In this video, Chris sit down with a seasoned corporate lawyer turned multifamily real estate investor to learn about his journey to success and how he navigated the challenges of gap funding.
Join us as we delve into the world of multifamily real estate and learn from our guest’s experiences and expertise.
Discover how he identified opportunities, mitigated risks, and secured funding to close deals and achieve his financial goals.
If you’re interested in real estate investing or looking to take your skills to the next level, this video is a must-watch.
So don’t miss out on this insightful conversation and hit that play button now!
Transcript:
Chris Bounds 00:00
you’ve shifted your business over the past couple years, and 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?
Ethan Gao 00:15
Yeah, absolutely. Thank you so much for mentioning that. So that 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 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 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 swampland to.
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 perfect 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, do you mean like today today? Not tomorrow today? He said, No, did what do you not understand about today? And I said, wow, you know, I have $6 million, I got a check. And while 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 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 02:39
because the risk had he not been able to do that is losing the deal, or maybe losing his earnest money worst case, or, you know, some, something very painful is going to happen on his end, which is probably gonna impact his investors to
Ethan Gao 02:55
absolutely, so from his perspective, he was going to lose hundreds of 1000s dollars of earnest and actually know the earnest money on that it was like 150k of earnest money, if 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 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 rubble. 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 04:06
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 were 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 was 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.
Ethan Gao 04:45
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 04:57
yeah, I mean, I’ve always opened it up to like hard money. So 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 to 15% of you no 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.
Ethan Gao 05:51
Thank you. I’ll give you five bucks for that commercial, Chris.
Chris Bounds 05:55
Oh, I mean, did you have plenty of money? I didn’t, I actually, there were a couple of deals that I paid cash for. And all of them, I 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 is 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? And I think that’s a good strategy. So GAP funds, what’s Is there any other scenarios where someone might meet a gap fund or may may consider working with a gap fund lender? Yeah, absolutely.
Ethan Gao 06:42
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, when 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’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 mark, they’re more sizzle than steak. So I got a guy, that’s all steak. So anyway, that’s common, another common ones, 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 Oh, shit, 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 or secure a different way. A reduction? 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 08:56
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 was a five year play. You’re not interested in that.
Ethan Gao 09:06
I’m gonna say caucus bounce. There you go.
Chris Bounds 09:09
But they’re like, hey, look, get this opportunity is that da? And I think I can get you paid back in three to six months. That that’s interesting to you.
Ethan Gao 09:19
Yep. I’m gonna drop everything I’m doing I’m okay that OKAY. OKAY.