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Transcript:
Chris Bounds 00:00
How do you go from multifamily to development of a 400? Unit? Like, how does that transition go? I mean, it probably didn’t happen overnight. I know a lot of folks that they like to stay away from development. There’s no cashflow. But there definitely could be some, it can be very rewarding on the back end, but a lot of investors, when they say, Hey, I’m in multifamily, they’re probably talking about value add, or Core Plus, which is more of a cash flow play, these are performing assets that they’re already leased up, and they’ll go on and maybe update rents and management, whatnot, but you’re doing new development. How did you make that transition?
DL Campbell 00:44
That’s, yeah, that’s a great question. Because what we’re doing is we’re forcing value on the land on the land development play, you’re forcing value on the land. So were some of the construct for finding a great deal is the same. Like I found an off market property in the middle of Dallas, that is unheard of. And people are going to Houston, which is a marginal market or other places, because they can’t find an excellent deal and in Dallas, so the Lord led me to a great deal. There are certain aspects where you need to be careful and and learn what to look for, like you need to have your zoning in place, and 12 utilities on the lot. But rather than going in and forcing value on an as built conversion.
See, the issue with all of these properties in the last three to five years is that they’re doubly appreciate it. And we don’t buy commercial property like that we buy for the cash flow. On one hand, we buy for the cashflow, and on the other hand, we buy for their appreciation. And while there has been some margin and cashflow, there has been no room for value add appreciation, and we’re starting to see it and unfortunately it’s tanking the market because a lot of the people who came in in the last 35 years, they think a 2% interest rate is normal. And, you know, we we knew that the interest rates needed to normalize.
And so we have lots and lots of buffers built into our formula. So we’re, we never buy on just cashflow or appreciation. And that’s one of the problems that I’ve seen in the market with people learning is there buying with absolutely no appreciation, the only place for that appreciation to go is down depreciation, and then they’re losing their value, then they have a loan that they can’t pay. And then if it’s a Class B or C, there’s only so much margin that you can force those rents on where to go. So when those rents go down a little bit, the only play that they have really is in those rents and their profit margins are diminishing. Yeah, cuz
Chris Bounds 03:17
commercial real estate, or especially as more of the commercial loan products you have. So say you were talking about only buying on appreciation or only buying on cashflow. Both is obviously what you really want. Cash Flow definitely pays the bills. But you need appreciation cuz it’s your buffer. But at the end of the day, unlike single family where you can get a 30 year fixed, 15 year fixed or whatever, the bank doesn’t care what your debt coverage ratio is.
But in most markets, when you buy and you’ve got your spread your cash flow, it’s probably not going to change a lot over the years. Not so much with multifamily. Because even if you were to get fixed rate, which is uncommon. With commercial finance, it’s typically fixed for a three, five, maybe 10 years, it’s very uncommon to get like 30 year fixed. Even in the situations where you have it fixed when that fixed turns variable or due to market circumstances, like excess inventory coming on pushing rents down or whatever the bank or or operating expenses skyrocketing, like taxes, insurance, and material costs, because that’s happening.
The bank wants to see hey, what’s your debt coverage looking like now and once it falls below a certain certain threshold, then they’re gonna start they’re going to start bugging you a lot more. And worst case pushing some buttons to to get you to perform or worst case, take over your project. It’s very different. You’re looking for both you’re looking for.
DL Campbell 05:07
And people aren’t teaching like teaching that. Unfortunately, the gurus were owner operators, we’re not syndicators, but the gurus are teaching, you know, by on either. And we we never do that we buy on both. And where are we going to find those deals of probate office, all the things that we know. But we have to think about talking to a probate attorney, somebody tried to get out, maybe a second generation trying to get out our property is that their parents work so hard for, they usually will sell divorce court, divorce attorney is good for finding deals on the courthouse steps. And it’s not all about sitting behind the computer. And looking although I did do that, to find our deal.
The way that I found this off market property is I was analyzing properties to the north of town and to the south of town driving back and forth, I was driving everywhere, as well as doing the online research driving for dollars. And I saw this little sign, and it is a seller sign. So we ended up in a seller’s market, tough, tough market that we’re coming out of in the next year, and ended up with an off market property, we’ve been able to nearly double the value in a year. And that’s the goal that you want. Same thing with those apartments, I doubled the value in a year.
And we’re forcing value on the land by working with the city working with the county and getting our entitlements we’re we’re 90% entitled. So our property right now is it’s worth at least double. And then when we get entitled, we’ll take that equity in the property and we’ll take it into construction loan, it’ll it’ll be three times the value at that point. So we’re just forcing value on the land on a development deal. Just like any other off market deal that you can find, you’re really in order to get a good deal. Over the last couple of years, you should have gotten an off market property and use those other tools that we’ve been taught before to get that smokin deal.
Chris Bounds 07:29
Yeah, because ultimately, the best deals that you get are when they’re calling you, or when you’re the only one calling them, which in that case is usually off market direct owner. But it’s a little bit more talent. I mean, with single family very common. Like I’d say 90% of all my deals are direct to homeowner, there were a couple through a wholesaler and very maybe two or three were on MLS I just never really did that. And then a couple referrals from Realtors with commercial, especially large commercial, or large multifamily, you know, a lot of them are almost probably exclusively are through brokers. But there are direct to owner transactions. And it’s probably, you know, the good old boys club where they just they just really know each other and they know you’ll perform. Any thoughts there?
DL Campbell 08:30
Yes, absolutely. You’re right on that, Chris, because a broker is not going to call you back, unless they think you’re at the top of the list to close. And they have their buyers that they know will close sufficiently quickly. And so that’s where those pocket deals are gonna go. So what I did 1000 years ago, 19 years ago, is when I was talking to brokers, I would email them first. And then I would have a chance to think about what I was gonna say. And because otherwise, you know, they asked me something I don’t know. And I’d be like, thinking that I’d be found out. So you have to you have to work your way into it. That’s why I did a lot of training a few years of training before I took on my first property. And also, you know, if you have a deficiency or a disadvantage, I would say just advantage. I changed my name to Dr. Campbell, a long time ago when I was working as an engineer, because it just levels the playing field. They get an email from Dr. Campbell and they’ll reply Mr. Dear Mr. Campbell, I’m like alright, good. I just have to work it out