74 Tim Bratz – Building Legacy Wealth
In this video, Wendy Sweet and Bill Fairman are joined by Tim Bratz who began his career in New York City. From there, he saw the potential of real estate to transform lives.
He spent a lot of time reading and attending workshops as well as networking with accomplished entrepreneurs to create his path to success.
With the knowledge he has gained, Tim embarked on creating his real estate company based in Charleston, South Carolina. But after the real estate bubble burst in 2008, Tim quickly adapted and using a credit card, increased his limit and then wrote himself a balance transfer check to acquire the cheapest property he could find.
Today, he shares his wealth of experience and knowledge through his great story. Don’t miss it.
Scott Patton (00:02):
You are live!
Bill Fairman (00:04):
I love it. I love it. When Scott says we are live.
Wendy Sweet (00:08):
No, he says you are live.
Bill Fairman (00:09):
Okay . I’m live! I shouldn’t say I’m alive, right?
Wendy Sweet (00:14):
Bill Fairman (00:15):
So, Hi! Bill Fairman, Wendy Sweet , Carolina Capital Management. Thank you for joining us again. We were just on 10 minutes ago.
Wendy Sweet (00:26):
Talking about all the great news going on,all the things going on in the world.
Bill Fairman (00:30):
And I was there to Debbie downer.
Wendy Sweet (00:32):
That’s right! His cup is half empty.
Bill Fairman (00:34):
Cause that’s my job. I am the anchor. So we are Carolina Capital Management. We do short term loans in the Southeast and we also have a fund that people can invest in.
Wendy Sweet (00:46):
And we’re rolling out long term product here in the next week.
Bill Fairman (00:50):
So if you are a borrower, you go to CarolinaHardMoney.com. Click on the borrower tab, If you’re an investor looking for passive returns, click on the investor tab, don’t forget to subscribe, share like, all that good stuff.
Wendy Sweet (01:04):
Tell your friends.
Bill Fairman (01:04):
And if you have any questions, we have a live chat over there to the right. If your question is worthy.
Wendy Sweet (01:14):
Yeah! If it stinks, we’re just go right over it.
Bill Fairman (01:16):
Sorry I can’t see that far. We have a wonderful guest today. Tim Bratz. He’s a.
Wendy Sweet (01:27):
Fellow CG, fellow Collective Genius.
Bill Fairman (01:30):
Collective Genius guy.
Wendy Sweet (01:31):
Bill Fairman (01:32):
Our last Collective Genius meeting was virtual. Like all the other virtual meetings.
Wendy Sweet (01:37):
It was pretty good online they did a great job.
Bill Fairman (01:37):
It was but it’s just not the same. We don’t get to spend extra money on lunch.
Wendy Sweet (01:44):
Bill Fairman (01:47):
But there’s a lot more fun networking when we can do it in person.
Wendy Sweet (01:51):
In the room,in the same room.
Bill Fairman (01:53):
Tim, thank you so much for joining.
Tim Bratz (01:54):
Yeah! Absolutely. I’m excited to be here, Bill ,Wendy. I look up to you guys and appreciate all the value you guys always bring. So yeah. I wish we could do it in person sometime .
Wendy Sweet (02:02):
Tim Bratz (02:04):
It’s all good. We’ll make it work.
Wendy Sweet (02:06):
Bill Fairman (02:06):
So you’re from Cleveland, right?
Tim Bratz (02:09):
I am from Cleveland, but I have a house in Charleston.
Wendy Sweet (02:12):
Tim Bratz (02:13):
I have a house in Isle of Palms and I’m actually coming down there in middle of August and I’ll be down there and put my daughter in school down there.
Wendy Sweet (02:20):
Oh wow! So I was gonna say, if you need us to check it out for you, we’d be happy to go down there. And.
Tim Bratz (02:24):
I guess I was coming to visit anytime you want.
Bill Fairman (02:28):
Our youngest brother has.
Wendy Sweet (02:30):
He has a place there. Yeah.
Bill Fairman (02:32):
Hard Skate Business. And so about half his business is in Charleston. So he’s got, he keeps his boat there and he has a house there as well.
Tim Bratz (02:38):
Bill Fairman (02:38):
So hopefully we can meet down there. And when they allow us to get together,
Wendy Sweet (02:42):
And we could write it off as a business trip.
Tim Bratz (02:46):
You got Caleb’s down there. Ron Phillips down there.
Wendy Sweet (02:52):
Yeah, Matthew Bell.
Tim Bratz (02:54):
Bell is down there, right?
Wendy Sweet (02:55):
Bill Fairman (02:57):
It’s a neat place.
Tim Bratz (02:59):
Bill Fairman (03:00):
And my favorite beer is from Holy City brewing company.
Wendy Sweet (03:04):
Bill Fairman (03:04):
So, alright. So my question, my first question.
Wendy Sweet (03:11):
Bill Fairman (03:12):
Yes. Poignant important question. So does Cleveland really rock?
Tim Bratz (03:19):
I’ll tell you what Cleveland got a bad rap. When I was going through school, right? When I was in high school, late nineties, you know, the whole steel belt thing, all that fell apart. And it was pretty rough for a little bit there. But they came back with a vengeance. I mean, Cleveland’s a really cool town. It’s got a ton of happening, hot spots, nightlife. Food scene’s amazing here. We’re right on Lake area. So there’s a ton of boating and a ton of cool stuff going on out there. And the sports teams were crushing it for a couple years, obviously since LeBron left and then a couple other things have happened. So they’ve gotten hurt a little bit, but we’re getting, we’re getting some good attention. So it’s a good town. And I mean, from an investment standpoint, it’s one of the best cities actually to invest in like the amount of rents per purchase price is like that ratio is pretty, pretty, like really strong. If you’re looking to buy and hold and have rental income and cash.
Wendy Sweet (04:12):
Awesome! Are you doing single family as well?
Tim Bratz (04:14):
Not anymore. No, not anymore. I used to do a lot on the turnkey space, so I would buy a single family house, fix it all up, put a good tenant in place. I had a management company built up one of the larger residential management companies in Cleveland. And then I would sell that property off to an investor who was just looking for turnkey, right. Cash-flow predictability. And and that was cool business. But then a couple of years ago, about, about three years ago now I was looking at where was my net worth growing? And it was about 10% of my time was spent in apartments that was 90% of my net worth. And I was like, it’s time to pivot, you know, all of our time in buying and holding apartment buildings. And that’s what we’ve just been focused on for the past few years. So it’s amazing what happens when a, well, what you focus on expands and you gotta make that declaration to the universe and how it, how it responds.
Wendy Sweet (05:05):
Well, you know, what’s really funny is you said this and I think it’s really important. What you just said is you realize that 90% of what your income was really coming off of the 10% of the work that you were doing. Right. And how many people do we know that don’t even look at a dashboard? They don’t, they think they know what’s bringing in the money, but when you really put those numbers in front of you and you pay attention to that, that’s your true map. The one that you should follow, that’s great that you did that.
Bill Fairman (05:38):
Work smarter, not harder. Right?
Tim Bratz (05:40):
I think you gotta work hard at the beginning until you gain the intelligence and then all of a sudden you can kind of pivot and put the right people in the right seats and then grow your business smart.
Bill Fairman (05:50):
So did you also go through EOS?
Tim Bratz (05:57):
Not fully, but all the masterminds that I’m in, they all talk about EOS all the time. So I’ve read traction and my COO was like obsessed with it. We never hired like one of those coaches, but we’ve, Oh, it’s pretty much how we run our business. It’s not EOS.
Wendy Sweet (06:09):
Yeah, yeah it changed our world when we did it.
Tim Bratz (06:14):
It’s really, really good.
Wendy Sweet (06:16):
So what got you into the apartment business? You’re doing this single family thing. And so what got you into the apartment side?
Tim Bratz (06:23):
Yeah, so I mean, I was going through college during the last market boom, right? ’03 to ’07. I was going through college money motivated. Every says everybody makes money in real estate. So I got involved in real estate and became a real estate agent initially. Then I got into wholesaling and then I got into flipping and then all of a sudden I got into some buying holds and then I fell into this apartment building. An eight unit building in late 2012. And it was like, it was super cheap. They were asking 50 grand for an eight unit building in Cleveland, Ohio.
Wendy Sweet (06:54):
Tim Bratz (06:54):
Like it was a C Class area. The market was kind of bottomed out at them and it needed some work, but I went in, I was like, I can’t mess this up. Right. I bought it for $30,000. I put another 50 into it. So I was in for about 10,000 a unit and it netted me $27,000 a year. So what a 33% cap rate.
Bill Fairman (07:13):
Tim Bratz (07:13):
Again, I’m managing it though. And there was a lot of work and a lot of brain damage and took up a lot of calories with dealing with that class of tenants. But I ended up seeing the scale there of, Hey, instead of driving to eight single family houses, I can drive to one apartment building and manage it. It was just easier. I go look at one route instead of eight routes, like a raise money on one deal versus eight deals. I can you know, manage and look at one foundation versus eight foundations. It was just easier and more scalable for me. So that really appealed to me in 2012, 2013, I decided to just focus on apartments and built up portfolio about 140 units. By the time I was like, I don’t know, 2015, 2016. And then that partnership, I had the exclusive partnership with a couple of guys and that we just kind of, didn’t see eye to eye on where we were going and who was bringing the value to the project, I guess you could say. So we decided to end up liquidating everything 2015, 2016. So it was one of those, like, you press the reset button. I just worked my tail off for the past three, four years, I gotta start all over again. But it really just kind of took a lot of weight off my shoulders and allowed me to do some different stuff and work with other people that I wasn’t able to work with before. But I kinda had to liquidate that portfolio. And in order to just kind of keep the lights on and keep food on the table, I got back into single family, got into the turnkey space. So we’re flipping 80 to a hundred houses a year making some decent money there. And then I was passively investing in or raising money for sponsoring loans for, and on some multifamily stuff down to the Southeast for a good buddy of mine. And again, a couple of a couple of years after that, you know, by 2017, I had about 400 units in my portfolio and that produced more net worth than, you know, the transactional stuff on the flipping of the houses.
Tim Bratz (09:00):
So I decided to pivot my team and we just started, we’ve only looked at apartment buildings and the first deal that comes across our desk when I like shut down and burn the ships on the single family was was 11 unit apartment building actually right up the street here. We wholesale it, made $87,000 on it. The next deal’s a 14 unit about two miles up the road. And we ended up flipping that and made $120,000 on that. And then all of a sudden we took down a 20 unit and kept it. And we took down a 74 unit portfolio and kept it. And then we just kept on growing and growing and growing. And in 2018 I had about 600, 700 units. And this big portfolio came across my desk for another 730. I ended up buying that in June of 2018 and that took like 1300, 1400 units. And then all of a sudden the snowball effect occurred. We got all sorts of deals, cause that was a really difficult portfolio to take down. A lot of buyers couldn’t do it cause they didn’t have the the operations and the construction background that we have. And so we were able to take it down and all of a sudden we got a influx of deals that were too distressed for a lot of small buyers to qualify for and also to distress for the big hedge funds and reits to want to get involved with. Right. They just wanted clean buy it, let it cash flow.
Tim Bratz (10:14):
So we found this niche of ours was big deals that were distressed. And I took the exact same philosophy of buying and flipping single family houses into multifamily. I’m not, you know, my great granddad didn’t have a bunch of apartment buildings. I never went to an Ivy league school and majored in real estate or finance. I don’t have a background in commercial real estate. I have a background in residential. And my residential buying formula was gonna be all in for 65% of the after repair value. And I thought if I’m buying apartment buildings, that makes sense to do it the same way. I started buying apartment buildings where could buy them at a wholesale price. I could create appreciation through that value add process. And then instead of selling it I ended up turning around and refinancing it. So if I’m all in for 65 cents on the dollar, I could get a 70% loan at the new valuation and there’s refinance out my short term money and then hold this property long term without having any of my own money in the deal anymore. And it allows me to then recycle my investor capital and those partners. So it allows us to get into more deals and offer more velocity on our money and our investors money into more and more projects. Because we could turn them over in 18 months on average.
Wendy Sweet (11:28):
Awesome! Now you talk, you’re talking about your investor’s money. So just touch a little bit on, there’s so many different ways to finance things and I think that’s a lot of people’s biggest problem when they’re, when they’re in this business or trying to get into this business, they think that money is hard to find. It’s not, is it?
Tim Bratz (11:48):
There’s a couple of things you gotta be aware of. If you’re going to go try to raise money, lenders are looking primarily three things. One is what is the asset? Right? Real estate is an easy asset, especially, you know, single family houses or multifamily property. People can wrap their head about it around it, even if they’re not in the real estate world, like they understand apartments, right? They understand real estate. They know that wealth is built through real estate. Most entrepreneurs understand that. So the asset isn’t very difficult to kind of sell somebody on. The second thing you gotta look at is what is the return. And is the reward worth the risk to that investor? Right. If they’re going to invest with you, you know,is their return on investment, great enough for the downside risk of that? Not only that, but it’s what else do they have or could they invest it. Right? And so, you guys are in, in real estate, so you know that you can go and make 12%, 15%, 18% on your money all day.
Tim Bratz (12:47):
And so versus somebody who only puts money in the stock market and it’s very volatile and it goes up and down. They’re just trying to get a steady 3% return on their investment. So, you know, something that I offer might be not a good enough return for you guys, but it might be like too good to be true for other people. Right. And so we try to play in the middle. And so, and understand that. The other thing that I realized is from a return perspective is a lot of investors usually fall in one of two categories. There is either the debt type of loan where it’s a very predictable return on investment. It’s like an annuity. Pays every single month and it’s very predictable and people love that. And I love that too. I think that’s a really good way to be a passive lender into something, but then there’s other people who want the equity piece, right? And they’re like, Hey, I’m okay. I don’t need the cash flow right now. I’m really looking for more growth, but guess what, there’s also downside risk to that element as well. What I don’t find a lot of it kind of where we created a little bit of a unique position is kind of a hybrid between both of them. And so what we do is we pay a fixed return on investment to our investors, and then they get all their money and then we keep in the deal and they have a little piece of equity forever. So now they can actually build some wealth, which is cool. And they have some appreciation and cash flow and future refi proceeds, future sales proceeds, which is great for them. But then they also earned a predictable return while their money was in play.
Tim Bratz (14:19):
And I see some people who like structure it that way on the single family side. Maybe they’re not holding the asset long term, but I find from a return perspective, investors are looking for like, what’s a minimum, worst case scenario. And I’ve seen single family guys that have structured it where, Hey, I’m going to pay you 12% return on your investment or 15% of the profit, whichever is greater. And when you offer it in that way and you create a minimum return for the investor with additional upside potentially, it’s a lot easier to raise money in that capacity. So number one is the asset. Number two is the return. And then number three, which I found is the most important in raising capital is the credibility and the character of the borrower. And so if, here’s what I try to convey, if crap hits the fan, everything falls apart. What your investors are looking for is, what they’re asking themselves. Whether they’re asking you directly, or at least asking themselves in their head is, does this person have the fortitude to repay me my money? You know, crap hits the fan, is Wendy going to go and work third shift at taco bell to make sure that I get my money back? And I conveyed that to my investors. Like you will get your money back, right? I’ve had one deal. One apartment building I’m really bad at flipping house. I’ve lost a bunch of money on houses, but none of my investors have ever lost money, but I had , I’ve only lost money on one apartment building ever. And it was my fault, right? Like I bought it from a buddy and he told me it was 80% occupied. It was 80% occupied, but physical occupancy and economic occupancy are two different things. So, although it was 80% occupied, only 25% of tenants were actually paying rent.
Wendy Sweet (16:06):
Tim Bratz (16:07):
So that buddy’s not as much of a buddy anymore, but I bought this deal. I thought I’d flip it and make a bunch of money on it in six months and save my investor. And I’m kind of like a joint venture type deal. He put up the money, he owned 50%. I own 50%. And we just did it that way. But what happened was I took it over and had to evict a bunch of people had to renovate 25 more units than we thought we’d have to do for a year and a half instead of six months. And all of a sudden, in order to get rid of this deal, I had to stroke a check, or the partnership had to stroke a check for $50,000. The dilemma there is, it really hurts your credibility. If you ask your investor to take that, that lump, are they ever gonna invest with you? Probably not. Right?
Wendy Sweet (16:47):
Tim Bratz (16:48):
So, what I ended up doing is I ended up writing the whole check. I took the loss. I gave him a hundred percent of his money back. He didn’t make any return on it though, which is a downside. But what I ended up doing is I made it work. Because I gave equity in another deal that I was buying at the same time without him having to put up any money. So it allowed for him to get the return on investment and maybe in a different way, right? Not all front, it’s an equity and deal. But you make good on it, right? And if you do the right thing by your investors and you build up that reputation, you build up a lot of credibility and character for doing the right thing. Even when things get tough. I think it makes it a lot easier, you know, that that word spreads and travels and it’s, it makes it a lot easier to raise, raise private money.
Bill Fairman (17:30):
Well, people, everyone understands that there are risk In investing in anything. And while real estate has, I believe the least amount of risk in the investing world, they understand that there is risk. And if you’re doing your best to make sure they do not lose any of their initial capital. That’s better than most anybody else would do. And the fact that you’re giving them equity in another property. That’s above and beyond. So do you have a fund structure or you just doing joint ventures?
Tim Bratz (18:08):
Yeah. On a deal by deal basis. We, every single one of our deals is an SEC regulated investment. So, we structure it. We file with the SEC.
Bill Fairman (18:21):
So you’re doing communications on each one?
Tim Bratz (18:23):
Yeah, On every single one. It’s a deal by deal basis. I don’t have like a general fund that people can just invest in and make a fixed return.
Bill Fairman (18:31):
That’s an accounting nightmare!
Tim Bratz (18:33):
It’s an accounting nightmare. And it’s very difficult because if you can’t deploy the money, what I’ve seen is if you can’t deploy the money, it’s a balancing act. Money’s coming in. You’re supposed to be paying it a return on it. And if you can’t, and I’ve seen people who invested in bad deals just because they had to get the money in play.
Wendy Sweet (18:51):
Tim Bratz (18:52):
I never want to be in that sort of a position. So we only raise money when we need money. There might be a general fund structure that we put together eventually. But if the money is not deployed, it sits in like a money market account that makes 2% or 3%. And because we’d have 50 or a hundred million dollars in that account, we can get a higher return from a money market. Then you could, if you had $500,000 in your local bank, so there’s, some scale that we can offer and benefit to the investors there. Where they’re making a better return than they would sitting in their own account. And at the same time, it allows us to then only invest in really, really good deals and be very calculated in that regard.
Wendy Sweet (19:30):
Bill Fairman (19:31):
Yeah. I just think it’s too difficult in a general fund to figure out values and depreciation on different assets and it’s.
Tim Bratz (19:40):
That too. Yeah, for sure.
Bill Fairman (19:41):
It’s a pain.
Tim Bratz (19:42):
It’s very complicated. So you gotta look at it from a, like a silo deal by deal basis. And then from a deal by deal. Yeah, so then we syndicate, some of them are 506B some of them are 506C. Which means it’s either accredited or open to everybody.Then,we raise money on that specific deal. And then whenever that deal refinances or sells, then we ended up paying the investors, their money back, and then we could roll it, but we always have deal flow. Right. Like I do a little bit in the education side. So I have, you know, hundreds, maybe thousands of people that are sending me deals on a monthly basis. And we were always able to kind of siphon through those and find the best deals. And so, you know, we’re closing a one to two apartment buildings every month, so we can always put, you know. Put their money back in play.
Wendy Sweet (20:26):
What areas? I’m sorry. What areas are you investing in in the country? What’s hot to you and what’s not hot?
Tim Bratz (20:34):
Southeast. I love the Southeast. I invest heavily in South Carolina and Georgia. South Carolina, mostly because I have a house in Charleston and mostly along the coast in South Carolina, I would do some stuff you guys are in. Are you guys in Greenville? Are you guys in Columbia?
Wendy Sweet (20:47):
Tim Bratz (20:50):
Okay. Yeah, Yeah. I love those markets. I just haven’t come across a deal yet. I guess there.
Wendy Sweet (20:55):
Tim Bratz (20:56):
Definitely buying those markets. I just love the Southeast because it’s more landlord friendly. First of all, secondly, you can do exterior improvements year round. Up here in the Midwest. You’re stuck. You can only do it six, eight months a year on doing the exterior improvements. And so you’re kind of hands are tied by weather. Also. You’ve got freezing pipes up here, you got snow, you got ice, you’ve got salt that gets beat up on the parking lots and all that kind of stuff. So it, the heating bills are more up here, so it just kind of balances out where it’s more landlord friendly, properties don’t get beat up as much. Property tax are typically lower in the Southeast as well. I got a lot of stuff in South Carolina and Georgia have some stuff in North Carolina, Alabama Louisiana and Florida as well. And then I have some stuff in the Midwest. I have things in Ohio just cause of my team is right here. It’s easy for us to find and manage and find opportunities. And I have some stuff out in like Texas in Oklahoma. I mean, those are pretty good markets as well. If you’re buying these deals where I don’t go, at least for multifamily is the Northeast and the Pacific West.
Wendy Sweet (22:06):
Tim Bratz (22:08):
Just too tenant friendly. Like they’re trying to pass laws. There was actually a law passed in Seattle that the city council said anybody who raises their hand for a rental property in Seattle has to be granted that property regardless of their ability to pay for that rental property.
Wendy Sweet (22:25):
See how crazy that is?!
Tim Bratz (22:28):
But it legitimately passed city council and one of the landlords ended up suing saying it was unconstitutional and it ended up being repealed. But some psychopath actually got that passed! And other people voted for it like that to me is just out of control. And you’re seeing the same thing up in New York. And in the Northeast. Now though I think those are good markets for other asset classes like office and retail and storage and warehouse and some of those types of things. I just wouldn’t own multifamily in those markets just because it’s too tenant friendly.
Wendy Sweet (22:59):
Bill Fairman (23:00):
It’s funny. We had that same conversation in the earlier show talking about those particular municipalities and all it’s doing is hurting the people that are trying to help because you’re going to have fewer and fewer landlords there. And which means there’s going to be fewer and fewer properties available for rent. So they’re nuts is what it is.
Tim Bratz (23:23):
And you see a lot of that money coming into your guy’s backyard. They’re coming into Charlotte, they’re coming into Charleston, they’re coming into Atlanta right now and Tennessee, you know, Nashville, and they’re coming into all these Southeast markets and they’re paying pretty close to New York prices now. It’s just, it’s interesting. It’s interesting how it’s all, how all this stuff changes, moves around. So we’ll see.
Bill Fairman (23:44):
Well, I was also gonna go back to your fund structure. So your syndication is paying for the acquisition, or is it paying for the the equity piece and then you can get financing or is it just deal by deal?
Tim Bratz (24:04):
Yes, typically what our projects look like, I usually buy things that are, that are a hundred units or bigger. Like hundred and 250 units is kind of like our sweet spot. So if we go and buy, let’s just say you got a a hundred unit building or 150 unit building. It doesn’t even matter, but let’s say the stabilized value of that building is going to be $10 million. It’s very predictable to calculate the valuation on an apartment, building a commercial property, because it’s all based on the income approach. Where you take the income minus the expenses, you get the net operating income. And then depending on the market that you’re in, it will be worth some sort of multiple of that, the cap rate, right? Based on the net operating income. So it’s very predictable. I know what these properties are going to be worth before I ever even buy it. And it’s very calculated. So I can go in and say, Hey, this property is gonna be worth 10 million. I have to be at six and a half million dollars. Let’s say 65% of that stabilized value.
Tim Bratz (24:58):
Now I back out the construction cost renovation costs. Let’s say that’s a million dollars. And you know, I’m buying it for five and a half or maybe $5 million. The, how much I’m buying it for and renovating for and holding costs. That’s irrelevant. Let’s say my total cost basis is six and a half million dollars. I’ll typically go get a bridge loan for about 80% of that. 75%, 80%. So let’s say I’m going to get a bridge loan from, I don’t know, like any of these bridge lenders, right. Or at some sort of debt fund. And they give me a 75%, 80% of that money. So it’s about if I’m all in for six and a half million, let’s say they give me $5 million of it. Then I go and raise one and a half million dollars from my equity investors. They come in. That could be one person stroking, a check for one and a half million that could be 10 people stroking a check for 150 grand. That could be any, any variation in between. So I bring them in. We syndicate it. It’s an SEC filing a reg D filing with the government, they sign documentation. They’re coming in as an equity investor.
Tim Bratz (26:06):
Now because I’m creating the value and it’s very predictable, how quickly I can turn these projects around. My cost of capital is very predictable as well. What my holding costs are gonna be, because I know I can turn this around in 12 months and then refinance it within 18 months let’s say. So if I’m going to borrow $150,000, or I’m sorry, $1.5 million, and I’m paying my investors 10% on it, say it’s 150 grand a year, and let’s say the property cash flows. I don’t have to worry about it. I could pay for that 10% preferred return out of the cash flow. If for any reason the property doesn’t cash flow, then I just create an interest reserve, kind of like what a traditional bank would do if you’re having a new construction development or you have a distressed asset that needs an interest reserve. So I’m baking that into the cost, my all end cost basis of six and a half million dollars.
Wendy Sweet (26:56):
Tim Bratz (26:58):
So those equity investors, they’re bringing the money essentially for the down payment and maybe a little bit of operating capital for us and potentially an interest reserve even as well. And then what I do is I pay, I understand that investors want a predictable rate of return. So we pay a quarterly distributions, 10% annualized return on their investment for a year, year and a half while their money is in play. And then once the property stabilize and cash flowing, then that money comes out of cash flows. And what happens is then 18 months later, I could turn around and refinance the deal at 70% LTV. So a $10 million valuation, I get a seven, I’m sorry, a $7 million loan. And with that $7 million pays off the bridge loan of 5 million. My investors have 1.5 million, and then there’s also $500,000 of non taxable refi proceeds that then gets up amongst me, any partners and our equity investors. And then all the chips are off the table. It’s only house money in play. It’s a non recourse loan. Typically a long term loan. Long term amortization schedule 10 to 15 year term balloon on it. And fixed interest rate. Right? And so then we just let it cash flow. And we let the tenants pay down our principal balance every single month. And the property appreciates over time. And we can recycle our investor’s capital and do another deal, another deal, another deal. And that’s, that’s how we structure.
Wendy Sweet (28:22):
Wow! Tim, you did a great job of explaining the details in that. That’s really hard to do, but he didn’t miss a lick on it. Did he? That was awesome!
Bill Fairman (28:33):
And that, as the investor, you’re getting a 10% return at the same time, because they’re an equity investor. They get depreciation pass through to them as well, because especially in the very beginning, the values aren’t there. It’s not returning as much money as it could. So the depreciation would be much higher than it would later on. Right?
Tim Bratz (28:54):
And without getting too much into the weeds, we like, here’s how we pay our investors. Four ways. One is the fixed preferred return. And then they get all their money back. And then the other three ways come from their equity. So we typically give up about 25% equity in perpetuity in the deal to our investors. So they’ll get about 25% ownership forever, as long as we own this. And that means they’ll get 25% of the depreciation. They get 25% of the cash flows. They get 25% of the refi proceeds. And they get 25% of any future sales proceeds. So it’s very beneficial and the way that we pay the pref payment, because they’re also an equity investor is tax advantage. So what we do is we don’t, they’re not taxed this year at the earned income tax bracket like they would, if they got a dividend from the stock market. Right?What we do is, it looks like a return of principle on their tax, on their K-1. So if they invested a hundred grand and we paid them 10 grand a year, it looks like their balance is $90,000. So that way, it’s not taxable this year, and they’re still owed a hundred thousand dollars when we refinance, it’s just, it’s reclassified and it’s classified into a long-term capital gains. That’s paid when the property sells instead of this year at the earned income tax bracket. So it totally reclassifies the return on investment. And not only defers it, but reclassifies it into a lower tax bracket, which makes it heavily tax advantage as well. So, I mean, you think about it like real estates. Since the beginning of, I don’t know, humanity. Real estate’s been what wealth has been measured by.
Wendy Sweet (30:32):
Tim Bratz (30:32):
And when you got all the wealthy people, they typically have a lot of influence in the laws, including the tax laws.
Bill Fairman (30:38):
Tim Bratz (30:39):
A lot of tax law benefits and advantages for being a real estate investor and an investor.
Wendy Sweet (30:44):
That’s for sure. We tell people all the time, it’s, the best way to build wealth is by owning the property. Having ownership in a property. Fix and flip is eat money, you know, income, but it goes away quickly. But building wealth is in owning the property 100%. You’re so right.
Bill Fairman (31:05):
Well, there’s another way. Lending the money.
Wendy Sweet (31:11):
Bill Fairman (31:11):
Where you’re still getting cash flow, but you don’t have the headaches of ownership or the responsibility.
Tim Bratz (31:17):
That’s where you want to be!
Wendy Sweet (31:18):
Tim Bratz (31:19):
Go to the biggest cities. Go to Charlotte. Who’s got the biggest buildings in Charlotte? Bank of America, you know, insurance companies, and it’s all the big New york city. You know, you got met life, you got all these different, big, massive buildings there are all in the finance industry. So if you can be the bank, that’s what you want to be, because I can promise you if I knew 15 years ago, what I know now about operations and how many times I’d be punched in the stomach. I probably wouldn’t have gotten involved in real estate because operations is not easy. It is very, very difficult. And you gotta to go take a lot of lumps in order to really have your systems and processes dialed in. So if you can just get involved and get a predictable return along with some equity upside in these deals and just be the bank and be passive, like.
Wendy Sweet (32:08):
Yeah. Well Said.
Bill Fairman (32:09):
And by the way, who takes all the risk?
Tim Bratz (32:12):
Bill Fairman (32:13):
The bank sent it for a lot less than the owner. Now, the only downside is you don’t get that depreciation.
Tim Bratz (32:23):
Bill Fairman (32:24):
But that’s okay.
Wendy Sweet (32:25):
But in your hybrid you can, so that’s a great way to look at it. So, let me ask you this question, you know, we’ve all been going through the virus. How, you know, being in the apartment world, how did, how did that affect your income and your rents? And it’s not over, I mean, they’re saying that even in June they had more people actually not pay in June than any month since the virus hit,
Bill Fairman (32:52):
A third of all, people missed their either mortgage or rent payment. It doesn’t mean it was, they didn’t miss it.
Wendy Sweet (32:59):
It was late.
Bill Fairman (32:59):
It was not paid on time.
Wendy Sweet (33:01):
So how did this affect you?
Tim Bratz (33:03):
Yeah. So I think that’s, that’s like a million dollar question, billion dollar question. Right? And so here’s like, when, while this stuff hits the fan, some people recoil. And they kind of wait, see how things play out.
Wendy Sweet (33:15):
Tim Bratz (33:16):
When everything was happening, I was like, we need to respond to this very intense situation with equal or greater intensity. And we need to hit this in the face before it hits us in the face. And so we got very aggressive in communicating with everybody, both on our team, our vendors, our tenants, and our lenders about what we had in our passive investors about what we were going to do and what our game plan was moving forward. So in March, at the end of March, the week before, you know, some people like, I don’t want the tenants to know that there’s a moratorium on evictions, guess what? They’re going to eventually find out. Right? Then they hear from their buddy. Who’s like, guess what? We’re not paying rent, nobody’s paying rent. So we reached out to anybody who said, Hey, there’s a moratorium on evictions. We’re not gonna evict anybody. That being said, that doesn’t mean that you don’t have to pay your rent. Rent is still due. Here’s why, because if you don’t pay rent, we can’t manage and operate the building. Right. How do you think we pay for trash? How do you think we pay for extermination? How do you think we pay for the grasping cut? How do you think we pay for, like, you don’t want rodents and bugs and all this stuff. Like what if the lights don’t work? Right? What if we can’t heat the property? What if we can’t pay for security and pay for somebody to pick up the phone call?, If you need maintenance done, like all that money goes to that, it doesn’t go to yacht or jet that you think the landlords going to be.
Wendy Sweet (34:37):
Tim Bratz (34:37):
We have bills to pay and we pay for the property by, you know, passing up, passing through the rents. And so we explained that. So we said, Hey, rent is still do it is still due on the first. And it’s still late with a fee after the fifth. And we will still be posting notices on whatever it was like the 15th. And when evictions do open up, we will pursue evictions. Right? That being said, if you are facing a hardship because of what’s happening with COVID-19, we want to work with you, but I’m not get chase you down. Right? That’s not my job. You’re an adult we’re adults. I need you to reach out to us and let us know that you’re facing hardship. And we will work out some sort of plan with you on a case by case basis. Now, if you did face this hardship, by the way, here’s how to, here’s how to apply for unemployment. Here’s some local church groups that are supporting people. Here’s the local subsidy organizations that are supporting people who need food assistance, rent assistance, any sort of other income assistance. And we gave them all sorts of resources on the front end. And what happened from that is we actually collected more rent in April than we did in March. We collected more rent in may than we did an April.
Wendy Sweet (35:49):
Tim Bratz (35:49):
Stimulus thing. Right? Also hits. So you can say, Hey, maybe that was part of it. But we, we are ahead in, we’re also ahead in June. And I can say also this, that some of that was lease up, right? Like I buy a lot of value add stuff, and some of that income did come from apartments coming online, leasing new apartments, new rents coming in, but we’ve been ahead on all of our rents month over month. I actually haven’t checked July yet, so I don’t know where we are with July. But every month since COVID hit, we’ve collected more rent than the previous month. We have about 2% or 3% of our tenants that are on work-out plans. And I have some stuff in like Albany, Georgia, which was like the that’s like where a lot of the whole COVID-19 thing hit. I was like the epicenter of it in the Southeast for a little bit there. And we did take some lumps in Albany, Georgia, but the rest of my portfolio is actually ahead of where we were everywhere else. We were pretty much steady in Albany, Georgia. We dipped a little bit, people paid late, but they ended up paying. And that’s kind of how things played out there, but everywhere else, we were actually ahead of it, I think because we were so proactive. And so in responsive.
Wendy Sweet (37:03):
Bill Fairman (37:05):
That’s why you don’t own one rental property, you own 20. In that’s way, you don’t invest in one town. You invest in 20.
Wendy Sweet (37:11):
Bill Fairman (37:15):
Speaking of that, you’re kind of spread out. And we’re getting kind of close to the time here, but what about management? Do you, is your management local, and then you’re using some feet on the ground a little bit? You have a lot of automation involved? Tell me a little bit about the, how you manage these properties.
Tim Bratz (37:34):
Yeah, absolutely. Great question. I think the beauty in today’s day and age is a lot of the software’s and things can be done remotely. You know, it’s, especially with COVID-19, it’s kind of forced people to be more open to technology and doing things a little bit differently. So my team here in Cleveland can asset manage anything around the country. Depending on physical property management, any unit that we have, any building that we have, it’s typically 80 or a hundred units or bigger. We have onsite personnel. So onsite leasing agents, onsite, property manager, onsite maintenance staff, so they can utilize, like we have people right there that we can have in house management. And we can take care of that remotely. We can still pay bills from anywhere in the country, right? Like we can take maintenance calls from anywhere in the country. You can deploy work orders from anywhere in the country. You can like the way that we collect rents, we use something called app folio, which is a management software, and we require everybody to pay rent online. And it registers real time. If they don’t pay rent online, then they can take like a QR code that they could print out and go to any ACE check cashing, a 7/11 or CVS in the country go up to the front desk or the front, the cashier’s desk register and they can have it scanned and then give them cash right there. And it uploads directly into our software.
Wendy Sweet (38:54):
Tim Bratz (38:54):
So you can do all those kinds of things. And even leasing, like we’re not really doing like we use something called rently , R E N T L Y. We just put a lock box on one of the units and we furnished one unit. It’s pretty indicative of what all the units look like in that building. Right? We renovate every unit that need the same. So we leave one unit open for showings. And they go in and it’s kind a done off of like kind a what you see with the hotels and stuff. You know, you know, you’re going to give a credit card just for incidentals. It’s really in case you screw up the unit, right? They have to take a picture of their license. They take a picture of their credit card and then it texts them on their phone from this lock-box text them what the code is. They type in the lock box code, they open it up, they can access the unit. They have to self report any damage in the unit and take a picture of it. Or, you know, if somebody finds it, then thereafter, they’re going to be billed for that damage to the unit. So it just them knowing that the credit cards on file, they make sure that they don’t steal anything or break anything. But it allows us to show units without having to have a leasing agent there and rent one out 30, 40 bucks a month versus us having to have, you know, pay off 50% of first month rent to our leasing agents. So more automations and nobody has to be there. Right? So we’ve done a lot of stuff like that. We have a lot of in house management, but then we also use third party management in some markets. It just kind of depends on the market depending on the property. But then we also, we always have somebody who’s local boots on the ground, kind of like an accountability partner that could go and put their eyes on the project, on the property once a week or every other week..
Wendy Sweet (40:33):
Wow! That’s awesome.
Bill Fairman (40:35):
Tim ,you’ve we been an awesome guest.
Wendy Sweet (40:38):
I wanna talk about his coaching for a minute too. Ok, sorry.
Bill Fairman (40:43):
I know you have coaching and I know you’re looking for investors. What are the, tell us real quick about your coaching. I Because don’t want to keep you too long. I know you’ve got something else going on at 2. And then give us the best ways to people get in touch with you.
Tim Bratz (40:58):
Yeah. Well, first of all, I appreciate you guys having me here and I appreciate your abundant mindset, right? Like we’re real estate. We’re always looking for deals. We’re always looking for money. All of us are, and I think supporting each other it shows that you have an abundance mindset because you know, you got people like me on who’s an active operator and I’m bringing on money. You guys are bringing on money. It just kinda depends on what people are looking for. And you guys on mine and I’m sure you guys are to get private money investors from mine. So it just shows that like you have an abundance mindset and that there’s no limitation to how much capital is out there putting the good deals with good operators. So one I want to appreciate, and thank you guys for that.
Wendy Sweet (41:35):
Tim Bratz (41:37):
And yeah, you know, I do some coaching. I’m not one of these, these gurus, I’m actually an operator 95% of my income and my net worth comes from doing deals. But I figured out a way to educate people and teach them about how to find off market deals and teach them about how to raise capital. And what’s happened is it’s created more collaboration than over competition. And so, out of all the people that were bird-dogging deals and sending them to me and we’re looking at amazing deals all the time. And then there’s other people coming out to my coach and they’re like, you know what, it’s a little bit too much work. I’m going to let you do that. Passively invest or raise some money or give you some of my capital to go and deploy in deals. So that’s really why I do the education. It creates deal flow and money flow and a lot of cool collaborative type partnerships as well. So yeah, that’s, it’s called kind of shifting it around, but if you’ll go to LegacyWealthHoldings.com/Coaching You can learn a little bit more about it there.
Tim Bratz (42:33):
You can also inquire on,if you’ve got a deal that you want to sell us, buy from us, joint venture with us. We’re always joint venturing with great operators and great people. And sometimes we bring money,and sometimes we’re raising money, right? Like this is real estate, you’re either deal heavy or your money heavy and very rarely both at the same time. Trying to do one or the other and try to balance, keep it balanced out. So it just kind of depends on timing on where we are, but yeah, I appreciate that. We teach a lot of people how to scale from residential into apartments and really start building wealth,the real wealth, right? Like the stuff that we’re, we all think about and the thing that has the allure of why we get involved in real estate, in the first place. That residual income, that passive income, that mailbox money. But then we all get stuck in this transactional trap. Right. so this is the stuff that we really want, you know, so, yeah, that’s good.
Bill Fairman (43:26):
So I did have the pleasure of listening to you and Mike Zlotnick talking on your, one of your podcasts, you know, he’s wow! He’s a smart guy. He has a Russian accent because it makes him sound even smarter, right?
Tim Bratz (43:47):
Or more intimidating. One of the two.
Wendy Sweet (43:51):
You’re gonna believe what he says.
Bill Fairman (43:54):
Tim, thanks again for being on our show.
Wendy Sweet (43:55):
Tim Bratz (43:57):
Absolutely! Thanks for having me and appreciate you guys appreciate all the value that you guys always bring and excited to see you at the next mastermind.
Wendy Sweet (44:03):
Thank you! We are too.
Bill Fairman (44:04):
So folks, thanks for joining us. Again, our website is CarolinaHardMoney.com If you’re a borrower hit the borrower tab, if you’re an investor click on the investor tab. Don’t forget to like, share and subscribe! And we will see you guys next week. Same time. Same channel.
Wendy Sweet (44:25):
Bill Fairman (44:26):