In this video, Ethan Gao who is a seasoned corporate attorney and successful real estate investor.
Ethan has invested in hundreds of real estate deals and specializes in offering fast funding solutions to multifamily investors.
He will be discussing the ins and outs of private money lending and how it can be a valuable tool for multifamily real estate investors.
During our conversation, we’ll cover topics such as the benefits of private money lending, the difference between private and traditional lending, how to find private money lenders, and what types of multifamily properties are ideal for private money lending.
Join us for an informative and engaging discussion with Ethan Gao!
00:00
If you’re gonna say, Oh yeah, we’re gonna make 79% IRR and you know, 7.25 Multiple invested capital, I’m gonna be interested to know what the hell you’re doing and how we can do that. And hopefully that’s not a fraud or you know, you did the math completely wrong. And then if you’re showing like an 8% IRR and you know, 1.3, multiple invested capital, I’m gonna tell you straight up, maybe you should go back to college and get a real job because you’re not very good at investment.
Chris Bounds 00:24
In this episode, I chat with Ethan gow, a veteran corporate attorney with 16 years of experience and a successful real estate investor for the last nine years, Ethan has invested in hundreds of real estate deals as a private money lender, including a lot of my deals, and currently specializes in offering fast funding solutions to multifamily investors, we’re going to cover a lot of things, including what Ethan has looked for when he’s working with investors before he would actually loan on their deals. So if you’re looking for private money lenders loan and your deals, you might get some good insight from what private money lenders look, look for. We’re gonna cover things like risk mitigation for private money, and what you can do to make yourself more attractive. As a borrower. We’re gonna talk about gap funding and multifamily, and we’re going to cover a lot of other things. So hope you enjoy. How’s it going? Anything?
01:13
Good, are you? Good? Good.
Chris Bounds 01:15
We go back quite a ways. And you definitely have a very interesting story. In real estate. A lot of people who get started in real estate they get started because they started like wholesaling, or flipping houses, or buying rentals. You get started like very, very differently, more on the finance side. So tell folks, can you share a little bit more into how you got started in real estate?
01:44
Yeah, absolutely. So my first real estate deal was I bought a rental property kind of ass backwards with a retail real estate agent that I bought my personal residence with, you know, I bought this rental property full retail price in a neighborhood that was pretty nice one that I wouldn’t necessarily have minded to live in. But what that meant was I ended up with a 5% a year annuity. And after I did the first year math, I was like, Man, how do people make money owning these things? Because I have to own 100 of these to make money. And if I and I bought it all cash, of course. And I paid a property manager $100 for them to not do their job.
And so I was like, if I own 100 of these all cash, I’d have like $20 million, or $40 million. And then I wouldn’t like why would I even care about rental properties. So I was like this, this logical loop like is not making sense. So I hopped onto Google found bigger pockets, started listening to a bunch of webinars, podcasts, and you know, people talking about real estate investing. And I was like, there was an aha moment. And I was like, Oh, so you have to buy it cheap.
That’s how you’re supposed to make money like buy at less than the actual withdraw. Now, I gotcha. So after I read all those articles, I determined that what I should do, so my background is corporate law. I met my wife when I was 16 years old, I was a freshman at Cornell University in 2000. My wife decided she wanted to be an investment banker in New York City, because that’s what the cool kids did. She didn’t know what it was. And I said, that sounds great.
So I went to Columbia Law School when I was 19, in 2003, and I graduated in 2006, when I was 22. So I was one of the youngest kids, just across the board and everything, I didn’t know anything. And so my wife worked in investment banking, and then private equity, I worked at a major, you know, couple of major law firms doing mergers and acquisitions work, all we ever did. And all we ever knew was Wall Street, you know, buy stocks and hold them or buy them some, whatever.
That’s basically all related to what we knew. And when I moved to Houston, about 10 years ago, my wife stopped working, we ended up having five kids. And so I was just always at the office late, you know, making a very good w two salary, but not having a lot of free time or even enjoying the work very much. So I just kept on figuring out how to exit this career track that I didn’t really want to be on. And so that’s how I discovered real estate.
That’s how I even bought the rental property. And then you and I, Chris, we did our you were my first investment deal. So when I lent you money on that deal that you had a wholesale on, but you couldn’t close it all at title on the same day, you had to wait like seven days or whatever. That was the first deal I did as a real investor. And then after that, I was like, well, I should just do this all the time. I just want people money to, you know, fix and flip properties. So I’ve sent them probably 300 400 I’ve lost count.
Chris Bounds 04:51
Yeah, I remember. We’ve joked before that like had I screwed that deal up for you. Know your your your trajectory. In real estate could have gone a completely different way. And I don’t know, maybe you just have a big stock portfolio today. But I remember that deal. And I already had a buyer. Yep. So I just didn’t prefer not to close on it, we were just going to assign it but they needed. I forget the details. I don’t know if they need more time, or what I’ve only
05:20
I remember, I remember the details. I don’t remember the numbers, but it was around 100k. I think you bought a house for like 100k. And you’re gonna sell it for 120. But what happened was the buyer was somebody that you had either done business with before, or you knew them. So you knew that they weren’t, you know, messing around. They wanted to buy that house cash, but they were in the process of selling something else to get the cash, okay, your seller wouldn’t extend. So you’re like, Hey, dude, I basically need this for like two weeks. And I was like, okay, cool story. And then I think it took less than two weeks, I think it was like eight days, seven days, something like that. Yeah, yeah.
Chris Bounds 05:55
Keep meaning to go back and see what the house is worth today because because that was in Sugar Land, Texas, so very nice neighborhood in Houston. And it was a perfect, like, cookie cutter type of rental property. So I think I think if I could go back, man,
06:08
I think, Chris, I think it’s better if you don’t look.
Chris Bounds 06:13
It definitely is. So that your treasurer, you started going more into private money lending with folks like me, which we did a lot of business together. And then when you start branching out to other real estate investors, I know you’ve you’ve worked with a large variety of real estate investors, what were you really looking for? And especially later on what like, once you you’ve done a few deals, you kind of understand how the games played, and you’re trying to, you know, make covering your cover your risk and make sure you’re doing proper risk management. And what were you really looking for from these investors before you knew like it was gonna be a good relationship?
06:55
Yeah, that’s a phenomenal question. And it’s something that I didn’t necessarily realize as I was going through the process, but as I reflect on the past nine years of being very active in investing, and basically being a professional manager of my own money, and to a lesser extent other people’s money, what I was always looking for was better counterparties, better counterparty risk and better counterparties in general. So what do I mean by that?
So, after having done like, 300 to 500, single family deals, you know, hopefully people don’t get offended, but the average fix and flipper in Houston, or maybe not seem to say the average, a very common fix and flipper in Houston is literally just a fixin flipper. If they couldn’t do that, and they had to get a real job, they would not be able to get a real job, whether that’s because of their qualifications, or their attitude, you know, some of these guys would just never make it in corporate where you have to eat crap all day long, they wouldn’t be able to do it, they need to be the boss, they need to be in control, even if they’re wrong.
Chris Bounds 08:02
So like, the lone cowboy, yeah,
08:05
the Yeah, the cowboy with with very deep convictions that is not willing to compromise, that person will have an extraordinarily hard time in corporate where they have to compromise and play the game of thrones and the you know, sensitivity analysis, all that stuff, they would, they would, they would have a really tough time making it unless they were just very, very superior at their job or had a massive relationship or book of business. And then there’s some that are just straight, unqualified, right, like barely read, barely do math, you know, couldn’t go to college, like whatever the case may be. And then another one is a contractor that decided that instead of the contractor, they should be investor because the investors make all that money.
Those people generally also don’t have great finances, their personal guarantee is more or less worthless. So So all of these can be good counterparties if they’re good people, they’re not trying to screw you, they’re not trying to cheat you. And they’re, you know, they’re they’re gonna do a decent job on the project. But if any of those is not true, so let’s say they’re good character, but they’re really really bad at what they do. And Chris, you know exactly who you are. One of the examples I’m thinking of great person could not get the job done, and then money was lost, right? Or even worse, can do the job but chooses not to and instead rips people off that’s also a very bad one.
You and I both know people like that. So the single family fix and flip arena is just not that full of great counterparties like yourself right now in multifamily and commercial we start moving a couple tears up. Now we’re talking about people who usually have advanced education work in corporate for a while then wanted to leave the rat race. And now their whole lives depend on being able to borrow money from banks and lenders and being able to raise money. from investors, so these people have something you know, something more tangible to lose. Generally, if they’ve already been through the wringer going, you know, getting a master’s degree I don’t even care in what if you get a master’s degree in anything generally you have to work a little bit harder that means that you are willing to conform to society’s expectations or your parents expectations, right?
You don’t just kind of show up and say yeah, why why not go spend another two years in college? Generally people don’t do that unless they’re gonna you know, they they believe in it, or they will they want to conform. So just generally, I feel in multifamily and commercial the fraud risk, the competency risk goes down quite a bit. So my Counterparty is now in commercial multifamily. There’s just multiple tiers higher than that what they were in single family. So that
Chris Bounds 10:49
I’m actually really curious on that, do you feel like it goes down or it just changes? So? Obviously, it there’s a lot I mean, people say, hey, multifamily, no different single family, I really, at a basic level, okay, maybe, but there’s just way too many we’ll gears turning in multifamily. So I mean, your multifamily is a business and buying a single family property is not necessarily the same. Do you feel it’s the last, which maybe that’s true, and also different because of fraud risk at a single family level, where people just like cut and run, but you can do that in multifamily, too.
But, you know, the there’s also there can be layers to fraud, because we’ve talked about just privately kind of keeping an ear on the ground, I know you keep a close here on the ground and know who those who those players are, hey, hear so and so about so and so. Be careful or so and so’s not not paying distributions or so and so on may have a lawsuit coming? Do you feel it’s it is less or just different or more more complex?
11:56
So it’s it’s less, it’s different? And it’s more complex? So I guess it
Chris Bounds 12:03
seems like it’s less, but maybe when it does happen? There’s significantly more impact maybe, I don’t know,
12:11
possibly, maybe not per capita, maybe just on a total, you know, somebody wants to defraud on a project and apartment buildings worth 50 million, then yeah, there’s a $50 million fraud going on. If it’s a single family house is worth 300k, then then the max fraud is really 300k I guess I would describe it as the following. So I think your counterparties in general, are one to two tears better than single family across the board. Now fraud exists in every sort of circumstance. I you know, I’ve been I’ve seen some locally. You read about them nationally, you look at Sam bank and fried. He had the darlings of the venture capital world invest all that money with him without doing any due diligence, you see JP Morgan paying like 175 million. For some woman who made up like, 5 million names of people that didn’t exist. I mean, things will always exist like that. But just in general, I feel like the risk is lower in multifamily. Because your counterparties are better.
And then their livelihood depends upon borrowing money. So you can’t have background issues. You generally can’t have bankruptcies or, you know, tough lawsuits, and then raising investor capital. And then when you run frogs in that sphere when you are raising money now you might be looking at SEC compliance, maybe DOJ if you just you know if local man local greedy man Ethan gal gets the fraud of 300k from by Chris bounds in Sugar Land, Texas. We can’t even get the Fort Bend County district attorney to give a crap. Yeah, so it’s too small.
There’s like, who cares? How does this make you my career? Who cares? Now if like, you know, bla bla bla bla bla raise $50 million, the frauds investors now you might be looking into federal prison time. So I just think the the amount to lose becomes larger. So if you do like a statistical analysis, that should mean that people you know, these counterparties in multifamily should be inclined to do less fraud. I mean, just quite honestly, I know a lot of fraud that goes on here in the Houston area and single family. I know some of the people that do it, and I know what they’ve been doing. And they’re just getting away with it constantly. You know, there’s, there’s basically no penalty for doing it.
Chris Bounds 14:26
Yeah, and so unfortunately, and that’s why I’ve told folks, there’s a common denominator regardless of where you’re investing, especially in private equity. It’s, it’s all on the operator. And one of the criteria is I have beyond experience because even you know, experiences and foolproof but a brand a personal brand. That one is good, but it also is one that they’re willing to protect so much so that they’d actually be willing to come out of personal pocket if necessary to make hole.
So I mean, I’ve flipped deals that I don’t know if any of the ones that you love You’ve learned on but you know, we’ve had flips when you do 200 Not all of them are gonna go well, and we’ve lost money on a couple. I mean, a lot of occasions like the investor probably had no idea because they got made not only hold on, you know all their other interests as well, just because I had that brand I was willing to protect, regardless of what happens. And then that’s something that I look for. And I know you look for that, in addition to other due diligence items.
15:28
Yeah, no, I think you told me at some point postmortem, I think there was one deal you definitely, it wasn’t a big loss. But then you told me about some more medium losses with others. And I felt bad, but that’s kind of that’s why you get the paid the big bucks, Chris.
Chris Bounds 15:44
Yeah, yeah. So your current focus now is, well, actually, before I go to their investors out there that are looking for private money they’re looking for they want to approach folks like you who may be able to fund their multifamily deals or, or their flips. What is your recommendation before, before making that ask or approaching private money lenders?
16:07
Yeah, so I, you know, I’m a little bit different than other people. So I underwrite the deal sponsor more than I do the deal. So the deal I just made sure it looks normal. So like a typical multifamily deal is going to be like a 1.8 to 2.2 multiple of invested capital over the span of the deal. And you know, like a 14 to 22% IRR. So if you’re outside of those ranges, if you’re gonna say, oh, yeah, we’re going to make 79% IRR and you know, 7.25, multiple invested capital, I’m going to be interested to know what the hell you’re doing, and how we can do that. And hopefully, that’s not a fraud, or, you know, you did the math completely wrong. And then if you’re showing like an 8% IRR, and you know, 1.3, multiple invested capital that I’m going to tell you straight up, maybe you should go back to college and get a real job, because you’re not very good at investment.
But if the deal was just normal, I don’t really care. So I care more about the operator, and you know, two things one experience, if they have direct experience, then I will extrapolate from that direct experience into future things. So unlike the stock market, in this kind of industry, past results are generally indicative of future results as well. And then number two, I just tried to understand a person’s personality and what drives them and kind of, you know, their family factors, you know, I know with you and Jamie, you know, you guys are super close knit family, and she’s involved in the business and your father in law’s helped to so it’s that that’s all super great, right? So I kind of just tried to understand all of those factors to make a determination of if things go poorly, how is this person going to react?
Is this person gonna book the first flight to Russia? And, you know, join the join the Wagner group or something or French Foreign Legion? Or is this person going to just put their nose to the grindstone and just keep working it out and dig themselves out of a crappy hole? So I just scrapped? I mean, that’s not gonna be perfect. That’s an art not a science. Even background checks can’t predict that. I mean, I’m sure there’s tons of examples of totally normal people that that ended up, you know, joining Vagner group, or French or Legion and stuff like that. But but those are not super common.
Chris Bounds 18:19
Yeah. Hopefully you haven’t had any go to that extreme?
18:24
No, no, hopefully not. And again, I think, fundamentally, if you kind of understand the person, I think, I think you’re able to dramatically lower the risk quite a bit. And again, everything’s almost the people business, right? Like you just look at Sam bacon and fried all those Silicon Valley firms had the best lawyers, the best investment bankers, their paperwork was perfect. None of that mattered. All all. Zero.
Chris Bounds 18:47
Yeah. Okay. So but, um, you’ve shifted your business over the past couple years. And you’re, you’re involved more in gap funding, especially in multifamily, the multifamily space? So can you explain a little bit more what gap funding is and how you’re approaching it?
19:05
Yeah, absolutely. Thank you so much for mentioning that. So doubt, funding to me is really like the perfect side business for somebody like myself. So I’m a corporate lawyer. I’ve been doing that for over 16 years, you know, I used to work 100 hours a week, you know, have to drop things on a dime and just work on things to get it done. I have a somewhat flexible schedule, I don’t have the most flexible schedule. I do have one, you know, particular massive disability, which is I have five children. So all kinds of random crap will happen where I have to drive them somewhere or pick them up or, you know, just with five kids, you just have five different distinct elements that are sometimes correlated and sometimes uncorrelated with to your already slightly too.
Yeah, so but I still have a pretty flexible Skellige schedule relative to other people that I know. So I’ll just give you a perk scenario. So there was a deal in Dallas, somebody, the lead sponsor called me at 9am. He was referred to me by a guy that was referred to me. So that was a third tier referral. He called me in the morning and said, Hey, I had an investor back out, I need $6 million today to close. And I said, You mean like today today? Not tomorrow today? He said, No, did what what do you not understand about today? And I said, wow, you know, I have $6 million. I gotta check and borrow. I gotta go make some calls. And he said, Okay, cool. So he made a bunch of calls, I made a bunch of calls, I had to go to a business lunch along the way, I couldn’t cancel it.
And then we reconnected around, you know, 1pm That day, after my lunch, and he was like, Hey, dude, like, so what’s the story, and he told me about all the calls he made. So a lot of people have like 1 million, 2 million, and that they weren’t sure if they could do it that fast, you know, their lawyer needed to blah, blah, blah, long story short, I funded 6 million at 3pm. That day, I was able to do the legal work. I, you know, through of a couple of partners, and the private equity fund that I run, we cobbled together the money just in time to close the deal. And we got paid back three days ago. So we got paid back around 88 days. So in that situation, the repayment strategy for him was he basically used our $6 million to fill the gap that he had in his equity raise, and then he continued to raise money after post closing to them pay off our loan,
Chris Bounds 21:29
because the risk had he not been able to do that is losing the deal, or maybe losing his earnest money worst case, or some, something very painful is going to happen on his end, which is probably gonna impact his investors too.
21:45
Absolutely. So from his perspective, he was gonna lose hundreds of 1000s of dollars of earnest and actually no, the earnest money on that it was like 150k of earnest money that was at risk. Plus, he would have to return all the millions of dollars he’d already raised from investors. Plus, he wasn’t going to make his acquisition fee on this deal. Plus, he looked, you know, stupid to the broker. Plus, he had a, you know, great first lien lender, he had a great preferred equity source, he just looked like a fool to everybody. Yes, for him, he was potentially looking at a big financial and reputation loss if he didn’t close. So it was worth it for him to borrow the money from me.
And in particular, me, because it was too hard to cobble together a large amount of money from multiple people, multiple people with multiple lawyers doing their own thing, trying to coordinate that just trouble. One person, that’s basically his own lawyer is going to be by far the better Counterparty. And it’s worth paying a premium for because then you don’t have to coordinate like 17 Different people at the same time, which is, I kind of think statistically, it’s impossible. I don’t even know the point of trying to do that.
Chris Bounds 22:57
Yeah. And really, I don’t know what the timeline of that deal is 357 years or whatever, when you boil it down the cost and interest in whatever other dynamics or financial dynamics where it’s probably relatively small. Not in a perfect scenario, he was just meant to raise all the money, but given the choice of lose the deal, lose a lot of money open up maybe litigation from the seller for not performing versus pay a little bit more in interest and whatnot. It’s really not me, it makes sense that you would go that route, if needed.
23:35
Yeah, you have to be very, very logical and stoic about it, because it’s not going to feel good. But if you think, you know, short term pain for long term gain, it’s 1,000,000,000%. That,
Chris Bounds 23:47
yeah, I mean, I’ve always opened it up to like hard money. So a hard money lender, if you’ve never looked at hard money rates, I’m not sure what they’re doing now, probably anywhere from 12 to 16%, depending on the deal, probably anywhere from two to five points, maybe more, depending on the deal. And then even some hard money companies want you to have an additional 10 15% of skin in the game. So looking at that, like, oh my god, this is so expensive. But I’m like, if you’re flipping the house, when you average all that out, it’s really not that much. I mean, if you’re gonna make 50 grand on the flip, and you average out all those little fees, it’s by percentage percentage, it’s not that much. If you’re gonna hold it as a rental, then it’s even less when you average that out over a seven year period. So ultimately, you got to do what you gotta do to get the deal and at the fundamental still work, just pay it.
24:41
Thank you. I’ll give you five bucks for that commercial, Chris.
Chris Bounds 24:45
I mean, I gave you plenty of money. I actually there were a couple of deals that I paid cash for. And all of them are regretted one. I paid cash for a deal that turned out to be a fraud and I had to wait a long time for my title policy to pay me back. So I really regretted that. And then other deals where I’ve just self funded more rehab than I needed to and just just talking about it. I’d rather have cash in the bank and just pay a little bit extra in interest. Liquidity is what really kills you. So can you pay a little bit more for liquidity? I think that’s a good strategy. So GAP funds up what’s Is there any other scenarios where someone might need a gap fund or may may consider working with a gap fund winner?
25:32
Yeah, absolutely. So the the most common is a shortfall in fundraising, which happens because somebody backs out. Or another common scenario is just lack of time. So one, a couple of teams have told me, their attorney was too slow in preparing the PPM, so then they wasted two weeks, not being able to send it to investors. In that case, anybody that has that problem, please call me I don’t do that type of securities, legal work, I can, but I choose not to. But I refer it all to someone that I really enjoy working with. He’s set up all the funds that I have. And I’ve referred him dozens of clients. And he’s always done a good job there.
There’s really no excuse for an attorney being the one that holds up your deal for multiple weeks. And I’ve been unfortunately, on the receiving end of some of that. A lot of deals that I’m personally on. Sometimes there’s like famous lawyers who are really good at business developing within multifamily, but they’re actually horrendous at actually doing the work correctly or on time. So I’m always kind of, you know, they’re more more, they’re more sizzle than steak. So I got a guy, that’s all steak. So anyway, that’s common, another common one, especially with 1031. Investors, they seem to be very finicky. And I think what they do is they select 25 different opportunities.
And then they might tell like, 12 of them that they might do it. And then right at the end, they might say, Oh, I can only find one of these, I’ll share like, I gotta go tell 11 Other people I’m not doing there’s no, there’s stuff like that going on. And then, you know, another one is somebody needs money for a different project, but they have equity and an existing project that I could put a second lien on are secure a different way. You’re filling a redemption. Yep. And then they’ll sell an asset to pay me off. So long story short, you know, I’m giving a lot of examples. But all I really care about is, is there a short term, acute need for money and short term I define as under the under six months, and ideally under four months.
Chris Bounds 27:46
So someone’s going to come and saying, Hey, I’ve got this killer deal, I need 3 million. We’re gonna give you a preferred equity position, it’s a five year play, you’re not interested in that.
27:56
I’m gonna say call Chris bounds.
Chris Bounds 27:58
There you go. But they’re like, hey, look, I got this opportunity in that data. And I think I can get you paid back in three to six months. That that’s interesting to you.
28:09
Yep. I’m gonna drop everything I’m doing. I’m okay with that. Okay, okay. I would
Chris Bounds 28:13
imagine especially given the the economic climate right now, especially with real estate and interest rates, so there’s probably a bit more of those opportunities popping up. And I we’ve talked privately on with the short term debt does a lot of multifamily over the past few years has been bought with bridge debt, which is two, three years with one year extensions up to five years. A lot of times, but those extensions aren’t guaranteed they’re usually performance based and in whatever reason, then at some point they’re gonna need to sell or refinance usually refinances. Actually, lately it’s been selling has been the the the strategy because the market tailwinds. But refinance is usually the primary objective. So they can finish out their their business plan. So have you seen any uptick lately? Are you are you anticipating any uptick in these type of GAP funds coming available on ongoing projects or new projects that are not able to raise because of market conditions?
29:18
Short answer, yes. longer answer, though, is I don’t generally prefer to be invested in distressed situations. I think if like somebody like you, that’s, you know, raising a fund right now. And if you can put in a flexible mandate, I think it’s quite possible that you’re going to see a bunch of deals that are distressed over the summer, where maybe they bought it a couple years ago, and now they’re cashflow negative because it didn’t buy a rate cap, nobody anticipated rates going up or maybe they just operated poorly. So they’re totally fine losing all of the investor money or almost all of it, and they just want to sell it for the loan amount. And that might be a great opportunity for you to sweep swoop in and say okay, or I’ll buy this at, you know, like 20% off of retail. And then now you and your investors can make all that money. I think those will exist. I haven’t seen them yet.
But everybody says they’re coming. And it’s quite possible they’ll come. For me personally, you know, most of the stuff I look for are these fundraising shortfalls. So if you just look at my opportunity set, and you just look at the stuff that people refer to me, which is not representative of the market at all, you would think like that, like 99% of people can’t raise their money, like, can’t raise enough money for closing. Because that’s what people know me as, and that’s what they refer to me. So like, almost all of my situations are like, Hey, dude, I got a great deal. But I’m short XYZ, and I have, you know, between zero to seven days left, right, so that that’s kind of the situations I look for. Another one, I guess I should mention, that kind of dovetails with this is, I’ve seen occasionally, with rate raises going so quickly. I’ve seen lenders actually come back, right before closing and say, Hey, Chris, remember when I said, and I put it up on a term sheet that was gonna lend you $15 million for your deal? We meet we actually met 13. So go find an extra $2 million.
That’s your problem now. And now it’s like, way too late. You can’t get another lender. And even if you do get another lender, they’re gonna say the same thing. So now, so this is when you call Ethan. And you say, Hey, man, I need to close this right now. I got to just raise 2 million after closing like he helped me. Yeah, yeah. Okay. Do you want to talk about the loan guarantor KP side at all, but that’s also something that I do. And I get a lot of opportunities like that.
And that’s where I see the other portion of deal flow. So for folks that aren’t familiar with being a key principle, where a loan guarantor, you know, in a typical commercial deal, the lender requires that the lead sponsors show net worth that exceeds the loan amount, and that’s shown liquidity that exceeds 10% of the loan amount. So for certain teams that either don’t have the net worth or don’t have the liquidity or don’t have either, or sometimes they might not have enough experience, then they need to bring in another person onto their sponsorship team. And that’s where I can play a role. I keep a very high percentage of my net worth liquid in my life insurance vaults.
Chris Bounds 32:20
I mean, ultimately, it’s a great option just just to have available, not not going to use it a lot. But I don’t know if this is the best example. You’re like, you’re like the rich uncle that doesn’t want to do any deals, but the one that you just really need them on. And if it makes sense, yeah, you will consider it.
32:36
That’s generally the way I like to position myself. And then I like to tell people, you know, I’ve made tons I made a good number of GAAP loans to sponsors that had famous KPS. And I was always a little bit surprised that they’re famous KPS that were willing assignment that we’re not willing to get fund them. But but that’s because, you know, maybe their business model is there, they don’t have that much liquidity for them to do that, or it’s all restricted. Or they don’t even pay attention to the deal. They’re on. They’re on 50 with their students or whatever. So who cares? But I’ve always found that interesting. So you know, whatever always
Chris Bounds 33:08
scares me. I see that a lot, too. And it’s like, you don’t have experience, they have tons of it, but like, who’s really running the ship?
33:19
Exactly, exactly. And I’m not trying to fault them at all. I’m just saying it happens. So whenever I get, you know, if I’m talking to somebody seriously about the the loan guarantor, and and I kind of just sense, maybe they’re considering something else I just straight up tell him like, hey, the benefit of using me is if we’re short on fundraising, I’ll just fund the gap. So you have certainty of closed right out of the gate, you pick some other loan, guarantor, I have no idea what they do, you know, they, they might do the gap, they might not have enough cash, they certainly won’t have as much cash as me. And then maybe they’re not willing to do it, or they don’t know how to structure or they don’t care. So it’s very different versus, you know, I professionally make gap loans to teams.
Chris Bounds 34:00
Yeah. And that provides a lot of value to operators that, like when they’re presenting offers, like, funds, typically can get better terms than someone who’s going to syndicate because that the seller knows, hey, you’ve got cash in the bank. So if I was an operator, I would want to work with you, even if I wasn’t gonna work with you on every deal, but just didn’t have that relationship and knowing that, hey, this is possible and potentially leverage that to get better deals. Absolutely. Okay. So I guess in closing, I got a couple questions. We always ask everyone when I’m doing these interviews, if you could give your 20 year old self advice, what would it be?
34:42
Yeah, so my 20 year old self was basically already married and in law school, I would have told so one of my wife’s biggest regrets is we didn’t have kids when we were younger. I don’t disagree with her. However, I would disagree with her about the total numbers so she’s moving that as a A creative number. So she actually wants three more. I’m already like over drowning with five. So I don’t want eight. But I don’t disagree with her that having kids earlier would have been easier for us. And then number two, I would have gotten to the real estate much faster.
So I read Rich Dad, Poor Dad, I think when I was 23, I was worth this is like my first year of working at a major Wall Street firm. I didn’t know anything. I read the book, I understood every word. I didn’t understand the point. I remember I just figuratively threw it in the trash. Like I didn’t get it at all. I just continued investing in stocks. And then I read it again, I think around the same time I met you, or maybe a year before, and I was like, Oh, this guy’s making a lot of sense.
Like, why am I bothered? Like, why am I investing in stocks? Which I literally have zero control over like none? I don’t have I don’t even have perceived control. Right. Like, at least with real estate. Let’s say they raise interest rates to 100%. Even if I didn’t have any control, at least I think I have control. But with the stock market, I don’t even have the perceived control of anything. So I would have gotten the real estate much
Chris Bounds 36:04
earlier. Okay. What book or books have greatly influenced your life? And so already answer that. But
36:10
yeah, one is the Rich Dad Poor Dad, in that it just made a lot of sense is a really good entry way book. I’ve also read a bunch of Wall Street books like when genius failed, or Random Walk Down Wall Street, they basically just tell you, Warren Buffett’s one in a billion, you know, just basically, the chances that somebody can deliver consistent alpha in a crowded space, like the public markets is basically none. So don’t bother.
Chris Bounds 36:35
Yeah, Ray Dalio echoes that too. Yeah. Okay. In the last five years, what new belief behavior or habit has most improved your
36:44
life? So my habits have been pretty similar just across my life. So you know, I met my wife super young when I was 16. That influenced a lot of like, how I did things. And then I had my first job when I was 22. And I really didn’t know anything. So anytime anybody gave me wisdom I just did. So one of the things I’ve always done is I’ve just always responded back to people quickly, even if it’s a no. Right. So like, if you, you know, I usually reply to, I usually reply to emails within a few minutes.
If I’m in front of my computer, or if I’m on my phone, if I’m in a meeting, and I can’t reply, then I just replied, afterwards, I return every phone call every text, I listened to my voicemails, I checked my mail every day. So I’ve just always been very consistent in doing that. And then when, when I find people who are difficult to work with, who don’t respond fast, it’s sometimes challenging for that to be a very fruitful relationship, just because it’s indicative of other personality traits.
Usually, that may not be consistent with mine, like my wife will send me an email. And then two minutes later, she’ll walk by my office, she’ll be like, are you not checking your emails? Because she’s just used to me responding so fast? Yeah. And the same with me. I’m like, I sent her an email and I walk across over to her to man, like, are you not checking your emails?
Chris Bounds 38:08
You would have been a fun mid level manager to work with. I,
38:12
you know, people people say that in a joking way. But um, you know, usually, like at the firms that I worked out, I was usually considered a better supervisor, because because I took some time to train and develop people a little bit more, versus a lot of other people just like dumped assignments last minute. And then if somebody did a terrible job, they would just fix it themselves, give no feedback, and they just leave a bad review, I would actually try to sit down and teach them something. But I will surely known as a good supervisor.
Chris Bounds 38:41
I’m going to clarify to someone who is trying to do the bare minimum to get by. But I was the same way. I was always in management and corporate America was always very prompt with emails and sold that that’s the way you should do it. But I have been I’ve been very prompt and responsive. And I definitely vouch that you’ve you’ve always been to
39:04
some people when I say no, like I just know your baby’s ugly. I’m sorry. To say I’m sorry, you’re
Chris Bounds 39:13
trained to the point but there’s definitely value in that. So how can folks reach out to you?
39:19
Ethan gao@gmail.com E th a n gao@gmail.com. Like I said, I check my emails all the time. Awesome.