EP 238: Lessons in Resilience: How Family, Fortune 500, and Real Estate Shaped Charlie Kao’s Path

[00:00:00] Hello, and thank you for joining us today on The Gentle Art of Crushing It Show, where we focus on learning and sharing with our listeners all there is to know about how to create success in our lives. This show stands on the shoulders of giants. Our mission is to empower and inspire our listeners to create the life of their dreams whilst having a blast in the process. Let's celebrate life together. Welcome to the show.

[00:00:26] All right, welcome back to The Gentle Art of Crushing It podcast. My name is Randy Smith and I will be your host today. Really excited to have Charlie Gow with us today. Charlie is the asset manager in principle of Twin Oaks Capital. Twin Oaks Capital is a boutique, commercial real estate firm that does consulting, feasibility, brokerage, and building construction management and really excited to jump into his journey and help educate and inspire our listeners today. So Charlie, welcome to the show.

[00:00:57] Hey, thanks for having me.

[00:00:58] Awesome. Well, Charlie, let's kick this off like I do with all of our guests. Can you share your perspective on the current market and how you think that might be impacting the passive investing opportunities today?

[00:01:12] Well, you know, it's funny because we just had the election and people are always talking about like, you know, what do you think about the national election? And it's funny because myself personally, while I do definitely pay attention to national politics, I actually have always been something that's really been focused more on local politics. And so, you know, it's hard to generalize across all the markets I'm invested in. But I would say in general, the markets are flat to little growth depending on what part of the market you're in.

[00:01:37] What people are really looking for now are safe havens. And it's typically going to be your class A properties with very little capex, newer age. Those properties are the ones I'm seeing that people are really trying to buckle down and buy.

[00:01:51] One, because it's a lower floor as far as, you know, return, but, you know, much lower or a higher floor, but a lower ceiling. So, you know, you have a much more predictable return. But then also, I think banks are also kind of forcing that to they're not wanting to go for these large pro forma based deals.

[00:02:08] And so, you're finding, you're also finding it harder for people to raise capital and take down that kind of deal because your carry costs are higher, your bank financing not as good, you may not be able to go non-recourse like you used to be.

[00:02:20] So, that's kind of a quick summary of kind of how you see it. Now, micro, I see some markets are definitely suffering more so than others. But in general, I would say the markets I invest in personally, we try to invest in eras where the economic indicators are so strong on a three, five, 10 year cycle that hopefully we're not going to be dealing with something, you know, like a kind of a flat market like we're dealing with now.

[00:02:43] Awesome. Well, that is, I mean, we could wrap up the show right now. And I think you brought a ton of value with that. There's like five or six different items that I'll want to dig into once we get into it. But yeah, thank you for that summary. I think you hit the nail on the head. We're seeing this kind of this, this move towards safety with dollars, whereas highly contrasting compared to where we were just a few years ago, it seems like. So, yeah, I think this will make for an interesting discussion once we get into it.

[00:03:09] But before, before we kind of dive into those weeds, Charlie, I'm curious, can you walk us through your journey in the commercial real estate space and how you found yourself where you are today?

[00:03:19] Yeah. So my first memories of commercial real estate and real estate in general go back to as early as I can remember for my childhood. Every child labor law, you can think of my dad had me break. I pretty much was on a construction site multiple times, whether it was doing weeding, you know, excavating, doing a flat roof on a commercial.

[00:03:39] Building whatever you could think of. CPS had a complaint for my dad on that kind of thing. So I really got thrown into it, whether I had a choice or not. And then on top of that, my dad came to the United States. English was not his first language.

[00:03:53] You know, he was 39 years old. He did not have a lot of choices for jobs. So the first job he got was as a maintenance person for a woman that happened to speak Chinese.

[00:04:02] She owned a ton of commercial real estate. And then long story short, you know, over the next 20 years, he made himself so irreplaceable to her that she sold off her entire real estate portfolio to him.

[00:04:15] And over that process, I did a lot of translation of legal documents. It's amazing. Now, when I look at a legal document, people are like, do you have a law background?

[00:04:23] And I'm like, no, I just I probably reviewed thousands of legal documents by the time I was 18 because I was constantly translating and trying to communicate to my father what his lawyer was trying to tell us.

[00:04:34] Unbelievable. Unbelievable. So so your dad came to the States at 39. And based on just the brief introduction you and I had before the call, it sounded like he developed an amazingly very large, robust real estate empire.

[00:04:49] I guess you could call it a relatively short amount of time just coming here to the United States in 39.

[00:04:53] So what did that what did that look like for you guys? Obviously, he was a maintenance guy.

[00:04:58] You're in the trenches doing a lot of that work as well. But so did he just take over that portfolio or did he start acquiring and buying his own stuff as well?

[00:05:07] Or where? Yeah. So, I mean, credit's always an issue for non-U.S. citizens kind of starting because we had a green card initially,

[00:05:13] even though we got fast tracked pretty easily because both my mom and dad's side had a lot of doctors and lawyers.

[00:05:19] And, you know, those type of occupations typically get, you know, permanent visas or passports relatively easy, especially because we were trading a lot of jobs.

[00:05:28] And so my actually my dad started out as the maintenance person for the whole portfolio.

[00:05:33] They had a lot of retail restaurants, tattoo parlor, office buildings, big boys, you name it.

[00:05:38] And a lot of it was triple net. But the woman did own a restaurant.

[00:05:43] And one day the head chef kind of didn't show up at the restaurant.

[00:05:46] We don't know what happened. And my father was like, hey, I can do this.

[00:05:50] And she's like, no, you can't. You're my, you know, you're my maintenance guy.

[00:05:54] You're fixing the pipes right now. And he's like, no, I can do it.

[00:05:57] So he did it. And then basically she said, you know, I actually don't mind you being company the chef,

[00:06:03] but I need you more for the maintenance of all mine because this is only one building.

[00:06:06] So my dad's like, no problem. I'll do both. I'll just outwork everybody.

[00:06:10] And then what he really meant was I'll outwork everybody and my kids will fill in their rest.

[00:06:15] At least that's what I felt like it was when I was a kid. It was like, yeah, my son, he gets out of school at three.

[00:06:20] Maybe I can get him out at, you know, 245 and then we'll work him until we until he goes to go to bed.

[00:06:26] So that's kind of how the challenge felt when I was growing up.

[00:06:29] So, yeah, I could relate to that entirely.

[00:06:31] My parents owned restaurants when I was young and I was the same thing.

[00:06:34] So right after school, I'd go home and I'm stocking coolers, cleaning dishes, scrubbing floors, all of those types of things.

[00:06:41] So I think that's important though, too, like that probably it builds something into your psyche from a very young age that you've got to work hard.

[00:06:48] You've probably got to work harder than anybody else because you've got some things that might be holding you back.

[00:06:53] Are you interested in real estate investing, but don't know where to get started or think you don't have the time or money?

[00:06:58] Are you stuck in your W-2 because the golden handcuffs make it hard to walk away?

[00:07:02] If this sounds like you, check out impactequity.net and schedule some time to talk with the founder, Randy Smith.

[00:07:10] Randy went from massive income to leaving his W-2 through passive income, and he can help you do the same.

[00:07:16] www.impactequity.net

[00:07:19] Yeah, it's up to you.

[00:07:21] And if you work hard enough, then you can accomplish anything.

[00:07:23] So now as a son to a man who's growing a business, there might have been some language barriers there, you said.

[00:07:30] And so you become this interpreter with legal documents at a very, very early age.

[00:07:36] So were you just simply reading documents, sharing that with your dad and your dad would provide guidance?

[00:07:40] Or was it like sit down, read a 100-page document, tell your dad what it was doing?

[00:07:44] I'm trying to get a feel for what that looked like because a young high school kid probably doesn't have the know-how of even what to be looking for.

[00:07:52] So at the beginning, it was a lot of, okay, lawyers telling us, we're telling the lawyer to review this document.

[00:08:00] And then the lawyer is reviewing it and giving us feedback.

[00:08:03] And then he's basically, hey, look at page three, section five, this, all that.

[00:08:07] And then after a while, my dad being the cheap, you know, super cheap, you know, like a lot of entrepreneurs are,

[00:08:13] was always trying to save legal fees like, hey, Charlie, can you look over this?

[00:08:16] And then basically, so then it became, okay, I'll look over this.

[00:08:20] And then I basically will just send over the document and say, hey, can you review just this section, this section?

[00:08:25] So, you know, try and reduce legal fees.

[00:08:26] Then it became to the point where my dad was, I don't think they had Rocket Lawyer at the time.

[00:08:31] They had a different website.

[00:08:32] I don't remember what it was called.

[00:08:33] I think it sold to Rocket Lawyer or one of those legal companies.

[00:08:36] But, you know, then it was like, let's try to use those, you know, and it was always being like as cheap as possible.

[00:08:41] My dad was always trying to keep the legal fees down.

[00:08:43] And so eventually just got to the point where, I mean, honestly, it was like second nature.

[00:08:47] Like I'm honestly surprised that like when I look back on it, I would have probably been a good fit to be a lawyer just because I thought like that.

[00:08:55] But it was always just a document, a review here, there, like, hey, let's do an amendment.

[00:09:01] And then it was like, well, hey, this amendment is almost the exact same as this building that we did a year ago.

[00:09:08] Can I reasonably, you know, obviously, this is a disclaimer.

[00:09:11] I'm not a lawyer.

[00:09:12] So, you know, but it became like, well, it's literally no different from this lease amendment.

[00:09:19] Can I literally just copy and change the dates on it to save my dad a few hundred bucks?

[00:09:22] And then, you know, my dad would allow me to go across the street to Mr. B's Foodland and get a popsicle or ice cream.

[00:09:29] And that was like my payment, you know, something like that.

[00:09:31] Sure.

[00:09:31] So he had access to cheap labor and he used it regularly, right?

[00:09:36] Yeah.

[00:09:36] Yeah, very good.

[00:09:37] So, okay.

[00:09:38] So you're a young guy watching your dad grow with this other commercial real estate owner.

[00:09:45] When do you start getting more involved in the business?

[00:09:48] Or was it a gradual process?

[00:09:50] Or did you end up taking the reins at some point?

[00:09:52] What did that transition look like?

[00:09:54] Yeah, you know, it's kind of hard to say because like, you know, if you go back 20 years, 30 years ago, look through tax returns, my name's not in anything.

[00:10:02] But if you ask me if I was the one basically driving the engine, I absolutely would say that.

[00:10:06] And I would say even to this day with some of the things that services we provide to a client, I actually do think that we did more than anybody else on that.

[00:10:15] You know, except it was done for maybe a fee instead of ownership.

[00:10:17] So I'd say, I mean, it was really from the very, very beginning.

[00:10:21] But the first chance I really had to kind of take over ownership.

[00:10:24] And I do want to point one thing out that I actually got out of real estate because I got so burnt out from it from my dad.

[00:10:30] He basically was like, I felt like he kind of just, you know, ran into the ground where I was like, this is the last thing I want to do work 90 hours, you know, a week and that kind of thing.

[00:10:39] But what happened was my dad's flagship property was that restaurant, that first restaurant that we purchased.

[00:10:48] Next door to us was a Taco Bell.

[00:10:50] They only had three parking spaces and it was kind of like one of the unofficial hangouts for the high school where the kids would have their motorcycles and sit on the cars, but there was like no parking there.

[00:11:01] And so they needed parking.

[00:11:03] I knew that.

[00:11:04] And I looked at the cost of the building and I looked at the cost of the building versus it being a parking lot.

[00:11:10] And I went to that, the franchisee owner of that Taco Bell.

[00:11:13] And I essentially said, you should buy this building from us, tear it down and build it into a parking lot.

[00:11:18] But it was the most lucrative and best financial decision to make.

[00:11:23] My dad completely vetoed it because, you know, and I didn't realize at the time, but there was a strong emotional attachment to, hey, this is my first building I ever had.

[00:11:32] So he vetoed it.

[00:11:33] And we actually didn't talk for probably a year because I was so mad that he, you know, just basically vetoed it and said, no, we're not going to do this.

[00:11:42] And then I'm like, well, now you're making me look like an idiot because one, it was hard enough to get people to trust a barely adult, let alone now we're going to have to go back and retrade or say, hey, we're backing on this deal that I came to you to buy in the first place.

[00:11:57] So I was pretty upset about it.

[00:11:59] Yeah, it sounds like it sounds like an interesting dynamic.

[00:12:03] And I know there was a change.

[00:12:05] It sounded like at some point in the in the recent recent past where you've kind of shifted directions a little bit based on kind of following your dad's footsteps for a number of years, seeing the path that he went down and you deciding that you want something different for your life as well.

[00:12:20] Do you care to get into that or talk about that a little bit?

[00:12:23] Yeah, you know, I my dad was always a heavy owner operator, obviously.

[00:12:27] So, you know, when I was growing up, he was always like, be entrepreneur, be entrepreneur.

[00:12:32] And then you could tell towards his years when he was getting like in his 60s, he was like, no, get a W2 job, you know, like, you know, don't work as hard as I did.

[00:12:39] And that's actually kind of exactly what I did.

[00:12:41] You know, I worked for multiple Fortune 500 companies.

[00:12:44] I worked in medical sales.

[00:12:46] I worked in health and fitness, which is actually what my two degrees are in.

[00:12:49] And I did very well in those industries.

[00:12:51] But what I really came to realize is that with my work ethic, I was, you know, making these companies like, you know, like one of my companies, I sold $80 million of product in one year.

[00:13:02] And, you know, even though I was making six figures, it was like, wow, I'm making point zero zero eight percent of what I brought into that company for as far as profitability.

[00:13:11] And so that's when I decided to make the switch back.

[00:13:15] And then along the way, I ran into some clients that were, you know, doing W2 that were actually running what I consider actual businesses where they had people work for them.

[00:13:23] Not, hey, let's make our kids work, you know, do all that kind of stuff.

[00:13:27] And that's when I realized, you know what, I can apply these corporate concepts from some of these large Fortune 500 companies I've learned and apply these systems to a model that maybe is the hybrid.

[00:13:39] And so that's how I flip my model to let's get back into real estate.

[00:13:42] Let's not do it the way that dad did.

[00:13:44] Let's not do it the way where I'm filling up the dumpster myself.

[00:13:48] Let's do it where I'm basically handling the contractors.

[00:13:51] I'm handling the finances.

[00:13:53] And at a worst case scenario, maybe I got to like, you know, put boots on for an hour, but then I can wear pajamas the rest of it.

[00:13:59] You know, that was a model shift I was trying to work for.

[00:14:02] And then more importantly, I wanted to be there for my kids as possible.

[00:14:05] So, you know, if you ask me what my greatest accomplishments is, is that pretty much every single day I'm able to drop off my kids at school and pick them up.

[00:14:12] So I get all my work done, you know, between 10 o'clock and, and two 30 every single day.

[00:14:19] And then I can spend the rest of the time with them that they're available.

[00:14:22] That's amazing.

[00:14:23] Yeah.

[00:14:23] Congratulations.

[00:14:24] It's yeah, it's, it's an interesting story.

[00:14:26] And I think one that's not that uncommon, as I mentioned to you, my, my parents were entrepreneurs as well.

[00:14:32] I remember when I left high school, you know, the thought was I could take over the restaurants as well.

[00:14:38] And I, I had zero desire to do that because I didn't want the lifestyle that my parents had had as well.

[00:14:43] I went off to corporate America, very similar to you.

[00:14:45] I was a sales guy in financial services.

[00:14:47] And at some point you start seeing like, yes, there's this positive aspect to being in a W2 where, you know, you get your paycheck every two weeks.

[00:14:56] You got these great insurance, you get all these, these benefits.

[00:14:59] But at some point, like you start looking back to those early years about entrepreneurship and I, it sounds like yourself had this itch to kind of get back in and kind of control the whole show again.

[00:15:09] And that's an interesting transition.

[00:15:12] I'm curious when you did the transition from the W2 off back into entrepreneurship, was that, were you doing side businesses?

[00:15:22] Were you doing real estate?

[00:15:23] Were you doing other things before you left the W2 or was there a line in the sand?

[00:15:28] You left W2 and went and started this other.

[00:15:30] Yeah.

[00:15:30] So I actually, I think, and I'm so bad about timelines now.

[00:15:35] I'm always defaulting to like a couple of years ago.

[00:15:37] And then, you know, like, but so I might be a little off on dates just because I've been kind of bad at a timeframe.

[00:15:43] But I think in my twenties, I actually did quit my W2 job.

[00:15:48] I was like, you know, making $40,000 a year and my passive income, you know, from rental properties rose right around 40.

[00:15:55] You know, what they don't tell you though, obviously is that, you know, medical, you know, a lot of those bills that you got to pay out yourself now, self-employment tax and things like that.

[00:16:02] That can really hurt.

[00:16:03] And then also I had a pretty bad health scare that was debilitating for me from a perspective that one, I couldn't work really.

[00:16:10] I was like, you know, kind of focused on my health.

[00:16:12] And then two, the medical bills itself were really crushing too as well.

[00:16:15] So that's why I went back to a W2 job.

[00:16:18] I would say that for the last probably 20 years, I've been house hacking.

[00:16:22] So even in the house I'm in right now, I've always had an in-law suite or pool house, or I've lived in a duplex or I've rented out rooms to like roommates and whatnot.

[00:16:32] And then I've always had, you know, like either some type of brokerage or consulting income.

[00:16:39] So we do a lot of consulting in particular for self-storage, a lot of brokerage too as well for, you know, deals that we're not buying, we're selling to clients instead.

[00:16:47] So there was always multiple streams of income.

[00:16:50] And then my W2 job, you know, that was always the one thing where the banks love the W2 income.

[00:16:55] Like, oh, wow, you work in the healthcare industry, you know, things like that.

[00:16:58] And then, you know, I think this came from my legal background because two things I really took away from my dad from, you know, doing that is that one, economy is a scale.

[00:17:07] Like when you got a full, like 500 crab cheese in one hour and you have to do it as efficiently as possible.

[00:17:15] I learned the most efficient way to do it because if I did one second longer than that, you know, that's extra five, six minutes, right?

[00:17:20] Sure.

[00:17:21] That was one thing.

[00:17:22] But number two, with all the legal documents, I learned loopholes like crazy.

[00:17:26] I mean, like, like I just, I always figured out like, hey, this is a legal way of kind of exploiting the loophole.

[00:17:32] This wasn't what it was meant for.

[00:17:33] So whether it was getting grants, whether it was basically submitting, you know, for properties, you know, for first look program, you know, I always found ways to basically work within the rules, even necessarily the way they're intended.

[00:17:47] And so I think that really kind of helped, you know, with that whole process all along the way is that, you know, W2 income, you know, like making six figures performing very, very well there.

[00:17:57] And then at the same time, my bosses, they actually a lot of times knew that I was doing this, but they didn't care because I'm like, you're going to fire your top three employee.

[00:18:08] I mean, like at one point, seven years ago, I was the number one rep for the largest medical device company in the world.

[00:18:15] And it wasn't even close.

[00:18:16] I was like 15, 20% higher production than my second place person too as well.

[00:18:21] So, yeah, no, coming from a sales role, if you are a performer, you have the autonomy to do anything you want to do, basically.

[00:18:28] That's amazing.

[00:18:29] Well, let's, let's dig into the business today.

[00:18:31] It sounds like you've done a ton of different things, but you've got a very specific focus that you're working on right now.

[00:18:37] Can you tell the audience a little bit about that?

[00:18:40] Yeah.

[00:18:40] So my, my, I do quite a bit in the self-storage industry, but I've been transitioning a lot more into industrial.

[00:18:46] You know, you, we talked about local economics and national economics in all my markets, as far as locally.

[00:18:53] And I'm also seeing this trend quite a bit nationally is that COVID kind of enhances, right?

[00:18:57] You have a lot of people that don't need office anymore.

[00:19:01] And then they went home.

[00:19:02] But then what you found is a lot of people realized, you know what?

[00:19:05] I didn't need an office, not in the home, but I don't need this fancy showroom office where I'm paying top dollar for rent.

[00:19:11] And so I think you're starting to see this nationally that your class A, you're, you're still seeing those, but then your class B and C are starting to get hurt.

[00:19:19] Cause they're like, you know, why would I pay 12 to 25 to 40 yards square foot when I can go into an industrial building that is more diverse of its use, higher ceilings, you know, and whatnot.

[00:19:29] And I really just need, you know, office for it.

[00:19:32] I don't need office to entertain a client at cause they're not visiting us there.

[00:19:35] And I can pay, you know, half of that.

[00:19:37] So like, you know, one of the markets I'm in right now market for office space is roughly between 15 and $40 annualized.

[00:19:45] Whereas for industrial, even a brand new industrial building, that's pretty nice.

[00:19:49] You're looking at six to $24.

[00:19:52] And so, you know, so what you're seeing now is those people now are kind of transition industrial.

[00:19:56] And then you still got your industrial users.

[00:19:58] And then also because light industrial is typically a, it's a more diverse amount of uses because they normally allow for the loudest uses possible because they're manufacturing.

[00:20:08] Right.

[00:20:08] So if you want a quiet use, like, Hey, I want to have a sports field for indoor soccer or whatnot.

[00:20:15] They almost always approve it because of the fact that it's an easier use.

[00:20:19] Now, the one exception would be that they may not allow it because it costs jobs because industrial, they want jobs.

[00:20:26] But in general, that's also why it's easier to flip zoning to industrial or to get master plan changes.

[00:20:32] Now, I don't want to go too much in that because there is a difference between flipping zoning variants of use and special use permits and all things like that.

[00:20:40] But that's what kind of the trend I'm seeing.

[00:20:42] So that has been a pivot of our focus.

[00:20:44] We have, I have 300,000 square feet like it right now and it's done very, very well for us.

[00:20:51] And so you were focused primarily on self-storage prior to this.

[00:20:55] So that transition from self-storage into this space, obviously the economic trends are what pushed you there.

[00:21:01] But refresh my memory, was this primarily development or value add in the self-storage space as well?

[00:21:08] Or both?

[00:21:08] So it's a little combination of both.

[00:21:11] The holy grail of self-storage is that I'd find, you know, a 10 to 40,000 square foot facility that's relatively new that has land for me to build.

[00:21:21] And I basically double its size.

[00:21:23] So then I get existing income, which banks like to help offset the, you know, the time it takes to build another one.

[00:21:29] And then I'm also, because I do the building construction management myself, I can basically build at a 20 to $40 square foot delta.

[00:21:37] So, you know, build at 45 and then it's worth 65 immediately, worth 75 stabilized per square foot.

[00:21:43] So now that's kind of the best strategy to implement, but then it became very, very hard.

[00:21:48] And so then it started to transition and just straight up new construction all the way, which then we would use, you know, investor money for some of that.

[00:21:54] And then we'd also do some other things that kind of help boost the return for the investors as well.

[00:22:00] And so are you doing the same thing in the industrial space as well, buying industrial with additional land potentially?

[00:22:06] Or are you just doing straight development in this space?

[00:22:09] You know, our model hasn't changed a ton, but how we go about the financing and the capital the stack of the model has.

[00:22:17] At the beginning, it used to be more of a straight equity model, like, you know, your 70, 30, 8% preferred, 14% internal rate return.

[00:22:26] And now because I can build these self-storage facilities in these industrial buildings so quickly, it's transitioned more to a debt model.

[00:22:34] So then I have 100% of the deal or at least our ownership group has 100% versus giving 70% to equity partners.

[00:22:41] And so how we do that is that like, so a good example would be that, let's say I have a build that costs $3 million.

[00:22:49] It's really four stages.

[00:22:51] You know, you got concrete, you got asphalt, you got buildings, and then you got electrical mechanical.

[00:22:55] But three of those steps are huge, huge expenses.

[00:22:58] And most of the time I can get net 30 or net 60.

[00:23:01] So like I'll have like $800,000 of steel.

[00:23:04] So what my partners and I have done because we're well capitalized, you know, unlike, you know, some, some operators that may not be is that like, if it's a $3 million build.

[00:23:14] And the bank, well, let's just use 4 million because it's easier number.

[00:23:18] The bank's going to give us a $3 million loan.

[00:23:20] We got to get 1 million ourselves.

[00:23:22] I will actually basically fret, let's say $500,000 of it.

[00:23:26] Maybe I'll borrow another $500,000 at 12 or 14%.

[00:23:30] And then what will happen is that once we get to about $500,000, I'm already like 60, 70% of the way built.

[00:23:37] And then basically then I can finish the build.

[00:23:39] One of the reasons why I did that is because anybody who's ever done a construction loan knows that you have to do a sworn statement.

[00:23:44] Hate dealing with those.

[00:23:46] Hate dealing with all the like, I'm sure I'm blanking it where the construction company waives their lien on it.

[00:23:55] The lien, they basically sign off that said they're not going to place a lien against the property essentially.

[00:23:59] I know why I'm blanking on it right now.

[00:24:02] But you don't have to deal with all that.

[00:24:04] And then I don't have to deal with a float rate on construction too as well because a lot of times they want to do a float rate.

[00:24:08] Or they'll say we'll do fixed, but the fixed rate is X percent higher than the market rate, which is so high it doesn't even make sense.

[00:24:15] So we like to bypass all that.

[00:24:17] Then we can skip straight into as built loan.

[00:24:21] Maybe not as good terms because it's not stabilized.

[00:24:23] And then I only need to borrow $200,000 to $300,000 for a short period of time to close the deal.

[00:24:30] Then I can give them 12% or 14%.

[00:24:32] I pay them one time.

[00:24:33] And then I keep 100% of the deal myself.

[00:24:36] So rather than having 30% of a $10 million deal, I can have 100% of a $10 million or $4 million deal, which is what I prefer to do.

[00:24:44] Yeah, so from the passive investor standpoint, you're paying 10%, 12%, 13%.

[00:24:52] Do you generally give them a set time period that you're going to guarantee?

[00:24:57] Even if you're only using the dollars for 6 to 9 months or 12 months, do you guarantee a time period that they're going to get that return?

[00:25:05] Yeah, so I typically tell them that I want 12 to 18 months, even though I know that it might be as short as 4 months.

[00:25:13] We generally will guarantee them 6 months.

[00:25:16] So even if I only borrow it for 4 months, I'll pay them out as if I borrow it for 6 months.

[00:25:21] And then I do a couple different ways, but how I structure it is typically it's 12%.

[00:25:28] And then if they need to call it within 30 to 60 days, I will pay that back to them on a 30 to 60 day call because I'm well capitalized.

[00:25:37] So I can pay that back to them.

[00:25:38] Now, the flip side of that though, is that if they do that 30 day call, I'm only going to give them 6 to 8% instead.

[00:25:46] So basically it's like, hey, you said you're going to give it to me for 6 months and you end up only using it for 45 days.

[00:25:53] I'm not going to pay you 12% because that really didn't help me out at all.

[00:25:56] So that way it gives them a lot of flexibility where now it's like, well, shoot, I have a potential for 12% long-term.

[00:26:04] Now, granted it's taxed.

[00:26:05] So, you know, when we do our other traditional investment, it typically comes to tax free because our equity holder, you can pass on depreciation, right?

[00:26:13] But we do it this way.

[00:26:14] It's taxed kind of like simple interest at the bank essentially.

[00:26:16] But then they say, well, if I want to buy a house or if I want to do something with it, which a lot of people are holding cash because they don't want to miss out on a potential deal that might come.

[00:26:26] Now they have that flexibility.

[00:26:28] So wait, I can set it aside with you at 12 to 14% instead of a savings or checking account, a short-term CD gain 3%.

[00:26:35] And a worst case scenario, if I call it due, you'll pay it back to me in three days and still pay me 3% or 4% higher than a bank.

[00:26:42] That's a no-brainer.

[00:26:43] That's a win-win.

[00:26:44] So we've been doing more of that.

[00:26:46] Now, obviously at some point, if I keep doing new constructions and it takes two to three to four years to stabilize these new constructions,

[00:26:53] I will have to go to a model maybe more where I have to give up equity because when I do this model this way, I'm 100% guaranteeing the loan myself.

[00:27:03] And so maybe I need to have a balance sheet guarantor, you know, or maybe I need to have one of my investors help me guarantee it.

[00:27:10] Or maybe the bank wants to see that these passive investors have equity because they just want more shareholders, you know, whatnot.

[00:27:17] But for now, you know, at the price point that we're staying in, we can easily do that and make it a really win-win and get to avoid all these high interest rates and carry costs that we don't want to deal with.

[00:27:28] Yeah.

[00:27:29] So from your standpoint, you're getting money generally much quicker.

[00:27:32] You don't have all the hoops and you don't have to jump through all these hoops in order to get the money from the banks and do all of those things.

[00:27:40] The investors are getting a much better option than having the money sitting in the bank quite often twice as good,

[00:27:46] actually four times as good as if they were having it in a high-yield savings account.

[00:27:49] And they still have the liquidity if for some reason something were to come up and they actually need access to the capital.

[00:27:56] And they still get double of what they might get if it was in a high-yield savings account or a CD or something.

[00:28:03] It sounds like a really good option comparable to some of the other debt funds that I hear out there,

[00:28:09] but less of a lockup period than what a lot of those debt funds actually require.

[00:28:15] I'm wondering if, can we dig into the kind of the details around what does that paperwork look like?

[00:28:22] What is being the guy with the legal documents?

[00:28:25] Can you talk to like, is this just a simple promissory note?

[00:28:29] Are you signing on that as a guarantee on it?

[00:28:32] Yeah.

[00:28:32] Like those types of details.

[00:28:33] I'm curious because we haven't talked about this on this show before, but we're seeing more and more in this coming to the marketplace.

[00:28:38] And I think it makes a lot more sense for people that are looking for cash.

[00:28:41] Yeah.

[00:28:42] Well, I mean, the whole reason why it's a SESA model is because I can front $300,000, $400,000 out of my own pocket to get the construction in the way.

[00:28:51] And let's say we'll go back to that $4 million build.

[00:28:54] If I front $300,000 to $400,000, typically you can get through excavating.

[00:28:59] I can get through my first application of asphalt and my concrete base layer.

[00:29:04] And then I got about a 30-day window to pay everybody back.

[00:29:07] And when I do that, I can give the investors a first lien on a property.

[00:29:12] And when they see a first lien on a property, that's like, wait, it's been excavated.

[00:29:15] It's got asphalt.

[00:29:16] It's got concrete.

[00:29:17] All I've got is steel buildings.

[00:29:18] And the steel building delivery date is 45 days from now.

[00:29:22] They can do that.

[00:29:23] And so if I do that, if I give them a first lien on a property, that might be closer to 12%.

[00:29:28] Some of my investors trust me so much because they just dealt with me so long.

[00:29:32] If anything, they beg me to find deals for them because that's actually a service that we started helping.

[00:29:38] We started helping other people too as well.

[00:29:40] I might do 14% and just have it be a straight permissory.

[00:29:43] Completely unsecured, but personal guarantee.

[00:29:46] And so that's how I might kind of transition between that.

[00:29:49] Like if you want the first lien, you can do that.

[00:29:51] Now, obviously, if I'm doing that, it's just a permissory.

[00:29:53] No, it's not even recorded.

[00:29:55] You know, they have it and then, you know, it's notarized, but they could enforce it in court if they had to.

[00:30:00] But they have to go to court and go, you know, win successfully and then try to garnish my tax return or put a lien in my house, something like that.

[00:30:08] Right?

[00:30:09] If they do it as the more traditional way, which is a first lien on the property, not a second lien because I don't have bank financing on it yet.

[00:30:17] Then I would basically give them a permissory note and a mortgage, which the main difference is that the mortgage is what you record with the county.

[00:30:25] So that way they know that everybody knows, hey, there's a lien on this property, but you don't want to record the permissory note because you don't want everybody's know your public information.

[00:30:34] Oh, these are your loan terms.

[00:30:36] This is what you're getting paid.

[00:30:37] So that's really the only difference is that we're just adding another document that can be recorded.

[00:30:42] So that way they can save the other lien.

[00:30:44] And then that way, if for some reason they defaulted, now they're basically going after the property, which to be honest, the risk, even though it may sound risk like taking over like the loan at that point in time, I've already fronted a few hundred thousand dollars.

[00:30:59] And so typically my investment is two to three times their investment.

[00:31:03] So even if they lost out on that, they would actually probably be in a better situation.

[00:31:08] The only really, really major pitfall to that would be, and I know a lot of people fear about this, is if you have a lender that does not want to lend to you because let's say they say, well, let's just say that we were doing this in the middle of COVID, right?

[00:31:23] And then let's say that COVID hits right when I was expecting to close the loan.

[00:31:26] And we all know nobody was doing anything the first two months of COVID.

[00:31:30] It was all triple P EIDL.

[00:31:31] Well, in that scenario, if it happened, then what I would do then is then I'll take one of my properties that's almost free and clear.

[00:31:38] Maybe I'll take my primary residence and then I cross collateralizing.

[00:31:41] Listen, we said we're going to do a 75-25 loan.

[00:31:45] You guys are retrading, not happy.

[00:31:48] I'm probably going to lower a bank, but I'm going to give you an extra $300,000 of equity in this storage facility, in this other property I have that's equity.

[00:31:55] Because in general, a lot of people disagree on this topic.

[00:31:59] Once I get all my money out of a property, I have infinite cash and cash return.

[00:32:03] I don't continually try to refi over and over and over and over again.

[00:32:08] I know people disagree with me on that.

[00:32:10] But if I put $200,000 in a property, I refinance it out and I got the $200,000 out.

[00:32:17] Typically, I will never refinance a cash out on that again.

[00:32:20] I'm fine with just having infinite cash and cash return.

[00:32:23] And so for that reason, I have a lot of equity that I can go back to as a backup to cross collateralize those properties.

[00:32:30] Now, it becomes an issue because when you are doing passive investments and you have a personal guarantee,

[00:32:38] one of the issues you have to deal with is that I have ABD has this group of investors that I have a personal guarantee on.

[00:32:45] And then I have this other one with BCD investors that's a personal guarantee.

[00:32:50] And so what we do to kind of offset that is I specifically utility bank that my personal guarantee, if I have one,

[00:32:58] does not include this investment with these investors because I can't expose them to that risk.

[00:33:02] And so then I basically kind of separate them off that way.

[00:33:05] So that's kind of one of the reasons, a few reasons now where I still do like to have investors or partners because I can use that excuse.

[00:33:12] I can't use a personal guarantee on this, but if I own a property 100%, I can't use that same excuse.

[00:33:19] Like, hey, I can't cross collateralize.

[00:33:21] I can't put this up as collateral because it's going to upset my investors.

[00:33:24] So that's probably the biggest downside to it is that banks are always saying, hey, this property on free and clear, we need you to cross collateralize.

[00:33:33] And we want that.

[00:33:34] They're always trying to go after it.

[00:33:36] So, yeah.

[00:33:36] Interesting.

[00:33:37] Okay.

[00:33:37] Well, yeah, this has been an interesting conversation.

[00:33:40] I've not got into this kind of detail on these types of deals.

[00:33:43] So thank you for kind of getting into the weeds on the specifics of this.

[00:33:47] This is really valuable for the passive investor to hear these types of opportunities are out there where they're much less risky than, you know,

[00:33:56] some C-class value-add multifamily in Texas where they can find an operator like yourself that they get to know, like, and trust,

[00:34:04] and then continue to put their dollars with you for years and years to come.

[00:34:07] So, gosh, I'm looking at the time here and it seems like this happens on every podcast where I feel like there's so much more that I'd like to dig into.

[00:34:14] But I do have a few questions that I'd like to ask everybody before we wrap up.

[00:34:17] And maybe we can have another conversation in six months or a year to continue the conversation if you're up to that.

[00:34:23] So let's do this.

[00:34:24] The passive investor that is trying to get educated and learn more about these types of opportunities,

[00:34:30] are there educational resources that either you provide or are available in the marketplace that they can continue to learn more about these types of transactions and investment opportunities?

[00:34:43] Yeah, you know, it's not an aspect of our business that we're really trying to grow,

[00:34:48] but it started to be because we got more conservative itself and our investors,

[00:34:52] especially because we had a lot of investors that had large amounts of surplus from, you know, COVID essentially.

[00:34:58] They were asking us to come to them.

[00:35:00] So, you know, I got to check with my staff what we're charging for, but we do have a service for that.

[00:35:04] But in general, I'd say that, you know, join a passive group that has a combination of experienced people that have invested.

[00:35:13] And one of my biggest indicators is that people, I think, are also too focused on success.

[00:35:19] I really like to focus on people that have really hit the fan and see how they handled it.

[00:35:25] I really like to see that.

[00:35:27] Like, I mean, like, you know, if I see a guy that is very open about a loss he took and I talked to their investors,

[00:35:34] I'm like, he didn't pay us and they might see a lot of bad stuff about it.

[00:35:37] But my question is, did they communicate effectively to you?

[00:35:41] Did they make the right decision with at the time that they made the decision or was it just poor underwriting or whatever?

[00:35:47] And then number three, did they offer some type of secret sauce?

[00:35:50] Like they, you know, sourced the deal off market.

[00:35:53] Did they do building construction management?

[00:35:54] And so, you know, what I find is that when you are in passive groups where a lot of people have taken losses,

[00:36:01] you're learning so much more from people's mistakes.

[00:36:04] Goabundance has one that we're both in.

[00:36:06] I'm pretty active in that one as well.

[00:36:08] Oddly enough, it was funny because I joined that group thinking that I was going, I did, I have learned a lot.

[00:36:12] But I find also that I have, I have experience on both sides because I invest passively a lot myself, my own money.

[00:36:18] And then I also have people invest in my own deal.

[00:36:20] So it's kind of funny seeing it from both sides.

[00:36:22] But sure.

[00:36:23] That would be one of my biggest things.

[00:36:24] And I will add one more thing.

[00:36:27] The level of commitment you will get is going to be related to the amount of money you pay to be in that group.

[00:36:33] I've been on a lot of free groups.

[00:36:34] I'm not going to bad mouth any of them, but I can tell you that the ones that are free, I'm not very active on.

[00:36:40] People don't really take it.

[00:36:41] Whereas I have some that I pay, you know, a few thousand, some I pay 10,000.

[00:36:45] It really does make a difference because when people are paying 10,000, they are either not seeing the group or they're being very active because you want to get their money's worth.

[00:36:54] Because, you know, all of us entrepreneurs, a lot of us are cheap.

[00:36:57] A lot of us want to get our money's worth.

[00:36:58] Yeah, absolutely.

[00:37:00] I can't agree more.

[00:37:01] You've got to pay to get into the room with the people that are willing to pay to get in the room.

[00:37:05] So I've had the same experience and GoBundance has been fantastic.

[00:37:09] Great passive investing community, but there's a lot of other paid for passive investing communities as well.

[00:37:14] And I've seen some as cheap as a couple hundred dollars a month.

[00:37:17] And I think if you're first getting started, it makes sense to even pay, you know, two, three thousand dollars a year.

[00:37:23] If you're placing 50 or a hundred thousand dollars to go get educated before you start putting dollars in the space.

[00:37:29] So really, really good advice.

[00:37:30] Thank you for sharing that.

[00:37:31] Curious, are there what types of books and podcasts are you listening to?

[00:37:35] And reading right now, anything got you excited currently?

[00:37:38] I don't listen to as many podcasts as you used to.

[00:37:41] I mean, there was a period of probably five years where I listened to probably 40 hours of podcasts a week at one and a half speed.

[00:37:50] So it was like 30.

[00:37:51] I would say that I try to read more fiction now.

[00:37:54] I'm trying to be more just like balanced.

[00:37:57] I used to be only a nonfiction self-improvement book.

[00:37:59] Then most of the stuff I kind of read now are either like people that you don't know.

[00:38:06] They're not these national people with a lot of advertisers.

[00:38:08] They're like, I can't remember the one I named, but the cover is like just a gray screen with red writing on it.

[00:38:15] And it's a multifamily.

[00:38:16] It's an operator where he just breaks down a deal that he's analyzing.

[00:38:21] And he literally does a case study over and over, things like that.

[00:38:24] So I try, I had to go for the really, really big one.

[00:38:26] So a show like this, you know, you got, not to say that, you know, BiggerPockets doesn't have passion or, you know, in some of these podcasts.

[00:38:33] But some of these BiggerPockets have been up for a while.

[00:38:35] You can tell that the passion that goes into them by the time they get a year five, six, or seven, it's just not the same.

[00:38:43] That and then obviously the one that I really have listened to probably for almost a decade now is How I Built This.

[00:38:50] It's basically about these entrepreneurs, Guy Raz.

[00:38:53] That's one that probably I probably listened to timelessly.

[00:38:56] And then I also listened to RPOE podcast, which is a local economic podcast primarily in my market.

[00:39:04] I try to listen to a lot of local economic stuff as well.

[00:39:08] Yeah.

[00:39:08] How I Built This is fantastic.

[00:39:10] Fantastic.

[00:39:11] Thanks for, we haven't had that mentioned on the show before either.

[00:39:14] So thank you for mentioning that.

[00:39:15] Yeah, I got one.

[00:39:15] And also, I like my, was it my first million?

[00:39:17] That's another one I like.

[00:39:19] So I'm sure more.

[00:39:20] So.

[00:39:21] Okay.

[00:39:21] Yeah.

[00:39:22] Good stuff.

[00:39:22] All right.

[00:39:23] We talk a lot about due diligence and you kind of referenced that in the passive investing communities.

[00:39:27] But are there, are there due diligence questions that passive investors should be asking that maybe they're not?

[00:39:34] You know, my biggest thing is that if you want to answer that question,

[00:39:38] you probably should find guidance for that.

[00:39:40] So like, I'll use like some of the passive groups on it or what we do.

[00:39:44] But if an investor comes to me and says, hey, I want to potentially invest in this deal.

[00:39:50] Typically, what I would do is I will reach out to that person.

[00:39:53] And normally, I would say passive investors, the first deal, they're typically looking at a 100,000, 200,000 investment trying to get their feet wet.

[00:40:00] Right.

[00:40:00] That's just, you know, how it works.

[00:40:02] What we try to do is we try to go to an operator like myself or whatever and say, hey, I see that you're looking for a $4 million raise.

[00:40:10] What if we did that whole $4 million raise for you?

[00:40:13] You don't need to have a full-time investor relations person.

[00:40:16] And you will basically primarily deal with me.

[00:40:18] I will ask the questions for the whole group.

[00:40:21] I'll screen out the questions that may not be great and really kind of get, hey, I got this group of 60 investors.

[00:40:27] Each of them are going to invest $100,000 in each.

[00:40:29] Raise a $6 million or $4 million for you, whatever.

[00:40:32] So I would really say that you should leverage that because if you're not an operator, a lot of times you don't know what to ask.

[00:40:40] And so it's hard to get to that point.

[00:40:41] So it's easier just to follow a path.

[00:40:43] And also when we do that, let's say somebody's offering 8% prep, I can go in and say, listen, why don't I just take this all off your plate?

[00:40:50] And you just pay us 10% prep instead.

[00:40:53] And then we're good to go.

[00:40:54] And then now when you need to communicate, I will communicate with you.

[00:40:58] And then I will serve as the in-between and communicate with everybody else.

[00:41:01] And in that way, everybody gets to answer questions because, you know, there's a lot of these deals where, you know, if it's a famous operator, you ask them a question.

[00:41:11] And then you get an email back like, oh, thank you.

[00:41:13] This deal has been funded.

[00:41:14] We'll let you know about the next one.

[00:41:16] It's like, well, I didn't even get my questions answered.

[00:41:18] Like, what the heck?

[00:41:20] So that's why I like smaller operators because I like to be able to ask a question and actually get an answer, you know?

[00:41:27] Yeah.

[00:41:27] I love that advice.

[00:41:28] I love that advice.

[00:41:29] And that's what I do with Impact Equity.

[00:41:31] I pull investor checks and bring them to large operators for better terms.

[00:41:35] So, yeah, you're talking my book now.

[00:41:37] So thank you.

[00:41:38] All right.

[00:41:38] Well, you mentioned GoBundance and I've had a bunch of folks on here recently.

[00:41:42] We'll continue to have a bunch of folks.

[00:41:43] But we talk a lot about bucket list adventures.

[00:41:46] Curious, do you have any recent bucket list adventures you checked off your list or one you hope to in the near future?

[00:41:51] Yeah.

[00:41:52] So my wife's father was a general in the Vietnam War.

[00:41:57] And he went through re-education, which is basically prison.

[00:42:00] They came to us and kind of told us, like, hey, we want to make one more trip back to the homeland.

[00:42:04] And they had been back to Vietnam multiple times, but they had not been back to, like, the north before, essentially.

[00:42:11] They had already focused on the south.

[00:42:13] So we did a three-week trip.

[00:42:16] My kids actually speak Chinese or Chinese immersion.

[00:42:18] And so we got to spend a lot of time with my relatives and her relatives over there.

[00:42:23] So it was great.

[00:42:25] One time I was getting trusty Wi-Fi in Vietnam was very annoying, but it was a great trip, you know.

[00:42:30] And then, you know, you got to take your aunt who had not been able to travel much.

[00:42:35] And then her parents, you know, they – I don't remember what he said to it, but, like, I felt like he kind of said something along the lines of, like, you know, I can die in peace now.

[00:42:44] So it was kind of, like, a really cool, like – because that was actually one of my worries, too, is that, well, what if he goes to the emergency room, like, a week before we don't go?

[00:42:53] And they were kind of like, if we die there, we're okay with that outcome.

[00:42:56] And I'm like, oh, okay, you know.

[00:42:57] So I would say that every year we kind of outdo the year before.

[00:43:01] The year before we did Africa and Kilimanjaro for kids.

[00:43:04] So this year I don't know what we'll do.

[00:43:06] But it seems like we try to top it every year or so.

[00:43:09] So –

[00:43:10] Fantastic.

[00:43:11] Yeah, it seems like you've made – you talked about the shift in your life and how you're trying to spend as much time with family as possible.

[00:43:16] It sounds like you're doing that successfully.

[00:43:18] So congratulations.

[00:43:20] Thanks.

[00:43:20] Awesome.

[00:43:21] All right.

[00:43:21] And then a final question here.

[00:43:23] If you had $100,000 that you had to invest today, but you couldn't put it in one of your own deals, where would you place that $100,000?

[00:43:30] I would actually probably put it in a deal structure similar to kind of what I said, where it would be probably some type of debt fund getting 12% to 14% interest on a $16,000 call.

[00:43:40] Because now these past few months, cash, I want to stay liquid, especially if I have – you know, want to buy a deal cash or, you know, whatnot.

[00:43:48] So I would probably put it into one of my existing deals.

[00:43:52] And actually, I'd go back to one of my operators that I've invested previously with success and say, hey, can you take this money on these kind of terms?

[00:44:00] Which – that's also very rare that a passive investor can do that.

[00:44:04] But if you got a very large, you know, six-figure, seven-figure investment with an investor, I can guarantee you that, you know, if you invested seven figures with me and you tell me, hey, can you find a way to make me 12% on another $100,000?

[00:44:18] I will gladly find a way.

[00:44:20] So that's what I would do.

[00:44:22] Yeah.

[00:44:23] Great, great advice.

[00:44:24] Very good.

[00:44:24] Well, Charlie, this has been a lot of fun.

[00:44:26] And I never quite know where the conversations are going to go when we get started, but this one was fantastic.

[00:44:32] Thank you so much for all the value you brought here.

[00:44:35] We dug into things that we've not talked about on the show, and I think you brought a ton of value to the audience.

[00:44:39] So thank you so much.

[00:44:41] Thanks a lot.

[00:44:43] Awesome.

[00:44:43] To the audience, as always, we continue to urge you to make that education journey and keep going down that path.

[00:44:49] More importantly than just getting educated, though, we encourage you to make the decision to invest in that first passive investment deal.

[00:44:56] Both Charlie and I are convinced that once you do, you will just wish that you had started that much sooner.

[00:45:01] So thank you again for joining us today.

[00:45:03] Be sure to join us again next Thursday for another great episode.

[00:45:06] And don't forget to like and subscribe on whatever channel you're following.

[00:45:10] So thank you so much.

[00:45:11] Well, there you have it, ladies and gentlemen, another episode of The Gentle Art of Crushing It.

[00:45:16] It was an amazing episode.

[00:45:18] We know we sure learned a lot, and we hope you did as well.

[00:45:21] We want to take a second and thank you so much for viewing or listening to this episode.

[00:45:26] And please just know that we only ask for one favor, and that is to make this life magnificent.

[00:45:32] Thank you and have a wonderful day.