Edited Transcript from the podcast episode ‘The Impact of Technology on Real Estate’

With Special Guest Danny Kattan

Originally Broadcast on Aug. 26, 2021

Kim Lisa Taylor:

Welcome, everybody, to Syndication Attorneys’ free monthly podcast, 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 am attorney Kim Lisa Taylor. Before we get started, please note that all of our podcasts 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 at our website instead of asking questions during the live call. Information discussed during this free podcast is of a general educational nature and should not be construed as legal advice. Today we have video but if you’re listening as podcast, it is audio-only and today we have a very exciting guest speaker, Danny Kattan, and he’s going to talk to us about using technology in your real estate syndication business. So, Danny welcome to the show.

Danny Kattan:

Thank you, Kim Lisa, and it’s a pleasure to be here, always great to see you, hopefully get to see you in person next time. I hope everybody’s doing well and keeping safe. 

I think when I say “the effects of technology on real estate,” people really think, “How do I use technology in my real estate?” And actually the speech is different; it is “how is technology affecting real estate?” which is even more important. And so, to give you an example, people think about “what does technology have to do with real estate?” and the way to look at this is Sears and Amazon. I mean, Amazon created a technology and before you know it, Sears was gone, right?

And there’s a lot of technology that is being developed that we are aware of but we really don’t understand the effects that technology has on real estate, and I believe that not only will it affect real estate but it will definitely affect the investments that we do on real estate, and some people might end up being big losers on their investments. 

The easiest way to think about it is that if you own a gas station and in 10 years all of the cars will be electric, then what are you going to do with the gas station, right? People said, “Well, I’m going to build something there.” Well, so every gas station is going to do the same thing and then you’re going to have empty parking lots because now you’re not going to need cars, they’re autonomous. So we can go very deep into that but I know you have some questions. Do we have some questions?

Kim Lisa Taylor:

Before we get too deep into all that, let’s talk a little bit about you and your background and what you do.

Danny Kattan:

I’m an engineer with a master’s degree in finance. I’m a recovering investment banker. Still shell-shocked from that part and then entrepreneur by heart. I got into real estate in 2009 after the whole downturn of the economy. I started buying houses one at a time, created a very integrated platform where we actually acquired 400 single-family houses, 400 small multi-families, all in South Florida. We sold most of our houses to a New York fund and we pivoted in 2019 to buy large multi-family. We went from having 75 people in our team — acquisitions, dispositions, property management, maintenance, construction company inventory — to having six highly specialized professionals in buying large multi-family. We have 244 units in Pensacola, we have 284 units in Jacksonville, and now we’re acquiring 216 units in Savannah. So we went from being highly operational to being more strategic in growing our portfolio.

Kim Lisa Taylor:

Well, that’s fantastic. So it sounds like you’ve got a pretty big operation then?

Danny Kattan:

Well, we don’t; we used to have a very big operation. Now the cool thing is that now we believe that we are extremely good asset managers because we’ve done everything that needs to be accomplished to manage and do property management of 400 single-family houses, 400 multi-family, so we learned a lot. We can tell you how much a toilet is worth in Home Depot by heart or we used to … but we realized that being property managers, we will never be as good as the people who are in other markets. We will never be able to grow that property management company and so we decided “you know what, let the property managers do what the property managers do best and let’s hire the best.” We are asset managers, we’re on top of them every day and the good thing is that we can actually fire them if they do a bad job.

The thing that we realized when we had our property management team is that they felt comfortable. They knew that we’re not going to fire everybody one day or another but we already accomplished a lot of things, which is get rid of the day-to-day and concentrate more on creating value for an investor. Believe it or not, going to Home Depot and buying a toilet $3 cheaper, it’s not creating value.

Kim Lisa Taylor:

Sure. So you started as property management and now you’re buying…

Danny Kattan:

We started as investors.

Kim Lisa Taylor:

Oh, yeah, as investors. Okay.

Danny Kattan:

We actually bought 400 single-family properties and 400 small multi-family with investor money. Then we raised money from a family office but we were GPs so actually we raised about $60 million to do that and so we were very structured in that sense. As part of our operation, we have property management, then we have construction, we have our warehouse. We got the whole drama of collecting rent and having bulletproof glass in our office; one of our guys got shot, almost killed. I mean, we were rough and tough, right? And so we already got passed through that and now we’re buying large multi-families.

Kim Lisa Taylor:

How long did all that take for that evolution to occur?

Danny Kattan:

In 2008, we bought the first house. We sold our portfolio in 2018 when we thought the market was through the peak; that was 10 years.

Kim Lisa Taylor:

And so you started out buying single-family?

Danny Kattan:

One by one.

Kim Lisa Taylor:

One house at a time and now you’re doing mostly multi-family?

Danny Kattan:

Large multi-family. When we started, Kim, buying single-family portfolios was something crazy people did, I kid you not, okay? A friend of mine thought I was going to get killed because of the places I was buying these things and then Warren Buffett said in 2011, “Oh, it’s a good idea, not practical.” Wall Street got into it and that was 2011, from 2011 to about 2017 it was hard to do and now it’s become the darling of the asset class. So single-families are kicking butt. Everybody wants in, everybody’s going to build to rent. Everybody’s buying single-families. When we got in there was no debt market for it. There was no software; we actually had to write our own software. Now all the service industry has been created.

Remember Invitation Homes/ The idea was we’re going to buy 5,000 homes and then sell them later. Now they have 85,000 homes that they cannot buy. They want to buy double that. So it became an asset class. This is a new asset class. Unfortunately, we got out of that in 2018 and we got into the multi-family asset class, which we believe is equally as good if not better, because it’s easier to manage. And in a way it’s been a proven asset class for 40 years.

Kim Lisa Taylor:

So it seems like you guys have really streamlined your processes over these 10 years by building and creating your own technology suite, I guess. Is that a correct characterization?

Danny Kattan:

No, when we started, we actually coded our own software because there was no property software for single-families.

Kim Lisa Taylor:

Okay.

Danny Kattan:

And then the big boys on Wall Street got in and Yardi, actually, started deploying technology for single-family and … at the end, we ended up ditching our technology. Talk about a painful experience … we invested $500,000 to build the technology. And then one day we decided “you know what, somebody else can do it better.” And then we moved to them, right? So as far as technology that we use in our operations, we try to be paperless. So when we do our syndication to our high net worth individuals, I mean, it’s not a syndication; it’s subscription, right? We use the platform where people come in and they put in their names, signature or the whole thing. And then after that, is just a lot of data, right? As asset managers, we require our property managers to send those data, right? And use data analytic tools and stuff like that. But I wouldn’t say that it’s specific and not technology for that.

Kim Lisa Taylor:

So what technologies? I guess you’re using technologies to manage your investors, right?

Danny Kattan:

Yes. Any portal basically. I mean, there’s portals, our investor portals.

Kim Lisa Taylor:

Sure. You’ve got your property managers who have their own property management software that’s being used. What other kind of technology are you using in your multi-family businesses?

Danny Kattan:

I will say that apart from the basic stuff, nothing much. I mean, I don’t think there’s new technologies that have been invented there. Again, going back to the title of the conversation. So it’s not so much about what technologies we use, is how technology is affecting the business. And by affecting the business, I go back to the same thing which is, think about if you’re an allocator of capital. It’s not only you have millions, but billions of dollars in office buildings, right? In South Dakota, it happens.

Kim Lisa Taylor:

Mm-hmm (affirmative).

Danny Kattan:

Our office is, “Hey you know what, not so great.” But I mean, talking about that a couple of years before, I said, “You know what, maybe people are not going to go to our offices because we had Zoom and we had avatars and the whole thing.” So a lot of what happened in COVID, is that COVID accelerated certain technologies to be adopted, right? Today, now we say, “Oh yeah, of course, we could have worked from home.” The reality is that Zoom existed before COVID, right? And now you’re having offices that are half-vacant or hotels that are half-vacant. The reality is nobody’s going to do business travel because why spend the money? I can do a Zoom call. I’m not saying that human-to-human interaction is not needed, right? But in some cases, engineers have figured out how to teach other engineers the use of their machinery using virtual reality. So now you don’t send an engineer to tell somebody how to use a machine.

Kim Lisa Taylor:

Right.

Danny Kattan:

But I go back to that, the cool thing about technology is we, as humans, we think linearly, right? Technology really moves exponentially, right? Which is like that. And then business model moves algorithmically, which is to the base of 10 — 10, 100, 1000 and so forth and so on. So let’s think about an example we all know: Uber. I mean, the technology to create Uber was already created. All people did was to basically assemble pieces of technology that existed, right? Then we thought linearly, “Oh, we can only use cabs and there’s no reason why we should give it to some stranger’s car.” Well, think about that. We always got into a stranger’s car, it just happens to be a taxi driver and it was yellow, but it was a stranger.

Kim Lisa Taylor:

Sure.

Danny Kattan:

Second part, comes Uber and people go like, “Oh you know what, maybe we can adopt this or not.” But Uber was slowed down, not by the adoption of the business model, but by regulation. If Uber were left unchecked, we would have grown more exponential algorithmically. And before you know it, that whole asset class of taxi was changed. Same thing happened with Airbnb. So now you’re a hotel owner, right? A lot of new things are going to happen with asset classes that we’re not aware of. For example, a retail strip, right? What will be the effect of that when you can literally put things on a drone that will be dropped in your house? A lot of people said, “Well, that’s not going to happen so quick.” I agree. Let’s assume that it happens in 10 years, right?

But in five years, when you were trying to sell that retail strip, your buyers are going to say, “Wait, hold on, do you want me to buy a strip center that maybe half of the things there are not really selling as well, because you got some different business models here? So if I were to tell people, “Hey, let’s go buy a Barnes & Noble.” The first thing that people have in their mind is like, “Wait, haven’t you heard of Amazon?” So that today is obvious.

Kim Lisa Taylor:

Well, I can see a place where we get back to people having one car or no car. We became a two-car society for years and years and years and then all of a sudden, now if you don’t have anywhere to go, you don’t have to go to the grocery store, you don’t have to go to the bank, you don’t have to go to the strip mall, but buy your clothes or goods, then pretty soon you won’t need a car. Unless you’re in a rural area, right? Or if you do, you maybe just have one car so you can go take a drive somewhere.

Danny Kattan:

I will tell you that right now, first of all, let’s face reality. In China, San Francisco, Phoenix, there are self-driving cars already in the streets. So it’s going to happen. Always technology happens earlier than we think it will happen, okay? Everybody criticizes Tesla, Elon Musk when finally he would have his software that can do self-driving, pushes a button, we got two million cars in the streets that can do that. But the issue of a car self-driving is not a convenience one, it’s an economic one. There are estimates of trillions of dollars being saved by people not owning their own car. By basically you push a button, the car comes and picks you up, driverless. The cost per mile is so cheap, it’s actually free. Why? Because while you’re sitting in the back chair, somebody is going to show you advertising and it pays for it.

Kim Lisa Taylor:

Interesting.

Danny Kattan:

So you don’t need any cars, right? And those cars are going to run electric because it’s cheaper to run an electric car. Now that is better for the environment or it’s green or it’s cheaper, period. Then what will happen to all this parking lots that are in those shopping centers,? And so the whole idea is, you really have to start thinking about what will real estate look like 10 years from now? And if you and I can agree that 10 years from now, most cars will probably be electric and we might not need a gas station, right? And whoever’s buying a gas station today and he’s not thinking about that, is going to have a problem selling in five years. Because in five years, the writing will be on the wall. It is the same person who’s going to buy through the Barnes & Nobles that is not thinking about Amazon.

And so the whole thing here, the reason I started this is because one day I sat down with my partner, he says, “You know what? I think that residential real estate is a safe asset because technology is changing the way all these things work and self-storage might be upended by the fact that self-storage will come through you in a self-driving car. And you might not need an office building and so forth. … 

I read a lot and I’m a very curious person. It just occurred to me that the only thing that doesn’t really change is our need to live somewhere.” I mean, unless somebody … can sleep standing up. …

So and I started getting into it, to a point that I’m trying to write a book; it’s been two years trying to write the book. I actually have a presentation I’m going to post the website in the chat so people can read about this, okay? About the effects of technology on real estate. And the conclusion there — or at least my conclusion — is that although it is not something that people see as a very evident, I think that Wall Street is starting to see it. And that’s why you see a lot of capital going into single-family and a lot of capital going to multi-family. You see all this cap recomprehensions in multi-family, right? Whereas you go sell a hotel, maybe two people show up to buy it. You go buy multi-family, there’s 40 people buying it. And literally you have to go hard day one with LOI, not even on PSA and board inspections …

Kim Lisa Taylor:

Getting back to how the technology affects that, is that people are buying real estate sight-unseen, right? I have a friend that just bought a house in Italy without ever having gone there; she bought it online.

Danny Kattan:

Yeah. That is correct. There’s a lot of people who are using the technology to buy real estate without being there. Because if you think about it, a lot of people feel comfortable with Zillow and things like that. I mean, when we were buying single-family houses, we had to drive and see it. Now, you push a button, Zillow tell you how much it’s worth and then Rent-o-meter does how much you can rent for. So you can literally underwrite something without even seeing it. If you have to go see it, there is a service that for 15 bucks, you send somebody that will take pictures.

Kim Lisa Taylor:

Right. Also, how do you think this affects multi-family? Because a lot of our clients are buying multi-family. Where do you think this is all going?

Danny Kattan:

Well, again, if I have a gazillion dollars, I will only buy multi-family residential, because I think that a lot of things might get affected by technology, right? I mean, if you think about it, you have a warehouse full of car parts and now you have a 3D printing that can print car parts, right? And now you don’t need a full warehouse, just a printer printing the car parts, right? I mean, a lot of people will say, “Well, you got the last mile but as the last mile becomes more efficient, you might not need that many warehouses.” I mean, we can have an argument about that, okay. But certainly the clarity is hotels and office buildings, right? If 70% of all hotel clientle is basically business, so suddenly you are not traveling anymore, then there is a lot of hotel capacity. When I go to Orlando for a conference, I’ll drive the day before, sleep there, wake up the next day. But if I have a self-driving car where I can sleep in the car going there … you don’t have to use the hotel, right? So things like that…

Kim Lisa Taylor:

Well, I’m not going to do that until they start putting beds in cars.

Danny Kattan:

For me as an investor, because my mandate from my high net worth individuals and the investors that invest with me, and again, not all my investors are high net worth individuals, right? They’re professionals. What I tell them is, “You work hard, what we need to do is preserve that capital.” So I feel extremely comfortable in residential. Why? Because in 2009, when I was buying houses and I was managing the houses, I saw how people did whatever they had to do in order to pay rent. And so there is this social researcher or economist, the name’s Maslow and it’s called Maslow’s Pyramid of Priorities. And of course the first one is food. I will argue that the first priority, at least in the United States, is not food, but rather it is shelter. Because food, you can always get for free. I mean, literally you go to any restaurant, they’ll give you food if you’re hungry. You can go to a soup kitchen, you can go to all this charity markets, they’ll give you food, they’ll feed you. But shelter, nobody is going to invite you to their house, to come and, “Hey, use my bedroom that I have for free.” And shelter is so basic because if you don’t have good shelter, you can die from heat exposure, from cold exposure. You’re in the streets.

Kim Lisa Taylor:

Well, except… just back up a minute, I could argue that people do invite people into their homes to their spare bedroom … Airbnb, right?

Danny Kattan:

Yeah, but you have to pay for it. It’s not free.

Kim Lisa Taylor:

Right, not free.

Danny Kattan:

So if you don’t pay for your shelter, you’re in the street. And in the street, you might die. Health, your safety, right? … So I saw how families struggled to pay their rent and then that means that they have to bunch up with other families and this is 2009. Remember we didn’t have the government giving people money in 2009. We didn’t know whether the government was going to survive or not, right? The financial system was very fragile.And those people in 2009 struggled to make rent and they paid their rent. And the cool thing, at least in Miami, I saw properties go from $300,000 to $80,000 and the rent go from $1,500 to 1400 bucks … The elasticity of rentals when the economy dips is not that much, right?

Kim Lisa Taylor:

Right.

Danny Kattan:

Actually, I would argue that when the properties went down in price, your taxes went down, your insurance went down. So your NOI actually went higher. Your rent dropped by 100 bucks per month, but your insurance and taxes dropped by 200. …

So, on single-family or multi-family or residential real estate, you’re protected against inflation, in a downturn and behaves well, right? I mean, unless you have cities like Detroit and places where the market actually goes bad, but that’s extremes. And then equally important, it’s very tax efficient. And it gives you a good cash-on-cash. You’re subsidized by the government. So risk/reward for me, it is the best asset class, period. Now, you want to triple your money, then go speculate on the stock market.

Kim Lisa Taylor:

Sure.

Danny Kattan:

And so what I see is a lot of people moving to multi-family as a way to keep their money in what might be an inflationary future that nobody knows, right? Or some people were saying, “Well, what happens if this dips?” Then you still make rent.

Kim Lisa Taylor:

So what about geographics? Do you think that the technology is going to, rather than having these urban centers, do you think that we’re going to start seeing people shifting to living in more urban or more decentralized areas because of the fact that you don’t have to commute anymore, you can live wherever you want. I mean, how do you see all that happening?

Danny Kattan:

Well, there’s two things, right? If you think about it from the urban perspective, I live in Miami, right? If now a car is driving for itself, which by the way, I have a Tesla. I have it with the autopilot and when I go to 95, I just put it on autopilot and I read.

Kim Lisa Taylor:

Okay.

Danny Kattan:

I’m not afraid because I trust that technology, right? But it’s not full, full, full autopilot. Because when it becomes full autopilot, it means that when I’m in the car 30 minutes or 45 minutes, is that really going to matter? Okay. You couple that with the fact that any company worth its salt is going to allow people to work remotely a couple of days a week, okay?

Kim Lisa Taylor:

Or completely.

Danny Kattan:

Or completely. So suddenly people don’t have to be next to the office anymore. So in an urban setting, you will change the dynamics, and equally important, if I don’t have to work in Miami anymore, well, I’m going to go to Savannah, which is a beautiful city, right? Amazing city, cheap. Maybe half the price of here. But I mean, moving from Miami to Savannah doesn’t really make as much sense as moving from California to Savannah or from New York to Savannah. So you’re going to have all these people move into these little towns, okay? So we’re betting on secondary and tertiary markets because the economies they are better. Easier, in a way, to underwrite and equally important, you might have exponential growth that catches on. If it’s linear growth, it’s okay, you can underwrite that. And we only underwrite for a linear growth. But if it happens to be one day that Savannah becomes the “it” city, right? And then it starts growing exponentially, then you’re in a grand slam.

Kim Lisa Taylor:

Sure. So maybe it’s time to start looking a little bit more at the secondary, tertiary markets that people have overlooked in the past.

Danny Kattan:

Yeah that’s our investment strategy. Our investment strategy is asset preservation, cash-on-cash over IRR, right? So let’s speculate. I mean, the cow is worth the milk it gives, right? At the end, that’s the whole idea of investing in real estate, it becomes the cash cow, right? A lot of people these days are sick in risks. “Oh, let’s do are super value added thing where I get a bridge loan…” Be careful with that risk, risk plus risk is not two risk, it’s risk squared.

Kim Lisa Taylor:

So I’d like to just shift the conversation a little bit. I mean, this has been fascinating to talk about the effect of technology and looking into the future and how that might affect things. I know there’s other things that are happening at the property level too, right? … You no longer have a person showing apartments; you can give somebody a code and they can go walk in and view the apartment themselves, right?  …  And I’m sure there’s a lot more happening beyond that of course. I’m sure that new apartments are being made with many more outlets or ability to handle so many more of our electronic gadgets, right? And then we’ve got 5G. I was just traveling in Eastern or Western Montana and I was amazed. We go through these little tiny cities that have 5G. I’m picking it up on my phone as we’re driving along so it’s pretty remarkable how rapidly that is starting to turn out, even in the rural areas. 

Danny Kattan:

Let’s not even get in to that, because you got a Space X right now putting satellites everywhere. … I think that in two, three years from now, the world will be hyper-connected.

Kim Lisa Taylor:

Mm-hmm (affirmative).

Danny Kattan:

There should not be any reason why people are not going to be able to work from anywhere they want.

Kim Lisa Taylor:

Well, and it’s how our law firm has worked. I’ve been doing that since 2008. When I first started out doing this, I was working with another attorney who lived 75 miles away from me. We did everything online, we only met two or three times in a year. We would actually meet when we went to live events, rather than trying to drive to meet each other to have a conversation.

Danny Kattan:

Something simpler, when we were running the single-family portfolio, we have about eight people working out of India. So we outsourced, and we basically said… anybody who’s not touching our property here, is going to be outsourced to India. Why? Because it’s not only cheaper, more efficient, okay? But you have less people in the office. I believe office politics at some point slows down their ability to grow a company, right? Second of all, it was easy. You would just basically say, “I need three accountants by tomorrow.” And they’ll just provide them, you don’t have a problem with that. But equally important, it allows us to be more competitive. I didn’t have to underwrite that much expense.

The other thing that became really, really cool, is that initially when we started, we were receiving checks and cash payments, rents. And it was like the beginning of the month, the first week, it was like a soap opera. “Oh, I sent my check. My check is in the mail.” The whole thing. Eventually, we moved to electronic payments only. And this is, if you guys are in the rental business, do not take cash, do not take checks, only electronic payments. A lot of people said, “Well, what happens if people don’t have bank accounts?” Well, think about that. They don’t have a bank account, they have to go somewhere, buy a money order, the same place that sells you that money order, is where you can pay your utilities. So there’s backend systems that will take rent over the same systems that people use to pay utilities.

And the cool thing is that it goes directly into your Yardi or whatever it is. But the coolest thing is that, if they’re paying late, automatically tax along the late fee. If they’re doing this strategy where they’ll pay you $100 because they’re in eviction and reset the eviction, it doesn’t take the payment on that until it’s full. So we moved from having literally three people and like, “Hey, is this the signature of Jim Smith?” … we started collecting late fees, no more arguments of “No, I send you a check,” so forth. … And by the way, it allows you to also get rid of the potential liability, which is maybe you get sued because you gave your friend a pass, “Okay, you can send your payment a week from now.” And then you didn’t give somebody else a pass because you didn’t like that person. Every tenant gets treated by a computer equally, is good. 

The cool thing is I call, they came to you as like, “Please don’t evict me.” I’m like, “The computer.” It was the computer, right? So we use that technology to our advantage, we use technology by having people outside of our office to our advantage. So outsource as much as you can, and by all choice, it doesn’t have to be India. There’s amazing people who happen to live in rural America, who are really, really, really happy having a job with your company.

Kim Lisa Taylor:

Yeah. I’ve hired people from Upwork to have them do stuff for me. And so there’s all kinds of 

Well, I would like to open up the meeting to anybody that has questions either for Danny or for me. But while we’re waiting that, can we go ahead and give them your email address?

Danny Kattan:

Danny@piaresidential.com and my phone number is (305) 803-5956.

Kim Lisa Taylor:

That, and then also the website that he referenced, where you can download Danny’s presentation about technology is at www.futureology.com. 

So thank you so much for sharing all this information, it’s been fascinating Danny. If anyone wants to reach us, our website is syndicationattorneys.com. We also have an affiliate website at investormarketingmaterials.com. If you’re looking to grow your database of prospective investors, you need to have a professional presence for your company, you have a brand, you’ve got to have everything be consistent. You need to have the correct marketing materials to be able to share with investors at the right time. So check out investormarketingmaterials.com. You can schedule an appointment with me there if you want to talk about creating some of those things for you. We have a staff of professional editors and graphic designers that do that.

Of course, we’re happy to talk to you if you have any syndication needs. And we do have a pre-syndication program that does allow people to engage with us at low cost. If you want to be able to access our weekly masterminds, we have them every Friday at 9:00 a.m. Pacific Time. Barring any travel that I might be on, those are the only weeks we don’t do it otherwise, every Friday.

So let’s see if we have some questions; we did get a comment. So raise your hand if you have a question, put your questions in the Q&A or put them in the chat, we’re monitoring all of those things. We did get a question from Devin, or not a question but a comment. Devin is from Silicon Valley and he says, “Technology and real estate combination is an awesome topic. Thanks for putting together this webinar.” Thank you, Devin. We appreciate you and are glad you showed up and found it valuable.

Devin again, has asked a question, “Which aspect of multi-family real estate, i.e buy and sell, is likely to be most disrupted by technology?”

Danny Kattan:

If you really think about it, real estate has been mostly asset class management for institutional money. And by institutional money, I mean that a life insurance company gives money to Blackstone, Blackstone then gives money to somebody else, that somebody else goes and either hires a company like us or partners through a company like us, and we go buy a multi-family or do single-families. I think of that as the tokenization in a way … think about Bitcoin … in all of these cyber things that are happening by blockchain … at the end, it’s underpinning a way where things can be transacted very cheaply, right? So I don’t invest in Bitcoin because I’m about preservation and I don’t like to invest in things that I don’t understand. But thing is that the blockchain is allowing really small investors to invest in deals, because it lowers the barrier to entry and it’s easy.

So I think that tokenization of real estate will allow, in the small contracts that are being created … it will allow for real estate to be more democratic. So capital will be more fractionalized, where it will be easier to attract smaller checks without the cost of having to deal with all these people. I mean, think about it, take it to the extreme, right? Where you have a million-dollar raise and you have a dollar each, you have to deal with a million contracts, right? There’s a way to do that very cheaply if you tokenize that. And suddenly people can actually get paid on a daily basis on that dollar that they invested because of that, at a very low-cost price.

So I think the buy-side will get affected with that. And then suddenly, that spread that people are paying might get compressed more.

Kim Lisa Taylor:

Okay.

Danny Kattan:

And I don’t think it’ll compress more because people on Wall Street might be willing to pay more. It will be like you’re going to have competitions which basically are distant through this intermediating the institutional capital. But that comes later. Having said that, if I’m an investor, be very, very, very aware of the people who are raising very little money. And I know that this goes against some of your syndicators and maybe somebody is going to say, “Don’t say what I’m about to say.” But right now, be very, very careful who do you invest your money with, because sometimes having big guys in your capital start, make sure that your papers are in order, your shareholders agreements is in order, right? Everybody gets treated fairly, that the underwriting is correct. Some people right now are saying, “Oh, you can invest $5,000,” and they throw a pro forma that not even Disney can write it. It’s so out of this world, right? And just be careful, right?

Kim Lisa Taylor:

They’ll call you without getting to know the syndicator before you invest with them. You need to get to know the people. You and I had a conversation even before this. It’s more about you than it is about the deals. And that’s why your relationships with your potential investors are more important than the deals that you’re finding. And obviously you have to be able to present reasonable and good deals and you have to make reasonable assumptions about what’s going to happen. You have to be realistic with those assumptions, don’t misrepresent, make sure that you’re warning people of all the things that could go wrong and making sure that you have the education to understand the difference between a good deal and a bad deal. I think all of that is critically important. But ultimately, it comes down to whether the people know, like and trust you. 

So I want to shift gears and talk just a little bit with you about how you guys raise money. So do you guys do Reg D offerings? What do you do?

Danny Kattan:

No, we basically keep it to our friends and high net worth individuals or family office that we know and friends of friends.

Kim Lisa Taylor:

Mm-hmm (affirmative).

Danny Kattan:

I mean, we get approached by other people that want to invest with us though we don’t know them. And we make sure that we do KYC and AML. KYC is Know Your Client for those people not aware of that. And AML is Anti-Money Laundering.

Kim Lisa Taylor:

Are you guys a broker-dealer or are you using a broker-dealer?

Danny Kattan:

No, we don’t use a broker-dealer.

Kim Lisa Taylor:

So, it’s more like you’re institutional-level or quasi?

Danny Kattan:

We’re like in the middle, right? I mean, this is people who started investing with us in 2009 and bought one house at a time with us. So some of them are doctors and some of them are lawyers and some of them are family office, right? So the question is, “If I like your theory, Danny, can I invest with you?” Sure. Give me a call and we’ll figure out if we can invest together.

Kim Lisa Taylor:

So all of your investors are accredited investors, right?

Danny Kattan:

Yes. We’ll, prefer that. I mean, we’re at some point looking into maybe lowering our minimum, but we really want our investors to be accredited. Our minimum is $200,000 and again, they come referred from our high net worth individuals. And most of the chunk gets taken by the family offices that we work with and the high net worth individuals that we work with. But believe that we have to give space to the people who have been with us for a while and they bring friends and we want to be a little bit more inclusive in that sense. 

Kim Lisa Taylor:

Great. Okay. Well, but that didn’t happen overnight, right? You didn’t get that work overnight, you had to develop relationships over time and then get to know people. So how did you go about doing that?

Danny Kattan:

Well, the first thing is, I remember when we bought the first house — because again, this is 2008 —  and we didn’t have money. So we went into an investor and said, “We’re going to buy this house. It’s your house, it’s in your title. So we don’t have to do a partnership. Pay me a fee.” That moment was $15,000. “We will fix it, we will rent it and you’ll give it to a manager.” All right? So the first thing that happened is that, we didn’t have our budget correct and we actually, the $15,000 that we were charging as a fee, we had to put from our pocket almost all the $15,000, if not more. But we delivered, we didn’t call that person and say, “Oh, we screwed up.” So sometimes we have to eat a lot of things.

The second part is we understand our investors and what their needs are and how they like to be presented with information. And we’re very professional about that. So we spend a lot of money being very structured and having the correct information doing research. But back then, it was just where people were basically presenting an opportunity in the back of an envelope, we were using a five page spreadsheet, right? With a really good presentation. And then I remember after the third property, we realized that property manager will not allow us to grow our business because property managers basically have a perverse incentive for the property to do bad. They make more money when the property does bad.

A property manager makes money if the property turns a lot, if something breaks in the property, they make money, right? They send somebody to change a light bulb … Somebody goes into eviction, they make money, right? I said, “Wait, hold on, it’s the tenant that you brought me, that you told me was a great tenant and now you’re evicting him? You make a commission on that and now you’re evicting and you’re making a commission on that?” So we created our own property management company. And one by one… And our investors knew that what we were doing was right by them and they gave us more money and more money. And eventually we managed to attract a very large, wealthy individual that was an industrialist and he saw that our platform actually had very good value.

And he basically gave us about $60 million to invest. And then when we pivoted out, we had all the people that we had bought houses for, that basically quadrupled their money and said, “What else are you guys doing? Are we going to multi-families; whatever you do, we’ll follow.” And by the way, way back then we were begging people to invest and people we’re not investing. Now that everything’s expensive, now everybody wants to invest, right?

Kim Lisa Taylor:

Sure.

Danny Kattan:

We have managed to create a very good following, basically underpinned by mostly the large family institutional money that we have. But we’re trying to grow that platform, every month to engage with new people. Now we have some from Colombia, South America. So I have a lot of people that I know in Latin America. When I was working as an investment banker, I was working for a Chilean company. So I know a lot of people from Chile and from Brazil. And now they’re starting to call and say, “Hey, you know what? We need to take money out. How do we do it?” And most people would say, “Oh, sure. That’s not a problem, send the check.” And we’re like, “Go to this lawyer over here, make sure you do this.”

More than anything else, we’re advisors. And if people invest with us, great; if not, not. I have friends that have told me, “You know what, I don’t like to invest with you guys because I don’t like the secondary and tertiary markets that you guys have. I like to invest in Miami.” Yeah, it’s more expensive. But I like Miami because I like to go drive by my property every day. So they still send me deals for me to help them underwrite.

Kim Lisa Taylor:

Okay.

Danny Kattan:

I’m very open. We’re very open in that sense.

Kim Lisa Taylor:

Yeah. Well, and I do think that that is one of the major keys to developing relationships with a lot of people, is being willing to share your knowledge. Don’t be afraid to share your knowledge with other people, whether they’re going to become competitors or whether they’re going to become potential investors, most of the people that you meet are not going to go out and become a competitor for you. And frankly, there’s enough to go around. So don’t worry about that and they could become great partners for you down the road, if they’re like-minded and they want to get in the business you’re getting in. But when you’re teaching and when you’re educating, you’re sharing your information that you’ve learned freely with others, you’re showing yourself as an expert in the field. And when you’re talking to prospective investors, then they’re going to see that and they’re going to want to invest with you. So that’s the natural thing, is just become a teacher, an educator, freely share the information you’ve learned with others and that’s going to come back to you at the end, very much so.

Danny Kattan:

I agree. So I just posted a link to an article I wrote in Forbes and you guys can Google “Danny Kattan Forbes.” It says, “When a cap rate is not a cap rate” and people think, “Oh, a 6% cap rate is better than a 4% cap rate.” Not correct. You might have a six that is stabilized and a four that is under-rented. And at the end of the article says numbers are numbers, don’t look into the numbers, look into the people. 

So in my book, there’s two types of people in your industry. Your colleagues that are “coopetition” because you cooperate with your competition.

Kim Lisa Taylor:

Okay, I like that.

Danny Kattan:

In this industry that is world of real estate … we run sometimes into people that are bidding for the same property that we’re bidding. We’re happy for them. We exchange information; may the best person win. I mean, if you’re competing against the fellow person sitting next to you and you’re not willing to share information, hey, you might not learn from them, right? 

Kim Lisa Taylor:

Or you might be missing a partnering opportunity where it’s like, “Hey, well, why don’t we partner together on this deal? I’ve got some investors or I’ve got some resources I can bring.”

Danny Kattan:

So people will think that they have competitors, it’s because they have not really understood the word colleague “coopetition.” You cooperate and compete, it’s much better than compete.

Kim Lisa Taylor:

But the one thing I would caution people just on the same vein, is that at the point that you have an LOI or letter of intent out, and even if it’s an accepted LOI, don’t start telling people about your deal quite yet.

Danny Kattan:

Oh, yeah. Of course not.

Kim Lisa Taylor:

No, because that can get still get taken away from you. Somebody can still bid more. They can figure out what property it is if you even mention the city and the number of units, they know what property it is, they can outbid you. So don’t do that. We’ve seen deals go away because of that. Don’t start talking about your deal to prospective investors or partners until you have a signed purchase agreement. If you’ve assembled your own partnership team and you trust each other, you’re not going to go out and undercut each other, then that’s okay. Keep it within your team.

But don’t start talking to prospective investors about it because not all of them are truly passive investors. Some of them are maybe looking to find their own deals. 

So Danny, if somebody wanted to invest with you, the best thing they could possibly do, reach out to Danny directly, get to know Danny, learn more about his philosophy, do some due diligence on his company, what he’s doing, how he does things, make sure you’re satisfied that he’s doing things in a way that’s compatible with your goals. And I say that for everybody, that’s not just for investing with Danny, that’s for investing with anybody. Before you invite someone to invest with, you make sure that their investment goals are compatible with the things that you’re going to be offering. And you’re required to develop that kind of a relationship if you’re going to do Reg D Rule 506(b) or other things.

Danny Kattan:

Important to understand we’re not syndicators. We basically work with professionals, high net worth individuals. But we’re always open to talking to new people.

Kim Lisa Taylor:

So any parting words that you’d like to share with our audience, Danny?

Danny Kattan:

Yes. So what’s been bothering me lately is that there’s a lot of people who are just basically throwing money at certain investments without understanding where the risk comes from. So for those of you who are listening, please understand how the numbers that are being presented to you are being assembled, right? So if you have somebody who tells you, “Oh, we’re going to buy that property and we’re going to fix it and we’re going to do a full rehab, we’re going to spend $10 million doing the rehabbing.” Think about construction as a risk. Think about refinancing as a risk, right? Everything that happens after the closing, it’s a risk. So we know a couple of things, the rental rates on a market are more or less known, right? You have a market that it’s growing and so forth; the exit in five years from now, we don’t know.

Everybody says, “Oh, in five years from now, I’m going to send it in and we’re going to sell it for so much.” And then you realize people are pointing out there, “Oh, we’re going to sell a 1985 unit in a tertiary market for $180,000 five years from now.” I’m like, “Are you kidding me?” All right. The second part is, how do you get there? The story of, “Oh, I’m going to buy something. I’m going to fix it, I’m going to do it with bridge debt and then prefer it.” If you hear the words preferred equity and bridge loans, stop and think about that risk because preferred equity and bridge loans basically are loan facilities given by people they call “Wall Street with big fangs” … full blood. Waiting for you to basically slip, for them to take the property, it’s called “loan to own.” …

Kim Lisa Taylor:

Those are really good points because a lot of the people that lost big in the great recession, lost because they had a short term loans. They needed to refinance, their balloon payments coming up within three to five years, they got caught in the middle of an economic downturn. So they couldn’t refinance because the property was worth less than the loan balance. And those are the people that lost. The other people that lost big and the ones that actually had to declare bankruptcy were the people that were doing personal guarantees. So if you’re doing properties where you have to do personal guarantees, then you should be doing very low loan-to-value ratios in order to minimize that risk. Because then if there is an economic downturn and you did have to do something with that property, you could still do it and you wouldn’t lose and you wouldn’t end up with a deficiency judgment against you because those are the people that actually had to declare bankruptcy. 

So Danny, this has been wonderful.

Danny Kattan:

Thank you very much. Thank you much everybody.

Kim Lisa Taylor:

Yeah, thank you everybody for listening. And we hope to see you all soon on a future podcast and Danny, we’ll have some follow-up discussions. Thank you so much.

Danny Kattan:

Thank you, guys, appreciate it. Bye-bye.

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