Insider Secrets Podcast Season 2, Episode 14
Guest: Matt Faircloth
Subscribe to Multi-Family Insider Secrets on your favorite podcast app:
Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, N.J., is a developer and owner of commercial and residential property with a mission to “transform lives through real estate.” DeRosa creates partnerships to finance select real estate investments and has a proven track record of providing safe, profitable investment opportunities to their clients.
Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to hundreds of units in residential and commercial assets throughout the East Coast. Under Matt’s leadership, DeRosa has completed tens of millions in real estate transactions involving private capital, including fix and flips, single family home rentals, mixed-use buildings, apartment buildings, and office buildings.
Matt is an active contributor to the BiggerPockets Blog and has been featured on the BiggerPockets Podcast three times (show #88, #203, and #289). He also regularly contributes to BiggerPockets’ Facebook Live sessions and teaches free educational webinars for the BiggerPockets Community.
Matt authored the Amazon Best Seller Raising Private Capital: Building Your Real Estate Empire Using Other People’s Money. The book is a comprehensive roadmap for investors looking to inject more private capital into their real estate investing business and is a must-read for anyone looking to grow their business by using private lenders and equity investors. Kirkus, the No. 1 trade review publication for books, had this to say about Raising Private Capital: “In this impressively accessible introduction to a complex subject, Faircloth covers every aspect of private funding, presuming little knowledge on the part of the reader.”
Real estate touches the lives of many people, making it essential to consider the human side of the business.
We’ve successfully turned properties with crime issues into safe and welcoming communities.
Providing quality housing that tenants love and find sticky can significantly reduce vacancy, a major cost in multifamily real estate.
Focusing on emerging markets with job growth is essential for successful real estate investments.
Consider markets with minor league sports teams as they indicate a growing economy and potential investment opportunities.
Single-family rentals can offer excellent cash flow and tenant stability, but the stress involved can be challenging.
“I quit my job in 2005, at Ingersoll Rand, and when I went all in, Liz and I got married, we lived off her salary and we started a real estate investing company.” – Matt
“Our typical buy box is affordable luxury, where things aren’t expected. They’re appreciated, but not expected.” – Matt
“People talk about how many doors they have, but people don’t forget too much about the humans that are behind those doors.” – Matt
“The biggest thing that’ll take the most money out of your pocket across the board is vacancy, in multifamily.” – Matt
“There are zero tax advantages for hard money. There’s no cost seg, there’s no depreciation, there’s no negative K one.” – Matt
“We encourage people to use IRAs with it to use a self-directed IRA.” – Matt
[00:38] Intro to Podcast
[02:10] Intro to episode guest
[03:16] One word that describes Matt personally and professionally.
[04:45] Matt shares his background.
[06:10] Have you always been in multifamily, or did you start out on the residential side?
[11:05] What are some of the fundamentals that you look at before you look at the deal in that market?
[16:43] So when you say residential, is it all apartments or are you in the single-family space also?
[28:12] We could talk about building relationships all day long, but how do we build those right ones? Who are the people that we need to build those relationships with?
Kristen: [00:00:00] Welcome to this edition of Insider Secrets, the weekly podcast that turns real estate investing goals into reality. Each show, we interview guests who are seasoned real estate professionals, actively closing and managing real estate deals. Mike is the founder of My Core Intentions and would like to help you make your real estate investing dreams a reality.
Mike coaches you to buy investment real estate, creating short term cash flow and long term wealth. Your host and real estate coach, Mike Morawski, has more than 30 years of real estate investing and property management experience. Here’s your host, Mike.
Mike Morawski: Hey, good morning, everybody. And welcome to the show today. And I hope you have your coffee and you are ready for a ride this morning. Have a great guest. We’re going to talk about multifamily. We’re going to talk about raising capital. And, that journey that we’re all on, where we’re trying to progress and get better.
Let me ask you this. Are you being [00:01:00] intentional this morning, this weekend on your goals, whether it’s family time, whether you’re still working through the week, here we are in the second half of the year, how did your first half turn out and where are you going to be at the end of the second half?
Are you hitting your goals? Are you on track? Are you off track? What are you doing? The one story that I’ve mentioned recently is that it’s a little bit harder to find a deal today. You have to turn over more rocks, open more doors, get more opportunity in front of you or get in front of more opportunity.
We underwrote a billion dollars in transactions to find one that we could finally start to walk towards the finish line with. So what effort are you putting in? Are you being intentional about that effort? I want to do what I can do to help you reach your goals between now and the end of the year that you accept for yourself. So let me know how I can help.
If you’re new here and you’re on YouTube, smash the subscribe button. We’re always bringing [00:02:00] you new content. We love followers and if you’re on social media, following us, just like us and love us. Would you help us with that a little bit? We appreciate it.
This morning, my guest is Matt Faircloth. I have a lot of respect for Matt. He’s done a lot. He’s big in the industry, in the space. And I think that we’re going to get a lot of knowledge. He’s with the DeRosa group from New Hope, Pennsylvania. And let me bring him in real quick. Morning, Matt.
Matt Faircloth: Morning, Mike. How are you?
Mike Morawski: I’m great. I’m great. I really appreciate you.
Matt Faircloth: Taking time away from my typical Saturday morning cartoons, Mike. Because I’m of that generation where Saturday morning was sacred until about noon from about like 9 a. m. until noontime and I was all in on cartoons back to back.
Mike Morawski: A little bit of Tom and Jerry never hurt anybody.
Matt Faircloth: Tom and Jerry, a little Bugs Bunny, throw that in there. Maybe a little Smurfs, yeah. Sprinkle that in there too. It’s good.
Mike Morawski: Maybe you and I can be a little Tom and Jerry this morning.
Matt Faircloth: You can. Whatever you want. I’ll do that. I want to be I think Jerry was the mouse. I’ll be Jerry.
Mike Morawski: Yeah. [00:03:00] Hey, listen, I appreciate you being here. I always start out and I ask one question and I always tell people I’m writing a book on this, but that one question is in one word, what best describes you personally and professionally?
Matt Faircloth: Oh boy. Authentic. Yeah, I try and be as real to myself and real to others as I can in conversations that turns into sometimes some transparency that I’m not always “everything is awesome”. Pound my chest, talk about how great this business is all the time. I’ll be very real with people and authentic. And try and speak my mind as best I can too.
Mike Morawski: Hey, were you always like that or is that something you grew into over years?
Matt Faircloth: No, I was full of it a lot of my life, Mike, in my earlier years and everything like that. And I still have to give up being liked on a daily basis and actually I still enjoy attention. I still enjoy being liked, but the more I give that up, the more authentic and the more myself I can be.
And I [00:04:00] realized the more likable I am by being myself that actually gets the result that I want by just being who I am. I’ve done a lot of personal training, read a lot of books. My wife and I, when we first got married, did a program called landmark education. It was phenomenal mind blowing for Liz and I, and it gave us a phenomenal, call it like a platform for her and I to stand on as a married couple.
Mike Morawski: That’s awesome. I did landmark a couple of times years ago and a great program for sure.
Matt Faircloth: And who hasn’t?
Mike Morawski: It’s kind of some of those things that help you make that turning point in life, right? Where you get with these decisions and it’s like, which way do I go?
Hey, Matt, how about a little bit of background on you? How’d you get in this business? What’d you do before real estate or multifamily and?
Matt Faircloth: Sure. So I was a traveling sales rep, selling industrial machinery for a company called Ingersoll Rand for many years. Was lucky enough and worked hard to become one of their top 10 sales reps in the country.
Made pretty good money, but still had the golden handcuffs. As funny as the sales rep is, if you [00:05:00] have a really great year as a sales rep, what the company typically does is they give you your performance from the last year as your goal for the next year, plus 5 percent saying, okay, that’s awesome.
You sold a couple of million in equipment. Go do that again. And, oh, by the way, we think your territory might be too big. So we’re going to shrink your territory. So it’s like, yeah, but hey, good luck. We took three counties away, good luck and go knock it out. And so it was good enough for me at the time, but it was something that I knew there was more in me to do.
And my girlfriend, now wife of 18 years, put “Rich Dad Poor Dad” in my hand, and got me to just read about what was possible and thinking about building businesses and assets to pay me. Versus selling industrial machinery, which is great. And I learned how to sell, learn to get my legs underneath me through that, but I didn’t learn how to go next level. And Rich Dard Poor Dad changed my life and it taught me and I decided to just really go all in on real estate investing.
And that was in 2005. So, I [00:06:00] quit my job in 2005, at Ingersoll Rand. And when I went all in, Liz and I got married, we lived off her salary and we started a real estate investing company. And the rest is history.
Mike Morawski: Have you always been in multifamily or did you start out on the residential side? How did you get started in?
Matt Faircloth: We’ve always been residential landlords, above all else. Multifamily has been a logical expansion point because we’ve been very passionate about providing housing, fair and equitable housing, affordable air port, affordable yet market rate housing for people. As you can see above my head, it says transforming lives through real estate.
Because we believe and understand and just know the fact that real estate touches a lot of people as residential real estate does. And commercial, all real estate does. Real estate’s where people live or where they do their jobs or where they practice their trades or something. But it involves people, always does.
And so we have not lost sight in human side of things. And so that’s why residential housing [00:07:00] for the most part, but we’re expanding into new stuff too, as a company that has been where our passion is just in the human side of this business.
Mike Morawski: Yeah. I love that. Would you say that your mission statement transforming lives through real estate?
Matt Faircloth: Yeah, I like it so much. I put a trademark on it. Yeah, you can use that too, but you got to send me a dollar.
Mike Morawski: Yeah. Okay. What’s your Zelle number?
Matt Faircloth: Yeah, right.
Mike Morawski: Yeah, exactly. So let me ask you this, in the real estate business, in the multifamily business, we know that in that bucket, there’s a lot of asset classes. We’ve got a market rate rent, affordable housing, tax credit deals, senior housing. What do you like out of multifamily?
If you were to say, hey, this is my buy box, this is what I look for. What do you look for?
Matt Faircloth: Housing in emerging or growing communities. Housing that provides, housing that is typically affordable to people that earn at or around the median income of the [00:08:00] area that the housing is in.
So like the highest point of the bell curve can’t afford to live in the housing that I got. So just middle income, blue collar housing in growing markets. So not luxury housing. But what I would call affordable luxury. So luxury that the top of the bell curve can afford, but has a few amenities that they aren’t used to getting elsewhere.
So maybe granite. I’m not used to getting granite. Maybe a microwave above the stove. Ooh, that’s new. That’s interesting. The little add on amenities like that, that make it feel a little bit like luxury where things aren’t expected. They’re appreciated, but not expected those kinds of things.
So that’s our typical buy box. And we typically do value add. Like I’ve bought multiple properties, Mike, where there were major crime issues or drug dealers or crime matters or whatever happening at properties. And we’ve been able to eradicate a lot of that. And where there were heroin needles, there are now playgrounds. And I’ve got multiple stories that are true that’s happened, that we’ve been able to implement.
Mike Morawski: [00:09:00] Yeah. Would it be safe to say that you buy a C class product?
Matt Faircloth: I buy a C and I make it a safe and affordable B minus.
Mike Morawski: Yeah. Love that. That kind of my mission statement is to provide safe and secure housing for my tenant.
So I love to be able to do that and do that turnaround. Because I come from an old carpenter mentality, so where you stand back and you look at it, it’s finished. You did a great job. It’s the same thing with multifamily when we have the opportunity to just really look at what you accomplished, or what you did for somebody else. And I think that says a lot about the business as a whole.
Matt Faircloth: I think you’re right. And I think that there are too many people lose sight, Mike, of the human side of the benefits you’re doing for people. And people talk about how many doors they have, but people don’t forget too much about the humans that are behind those doors.
And the life that I’m helping them have and the safety that I’m having them, that I’m helping them create for themselves and their family and all [00:10:00] that, and the less likelihood that they’ll move if I give them a phenomenal place that they’re proud of and that they want to call home. Because people forget like, Oh, I got to reduce my occupants, I’ve got to decrease my expenses or increase rents or whatever. I’ll tell you, the biggest thing that’ll take the most money out of your pocket across the board is vacancy, in multifamily.
So if you can create housing that people love and they’re raving fans of, and then it’s super air quotes sticky, meaning like they can’t not really sticky, but it’s sticky. They’re not like sticky floors, nice floors on property that’s sticky that people want to stick to.
They don’t want to ever leave because they’re not going to get that lifestyle anywhere else. That’s what I’m trying to create because it helps me by helping me make the most money for myself and my investors, by decreasing vacancy, the silent killer of real estate income, vacancy. And also helping them raise their families and create something that they’re proud of.
Mike Morawski: That’s awesome. So one of the things you mentioned is, you alluded to the fact of markets, right? Emerging [00:11:00] markets. And so what do you look at? How do you determine whether that market’s emerging? What are some of the fundamentals that you look at before you look at the deal in that market?
Matt Faircloth: Yeah, look at trends. We do a lot of evaluating markets with regards to like job growth and those kinds of things. We look at who’s coming in, job wise. I care less about who’s employing now. I’ll give you an example. We are heavy in the Piedmont triad in North Carolina, which is where Winston Salem, Greensboro, and High Point are.
High Point used to be one of the furniture capitals of the world. They still make some furniture there, but not like they used to. That said, two major companies, Toyota and Boom Supersonic have already committed to come into that market. They’re not in there now. But they’re going to be.
Toyota is going to make all of their EV chart, our EV batteries for their entire fleet in the Piedmont triad. And Boom Supersonic is a company that is going to make supersonic jets, come like jets. They’ll get you and me from LA to Beijing in [00:12:00] five hours. They’re going to make those jets and they’ve already got, American airlines has already ordered a large portion of them already.
And they’re going to have them on the market in a couple of years. These are companies that aren’t employing yet in those markets, but they’re going to be. I got to read through the media and the markets on where industries are looking to go. We’re not in Columbus, Ohio, but I’ve heard Intel is building a huge, I think it’s in Columbus that they’re going to build a big plant.
Columbus is starting to become like the new place for microchips. China used to be the microchip manufacturing capital of the world. Now it’s becoming maybe Columbus, Ohio. And so I look at markets like that, that are on the trend to be providing more and more jobs.
Mike Morawski: Yeah, I think it’s important that you look at those trends. I remember one time years ago, we bought a deal in a tertiary market outside of Indianapolis in a cornfield. And, you would have thought, God, who’s going to buy this thing in a cornfield. But walmart was building a super Walmart across the [00:13:00] street.
I knew that was going to absorb 1500 jobs and take some of the tax bases. They were building a carbon engine manufacturing plant just outside of town. Another 500 jobs. So when you start to look at trends, like you’re talking about, I think it makes a lot of sense, as to how to pick a market.
Do you have any other fundamentals around markets other than employment?
Matt Faircloth: Yes, I’ll give you a laugh. Okay.
Mike Morawski: Okay.
Matt Faircloth: I would not buy in a city that has a major league sports team.
Mike Morawski: Really?
Matt Faircloth: Rarely. You could probably try and catch me in a lie on that one, but I don’t think that we ever would. Because Cities that have major league sports teams are considered to be major metros.
Let’s list them, Charlotte, Raleigh, Atlanta, these markets they already get a lot of attention. And it is my argument to you that they will have a lower cap rate than what really they should because they get too much [00:14:00] attention. And because people think that the party will continue to keep going and Raleigh will continue to grow at 15 percent a year as it has been.
Maybe it will, but maybe it’s not going to grow like Greensboro. On the other side of it, Mike, I will not buy a market that has no sports team. But my favorite is like a minor league baseball team. I’m all over that. If they got a minor league baseball team, I am all over that market because that means that they’ve got enough economy that major league baseball player, let’s say you’ve got a few dollars, they will go into that market and stand behind.
Yes. We’ll allow whatever, the Greensboro bats or whatever they’re called to have a team here. And the tickets for those games are not much 5, 10, 20 bucks to take your family to a game instead of like $300 to take your family to a game at the New York Met Stadium or something like that. So I like secondary and tertiary markets that are on the rise in there, that are on the rise to the point [00:15:00] where they’re getting some investments from major league sports, but not enough to get their own team. Does it make sense?
Mike Morawski: No, that makes a lot of sense. And I’m glad you said that. Cause I was going to ask you, Hey, what about a Triple-A?
Matt Faircloth: Oh, yeah.
Mike Morawski: We’re doing a deal in Tulsa. And I started to think right away when you said that I was like, no major league sports teams there, but there’s a Triple-A team there.
Matt Faircloth: I’ll tell you another quick story, Mike. I know we’re just rabbit hole in real quick. We’re just having fun. Tom and Jerry remember?
Mike Morawski: Yeah, right.
Matt Faircloth: So we were going to take a bunch of our students to a baseball game in Winston Salem. And so I was like, man, I’m going to splurge and I’m gonna run out the skybox.
The skybox was nothing. It was literally like 500 bucks or whatever. Cause you know what, Mike, you only got one, one skybox. Now, when you read out the skybox, you get to throw out the first pitch of the game.
Normally that’s like the vice president of the United States thrown out the first pitch at a baseball game. But for minor league, all you gotta do is run up the skybox for 500 bucks and you can throw out the first pitch. I’m so ticked off Mike, because it rained that day.
Mike Morawski: Oh.
Matt Faircloth: I [00:16:00] was not able to go to the game throughout the first pitch, but I was ticked and nervous. My son, my nine year old son and I were throwing the ball back and forth for hours in my front yard for days ahead of that game getting ready for it, but I didn’t get a chance to do it.
So now it wasn’t before, but now it’s a bucket list of mine to throw at the first pitch at any baseball game. It could be at my son’s T ball game. I could do it or whatever. But now because of that day, I really want to do it. And it’s a tip to you. If you and I want to go to Greensboro, you could throw out the first pitch by just renting the skybox.
Mike Morawski: Yeah. Hey, I’m going to have to look into that now.
Matt Faircloth: You should.
Mike Morawski: Cause that might be fun to do. Hey, so you said early, and you might even mention this, when we first got started that you’ve always been focused on residential. So when you say residential, is it all apartments or are you in the single family space also?
Matt Faircloth: I came up through the single family world. So my first investment was a three bedroom, two bath, and I lived in one bedroom and rented out the other two bedrooms in. I then graduated into some duplexes.
I’ve [00:17:00] had single family rentals on and off in my career. Single family rentals are kind of hard to beat, man. I challenge you to show me a better investment for cash on cash that a single family home with tenants that have lived there for a long time that pay their rent on time. Cause they treat it like a home.
Like half my tenants back in the day when I owned single family homes, Mike, they’d have gardens going on in the back. Like it was their house, they decorate my rental property for Christmas. It was great. We’ve gotten bad. I got out of that world a few years ago as our equity increased and our ability to raise capital increased and that kind of stuff.
So we’ve gotten more into multifamily. My company is now raising capital and putting it into hard money. And so we are now lending in the single family home space among other spaces as well. We just closed the deal on a warehouse in Philadelphia recently. So, just lending on a warehouse project.
So we’re getting ourselves into other asset classes as lenders, in that. And we’re also lending on single family homes too, but I don’t know if I’ll get [00:18:00] involved as an owner of single families. I’ve also done a bunch of fix and flips, which I love that vehicle. I just don’t love the stress that it brought me.
Mike Morawski: Yeah, right. So lets back up for a minute here. So are you doing hard money or are you doing debt or equity?
Matt Faircloth: Hard money only. We raise investor cap. We raise the capital from investors. Those investors get a higher prep than what they would get multifamily. They’re getting eight, which most multifamilies don’t pay eight anymore.
So they’re getting eight on their money plus a percentage of profit. And very few hard money lender syndicators are paying a percentage of upside, we are. What I like about hard money, Mike, is it allows them to get monthly cashflow as soon as they give us money, the deal goes into a loan and that loans cash flowing because it’s the borrowers sending us a monthly check.
We then are able to pay the investor out of distribution first month that they’re in number one. Number two, because it’s a fund, they can compound. So they can compound the returns, [00:19:00] and because the hard money short term, every borrower in the world treats hard money like a hot potato.
They want to give it back as soon as they can. Because it stinks. It’s high interest rate, you don’t want it, you borrow it because you have to get it, not because you want to. So until they’re around the corner, they’ll have it, but then they give it right back. So because of that, we can also offer liquidity.
Matt Faircloth: We can give the money back if they want it. So that’s why I love it for investors and the downside about hard money, as you probably know, there is zero tax advantages for hard money. There’s no cost seg, there’s no depreciation, there’s no negative K one. You’re claiming everything you make with hard money.
Mike Morawski: Right. Because it’s straight income. It’s straight line income.
Matt Faircloth: Bottom line, we encourage people to use IRAs with it to use a self directed IRA. Cause that’s a tax vehicle that you can evaluate a hard money investment in. But if you can’t do that, then you just have to pay, I’d have to pay income tax.
Mike Morawski: So are you encouraging your investors at all to maybe invest on both sides of the line where they have some money in the fund, but they also have some money in maybe multi-family where they are getting some depreciation and able to write some of that off.
Matt Faircloth: Yeah, we just refinanced the property and returned 40 percent of the equity stack [00:21:00] back to investors. And one of our multifamilies we’ve owned for, there used to be heroin needles and now there’s a playground kind of investment. So, we got it to stabilization, refied it, returned 40 percent and a lot of those investors stepped into our hard money fund.
Mike Morawski: So when you refi it, did you re-finance it in these higher rate markets right now?
Matt Faircloth: Yeah.
Mike Morawski: Wow.
Matt Faircloth: Yeah, we refinanced it to Fannie Mae. We got 5.65 with Fannie.
Mike Morawski: Okay. That’s not all that bad.
Matt Faircloth: Yeah, I know, but you can’t help but look in the history books, Mike, and look back. But you and I both been around long enough to remember that 5.65 historically is really not that bad. But you can’t help remember the days when people were getting like 2. 2 percent with Fannie and Freddie and all that. But those were flukes really the market should be somewhere on four or 5% for multifamily.
Mike Morawski: So Matt, let me date myself a little bit here. I went into real estate and interest rates were about 11. When you look in the history [00:22:00] books and you go back and you say, Hey, back during the Carter administration or they were in the twenties, right?
Matt Faircloth: Yeah. The same problem we have now, they were trying to shake the inflation bear. And they pumped rates as high as they can. I don’t think we get there now. Unless this is your podcast, I am going to ask you, where do you think we’re going with rates? You think we’re done because you’ve seen it before, but they had to take inflation off. And given what you’ve seen in the past, you’ve been around the block a few times. I’ve been around a few times myself, but not as long as you have. What do you think, man? Where do you think we’re going? If you don’t mind me asking. I know I’m turning the table around.
Mike Morawski: Yeah, no, I appreciate you asking. I think it’s interesting because I see it right now based on the report, the job report that came out a couple of weeks ago. And Paul saying that, Hey, we’re gonna raise interest rates beyond what you thought. We would have thought maybe a quarter of a percent, but I think we’re going to see something North of 50 basis points coming up here.
I think we might see a couple more points over the next several [00:23:00] months cause they have to shut, their whole mythology is we have to slow things down. And when you have job growth and you have income people are making and money going into the economy, that’s not slowing things down.
So I do think that they’re going to go up a little bit. I think things will slow down. However, we’re going into an election year, and as soon as we hit next year, I think that the political landscape is going to try and cycle us out of this thing to say, hey, we’re heroes. And try and change the environment.
Matt Faircloth: And then around this time next year, he can start dropping, which will have the economy into a frenzy by November of next year.
Mike Morawski: What’s funny though, is a lot of people have said, Oh, this is going to be just like 2008 or we’re going to have another 2008. And I don’t believe that at all. It’s a softer landing. It’s going to be easier for everybody to deal [00:24:00] with. And I think one of the big things is there’s so much equity in the market, but the problem is people are sitting on that equity. Are you finding your investors today that are just like sitting on their equity and saying, Hey, we’re not going to do anything. We’re just going to wait.
Matt Faircloth: Many want to just wait.
Mike Morawski: How are you dealing with that conversation with those investors today?
Matt Faircloth: We haven’t bought a multifamily deal in a year. We haven’t closed on anything. We’re just passing our one year anniversary of doing our last deal. And that’s not from the lack of trying.
We’ve been trying and trying and trying and trying to get a deal. We’ve underwritten like 280, 300 deals in the last year. Made a lot of offers. We had one just a couple of weeks ago, Mike, we offered asking like the whisper here. And I hate that term, but the whisper was 30 million.
They were like, it ended up going under contract at 33. So it’s like still in this day and age that people that are overpaying for stuff. Anyway, [00:25:00] what are we telling investors? We’re staying in regular communication. That’s what we started the income fund. It’s called DeRosa Income Fund the hard money fund That’s where we started that is so I can stay keeping investors what they need and giving them what they want which is something that’s compounds that they can get their money back when they want it. That pays better than a CD does.
That’s what we’re doing, but we’re already starting to see some distressed deals. Like we’re looking at one right now, guy bought it a year and a half ago, went in undercapitalized, as rate caps come and do, doesn’t have the money to buy a new one, property’s not doing well, and they’re already looking to sell it for less than what they paid for it.
It’s 80 units in the Southeast and it is on the market for less than what this guy paid for. And all he wants is surety to close so he doesn’t have to pay a rate cap, which is the money for in December. So it comes due in December and he doesn’t have the money to buy the rate cap.
Mike Morawski: Yeah. What’s interesting, I have one of my coaching clients come to me today and say, Hey, this broker just brought me this deal and it’s [00:26:00] under what the guy paid for two years ago. He’s got a tax problem, needs to dump it and get out.
Matt Faircloth: Yeah. You’re going to see more of that. I think we’re going to see a lot more of that. Mike, you offered me what you think, which I really appreciate. Here’s two cents from Matt. I think we’re going to see blood in the streets. I think that these sniper investors are the ones that are going to do really, really, really, really well.
And when I say sniper, I mean like you got to say, okay, I’m Matt and I’m focused on the Piedmont Triad. C class, and I’m going to get to know every broker and let them know, Hey guys, I am your guy. If you need a fast closing, if your client comes to you and needs a fast closing, needs a creative sale, needs a quiet or creative sale, or a little bit of both, I’m your guy.
If you go and try and go wide and shop 30 markets across the United States. You’re not going to have the time or the reputation to infiltrate those markets. It’s not going to be blood in the streets because most sellers aren’t going to need to sell in the next couple of years. If I got stuff that’s on seven year fixed rate [00:27:00] debt.
You couldn’t put a gun to my head to sell right now. I’m not going to sell anything I got that that doesn’t have to sell. So nobody’s going to sell in the next couple of years that doesn’t have to. So that said, you’re going to have a lot of quiet sales come up and those that are Uber focused and Uber connected hate to say that.
Uber connected, like for example, the 3200 units that went under foreclosure in Houston. I’m sure you read that article. That got sold to a New York hedge fund. That was a backroom. That was a backroom, good old boy, good old girl deal.
Mike Morawski: That was done over a vodka. For sure.
Matt Faircloth: Yeah. That was done like, Hey, I need surety to close. You got to take this right now. I didn’t get an email from that. There was no best and final file kind of thing. I’m sure they sold that for a phenomenal price to someone that they knew could close it right away.
And if you show up as that person, you’re going to get those deal, not 3, 200 units. Cause the hedge fund that got that deal is going to get the 3, 200 [00:28:00] units that comes up next, but the 200 units the hedge fund won’t buy will come to people like you and me if we’re connected.
Mike Morawski: Right, and I think that brings up a good point. Building right relationships. We could talk about building relationships all day long, but how do we build those right ones? Who are the people that we need to build those relationships with?
Matt Faircloth: Yeah. I’ll tell you who we’re reaching out to. We are reaching out to local brokers and our markets. Number one. And so again, these are my sandboxes. Yeah, the national guys, the Marcus and Miller chaps and the Cushmans call those guys too, but I’m talking about like Joe Smith of Smith real estate, that guy. The people that are only in the market that like their last name is the name on the side.
That’s who you want to call. Find those people. That’s number one. Number two, we’re also setting up calls with lender relationships that we have. If you cold call lenders all across the country and go into the lender phone book and call and start at A and call all the way through [00:29:00] Z, you’re not going to get very far.
You might get some phone calls, some conversations going, but you’re likely not going to get very far unless you talk to lenders you already have an established relationship with. So lenders you’ve already worked with know that who you are, that know you can close that are going to willing to show you their dirty laundry.
Let’s say, because that’s what you’re going to be asking them to do is say, I either go to those letters and say, I can help you take some of the bad loans and the non performing assets. That’s what they’re going to call them in lender talk. That’s what it’s called is a non performing asset, which what that really is a loan where the borrower’s not paying anymore.
Cause that’s what a bank, my multifamily, that is their asset really. Cause I’m paying them a monthly fee. So it’s their cashflow. You want to talk to someone about their non performing assets and they’ll say, yeah, we got this property over here.
This guy’s starting to look like he’s in trouble. We don’t know what to do. So they’ll either introduce you directly to the borrower to see if you can work out a quiet sale with the borrower. Or if you want to get really creative, you can go to [00:30:00] the bank and buy the loan from the bank. We’re talking to a bank on one of these right now to say, here’s a property, let’s just pretend for you and me sake, it’s a hundred unit apartment building. The owner has stopped making their monthly payments. The bank really doesn’t want to deal with foreclosing and deal with going into receivership and taking it all the way through the process. They really just want it off their books and go like this.
Banks are in the business of loaning money, they are not in the business of owning these kinds of things. So we’re talking to the bank right now of buying the debt they have, which is like seven and a half million dollars of purchasing that debt, which we’d have to raise the equity and then buy the debt from them. And they would sell it Mike at a discount.
They’re not going to sell it for par value. They’re negotiating right now on what they want for it. So maybe, we’d buy the debt and then go to the owner direct and say, okay, how about cash for keys at a bigger level to go away, or here’s a renegotiate on you make me the monthly payments. And if they don’t [00:31:00] pay, then you can full foreclose and you get the asset.
Mike Morawski: So that’s on a particular asset you’re looking to buy then.
Matt Faircloth: Yeah.
Mike Morawski: That’s interesting.
Matt Faircloth: Guy bought it two years ago, overpaid, went and under capitalized, stopped making his monthly payments, stopped communicating with the bank. They already are working on taking you over to receivership because that’s what assignment of rents means.
When you sign that assignment of rents agreement, that means that the receivership documents can happen and the rent goes direct from the property manager to you. Gets more complicated on this one, Mike, because this owner is self managing. And so you can’t just go tell the property manager, Hey, send me the rents. The owner is the property manager.
Mike Morawski: Hey, what’s interesting though, is you mentioned that this deal you just lost out on at 30 million, somebody paid 33 million. I don’t understand how some of these groups are out there overpaying for deals. Because obviously you’ve been doing this a long time, you know the numbers. And if you’re saying, Hey, a [00:32:00] deal’s only worth 30 million, and I don’t want to go above that, but somebody comes in and they pay 33 million for it. How can they even make that work?
Matt Faircloth: Okay. The way that I’ve seen it done is you end up getting, and sorry, we’ll get a little techie here.
Mike Morawski: That’s fine.
Matt Faircloth: You end up going in Debt yield restricted, meaning like the Fannie and Freddie, because these are typically properties that are well located newer vintage assets that are in the high occupancy range. So they’re 90, 95 percent occupied, which means you can get agency debt on them.
So you go in with agency debt day one. But you’re going to be restricted to like 60 percent loan to value so that they’re going to borrow a very little percentage of the purchase price. This is what the $33 million guy is going to have to do. Then what he does is he’s going to come in with this awful thing called pref equity.
That he’s going to drop in second position, which is, you remember Popeye’s friend? I’ll gladly pay you Tuesday for a hamburger today.
Mike Morawski: Yeah, right.
Matt Faircloth: Right. Remember, wimpy or whatever that guy. Pref equity is I’ll gladly pay you Tuesday for a hamburger [00:33:00] today of real estate. It’s I’ll pay you 10, 11, 12, 13 percent on your money. And these are institutions that take these agreements, but I’m not gonna pay anything today. I’m going to allow what I owe you to accrue, and roll up into the low teens on returns. And you’re going to put in another 10 to 15, 20 percent of my equity stack.
So then the syndicator goes in and now they’re at 80 percent technical loan to value because they’re borrowing from the agency in first position, they’re putting pref equity in second position, and they’re raising an equity from investors in third position. And they get a nice fat acquisition fee and if the market goes up.
If they’re able to take out a supplemental or refinance out of that agency loan in the future, or maybe just hot potato, sell it at some point to take out the pref equity and the common equity starts making money at that point. But the common equity can’t make anything.
Because if the [00:34:00] property makes a dollar above debt, that money typically has to go to the pref equity. It has to go to the second position until they’re satisfied that it goes above that. So you gotta be willing to go in and hold your breath for a while that you make a nice fat acquisition fee.
And then nobody makes anything and until you’re well, and until you’re a way into the money in cashflow and in value. So that’s everybody’s structuring the deals. There’s a lot of hope and smoke of mirrors. Not something I would do.
Mike Morawski: A lot of people have to be able to be willing to hold their breath for a while.
Matt Faircloth: Everybody.
Mike Morawski: So as we wind down here a little bit, one question I have is, if you were talking to a new capital raised partner today, or somebody who was starting to raise private capital for a multifamily syndication. What techniques are you using to get in front of investors today to get their attention and say, Hey, take a look at this, understand what’s going on here.
Matt Faircloth: Yeah. A, I would start small. I wouldn’t go chasing a hundred, 200 unit apartment buildings right now. [00:35:00] I’d be on 30, 40 units or even try a different asset class. That’s maybe a lot less hot than multifamily personally, if I was just getting started. Second, I would go in as an educator first. I talk about this a lot in my book, Raising Private Capital, which got a facelift by the way, Mike is a new book cover.
New revised edition for the book. Everybody should check it out. I would have those conversations about educating my base about what multifamily is and why it’s amazing and real estate investing, why it’s amazing. I would do that.
And I would also just stay in front of people with regular communications, newsletters, that kind of stuff about, Hey, this is why multifamily is great, or this is why what I’m doing is great. Just so you know, read this article, here’s a great podcast. And then eventually, Hey, we have a deal.
So stay in front of your base about real estate investing on a regular basis. For goodness sake, don’t just email your people whenever you have a deal. Send them regular communications, whether you have a deal or not. So they’re used to reading stuff from you about the topic.
Mike Morawski: Yeah. Absolutely.. Good point. So let me just ask a couple bonus questions real quick.[00:36:00] Best book you’ve ever read? And you can’t say Think and Grow Rich.
Matt Faircloth: I can’t say Rich Dad, Poor Dad. And I can’t say, Think and Grow Rich, right?
Mike Morawski: Yeah.
Matt Faircloth: Let’s see. You know what? I haven’t said this in a while, but when I was very young, 19, 20 years old, I was selling corn and produce on the side of the road on the back of a farmer’s pickup truck.
That was my job in between semesters of college. And I’ve read a lot of books and my mother put The Seven Habits of Highly Effective People in my hand. This is back in the late nineties. That book really taught me a lot about how to work with people and about just mindset and everything like that.
So this is my first like big mindset book, seven habits got me thinking about leading a bigger life and becoming a bigger person and everything like that.
Mike Morawski: Yeah, that was a great book, Covey wrote. Matter of fact, chapter two in that book is Think With The End In Mind. How I came up with the title of my book, Exodus. I can relate to what you’re saying on that.
Hey, listen, I appreciate you being here [00:37:00] today. Thank you. Show people your book again, tell them how they can go get it.
Matt Faircloth: Yeah. So my book is called Raising Private Capital. It’s the second edition. The forward was written by my good friend Pace Morby. And another good friend of mine, Joe Fairless wrote the introduction. And two great hands involved in this book. I’ve written a bunch of new content for it. Versus the prior edition, a lot of new stuff about the new things going on in the world and raising capital in today’s economy are all here.
So I highly recommend people check out my book, Raising Private Capital, which you can get biggerpockets.com/rpc or on my website derosagroup.com
Mike Morawski: I’ll send you mine if you send me yours.
Matt Faircloth: Ooh, love that. Yeah. Email me. I’ll trade sign copies with you.
Mike Morawski: Okay, perfect. Hey, tell me this. How do people get in touch with you? If they want to reach out to you, find out a little bit more about DeRosa Group and your fund and, what else you’re doing?
Matt Faircloth: They can invest with us. They can learn from us through our education vehicles at DeRosagroup.Com.[00:38:00] You can look at our investments. You can look at our educations. You can look at anything we have there. You guys will follow me on social @TheMattFaircloth on all social channels.
Mike Morawski: Matt, I appreciate you being here today. It’s been a pleasure to get to know you a little bit more and talk shop.
Matt Faircloth: You too, brother. Good to see you.
Mike Morawski: Take care.
Kristen: Thank you Mike, and thank you for joining us for another great episode of Insider Secrets. As always, Insider Secrets is brought to you by MyCoreIntentions. Wherever you hang out on social media, you will find Mike and MyCoreIntentions. Please like and follow us to get the most up to date real estate investing trends.
Visit mycoreintentions.com where you can get expert coaching on all things real estate investing and property management. If you’re looking to become an expert, Mike’s coaching will help you scale your real estate investment business. We’re looking forward to having you back again next week for more Insider Secrets.