REAL WEALTH SOLUTIONS PODCAST WITH DARREN LIGHT, GREG SCULLY AND TOMMY BRANT
Audio
TRANSCRIPTION
Darren Light: Good morning everyone, and begin this episode of The Real World Solutions Podcast. I am Darren Light, one of your co-hosts, along with my awesome partner, Greg Scully.
Gregory, good morning.
Greg Scully: Morning, Darren.
Darren Light: Heard that.
Greg Scully: Yeah, I was going to say this is like active real estate investment trying to do a podcast. We got some muddy wifi every now and then.
Darren Light: That’s part of it.
Greg Scully: Yeah, we’ll run the along through it.
Tommy Brant: Makes it authentic.
Greg Scully: That’s the word.
Darren Light: Exactly. We should warn the audience this talk-over will progress throughout this entire podcast. We’re thrilled this morning to be joined by Tommy Brant, owner of TB Capital out of Nashville. We met Tommy a couple of years ago, maybe online, and then met at some meetups and he randomly just shows up at meetups too, which is awesome. So we’re looking forward to learning more about his journey.
Tommy, if you wouldn’t mind, just give us your intro, your background, where you came from, and how you got to where you are today, please, sir.
Tommy Brant: Thanks for the intro guys. I appreciate it. Yeah. My name is Tommy Brand. I’m with the TB Capital Group. I’ve been full-time in the real estate space since August of last year.
I’ve got a couple of long-term rentals or short-term rentals. I’m invested in a few apartment deals and as of last Thursday, I joint ventured on a self-storage deal, so I’m doing a little bit of everything. I’m trying to get exposure, but still primarily focused on apartments. That is definitely a strong suit of mine and what I’m prepared to take down.
I am a recovering electrical engineer of 12 years, and I’m located in Nashville. I’ve been here ever since I graduated from Georgia Tech with an electrical engineering degree. I worked with the same company for 12 years. I guess where I really cut my teeth in real estate was back in 2006.
I worked for a friend’s dad who was a general contractor and we made mobile homes rent-ready. Most of that was just kind of light construction, renovation-type stuff. Nothing too crazy. We were in middle Georgia and about 15% of the demographic we served was post-eviction.
I had those unique experiences where you’re walking into a place, there’s trash everywhere. You’re wondering how this thing caused that stain in the other room and how did this stain get on the ceiling? There are used diapers in the corners, and hypodermic needles in the other corners.
Utilities have been cut off for weeks and you’re looking at your partner and you’re like, who’s gonna clean out the fridge? Not it. So you get to play fun games like that. I guess you do two things. So you build character. It is kind of my joke on the first one. The second thing it allows you to have the vision to see past all the clutter.
What is the finished product gonna look like? So if you fast forward to 2011, the market’s kind of coming back up, but I lived on the southeast side of Nashville. A little suburb there, and I bought a short sale. And my realtor thought it was crazy. She shoved me like five or six different houses, just kind of shoving them in my face.
I said, no, I want this one. I want this four-bed, two-bath with a sagging ceiling over the garage with a roof leak where every square inch needs to be updated, where the pool in the back is just solid black. I want this one. She thought it was nuts but I really kind of wanted a project to take on and so we got it cleaned up.
It was a slow living flip. We got it habitable, I’ll say in the near future. I rented a bedroom out to a colleague, I got a job where I was working as well. He was paying down the mortgage while I was funding more projects. So every year I would save 10 to 15,000 for the backyard kind of hardscaping stuff going on there, or the kitchen or all the flooring, every single square inch of the flooring, every single square inch of stuff that needs to be painted.
Fast forward to 2020, we liquidated that property. I bought three single-family homes within a six-month time span of that one. I looked at my net worth calculator to see if I was advancing as fast as I wanted to go using single-family homes with the timeline that I wanted.
The answer was no. The conclusion that I came to was I needed more doors and less driveways. I think multifamily is probably the shortest cut from a single-family. It was easy for me to understand, easier for me to learn than something like mobile home parks or self-storage at the time or short-term rentals and stuff of that sort.
I leaned really hard into multifamily, just getting educated there. I’m a voracious reader, I will just kinda leave it there. I was meeting the criteria of reading a book a week. So the past two years I’ve read 60 books a year. I’m just like consuming podcasts nonstop. That’s kind of my appetite for continuous education. They’re not all real estate, but also business, leadership, and stuff of that sort. If I’m playing entrepreneur, at the end of the day it’s like I gotta be mindful of where I want to be 18 months from now, five years from now, that type of thing. That’s kind of the journey that I’ve been on over that time period. I guess that brought me to the fact that I want to level up apartment syndication. So I joke that that’s my day job and everything else is just real estate investing on the side.
Darren Light: So the last two years, you say full-time real estate back the last August, but we know what you were doing a year prior to that. So the last two years, I’m going to say you have vastly increased. Well, number one, possibly your net worth as well as just your activity within the multifamily space, whatever that looks like. What were those last two years? If you wouldn’t mind breaking down that nugget. What’s those last two years consist of including the transactions?
Tommy Brant: Yeah, I guess my first foray from, I’ll call it more the transactional side of real estate investing. So going from flipping to landlording, there was a lot of fun stumbling blocks along the way, but every house that we closed on got more efficient, and more effective because I would get the right team members in place before taking on stuff rather than trying to scramble afterward.
So those were base hit off buying off the MLS stuff that would cash flow a hundred, 200 bucks a month after variable and fixed expenses. After that, I invested as a limited partner in two syndications. This is in the 2021 timeframe. I invested in 132 units in Louisville, Kentucky and 220 units in the Huntsville submarket, over there in Decatur, Alabama.
These are just stones thrown away from me. I can go touch the assets if stop by or anytime I wanted to. More than a three to four-hour drive. I’ll read the direction. That was kind of the conclusion that I wanted to invest in someone else’s deal because they could effectively be a mentor or be a resource for me if I had any burning questions about stuff that I saw, and maybe a different market.
If I’m thinking strategy or underwriting techniques or I need help with loan products or potential lenders. They’ve just been great assets to me outside of some of the paid mentorships and other coaches in this space. That’s been pretty helpful for me. Where I would say I’ve, most recently within the past couple of months, I’ve considered stuff outside of multifamily. Before I get there, you know what, so I went full-time last August before I’ve been a GP or co-GP and there’s a little bit of a leap of faith in that I would say full transparency. The idea was, let’s make sure we’re capitalized as a household. My wife is still working, so we can kind of stand to take a risk there. Then let’s try it. The worst case is I go back to work, not the end of the world. So let’s just try this thing while we can manage to take a risk.
As of this March, we had a 52-unit apartment complex under contract. It was a pocket listing from a broker that we’d been building a relationship with for the better part of a year. We haven’t been doing a shotgun approach when it comes to broker relationships. We really kind of doubled down on one or two. That was starting to yield some fruit. So the activity was starting to create some results. That was really exciting to see. Long story short, we ended up canceling the contract on that one and maybe that’s something we talk about today.
There were a couple of lessons learned there, and we didn’t lose any hard, earnest money or anything like that. It was just proof that we were doing the right things. We have the right relationships in place. We have the right activity assosiated with our KPIs that we’re tracking weekly and monthly.
Darren Light: I do want to talk a little bit about that, but I want to go back a little bit as well too. You made the statement, something along the lines of, in the single-family space where you were starting, your net worth calculator was not moving fast enough and you recognize that quickly. I think is that because you did have a number that you needed to get to in a certain amount of time.
I’m a perfect example of this, is like I didn’t have that number and so I kind of rolled in that single-family flip space maybe too long. I mean a couple of years for myself. Really, nothing more major, but I think people can get in that space and stay in it for a long time because they’re making these big chunks of chains, but yet, even though it’s transactional, they get a big high off of that big chunk of change that comes from my flip, for example.
Maybe they’re making $400 or $500 on a single-family rental per unit. But you recognize that more quickly, sounds like than most people. Was it just because you had a goal and you’re like, you know what, this is not working. Let’s switch gears. Let’s go do something different.
Tommy Brant: Yeah. I would say probably my first goal, and I kind of have a couple of different tiers of personal goals of mine. I want to offset an engineer salary, plus benefits plus a 401K match. I’m kind of looking at about $10,000 a month and passive income. That’d be a real sweet spot for me. I was getting an extra hundred dollars under $200 a month for some of these properties.
If I got some opportunities to do a full burr. If I got a grand slam that would look really amazing. Those opportunities are few and far between. It was kind of rare to be able to find situations where you can get your money back in six months and redeploy it and just keep that snowballing.
So for me, I was taking the proceeds from that slow live and flip that I had and just kind of whittling away at the reserves. As a result of that, I’m putting all this money down. Depreciation was doing great in Middle Tennessee all things considered but it wasn’t creating the passive cash flow that I wanted. You could argue that you could get passive cash flow if you have a big enough nest egg. So maybe you create a high nest egg dollar amount or just try to do it based on passive income. No matter what way I was looking at it, I wasn’t getting there at the pace that I wanted.
Greg Scully: Yeah, like on the cash flow thing. I think there are so many ways you can look at it. Personal goals, everybody’s a little bit different, but ultimately if you get to that point where your basic living expenses and the reasonable amount of meals and entertainment are covered. Everybody needs that number. So if you could figure out what that number is and focus on that because financial stress sucks. I mean that was part of what drove me into entrepreneurship. It was 20 years of single-income W2 stuff. I mean, it can just weigh down on you.
So getting that number figured out quickly and the flips are nice because you do have some transactional income, gives you some runway while you’re building up cash flow because this is a long play. You don’t get that cash flow all at once. It takes a while especially GP and on syndications, hey, by the way, everybody out there we’re not swimming in cash flow doing the general partners on syndications.
A lot of that income is fee-based or on the backside. So cash flow along the hold, unless you have money on both sides of the deal as an LP and a GP, can be thin.
Tommy Brant: For sure and I think Daren to reference your question on the flipping. I think it’s easy to get misled by the numbers in flipping, right? It is easy to get drawn to the big sexy lumps of cash that you get but then you get hit with some pretty hefty tax bills. Just because of the way it’s taxed. The upfront money is nice and then it’s just like, okay, you know, you’re scrambling to figure out how to protect that on the back end.
Greg Scully: Yeah. I’m just curious, like on your number, roughly 10k a month. Is that gross or is that net?
Tommy Brant: That’d be gross.
Greg Scully: We’ve talked about it before, it’s not what you make, it’s what you take home. So if you transition to a real estate professional, you don’t necessarily have to make the same gross as you did as W2. You need to make the same net, which can be a much different number.
Darren Light: Yeah, real estate professionals, it’s a big deal once you are able to utilize that and have the right CPA that knows how to utilize it. I was just going to comment about flipping, as time has rolled on and it’s all multifamily and RV parts for us. It’s that chunk of change that is great and it can give you a runway as Greg says.
The return on effort is just not there anymore. It can, yeah. Nothing ever takes as long as you think it’s gonna do. It always takes longer. So with the labor market that we’re in now, it’s totally different than 2016 when I got started. Looking back, it seemed easy in 2016, even though it was new to me at that time.
Now I’ve realized I’d rather take the four to six months. It does, it takes, let’s just say six to nine months. Just to be totally honest. It takes to do a flip, put my energy into the next multifamily project because I know that’s going to be the long haul play for me for however long we hold that asset. You can do much more to the asset building your business overall as an entrepreneur. We have no current flips right now. I’m not looking for one. If it comes along, great if not.
Tommy Brant: Oh, should I unsubscribe for some stuff then?
Darren Light: No.
Tommy Brant: Clean up my inbox a little bit.
Darren Light: We would still probably do one, but yeah.
Tommy Brant: So yeah, we still look.
Darren Light: Yeah, yeah, yeah.
Greg Scully: Let’s go back to that 52-unit. I think we’ve had some stuff that we’ve canceled contracts on. I think that’s a very useful subject. Can you tell us a little bit about the deal, what attracted you to it? Then you’ll get into more detail of ultimately why you pulled out.
Tommy Brant: Yeah, happy to talk to that one. I’ll give just kind of the whole story on that one and just jump in with questions if you think anything needs to be clarified. This was a 52-unit apartment complex in a submarket of Nashville, probably about an hour away from Nashville.
We’ll call it the outskirts of the MSA area. This was a pocket listing from a broker. It was given to us on Sunday, and by Wednesday we had a team assembled around this deal and an offer submitted on Friday, and PSA signed on and executed by Sunday. So within a week from knowing about something to forming a team, to ensuring that this is truly a deal that we want to pursue, we had it under contract.
I couldn’t have done that if I’m dabbling in multi-family and networking. It’s one of those things where you got to be in the game to be in the game. If I wasn’t full-time in this space and fully committed then I would’ve never been able to do anything like that.
As far as the team goes, I think we had a team of four, and so it was just kind of a small, intimate team. We met with one person that we knew was going to be a strong teammate on this one. We showed him the deal. He actually kind of already knew about it. So, he was one of the 10 people that got wind of this pocket listing.
We said, Hey, you know, we’d love to collaborate instead of compete. I suspect the abouts this one, By the way, here’s all the homework that we did on the market analysis. There are three things going in that are gonna be a nine-figure investment to the city in a two-year time span.
Here’s population growth, above the national average, and then here’s our underwriting. With this debt product, our worst case, best case on rent growth, and where we think we can go, which would kind of make it a grand slam and potential to even refinance it at the end of three years and get our money back.
There was just a lot of just based on the purchase price alone. It kind of dictated that this was truly a good deal. We showed him everything. He said I like your conservative here, here, here, and here. Sleep on it and let me know tomorrow if you still want me to partner on it.
My partner and I texted each other right after, and we were like, okay, it’s we know that we don’t need sleep to know that we want him on our team. So the next day he was like, what do you need from me? I said we need a strong asset manager. He said I know a guy.
Within a couple of day time span, we had our rounded-out team. It was a 4 million, 4.1 million purchase price that puts it at 78, 8 a door. So the raise was going to be 1.4. The debt product we had lined up on that one was 80% loan to cost, and that was 80% of the construction costs are baked into that loan.
When it comes to underwriting and how that relates to due diligence, you need to be expecting surprises. Whenever you get into physical inspection. This was 13 buildings all in crawl spaces, and whenever we got in there on inspection day, there was basically every single building needed some type of subfloor repair or joist repair.
There’s just a lot of moisture getting into the crawlspaces, and it was just wreaking havoc on the subfloor of the building. The reason for that is that they were breezeways to the building, but they were enclosed. There was a front and a back entrance door, but they were always open.
And so every time it’d rain, just water would just get in there and it would flow to the cracks and it would just over time as damaged the place. The person that bought it previously did not take the recommendation to the inspector to do repairs on the buildings, and foundation and tightens those up and maybe put automatic closers on doors and things like that to keep water out.
Awnings would’ve helped dramatically too. It’s funny because the inspector that we hired was the same inspector that they hired two years prior. So he’s here just like, they didn’t do this, they didn’t do this, they didn’t do this because I recommended all these things. He was just like, you know, more or less like two years of neglect, which is not uncommon.
I would say I bought a number of properties in Nashville where they’re like, Hey, you know, it’s, it’s a 1980s, 1970s product, and it still looks 1980s, 1970s, and I can’t tell you how many times this thing is transacted. I’m like, no one has actually executed the value add business plan. It’s like, yeah, like what is going on?
Greg Scully: What was the date built on this one?
Tommy Brant: It was actually the early 2000s.
Greg Scully: Oh wow. Terribly old.
Tommy Brant: Yeah, and I don’t know if that was like the last building, it was between the late 90s and early 2000s.
Greg Scully & Darren Light: Okay
Tommy Brant: It was a good year built, but it was just not treated well. There weren’t any other issues that we would have like aluminum wiring or old plumbing and stuff of that sort. So thankful in that regard. So moving forward, we actually talked through the concessions. So we got quotes for every single line that would take to get the buildings back to where they were. We said, Hey, we would like $150,000 credit back at closing. And they were like, oh gosh. You know, like, and, and we went into this thing budgeting just a quarter million just for new roofs.
And so we’re like, Hey, you know, for all these issues that you know are kind of, have been outstanding for years as far as we can see you know, we need this credit back at closing. They eventually agreed and we instead try to just leverage that money towards the foundation repair and the money that we had originally budgeted for the roofs.
We said if you can initiate an insurance claim on the roofs because there are recent storms which would save us money out of pocket. It’d raise our premium, right? But that would save us money out of pocket if you want to do that. They agreed to that. There are a lot of great wins during the concessions actually.
Whenever we got down to investigating the accounting, that’s kind of where stuff started to go downhill. Just to give you some backstory, the property management franchise in Nashville that was hired to take care of this, hired a tenant to be the onsite property manager. You probably know where this is going, but they effectively are the hammer, right?
They are the authority the on the property and so they missed a rent payment. It wasn’t getting audited, wasn’t getting checked, realized nothing bad was happening. They said, all right, you know what happens if I miss another rent payment? They stop. Then they eventually stopped paying the rent. This went on for about a year.
Then all their friends that she had known on the property, she was saying, oh, you know, like if you’re in trouble, don’t worry about it. Like just don’t, you know, give me a check. I won’t cash it. These situations going on where 40 out of the 52 units had some form of account balance due, right? There was $127,000 in delinquent rent.
Greg Scully: Oh damn.
Darren Light: Wow.
Tommy Brant: That’s substantial.
Greg Scully: That’s a lot to inherit too because then as the new owner, you got to unwind that tenant base.
Tommy Brant: Yeah. That can be difficult after too.
Greg Scully: Is this a Class B property?
Tommy Brant: This was C probably more towards the C range, I would say. So there were some that had applied for housing assistance and that was going to make evictions challenging because you couldn’t evict until you got the results from their housing assistance application. There were a lot of people that were living there for free.
I don’t know how much of it would’ve been resolved by just correcting the onsite property manager to let the tenants pay. Issue the checks and then just actually cash them. Maybe it’s as simple as that for some people, but we thought that there were a number of bad actors.
We brought the lender up to speed. We said, Hey, what does this mean for the loan? And he said, well and I was like, are we looking at like construction loans now? Like 50% loan to value? What is this going to do? So we went from 80% loan to cost, which we’ll just call the best you can get to now 60% loan to value.
Greg Scully: Oh wow.
Tommy Brant: The interest rate on that line. We’ll just call it 5%. If we’re underwriting for 15 to 20% annualized returns, a fifth of the capital required to close, just quadrupled in cost. I don’t have to tell you what that does to your returns on paper there.
Greg Scully: I was just curious, was this also during any kind of covid eviction, or moratorium? I’m just wondering if there was another layer of the regulatory atmosphere that was a bit of an unknown. I don’t remember the timing of this.
Tommy Brant: Not as much. This was March of this year actually.
Greg Scully: Oh, okay. We were beyond that.
Tommy Brant: It was just more on the housing assistance programs were still alive and serving some of the tenants based there. There were just a lot of delicacies around, who you could evict based on who had applied and who was enrolled and, who was ending the program.
The payments ended up just being lumpy. When we looked at the P&L and I guess they kind of just become lumpy. You’re waiting to get results back from an application and there were some ways that we could’ve navigated it.
We could’ve done I guess the first obvious part, the guy couldn’t move too much on the purchase price because he syndicated and he owed money back to investors. I just think that he should have lost money based on how he executed that one, but that’s neither here nor there.
So because he syndicated, he couldn’t move a whole lot on the price, he kind of already threw something out there that we all felt was reasonable. I mean, if we were gonna take on something at that level of risk, we wanted to pay less than he paid. For two years ago, he would’ve laughed and that would’ve damaged broker relationships and stuff like that.
So when the broker asked, what is your new number? I was just like, can we politely decline offering the new number?
Greg Scully: Yeah, right. Exactly. How many days of due diligence did you have by contract? I’m just curious, you know, when did you say, Hey, we’re just gonna back out?
Tommy Brant: We had 60 days. Wow. I’d say normal. I guess 60 days total, but a 30-day due diligence period. We’d also put in the contract that we would like the option to buy 30-day extension for an additional 0.025% of the purchase price. We had things in there to help get extensions if we needed it.
We had pretty much known within the last week or so that there was this big glaring issue, and so it was just a matter of having some team huddles with the PM. Our property manager, the broker, just the team alone, and just talk openly about it. Some other option we could have done was a master lease with option. Where we said, Hey, let’s operate the property. Do you still own it on the title? Well, correct it. We’ll get our PM in there. We’ll do everything that we want to do. The challenge is that we wouldn’t have had a capital injection to start the exterior CapEx and interior renovations.
We probably could have taken a loan and navigated that somehow. But the real risk for us was we didn’t know anything about the owner. We hadn’t done business with him before. There’s nothing really to stop him from canceling the contract and saying sue me at which point we would’ve been out so much effort, so much capital, and there would’ve been the question of whether is it worth even taking litigious action against them.
The other thing that could have happened was god forbid they got hit by a bus, it goes to their children and they’re like, no, we don’t want to sell this.
Greg Scully: Right. I mean, that’s an excellent point it’s buying something, you got that lion in the sand. It’s like you used to own it. Now we own it. You get into a master lease, you have this ongoing long-term business relationship. It’s just a lot of risks that I think might not be as appreciated as how much relationship, contractual type risk you’re taking in those situations because you brought up a bunch of things that could happen.
It’s like the guy could die and then you got to deal with the estate. There are a number of things that could happen along the way.
Darren Light: There are a lot of risks and goes back to the return on effort. Greg sort of asked this question, but how many days were you actually into the entire due diligence when you said we were out?
Tommy Brant: I guess like the day 29. The timer didn’t start until we had all the documents. We did an inspection day on the day that we got the last of the document. So we were pretty good in terms of timing.
Greg Scully: You formed this team quickly. You said four people, someone that you respect in the industry. I don’t remember if you said it that way, but we’re glad to have them on board. They found a rockstar asset manager that probably they’ve done business with or so. From that, were you able to form a nucleus with this team, and then now you’re looking at future opportunities moving forward?
Tommy Brant: Somewhat, somewhat. So there were two veterans and two newbies if you want to kind of split it. So my partner and I, we’ve been making offers together since Q4 of last year. We brought on two rock stars that we knew would be great advisors to what was going on.
We’ve made offers on a couple of things since then. We had paid in terms of maybe capital lost on this one. It wasn’t hard earnest money, so we got our earnest money refunded. We were planning to syndicate, so we paid for paperwork upfront to get the syndication paperwork.
I think it’s not as challenging as we think to get that transferred to another property. So as long as we do another deal together, we can do some type of doing business and keep the signatures aligned. As long as we do another deal together, it’s not a waste of $13,000, $15,000, however much it ended up being.
Greg Scully: What were the major takeaways? Actually, it doesn’t sound like something completely came out of the left field or you forgot something. It’s just the character of the property and that’s the purpose of the due diligence process is to make sure things are presented or are as they were presented, especially on the financial side. I mean major takeaways that got added to your checklist as a result?
Tommy Brant: While we were reviewing I guess the state after we learned everything right, and what was going on with the property manager. The team members that had been doing it for years, brought up some good points in that if we do take this property on in its current state, we’re six months from now, we are gonna be waist-high running through the mud.
It is still going to be consuming our day-to-day. Our thought process is gonna stress us out. They were like, six months from now you’re probably gonna be in two or three different properties. You’re gonna have things pulling your attention. I’m so thankful I don’t have this thing consuming my day-to-day. So return on effort kind of is like an intangible metric I think we should all consider when we’re talking about properties because I could probably cite like 10 people’s success stories where they’re like, yeah, we just got in there and it was a disaster property. We turned it around and we made it happen. You know, Darren and Greg, I think you all have that.
Greg Scully: Oh, we’ve done that and it sucks.
Darren Light: Yeah, it’s that easy and it always works out bullshit.
Greg Scully: Well, here’s a question though. Does the return on effort increase as that purchase price goes down? So if you were able to get it at the price you wanted, would the return on effort metric change? I think it would because I would think to some extent you’re like, yes, this is a bear of a project.
It’s going to be a pin on the ass, in the ass, near the ass, whatever. But our capital base is just so low that when we get through it, we don’t feel like we’re in any real financial risk because we were able to get it at such a good price that when we get through it, we’ll reap the rewards.
Otherwise, if you’re buying market and you have a major rehab project and you’re fighting the labor market and things like that, then yeah, the return on effort, just we’re saying that a lot. I mean, it’s a lot easier to say no. What are you thinking? If does return on effort increase as the price goes down?
Tommy Brant: Yeah, I’d say purchase price is definitely a variable in the return on effort.
Darren Light: I think that’s only the case that it helps if the return on effort if the purchase price is lower, if you have your own rehab team in place, you’re not hiring an outside contractor, you’re that vertically integrated. This is where my head is currently where we are, so I’m just gonna throw that out there.
Tommy Brant: I would say, there was one paradigm shift for me of how I look at hard money, honestly, because if we would’ve put hard money on this thing we’d be out. $40,000 was our down payment there.
It got me looking at not just the asset. I think so many people just look at the asset alone and they’re like, oh, this is a great asset, I want to be here, let me throw hard money at it. I would argue that you need to be looking at who is the. What’s the ownership team?
What was their plan? Did they execute their plan? Are they ahead of schedule? Are they above projections? Or are they dragging their feet and they’re lazy and there are probably more problems than you would expect on this one? It really got me thinking of I need to be asking questions about the ownership group when I’m considering hard money.
Greg Scully: Yeah, that’s an excellent point. Something that popped to my mind is like, as a syndicator, you have some sunk costs there. There might have been an appraisal that was paid for legal fees. A building inspector scoping septic lines. I don’t know how far you guys went, but there are prepaid closing costs and sometimes you hear pushback from limited partners or passive people with the fees that some syndicators charge. I’ll agree, some of them may be more than what is necessary, but what’s not sometimes realized is that you’ve incurred these costs. It never even got to the point where you pushed it out necessarily to your investor list or if it did, you’re pulled back and you’re like, full disclosure.
Hey, this wasn’t how we thought it was. So we charge fees not only to buy bread but to recoup some of these costs from deals that never make it to the pitch deck level.
Tommy Brant: Yeah.
Darren Light: You touch on something though that’s huge in this space is being able to say, there’s a lot of people that are itching to get that deal to say they’ve done one to that would’ve gone forward with what you guys were and they could help hopefully still make it work. There are a lot of guys that would’ve gone forward, teams that would’ve failed because they’re so hell-bent on getting a deal. So the fact that you could go to your investor base to Greg’s point and say they should respect the hell out of you for making that decision the right investor that you need would say, oh yeah, well guess what, let me know when you get the next one. The fact that you did that and didn’t screw me over says a lot about how you guys operate, so just let me know. That’s huge in my mind.
Tommy Brant: Yep, so we went through the process of teasing it out to investors. We didn’t get to the point of a formal pitch deck because we never really agreed on are we actually buying this thing, but there was a lot of teasing going on. So that process and the unteasing heartbreaking. That was just super transparent as far as just what was going on in the situation and the impact there that it had. But also the emotional part of how I was super excited and like whenever we came to this conclusion and we made the move as a team.
It’s super frustrating. I’m super disappointed. I just like, what have we been doing for the past month and a half? Like, nothing and there are so much words of encouragement I got from my investor base, I’m just like, Hey, something like this, it happens. I appreciate your honesty about this one. Let’s look at the next one together. I think, you know, transparency is definitely a key part there. Go ahead, Darren.
Darren Light: I’m sorry. It also leads to an opportunity for those family and friend type investors or acquaintances that have been waiting on the sidelines for them to learn themselves, which makes them respect you all the more because they’ve gotten to learn what you’ve been through and why you’ve let this go. It adds to their opportunity to be with a great operator.
Tommy Brant: For sure. Yeah, there was something else I was going to say, but canceling the contracts has had the same impact as if we would’ve actually closed. So me, telling other operators of we had something under contract, but we had to cancel it or we were under contract so many months ago on a 52 unit and this went terribly wrong. We had these lessons learned. Depending on who you’re talking to, whether it’s a broker, or investor, or a peer, it seems to have the same impact in terms of credibility and rapport in the space which I didn’t expect, honestly.
Darren Light: That’s great. I love what you said in the beginning as well, is about you’re building relationships with one or two brokers, and that goes so far down the road.
This should make them respect you all the more. It’s also a learning lesson for them. Every deal is not a good deal, and here’s what your owner was doing that you didn’t even know about.
Tommy Brant: So we’re keeping the lines of communication open with the broker that was representing that one. Just to let her know that, hey, we’d like to say top of mind if the corrections are put in place. If he gets refinances or gets proper property management in there, he doesn’t have delinquent rent. Let’s revisit it. We’ll see if we can reach their number in this environment still.
Greg Scully: I was gonna ask, did it transact with somebody else as far as you know?
Tommy Brant: It hasn’t, no. I think the reason that they were considering selling at that time of year as they had a variable-rate debt. Their option was to refinance or sell, so they didn’t sell, they refinance into a fixed-rate debt.
We’re just keeping the lines of communication open, being top of mind, and I think we’re still the top pick for that broker, for a team to take it down whenever it’s stabilized, but it’s got to get to some sort of resemblance of a stabilized asset.
Greg Scully: Awesome. Well, let’s change subjects a little bit. You mentioned in your email a unique approach for direct-to-seller, so we want to hear your secret. Broadcast it to the world. I’m curious.
Tommy Brant: Not a secret.
Greg Scully: Yeah, yeah. Let’s make it not a secret anymore. What is the unique approach?
Tommy Brant: I think if you look at the kind of the boilerplate approach, it’s to send mailers, send texts, send phone numbers, based on some database, whether it’s you’re getting information from a tax assessor’s office, or Reonomy, CoStar, or Yardi. The approach that we’ve taken is we’re actually partnering with a broker to take on some of those marketing costs.
So all that we’re doing is we are using, I’m an engineer so I’m going to get into the details. Bear with me. So we’re using Reonomy to just understand what is inventory in my markets. If I’m looking at Louisville to Huntsville, but also Chattanooga, Knoxville, I want to know what are 30 to 200 units, 1980s or later build. Just tell me the addresses, tell me those that exist. Now, tell me which ones do not have, and this is just scrubbing it at this point, but out of these properties, let’s look them up. Do they have rents that are top of market or is there a little bit of a gap?
And so anything that has top of market rents, we automatically disqualify those properties. We only interested in ones where there’s a little bit of a lull or they’re lagging behind in market rents. From there we go to the broker and we say, Hey, can you send us a CoStar underwriting report that gives sales comps, rent comps for everything in the area? Help us understand what comps look like.
So we get that. Based on that, that gives us kind of a good idea of the top line. How high can we go in our rents? What are the reasonable rent projections? So between the CoStar report, things like apartments.com, apartment listings.com, and home.com, we understand kind of what is top of market rents, and then really where the assumptions come in is around expenses.
So you can do that a couple of different ways, depending on your markets. You can do it dollars per door, or you can just do somewhere of 40%, 45%, or 50% expense ratio. So you make your assumptions put them in place, and come up with a purchase price. Without seeing any T-12 or financials.
We position our purchase price to be about 85% to 95% of what we truly want to offer, knowing that it’s human tendency to ask for more, or we want to leave some room for negotiation. Then the broker takes our offer price. He puts it in an offer letter, we sign it, and that is our first touch.
If you compare it to what they’re receiving, all day, every day it’s, Hey, you know, I’d love to give you a free opinion of value on your property. Give me your T12, give me your rent roll, and give me your claim history. Right? It’s just ask, ask, and ask before you give anything. Our approach was to really just on the first touch and then ask for just a discussion in a non-competitive environment.
Greg Scully: Do you have any agreement with the broker that you have, like a first right of refusal type thing for they come back and they say, yeah, I’m interested in possibly selling. Do you have some exclusivity if I said the word right.
Tommy Brant: We would and so that would come to a situation where eventually we’d have to come to some alignment on price. If we can’t, we’re not their buyers. The broker would still represent them. If they wanted to market and take it to market or anything like that which I’m okay with honestly. I’m not really interested in a kickback or anything like that. I’m in it for long-term relationships and I have to think that they’re going to include me on any pocket listings anymore. Pocket listings that comes down the pipe for them. That’s the overall thought process on that one.
I guess as far as financial reimbursements go and, and whether or not we can buy. Well, we’re not everyone’s buyer. I told my partner, for the types of returns that we’re underwriting for in today’s super competitive environment, we’ve got to be solving a problem.
And so for anything that is, the value add business plan is already executed, everything looks pristine, and it gets marketed by Marcus & Millichap. We are not their buyers. They’ll never like the purchase price that we come up with. That’s part of it.
Greg Scully: Yeah. Right. I mean, we talk about that all the time. We see stuff trade and I have no idea how they’re able to pay that price, but different money has different needs and for what we’re doing largely heavily marketed stuff is probably not something we’re going to win. But I like that approach. You’re basically doing a lot of the backend work for brokers. You’re being very specific so you’re creating deal flow and maybe going to a potential seller with a little bit more of the substantial first touch than the yellow letter type thing, than the junk mail type thing. That’s a good approach. I like that it’s not like you’re doing some work though.
Tommy Brant: Yeah, for sure. I mean I’m underwriting hundreds of properties, I would say in our small territory, honestly. We exhausted our 30 to 200 units list within a six-month time span. All the offers are out on properties that we wanted to offer on. We started saying, okay, do we want to consider smaller properties, maybe 10 to 30 units, but in markets where there’s inventory? So we started looking at 10 to 30 units in some markets that just have a good inventory where you can buy 4 – 10 units on a block and then suddenly have a 40 unit.
Greg Scully: Yeah. I mean we’re kind of going through that lot of our portfolio. Fairly small unit counts, 30 to 70 units, but trying to get some scale by just buying stuff close is another approach. This is something we were talking about cash flow, and this is kind of our list. So a very self-serving question. Can you short-term rentals for less than you think?
Tommy Brant: Yeah.
Greg Scully: What’s going on? Because I need to know.
Tommy Brant: Sure. We closed on a short-term rental in March and we’ve had that listing since the last week in May. It’s been doing really well. Learning what you can automate and what systems you can use and how those plugins together. It has been an interesting journey for me. We’re in Panama City Beach, Florida.
Greg Scully: So remote, to say the least.
Tommy Brant: We’ve got a cleaner and handyman down there that we’ve interviewed and took a lot of networking to settle upon someone. But for the entire month of July, there is one day available.
Greg Scully: Oh, wow.
Tommy Brant: That’s the kind of demand we’re seeing in the market. There’s one night open, the rest is booked. People are paying for all those nights. Suffice should say that it’s come a long way in a short period of time.
Greg Scully: Is the cost saving just the automation side of it instead of just go into a PM and say, yeah, take 40% sure, or whatever it is?
Tommy Brant: I’m actually presenting tomorrow at my old company, like a lunch and learn of the secret formula that I have on this one. The idea there if you want a short-term rental, where you can even buy retail, even buy list price today.
Depending on the market, depending on price. If you use a vacation home loan and you self-manage. You can usually get 20 plus percent cash on cash return, 15 plus in a lot of markets. But the idea for a vacation home loan is I don’t think it’s, it’s well advertised.
So a vacation home loan, a.k.a second home loan is a product for a property where you want to live occasionally throughout the year. The whole reason that it is powerful, it’s a Fannie Mae and Freddie Mac product-backed product, but you only need to have 10% down.
Greg Scully: Oh, wow.
Tommy Brant: Whereas traditional investment property, a bank or lender would say, I need you to bring 20 to 25% to the table to close on a property outside of your primary house. Um, and so there are a couple of things that have to line up for this product. If you’re buying a home, it has to be in a, what we would say a tourist market or a vacation market.
You can’t just go buy in the middle of the desert and say, Hey, look, that’s my vacation home. It has to be more than 65 miles away from your primary residence. You can actually have multiple. I guess the last thing I’ll say is it needs to be warrantable. Warrantable is the term used by Fannie Mae and Freddie Mac, which means that it can’t be at a condo hotel.
If you think of all the condo hotels or hotels that are like right on the beach, all of those are automatically disqualified. It has to be like a true home. Duplexes, quadplexes, or triplexes are all automatically disqualified. It needs to be a home, just like a single-family residence.
Greg Scully: Were there specific lenders on the debt side, broker side, or more familiar with these products than maybe just your local credit union mortgage broker? Are there people that speak this language a little bit better than others? And if so, where are they?
Tommy Brant: Yeah, there are some direct lenders. We used one that was in Florida. I actually wouldn’t recommend them again, but we used one in Florida that was local to the market, knew how to navigate the questionnaire, or knew how to coach the HOA to answer the questionnaire properly in order to be qualified as warrantable.
It’s an in-house loan. They didn’t sell it off to Fannie Mae, so they still own that. I went to another mortgage lender that I used for all my investment properties and I asked him, I was like, do you do vacation home loans? He said, no, we don’t do any of that.
There is a limited set of lenders that are going to have an appetite for this product. I don’t know how to find them without asking them. I do think credit unions are open to that. Even I’ve heard some credit unions that are even open to like 5% down loan products. They’re lending their own capital so they can deviate from the normal standards.
I know two people here in the Nashville area that have cabins in Gatlinburg, the severe county where they only put 5% down. It’s crazy to think that you can buy a million-dollar cabin for 50,000 plus closing costs.
Greg Scully: That’s ridiculous to me because I’m in beautiful towns in Tennessee right now. From that cashflow discussion earlier, a lot of attention is being put on the short-term rental market. Price appreciation happened just as well as some other asset classes. So finding that hybrid of either self-management and or the right debt product can make the difference between completely average and return on effort, basically to bring that back in. Yeah, that’s something we need to look at.
Tommy Brant: Well, you can see I would totally be open to syndicating a portfolio whether it’s a severe county or somewhere on the beach where you can establish a team. You get someone on board that’s managed a bunch of these short-term rentals and you give them severely below market cost for PM and then you make them an equity partner. I’ve actually seen some types of STR portfolios where that’s kind of the structure. I’m totally open to doing that too. Where it makes sense.
Greg Scully: Yeah. Interesting. You just gotta get creative otherwise everybody would be doing it, right?
Tommy Brant: For sure.
Greg Scully: We’re about an hour in, so I think we’re probably in a good spot to wrap it up. Tommy, where can people find you on the inner web? How do we get in touch with you? Maybe wanna reach out and talk about it. You know, some of the things that you went through or. You know, in the market that you’re interested in?
Tommy Brant: For sure. Yeah, that’s TBcapital group.com. TB is in Tommy Brant capital group.com is my website. Once you go there, you’ll find that I have a gift for anyone that joins. I wrote the Passive Investors Guide to the Multifamily Universe. So if you have any questions on multifamily apartments why I chose them.
Greg Scully: Nice.
Tommy Brant: I’m an engineer, so it is very data driven. Not a lot of fluff. I think for people that are looking for hard facts, it’s a good read. I would say. Outside of that, my email is on there, if you go to the connect tab of the website. That is my calendar. If you ever wanna grab 30 minutes with me, feel free to go in there. Outside of that, I’m on Facebook and LinkedIn under Tommy Brant.
Greg Scully: Awesome. Thanks, Tommy. I will take us out. Thank you for joining us again on the Real Wealth Solutions Podcast. We appreciate your time and if you found this episode useful or have somebody in mind, please share it with them directly.
And as always a favorable review and a subscribe are welcome. So for myself, for Darren, and for Tommy, thanks again and we’ll see you on the next episode.