Clint Harris and Neil Henderson engage in a profound discourse with Joel Kraut, a distinguished figure in the realm of real estate investing and lending, focusing predominantly on the intricate dynamics of passive income. Central to this enlightening exchange is the exploration of the BRRRR (Buy, Renovate, Rent, Refinance, Repeat) method, alongside a meticulous examination of the evolution of lending practices, which underscores the necessity for preparation and strategy within the landscape of real estate investment. Joel delineates the paramount importance of cultivating relationships in the industry, asserting that such relational capital transcends the mere transactional nature of real estate, proving invaluable across various market cycles. With an emphasis on adaptability and flexibility, he imparts insights drawn from his extensive experience, particularly in navigating the current market challenges, thereby illuminating pathways for sustained success. This episode serves as a clarion call for investors to remain vigilant and prepared, ensuring that they can adeptly respond to the ever-evolving demands of the real estate market. The discourse between Clint Harris and Neil Henderson with Joel Kraut, an esteemed real estate investor and lender, delves into the intricate realm of passive income generation through real estate investments. Joel articulates the pressing relevance of establishing strategic partnerships and the criticality of preparation in the ever-evolving landscape of lending practices. The conversation navigates through the BRRRR method—Buy, Rehab, Rent, Refinance, Repeat—highlighting its efficacy in maximizing cash flow and equity. Moreover, Joel expounds upon the current market challenges, emphasizing the necessity for adaptability and the cultivation of robust relationships within the industry to weather cyclical downturns. Through his extensive experience, he illustrates that the true essence of real estate investment transcends mere property transactions; it is fundamentally about nurturing relationships that propel success across varying economic climates.

Takeaways:

1. The significance of relationship capital in real estate investing cannot be overstated, as it often proves more valuable than the properties themselves.
2. Flexibility and adaptability are crucial traits for navigating the ever-changing landscape of real estate investment and lending practices.
3. Preparation and strategic planning are essential components of successful real estate investment, especially when utilizing methods such as the BRRRR strategy.
4. The current lending environment is challenging, with fluctuating interest rates and property values necessitating a thoughtful approach to financing.
5. Investors must be cognizant of their exit strategies and ensure they have multiple options prepared prior to committing to any investment.
6. The evolution of lending practices reflects a broader trend in the market, emphasizing the importance of understanding both the financial and relational aspects of real estate.

Links referenced in this episode:

1. brrrr.com

One of the biggest fallacies, misnomers, incorrect things, is all these people in real estate think it's about real estate.

It has nothing to do with real estate.

If you have the wrong partners, they cost you more than anything in life.

And I've been through that.

Those are the worst beats I ever took.

The others are math equations that you can step away from, lose your money, make it on the next one and start feeding back and getting going.

But relationship building, relationship capital that is going to take you through all different types of cycles.

Foreign.

Welcome to Truly Passive Income.

I'm Neal Henderson.

And I'm Clint Harris.

And today's guest is Joel Kraut.

He's the co founder and managing director of BRRR Loans, a direct private lending firm focused on fix and flip and small balance commercial deals.

He's got over 20 years of experience as an investor, a broker and a lender.

He's got deep expertise in hard to finance assets and burr style lending.

What sets his approach apart is a disciplined view of leverage.

He focuses on using private capital with intent, slowing investors down and helping them build durable wealth without blowing up from bad debt or bad partners.

Joel Kraut, we're excited to have you with us today, sir.

How are you guys?

Thanks a lot for having me on.

You know, we always joke in background like truly passive, as we talked about off camera.

Is it really truly passive?

But for all of us, you know, it's our chosen lot in life.

I'm a real estate junkie.

It sort of evolved from reading books to getting active and just continuing the process, being insane enough to just show up every day.

And here we are, you know, years later.

Last year we let $300 million out of our office and we're expecting to double that this year.

So, you know, we've been really blessed and it's been a great ride.

Joel.

We, we've only interacted for a very short period of time before recording.

But anyone who's candid enough to bust our chops for the name of our podcast within the first 30 seconds, we're going to, we're gonna get along great because what I value is candor and honesty.

And you shot us straight from the first second that we talked to you.

And I know you're going to continue to do that today.

And I'm excited about that.

And you're exactly right.

The name is tongue in cheek because there is really nothing that is Truly Passive Income.

It's all on a scale, right?

Something is the most passive something is the least and everything else falls in between.

Sometimes it depends on how much work and preparation you've done ahead of time.

However, hard money lending or brrrr lending is one of those things that a lot of the work you're doing upfront is on qualifying the buyers, on qualifying the property.

And after that it becomes fairly passive and in a good spot on that scale.

So tell us a little bit about.

I'd love to hear more about you and, and your background.

You mentioned that you know, you've been doing this for quite a while, you've been through some market cycles and you are seasoned and I think with that comes a lot of wisdom and I'd love to hear more about that.

And then for those that don't know what brrrr is, we've talked about it many times on this podcast, but love to hear brief explanation or your explanation and the type of lending that you guys offer.

So we are a typical fix and flip 30 year fixed rate, commonly referred to as the DSCR style loans.

And we do a lot of new construction spec houses out of the ground.

We can do some small multifamily construction, but most of our construction is is one two family, maybe a four family.

Not that many larger buildings.

We've known it for a long time.

Truthfully showed up in my office, had never met her before, quickly introduced herself.

I didn't even really make out what she'd said.

And she told me that she thought I bought my property really cheaply and it was worth a lot more.

We could refinance the property and I could get all my money out.

I didn't even realize that the mortgages were recorded public instruments.

I got nervous.

Like somehow she knew this info on me.

I called a friend of mine up who'd sold me the property, my realtor friend, and walked her through the process.

And I started out by saying, mindy, please don't laugh at me.

And of course she started to laugh.

Cause I asked if it was legal.

I mean, I was a Wall street guy trading derivative products.

And I'm like, wait a minute, you're telling me you're going to give me all my money and I can get a check above that?

I still own the property, it's going to cash flow and I still have equity.

The light bulb goes off and you can imagine so that mortgage rep who I Consider one of the sharpest ones I'd ever met.

Explained her theory.

Instead of going to look for all three of us to go buy our next house every five years, she went into the county records and found where the three of us own more than one mortg.

And she would approach us when one of those mortgages hit the 10 month mark.

Because back then in the 90s, you could not refinance the property to market value to 12 months in a day for seasoning.

Now that's changed dramatically, but back then that was the rule.

So she would only approach the three of us when we got to the 10 month mark.

And she did hundreds of loans a year instead of trying to find 20 new homeowners a year.

And in that she built a repeat customer, me, because I went on and did 22 loans of her in the next two years.

So we started to understand what was happening.

I didn't know 20 years later that'd be called brrr.

You know, buy it, renovate it, rent it, refinance and repeat it.

It just seemed too easy.

So we started to do it.

And through that we started to find the opportunity to flip a house or two.

And I was doing a deal in Newark, New Jersey, and I was working on two houses on the same block.

And a couple of guys came over to me, you know, was a little different neighborhood, if you know what I mean.

And they're like, you know, yo, what's up?

How do you do two houses on one block?

And I explained to him how I got the money basically from friends at, at that time it was 14% and 4 points.

Now the markets had a lot more meat in them back then, so you could definitely afford that.

And my friends would lend me basically 90% of all the money, sometimes a hundred.

So they asked, could you do that for me?

So we turned around and lent them less.

But we started a little lending business out of it.

And that kept growing over time as well.

I really learned about hard money lending in the crash in, oh, we had a 31 unit condominium complex going up, ski on, ski off at Hunter Mountain, New York.

We were just about done.

The markets really implode.

Our bank at the time calls us up, look, we have a problem.

We can't fund anymore.

Like, well, we have deposits on all these properties.

We're going to get sued by God knows how many homeowners here or potential homeowners.

We met a gentleman who was a private lender.

I had never met somebody like that before at that level.

I'd just done it with buddies that we were.

I didn't even call them private lenders.

They were my friends who gave me money.

I didn't even put two and two together.

But this was a professional person who did this.

And he lent us the money to get us through, in this case, the last four build out of the units.

In particular, we paid him back from the sales.

We sold those units a lot lower than we had sold for the last 12 months.

But we got out of the job and we're able to walk away with our heads.

So that was my first exposure.

And I just thought, this is a great business.

I mean the guy's in first position, he's got a ton of collateral, guys desperate to pay him.

There's something here.

This is not just one guy on the street that we're going to lend, you know, $110,000 to.

This was $1 million.

It was a whole different world.

So you started to put two and two together and fast forward all these years later.

I never really thought it would get to this point, but here we are.

You know, it's kind of amazing.

I, it's so funny you mentioned your first time, you sort of become aware of the entire idea of brrr.

I had a similar experience.

I think the first time I heard took me an absurdly, an absurd amount of time for the concept to get through my thick skull of using a short term loan to buy and you know, to basically fund the purchase and rehab of a property that I would then use another loan to, you know, go into a longer term.

It just did not compute for me for the longest time.

And I think I, I finally, somebody, somebody finally explained it on the BiggerPockets forum in such a way that it got through my skull.

But it's still to this day, you'll explain it to a, a civilian and like, wait a second, you're using, you're, you're using, you, you have two loans.

Well, that's, that's high.

That's high risk.

Well, what do you, how do you.

You're.

So then you're paying two loans.

You're building a house of cards.

Yeah, yeah, it's like, no, I'm using, I'm forcing the appreciation on the property with the first loan and then I'm going and getting another loan that pays off the original loan and they go, well.

And then it just doesn't compute for the average person.

Yeah, well, the concepts of value add are foreign to most people.

Right.

I tell the guys in the office, the men and women, and when we travel and meet groups.

You have to still remember 9 out of 10 people have never gone to a real estate meetup or spend time on the BP platform, BiggerPockets platform or gone to any of these types of events.

So to your point, when you're speaking to them, I used to get questions or questioned.

What do you mean someone's going to sell you a house for a discount?

I don't believe that.

Why would any idiot do that?

Why would you buy a house you're not going to live in?

Right.

The lady didn't pull up a Lambo, had perfect hair and nails and skin on a job site.

It was like guys that were rusty and crusty like me and you know, we'd fight our way through these jobs and make some money quietly and go home.

And it wasn't publicized unless you were up at midnight to 4am watching Carlton Sheets.

There was nobody else available.

I was a guy who was in a car, smoked windows, I'd roll past YouTube, roll down the window, you'd throw in the payment and go.

That was the feeling.

And when you didn't pay me, I was going to steal your property.

That was sort of the impression of a hard money lender, right?

I was a wise guy basically.

It was unbelievable.

And you've quickly figured out, look, I could put some money into it, unlocks, unlock some of the value like you just said, Neil, and now make a profit.

All of a sudden.

This is a business now.

I'm a good guy, I'm not a bad guy lender anymore.

I'm helping you make money.

And the whole world changed.

My wife and I, we were in Columbia, South Carolina.

It was crazy.

And I like accidentally burned them several years later.

And that was the first time I heard about.

And for me, that was the kind of time it was off to the races after that for not off to the races, but like it became less of a niche product and more Main Street.

Right at that point, one of the things that I wanted to ask you about, about being a lender and this is a niche lending product for this type of thing is the one thing that is hard for you to control is deal flow.

And two years before that was Covid.

And during COVID we've had this astronomical appreciation in prices when you have these compressed cap rates due to really low interest rates.

And the commercial side was priced really high.

The residential side is now priced really, really high.

So your basis is so much higher.

And then, yes, interest rates historically are not high.

Now when everybody has recency bias because you had 2.8% interest rates a couple years ago, that's one thing.

But historically they are not high.

But it seems to me like it is getting challenging to find properties that will burr because the values are up, the cost of materials and renovation is a little bit high, the interest rate is a little bit up.

And also the thing that compresses when those interest rates go up is that the LTVs sometime change.

So maybe you could refi to 80 or 85 or 90%.

But in the commercial world, for us, we went from one year getting 80% LTV or LTC, depending on what you're doing, and the next year it was 65% and sometimes 60%.

So that's limiting the amount of equity you can pull out of the property.

So help me understand, like, you have to navigate and bob and weave to create a product that's going to work for these certain types of of investments when there's so much turmoil in the market.

How do you navigate a time period like.

Well, for one, having gone through a couple decades, the markets are always going to do what the least amount of people expect, and you have to be sensitive to that.

So when you see people really on the bandwagon, that's the beginning of the percolating of getting nervous.

Right.

So for all the young people in the industry, I don't Mean just chronologically young, but new to the industry I'm referring to, you know, they're buying as many properties as they can at 4% interest rates and never considering any of the cash on cash returns and the money they're putting into the properties.

That is a recipe for disaster long term at some point rates don't go down anymore.

And to your point, everyone knew they were going to go up, right?

But very few if any predicted 200bps in one month and nobody really saw that coming.

And we could see deal flow in our office shrink for that six month period dramatically.

We're probably off 30% and slowly over time it's come back.

So what you're seeing a lot now are more seasoned investors participating.

Now you also seeing tremendous rotation.

The California, Texas, Florida investor from wherever they came from, from around the world or if they live there, have rotated into more traditional cash flow positive markets which aren't as exciting on appreciation, but can cash flow you through the next three years and keep your portfolio moving successfully so that as things change and maybe rates do trickle back down into the five and a half range.

We're not that far.

We're doing loans now at six to six and a half.

Dramatically different than eight and a half in that quarter that you're talking about in 22.

So that's helped our business and our industry dramatically.

We have all just about all exceeded previous numbers now and that's with rates being 50 basis, excuse me, 50% higher than they were at the low.

Right.

We're saying we're net net increase in volume with rates going from 4 to 6.

Right.

A 50% increase than where we were at 4%.

So it's really a testament to the play out there.

Look, I'm a long term guy.

Investing in these types of properties has really been around since the beginning of marking time, the beginning of the Bible.

People have paid for a place to stay, work through storage, transportation, hubs, whatever it is, and like until Amazon, Google and Apple take that away, which they may, they may invent the George Jetson pill overnight and banish us and come back.

I'm still a believer.

So I believe our business will double or triple in size over the next three to five years.

And most of our industry, the bigger players are gearing for that big move forwards with AI and technology, et cetera, to help keep costs reasonable so that everything in the world doesn't necessarily just go offshore and helping us all navigate that.

So I see big rotation.

We have never done as many loans as we do In Ohio now Kentucky, West Virginia, Alabama, Mississippi, Louisiana, Oklahoma, Missouri, Michigan.

I mean, dreaded Michigan, right?

You think of Michigan, you think of 8 Mile, an Eminem and half the city's burning down in your head.

But that's not what's going on there anymore.

And as people have become aware, entrepreneurs are interesting because they find problems and they go solve them.

And in this case they're tying it to real estate so they can make money.

But the key focus is in any business, just like you guys take properties and reposition them, it's finding problems.

Kmart sucks.

Ha ha.

Right?

That was the tagline for a while as they kept folding up.

But you are also going and understanding the demographics and what the need is.

And as you see development and new construction, road work, you know there's going to be a need for storage, right?

I mean that goes hand in hand.

And also with big transitions all over the country from COVID where people moved that put big pressure and you see the U haul statistics are up tremendously.

So you're looking at some of the non obvious but still free things to research to help guide you to keep your finger on that pulse to your point.

And rotation has been the key.

We have had to do that, had to really pay attention and respect it.

We've spent infinitely less money marketing in Florida and Texas and much more in Alabama.

It's like, wow, Alabama, I mean Ohio, God, no one likes Ohio, Pennsylvania.

These are boring states.

But man, things have happened.

So you know, you're right.

We all have to pay attention.

It doesn't matter how smart we think we are.

The market is smarter.

And if you don't listen, you lose.

So we have to always do that.

That's one good thing I learned as a trader on Wall Street.

If you don't recognize the trends early and jump on board, you're a loser.

All right, so I have to ask a clarifying question so I understand what you're talking about exactly.

When you use the term rotation, what are you talking about?

Well, for a long time most of the Middle east was investing in California, Florida and Texas, South America, same three states.

But now you're seeing those same foreign born American or foreign nationals investing in Pennsylvania, Ohio, Michigan, Missouri.

So you're seeing rotation to non super big appreciation states, but more cash flow friendly states.

That's what I mean by that.

Interesting.

What's so the current terms that you guys are operating under, I've explored.

I'm flipping a couple houses right now, which I did last time I flipped houses was probably 15 years ago.

But I've got two that we're flipping right now that I, we're, we're just funding them ourselves.

But I've been shopping around at some of the different fix and flip loans that are out there.

I'm seeing 11% with three points, but minimum of six months seasoning or six month old time, you can't do anything less than that.

I've got another group that's like 13.75% with two points.

They'll do three, six or nine month terms and they, and a lot of them seem like they are adjusting.

And one of the things I realized is one of the groups, they are raising money from investors and they're paying 8 to 11% depending on what tranche you're in and how much money that that investor invests.

And then they're lending it out at two points and 13.75% which seemed a little high to me, but they're turning the money very quickly.

And the difference is they're raising this money from investors, they're lending it out at a higher interest rate, they're actually spending a lot of that, that difference on their marketing and things like that.

Where they're really making the money is on the points.

And the key is how many times can they turn the money?

Can they turn the money two or three times in a year?

Because then it's not tied to the annualized interest rate it's turned to, it's tied to the.

If you're getting two points and you're getting that four times a year, that's 8% on top of the interest rate.

Is that kind of the traditional model of you want to like the money that you're lending?

Is it private money?

Are you guys raising that money and are you trying to make difference on the spread or is it on the points?

So we actually do both and you bring up a very good understanding and overview of what's going on out there.

So when we're really lending our own money, we are doing exactly what you just described.

We're putting in some of it, let's say it's $100,000 loan.

Myself and my son, who's my main partner, probably put in 25,000 of it.

We raise the other 75 from co lenders, we're giving them an interest rate, we're making that scrape on the rate between what we lend at and what we pay them, plus we're making the points, the fees.

So yes, that's a huge business, It's a very good business.

But the big boy money is made in the full interest stub and then how fast you can turn it to add fees to it, to enhance it.

Right.

And now your rate of return is, is going to be on a bad deal.

20 plus percent on a really sexy deal could be 30, 40, 50% annually.

So people don't really understand how the money works.

They think it's about the loan and they're kind of missing that.

Which is fine.

We appreciate that they missed that.

That's good.

It works for both sides.

Then we're also doing this quasi institutional.

There are a lot of institutions that you know the names of that are bringing gigantic money to these markets.

So for many women like yourselves who have that kind of experience, we can lend down to 8.99.

If you wanted to, you could buy it down even lower to 8%.

Eight and a quarter.

We could charge one and a half, two points.

Max.

Max.

We just did a deal at 8.99 and 1.

It was a $2.8 million deal.

So we brought the fees down a lot.

And that person also is only going to pay interest as the money's drawn down.

That's a big thing.

When you're out there talking to people like me, you must always make sure you understand that that is a key question to ask.

You want to make sure you're only paying money as you draw it down, not from day one on the full loan amount.

We've seen numerous people call us up.

They're all upset at the last minute.

You know, I didn't realize this.

Well, part of your responsibility, your own due diligence, is to read a few things and ask questions.

Right?

We can't substitute for that.

Some people are not good people and they don't bring it up on purpose because they feel you're a little green and they're going to get you.

We definitely don't operate that way.

We don't like that anybody in the industry operates that way.

It's not good for overall business and it leaves a black eye for us all.

We are trying to be ethical, fair, transparent, stay away from the image of the old hard money lender.

I mean, we're a quasi institutional shop and a true private shop.

We do both.

Sometimes people will call me on a Thursday night.

I'll literally go see the property over the weekend if it's within, let's say two hours of me, and then we can close by Monday night, Tuesday.

On those deals, we're doing what you're describing, probably charging 12 to 13, 2 to 3 points and lending about 70% of the cost.

But on the other deals, if you're going to fix and flip something and you go to contract and you have 15 days to close, we can do an appraisal.

With your renovation budget.

I can charge you 8.99 and depending on the loan size, anywhere from 1 point to 2 points.

Well, that feels a lot different.

That makes some deals more workable.

And I can also be insane enough to give you 90% of the purchase price, a hundred percent of the renovation.

So.

And there are lenders out there that will do 100% of purchase and 100% of renovation.

So there's a gambit out there.

You as a borrower should really be studying that market all the time, introducing yourself to people.

Look, in anything we do, in any business we're in, if you don't tell everybody what you're doing, you're making a mistake.

Just tell them what you're doing and shut up.

Eventually it'll match up if you're telling the right people.

Low hanging fruit.

Here's a question.

This is, this is a personal question that I have not always understood really well.

Okay, so you're the private lender for this.

I mean, great products, you're helping people accomplish goals and move forward no matter what the market is giving them.

I love that.

In your position, when you're talking about earning the full interest, you are only making money and your investors are only making money when you have deployed capital, right?

So let's say that you are making 30% per year.

But then let's say that you, you know, you can only turn that money half of the year.

That's an effective 15% return.

How does that, how do you factor in?

Like if you have, you're putting down the 25 grand for a hundred thousand dollars loan with your son, you have somebody else funding the other 75 and it's a three to six month term or nine month term or whatever it is.

At the end of that they're getting their payout.

Is there another opportunity for them to roll right into or are they investing into a fund and that fund is going to continue to pay out regularly because at the end of the day the money is only generating income when it's working.

How do you balance that side of.

That's a great question.

And a lot of people have moved to the fund scenario where they're paying people a preferred return and there's cash drag issues.

So you need to have the money ready to move all the time.

Because cash drag meaning Having the cash literally sitting in your account can be very expensive.

You can go to high yield savings accounts at the vanguards of the world and maybe get four or four and a half percent.

But if I'm still paying you a preferred return of 7 or 8, I'm still have a hole to fill, right.

So I need to move that money along.

In our business, we've been around a long time now, so we're fairly fortunate that yes, we pay you back and literally the next week or so we can put your money back out if you want.

So that has taken a long time to develop though.

That's not a startup scenario.

We and myself, I really like the deal by deal scenario.

If you don't like that deal, you shouldn't have to invest in it.

Right?

It's still your money.

I want you to feel totally comfortable.

I think it's a good deal.

I'll put mine in.

I'm willing to lose mine before yours too, by the way, which I think people like.

And we tell you what the differences are upfront, no hidden secrets.

You see it in the documents.

We tell you out loud if you're uncomfortable with it, maybe this isn't right for you.

And that's okay.

We'll catch back up down the road when it feels right.

So for people like, we're doing one deal now in Alabama, the gentleman has the money literally sitting undeployed in a Roth ira and he's going to give it to us and he's going to make 12% on it and we're going to flip the house.

It's a good deal for him.

He's in first position.

He knows us for a while, he feels comfortable with us.

The price points we're participating at in the market, you can always lose.

There's always risk.

Things change in the world that are unanticipated.

Proof Covid, right?

There are other things that have come up too, but Proof Covid is one that keeps a lot of people honest mentally where they get out of, I don't think I could lose mentality.

And it's a very reasonable risk for even a layperson to see that at this price level it would be hard to get hurt.

Could we lose 5 or 10% of the capital in a disaster?

Maybe.

But is it more likely that we won't make 30% returns on the flip and only make 10% returns?

Yes, that would be the bad scenario.

And, and honestly, at this age, I mean, you guys can see I'm not a little kid anymore at this age, I personally only flip houses where I can make some money, not tons.

I'm not interested in that.

It's too much risk for me.

It's kind of how I got this haircut, building that, you know, portfolio in the sky that was going to all work great.

And, you know, I thought I was a smart guy till I wasn't type of thing.

So we're more conscious of that now than ever before.

I didn't even realize the time, how much I got in under the wire before COVID shut everything down.

And at the time, I was smart.

I used a HELOC to buy a, you know, to buy a property, was on the phone with a lender before I did anything, told them exactly what I was doing, how I was funding it, and, and had my permanent loan, the BRRR loan, lined up before, before I signed the docs to buy the property.

And at the time, you could very easily pull out.

I think I pulled out 80%.

You know, I, I, you know, it's all, of course, dependent on the arv.

What, you know, what, what the appraisal comes in.

Felt like I got off.

Well, how has that changed now?

We're in a much different lending environment right now.

Well, I'd like to split up the good old days differently than you just did.

I believe the good old days are from the beginning of the Bible till whenever, meaning now and into the future.

Because, oh yeah, we do have this on tape and it should be replayed ad nauseam because what you described and how you got ready and how you laid it out and how you had the process down before you entered.

Before you entered, before you entered.

That's why you were successful, sir.

It had nothing to do with the market.

It had to do with your preparation.

You now account for one out of every ten investors.

You guys have met them, we meet them all the time.

It's unbelievable to me in the world of due diligence, one of the most misused and abused words ever.

Well, my friend said it was a good deal.

The realtor said I couldn't miss in a zip code.

And you put out $400,000 or you signed for $400,000.

You make $92,000 a year and you just signed for 400 grand.

You make 30,000 a year and somebody like me let you sign for 400 grand.

We both had no chance, right?

The people who prepare in the manner with which you described are successful yesterday, now and in the future.

When someone comes to me like you, that is prepared like that, we are going to do better for you on rates and terms because you're going to make my life easier, right?

Think about how organized that person was.

And people are often surprised to learn.

And I talk about this publicly a lot.

A lot of times it is single moms and people say, what?

What are you talking about?

Well, think about it this way.

The single mom has had a manager budget forever.

Their logistics manager, right?

They're a scheduling manager.

And last I checked, those three things are huge on a fix and flip project.

So those personal traits, qualities and experiences translate well to what they're trying to do versus a lot of people who look like me and think, oh man, I got it, I'm good.

I don't need to understand what the materials cost.

I don't even need to understand what goes.

I got three bids.

You have no idea what they even are.

So preparation and understanding your exit, before you get into it, multiple exit strategies, these are not just terms, these are things people need to participate, master plan out and be prepared to execute as markets change and things evolve.

And if you don't, you're going to suffer the consequences.

I'm not trying to make it bad for anybody, but that's reality.

And if you're prepared, you can be successful.

I think it was Branch Ricky once said, I wrote it down once, like luck is the residue of design, right?

So if you prepare, you're going to get lucky.

Well, it's no shock.

So to me that's a big part of the changes that are out there and what you need to be aware of and doing all the time.

And if there been any changes in the seasoning period, I mean, that was kind of what, what.

Where I was, you know, where I was going with that is that I knew going, going in that I was going to be able to, if I hit this arv, I knew I was going to be able to get this money out.

Whereas I worry now that there are a lot of people that may think, oh yeah, we're just going to, you know, we're going to get this done in three months and then the bank's going to go, yep, 10 months, you know, or 12 or 12 or 24 month, seasoning period, you know.

So I will say that because of the way money works and you guys know, the pressure to get money out is unbelievable.

So every week that goes by, we just kind of make it easier and easier for the people, not harder and harder.

I know that sounds insane, but it's actually true.

If you can show you've renovated the house, seasoning is 90 days.

Some lenders will do it with zero.

So if you can show you renovated the house basically at day 91 of ownership, not when you completed your renovation, but from day 91 of ownership, if you show your renovations without receipts, by the way.

Without receipts.

So the pictures say, hey, I put a new roof in.

New roof was 14,000 even though it was 8.

The windows were 9,000 even though they were 6.

But they look new in the pictures.

In the appraisal, we can qualify it.

I can give you the lesser of 75% of the after repair value or 120% of your cost.

And when people give us that initial renovation budget, do they aim a little high to add to the cost so they can get more?

Probably happens out there.

Probably, you know, is it.

It's 75% of the ARV or 120% of the.

The cost, whichever is lower of the two.

Yes, but you'll be surprised, you won't be surprised to find that in most of America, when you look that up and sort of really work through the math as, as Neil did before, they're going to be very close or the cost will be slightly within a couple of percent of under 75.

Not a lot people.

You know, the appreciation is flattened out a lot.

So now you're really unlocking value back.

Like the old days, you bought houses, you renovated them, you unlocked value.

You didn't think they were increasing $30,000 in pure value while you were doing the job, like during COVID So seasoned players, the more well planned out players, the people who go to really good mastermind groups and get good advice instead of just rah, rah, sell stuff, those people are successful.

That's the truth.

I love that you talk about beginning with the end in mind.

That's basically what you're talking about, you know, like on a, on a BR property.

It's honestly, it's similar for a flipper as well.

Like the flipper starting with the arv.

That's oversimplification.

But you better start with what's this thing going to be worth when I'm done with it?

And then let's subtract the construction cost, the carrying cost which most people get wrong, the cost of the lending, which most people get wrong.

And then everything, a lot of other things affiliated with that.

And then you got to factor in what you want to make and then you got to realize that you're going to be wrong on the amount that you're spending on the renovation and how long it's going to take you on probably the first three to five of them that you do.

And you got to kind of navigate through all that is it?

But ultimately that's a brrrr.

Property is basically.

This is an oversimplification.

I haven't thought about this till just now, so I'm not sure how this is going to come out.

But it's basically a flip property.

But you know who the buyer is.

The buyer is the bank that's going to be willing to refinance it at the end.

They're going to do it at a certain percentage of LTV off of your after repair value.

So you, you still better get that right.

Right.

You better know who the person is that's going to buy this flip or you already know who the buyer, quote unquote buyer is for this brrrr.

You better work backwards from the beginning with the end in mind.

You have to have your exit pre designed.

Is that fair to say?

I think it is totally spot on.

And I would add you're speaking in front of an audience.

You want to start off with some warm up thing to get the audience engaged and truly passive.

Right.

So you ask the audience the obvious question.

What's your number one financial goal for the next 12 months?

Just write it down and you look into the audience.

Usually there's a couple people falling asleep, but now you as the speaker can see the stress on their face.

Cause it's hard for them to write that down.

How are you going to be successful?

How are you going to get to where you want to go if you don't even know succinctly where you want to go?

And to your point, if you haven't planned the exit you haven't planned.

Right.

How can you get there if you don't really know succinctly where you want to be?

It's permeating through everything in your life.

This isn't just about a flipping a house, this is about cleaning up your house personally and all the way through.

And if you do that well, even though it's hard upfront, everything will get simpler long term.

And that's really what we're trying to do.

So we can get to truly pass it.

I love that.

That reminds me of, you know, the analogy of you can have two identical sailboats sailing across the ocean, both tacking with the wind.

They look like they're doing the same thing and they're all over the place.

But the difference may be that one's out for a pleasure cruise and the other one's headed to an island that's a miles away that you're gonna, you may bob and weave to adjust with the wind or the waves right now, but the reality is you know where you're going, right?

And so those tax and those adjustments that you make that look haphazard are with a destination in mind.

And I, I think working backwards from that is paramount.

Let me ask you this follow up question.

My parents first house, I believe their interest rate was 15%.

And we all know that the best time to buy real estate was 10 years ago.

And the second best time is right now, right?

You don't wait and buy real estate.

You buy real estate and you wait.

It's a very forgiving asset class.

We're surrounded by people that look like a genius now that likely prodded, probably bought a dumb deal 10 or 15 or 20 years ago.

But over time it's a forgiving asset class.

Now their grandkids are like, man, I wish I could have bought that lake house for this or whatever it may be, right?

When I'm hearing your model in the way that you guys are operating, the interest rate is almost irrelevant because you're making a spread and the points.

So if the interest rate was 20% and you guys were lending it 23%, there's obviously going to be a lot less deals out there.

But the people that know how to work with the exit in mind are working backwards.

It's just a cost of doing business that needs to get factored in.

It's a word problem.

You are factoring that amount of money into the word problem.

And it really probably doesn't matter to you what the interest rates are because you're charging a spread and you're charging the points and the good operators know how to operate in any market.

I went through a cycle where I was like, well, single family rentals is my destination.

Before I realized that was just a stepping stone to small multifamily.

And then I was like, this is my destination.

Until I converted those multifamily to short term rentals and then that was my destination.

And still I started property management and then self storage and then capital raising and syndication.

And at this Point, I don't believe there's a destination anymore.

It is all, how can we be lifelong learners?

How can we tack the sailboat?

And how do we do it with a destination in mind so that we're going to get there?

Do you feel like your model is something that is, in my opinion, it is timeless.

There's always going to be a place for this type of lending and this is a tool that any investor should have in their tool belt.

Because the reality is you, there's not always one strategy that works for a hundred years in a row in your market.

And sometimes we have to adjust and pivot.

And what we should be doing is collecting relationship equity like this and know the products that are out there and the tools that we have in our tool belt so that when the next job pops up and maybe it's a little bit different, we have a tool designed for that job.

And I feel like you guys have versatility, that your product is always going to be available, even though what you're lending on and the type of flips might change what you are offering is always going to be there.

Yeah.

I think for us, when we get an opportunity to sit with gentlemen like yourself and women like yourself and have you just say what you just said, I could never put it together as well.

The reality of understanding how to use business tools is really what we're talking about.

And then most importantly, you just mentioned relationship capital.

One of the biggest fallacies, misnomers, incorrect things, is all these people in real estate think it's about real estate.

It has nothing to do with real estate.

If you have the wrong partners, they cost you more than anything in life.

And I've been through that.

Those are the worst beats I ever took.

The others are math equations that you can step away from, lose your money, make it on the next one and start feeding back and get and getting going.

But relationship building, relationship capital that is going to take you through all different types of cycles.

It's going to keep you relevant.

And then look, a lot of this is sales and marketing in today's world.

Right.

Instagram, TikTok, Facebook, whatever.

There's actually a textbook, it describes them now.

We have amazing concepts like, you know, rent the room.

Oh, no, no, no.

Right.

That's house hack.

Right.

We can sell you a whole course, charge you 35 grand.

How to become the best house hacker in the world.

But the reality is, to your point, you have to be flexible.

You have to Understand these strategies and understanding when these three strategies rotate.

And now you have to go to the next two and how to apply those.

Those are what's going to make you successful.

And again, that's not just the real estate, that's the market dictating what's happening to you.

And you need to be finger on the pulse, pay attention, network a lot and hear and listen and ask questions and shut up and listen.

Love it.

All right, I've got one final kind of selfish question while we've got office hours with Joel Kraut.

You know, one of the challenges that we really face at Nomad and I appreciate you, you appear to have done a little bit on us based on our emails back and forth.

You know, we, we're essentially doing a large scale burr.

We're, we're taking a, we're buying a Kmart for two and a half million dollars.

We're putting about two and a half million dollars into it.

And at the end of the day we're all in for five million and at certificate of occupancy, it's worth eight and a half, nine maybe, maybe more.

As an empty facility.

As an empty facility.

Stabilized.

Yeah.

So with, you know, if it were a residential property, we'd go to the bank and we'd say, hey, we want to get our money out.

The problem is it's commercial now, it's commercial property and commercial banks get a lot more.

You know, that's where we are running into the issue of, you know, banks are not usually going to let us do a cash out refinance at CEO.

You know, so, you know, you know, we're talking about the different tools, you know, in our tool belt.

You know, for somebody who just described that problem for me, you're an experienced lender, you've been in this space for over 20 years.

What would be the tool you would use to best execute that strategy?

Well, for me, I would sit down with both of you in a room, we'd go over what the cost was and where the loan, loan to value would sit.

I'd want to approach the bank on your behalf or sit there with you at the bank.

We want to talk about getting our cost out and then an earn out as we stabilize over the next 12 months so you can get more equity out.

So it's a two step approach.

You get all your capital back for your investors at CO and then maybe a 12 month IO period or 24 month as you stabilize and there's an earn out based on a debt service coverage ratio.

Just like you said, a big burr where you get maybe another 2 million out.

Also, one of the things that I would try to do if I was you, I would want to connect with the people who are direct to insurance companies.

Insurance companies like your product.

They will lend to them 10 year fixed rates, no personal guarantees at maximum leverage, 25 year amortizations.

So they're going to have more flexibility than anybody else.

The MetLife's, the AIGs, the New York Lifes, people like that are making these types of loan.

Northwest Mutual, big, big companies, they need to put out truckloads of money.

Right.

Those interest payments are matching off for them for dividends they have to pay out.

Right.

Those are interesting niche opportunities for you to find lenders that aren't as obvious to the market.

Have you guys done a CMBS loan, a collateralized mortgage backed security loan yet?

You'll end up with my haircut.

But you know, those can work well too.

I was about to say, you say that like it's an easy thing to do.

It's like a proxology exam and a tax audit.

Correct.

But depending on what you're doing, and you guys are doing this, you know, you're medium to high level now.

So you need to find alternative strategies for financing private equity funds.

Have you gone to, have you gone to family offices yet directly?

We are sub family office level.

We are right at the fractional family office kind of sub institutional level right now.

You know, the last two years we raised $20 million from our investors and that has gone really well.

Now we're getting to that point of like looking for more joint venture strategic partnership partnered with fractional family office, partnered with some sub institutional money and everything's headed towards an eventual PE roll up.

Like we're in this tricky in between phase.

Just kind of like exactly what you said.

We feel like we've outgrown a lot of the loan products that have been available for us.

But we're, we're barely knocking on the door of having some products kind of designed for us, but we're really not there.

We've actually grown really rapidly.

We've got 150 million in assets under management from converting these buildings, which is great.

But in the grand scheme of things that's still really young, especially for family offices and institutional.

So we feel like, you know that.

I'm sure you're aware of the the book by Dan Sullivan and Benjamin King, who Not how of like, we were like how do we fix this?

How do we do that?

How do we do that?

And we're to the point of we need a who, not a how, but specifically we need a super who.

Like we need someone that has intimate knowledge of this type of environment that can honestly help us find the relationships where we're almost creating the type of product.

Because we are just like Neil said, we're buying a Kmart for 2 to 3 million.

We'll put 2 to 3 million into it, be into the whole project 4 to 6 and as a stabilized facility, eventually it's going to be worth 12 to 15.

The last one we went full cycle on, we bought a Kmart in Danville, Virginia for 2.5 million.

We put 3 million into it and 37 months later we sold it this past July for 9.53.

Congratulations.

Thank you.

Excited about that.

Just especially because the last three years in commercial real estate has been very challenging.

We also beat our projected investor returns, which is something that we were ecstatic about.

And that's going a long way in terms of helping us with track record.

But it's easy to say that and easy for people to see that, for people to want to lend on that and design a product for that that frankly like that lending product is more of a brrrr product.

If we could find that, it would be great.

So it's, we're kind of in that in between phase and it's a little squishy.

We're not quite to the level we need to be to get that preferred lending from a private bank that's going to build a product for you.

I feel like some of the people that could help you are in the prefect mes debt scenario where they're getting that preferred return and it's carried, you know, as you do your earn out, you know, you get to where you want.

They have one or two exits now.

They really trust you a lot and we'll put up all the money for you and I'll still allow you to have a nice carried interest instead of cutting you back to peanuts.

So those types of people I think can be really effective for you.

Yeah, our gut instinct is telling us the same thing.

I just don't think that we've got the, the, the decades of experience that you do to help us.

But yeah, but I think you have an exit.

You, you have a real exit that's tangible.

It's a serious building.

I saw the building on the website.

You guys are not small, you're young.

Not small.

You're doing buildings that are 25, 40,000 on the low side to 85 ish thousand, a hundred thousand on the big side.

Those are big swatches.

Those are pretty good.

The market's going to respond well to that.

The story you just told about going a full cycle, very few syndicators in the last four years can talk about that, especially the last two.

Also, you are in the sexy space.

Multifamily is not sexy anymore.

Multifamily is a problem.

Right?

There's a sign everywhere for rent free.

But you don't see that in self storage.

Self storage is running the same sign since great grandma ran first month free.

Talk to me.

Right?

And technology has made this business infinitely different.

It's not a grandma business anymore.

No offense to grandma.

I watched one of my clients do what maybe you want to do one day.

They built a number of these facilities and rolled it up and sold it to Publix.

And the gentleman and his family did rather well.

The first build out, I think we did, was 10 or 12 million.

And it kept growing from there, you know, 25, 30 million, just like you're describing.

Facilities got a little bigger.

But it's a great business.

No toilets, trash.

And tenants.

Investors like that because there's less movement physically from humans.

That's always encouraging to money.

Money doesn't understand humans and doesn't want to.

So you're feeding them what they want.

And I feel like that's a really good place for you to be in the next five years.

And as you get to 50 million up from 20, that's when people in fund of funds can now invest 10%, which is 5 million, which is the hurdle they need to be at.

And that will change everything dramatically for you and you get a multiplier effect.

Joel, thank you for turning into our personal consultant for the last 10 minutes.

I appreciate that.

It saves me the time of booking the call that I'm going to book with you anyway after this.

For the sake of time, we got to wrap this up.

I could keep chewing your ear off for a long time about this.

I appreciate your willingness to share with us, with our listeners and everything else.

I'll ask the final question here and then we'll wrap it up.

But one of the things we ask everybody, we used to just ask everybody, what's your favorite business book?

But the reality is, when you have someone come to you that clearly wants to tap into the incredible amount of knowledge that you have about this subject matter, when someone is fairly green and they're trying to learn and they're coming to you, is there a book resource or something like that that you find yourself recommending to friends and family more than any other?

Well, I really like the 5am Club.

It's a little bit different than the answer of, you know, go read Robert Kawasaki's book Rich Dad, Poor dad, you know, learning how to start your day correctly, getting it organized.

Think about it strategically.

You know, you mentioned Dan Sullivan.

Obviously.

Those types of books are fantastic.

I'm really mad at my whole educational process because the who, not the how was never taught to me.

It was just taught to me to go do more work and spend more hours and get more jobs.

And, you know, it's great if you want to raise your income 10%, but it's not great if you want to double and 10x it.

Books like that, by authors like that, that can think slightly out of the box or out of the box.

Those are places that today's market will take you and what you need to be aware of.

Great answer.

Sorry, is the 5N club an actual book?

Yes.

Got it.

Okay.

Yeah.

The Miracle Morning.

Just finished Miracle Morning myself.

Sort of a regurgitation.

Not a regurgitation.

It's, you know, along the same lines.

Take on it.

His take on it.

Yeah.

Yeah.

Well, listen, Joel, we're going to land the plane there.

For the sake of time.

I just want to say thank you very much.

I appreciate you being here.

Thank you for your time.

Great to connect with you.

This.

One of the things I love about this podcast is that allows us to continue to build that relationship equity.

Absolutely.

This is a digital way for us to continue to put ourselves in a situation where we are the dumbest guys in the room.

And we have certainly done that today with you.

So thank you very much.

If any of our listeners would like to connect with you about lending or anything else, what would be the best way for them to do that?

The easiest thing to do is just to go to brrrr.com we don't use bots.

We use people.

So we really respond.

I'm some of the times responder, so be with 4rs.com and we'll get back to you pretty quickly.

For us, that's really important.

I remember what it was like to be on the outside looking in, both as a starter and in the middle of my career getting annihilated and just trying to find people who I could build trust with again and build a business out of.

So we're respectful of that.

It's important to us and we want to help people with that.

So brrrr.com is a great place to get us.

So thank you.

You've been doing it before.

It was cool if you landed brrrr.com that is.

That is next level.

That's some good real estate.

Joel Kraut with Brrr Loans.

Thank you so much for being here.

We appreciate your time and we appreciate the opportunity to connect with you.

And I'm sure I'll be doing it again outside of this podcast.

Yeah, I look forward to it.

Thank you guys.

Have a great afternoon now.

All right, bye bye.

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