Edited transcript from the teleseminar ‘Surviving Today’s Multifamily Market Conditions’

With Special Guest David Lindahl

Originally broadcast on June 20, 2019

 

Listen to the teleseminar

 

Kim Lisa Taylor:

Welcome to Syndication Attorneys, PLLC’s free monthly teleseminar where we talk about topics of interest to real estate syndicators with opportunity for live questions and answers at the end of the call. I’m attorney Kim Lisa Taylor. Also joining me on the call is Charlene Standridge from our office and our special guest.

Before we get started, please note that all of our calls will be recorded and may be used for future promotion, posted on our website, or broadcast in a podcast available to the public. If you don’t wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call.

Information discussed during this free teleconference is of a general educational nature and should not be construed as legal advice. This is an audio-only conference. Today our topic is
“Surviving Today’s Multifamily Market Conditions.” Our special guests for this month’s program is David Lindahl, a leader in the field of multifamily and commercial real estate training. Hey Dave, are you with us?

 

David Lindahl:

Hey, Kim, what’s going on?

 

Kim Lisa Taylor:

Hey, Dave. So good to talk to you. Oh my gosh, it’s been a long time.

 

David Lindahl:

How are things?

 

Kim Lisa Taylor:

Really, really good. How about you?

 

David Lindahl:

Things are busy.

 

Kim Lisa Taylor:

Yeah, that’s good. That’s always good to hear. Well, so I’ve known Dave since … I met Dave in 2007 at, oh gosh, what was that? It was at the L.A. Convention Center.

 

David Lindahl:

Oh, yeah. That’s when the learning annex …

 

Kim Lisa Taylor:

The learning annex. That’s it. And I think there were thousands of people at that event and …

 

David Lindahl:

There were. I think I spoke in front of 25,000 people that day.

 

Kim Lisa Taylor:

That was amazing. It was an amazing event. And of course, my husband and I bought your home-study program and then we thought we knew everything. So we went home and we said, “Oh, well, we’ll just get the home-study program and we’ll just do this on our own.” And two years later and when we had not done a single thing, we were still getting your emails. And we got on a conference call and I listened to you and you were advertising that you were going to have an upcoming Multifamily Millions bootcamp in Boston. And I said to Chris, “Well, if we’re going to ever do anything with this, we should actually go to this.” So we did and never looked back. Really glad that we went. Learned so much. I mean, my head was swimming at the end of that conference with just the amount of information that was provided; it was just completely amazing.

 

David Lindahl:

Yeah, practical information that you can use to make money.

 

Kim Lisa Taylor:

Yeah, absolutely. Absolutely. So, yeah. Well, so give us a little bit about your background and tell us about the training programs your company offers.

 

David Lindahl:

Well, quickly, I started probably about 24 years ago now. Started as a landscaper, basically wanting a better life. I learned about multifamily properties by seeing an interview on a biography about Harry Helmsley, who started with nothing and then ended up owning the Empire State Building by flipping or owning multifamily properties. So there’s something that he said in the interview that really struck me. He said that there will be people that will pay for your properties, pay for your mortgage every month. They’ll pay for the maintenance, for people to do the maintenance of your property every month. They’ll pay for management companies to manage your tenants so you don’t have to. And then at the end of the month, they’ll actually pay you just for owning the building and you can get started with no money down. And I was like, “Holy crap, if that’s really true, then I want in.” Because I had no money to put down. And it was true.

I started with my first multifamily in Brockton many years ago. And within three years’ time … it took me a while to get started. I was really nervous and afraid and like most people are when they start something new. But I did my first deal after about nine months of compostulating and training. And then three months later I had three more; six months later I had nine; and the first year I had 11, and then we went on to own a bunch. Then the market started changing about three years later. And I had gained a lot of equity and I thought, “Well, I’m going to lose this equity if I don’t do something with it.” So I started learning about emerging markets and then I started moving my equity down to Montgomery, Alabama, first. I bought a 40-unit. And then from there I moved across to Jackson, Mississippi, and then to Texarkana, Texas.

And we developed the model for certain characteristics of what we call emerging markets, basically based on job growth and household formation. And we started buying in these cities. And at one time we owned over 8,000 units in 18 different cities across the U.S. And then we started training about 11 years into it. We started the training systems and we teach people how to buy multifamily properties through home-study systems, through live events and through coaching programs. That’s what we do. And we have a big event coming up next month, Ultimate Partnering.

 

Kim Lisa Taylor:

Yeah, that’s an amazing event.

 

David Lindahl:

Yeah, it’s going to be about a thousand people in the room. And a lot of it is about two-thirds older students, people that have been with us for sometimes short periods of time, sometimes long periods. And then there’s one-third newer students and it’s full of people that are looking to raise money for deals. It’s full of people that have been very successful in this business through our trainings and are looking to give money for deals. And then there are people that are looking to partner on deals. So we call it the big networking event. And it’s just a lot of fun. There’s a lot of great education, there’s a lot of great networking and this year we’re giving away a Mercedes.

 

Kim Lisa Taylor:

Yeah, we’re going to be there. We’re actually going to be one of the exhibitors.

 

David Lindahl:

Yeah. You’ve been there for three years now.

 

Kim Lisa Taylor:

Yeah, actually we have, and we’re pretty excited about it. It’s the big event of the year for us. We really like to go.

 

David Lindahl:

Yeah. It keeps getting better and better.

 

Kim Lisa Taylor:

It does. It does. And I know every time I go in the room, I end up learning something new that I didn’t know before. And the quality of the people there is pretty fantastic.

 

David Lindahl:

Yeah. I think that’s the thing that separates us, is that a lot of people, especially the new people that come to the event, they are amazed at the amount of people actually doing deals out there with the education that they learn. It’s just full of doers, which is great.

 

Kim Lisa Taylor:

That’s right. So how far into your buying multifamily, how long was it before you said, “Hey, I can start training people.”

 

David Lindahl:

I didn’t start training for about 11 years. And it was only because I’m kind of a serial entrepreneur. So I started with the smaller units. I started doing emerging markets. I created a brokerage company called PHP Realty over in Brockton and I grew it to 20, 60 agents in a short period of time. But if anybody’s a Realtor out there or worked for a real estate brokerage agency, I use the term it turned into an “adult daycare center.” And you’ll know what I mean if you worked in that industry. And I didn’t want to go to my office and one day I decided I’m not going to go that office anymore. It just gets too crazy. And then I thought, well, what am I going to do? And I know that there were people that I had gone to all the seminars with back when I started investing because I went to every seminar.

I was a seminar junkie, but I was out there using the information. So I’d go to a seminar, I’d use the information to make money, go to another seminar. So some of those people actually started teaching as well. And they’d been teaching for a few years. So I called one of them and I said, “Hey, how do you do that business? I might be interested sharing the information I know about apartments.” And she brought me into her event and I did the last day. That was back in 2002. And in 2003, that company grew from me and my mom to 11 employees. And then in 2004, 56 employees and we became nationwide and now worldwide.

 

Kim Lisa Taylor:

Oh really? So you’re doing training in other countries now?

 

David Lindahl:

People are coming to the U.S. for our trainings. We haven’t actually gone and trained in other countries, but we’ve got people from around the world that would come to the U.S. to learn about how to abide in emerging markets in the U.S.

 

Kim Lisa Taylor:

Yeah, I’ve seen some of those people at your event.

 

David Lindahl:

Yeah. A couple of my books are written in eight different languages.

 

Kim Lisa Taylor:

Oh, my gosh. So how many books do you have out there?

 

David Lindahl:

Right now I have four major books: “Multifamily Millions,” “Emerging Real Estate Markets,” “Six-Figure Second Income,” and then “Commercial Properties 101.”

 

Kim Lisa Taylor:

Wow. Well, so I’ve got a book coming out.

 

David Lindahl:

Oh yeah, that’s right.

 

Kim Lisa Taylor:

That’s right. That’s right. “How to Legally Raise Private Money for Real Estate and Small Business.” And hopefully that’s going to be published within the next couple of weeks.

 

David Lindahl:

Yeah. That’s exciting.

 

Kim Lisa Taylor:

And I have asked you to write a foreword for that. So I’m really looking forward to getting that as well.

So yeah, we’re super excited about the book. And it’s crazy. I started writing that book like back in 2011. And I finally got around to finishing it and I realized that there are easier ways to write a book. In fact, one of our past teleseminars was “Yes, You Should Write a Book” and talking about how much easier it is to get one done now when you actually enlist professionals instead of trying to do it all yourself. And I’m sure you’ve had those experiences yourself with the books you’ve written.

 

David Lindahl:

I learned with writing books, it’s a four-month process and I just get up an hour earlier every morning and I write for an hour to an hour and a half. And then that’s it.

 

Kim Lisa Taylor:

Oh, that’s great. That’s really good advice. I will take that to heart. In fact, today I just ran across some notes that you had told us one time about speaking, public speaking, and I still abide by those notes today. So that’s been helpful for me.

All right, so there seem to be a lot of new multifamily trainers out there. I’m getting bombarded in my inbox all the time about all these new events that are popping up and new names. So I get the sense that probably most of those people started in your programs. Would you agree with that?

 

David Lindahl:

A lot of them did. Yup. A couple of them didn’t, but yeah. I guess we’re the leaders in the education of multifamily properties. So we’ve trained a lot of people. And people say, “Oh, you’re upset that your student’s now competing against you for the trainings.” And it doesn’t bother me at all because when people can learn about multifamily properties and go out and it benefits their lives, I think that’s a great thing, wherever they get the information. So, no, it doesn’t bother me; the biggest thing with where you get your information is the fulfillment. Are they going to back you up after you’ve gotten what you learned from them? Is there somebody there to pick up the phone to answer your questions? And that’s where we’ve always excelled in our fulfillment.

 

Kim Lisa Taylor:

The other thing I think that’s different is that a lot of these guys seem to have like a one-off deal. They’ll get a ton of people in a room for a multifamily conference or something like that. But I think one thing that sets you guys apart is you’ve really got all these other additional trainings that people can go to. There’s the Private Money Bootcamp, the Commercial Training, the Immersion Training, all these other more advanced-training programs. So your education doesn’t stop at one event.

 

David Lindahl:

Yeah. And that was kind of built up over time because we had the Multifamily Millions product and then people were saying, “Well, you’ve raised so much money, how do you raise money?” So then we created that product and then you’ve managed so many properties, how do you manage? So we created that product. And then the commercial product and then the sponsorship product and then how to actually set up the business product. So it all came from our students saying, “Hey, how do we do this?” As they were reaching different levels and more and more success, I kept writing courses and doing live events to the point where I don’t do any more live events anymore. I have the students who are actually now our trainers. So it’s an evolution.

I was the founder, I actually retired last year. I was the founder. The students came up behind me. All of our coaches are our students. They’re out there doing the business. They have to own at least 400 units or more to be a coach and they have to have gone through all the products. So yeah, everything’s been an evolution and it’s great. It’s great to see … It’s great to hand down to somebody some information. They go out and use it and then they come back with additional information. So now it’s a collaboration of myself, our coaches, the current student body who’s we call the next generation. We all collaborate on best practices, what’s working.

There’s certainly foundational information that works and it will continue to work. But in any market, part of the market cycle, there’s always stuff that’s working now. So we collaborate all together on that and we find out what’s working amongst us and then we share it with the student base.

 

Kim Lisa Taylor:

Boy, we definitely want to talk about what’s working now. But one of the things I want to say before we get to that — and I’ve said this for years — is that all of our successful clients that have done multiple syndicated deals have come out of your coaching programs. And I was in the coaching program too, so I understand the quality of that program. And I know there’s other people out there that are training and offering coaching and stuff, but my experience has been with our clients that they’re very successful. The most successful have come out of your programs and they’ve been in your coaching program. And so that says a lot that your coaches are actually working and they’re helping people, nurturing them along so they actually can do the business and create a sustainable business.

 

David Lindahl:

Yeah. I think the best part about coaches is they hold our students accountable. So it’s not like, all right, pay the fee. And if you make it, you make it. It’s pay the fee. And all right, this is what you’ve got to do to make it. So let’s make sure you do what you supposed to do. And if you don’t, then the coaches let them have it.

 

Kim Lisa Taylor:

All right. So I want to tap into some of your wealth of knowledge here and just give some tidbits to our audience. What qualities do you think syndicators need to be successful?

 

David Lindahl:

Certainly you have to be a good underwriter because it all starts with … Well firstly, you got to be able to source the deals. So you’ve got to find some sort of a source, whether it be brokers, direct mail or a multiple different ways to bring deals in. Brokers and direct mail seem to be the biggest. So you make your good connections with your brokers by what we call commonality. And that is, you find something that you have in common with the broker outside of real estate and you really focus on that instead of the real estate and you become friends and you start getting deals in. But it goes hand-in-hand with underwriting because if you can’t underwrite a deal or don’t underwrite a deal properly, then you’re going to get yourself into bad deals. You’re going to get into deals that don’t work, you’re going to have sleepless nights and it’s not fun.

So once you start sourcing the deals and you know how to underwrite properly, then the next quality is getting out and networking through social events and through business events and just telling people what to do. Every opportunity where you meet somebody and I ask you, “What do you do?” is an opportunity to let them know that you’re a real estate investor. You can say it in multiple different ways, but you say it with enthusiasm and you say it with an excitement that people, if they’re interested, will want to get involved. They’ll ask you, “How do you do that?” And that’s the question you’re looking for. And then you just take them to the next levels after that.

 

Kim Lisa Taylor:

Oh, that’s fantastic. So you’re really, I think, kind of describing the two parts of this business for any syndicator. One, you got to have your business model: what is it you’re doing? And then the other is, how are you finding your investors and making sure you’ve got people who are ready to invest with you when you’ve got a deal?

 

David Lindahl:

Yeah. And well, you just hit something that’s very important too, is having investors ready to invest in you when you have a deal. So one of the questions we always get is “What do you do first?” Do you source the deal or do you source for money? And we always say, “Both,” because if you wait until you get your deal to start sourcing your money, you’re going to be behind the eight ball. And there’s this three-week period before the close of your deal that people just do not want to invest with you because they are feeling pressured to getting into the deal. Even though they don’t say it, they do. So that’s the tough period. And so now you have, so you’ve got a 60-day close, you’ve got five weeks to raise that money. And if you’re just starting out, and people won’t do business with you unless they like and trust you.

So if you’re just starting out establishing that trust, it’s very, very difficult. So you start at the very beginning, you start meeting people. And yeah, there’s going to be objections. “How many deals have you done?” You might be uncomfortable getting those questions. “How much money are you putting into your deal?” which a lot of our students don’t put any of their own money in, but there’s ways to handle those objections. And yeah, some people won’t do business with you if you don’t put your own money in or some people won’t do business with you if you haven’t done anything yet and you don’t have a track record. But you know what? There are people that will. And that’s the most important part because a lot of our students, not all, we’ve got some very successful people in other fields that come to us for trainings to learn about real estate.

But a lot of our students start out with nothing. I certainly started out with nothing. And there are people out there that will look at you, look at you as a person, look at you in terms of your integrity, and if they feel comfortable then they’ll move forward with you. And of course they look forward to you to see if you know what you’re talking about, your education level. You may not have done a deal, but you can certainly talk to them about your team that you put together. So when you do get a deal, and you could certainly talk about the education that you’ve been through to prepare yourself to do a deal. So that’s the thing. So you want to accumulate as many of these people as you can into your list.

You want to be contacting them on a regular basis, letting them know how you’re doing, what you’re up to, if you’re looking at particular deals or you’re looking at a particular market. So when you strike and you get an offer that gets accepted, now you can go to these people and say, “All right, I’ve got this deal. Are you interested now?” And then you know Kim, 50 percent of those people are going to say no, regardless. And even when they first told you that they were interested in investing with you, they really weren’t, either through fear or a number of other different reasons, but we’ve learned through the years that 50 percent of the people that say they’re going to invest with you won’t. And then of that 50 percent that will, another 10 percent will fall out only because something happens in their life where they can’t come up with the money to help you fund your deal.

So you’re looking at about 40 percent of whoever’s on your list to fund your deal. So again, that being said, if you ever want to close $1 million, let’s say you want to close, yeah, a million-dollar deal, then you really need about $2 million in people on your list, people that were willing to commit up to $2 million to get to that million. Does that make sense?

 

Kim Lisa Taylor:

Yeah, absolutely. In fact, the SEC has some statistics about that. They say that the average raise for a Rule 506 offering is $1.5 million and includes 14 investors. So if you’ve got 14 and you know that are going to invest with you, then you’re going to have to have 60 percent more than that in order to be able to close that first deal.

 

David Lindahl:

30 plus.

 

Kim Lisa Taylor:

That’s right. That’s right. Now, one of the other things I think you touched on a little bit when you were talking is about leverage. You can bring in other people with experience to augment your lack of experience, especially first starting out. And that’s just so important.

 

David Lindahl:

That’s one of the reasons we started our sponsorship program. We have an event every November called Sponsorship. And what it is, is we bring successful students in and they sit up on the stage and they talk about the criteria that they’re looking for in a deal. And then the students out around the room, there’s usually about 100 to 120. They listen to the criteria and then they meet them one-on-one and then they can talk about potentially doing business together. So the newer students that don’t have a track record or can qualify for the bank financing, the senior debt, will have somebody to walk through that deal with and be successful. And you really only need two sponsors or somebody to sponsor you in two different deals before you’ll be able to qualify yourself. That’s the beauty of it. We’ve had so many students that started out green, they get a sponsor for a couple of deals. Then they started rolling and then before you know it, a couple of years later, they’re at the sponsorship event, they’re sponsoring other students. It’s really nice to see.

 

Kim Lisa Taylor:

Yeah. And I’ve seen that, absolutely seen that in action. I’ve seen some of the sponsors from your event come and help some of the new syndicators that become clients of our firm. And we get a lot of repeat clients, so people that come to us once and come to us again and again, which is what we want. I mean, we want to help you become a syndicator for life and we want to help you grow your business. But some of those new syndicators come to us and they have somebody that’s helping them augment their deals and using their qualifications. And then later on, three, four deals down the road, they don’t need those people anymore. And maybe eventually they even start becoming those sponsors for other people. So it really is a big cycle and it really does work.

 

David Lindahl:

Yeah. It’s a nice cycle.

 

Kim Lisa Taylor:

Yeah it is.

 

David Lindahl:

You see it at the Ultimate Partnering event. You see that cycle all the time, year after year.

 

Kim Lisa Taylor:

Yeah. So for years we’ve heard about Dave’s “holy trinity.” Can you tell us about the holy trinity and what it is and is it the same now as it was 10 years ago? Is it evolving? What’s up with that?

 

David Lindahl:

Yeah. It’s a simple method to determine whether or not a deal works, assuming that you’re going to raise money for that deal. Bring in outside investors. So through doing numerous deals before I started teaching, I recognized that these three figures when they came into alignment meant that I had a successful deal that I could go to my investors with. So it’s a cap rate of eight-plus, so a capitalization rate of eight-plus, a cash on cash return of 12-plus and a debt coverage ratio of 1.6 or more.

And those three ratios cover the three most important people in a deal. The capitalization rate covers you as the investor, so you’re looking for a certain return on a deal. The cash on cash return covers the people that are going to be investing in your deal. That’s 12 plus. And then the debt coverage ratio is the ratio the banks look at to determine whether or not they’re going to lend you money in that deal.

So you got the three most important people covered. And we discovered that when you hit the holy trinity, when all of those three numbers come in line, then you can go to your investors and they can put up all the funds for the deal. You’ll get 25 percent of the cash flow and 25 percent of the equity and they’ll get 75 percent, which is a beautiful thing for funding a deal and not putting any money down. Now, if your numbers are better than that, then you can increase that ratio to your favor.

So you can go into the market with a 30/70 deal, 30 percent in your favor. A 40/60. And after you get some experience, you probably are not going to go onto the street with deals that are less than a 40/60 split, 40 on your side. And we call nirvana a 50/50 split. So when you get there and you put no money in a deal and the investors put it all in and you get 50 percent of the cash flow and the profits, it’s a beautiful thing.

 

Kim Lisa Taylor:

Well, I’ll have to say I haven’t written very many of those for multifamily. The 50/50s I’ve seen are really for the single-family market where you’ve got a lot of hands-on work actually doing the work of rehabbing the properties and all of that.

 

David Lindahl:

Yeah. 50/50s are what we call the home runs, the 25/75s are the singles. You want to hit a lot of singles, doubles and triples on the way to those home runs. But wait, you asked a very important question that I want to get to. And you said, has that changed through the years? And it hasn’t. And you know, there’s four phases of a market cycle and right now we’re in the latter phases of an up cycle. And students will come and say, “David, it’s harder to find a deal now. Should I change the trinity so I can get into more deals?” And the answer is no. You should strengthen your relationships with your brokers or increase your direct mail out there for distressed sellers because the trinity’s the trinity. I mean you want to … This is a cash flow business.

You want a certain amount of cash flow in order to go into safe deals. We don’t want to go into deals that are going to keep us awake at night, deals that we’re going to struggle to get our investors their returns. We want to go into deals that are strong, that cash flow properly, that we can accumulate. Every multifamily property is a business and we want to keep accumulating strong businesses as we go forward. Once you start deviating from that trinity and accepting less, and usually the way people will do it is they’ll say, “Okay, well I can buy this property. The numbers are lower than the trinity, but I’ve got a value add or a value play that I can do. I can raise the rent or I can decrease the expenses or I can raise the occupancy that will get me to the trinity.”

But unless you have experience like three, four, or five deals under your belt, that’s a fool’s game when you’re first starting out. Because even though you know you can have all the training in the world, you still don’t know what you don’t know until you get into a deal. And it’s just like having, if you haven’t had a baby, you can read all kinds of books on babies, but until you have that baby you just don’t really understand what it takes all to get the whole job done. So yeah, the trinity has been working for me since way back in 1998.

 

Kim Lisa Taylor:

So I recently went to … Well, it was last October, so it’s been a little while. But I went to a multifamily market conference and they had a lot of pundits talking about trends in the economy and trends in the multifamily business. And one of the things they were saying is that, hey, this isn’t a 25-plus cash return, annualized cash on cash return market anymore. We’re in a world where if you’re hitting the mid to high teens for your investors, you’re doing well. Would you agree with that?

 

David Lindahl:

Yeah, actually, with the annualized return, that’s what we typically hit with the trinity. We’ve never … it’s got to be in the early stages of an upmarket to hit the 25 percent. If you’re hitting anywhere from 16 percent to 20 percent, you’re doing good. Anything close to 20 is really good. We used to say we wouldn’t do anything less than a 20. Then we realized there were actually deals at that cash flowed well below 20. So it’s really 16-plus. The problem is now is there are far less deals at 16-plus annualized and hitting the trinity than there were when the market has been climbing to this particular point. But now that being said, now some people say, “Well, I’m just going to wait for the correction to happen and then I’ll join the multifamily market.”

We tell students now that the best thing you can do is get into the game, learn how to play the game, go out there and start playing the game and you’ll get one, two, three, four deals under your belt before the next correction. And then when you go into that next correction, you’ll be armed with this gut feeling, this intuitiveness that you only get from doing deals and there’s going to be a lot of opportunity out there in the next correction. But there’s going to be land mines and there’s going to be gold mines. And the difference between the two is going to be very, very minimal. And the people that have some experience or have their gut, their intuitiveness under their belt, they’re going to be getting the gold mines. The people that don’t, some of the deals that they do are going to be land mines.

And the problem with that is as the market starts emerging, your mistakes will correct. But as the market starts to straighten out, those land mines, their problems are going to expose themselves. And now you’re going to be really focused on how to solve these problems to make sure that your investors are getting what you promised. And how do I know this? Because during my first upside on a market cycle, we went after a ton of properties, we were buying up a storm. We ended up getting almost 30 complexes at that time. And when the market started to change, four of those properties started giving us real problems. And for the next three, four or five years, all we could focus on was those properties because we wanted to give the investors what we promised. And it was just really hard work correcting the problem that those properties exposed when the market flattened out.

 

Kim Lisa Taylor:

Wow. Well there’s some sage advice. Get your experience now so you’re ready when the market does correct. But I guess the question is, how do you minimize the risk? What happened last time, from my understanding is that people had these short-term maturity dates on their loans and when the market was still down, they couldn’t get the financing and some of them ended up losing their properties. How do you hedge against that now?

 

David Lindahl:

The best hedge against that risk is higher down payment. So instead of putting 25 percent down, we put 30 percent or 40 percent down. The other next good hedge is cash flow. Having a strong cash flow going in to a market that starts to fluctuate.

 

Kim Lisa Taylor:

Yeah. So that’s really good advice. Extremely good advice.

 

David Lindahl:

Yeah, because I’ve lived it. I’ve lived outside of the downsides of these markets. And anybody that says they’ve been in this business for a long period of time and they say they haven’t done a bad deal, well they’re just simply lying because we all go through our bad deals and hopefully we learn from them and become stronger investors. And I’ll tell you what, as a new investor, your worst deals will come in your first few deals because of your lack of experience. And again, no matter how much training you have, you’re at your highest risk on your first few deals. And then after that you really start understanding how the game is played. So that’s why you want to be extra cautious at the beginning as well.

 

Kim Lisa Taylor:

Well, that’s great advice. So we have a lot of clients that have been doing preferred returns for a long time, offering that to their investors in addition to some share of excess cash flow. And lately I’ve had some clients start to say, “Well, maybe we’re not going to do the preferred returns anymore because we’re giving all the money to the investors and we’re not getting anything for all the period of time we own these properties.” What are your thoughts on that?

 

David Lindahl:

Well, if they’re not getting the preferred return and are people are unfamiliar with them? The investors get the money first and then from the split. So they would get their 75 first and then you would get your 25 after they get theirs. So if somebody is complaining that they’re not getting theirs, that means they’re not underwriting properly. The deal is not operating the way it should. So they got to take a look at the way they’re underwriting. And it also depends on how you’ve trained your investors coming in. If you train them on preferred returns then they’re going to be looking for preferred returns. If you train them on just a straight split, then there’ll be expecting the straight split.

One of the things we learned early on was your investors will act however you train them at the beginning. Like for instance, we started offering an 8 percent return at the beginning. It wasn’t preferred, it was just straight. Then the market was getting good and we were getting a lot of deals and we went to 9 percent. And then for a five-deal period that happened very quickly, we were offering 10-plus just because we got us some really good deals. And then we got a regular 8 percent return and we couldn’t fund it. And I remember talking to Tina in the office like, “Hey, what’s going on with this deal? Why don’t people like it?” And I said, “It’s a great property in a great area and in a great city.” And she says, “Dave,” she says, “They’re waiting for the next 10.”

I said, “What are you talking about?” She said, “They’re waiting for the next 10.” We had trained them to expect a 10 percent return, cash on cash return. So we learned that lesson. So now what we’ll do is we always stick with the 8. And even if we see a deal that comes by with a 10 or 11 or a 12, we still promise the 8, give the 10, 11 or 12 and then we’re heroes.

 

Kim Lisa Taylor:

Yeah, I like that. And the same goes for on your mirror back-end splits. If you’re underwriting a showing that you’re going to be getting in 25 percent or 30 percent split or 30 percent return for your investors when you sell that property, you might want to consider having a cap on their returns where the split changes. Once you reach one performance hurdle that they’ve really gotten a great return. Maybe they get 17 percent annualized, at that point maybe you can go do a 50/50 split or some other split.

 

David Lindahl:

Yeah, that’s why you’re here to show everybody how to structure those deals because that is really good advice.

 

Kim Lisa Taylor:

Yeah. All right. So any other words of wisdom that you might want to share with people about surviving today’s market?

 

David Lindahl:

Just be really conservative, know where you’re investing. Some of the properties where cash flows properly right now are in C-, D+ or C areas. And kind of going into the next correction, those tenants are going to be the first people that lose their jobs because they’re the service type of jobs. So in this market, you really want to focus on B properties and B areas. And that way as we go into the correction, your property will weather the correction and actually outperform everybody else and you’ll go safely into correction buying additional properties instead of trying to keep properties afloat.

 

Kim Lisa Taylor:

We’ll take all that to heart. All right, so we do like to go to live Q&A if you don’t mind. But before we do that, go ahead and give out your contact information again especially like where people can sign up for the UP event where they can learn about your other training programs.

 

David Lindahl:

Yeah, if you’re interested in Ultimate Partnering, you can go to rementor.com and you can learn about the event there. You can certainly call the office if you’re interested in other trainings and talk to Jeanie at 800-649-0133.

 

Kim Lisa Taylor:

Okay, great. And just full disclosure for everybody that is on this call. I do co-teach the Private Money Bcamps a couple of times a year that RE Mentor offers and that’s a pretty phenomenal way to get a really more in-depth knowledge of syndication and finding investors and dealing with investors. It’s a really great event.

 

David Lindahl:

Yeah, it is. That gives you the scripts and the legal. You know, for years I wouldn’t teach that event because I was afraid that I knew — as you know — that when you say something from the stage, people hear things differently. That always amazed me when that would happen. But when it came to the Private Money event, I thought, I don’t want to be teaching how to do this and then have them hear something different and go out and do something different and then get in trouble and then have it come back to me. So I finally smartened up and you were the first attorney, but I had another attorney that was teaching it years ago. And I let him take on all the risk and I just taught how to talk to the investors. So that worked out pretty well. And then we continued to do that. As you know, you co-teach it with Bob Bowman. He teaches how to talk with the investors and the right scripting and what to say to them and where to find them. And you can talk about how to keep it all legal. It works out well.

 

Kim Lisa Taylor:

Yeah, it works out great. It’s a great event. All right. Anything else you want to share before we go to the live Q&A?

 

David Lindahl:

No, that’s it.

 

Kim Lisa Taylor:

Okay. Charlene, how do people raise their hand to talk to us?

 

Charlene Standridge:

So you can go in and you can just click the little hand button in the webinar or you can type a question in the question box. And I have two questions in there right now.

 

Kim Lisa Taylor:

Let’s go for it.

 

Charlene Standridge:

Okay. So the first question is from Julio and he wants to know, “How do I find distressed sellers?”

 

David Lindahl:

Well, distressed sellers for smaller properties you can find them through the banker. Every city has a local real estate newspaper that comes out. It’s a journal. Some cities call it a journal. In Massachusetts, it’s called the “Banker And Tradesman.” So you just have to find out what it’s called in your area. And that shows the foreclosures for multifamilies in there. It’s usually the smaller ones. So that’s one way to do it.

The other way is to just do direct mail. It’s kind of like a shotgun approach. You determine what size property you want to go after, go to the assessor’s office, get a good list or go to a list broker and get a good list of those properties and then send out a direct mail piece. Typically with direct mail, we send it out every two months. So somebody’s situation might not be at a point where they need to sell a property, but they keep getting that piece. And eventually, people will. All you’re looking for is a 1 percent response on that to make a lot of money in direct mail. So that’s where people in distressed properties typically raise their hands.

 

Kim Lisa Taylor:

Interesting. All right. What’s the next one, Charlene?

 

Charlene Standridge:

Okay. And John P wants to know, “Can you give us those trinity numbers again?”

 

David Lindahl:

Yeah. So the trinity numbers are, the capitalization rate needs to be an 8 or higher. The cash on cash return needs to be a 12 or higher, and the debt coverage ratio needs to be a 1.6 or higher. And that coverage ratio is, that tells you the amount of times your cashflow covers your mortgage payment, your debt payment. So at 1.6 for every dollar you have coming in, for every dollar you’re paying in debt, you have a $1.60 coming in.

 

Charlene Standridge:

Okay. That’s all I have in my typed questions and I don’t see any hands up. You just have to click on your hands up and then I’ll unmute you and you can ask your question.

 

Kim Lisa Taylor:

Okay. So what else you’ve been working on Dave, since you retired?

 

David Lindahl:

Well, we’re still involved in the properties. We’re still doing deals. Actually, I retired more from teaching than I did from investing.

We didn’t really talk about emerging markets, but we’re really focused on being at the right place at the right time. In this particular phase of the market cycle nationwide, there’s not a lot of cities that are in the emerging phase, or they’re in the latter half of the emerging phase. So we’re really looking at one-off deals like a lot of other people are as well. So we’re in Missouri — St. Louis, Missouri. It’s a pretty good market to be in right now.

Also, the smaller markets in the Midwest. Because the way money flows in real estate cycles is, it starts on the coasts, the East and the West coast. A major city like Washington, D.C., is usually the first city out of the gate in a recovery. Weirdly, Minneapolis is usually the second. Why that is, I still haven’t pinned it down, but it usually is. So that’s something you want to maybe take a note of. And then like New York, Boston, Miami, those cities come up. Atlanta and on the West coast, L.A., San Francisco. So those cities start doing well and when they start to “yield out” as we call it, the money starts moving in to the center of the country to get higher yield. To the point where it is right now, we’re in a lot of smaller cities to be able to get the yields that we’re looking for.

So like Cincinnati, Ohio, is a good market to be in. Cleveland is a good market to be in. Reno Nevada, is a good market to be in right now. Kansas City is always a good market because at like different parts of that city there’s sub-markets and usually in different parts of the market cycle at any given time. Texas is good. Texas just seems to keep rolling and rolling. It’s a very business-friendly state. Same with Utah. So Ogden is a good place to be right now. You look down south, Atlanta on the outskirts is still really good. We had some students in the last cycle do really, really well in Atlanta. One of our students hit the hall of fame by doing three deals in a year, getting $600,000 in acquisition fees and getting over $8 million in equity, just being in the right market at the right time.

 

Kim Lisa Taylor:

Wow. Wow. We’d all like to be there.

 

David Lindahl:

Yeah. Everybody can be there. And it’s just a matter of commitment, learning and …

 

Kim Lisa Taylor:

Yup. You’re making me think I need to jump the fence. I need to dump this law firm and start being …

 

David Lindahl:

There you go. Well you certainly can save on your legal fees.

 

Kim Lisa Taylor:

No, not really. I have to pay somebody else to do it then. All right, so go ahead Charlene, who’s next?

 

Charlene Standridge:

Okay. We have another one from Isaac and he wants to know, “Can you tell us about your experience; how did you prepare to weather the economic storm?”

 

David Lindahl:

Right now, so from my experience and going into this next correction, we’ve sold off all of our properties that are in C areas. Like I said before, those are the marginal areas. One of my first mentors told me — I was really proud I had bought my seventh property when he had taken me on as a mentoree — and I said, “Hey, Mark, check it out. Check out this new property I bought. It’s in Brockton, Mass.” It was a three-family. I was proud because I was getting it cheap and it had great cash flow. And he said, “Why are you buying that property?” And I said, “Because it’s cheap and it’s got great cash flow.” And he says, “Yeah. But it’s a marginal property in a marginal area.” And I said, “Yeah, and it’s cheap and it’s got great cash flow.”

And he said, “No, Dave.” He says, “You don’t understand.” He says, “When you buy marginal properties in marginal areas, you get marginal tenants.” He said, “You actually do more wear and tear on your property than good tenants.” He said, “Marginal properties in marginal areas, when the market changes, they’re the first people that are going to lose their jobs. So the revenues that you expect from them, you’re not going to get it.” He said, “And also these marginal properties in marginal areas in the upper economy, as the economy changes and starts to move,” he said, “they’re only going to go up marginally, whereas your good properties in good areas are going to go up much higher in appreciation and increase in cash flow.” He said, “But more importantly, in a down market your marginal properties, you will not be able to sell if you get into a cash crunch.”

He said, “In the market, people are always interested in good properties in good markets.” So he said, “Always buy good properties in good markets. You get good tenants, you get great appreciation and cash flow when the market changes. And no matter what cycle you’re in, you’ll always be able to sell it.”

And I took that to heart and that’s maybe a lot of money through the years and that’s good for anybody else. Write that one down. That’s good advice. So any properties that we did take on were those that we thought we could have a value-add on. So we typically buy B properties, B- properties. But if we can get a good C properties or a good C+ property that has good bones and it’s in a good area, like a B- or B area, it’s in an area above its class, we’ll take on that project, look to improve the property, bring it to a B- or a B type of a property and improve the tenant base so that we can raise the rents and hence raise the value of the property.

But we take out a lot of different projects and if all of a sudden we realized we were getting close to a correction and we haven’t completed that project yet, these properties still cash flow. Cash flow is king. So we very rarely buy anything that doesn’t cash flow unless it’s a full-blown repositioning. So when we start getting close to the market changing, which was a couple of years ago actually, when we started seeing that this market was starting to weather out, we started selling off those properties just to make sure that we weren’t caught in a situation like we had been two market cycles before.

And also we don’t take on any big rehabs at this particular time in the marketplace. A student came to us with this really good deal in Oklahoma City about a year ago, 420 units. The purchase price per unit was really low, but it needed approximately $4.5 million worth of renovations. And I just looked at the time frame going into that particular deal. And it looked like it was about a year and a half turnaround, maybe two. And I thought, this market could turn at any time. And if we get caught in the middle of this, we’re not going to get the returns that we want, then we’re going to get stuck with a property in a down market that is going to take a lot of our attention. And we’d rather our attention be spent on finding great deals in down markets than to try and keep afloat marginal deals that we bought wrong.

 

Kim Lisa Taylor:

Oh well, that makes a lot of sense. All right. Charlene who’s next?

 

Charlene Standridge:

Okay. So from Anita, she says hi to both Dave and Kim. And then she says she has a small 11-unit luxury apartment building in North Carolina. And would you suggest she find a broker to sell or find an investor to buy it without using a broker?

 

David Lindahl:

The first question is, how did you come across it? So if you bought it through a broker and you want to do more business with that broker, then sell it through that broker. If you bought it on your own, the first thing I would do is you come up with your exit price. And if you price it so that an investor will buy it, you can base it on the trinity or you can be a little bit more aggressive to see what you can get initially. But why not put it on LoopNet first, see if you can get some action. It’s a seller’s market right now out there. There’s a lot of buyers looking for deals that cash flow. Some people are paying crazy prices right now. My philosophy was if I wasn’t selling it through a broker is try to get the crazies to bite on it the first couple of weeks it’s on the market.

If they don’t, then I put out what I originally thought I was going to get for it with good cash flow for the next guy coming along. Another mentor told me, always leave a little meat on the bones for the next guy. If you do that, you’ll be in and out of deals on a regular basis. And he taught me that it’s not money that makes money. It’s the movement of money that makes money. So every time you can churn your money by buying and selling properties, and even though we’re not flippers, our typical buying hold is a three-to-five-year period. But still during that three-to-five-year period, we’re going to get cash flow. But we want to be able to churn our money. So the more times you can turn your money, the more money you’re going to make.

 

Kim Lisa Taylor:

Well, here’s another question for Anita is, what is your motivation? Why are you trying to sell it? If you only want to get cash out of it, why not just find some investors and get them to give you some cash back? And the three, four of you keep the unit. It’s an idea.

 

David Lindahl:

Yeah. That is a good idea.

 

Kim Lisa Taylor:

All right Charlene, who’s next?

 

Charlene Standridge:

Okay, so we’ve got Richard and he wants to know, “What size or minimum criteria do you feel small cities and towns are worth considering for better returns?”

 

David Lindahl:

That’s a really good question. You want a population of at least a hundred thousand or more in a city. You want at least one highway going through it. So the transportation of goods and services. If you can get you one with an airport with one major carrier. There are a lot of smaller airports out there, but you want one with a major carrier. And then you want it to be either the retail hub or the healthcare hub of the area. Those three factors are minimal to what you’re looking for in a market. Don’t go to a market with 30,000 people. It doesn’t have a major access way through it because you’re going to limit the amount of people that are going to buy that property from you. So it’s all about you make your money when you buy the property, but you also have to look at your exit strategy and who’s going to be buying from you. So that’s why you want the larger population. Other things you want to consider are universities … state capitals and universities always make for good markets as well.

So here’s the definition of an emerging market that we’ve used for years. So we look for a 2 percent year-over-year job growth and we look for a 2 percent year-over-year household formations. We don’t care about population. We want household formations because that means people are looking for a place to live. And that will increase the demand for the housing in the area. And to get that, we’ll look at the Bureau of Labor statistics to get that information. And I’ll even try to get it in a little bit early. If I see a city, if I’m looking at the statistics from the Bureau of Labor and it shows that a market was at a job growth 0.8, and then 1 and then 1.4, then I’ll start looking at that city and I’ll call the economic development committee of that city.

And I’ll see how aggressive they are at attracting job growth. What type of incentives are they giving? And if it looks like they’ve got aggressive incentives going on and they’ve got companies moving into the area, then I’ll try to get into that market early. Because the earlier you get into a market, the more upside you’re going to get. The other thing I’ll look at is the Milken report. The Milken Institute puts out a report every January called the Best Performing Cities. And that will give me an idea. It will tell you the best performing for the previous year, the best 25.

It will give you the 10 worst performing cities, which is always going to look at. But then it lists all of the cities from one to I think it’s 400, from year to year, like the previous two years. And it shows you the advancements. So I’m not looking for the cities that have advanced into the top 20. I’m looking for the cities that have actually advanced into the top 75 because those are the ones that have more up-growth potential that could get to the top. So if you’re looking for cities that are moving, look at the Bureau of Labor statistics and look at the Milken report.

 

Kim Lisa Taylor:

Interesting. All right. Charlene, who’s next?

 

Charlene Standridge:

Okay, so Nick wants to know, “It seems like in most MSAs right now, B class multifamily is trading closer to the 5 percent to 6 percent cap rates. Buyers are using government-sponsored loans with interest-only periods sometimes up to four years out. I’ve been underwriting deals for the past three years and consistently cannot compete with the other buyers since I’m trying to hit the trinity. Any advice?”

 

David Lindahl:

Yeah, it’s all based on your relationships. The advice is to strengthen your relationships with brokers because there certainly aren’t as many deals that hit the trinity in this particular phase of the market. But excuse me, but there are, and who’s getting those deals? It’s the people that have relationships with the brokers. So again, focus on your broker. The conversations with the broker and find out what you truly have in common with that person. Maybe it’s NASCAR racing, maybe it’s fishing, maybe it’s cooking, maybe it’s reading and specific types of books, whatever. But find out what it is that you have in common and then start talking about those things. Start sending them information about those things, maybe gifts with those things.

And then you start becoming friends because you like people who are like you and so do other people. Then you become friends and before you know it, you start doing business together. And then you’re doing business with a friend, and you start doing deals. That’s the fastest way to get deals. And that’s the way that people get deals in down markets.

 

Kim Lisa Taylor:

Well, I would like to add that that’s the fastest way to get investors too. If you took those same exact steps and met investors and developed your relationships with them in that way, you would not have any trouble funding your deals.

 

David Lindahl:

That’s true. Yup. Good point.

 

Kim Lisa Taylor:

All right. Charlene.

 

Charlene Standridge:

Okay. Thomas wants to know, “What is the best way to find deals, B neighborhoods? Or do you have specific metrics or census data as a reference?”

 

Kim Lisa Taylor:

I think we kind of covered that one.

 

Charlene Standridge:

Isaac wants to know, “What do you say to buying near Amazon logistics centers in Cincinnati or North Kentucky? Amazon is investing $1.5 billion, but Amazon jobs I heard does not pay as much.”

 

David Lindahl:

It’s job growth. So Amazon, whether it be Amazon, a car plant, Boeing that went into Charleston a couple of years ago … we’re following that information. So if they’re bringing in X amount of jobs, you certainly want to … 80 percent of your tenants are going to come from a three-mile radius. So you want to know what the demographic profile of that tenant base is. And then you want to buy a property that’s going to service that type of a tenant profile. So I’m not as concerned about these jobs that don’t pay as much because I know they can certainly afford C+, B- rates usually. So if there’s a fulfillment center going in somewhere and it’s creating 500-plus or more jobs, it’s usually an opportunity to be buying around it.

 

Kim Lisa Taylor:

I see Isaac’s next question is, “Can we get a link to the replay?” and we will be posting this on our website and we’ll also be sending it out to our database. So yes, you will get the link to that, Isaac. Thanks for asking.

 

Charlene Standridge:

Julio wants to know, “How do I find household formation?”

 

David Lindahl:

That’s in the Bureau of Labor statistics as well. I have to practice saying that word statistic.

 

Charlene Standridge:

Bob wants to know, “Is it common for security deposit collections to be a low percentage to all units? 22 to 71% actual collected deposit money? This is on a 100- to 360-plus unit.”

 

David Lindahl:

It all depends on where it is in the country. I know coming from Boston, we always get first, last and security. When I first bought in Montgomery Alabama, it was first and last, no security. And I told them, “No, we have to have security. How can you take somebody with no security?” And he said, “If you ask for security, you won’t get any tenants. You won’t be able to fill your units.” And I didn’t believe that. And I asked for security deposits and he was right. Nobody would pay it. We couldn’t get tenants. So we had to go with first and last. So it depends on that, it depends on what the competition’s doing. It also depends on whether they were doing any incentives to get people in.

A lot of times if they’re trying to lease up a property, they’ll have an incentive like first and last, no security deposit, or first month only, second month free. Things like that. So you want to take a look at that. But if those aren’t in place and they’re just relaxed and getting their security deposits, that could be an opportunity. That could indicate some poor management practices. So I’m sure that will show up in other aspects of the management of the property. And one of the best types of properties to buy are properties that weren’t managed properly. You bring in a good management company to straighten it out and that’s a really good value play.

 

Kim Lisa Taylor:

Charlene, I think we were running out of time here. So I want to skip down to Rob from San Diego or actually to Nicole Amundson. So Nicole says, “I just want to tell you again how much I appreciate all you taught me all those years ago. I still use what you taught me. Forever grateful. I would recommend your class to everyone unreservedly.” So that was nice.

Yeah, very nice way to wrap up the call. So Dave, this has been just an amazing fountain of information and I’m sure everybody’s been furiously taking notes and they’re going to want to listen to this again and again. And I know I want to listen to it again because just the tidbits that you’ve given here, I don’t think you can get this kind of stuff anywhere else and certainly not within an hour. So thank you so much for taking your time to join us today. Just loved having you on call and we’ll have to do it again.

 

David Lindahl:

Yeah, it’s great talking to you again. We’ll see you soon.

 

Kim Lisa Taylor:

Yes, very much. All right. See you soon. Thanks so much.

 

David Lindahl:

All right. Take care. Bye, Charlene.

 

Charlene Standridge:

Bye-bye. Thank you.

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