy at a high cap rate, it doesn’t sound right, and then you sell at a low cap rate, you can make lots of money. We do that almost all the time. How do we do it? In the multifamily world, let’s say you sold the property and you made a $5 million profit. You’ve got to pay taxes unless you do a 1031 exchange. It’s very common in our business. In the bigger projects, they don’t do so much in the single-family. In the multifamily game it is, if you make $5 million, you’re trying to figure out how to not be tapped on any of that. You’ll go try to do a 1031 exchange. It has to happen in a very short time period. If you can’t get it done or something goes wrong and you’re in a deal and it doesn’t pan out, now you’re having broken 1031 exchange and we’d rather take a less a project then have to pay taxes. We market our property to potentially broken 1031 exchanges because we know they’ll overpay.
A lot of questions are coming in my head and the cap rate in layman’s terms, is what your yield or your return would be if you paid cash for the property. If you weren’t leveraged and you weren’t earning any money. In layman’s sense, a cap rate is an expected return on investment on a particular property. Why would you want to buy it at a high cap rate? The money, you buy high and sell low that one time. When investors buy high and sell low, it turns out to make them quite a bit of money.
Investing And Private Lending: When you choose to learn, your hand is reaching up for education and advice, while the other hand is pulling up someone below to pass on knowledge.
You can buy at a nine cap and sell it at a five cap. You could do nothing but just do that because markets change. Right now, in our pro formas, we’re buying out a seven cap and we’re exiting at 7.5 cap. It’s worse because we think something’s going to happen. We don’t know what it is. We’re planning that it’s not going to be great. Even with that said, our business plan internally is to sell out five. When we come to a paper, we model something. We’re going to model exiting at a worse cap rate.
You’re stress testing it before you even get into it.
It has to be done that way so that when you’re raising millions of dollars of people’s money, real money, and these are my main street types, I don’t ever want to be wrong. How I protect myself in doing that is I am ultra-conservative in what we think we can do. You have to do it that way. You set the floor, not the ceiling. Worst case is it probably only does this in a deal and we’ve got to make it qualify on those metrics. Even if it qualifies on those metrics, if we do anything better, great for us. We look like heroes. The reason for that is Corey Peterson has to be able to sleep like a baby at night. I cannot be like, “What’s going on?” because I’ve been there before. I’ve had to pay for this lesson and so I chose to never have it again. I told you my first deal was great. My second one was not so great. I made some mistakes and so I learned from those and because of that, I’m super conservative. I was able to get all my investors back but for two years, I had sleepless nights.
You’re talking to a guy who got his truck repossessed when his wife was five months pregnant. That was me. You learn quick.
If someone says they’ve not lost money on a deal ever in their lives, they’re lying.
One thing I love about the real estate game though is if Wall Street loses my money, they still get bonuses.
It’s the market. That was their excuse.
My dad has a Master’s degree, but he had a lot of frustration with people with Master’s degrees. My dad was in the oil field and he said, “Give me an old guy missing a finger. He’s been doing it his whole life. I’ll take him any day of the week over some kid out of college.” I was that kid coming out of college. I had a mistake when I was in the oil field and I got three line-managers calling me, asking me what happened. “I screwed up, I made a mistake, this is what happened.” They were so used to people making excuses. They were like, “Don’t let it happen again.” I kept my job and I’m like, “How do I still have a job? I just lost somebody $500,000 and downhole tools.” Anyway, you learn from those.
There are a lot of lessons. Sometimes it’s the things that go wrong. Life is experience. It’s the sum of all your success and your failures. If you’re not failing, you’re probably not doing it right. You learn a lot from failure as well.
A dollar saved today is worth more than a dollar tomorrow. Click To Tweet
You pick yourself up and keep going. It doesn’t feel good. I had a deal fall together. You can’t take it personally for a second. I’m a Dallas Cowboys fan, all apologies accepted but I have a 24-hour rule. After they lose horribly, I have 24 hours to wallow, to get mad, to scream. Twenty-four hours after that kickoff, it’s over. It’s done. It’s the same thing. Pick yourself up and move on. It’s hard to do, to get up and keep going and that’s what makes people successful. You said you take both accredited and non-accredited and in the single-family world, we don’t deal with a whole lot of accredited folks. Tell us how you’re able to work both ends of that.
What we don’t do is we don’t advertise. We don’t solicit. We have a whole process. We have to get to know you on a substantial level before we would offer you and you look at any of our deals. We have a process. When I’m on podcasts, this is education for them. I’m talking about what I do. When people were saying, “I’ve got a couple of hundred thousand dollars. Let’s go to work.” I was like, “You’ve got to fill out an accredited investor form with me. We have a process. I need to get to know you and not just know who Keith is. I need to know you financially, Keith. I need you to fill out a form and we need to have a discussion about your money. If you’re not accredited, I need to understand your sophistication and whether you’re a good fit for my deal or not.” If your last money is $50,000, I’m not taking it. You basically can’t market or do any marketing for investors. It really becomes through education and through people that you know and referrals. We get referred to a lot of people. When you do a good job for people, they let other people know.
I was about to say success leaves clues and they’ll talk about it. They’ll say, “This guy is doing this. This guy’s doing that.” Is that the Reg B where you can take on a non-accredited?
I notice that people say, “I’m going to go invest in them. I’m going to put my money in apartments.”
A lot of people do it wrong to me. I see people say, “I got a new deal, hit me up.” You can’t do it that way.
You’ve got to be able to establish a personal relationship and knowledge of the person. No soliciting, no advertising, no marketing.
I was on a SiriusXM radio show. You’ve got to do some work to find me because I don’t just have my email out there, but it’s out there somewhere. You’ve got to know where to find it. He emails me, he gets into it. He’s like, “I heard you on this. I know Jennifer, the host of that. I have $400,000. Can you get us some deals?” I don’t know who this guy is. He can be an SEC regulator for all I know. I don’t take the risk. I don’t ever want to screw that up. I’m like, “I would love to talk to you but before we start, you’ve got to fill out my credit investor form and then we need to have some discussions over that. I need to understand who you are and what your experience level is. After that, we can talk about potential deals that we have.” That’s a good way to do it.
It’s just adding another zero, but there is a little more minutia, little more variables.
Investing And Private Lending: Deferred maintenance and bad management always come together in pairs.
It’s a little bit more work, but when you’re syndicating correctly, the money’s in the money. Let’s say this is for the single-family business. When you can go get money at 6% and lend it out at 10%, you can be a syndicator. You can go out and find capital and do it through a PPM or a pool or create a fund and get money. You could go lend out for your business and make money. It doesn’t just have to be your money.
That’s a good question because from the start, for the last year and a half, this is only about true private money, self-directed IRA stuff. 401(k)s, it’s your own money. As a private lender, if it’s my money, there is no SEC regulation prohibiting me from coming out and saying, “I loan money. I loaned money to this. I can do with that all I want.” Ultimately some of the audience and the people that have reached out to me, they want to become a hard money lender. They want to create a fund, they want to pool and take other people’s money and go do that, which I don’t have any issue talking about. Since I don’t do it myself, I don’t promote it but I’m happy to have other people. I stick to what I know. The whole idea behind this podcast is it’s going to be a reflection of where I’m at in my investing career. I’ve pigeonholed myself into this private lending thing, which isn’t bad.
Am I making $500,000 a year? No, but I’m not flipping houses. I’m not dealing with sellers. I’m cutting checks. I’m doing my underwriting, I’m doing my due diligence and I’m saying yes or no.
That’s a great model. I love what you’re doing. There are lots of ways to play Monopoly. Lending is a key aspect of Monopoly. You’ve got to build the right stuff and people are always looking to purchase. If you can help fund them, get notes and be a trust or take private lending if you want a different way, that’s what I do. You can learn to raise capital and lend it even more and make an aggregate of that money. There are so many ways to make money in real estate, but they all can lead to the life that you want, which I call sunsets and palm trees. The goal is not to be busy, it’s The Richest Man In Babylon. It’s when your money is working for you and you’re not working. Your cup gets replenished every month. That’s the trick.
That’s what I love about this as you said back to limiting beliefs. I definitely want you to mention you have your own podcast as well.
I knew you have a book, which I absolutely love the subtitle.
Why The Rich Get Richer: The Secrets To Cash-Flowing Apartments. I launched a new book coming out. It’s called Copy Your Way To Success. We haven’t figured out the subtitle on that one yet, but we’re close. That one took a long time to write. It is my journey. I’m excited to have that one come out. It’s not ready yet.
How do people get ahold of you?
The easiest way is to go to Kahuna Wealth Builders. KahunaWealthBuilders.com is the website where we teach and relay all the information. There’s a Contact Me button somewhere in that webpage. Send an email and we’ll respond. We’ve got a whole team set up for that. That and the podcast is the best way to figure out the multifamily world.
Corey, thank you so much. I’ve had a blast doing this and I appreciate you coming on and talking about syndications and apartments. You shared your story about your kid and I’m right there with you. I came out of the oil field because my daughter thought a cell phone was daddy.
There’s no bigger value than being a full-time dad. Sometimes we fail but sometimes you stroke for season but you can fix it. That’s what I did and I fixed it and we’re proud of that. Thank you again for having me on your show.
Thanks. Take care.
I want to thank Corey for coming on the show and giving us his take on multifamily investing. This podcast is free to read, but I do ask that you pay a very small price with your time and that is to leave a rating and review over at iTunes or whatever platform. Especially iTunes because they are the 800-pound gorilla in the room. Even though Google has got its own podcasting coming out, iTunes is still the 800-pound gorilla in the room. If you could please go over to iTunes, leave me a rating and review. They just made it easier for you to do it.
Go to the Private Lender Podcast, scroll down and if you think I get zero stars, seriously, please give it to me. If it’s one star, two stars, I want an honest review because the more reviews will put this podcast into the ears of more and more listeners. That is the price I ask that you pay. Also if you’d like to connect with me, please do connect with me on social media, Facebook, Instagram, Twitter, LinkedIn and BiggerPockets. I do appreciate your time and your consideration. Please keep reaching out to me. I really do appreciate all the feedback I receive whether it be on social media or you can always just send me an email, Keith@PrivateLenderPodcast.com. I love the words of positive reinforcement and encouragement but I would also like some negative words.
I’d like to know how I can make this thing better, how I can craft this to reach the most people and to build this tribe of lenders so that we can disrupt the banking system. We can disrupt everything. The power is in the people. I’m not talking about revolution, but we have more power. We have more ability, we have more opportunity than we ever have in the history of humankind. We are coming up on a world of flux and I’m excited about that. It’s a good thing. We can all benefit from it. We just need to have the right set of eyes looking at it. Before I forget, please go to PrivateLenderPodcast.com/guide to get your free private lenders loan guide and checklist. We put this little checklist together for all the things you need to do your due diligence on a loan and then also three sections of pros.
I try to at least let you know the mindset that I have as I go through to come to the three-step process of the person, their process and the property. Look at the person. Is this somebody who’s going to cut their throat to make me whole? If not, I don’t need to lend to them. Ask me how I know. I have screwed up along the way being a little brash. Can this person pay me back? Are they the type of person that will pay me back? If they are, okay, great. What are they doing? Are they a landlord? Are they a flipper? What do they do on their finance? What is their particular niche of real estate and are they sticking to it? Is this a landlord who wants to start flipping houses and go to hard money?
Sorry, go gamble with somebody else’s cash, not mine. I want to loan to people who stay in their own lane. Finally, let’s take a look at the property. Is this a property that I want to own? If worse comes to worst and this borrower doesn’t pay me and I foreclose and I take this property over, do I want it as an investment property? You have a whole range of options here. Do you want to be a landlord? Maybe put that into your portfolio or maybe you complete the flip. If you’re smart and you don’t give all the money upfront and you only pay on the draw system, once the work is completed and approved by an acceptable inspector, you play those cards right.
If somebody defaults, but you haven’t given up all the money, then you can step in and pretty much be made whole. Sometimes I know people who have profited even better than the original loan terms because of a foreclosure, but they were smart and they didn’t give all the money upfront. They didn’t expose themselves. That’s the name of the game. That’s going to do it. Besides good health and self-awareness, I wish every one of you safe and prosperous private lending. I’ll catch you on the next episode.
As the owner of Kahuna Investments, Corey strives to provide his investors with stable cash flow returns and long-term capital appreciation by buying multi-family apartments. Corey has managed and acquired over $95 million in real estate across the country. He is the bestselling author of “Why The Rich Get Richer – The Secrets to Cash-Flowing Apartments” and host of the Multi-Family Legacy Podcast. He speaks around the country on this subject including at Harvard and Nasdaq. Corey is frequently featured on FOX, CBS, ABC, and NBC affiliates.
Love the show? Subscribe, rate, review, and share!