Edited Transcript from the podcast episode ‘So You Want to be a Real Estate Developer?’

With Special Guest Daniil Kleyman

Originally Broadcast on March 25, 2021

Kim Lisa Taylor:

Welcome to the “Raise Private Money Legally “podcast. We are now an official podcast, where we talk about topics of interest to real estate syndicators with the opportunity for live questions and answers at the end of the podcast. I am your host, attorney Kim Lisa Taylor.

Today, our guest is Daniil Kleyman. I’ve known Daniil for a couple of years. I’ve been impressed with the kind of educational content that he puts out for people who are doing rehabs and also, I was really impressed when I saw that he had created a development course because that was something I was always interested in. I have to tell you that I’m getting a lot more development syndication clients. I think that’s because when deals are scarce, when the existing deals are scarce, sometimes it’s more profitable to go into development, but there’s definitely an art to that.

You don’t want to do it without having any kind of guidance or experience. Daniil, welcome to our show.

Daniil Kleyman:

Thank you.

Kim Lisa Taylor:

Thank you for agreeing to be our guest. Can you tell us a little about yourself?

Daniil Kleyman:

Sure. Absolutely. Thanks for having me on. By the way, actually Kim, it’s not a development course. All of our development content is free.

Kim Lisa Taylor:

Wow.

Daniil Kleyman:

Yeah. Anybody that wants, I’ll give you guys a link to access all of our development training.

Kim Lisa Taylor:

That’s fantastic.

Daniil Kleyman:

We put that out for free, so we don’t charge. Primarily, on the internet side, we’re a software company first and foremost. And so we put out education to kind of enhance the abilities of our software clients. But very briefly, I live in Richmond, Virginia. I run a couple of different companies on the development side. I run a  property management company, I run a development company and then I run the software and education company.

On the development side, right now we primarily do infill development. Infill simply means we’re not going out to the suburbs and developing brand new tracts of land and putting utilities in and building subdivisions. Instead, we’re taking existing, usually lots or pieces of land in more of the urban core environment and we’re doing development there, say anything from single-family houses.

I build a lot of duplexes — that’s kind of my “bread and butter” for the last couple years is building duplexes that we rent out, all the way up to mixed-use buildings with commercial and retail tenants and apartments above and large apartment communities that we’re getting into right now as well.

So bulk of our development work is focused on building rentals. I am a huge proponent of … we used to call it the mailbox money, but now our property management software just pulls it in online, but I’m a huge believer in building monthly residual recurring checks. I get a lot less excited about the flips. But we also build a decent amount of houses every year that we sell to owner-occupants. 

And then I have a property management company that once the assets are built, they get turned over to our property management company which then leases and manages those assets. We do that in-house. I don’t outsource our property management to third-party property managers. We handle that via our own property management company.

And then on the internet side, we run a software business as well as an education company. Primary software product is we have valuator indicator to not just developers, but wholesalers, rehabbers. And it’s a deal analysis, deal marketing, money raising and project management software essentially. If people have questions, we can go into details. 

But on the development side, we use the software in-house for deal feasibility, to create funding presentations for our lenders to raise capital.

We don’t syndicate. I know a lot of your audience are syndicators. I can talk more about my business model but we typically do not syndicate; we invest our own money into deals, develop them. But on the software side, we use it for creating construction budgets, estimates, scopes of work, managing the project. We can build schedules of each project from the software in app accounting and we can use it to track our projects in real time. Before we even get to that stage, we use the software to raise capital usually from local banks, for construction loans and then permanent finance.

Kim Lisa Taylor:

That’s amazing. And you have a very wide-ranging suite of products and services that I think is super valuable.

Daniil Kleyman:

Thank you.

Kim Lisa Taylor:

That’s why I wanted you to talk to our audience, because I think that some of them can really take advantage of this as well. I’m ready to just dive into the questions. Are you ready?

Daniil Kleyman:

Yeah, let’s go.

Kim Lisa Taylor:

All right. All right.

Daniil Kleyman:

Absolutely.

Kim Lisa Taylor:

You mentioned some of the developments you’ve done. You do infill, but you said that you’re starting to do some larger apartment complexes? Can you tell us about that?

Daniil Kleyman:

Yeah. But even that locally, I think of it as infill because these are existing pieces of land and they just happen to be zoned for larger properties. What I started out doing was rehabs. I started out doing a lot of renovations. Most of the housing stock in the market where I’m active is 100+ years old. So if you’re buying a single-family house, and whether you want to flip it or turn it into a rental, if it’s been in the same family for 30-40 years, you have to take it down to the studs.

I spent probably the first five, six years of my real estate career taking these old historic single-family homes and bringing them back to life. And then we started renovating duplexes. I bought a corner mixed-use building where we put a restaurant in and a bunch of apartments. That’s what I did for the first couple of years. 

And then I started picking up vacant lots here and there, because they were cheap. Existing properties were getting more and more expensive. And so I got into development almost by way of necessity, because in order to continue doing profitable deals, all the competition was focused on buying existing properties, rehabs.

A lot less people were paying attention to vacant lots. So I started scooping up a lot here, a lot there. Because my focus was primarily on building up a rental portfolio, I started putting duplexes on these lots. You can build a duplex by residential building codes, same as you build a single-family house, which means that it’s cheaper to build. You don’t have to sprinkle it, you don’t have to do a lot of the things that Commercial Building Code requires. And so I started doing duplexes on various lots that I was picking up. 

Our tenants loved them, because you can have a private entrance to your apartment. It’s not a big crowded building, where you can hear 20 different dogs of your neighbors barking. So it still feels like a residential experience. 

From there, I slowly transitioned into building four-unit. I built a six-unit. We just finished a 14-unit building and the projects that I really love because they’re in urban core are mixed-use projects. So mixed use simply means usually there’s a corner commercial space there where we get to work with some really neat tenants.

We just finished the building where there is a juice bar and a yoga studio, a restaurant. They just finished a building where it’s got 13 apartments and we’re putting a restaurant in the corner commercial space. It’s going to be a great amenity to the rest of the building.

I’m getting ready to do another similar project. We’re doing a larger project that we’re in the middle of right now that’s got 21 apartments. We’re going to do four of them are short-term rentals. And then there’s four different commercial spaces there for which we already have tenants for most of them.

On a small scale, it’s a very dynamic sort of development because we get to put tenants there but we also get to put really cool businesses that become an amenity to our tenants and also to the surrounding neighborhood where we also own properties. It’s kind of self-serving. Like I want to put a really cool restaurant in my building, because then I’m not just going to make my building more attractive to my tenants, but I’ve got a bunch of properties scattered around on surrounding blocks and it will be easier to lease those properties. 

And then we’re also building a couple of houses here and there. And it’ll be easier to sell those houses because there’s more walkable amenities that people can walk out of their door and they can walk to a juice bar, yoga studio, restaurant, etc.

That’s really what I’m focused on. I enjoy it a lot because some of the business owners that we work with are first-time business owners. It’s a little bit risky. We try to vet them carefully, but sometimes you take a chance on somebody, but we get to … New construction allows me to build really well-designed residential spaces and apartments for people, but also get to creative places where people can open up potentially their first business and now they’re employing a bunch of other people and they’re making their entrepreneurial dreams come true.

I’m lucky to do what I do. So now we’re transitioning to larger apartment buildings. I’ve got land in which I’m getting ready to get the permit where we’re going to do 150 units.

Kim Lisa Taylor:

Oh, wow.

Daniil Kleyman:

I’m doing due diligence now on another piece of land that we’ll do potentially up to 200 units. We’ll see what the due diligence reveals. But it’s all on the same general area. I tend to be geographically fairly focused on where I develop. I don’t jump around to every surrounding county, at least for now.

Kim Lisa Taylor:

Would you say that there’s kind of a footprint around where you live that you won’t go outside of?

Daniil Kleyman:

Yes, because for now that’s where my … So there’s a couple of reasons why. One, I truly believe and serve the core competency. I want to be geographically focused because it allows me to know one area really well. It also allows me to be known for that area.

Oftentimes, when people have deals in that particular market, I try to be the first person they think of, because I’m doing a fair amount in that particular market. It brings me some deals. But also, because if my efforts are scattered, they’re operating kind of at the mercy of those markets.

If my efforts are concentrated, I get to drive up my own property values. Especially in an area that’s gentrifying, in an area that is in the path of progress, if your efforts are concentrated, you get to basically … You don’t have to wait and hope that you’re in the path of progress, you can create the path of progress.

Kim Lisa Taylor:

That’s kind of cool. That’s extremely cool. Do you mind telling us what geographic area you’re in? You don’t have to if you don’t want to.

Daniil Kleyman:

No, I’m in Richmond, Virginia, and I’m centered around kind of downtown area.

Kim Lisa Taylor:

Okay. So this sounds like a model that other people could replicate in their own geographic areas. Would you say that’s true?

Daniil Kleyman:

Yeah, absolutely. And especially if you’re dealing with an area where properties are still affordable. Again, if you go on to a particular block and it’s not great and you buy one house and you renovate it, now you have to wait and hope that other investors will show up. And eventually, things pick up and the area improves. Or you can go and buy up a bunch of houses on that block and kind of dictate your own destiny. I know it sounds like, “Oh, yeah, just buy a bunch of properties.” But I started out buying houses for $20,000-$30,000. That’s tougher now. But there’s still markets where things are affordable because people are paying less attention to those areas.

Kim Lisa Taylor:

Now, I guess you’ve probably developed a relationship with people at the county and city level, so that you’re getting your approvals and your entitlements fairly quickly. Is that fair to say?

Daniil Kleyman:

That would be fair to say. Yeah, that would be fair to assume, except that I do business in a particular area: Richmond city. But no, it’s a complete nightmare here. But the hilarious thing is that keeps a lot of people out, it’s so bad. It takes so long to get permits and even before COVID, it took so long to get permits and it’s so painful that if you know how to work within the system and you know how to plan for the time delays, you’re okay.

But it keeps a lot of other it keeps a lot of competition out of developing here because they simply will not come here and deal with the local jurisdiction.

Kim Lisa Taylor:

And so what kind of timeframes is there between when you either acquire get the land tied up and then actually get the entitlements so that you can begin construction?

Daniil Kleyman:

In the normal world, if you live in a county that does not make it a habit to recruit the worst, dumbest people in the whole universe, and man, I’m not going to make any friends if they hear this podcast, I guess … but let’s just assume that you live in the place where they literally do not go and try to find the laziest people in the world who approve permits and just do anything.

Your residential building permit should be approved under 30 days. Let’s say you’re buying a piece of land that’s already zoned for what you want to build on it. The easiest thing to do is to buy a piece of land that’s already zoned for what you want to put on. It’s zoned for a single-family, you’re going to put a single-family on it. There’s land that you can buy. It might be zoned for a two-family. A four-unit building, 10-unit, whatever that is. The shortest path to getting up and running is to buy something that’s already zoned appropriately. You will then turn it over to an architect.

If your architect is efficient, they can turn drawings around for something simple, maybe 30 days. You submit it for permit and if you live in the normal place, within 30 days, you should have a permit in hand and you can be building. You can be off to the races. Or you could be dealing with a commercial project that takes longer because now you need not just architectural drawings, but you need civil, structural, electrical, plumbing, H5 drawings, sprinkler drawings.

And so that planning stage takes longer if you’re buying something that is not already zoned appropriately for what you want to do and you need to get a rezoning. In my market, we have what’s called a special-use permit that is a six- to nine-month process where I go to our local county and I say, “I want to do something here that’s not allowed by zoning.” Again, that can take six to nine months. We have projects where we can be up and running in a few months. We have projects that we did not put shovels in the ground for three years since buying the land.

Kim Lisa Taylor:

Wow.

Daniil Kleyman:

We’re in the middle of a $5 million project now where we have to go through… It’s in a historic district. We have to go through a special-use permit process twice. We have to go through four meetings of the historical board that dictates what you can do to the exterior design of the building.

It took three years just to get to the permit stage. And then the permit took another nine months because again, I live in a unique place.

Kim Lisa Taylor:

Do you use a consultant to help you get through all of that or did you initially and now you kind of know the process and you do it yourself? What would you recommend for someone who’s never done it before?

Daniil Kleyman:

I have a zoning consultant/attorney. And so wherever you are, these people may be attorneys, they may just be consultants, they may be both. I use a zoning consultant to do a number of things. Even before I buy a piece of land, he’s somebody that I can ping and I can say, “Hey, make sure I’m looking at this correctly. I think by the current zoning and dimensions of this land, I can do 20 units here and there is not a commercial requirement.” He’ll look at it and he’ll say, “Yes, you’re correct.” He’ll interpret the zoning for me. Even though I’m familiar with the local zoning, he knows it better.

So even before I purchase a piece of land and put something under contract, he’s my sounding board. And then if we need to go through a zoning exemption or a special-use permit or any kind of rezoning, I hand it off to him. He handles everything from the initial paperwork down to meeting with neighbors, sending notifications to neighbors, meeting with the Planning Commission, meeting with City Council. 

There’s certain instances where I will tag along. If it’s something very contentious, I try to be there to pacify the opposition. We’ve had some contentious cases where we wanted to do something that some neighbors were opposed to. I like to be there at those meetings because it allows me to, hopefully bring some people over to our side and show them that hey, the developer is involved and is listening to people. We do probably 10 to 15 special-use permits a year and the majority of them, I hand it off to him and nine months later, he emails me says, “Hey, this was just approved.” It’s well worth the money. It’s well worth the money to pay somebody like that.

Kim Lisa Taylor:

You said you’re developing most of your projects for rental purposes, right?

Daniil Kleyman:

Mm-hmm (affirmative).

Kim Lisa Taylor:

You just hold on to them only then and then I guess, do you ever have plans to sell them or you just keep them forever?

Daniil Kleyman:

I may sell them. Nothing is set in stone. And again, I do other development where we build single-family houses or townhomes and we do sell them. It becomes more about this particular piece of land allow us to do. If something is zoned for single-family, I usually won’t fight it and I’ll build a single-family and I’ll sell it. If something allows for more density, I’ll typically build rental product and I’ll hold on to it. But 10-15-20 years from now, I may sell it.

The beauty of new construction is if you do it correctly in the first five, six, even seven years, it should be fairly maintenance-free. It should be easy, attractive asset to manage. What you’ll see a lot of developers sell after that period, when something starts to accumulate some deferred maintenance on it, when something starts being less attractive than old and new product that’s coming to market now it’s becoming harder to compete, you become more incentivized to sell that off. That might happen down the road.

Kim Lisa Taylor:

You’re looking for vacant lots, you’re looking for something that has the right zoning, that meets the property that you want to build on it or the project you want to build on it. How do you get it tied up? Do you outright purchase the land or do you do purchase options?

Daniil Kleyman:

I don’t do options. On the residential side, if it’s something that’s fairly straightforward, I’ll just go and I’ll buy the lot with cash. So if we’re talking about a piece of land. And again, this is me right. I’m not saying everybody should do it that way. But typically anything under $200,000, if I have the cash available, I’ll just go buy it.

A lot of the lots I bought initially were $10,000-$15,000-$20,000 lots. I would just pick them up. I know I can build on them. If it’s something more involved, if it’s something that I think … If it’s a commercial piece of land, I’ll typically put under contract and there’s a length of due diligence dates.

Kim Lisa Taylor:

And what kind of length? Like six months or?

Daniil Kleyman:

Anything from 60 days to six months. I’m doing one right now where I have a six-month due diligence period because it is a topographically challenging piece of land where just for us to figure out how much density we can put on there, I have to turn it over to engineers to do topo studies, soil studies, have my architect look at it. That’s an extreme case. It’s usually not six months … 60 days, 90 days to close, typically, where we’ll do a phase-one environmental study.

I may do some soil testing to make sure that there’s not eight feet of fill which will require really expensive foundations in my market. If it’s something that will require rezoning, we’ve also put properties under contract subject to us being able to actually execute that rezoning. Where if we are not successful, we don’t close.

It really depends. It really depends on the deal. For land, I really haven’t done LOIs, I haven’t done options. We write a contract and that contract will stipulate if we’re closing quickly how much due diligence period we have and what the closing is contingent on.

Kim Lisa Taylor:

Okay. That all makes good sense. Can you explain this term “entitlement,” what does that exactly mean?

Daniil Kleyman:

I bet people have used that word in many different ways. To me, and we don’t necessarily use that word a lot in my business. When you say entitlement, I think of by-right zoning. So that’s that’s really kind of the equivalent term that we use is by-right zoning.

When I look at a given piece of land, by-right, the zoning allows me to build something there. Now, there are certain pieces of land here that are not even buildable. There are little pieces of land that if you look at the current zoning, to build a single-family block has to be 30 feet wide and this is 15 or 16 feet wide. Some pieces of land we come across are not buildable at all. But when I look at a piece of land, the first question I ask is by right, what can I build on it? Because that gives me a baseline valuation for that piece of land.

Now, I may want to then go and rezone it to something that allows me to put more density on it which then increases the value of that land. But by-right zoning gives me a baseline valuation.

Kim Lisa Taylor:

And its not buy, B-U-Y. We’re are talking about B-Y, by right you are able to do these things on that property.

Daniil Kleyman:

Correct. B-Y, yeah, by right. So basically, I own this piece of land. By right, I can go and file a building permit and put a four-unit apartment building.

Kim Lisa Taylor:

Got it. And then during that process, that’s when you’re… So even during your due diligence, you’re incurring some costs for hiring engineers and maybe architects and these soil engineering studies, phase ones. That kind of stuff. You’re footing those costs yourself.

Daniil Kleyman:

Correct.

Kim Lisa Taylor:

Typical, for a single-family house, would you ever have to do all of that or not necessarily?

Daniil Kleyman:

For a single-family house, what I’m going to do before I close on it is I’m going to get a zoning confirmation to make sure that it’s a buildable lot. I’m going to pay for a survey and title work. Primarily what I’m looking for other than just underlying title issues is easements.

That’s why I get a survey done. I want to make sure that there is no utility easements or alley easements or any kind of easements that would preclude me from being able to build there. I made that mistake one time years ago, where I built the house and I ignored an easement. The left side of the house sat over an easement. It was a very old easement, but it was there and my buyers had a hell of a time getting title insurance.

We eventually worked it out. But because it wasn’t an easement that anybody was using and then there was no reason for that easement to exist. But it was there. It was on my survey and I just completely ignored it. I even did the due diligence correctly. I paid for a survey and then I ignored what the survey said, built the house. It would just presented us with major problems getting to the closing table with the buyers after the house was built. 

I will typically pay a couple of hundred bucks for a survey. I will get the zoning confirmation from my local county to make sure that it’s a buildable lot.

Kim Lisa Taylor:

And that means you’re getting them to write you a letter saying, “Yes, it’s zoned for this.” Right?

Daniil Kleyman:

Correct. Correct. County will issue a letter saying, “To Daniil Kleyman, this is a confirmation that this lot is zoned this and this is what you can do there.” In certain cases, if I suspect that there’s soil issues, I will pay for a soil report where somebody comes out and the hand augers the ground and tells me, “In my market when they used to demo historical houses, they would just collapse them into the basement and drive off.”

That results in fairly high construction costs because now I have to excavate all that stuff out and haul it away when I’m digging before I can put my footers in to the ground. In certain cases I might pay for a soil report before we close, but I usually don’t do that for single-family lots. My due diligence costs on residential lots are very low. My due diligence costs on larger commercial lots usually, they may go into tens of thousands of dollars.

Kim Lisa Taylor:

Okay, yeah. So I was wondering. I’ve heard costs on certain commercial projects of up to a couple of hundred thousand. But I think that includes some option fees for getting purchase options on the property and all of those things.

Daniil Kleyman:

Correct. Right now, I have a piece of land under contract that’s zoned for up to 200 units. I have a six month due diligence period. I’m going to end up paying probably $20,000-25,000 to engineers to do a full survey, topographical survey, all existing utilities.

There’s a sewer line there that has to be moved. They’re going to create a drawing and the plans. They’re not going to go out and get a bid to move that sewer line. So it’s an extreme example. I’m probably going to spend $25,000 to $30,000 that I’ll never get back if I don’t close on that piece of land.

I’ll turn it over to my architect, but he’s not going to charge me much to just do a study and say, “Given the layout, this is what we can put here. This is the rough density that you can do by zoning, by right.” You don’t pay for a full set of architectural drawings before you close. You look out and you say, “Here’s some boxes that represent the buildings and this is what we can fit.”

Kim Lisa Taylor:

Okay. I’m writing notes here. I think I’m learning a lot. I appreciate all this information. I think it’s great. Private aspirations to become a real estate developer. I don’t know if my husband’s going to allow me to do that. But you never know.

Daniil Kleyman:

It’s fun. It takes a while before you get paid, but it’s fun.

Kim Lisa Taylor:

Right, right. Well, and I think the challenge is right now, of course, you’ve got accelerated or I guess higher construction costs is what I’m hearing because of COVID, that there’s shortages of lumber and appliances and supplies and so that the building costs are going up and things are taking even longer.

Daniil Kleyman:

That’s absolutely true.

Kim Lisa Taylor:

Yeah. Eventually, that’ll iron itself out, I think, and we’ll get back to normal on that stuff. But it might take a year or two.

Daniil Kleyman:

I hope it irons out. I’m about to open up a lumber mill.

Kim Lisa Taylor:

Yeah?

Daniil Kleyman:

No, no, no.

Kim Lisa Taylor:

Not a bad idea.

Daniil Kleyman:

I’m tempted to, but…

Kim Lisa Taylor:

Right, right. Just buy some timber land, right?

Daniil Kleyman:

Mm-hmm (affirmative).

Kim Lisa Taylor:

Okay, so how do you go about selecting contractors? You’re the developer, what’s the difference between a developer and a contractor?

Daniil Kleyman:

Developer’s job is to put the deal together to bring all the parties together. A developer’s job is to find the land, bring in financing, bring in architects, engineers, coordinate all of them. Sometimes the developer will also act as a general contractor. I’ve acted as general contractor in some of my projects before, but now I outsource it to third-party GCs. The alternative to that would have been to start my own construction company, in addition to my development company. I may do that in the future, but I’m kind of allergic to where we’re heading. I like the model now, where for specific jobs, we hire general contractors. And hiring them and selecting them, it always comes from referrals.

Every contractor that I’ve ever worked with that has worked out has been a local referral from somebody else. We don’t go to Angie’s List and look for contractors there. I’m talking to other developers, I’m talking to other investors and I’m getting referrals. For certain projects, there’s going to be a subset of contractors that are good candidates. For those for bigger jobs, you’re going to look at a different subset of contractors that have the core competency to execute those projects. 

It’s a constant process to meet new people and maintain and build new relationships. Eventually, you find people you like working with and you end up doing a bunch of deals together and things get easier. But you’re probably going to kiss a bunch of frogs before you find your Prince Charming. You might spend years kissing frogs. 

Kim Lisa Taylor:

The nature of the business. Who do you use to draft your construction contracts? Do you have a local attorney that does that and what kind of special expertise do they have?

Daniil Kleyman:

I don’t. I have one general contractor that does a lot of my smaller jobs. We’ve worked together for so long, we don’t even sign agreements anymore. I know, you as an attorney, probably your head is about to explode, right?

Kim Lisa Taylor:

I don’t want to hear that.

Daniil Kleyman:

Your hair is on fire right now. No, I mean, on bigger projects… So we’re doing a $5 million project now. We’re working with a new general contractor and they use the standard AIA agreement that they sent over to us. We marked it up. I did have my attorney look at that. We made some revisions to it. I had my lender review it because the lender needs to approve the construction agreement as well.

Unlike real jobs, over probably a million dollars, we do have multiple parties review that contract and typically on commercial jobs that it’ll usually be a standard AIA contract that you can mark up.

Kim Lisa Taylor:

An AIA means?

Daniil Kleyman:

It’s American Institute of Architects. It’s kind of industry-recognized paperwork for construction draws, construction agreements, etc., etc.

Kim Lisa Taylor:

Okay. And then let’s talk about the lenders. So you work with lenders, what kind of information do you have to provide them? What kind of terms do you get?

Daniil Kleyman:

Most of my construction loans, we go to local community banks. Oftentimes, these loans will be an interest-only loan for the duration of construction. Usually, there’s a lease-up period as well. A lot of the loans that we do then automatically rollover into what’s called a mini-burn. Think of it as a refi without doing an actual refi. So it’s an interest-only loan while we do the construction, lease up the property and then it just automatically changes into an amortizing loan, usually 20- or 25-year amortization.

Typically with a five- to seven-year, either balloon or reset. At that point, I have the option. If I left too much cash in the deal, I can still refi. You can refi out with that existing lender and they can just give me some of my cash back and increase the loan amount. Once we’ve stabilized the property and leased it out, shown to the lender that hey, we met our pro formas or we beat our pro formas, the property is worth more now because, our rents are higher than what we projected, our NOI is higher than what we projected. I can refi out with somebody else but I need to pay attention to prepayment penalties because local banks love to stick prepayment penalties into your loans.

If I cheat on my existing lender, they’re going to allow me to break up with them, but they’re going to keep some of the money.

Kim Lisa Taylor:

Are these recourse loans that you get?

Daniil Kleyman:

On the smaller side, yeah, they’re recourse loans. Once you go a couple of million and up, now you have some options where you can refi into Fannie, Freddie and you can refine to non-recourse loans.

Kim Lisa Taylor:

What kind of loan to value? Are you having to still put some of your own cash in it? You’re putting up your own cash for the land. What about at the point that you get to the construction loan. Are you having to put in additional money?

Daniil Kleyman:

Oftentimes, it’s very little. It’s funny, because I was literally recording a training on this topic, this morning, but oftentimes, if I’m bringing the land as equity into the deal, I’m able to finance a very, very high percentage, if not all of my construction budget, via that loan, via the construction loan.

It just depends on your numbers. It depends on your construction budget, it depends on what kind of value you can show your lender. That’s one of the big things that our software allows you to do is it allows you to show your lender. That’s one of the things that we use for my businesses, I’m able to show my lender, “Here’s my pro forma, when the property is built and stabilized and leased. Here’s the net operating income it’s going to generate and based on the 5% or 6% cap rate, it’s going to be worth this much. Because it’s going to be worth this much, I want you to lend me”—  let’s say the property’s going to be worth $2 million — “I want you to lend me $1.5 million to build it.” Well, $1.5 million out of $2 million is…

Kim Lisa Taylor:

75%.

Daniil Kleyman:

Thank you. 75%. But my construction budget might be $1.4 million, maybe it’s… But because I’m able to show the value to my lender, they feel safer and I’m showing them how I’m bringing the skin to the game because I already own the land free and clear. I’m presenting a case to my lender to lend me enough money where I can build the whole project.

And so if the numbers work and if you can make the case and if you have a good relationship with these lenders … What they will lend you is also a matter of comfort. It’s a matter of a relationship. Two projects can hit the lender’s desk, identical projects from two different people. They will loan two different amounts on those projects because maybe the first person is somebody they’ve been doing a lot of business with already and they like their business model, they know them, they feel comfortable.

The second project, identical project, may be coming from a new relationship to whom they’re not going to be willing to lend as much money. It really depends, but the better that you can present yourself and position yourself and show credibility to your lender, the better you will do.

Kim Lisa Taylor:

And then also during the period of time from when you put the property under contract and then you’re now ready to obtain your construction loan, some of the things you’ve done, these engineering studies and all the things getting it ready for construction are actually adding value to the property, to the land?

Daniil Kleyman:

Yeah, yeah. Especially if I’m going through a rezoning. Especially if I’m going through some sort of special-use permit or an exemption. That adds a lot of value to the land. But yeah, even for all the due diligence I’m doing, I can always… If I decide to not develop and sell that piece of land, I’m going to be able to hopefully command more money for it, because I’m turning over a lot of the work, “Hey, next developer, a lot of this is already done. A lot of this, you don’t have to reinvent the wheel. Here’s a survey, here’s topo, here’s soil studies. Here’s some architectural plans. If you like them, you can just build that.”

And you’ll see a lot of projects being marketed like that. The marketplace where it’s already entitled, and its plans are in place. Oftentimes, there is going to be permits in place. And for whatever reason, the developer decided not to pursue themselves, but they’re able to get a premium for their property, because all of that… Time is money. If somebody can buy that from you and have plans in place, all the due diligence done, maybe the permits already in place right now and they can bring that property to market in 12 months instead of two years. That’s huge.

Kim Lisa Taylor:

That is huge. And then when you get your construction loan are they doing an appraisal on the land at the point that the construction loan is being funded?

Daniil Kleyman:

They are doing an appraisal on the property as built.

Kim Lisa Taylor:

Okay.

Daniil Kleyman:

Because again, they want to figure out… This is what we teach people, anytime you’re doing anything, whether it’s a rehab, whether you’re evaluating a wholesale deal for a house that you’ll flip through your end buyer, it all starts with the end. It all starts with what is this going to be and what is this going to be worth?

And you work backwards from that into your loan, into your… Down to, “What is your land worth?” To answer your question, they typically will not appraise the land itself, at least from my experience. They will run an appraisal on… “Here’s some architectural plans. Here’s your scope of work with finishes.” What I like to do is I like to send my lenders and we present them a funding package. I will include pictures of similar projects that we’ve already done. 

Because I want to paint the picture for them. “This is not just going to be an apartment building but this is going to be an apartment building with top-of-the-line finishes. Here’s what they will look like.” Not only is it helping them visualize the project and this works for private lenders, this works for anybody. If you’re out there, syndicating deals and you’re pulling investor capital, the more real you can make this deal in people’s eyes, I think the better.

Kim Lisa Taylor:

You’re telling a story.

Daniil Kleyman:

You’re telling a story and you’re… The beauty of real estate is it’s real, it’s physical, you can touch it, you can feel it. So if you’re dealing with a new construction project, people can’t touch it, they can’t see, they can’t feel it. So it helps them visualize it. So we include pictures of finishes, pictures of similar buildings that we’ve done.

Not only does it help my lender visualize the deal and the quality of the final product. And same for the appraiser by the way. You need that for the appraiser. But it also just reinforces the fact that hey, we’ve done this before. 

Kim Lisa Taylor:

That’s great.

Daniil Kleyman:

You want whether it’s your syndication investors or you want your lenders, everybody wants to know they’re going to get their money back.

Kim Lisa Taylor:

What advice would you give to somebody who wants to do a first-time development project?

Daniil Kleyman:

Start small. Again, I cut my teeth on duplexes, single-family houses. Start with something that’s easy to understand, that’s easy to wrap your head around, that’s liquid. What does liquid mean? You build a single-family house or you build a duplex, if your numbers are correct, you can sell it, you can rent it.

Kim Lisa Taylor:

Yeah. I like that. That’s great advice. Well, all right. This has just been really great information. I’ve learned a lot. I’m super happy that you came on the show. I hope the attendees are learning something as well and taking a lot of notes. I know I am. Tell us about your other training courses. I know you have different courses that you offer. Can you tell us a little bit about that?

Daniil Kleyman:

Sure. All the development content is actually free. If I was like a smart internet guru, I would put the course together but… If you go to rehabvaluator.com/developers, you can access all of that education for free. We also put out an A-Z Wholesaling course, that’s a seven-module legit course. And again, if I was a smart internet guru, I’d be selling it for a thousand bucks, but we put it out. It’s available, it’s 18 bucks.

So wholesaling is how a lot of people get started. Probably doesn’t make sense for your audience since you’re probably a higher caliber investor, if you’re paying attention to Kim and learning from Kim. But we have Investing Wholesaling course out there as well. Rehabvaluator.com/no-bs-18.

Kim Lisa Taylor:

That’s cool.

Daniil Kleyman:

Easy to remember. But we’re first and foremost, a software company. We don’t make our money off of education.

Kim Lisa Taylor:

So what about your software? Tell us about what you have to offer.

Daniil Kleyman:

On the development side, what we use the software for is deal feasibility. I can plug my numbers in, I can plug my cost of land, my financing, my rent and income, when the property is built. I can determine here’s what the property is going to be worth. I can back into this is how much financing I can get. I can put together a detailed construction budget. One of the things that we use the software for is construction cost templates.

I can click a button in a typical budget for my, let’s say a duplex deal is already pre-populated with costs. It makes it very predictable for me to calculate costs on the next project because I’ve already done it and here’s my template. You can create as many of those as you want.

What I’m able to do from there is put together that presentation for my lender that’s got an executive summary, it’s got a pro forma for my development project. It’s got the financing summary that shows, “Hey, this is what the property is worth. This is how much income it’s going to generate.” Think of the lender’s numbers. “Here’s some pictures. Here’s some additional pictures, here’s some comparable sales and all of that.” Boom, boom, boom, click a few buttons and it spits out a PDF presentation that you can email out to your lenders, to your partners, whoever.

Kim Lisa Taylor:

Is this the one you call the Rehab Valuator Software or is it something different?

Daniil Kleyman:

Rehab valuator… Because it started off being for rehabs. I got into construction and now we use the software for construction. But the brand name is already there, so I haven’t changed it. Rehabvaluator.com, there’s a free version there. There’s a lot of the stuff that we do … lender presentations, project management, tracking and accounting schedules. That’s available in the PDF version.

Kim Lisa Taylor:

That’s fantastic. All right. Well, I’m definitely going to check that out for sure. How can people contact you if they have any questions for you? What do you suggest?

Daniil Kleyman:

Just follow me it’s Daniil@rehabvaluator.com, R-E-H-A-B V-A-L-U-A-T-O-R. Or you can just go to the website. If you sign up even for the free version of our software, you start getting some content and education from us. And those emails will usually originate from my email address, you can just reply and I typically read everything.

Kim Lisa Taylor:

Well, that’s fantastic. Let’s see. So if you want to reach out to us, of course, we’re Syndication Attorneys, we help people who want to raise private money for any purpose, but primarily for real estate. We have several clients right now that are doing development projects and we have several clients that have done millions and millions of dollars in development projects.

So there is a little bit of an art to raising money. If you’re doing bigger projects, you might raise the money for the land purchase, you might raise some additional money in case you needed in order to get that construction loan. We’re usually raising money in phases. There’s some slightly different structures that we use, because you’re usually going to have a title holding entity that takes title to the land and becomes the borrower on the construction loan. And then we’ll usually have a remote investment level entity that invests in that title holding entity.

And then of course, that will have manager so that’s your more typical syndication structure is one step removed from the title holding entity. But we do a lot of these. You can too. 

Daniil has just told us how the process works and how you can get it done. I will tell you that this is an art. It’s not something that everybody will teach you unless you just happen to fall into somebody who’s doing it and work for them for a while. It’s hard to learn these lessons that Daniil already knows. I highly encourage you to take advantage of his products and you certainly can’t beat the price. 

But if you want to schedule an appointment with us, you can reach us at syndicationattorneys.com. You can schedule a free initial consultation there. 

But anyway, we do have a question. Let’s see, “thank you both. What was the second link that Mr. Kleyman shared with us?”

Daniil Kleyman:

Rehabvalutor.com/developers and then rehabvaluator.com/no-bs-18 and that’s the wholesaling course link. And that wholesaling course has a bunch of additional education on finding off market deals, value in deals, running comps. There’s a lot there for… I don’t know why it’s 18 bucks.

Again, we don’t really make our money off of education. We try to empower people, and primarily kind of do it for our software users because we learned a long time ago that especially if you’re newer, it’s not enough to just hand you a piece of software. You need education that complements it. We try to put that out there and not charge tens of thousands of dollars for it.

Kim Lisa Taylor:

Everybody, thank you so much for taking time out of your busy day to join us today. We’re really happy that you did. I’m really happy that we had Daniil on the call because I learned a lot and now I want to be a real estate developer, which is probably really dangerous. All right. Daniil, thanks a lot. Everybody, have a really great day.

Daniil Kleyman:

Yeah. Thanks for having me on. It was fun.

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