Working Capital The Real Estate Podcast

$100M in Multifamily Real Estate with Millennial Dave Toupin|EP40

Feb 10, 2021

In This Episode

David Toupin is a Top Millennial real estate investor, speaker, and entrepreneur. David is the co-founder of Obsidian Capital, an Austin Texas based real estate investment firm. David started investing at the age of 20 in Michigan where he bought his first property in college, a 12 unit apartment complex. Prior to graduating with a Finance degree at the University of Detroit Mercy, David had acquired $7M in multifamily real estate holdings

 

Transcript

Jesse (1m 22s):

Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time. Hey everybody, this is Jesse Fragale. Before we started this episode, I just want to say thank you so much for everybody that keeps on listening. It really is amazing to me and I can’t. Thank you enough. What would really help us out is if you enjoy the show to go over to iTunes and leave us a five star review. Also, if you have a favorite episode, what would be great is if you could share it on social media, whether that’s Facebook, Instagram, or LinkedIn, anyways, enjoy the show.

Jesse (2m 9s):

All right, ladies and gentlemen, you’re listening to working capital the real estate podcast. Got a great guest on the show tonight. And his name is David Toupin. He’s a top millennial. Sorry, I just want to back up for a sec. I never asked you the pronunciation of your name. So let me restart that. Is it Tupin or Topen okay. Right when I’m reading it, I’m like, ah, I don’t want to do that. All right. Well, all right, ladies and gentlemen, you’re listening to working capital the real estate podcast. I’ve got David Tupin on the show. He is a top millennial real estate investor and entrepreneur. David is the co-founder Obsidian capital and Austin, Texas based real estate investment firm. He started investing at the age of 20, and we’re going to talk about that today, where he bought his first property in college, by the age of 25, David had purchased and developed over a hundred million dollars in multifamily real estate, David, how’s it going?

Jesse (2m 56s):

It’s going great, man. Thanks for having me. No worries. Maybe just as a little bit of background for the, for the listeners and viewers, you could talk a little bit about where you’re based out of and yeah. How you got involved in real estate from the beginning.

David (3m 11s):

Absolutely. So I’m based in Austin, Texas, but I was actually born and raised outside of Detroit, Michigan, which is where I got my start moved down here. About two years ago, my business partner lived here and figured instead of working remotely, let’s grow a company together. So I made the move down to Austin, but I started buying real estate. When I was in college. I had always had the entrepreneurial bug, I guess you could say, or entrepreneurial spirit. I started my first business when I was 13. It was a landscaping company, like many entrepreneurs. And in college I started off going a little bit more of the traditional route. Did some investment banking, internships decided that corporate life was for sure not for me.

David (3m 57s):

I learned a lot, but I transitioned a lot of that stuff. I learned in the financial side over to apartments and I read rich dad, poor dad. It got me hooked to like many, many people. And dude, I just had a burning passion and desire to, to master apartments. You know, I, I guess I don’t know what it was. I think it just logically it made sense. It was the asset class that I was like, I really wanted to go all in up and I had no money. I was broke as a college student, like many others, but I figured out that if I could find the deal, I could raise some money from investors, put it together and get a piece of sweat equity for doing that.

David (4m 40s):

And so that’s what I did. I started off with a 12 unit and grew from there.

Jesse (4m 44s):

Awesome. So that’s a great 30,000 foot view. So you’re starting in, I mean, again, not dissimilar from other entrepreneurs and real estate investors. You’re starting in high school earlier entrepreneur by just, just have, has that natural tendency and then moving into college. So why don’t we pick it up in, in college? So you are in college, you’re going relatively traditional route in terms of, it looks like financial, the financial end or investment banking. At what point did you start to realize that real estate was something that you wanted to focus on or that you thought you had a natural inclination towards?

David (5m 21s):

Well, I just met a couple of people along the way in growing up that had been very successful in real estate. And so it was kinda in the back of my head. I didn’t know how I was going to get into it. And, and you know, I, somebody suggested this is when podcasts were just starting to get big, but in 2016 somebody was like, Oh, you need to go on and listen to podcasts. There’s all these cool entertaining ones, et cetera. And I went straight to the real estate section and, you know, I listened to a couple of podcasts. There’s a guy in my backyard that where near where I lived in Michigan that had been investing successfully. And he suggested the podcast that his favorite book is rich dad, poor dad. And I read that and it was, it just made so much sense to me.

David (6m 4s):

It was like logically, there’s no reason why I shouldn’t be investing in real estate. And the more I dove in the more I really just, I loved it. And it was just fun for me. So,

Jesse (6m 14s):

So you’re in, you’re in college. You’re you start getting the bug for investing in real estate, if you just, just to clarify, what was it that you were taking in college? Was it fun?

David (6m 24s):

So I was studying finance and I was working for, I took a semester off my junior year to work for an investment baking company. So they had me rolling like 70, 80 hours a week, you know, it was just a grind. Oh yeah. Spreadsheets, all that kind of stuff, which was great. I’m glad I learned all that. And, and I actually, I think thinking back, one of the things that was at catalyst was one of the partners at the firm owned like 20 or 30 apartments. And so I had expressed to him, I had an interest in real estate and he actually walked me through a couple of financial statements and taught me the very intro basics to apartment financials, which was really cool thinking back.

David (7m 5s):

It was a good early mentor.

Jesse (7m 6s):

Yeah. That’s probably, I mean, there are a lot of different, different avenues people kind of go through to get to real estate. There’s a bunch of great ones, you know, the law finance property management, but you definitely we’re ahead in terms of the, it sounds like modeling or building out when you have that just as your background. So how do we get to the first investment? Walk us through that. What did that look like?

David (7m 30s):

So I decided after those internships that I wasn’t going corporate, I had a couple of job offers. I, I actually just turned them down right off the bat. Cause I was like, there’s, there’s no other way I’m going to do this. If I don’t just cut everything else off and give myself no option. So I just went to work and, and I figured that if I spent 80% of my time looking for a deal, the rest of the things would fall into place. And so all day it was calling brokers, touring properties, going on, LoopNet, looking at deals, you know, a lot of the ways that people I’d say kind of start, but I just that’s all I did. And I was doing that 50, 60, 70, 80 hours a week was taking classes, just looking for deals and underwriting and trying to learn all that aspect of the business because without a deal, you know, you don’t have anything.

David (8m 23s):

So yeah, I could spend my time making, you know, making a logo or a website, but for me it was like, man, I just need to find the first deal. Awesome.

Jesse (8m 30s):

And that was, so it sounds like during university or college, you’re still going through that process. And how long were you doing that before you first found the deal that you thought would be of substance and that you could raise, raise some money doing

David (8m 44s):

Like three months? I think, I think from, I started off kind of wholesaling a little bit the summer 2016 and then near the end of 2016, I said, I’m going to just look at apartments, no more wholesaling. And then by March of 2017, I had my first two deals under contract. There are two 12 units separate from each other separate buyers. They’re actually on the same street.

Jesse (9m 7s):

Okay. So, so you started in wholesale and I think I, I heard you talk a little bit about this. So that would mean that I assume you, you went the route of actually getting your license to wholesale.

David (9m 18s):

I did. Yeah. I got my real estate license. Never used it, but

Jesse (9m 21s):

We have a, I mean, we’ve talked about wholesaling a little bit on the show, but you know, a little bit of background for listeners that don’t know, you’re basically purchasing, purchasing property properties with the intent of assigning the contract to somebody else. Is that right?

David (9m 35s):

Yeah. Yeah. So I’d go. And I did like four or five of these steals. I didn’t do a ton of them, but I locked up under contract and I found a flipper. I flipped, I assigned the contract to them and they bought the property and I made like three, four or five grand, you know?

Jesse (9m 48s):

So the wholesaling kind of leads into a focus on, on multifamily and there’s the two 12 units. So how did you find those deals and what was that process like? Where were they purchased? Like as a portfolio or were they purchased individually?

David (10m 4s):

No, it was funny cause they were only two blocks away on the same street, but they were from two separate brokers, two separate owners. They’re two local boutique multi-family brokerages that are kind of competitors, but one of ’em, you know, one of them I locked up and then the next week I found the other one. And so I kind of was under contract on both of them within a couple of weeks of each other, which was I thinking back a little crazy. I probably should have just focused on getting the one done, but, and ended up working out well. And it was a really good experience because one of them did really, really well. And the other one still did. Okay. And we still made money, but I didn’t hit, you know, really what I should have been able to done because I didn’t raise enough money on it.

David (10m 48s):

So it was a great learning experience for me seeing like the contrast between a good deal and a bad deal, you know, what to buy

Jesse (10m 56s):

Kind of, if you, you played Monday morning quarterback and you only bought one, you would have just been like, Oh, all these deals are so easy or the other way, all these deals or the other way, these, these are super, super difficult. Yeah. That’s a great point. So you had almost like a what’s it called when you, you test you test two thumbnails on the <inaudible> great. Okay. So you’re doing that. So first of all, just to back up, the first thing that came to mind when I, you know, listened to a bit of your story was most people’s first deal. They don’t even think in the context of raising capital, they think more so in the context of raising money for this particular deal, which is usually from my experience, a deal that doesn’t necessarily need to raise multiple maybe stakeholders or limited partners where it sounds like you kind of skipped over that and you went right to larger scale, relatively larger scale with raising capital.

Jesse (11m 46s):

How did that happen? And why was it that, you know, you didn’t start with the duplex.

David (11m 51s):

Yeah, honestly, I, I just, you know, I think I just heard a couple people on other podcasts that had been doing it, listening to bigger pockets and some other podcasts that have been out there at the time, you know, hearing about other people’s syndicating multifamily, which it was kind of a relatively new buzz word. Now it’s all the, you know, everyone raves about it syndication without hearing the term. Yeah, exactly. And, and, and it’s, and it’s awesome. I mean, it’s how I buy deals and it’s how I bought most of my deals, but, you know, I just, I’d heard a couple people do it. And for me it’s like, that’s the only way I’m going to get it. I don’t, I had no money. I had less than like five grand in my bank account.

David (12m 31s):

Like I’m not, I’m not buying these deals. I’m not even able to put the earnest money above my own. So I needed to raise capital if I was going to get into a bigger deal. And it was the only option for me. So I just kind of went into it with the mindset of, I need to syndicate this deal and I’m going to need to get an attorney involved and write some, you know, PPM and operating agreement, which are the documents that allow me to raise capital. And then I’m going to need to go to town and find some investors, which I didn’t really have at the time, but had to kind of scrape together.

Jesse (13m 5s):

Yeah. That’s, that’s funny because we had Brian Burke on the show, a large syndicator, and he would always say that there’s the three curves of real estate. When you have somebody to trust you when you’re raising capital and it’s one is the investor yourself, the other one is real estate in general, the actual, you know, you have to like the asset class and then the third one is the deal itself. Now, when you’re starting out, you don’t have the track record. You may have brought the deal. What was it when you started to actually reach out to maybe it was friends and family first, whatever your, your network, you know, how did you, how did you start raising capital and how did you make sure that you could have these people or show these people that, you know, you could trust them to do it?

David (13m 47s):

Yeah. I think I just had, like, I had mad confidence in myself, which it was, it was probably, I don’t want to say misplaced, but you know, I hadn’t had the track record of the experience, but I went into it thinking that it’s, this, this is very simple. I’m buying an asset that has tenants that are renting. And I need to look at it from a financial standpoint beforehand, which I had been practicing in, which I had done a lot of. And I looked at these assets and I said, okay, the rents based on other rents in the market are 50 to a hundred dollars below the expenses are here. It’s a very unlikely that my expenses are going to trend outside of what’s the market standard. Right? I mean, you have one-off scenarios where there’s, you know, a fire or flood.

David (14m 31s):

Right. But that’s why we have insurance. Right. So I’m protected in certain ways. So to me, the risk was kind of low and it was just in maybe a few of the unknowns. But after looking at so many multi-family properties, I just recognize that these are all very similar in terms of their operations. Most of them have right around 50% operating expenses, expense ratio. I look, yeah. Expense ratio. And so I looked at the taxes and I talked to the local tax assessor. I said, Hey, once I buy this building, what do you think is going to happen to the taxes? So I did my research. I put that all into a spreadsheet that I’d been working on in building. And to me, it kicked out a certain amount of returns and I was being pretty conservative. And, and so to me, it was, it was just like, okay, these deals both look like they’re making money.

David (15m 16s):

They’re going to cash flow. Why don’t I give 80% of the deal to the investors, I’ll get an 8% cash on cash based on the numbers that I’m seeing, I’ll take 20% myself and a small acquisition fee. And I’m going to just going to go out and start pitching it to people. And so for me, it was just like a really logical approach. You know, it’s just, it’s just like, here’s the numbers. It’s, it’s black and white. This either makes sense. Or it doesn’t, these deals made sense. Now I just need to find people that are interested in investing in it. And that was the tough part because I was young. I had no track record and I had to use the logic to sell the deal. I had to go to investors and say, Hey, look, these are the numbers. This makes sense. This is a good deal.

David (15m 56s):

You know, you’re going to be happy. You came in on this with me. I’m going to make you money on this. So, sorry, go ahead. No, so that, you know, that’s just kind of the thought process

Jesse (16m 5s):

Right on. So those first few investors did you look, you know, in, in your immediate network, was it friends and family for you or did you, so that was, that was how you started

David (16m 14s):

All the friends and family. No, no family, but it was, yeah. I didn’t want to go to family until I really kind of had gotten it down. And so, but I, I had met people through, you know, I was, I was young and I was ambitious. I was going to have tons of RIAs, you know, real estate, investor, association, meetups, all that kind of stuff, networking like crazy. So over the past, the previous year running up to this, I had met a lot of people that were like local fix and flippers and investors, you know, the people that are retired and they have eight, 10 rentals, but they’ve got 50 grand sitting around. I had a guy who was a state farm agent. He actually, to this day still invest quite a bit with me. You know, he owned a state farm agency and had like 15 or 20 rentals.

David (16m 58s):

And he liked the fact that I was young and ambitious. And so he’s like, all right, I’ll give you 25,000 and stuff like that. And so I just kind of cobbled it together from a couple people. And then the second deal, the guy that signed on the loan actually put up all the money for the other 12 unit. And so I had him on one and then five investors on the other. Okay.

Jesse (17m 17s):

So it sounds like just, just from what you just said, it was basically, you got a small acquisition fee. You were in your proforma or in your model, you’re basically giving an 8% cash on cash. I assume that would have been the preferred return.

David (17m 32s):

Yeah, I did a pref and then an 80, 20 split eight pref 82. Yeah.

Jesse (17m 36s):

Okay. So basically for, I mean, we’ve been over this before, just different private equity or syndication structures, but for listeners, you basically, anything above that 8% return you were participating in the upside of that deal. So well, so those first two deals were though, are those deals that you still have or did you exit out of those?

David (17m 54s):

Yeah, so that was about four, four and a half years ago now. So I exited those, I think I held them for like a year, year and a half and I sold them as a portfolio to another buyer. Oh, right on. Okay. And we did, we did pretty well on those.

Jesse (18m 6s):

So was the plan when you initially were raising capital for the deal, was the plan to refinance or exit after a two year, five year and it just, it was even better than you thought or what was the initial plan?

David (18m 19s):

Yeah, it was a five-year exit type of model. However, for me, I was self-managing the properties and it was a lot of work. Yeah. And I had at that, you know, a couple months later I closed on a a hundred unit property, which I was actually living at and self-managing as well. And, and I just realized that the bigger scale was so much easier. And, and, you know, I had, it was easier for me to manage a hundred units than it was 24. And so for me, I talked to the investors, we found a buyer, we got everybody like an 18% IRR after a year and a half. And so I figured, Hey, let’s, let’s just, let’s sell these. It’ll allow me to go do my thing. I’ll have proven my model to these investors.

David (19m 1s):

And I can go talk to other investors saying, Hey, I successfully bought renovated, made cashflow for these investors and exited, now I have a track record. Yeah. And that was kind of the first year and a half for me.

Jesse (19m 14s):

That’s great. You said something earlier, too, that I just want to just, you know, talk a little bit about the, the fact that you’re taking these down. Obviously you raise outside capital, but you know, the first question, I’m sure you get this, that people ask, like, where did you get the capital from for the first few deals? So on the, in the same light or the same theme, you said that somebody had signed for the loan. So that relationship was that a relationship that you had with somebody that came in as an investor, as well as somebody that guaranteed. And how did that come about?

David (19m 44s):

Yeah. So he’s a guy that was, he is a local, like single family type investor, a lot of fix and flips. And I had been talking with him about multifamily side of things and what I was looking to do. And so he was kind of lined up as the loan guarantor for those first couple

Jesse (20m 3s):

Right on. So you do this first deal. You’ve exited out of him. You’ve obviously now have done bigger deals. I want to just take a bit of a step back and talk a little bit about the investment philosophy that you have. And you know that by that, I mean, what type of deals do you look for today and what is your process when underwriting those deals now, since, you know, in comparison to that first deal?

David (20m 26s):

Yeah. My whole investment philosophy is buy, right. You know, you buy right. And I think everything else falls into place. One of the first things I heard from my uncle, who’s a real estate developer. When I was, you know, before I even got started, I was probably like 17. And I was just curious and asking him about what he does. And he said, you make money real estate when you buy. And that always stuck with me. And so for me, I’m a value investor, just like Warren, Buffett’s a value investor. When it comes to stocks, you want to buy at a good price relative to the market. I want to buy my real estate properties at a good price relative to the market. And what that entails is normally hunting down and looking at hundreds of deals in order to find the one or two diamonds in the rough that are priced better than the rest of the properties in the market, where I get a deal, I’m buying them wholesale.

David (21m 19s):

And if I can do that and I can add value to the property, increase that value, you’re going to make good returns and you’re always going to be safe when investing. So that’s kinda my philosophy overall.

Jesse (21m 30s):

So when you’re looking at deals now from an underwriting perspective, are there certain targets that you want to hit with, say that value add, do you have a plan to potentially turn over certain suites and or is there a return that you’re, you know, an area or a range that you’re looking at? And then in addition to that, what, what is the metric you like to use? You know, is it IRR? Is it compound growth?

David (21m 53s):

Yeah, I’m normally looking at first thing, I look at three things. I look at the annual return, seven to 8% is what we’re targeting. And then overall we’re looking to get a 15 plus IRR. So leveraged, leveraged IRR. Yeah. And for people listening, IRR is really, it’s, it’s, it’s a little bit of a complex calculation, but what it entails really is it’s the growth rate of your money? What is the growth rate of your money? And it takes into account a period of time and so 15, which it comes out to like 15% annualized return.

David (22m 34s):

And then the last thing is equity multiple. I’m looking to get as close to two equity, multiple and five years, which means doubling your money in a five-year period.

Jesse (22m 41s):

Okay. And the, do you still do the underwriting for these deals or is it, or have you have a team that’s doing that?

David (22m 49s):

Yeah. I have a team. They do the early set of the underwriting. They’ll pretty much fill everything out and do the rent comps, that kind of stuff. Send it to me. I spend time tweaking it, reviewing it, and then making the final decision on where our offers go in an app. And so when we’re in like full acquisitions mode, we’ll be under, I think last, last year we underwrote like 425 deals or something like that. It’s crazy. I mean, you know, and I’m starting out, we’re sending three to five offers a week when we’re really, you know, in the weeds. Yeah.

Jesse (23m 20s):

Well, it’s, it’s always that case where, you know, when the, when the, the deals are out there, when there’s a bunch of deals, the pricing doesn’t seem right. And when the pricing doesn’t seem right, there’s a bunch of deals out there. So yeah. Yeah. The last few years, it seems to be something where, you know, you underwrite hundreds and then you, like you said, you find the diamonds in the rough. Yeah.

David (23m 38s):

But the supply and demand, you know, there’s just, there’s just not a lot of inventory out there for sale and there’s too many buyers. Yeah, for sure.

Jesse (23m 46s):

And in terms of, so that’s kind of how you would you’d model it now, when you find a deal like that, that hits that seven, 8% annual, you know, 50% IRR in that two X, multiple from a, a debt point of view. Do you, are you guys, what type of loan to value would you put on, on these types of deals and maybe even, I guess just as a caveat, if you do find a value add deal, is it something where you’re structuring it or you’ve structured it, that you bridge it and have a short-term loan and then put more stabilized debt? How do you, how do you view that?

David (24m 17s):

Yeah, totally depends on the deal. Every single one’s going to be a little different. So sometimes we’ll do a stabilize. If it’s a stabilized property, we’ll do like a Fannie or Freddie agency type loan, 75 to 80% loan to value on the purchase. And then we’ll raise capital on the side for renovations. Recently, I’ve done several bridge loans. One, I actually, I did where we are total leverage on the deal. It’s like, I bought it for 1.3 million as a 20 unit. I just JV this deal with one other investor and bought it for 1.3. But my loan on it, it’s 1.6 all in. Yeah. Because I wrapped renovations in.

David (24m 58s):

Yeah. And it will be worth around 3 million when we’re done with it. So that one was 80% of the purchase price and a hundred percent of the renovations they gave us. So it just kind of depends on the deal. Yeah.

Jesse (25m 11s):

And it’s, it’s true because you have you being a value add investor. Sometimes you do have your, it wouldn’t be a loan to value, be a loan to cost ratio. Right. You would have a cost. Yeah. So, you know, you have that extra money. And then, then the question is, how do you schedule those sweet turnovers or renovations and, and where are you? You adding that? So what exactly. So right now then are like, if you’re getting, you’re getting debt, say agency debt, Fannie Mae, Freddie Mac, are you, are you looking right now to do five, 10 year debt? I know right now we’re kind of in a, in a wild West, in terms of interest rates, they just keep getting lower. What’s your view on debt for the properties that you’re acquiring?

David (25m 49s):

Yeah. If we’re doing something where our upfront loan is, you know, ends up being 55 to 60% of our projected two to three year value, right? So maybe we’re doing 80% leverage from the start, but our goal is to bring, you know, and we’re, and we’re doing an $8 million loan on a $10 million project costs. But in the end, our, our project value, you know, that some people would say like ARV, right after renovated or whatever is 15 million. Now our $8 million loan is, is 55, 50, 60%. Right. So if we’re doing that, we’ll do short-term bridge loans all day.

David (26m 32s):

I’m not opposed to doing bridge loans, even though they’re two or three year terms. Because I think in the foreseeable future interest rates will stay low. The fed has come out and said that they intend to keep interest rates low. I don’t see them them either with the state of the economy that we’re in right now, but we’ll see what he was Biden, but so we’re doing some bridge. And then if we can, if it’s a stabilized enough property, ten-year debt all day, you know, I’m looking to lock his love and interest rate for as long as I can

Jesse (27m 2s):

For as long as possible. Yeah. That’s, that’s great. That makes a lot of sense. And it’s with the value add, it’s always kind of a chicken and egg situation where you go in and you, you want sweets to be vacant. You want the rent to be low, but then from a, you know, a debt point of view, you need to show it

David (27m 19s):

To finance then. Yeah. So it’s tough. I have, yeah, I just closed on a portfolio of deals and, and that, you know, they were just amazing prices. We were buying them for like 60, 55 to 60 a door and they’re going to be worth well over a hundred a door when we’re done with them. And so it’s just a huge spread, but the current financials were so bad that, you know, I can really only get like 60% leverage on a stabilized loan. So I had to go bridge and, and get the renovation costs wrapped in. Yeah,

Jesse (27m 48s):

That’s an a situation you’re just telling a lender, listen, just give me the money. I can

David (27m 52s):

Give me the money. And so since we’ve gotten in and we’ve gotten the rents from like 700 bucks to 1300, right. And so we’ve got huge rent bumps, and now we’ll be able to refinance within the next 12 months and pull all our money out, which is great.

Jesse (28m 5s):

So I want to talk a little bit about David obsidian capital. So you’ve created, you’ve created this company. Did, was this something that you created when you started investing or was this something that you built out in the last, you know, in the last few years?

David (28m 20s):

Yeah, I started at a couple of years ago after I’d bought my first few properties. I was like, okay, I need to build a brand around this. And I had about 120 units at the time. And then, so I started the company under the brand of city obsidian capital. And then when I met my business partner, Glenn, who lived down here in Austin and we started buying apartments together, we both kind of adopted, you know, he decided like, Hey, let’s continue using that name. And so we both partnered under obsidian. And so it’s me, him. And we actually have one other business partner now, Mike, who runs our asset management. And so there’s three of us in the company as partners.

Jesse (28m 59s):

So the asset management, I assume that’s, that’s managing the managers. You have a property management for the, for the properties. And is that in-house as well? Or is that third-party management?

David (29m 9s):

It’s not in house. I know everybody loves saying vertically integrated, but that’s the last thing that I want to do personally. So

Jesse (29m 17s):

Yeah, we just started a property management company. I’m with you on that. Oh man. Kill me. Yeah. That’s amen. And this is like, for all the property managers listening, you’re doing God’s work. It’s just, it’s something, Oh man,

David (29m 28s):

It’s a thankless job, man. I, I, I definitely appreciate good property management companies.

Jesse (29m 35s):

So let’s talk a little bit about like the fee structure. So I assume it’s fairly standard, but for when you’re selling to a limited partners and you’re, you know, you have somebody who say that it’s their first syndicated deal. Well, how do you walk them through or, or approach, you know, what the fees are going to be for their investment?

David (29m 53s):

Yeah. I think it really depends on what the deal can support. So if the deal can support a 3% acquisition fee and it’s a really juicy deal and we put a lot of time in defined it and it’s going to be a lot of work after the fact, we’ll charge a 3% acquisition fee and we’ll do, you know, a 70, 30 straight split with no preferred return, right? So we just get 30% of the equity straight up, straight up. Cool. We’ll charge an asset management fee. You normally one to 2%. But if the deal is a little bit more thin and, and, and to give the investors, the returns that we really target to hit them, and we need to do a 80 20 split and a, a preferred return, or we can only afford to charge a 1% acquisition fee.

David (30m 37s):

I mean, we’re not gonna, we’ll never gouge the deal unless it can support it, right. We’re not going to charge, you know, certain fees. So it’s all dictated by the, the deal itself.

Jesse (30m 48s):

So when you say asset management fee, I know that some investors will base that off of, you know, the more sophisticated, or maybe just the one, the ones that want to do it this way off of net asset value nav, or some will do it off of effective, gross income. What do you base that, that one to 2% asset management fee off of,

David (31m 7s):

Yeah, we’ll do it based off the gross income. I think it’s, it’s more of like a fund model, private equity. I would say that, do it off the asset value or the investment capital a value, but yeah, we just do it off gross income,

Jesse (31m 19s):

Or, you know, you said syndication’s just a buzzword. You hear everything now funds a fund of funds is the same thing. So like you see

David (31m 26s):

Yeah. People raising capital for other people’s deals. Yeah.

Jesse (31m 28s):

And for those that, like, you know, if you Google private equity real estate, you can see how they do their structure. And the challenge with nav is that you’re, you’re constantly having to every year, come out with an asset value. Right. Because every year that you don’t sell it, you still have to figure it out for the fund direct. Okay. So revaluing it. So it really depends, you know, what the deal can support and that’s, that’s how you base most of your, you know, your expenses to the investor. And when you’re presenting to investors, do you show them a return net of expenses or do you kind of just give them a macro return and let them figure out what their expenses are?

David (32m 4s):

No. Yeah. We always give them just in that, in that, like, I don’t want them to have to do any thinking. No calculating, like here’s what we think we’re going to be distributing to you at the end of the day, when, when everything’s said and done, like this is your annual projected return. And when we sell, we are expecting to get you a 17 IRR on your money or whatever it comes out to. So

Jesse (32m 26s):

Do you deal with like your, like you said, you were a value add investor those couple, first years. Oftentimes there’s just either little to distributed or sometimes nothing to distribute. How do you deal with the accrual during that time? If you, if you, if there’s no preferred return, if it’s just a 70, 30,

David (32m 45s):

So, well, fortunately, anytime I’ve ever done a pref Mo the deals that I’ve done it on, we’ve always been able to hit the pref. And if we don’t do a pref and let’s say we just do a 70, 30 split, what we do is every quarter, we’ll just calculate the available cash flow to distribute. And that’s what we’ll send out. And then we’ll say we can distribute to keep it simple $10,000, seven, 7,000 of that goes to the investors 3000 would come our way. And, you know, let’s say that there was a hundred thousand dollars invested in that deal. And that was, you know, over the course of a year, they made a 7% return on their money. Right. So it’s just, it’s just kind of like the straight split, we just turned in the available cash flow to distribute and that it’s, it’s split up

Jesse (33m 29s):

Accordingly. Okay. So it’s no, there’s no accrual. Yeah. Yeah. So in the event that there’s no, you know, preferred return, it doesn’t accrue annually because it doesn’t exist. There’s no,

David (33m 37s):

There’s no, exactly. Yeah. You just get what, you just get your percentage of the cashflow right on, right. Yeah. So w we just look at that normally in a way where we’re underwriting it upfront, it’s, it’s a little harder, you know, we have to pay a little less for deals to make those structures work, but it’s a way where we get a little bit more cashflow as an owner-operator for the time we’re putting in on top of that. We’re, we’re not the type of operator, you know, when I started, I didn’t have any capital to invest, but we’re the type of operators where we’re often one of the bigger investors, if not the biggest investor in our deals. So, you know, a lot of, you know, that’s why I think we can afford to do this kind of structure.

Jesse (34m 14s):

Yeah. That was my next question. I was curious what, you know, what, you know, some investors will put 5% up and they’ll take 20 or 30%, or sometimes 50% depending on the investor. Whereas it sounds like you’re putting up a good chunk of the capital.

David (34m 27s):

Yeah. Sometimes it’s 10% or more of the capital. Cool.

Jesse (34m 31s):

So let’s fast forward to today. We’re we’re now at, you know, we’re at the beginning of new year it’s it’s it was a crazy last year. I think everybody would agree. What, what is this year looking like for you? Investment-wise geographically. What’s, what’s on the horizon for the team.

David (34m 50s):

Yeah. I’m really trying to hone in on Austin. We’re buying a property in Austin right now. It’s just really tough, super expensive market. I mean, it’s just one of the fastest growing cities out there. So lot of capital come in this way, which makes it difficult. But I want to buy a couple properties here in Austin developing 250 apartments right now, we’ve got two between two projects. So one we’ve already broken ground on. And the other I’m working towards getting a HUD loan and breaking ground this year. I’m at. So that’s part of the goal. And then I would like to close on another two or three assets by the end of the year, which will bring us up to five total for, for 2021. That’s great.

Jesse (35m 29s):

So, so now that you’ve, you know, you’ve done a few deals, you have this, the team there, I assume that your partnership is kind split up. Like you were saying, asset management, yourself, which role, what role do you play with the team right now?

David (35m 45s):

I am the Hunter man. I’m out, I’m hunting, deer, running numbers, running and gun. It you’re the face. I’m assuming too. Yeah. In a lot of ways. Yeah. Yeah. Between myself and Glen, he is as well. He’s, he’s, you know, I’m young, I’m 25. He is twice my age and he’s owned about 4,500 apartments. He owned a really big portfolio when we started up city and he sold most of that off stuff. He owned separately and then me and him bought about a thousand apartments together. And so he, he has a lot of relationships, very well-known in the industry. So I’d say between me and him. Definitely. Yeah.

Jesse (36m 19s):

That’s great. And in terms of the acquisition, like you said, you’re, you’re hunting, you’re putting a lot of, a lot of deals, underwriting, a lot of deals, and then maybe only, you know, a small percentage of those that you actually take down, the relationship that you have with brokers or, you know, people that are finding you deals, what does that look like? And how did you develop that?

David (36m 39s):

Yeah. So we’ve got a lot of really good broker relationships, although with the brokers that are putting most of the stuff on, you know, that, well, I would say that put all their stuff on market and, and do you know the call for offers type of thing. I’m, I’m bidding on almost zero properties like that. We are hardcore targeting properties off market between sending letters and cold calling. And I’ve got a team of a couple of people and myself, we all cold call direct to owners. And our goal is, you know, I just talked to one this morning. They live in California, they’re selling a property here in Austin. And so, you know, my goal is direct owner deals. We are the broker that we’re doing exactly what the broker is doing, developing relationships, but we’re in control and we’re able to negotiate and get a deal before it hits the market.

David (37m 25s):

And before a lot of other people see it. And that’s the key in 2021. Yeah.

Jesse (37m 29s):

100% for sure. It’s such a, it’s such a nice thing to do when you can find an off market deal where you’re just working directly with the owner. It’s a little bit for my experience, a little bit more of a, you know, if they’re not sophisticated, you’re kind of, you’re walking them through the deal a little bit sometimes. But so just out of curiosity, I always ask, when people talk about finding whether it’s director, owner is the, you know, do you use Altice CoStar, you go to secretary of state. Yeah.

David (37m 55s):

CoStar has been, we also skip, trace, go trace and do a little extra work. So

Jesse (37m 60s):

I don’t think, can you talk a little bit about skip trace for those that don’t know? I think we’ve only talked about it once on the show.

David (38m 6s):

Yeah. So skip tracing is just the act of taking a list of names and addresses and, you know, either using a certain system or a certain person to go and scrape phone numbers, email addresses based on, you know, public record or others, other methods, you know, I’ve actually hunted down certain owners through like LinkedIn or Facebook sometimes. So it just kinda depends, but yeah, just, just skip tracing is just digging contact information for a list of

Jesse (38m 37s):

Leads. Yeah. And it’s one of those things is like CoStar, for instance, it’s not cheap, but I mean, if you really use it as a function of, you know, what is the price of CoStar out of the potential deal that you get? I mean, it’s, it’s a no brainer,

David (38m 50s):

14, 14 grand a year on CoStar. It’s like, it’s over a thousand a month, so it’s really not cheap, but, and, and it’s, and it’s tripled over the past four years, I started using it four years ago. It was like 300 bucks a month. And now I’m spending 1200. So I’m like, Oh my goodness. But at the same time, if it helps me to put even one deal together in the course of a year, I mean, it’s paid for 10 years.

Jesse (39m 11s):

Yeah. The only like a hundred percent, the only hard part is that, you know, real estate is very lumpy when it comes to cashflow. So I th I think where people think, Oh, this huge amount, I’m not going to see their ROI for a number of months, maybe even years. But when you do get it, it’s like, there’s no comparison. You have to total numbers. It’s only making

David (39m 29s):

You want it. You want to get in the business and, and ha you know, you definitely need the right tools to help you. I mean, you don’t need it, but I did my first couple of deals without it, but it’s, it’s really helpful for sure. I’m actually building a software program of my own. That’s going to have some similarities in a way. So that’s launching this summer. Awesome. And excited about,

Jesse (39m 50s):

Well, we’re coming up to the end here, David. I have four questions. I ask every guest on the show, and then we can talk a little bit about, you know, where people can find you and a little bit about the software. So if you’re ready to go, I’ll, I’ll hit you with these. I was born ready, man. All right. I like it. What’s something, what’s something, you know, now that you wish you knew at the beginning of your investing career.

David (40m 12s):

Hmm. Buy everything. I bought everything back. That’s a bad answer, but by everything, I think, I think if I were to give one piece of advice on that, it would be to raise more money than you think you need always have extra money and you won’t have any worries.

Jesse (40m 28s):

Yeah. And that’s a, that’s a great point. I think so many times you’re like the investors that you think are a hundred percent, a lot of times are the ones that you did expect Euro. Yeah. Yeah. For sure. Okay. Number two, here, your thoughts on, on mentors and, and your experience with mentors in your career,

David (40m 45s):

The most valuable thing ever, you need mentors, everybody has mentors that is successful. They will cut your learning process down in multiples of 10. And you will, you will scale significantly quicker if you have the right mentors. Yeah.

Jesse (41m 2s):

I CA I couldn’t emphasize that enough. And I think it’s, it’s illustrated by the fact that every time we have somebody on that comes up time and time again, because it really is, like you said, it’s multiples of 10, but when you think in terms of time, you know, it’s five, 10, 15, 20 years potentially that you are cutting that learning curve down hugely. Okay. A hundred percent, you talked a little bit of a rich dad, poor dad, but maybe another resource or book that just had a big impact on you and has helped you with your investments. The biggest resource

David (41m 36s):

I joined a mastermind about three and a half years ago. That’s where I met my current business partner. And I did a deal with a couple other guys in it as well. And, you know, just being surrounding yourself in a group, and this mastermind is rod cliffs mastermind to be specific. Yeah.

Jesse (41m 55s):

Rod on the show about a year. Yeah. About a year ago.

David (41m 59s):

Oh, nice. Okay. Great dude. And a great friend and his mastermind was hugely helpful. And since then, I’ve actually started my own community where I mentor a bunch of other people and we all kind of network and connect. So you know what? Yeah. I think I just being in a group is huge, man.

Jesse (42m 15s):

Yeah. That’s a great answer. We’ve heard this before, but I just want to put, just kind of talk about this a little bit, because the mastermind, a lot of people see these like five, 10, 15, 20 grand, right. For these masterminds. And they’re just like, that’s crazy. Maybe you could talk a little bit about how that it’s just, it’s a drop in the bucket in the grand scheme of things. When you have a really good mastermind or a really good mentor,

David (42m 39s):

Dude, I couldn’t even afford joining Rod’s mastermind. My first did I put it on a credit card? I just closed on my first, those two, 12 units. Yeah. And I got, you know, I had like $30,000 in acquisition fees of which all of that I had to put back into one of those two deals because I didn’t raise enough money for renovation. So I put all my money back and I actually never got that back out, but I did that. And so I put, as I joined his mastermind on a credit card, you know, 20 grand, but I’ve, I’ve since made millions and millions of dollars off those relationships, like it’s been invaluable.

Jesse (43m 11s):

Awesome. And last question, my personal favorite first car make and model.

David (43m 16s):

My first car was a 2003 Audi RS. Six had like 120,000 miles on it. It was fast, but it broke every other month or something that went wrong. I couldn’t afford to keep, keep up with it. And so I got a, an ex I got a 2014 Mustang.

Jesse (43m 33s):

Awesome. That’s a great answer. I mean, that’s a great car for first car. I love cars, man. Yeah, me too. I’m a, I’m a huge car guy. And that’s why that’s I got that question from a master’s in business. One of my favorite Bloomberg pod.

David (43m 45s):

Oh, that’s asking. He always asked that. What was your first,

Jesse (43m 48s):

Oh man, that’s a good one. My first car was a four door, 2001. I believe a Sunfire. And if you remember, like the Pontiac Sunfire is, and like they were everywhere.

David (44m 1s):

I don’t think if I see one on

Jesse (44m 2s):

The, on the road now I’m just like, it blows my mind.

David (44m 5s):

Oh yeah. No, you don’t see them anymore, but that’s classic dude.

Jesse (44m 8s):

Yeah. It was the cavalier in the Sunfire though. Those were everywhere. But yeah, that was, I haven’t been asked that I don’t think in years. Awesome. And so why don’t you give listeners just to where they can find you what’s the best place to reach out and then maybe even dig a little bit about what you’re, you know, what you’re creating right now.

David (44m 27s):

Yeah. So if, if you have Instagram, which most of you guys should, it’s a 20 century real estate Jedi at real estate. Jedi is probably the best way to connect with me a DM me on there. Or you can check me out on my website, which is obsidian capital code.com.

2 (44m 44s):

My guest today has been David Tobin, David, thanks for coming on working capital.

David (44m 48s):

Thanks, Jesse. Appreciate it.

2 (44m 53s):

Thank you for listening to the working capital podcast. My goal is to help individuals break into real estate investing as well as educate experienced investors. If you enjoyed the show, please share with a friend subscribe and give us a rating on iTunes. It really helps us. If you have any questions, want to learn more or likely to cover a specific topic on the show. Please reach out to me via instagram@jforgalsorheadtowwwdotjesseforgalley.com. My name is Jessica galley, and I’ll see you back here for the next episode of the working capital real estate podcast.