Latest / Carson's Corner: Entrepreneurship & Investing / How to Short the Multifamily Market Without Owning Property - Richard McGirr

Transcript

How to Short the Multifamily Market Without Owning Property - Richard McGirr · Carson's Corner: Entrepreneurship & Investing

0:00
SPEAKER_02: That's the common misconception today the goal of buying a non-performing note is to take control of the property.
0:05
SPEAKER_02: That is not the goal.
0:07
SPEAKER_00: Today's guest is Richard of Property Llama, who built and lost an 80-person software company and now buys the distressed debt nobody else wants to litigate.
0:17
SPEAKER_02: There was zero durable value in the business.
0:19
SPEAKER_02: You're just on a treadmill of clients and headcount and payroll.
0:22
SPEAKER_02: It is very hard to get off that treadmill or sell it.
0:25
SPEAKER_01: Very good paying job, though.
0:26
SPEAKER_01: Nobody feels sorry for you, but at the end of the day, it doesn't matter how much money you make.
0:30
SPEAKER_01: Now I used to think when I was younger, oh, that guy's got money, he must have it made, and it's like, no, he's really busy.
0:34
SPEAKER_02: Things really went off the rails at about 40 headcount because that's about where you no longer know the names of everyone in the company.
0:42
SPEAKER_02: 20% client work, and then 80% of our time was just like rolling HR crisis.
0:46
SPEAKER_02: There's no J curve.
0:47
SPEAKER_02: With loans, you're just earning interest and paying out the interest to your LPs the whole time.
0:50
SPEAKER_02: The project is earning a return from day one.
0:53
SPEAKER_01: You're doing it as tenants are moving out and the units stay tied up in a value add position.
0:58
SPEAKER_01: It always ends up being longer than you expect.
1:00
SPEAKER_01: The renovation never goes as planned.
1:03
SPEAKER_02: You're not pro pulling a reasonable amount of income until it's stabilized, and that's typically like 12 to 18 months in.
1:09
SPEAKER_02: Versus a loan.
1:10
SPEAKER_02: You go and write that loan and you start receiving your monthly payments on day one.
1:14
SPEAKER_01: So then you get the asset when it goes to the bank or whatever.
1:16
SPEAKER_02: You choose a note that is owned by an operator who has the ability but is not yet paid off.
1:21
SPEAKER_02: Because they're playing with games with the bank.
1:23
SPEAKER_02: The banks have been kicking the can down the road.
1:25
SPEAKER_02: The bank usually is not staffed and does not want to do the foreclosure.
1:28
SPEAKER_02: So they eventually sell the note, that fund files a foreclosure.
1:32
SPEAKER_02: And then what actually happens 90% of the time is that the person pays off.
1:35
SPEAKER_02: Nine out of ten times, they actually pay it off.
1:37
SPEAKER_02: Wow.
1:37
SPEAKER_02: There's a reason why not everybody is out there buying MPL.
1:40
SPEAKER_02: These guys are super good at three things, and that most funds are only good at one.
1:44
SPEAKER_02: They're really good finance guys because the stressed loan analysis is like its whole own thing.
1:49
SPEAKER_02: Second angle is they're really good at going to court and have a taste for it, which most people do not.
1:53
SPEAKER_02: Like I do not have the taste to go suing people left and right.
1:56
SPEAKER_02: And then third of all, you have to have in-house property management.
1:58
SPEAKER_02: You then have to be a grade A multifamily operator.
2:01
SPEAKER_02: Who has all three of these pieces?
2:02
SPEAKER_01: It's a very, very hard strategy to execute in reality.
2:05
SPEAKER_01: There's risk in any investment, but I see a lot of like win-win type of uh positioning here.
2:11
SPEAKER_02: I'll tell you where the risk comes from.
2:12
SPEAKER_02: The risk is the court case.
2:13
SPEAKER_02: You have a hostile, professional, like bankruptcy filer.
2:16
SPEAKER_02: Oh, you're not gonna get that property for two years and you're gonna be paying a lawyer the whole time.
2:19
SPEAKER_01: It's gotta go through the bankruptcy trustee.
2:22
SPEAKER_01: Yeah, yeah.
2:23
SPEAKER_01: And then you have you have a bunch of other legal claims against them.
2:26
SPEAKER_01: It gets hairy.
2:27
SPEAKER_01: Do you ever picture yourself getting back into multi-fam?
2:30
SPEAKER_01: I don't know what you're doing.
2:31
SPEAKER_02: Like any kind of value add at some point.
2:33
SPEAKER_02: Actually, what's interesting, and I didn't plan to talk about this.
2:36
SPEAKER_01: We're actually planning on So, how do you see things uh like where's the end?
2:41
SPEAKER_01: I don't think you see this like hopes and dreams of interest rates dropping drastically.
2:46
SPEAKER_01: I don't think it's happening in the next 15 years.
2:48
SPEAKER_01: And I'll tell you why.
2:48
SPEAKER_01: Two reasons.
2:49
SPEAKER_01: Number one.
2:52
SPEAKER_03: Welcome to the Carson's Quarter.
2:56
SPEAKER_01: Alrighty, I'm sitting here with Mr.
2:58
SPEAKER_01: Richard McGear.
2:59
SPEAKER_01: He is with Property Llama.
3:01
SPEAKER_01: He specializes in debt funds, real estate debt funds.
3:04
SPEAKER_01: Uh Richard didn't start his journey in this space.
3:08
SPEAKER_01: Uh came from Value Add, uh, a number of different spots.
3:12
SPEAKER_01: So how are you doing, Richard?
3:14
SPEAKER_01: I'm doing great, man.
3:15
SPEAKER_01: It's really great to be here, Carson.
3:16
SPEAKER_01: Thank you.
3:17
SPEAKER_01: Awesome.
3:18
SPEAKER_01: Uh we're figuring out ri Riverside technical difficulties along the way.
3:22
SPEAKER_01: So we've uh long journey to make it on here.
3:26
SPEAKER_01: Uh welcome to Carson's Corner.
3:28
SPEAKER_01: Um so where where did you uh begin your real estate journey?
3:32
SPEAKER_02: Yeah, so um, well, like many people in real estate, I've been an entrepreneur my entire life.
3:39
SPEAKER_02: Um uh I my first career was in technology um and marketing.
3:45
SPEAKER_02: Um I moved to Hong Kong uh when I sold a marketing firm I started in college.
3:51
SPEAKER_02: Uh I worked in venture capital in the cryptocurrency space in about 2014, Wild Times.
3:57
SPEAKER_02: Um, and then just started a software development services company that I got to about 80 employees, um, about five million in revenue.
4:06
SPEAKER_02: We were doing uh consulting projects for like some of the largest businesses in the world.
4:10
SPEAKER_02: And then, like many successful entrepreneurs, I decided that I needed to buy some real estate with all this money.
4:15
SPEAKER_02: Um, which is like every single entrepreneur does this journey.
4:19
SPEAKER_02: You know, and then the other thing, things that kind of happened is that I um that business eventually came to an end due to geopolitical issues in Hong Kong and Eastern Europe, where I was doing business, which are you guys watch the news.
4:33
SPEAKER_02: You know, you know what's going on over there.
4:36
SPEAKER_02: And that when I was looking to start a new business after moving back to the US, there were there were problems with my old business, mostly that we just sold ours.
4:44
SPEAKER_02: They were either my hours or they were someone else's hours, and there was zero durable value in the business.
4:49
SPEAKER_02: Like zero.
4:50
SPEAKER_02: Like, because when you're like if you're just doing marketing services or technology services, you're just on a treadmill of clients and headcount and payroll.
4:59
SPEAKER_02: And that like it is very hard to get off that treadmill or sell it.
5:03
SPEAKER_02: Like just incredibly difficult, like very little value in the business.
5:07
SPEAKER_02: Um, and so when I started a new business, I said, I want to fix that.
5:11
SPEAKER_02: I want assets, I want a growing capital base that is compounding.
5:17
SPEAKER_02: I want durable assets throwing off cash flows that are like part of the business model, so that like there's actual value here that I'm building and not just like a job.
5:27
SPEAKER_02: And like, yeah, I just had a job.
5:29
SPEAKER_02: Like, or my wife and I, I co-founded the business with her.
5:31
SPEAKER_01: A very good paying job, though.
5:33
SPEAKER_01: Yeah.
5:33
SPEAKER_02: Oh, an excellent paying.
5:34
SPEAKER_02: I was making several billion dollars.
5:36
SPEAKER_01: But nobody feels sorry for you, but at the end of the day, it doesn't matter how much money you make, you're just a larger version of, you know, you know, I used to think when I was younger, oh, that guy's got money, he must have it made.
5:47
SPEAKER_01: And it's like, no, he's really busy.
5:49
SPEAKER_01: So no, dude, my life was hell.
5:50
SPEAKER_01: Yeah.
5:51
SPEAKER_01: Like oh, I get it.
5:52
SPEAKER_02: Yeah, especially after we got past about things really went off the rails at about 40 headcount.
5:59
SPEAKER_02: Yeah.
6:00
SPEAKER_02: Uh, because that's about where you no longer know the names of everyone in the company.
6:05
SPEAKER_02: Yeah.
6:05
SPEAKER_02: And that that means that now your company is several departments that are at war with each other.
6:11
SPEAKER_02: And like wanting like drama, and basically just the job becomes managing drama.
6:16
SPEAKER_02: Like past 40, I was doing 20% client work, which is the important part, or like actually doing delivery, and then 80% of our time was just like rolling HR crisis.
6:28
unknown: Yeah.
6:29
SPEAKER_02: And it it was and then at the end, I had nothing to show for it.
6:32
SPEAKER_02: Like we made a bunch of money, and then the business was gone, just kind of gone.
6:35
SPEAKER_01: Yeah, it was on to the next gig.
6:38
SPEAKER_02: Yeah.
6:38
SPEAKER_02: And it was like, I didn't want to do that again.
6:41
SPEAKER_02: And so I had bought some real estate and then was just very and had studied real estate for like six years before I went into this professionally.
6:50
SPEAKER_02: Like, and then I said, I want to do real estate full time.
6:55
SPEAKER_02: Um, you know, I want to be a real estate investor.
6:57
SPEAKER_02: And that where I so my partner Chris, I started the business with Chris, uh, Chris Lopez, he's the host of Passive Pockets on the Bigger Pockets Network.
7:06
SPEAKER_02: Okay.
7:07
SPEAKER_02: Good, good guy.
7:08
SPEAKER_02: He was my broker, actually, who sold me my rental properties.
7:11
SPEAKER_02: Um, yeah.
7:13
SPEAKER_02: And then like I knew he had this idea for a piece of software, and that's property.
7:17
SPEAKER_02: Like, what is property llama?
7:18
SPEAKER_02: Um, property llama is a real estate financial planning tool for landlords.
7:23
SPEAKER_02: And I don't mean like corporate landlords, I mean normal Americans do not have like a person who owns one to five rentals, that's that's our target market.
7:33
SPEAKER_02: Is they do not have a great tool for visualizing their portfolio and how is your portfolio performing today?
7:40
SPEAKER_02: Because there's a lot of dead weight in a lot of people's rentals where they don't realize that they bought like an eight cap in 2009 and that's all amazing, except you own a three and a half cap in Denver right now, uh, you know, and it's got a 20% LTV loan.
7:56
SPEAKER_03: Yeah.
7:56
SPEAKER_02: And and that you're if you run the math on that, your returns are like eight percent.
8:01
SPEAKER_02: And people are like, wait, the stock market did 13 this year already, and I don't have to be a landlord, and there's no risk.
8:07
SPEAKER_02: And if like well, I mean, there's obviously risk, but like there is, but I get it, yeah.
8:11
SPEAKER_02: Yeah, yeah.
8:12
SPEAKER_02: You're not like gonna get sued owning the SP 500.
8:15
SPEAKER_02: You can be sued owning a owning a owning a rental property very easily.
8:19
SPEAKER_02: Yeah, yeah.
8:20
SPEAKER_02: Um and so we started with that, and that that translated into a job when I got back to the US because I had been gone for eight years.
8:28
SPEAKER_02: I had no connections in the US.
8:30
SPEAKER_02: And so we co-founded Property Lama, but Property Llama was just a startup with zero revenue, like a little app, and that Chris is like, hey, you can join Curtis Street Media, which is my media company, you'll be the CTO.
8:41
SPEAKER_02: Uh, well, we get property llama off the ground, and you can help me run the rest of my businesses.
8:46
SPEAKER_02: Uh and we did that, and then the next thing you know, suddenly property llama started doing very well.
8:51
SPEAKER_02: But what happened in between?
8:53
SPEAKER_02: What happened in between is that we joined uh a private equity group.
8:57
SPEAKER_02: We were asked to join um a fund of funds, and we did not know what a fund of funds was at the time.
9:04
SPEAKER_02: Yeah.
9:04
SPEAKER_02: Um, what we were asked to join was the guy who had sold the brokerage Chris was at, like just sold the brokerage, is like, hey, my net, super successful guy, huge real estate portfolio, sold the title company, sold his uh brokerage, was the largest independent brokerage in Colorado, uh, because Chris was the number one agent at that brokerage.
9:22
SPEAKER_02: Wow.
9:23
SPEAKER_02: Um and he's like, Oh, you guys have a recording studio in the office building I own, and you guys sell real estate investments?
9:31
SPEAKER_02: Like maybe maybe you guys would be team members over here, and we're like, yeah, cool.
9:36
SPEAKER_02: Um, and then we discovered that the fund was a fund of funds.
9:40
SPEAKER_02: Like, I didn't know what a fund of funds was at the time, or I I like I knew what a fund of funds was in an institutional sense, but I was like, wait.
9:48
SPEAKER_02: So what we would do is he would select like eight real estate projects, put a fund around it, raise capital, and then it was kind of like being in a diversified mutual fund of real estate, of private real estate.
9:59
SPEAKER_02: And I was like, this is a great model because you know, I'm a businessman, we don't have to own the properties, we don't have to manage the properties.
10:05
SPEAKER_02: All we do is select the operators, select the properties, negotiate some kind of discount from the sponsor, and then we raise capital into that deal.
10:13
SPEAKER_02: And I was like, this is a great business model.
10:15
SPEAKER_02: Yeah.
10:16
SPEAKER_02: So what happened is um we eventually like that Chris and I being part of that firm that lasted about a year and a half, you know, there's creative, creative differences, difference, you know, business partnerships, some last, some don't.
10:30
SPEAKER_02: Um, and we decided to go out on our own.
10:32
SPEAKER_02: And this is about 2023.
10:35
SPEAKER_02: Um, and so right as interest rates are kind of finished rising, you know, this really dramatic raise of interest rates.
10:42
SPEAKER_03: Oh, yeah.
10:43
SPEAKER_02: And that when we were at the previous month, we did mostly real estate equity deals.
10:49
SPEAKER_02: So it was development and value add deals in multifamily.
10:52
SPEAKER_02: Yeah.
10:53
SPEAKER_02: And that we raised, did very well.
10:55
SPEAKER_02: We raised$45 million, approximately, not not an income claim.
10:59
SPEAKER_02: We raised, we raised mid-40 million dollars um in in one year, and we were like, hey, Chris and I did all the marketing, we can do this ourselves, you know.
11:10
SPEAKER_02: And then we went and launched our first value ideal basically in 2023.
11:15
SPEAKER_02: Except by then, market sentiment from investors had really turned, and that we thought we were gonna raise another 40 million a year or at least 20 million a year, right?
11:24
SPEAKER_02: Because we picked all the low-hanging fruit, but we should at least be able to raise half.
11:27
SPEAKER_02: We raised three and a half million dollars, I believe, in like eight months.
11:35
SPEAKER_01: Yeah.
11:35
SPEAKER_01: Oh, I believe it.
11:37
SPEAKER_02: Yeah, because basically investor appetite just kind of evaporated by the end of 2023, as you're aware.
11:43
SPEAKER_02: Yeah, oh yeah.
11:44
SPEAKER_02: Yeah, and that we were trying real hard, and take my word for it, that we were really good marketers and really good at raising capital.
11:52
SPEAKER_02: I mean, trust me, because we had just raised$45 million the year before.
11:55
SPEAKER_02: We're like, what the hell is going on here?
11:58
SPEAKER_02: Except one thing that we noticed was that that previous fund, they didn't just have the real estate equity fund, they also had um a credit fund, which was making loans to um flippers in the Denver area.
12:12
SPEAKER_02: I'm from Denver.
12:13
SPEAKER_02: Or I'm not from Denver, I live here now, that's where Chris is.
12:15
SPEAKER_02: Okay, um, and that this fund was about half of the capital we raised when we were at that previous firm.
12:22
SPEAKER_02: And that not only that, we later found out looking at the financial model of the company when we were like discussing with the principal over there that basically that fund was paying for all of the operations at the company.
12:38
SPEAKER_02: And why is that?
12:40
SPEAKER_02: So, number one, it was the largest single amount of dollars that went into a single project, it was all went into one credit fund.
12:47
SPEAKER_02: And number two, this credit fund was a complete cash machine for the sponsor.
12:52
SPEAKER_02: Why is that?
12:53
SPEAKER_02: Um, it's a complete cash machine for the sponsor for the same reason that it's a cash machine for our investors, is that the way the way that the return is earned on loans is it's very linear.
13:03
SPEAKER_02: There's no J curve.
13:04
SPEAKER_02: There's not like, hey, we got to go execute a value add plan and then sell the asset, and then we make 70% of the profit at the end.
13:10
SPEAKER_02: With loans, you're just earning interest and paying out the interest to your LPs the whole time.
13:14
SPEAKER_02: Yeah.
13:15
SPEAKER_02: And that therefore, like the the project is earning a return from day one versus like, you know, day one in a value add project, actually the property value goes down typically.
13:25
SPEAKER_02: Like you typically lose money for a couple years before it turns around.
13:29
SPEAKER_01: Well, yeah.
13:30
SPEAKER_01: You're you're doing it as tenants are moving out and the units stay tied up in a value add position for long.
13:36
SPEAKER_01: It always ends up being longer than you expect.
13:39
SPEAKER_01: But yeah, I totally get that.
13:42
SPEAKER_01: The renovation never goes as planned, it almost seems like.
13:45
SPEAKER_02: Yeah, well, and you're not pro pulling a reasonable amount of income until it's stabilized, and that's typically like 12 to 18 months in, maybe, you know, maybe versus a loan.
13:55
SPEAKER_02: You go and write that loan and you start receiving your monthly payments on day one.
14:00
SPEAKER_02: Oh yeah.
14:02
SPEAKER_02: And and that that means as a manager, that is a source of revenue where you are now taking your carry monthly too, instead of all in 70, because it's the same problem for the GP.
14:14
SPEAKER_02: The LPs, yeah, they earn all their money in five years.
14:16
SPEAKER_02: Well, guess what?
14:17
SPEAKER_02: Your compensation as a manager is tied to your LPs, and therefore in a value ideal, you're making all your money in five years too.
14:25
SPEAKER_02: That's a very hard financial model from an entrepreneur's point of view to say I have to spend a whole lot of money raising a fund, you know, or time, time or money, same thing.
14:34
SPEAKER_02: Um, and then I have to like staff my company and pay for marketing and attract investors and do and we're gonna do all this work and then we're not gonna make a major amount of money on this for four years.
14:49
SPEAKER_02: Oh, I know.
14:50
SPEAKER_01: It's a tremendous amount of work.
14:52
SPEAKER_02: Well, and and that you gotta wait four years to get your money back?
14:55
SPEAKER_01: Oh yeah.
14:56
SPEAKER_01: Well that's yeah, that's what most uh beginning multifamily or any kind of real estate investor doesn't understand is how much work is involved in putting together the project and the risk and the execution that it takes and all that.
15:10
SPEAKER_01: That it's you almost have to plan for the worst, but um do you ever picture yourself getting back into multifam or I don't know what you're doing, like any kind of any kind of value add at some point?
15:24
SPEAKER_01: I mean, is there a possibility?
15:25
SPEAKER_02: I mean, if the deals start coming off, so actually what what what's interesting, and and I didn't plan to talk about this, we're actually planning on getting real short multifamily right now.
15:36
SPEAKER_01: What do you mean real short?
15:38
SPEAKER_02: Well, you know, like short selling in a market, and people say Oh, yeah, yeah, yeah.
15:41
SPEAKER_02: Yeah So how how do you short private value add multifamily?
15:45
SPEAKER_02: Of course, the obvious question.
15:46
SPEAKER_02: Like, how how how would you short this?
15:48
SPEAKER_02: Like, I would love to short it.
15:49
SPEAKER_02: I mean, yeah rates are up to five point two four this morning.
15:53
SPEAKER_02: Yeah, yeah.
15:54
SPEAKER_02: Like, oh, I'd love to get short.
15:56
SPEAKER_02: How do you do it?
15:57
SPEAKER_02: We're getting into non-performing loans.
15:59
SPEAKER_02: Okay.
16:00
SPEAKER_01: Yeah, that's gonna be So then you get the asset when it goes to the bank or whatever.
16:06
SPEAKER_02: So that's the common misconception.
16:09
SPEAKER_02: Is that is that the game plan in the common misconception, which I had as well, yeah, was that the goal of buying a non-performing note is to take control of the property.
16:20
SPEAKER_02: That is not the goal.
16:21
SPEAKER_01: Yeah.
16:22
SPEAKER_01: You don't want to operate.
16:24
SPEAKER_02: No, no, no, no, it's not even about that.
16:26
SPEAKER_02: What happens and the way you select your deals is you choose uh a note that is owned by an operator who has the ability but is not yet paid off.
16:37
SPEAKER_02: Okay.
16:38
SPEAKER_02: Because they're playing with games with the bank.
16:40
SPEAKER_02: Because that's but they've been rewarded.
16:42
SPEAKER_02: Like the banks have been kicking the can down the road and they're like, Oh yeah, give me an extension or a modification or this or this or this or this or this, and that they'll get away with it as long as they can, except the bank usually is not staffed and does not want to do the foreclosure.
16:56
SPEAKER_02: So they eventually reach their limit of patience, and then what they do is that they sell the note to a non-performing fund, and then basically that fund files a lawsuit day one.
17:06
SPEAKER_02: Or like a foreclosure.
17:08
SPEAKER_02: And then what actually happens 90% of the time is that the person pays off because suddenly it's like, hey, chips on the table.
17:14
SPEAKER_02: Uh, you know, you're you're filling the blank as in a vice.
17:18
SPEAKER_02: Um, are you gonna lose this property or are you gonna go refi and figure out a way to pay this loan off?
17:23
SPEAKER_02: And nine out of ten times they actually pay it off.
17:26
SPEAKER_02: Wow.
17:27
SPEAKER_02: Wow.
17:28
SPEAKER_02: So you don't want to totally think that you're trying to get the property, but that's not the game plan.
17:33
SPEAKER_02: Like if you're not gonna do it.
17:33
SPEAKER_01: You do end up, it doesn't happen that way.
17:36
SPEAKER_02: No.
17:37
SPEAKER_02: And so they're actually like super high cash flowing funds.
17:40
SPEAKER_02: That's the interesting part, is because like the average deal duration is like six months, actually.
17:46
SPEAKER_02: Because it just takes six months of filing lawsuit and going to court and then finally like coming to a settlement with a borrower.
17:53
SPEAKER_01: Yeah.
17:55
SPEAKER_01: What does it look like when they don't pay it?
17:57
SPEAKER_01: Do you just take over the property?
17:58
SPEAKER_02: Yeah, then you take over the property.
18:00
SPEAKER_01: Have those uh have those turned around pretty good?
18:03
SPEAKER_01: I mean, you're you're getting it at a steep discount, aren't you?
18:06
SPEAKER_02: Yeah, yeah.
18:07
SPEAKER_02: So problem being in that case, okay, here's I'll start with a good thing.
18:10
SPEAKER_01: You really don't want that.
18:12
SPEAKER_01: You don't want the property because it like you said, it's just like another value added's a headache.
18:16
SPEAKER_02: I mean, isn't that well I'd say that that's not it because you're you're okay, yes, but you're in the property at an amazing basis.
18:23
SPEAKER_02: And that's where like like basis is everything in real estate.
18:26
SPEAKER_02: Yeah, basis is frickin' everything.
18:28
SPEAKER_02: So you are in a good position at this point.
18:30
SPEAKER_02: Like I would say you have gotten a property, you have paid way less than the objective worth of that building, and you have taken control of it.
18:40
SPEAKER_02: So that's a huge win.
18:41
SPEAKER_02: Yeah.
18:42
SPEAKER_02: Now, how long do workouts take?
18:44
SPEAKER_02: A while.
18:46
SPEAKER_02: So you are gonna do well, but it may take a year or two versus what we're looking for is like I said, that payoff and the kind of six months, and that that's the bread and butter in the majority of the time.
18:58
SPEAKER_02: But what happens when the person doesn't pay off and we take control?
19:01
SPEAKER_02: We're in an amazing price, except it may take time to get out of that deal.
19:04
SPEAKER_02: Especially because that deal often may be not stabilized.
19:08
SPEAKER_02: You know, because the guy didn't have money to turn units, didn't have money to do anything.
19:13
SPEAKER_02: Uh a lot of times they've the the the borrower has also like mentally walked away a long time ago.
19:18
SPEAKER_02: Oh, yeah.
19:19
SPEAKER_02: You know, and so you've got like vacancy problems, deferred maintenance, all this other stuff, except you know that coming in.
19:25
SPEAKER_02: Like you know the value, like you drive by the property before you take control of that note.
19:29
SPEAKER_02: Yeah.
19:29
SPEAKER_02: Like you know the condition that it's in, and you know that I'm gonna come in at like typically.
19:34
SPEAKER_02: What's funny is the first time I talked with this partner and he's like 75 per 70% LTV, 70% LTV.
19:40
SPEAKER_02: And I was like, Do you mean 70% LTV of the property?
19:45
SPEAKER_02: He's like, No, of the unpaid balance.
19:48
SPEAKER_02: And so they're really in at like a 50% discount, they're in at like a very deep discount on the property.
19:54
SPEAKER_02: Just takes at that point, like takes a while to get your money back.
19:57
SPEAKER_02: Like it because they're not liquid, you gotta sell it, you gotta do all these other things.
20:00
SPEAKER_02: Like, you are gonna make your money for sure and do very well for sure.
20:04
SPEAKER_02: Well, not for sure, of course, no guarantees in real estate.
20:07
SPEAKER_02: You guys know when I you guys know what I meant by that.
20:09
SPEAKER_02: Um things look pretty good because you're in at a great basis, and that's 90% of the ball game in real estate, you know?
20:15
SPEAKER_02: Yeah.
20:16
SPEAKER_02: But what you're really looking forward is that payoff, to be honest.
20:19
SPEAKER_02: It's it's really like you're like, I know you got the money, bro.
20:22
SPEAKER_02: Like, you got you got 12 other properties and a PG on this note.
20:27
SPEAKER_02: Do you really do you really want to play?
20:28
SPEAKER_02: Like, look me in the eyes.
20:30
SPEAKER_02: And they pay.
20:32
SPEAKER_01: That's uh that's pretty interesting, man.
20:34
SPEAKER_01: I never really looked at it from that perspective.
20:36
SPEAKER_01: I was thinking, you know, you're hoping they default, and it's like, nah, you really don't.
20:41
SPEAKER_01: If er if every one of them defaulted, it would be an absolute nightmare.
20:46
SPEAKER_01: It would be unmanageable.
20:47
SPEAKER_01: Well, you can manage it, but you would have to raise additional capital and it would it would be a huge it would be a huge headache.
20:53
SPEAKER_01: I mean, it's doable, but you don't want like a hundred of them defaulting at once, but you know.
20:58
SPEAKER_02: Well, dude, and it's a much harder strategy.
21:01
SPEAKER_02: Like, there's a reason why not everybody is out there buying MPLs, is because you have to be, and that's the one thing I learned working with this group was that these guys are super good at three things, and that most funds are only good at one.
21:13
SPEAKER_02: Yeah.
21:14
SPEAKER_02: Like they're really good finance guys because these loan docs and calculating accruals and calculating like a value of a loan, and and like the entire financial analysis and distressed loan analysis is like its whole own thing.
21:26
SPEAKER_02: You know what I mean?
21:27
SPEAKER_02: Like bank banks have floors of office buildings of people who just do that.
21:31
SPEAKER_02: And then the second angle is they're really good at going to court and have a taste for it, which most people do not.
21:37
SPEAKER_02: Like I do not have the taste to go suing be suing people left and right.
21:41
SPEAKER_02: Like they spend two hundred thousand a month on legal, I I think they told me.
21:45
SPEAKER_02: Yeah.
21:46
SPEAKER_02: You know, so then you gotta be really good at litigation and have a taste for it too.
21:50
SPEAKER_02: Yeah.
21:50
SPEAKER_02: And then third of all, you have to have in house property management.
21:54
SPEAKER_02: Yeah.
21:55
SPEAKER_02: Which is you well you then have to be a grade A multifamily operator.
21:59
SPEAKER_02: Yeah.
22:00
SPEAKER_02: And then you're like, who has all three of these pieces?
22:02
SPEAKER_02: It's a very, very hard, like, very hard strategy to execute in reality.
22:07
SPEAKER_02: Very lucrative, super lucrative, but you gotta be good at like three things that most people, you really only need to be good at one to make decent money.
22:14
SPEAKER_02: And these guys had to be good at all three.
22:16
SPEAKER_01: Oh, yeah.
22:16
SPEAKER_01: That's pretty crazy.
22:18
SPEAKER_01: So what is your um you know, what's the typical size of the loan that y'all are doing?
22:23
SPEAKER_01: I mean, you you're I'm like picturing this.
22:25
SPEAKER_01: I'm like, okay, if you have multifamily kind of applies to a lot of different, I mean, are you looking at 10 units or 100 or is it just all kinds of larger, larger, 100, 50, 200?
22:38
SPEAKER_02: Well, it's because most of it is a court case so that the the difficulty doesn't really scale with units.
22:44
SPEAKER_02: So you really want to like make it worth your time.
22:48
SPEAKER_02: You know, so we're they're typically looking at like twenty to seventy million dollar loans.
22:53
SPEAKER_02: Oh wow.
22:53
SPEAKER_02: Okay.
22:54
SPEAKER_02: Yeah, and then buying them for 80% of the payoff or or 80% of the unpaid balance.
22:59
SPEAKER_02: Yeah.
23:00
SPEAKER_02: Or 90% or even a hundred percent of the unpaid balance, because what it what else has happened in the loan here is that the borrower has been in default for 12 months and that most commercial loans have default interest, you know, which then kicks the interest rate up into the 20s typically.
23:15
SPEAKER_02: Oh wow.
23:16
SPEAKER_02: And really, so it's usually like you have unpaid balance, and that's just your principal, right?
23:21
SPEAKER_02: Yeah.
23:21
SPEAKER_02: But then what you have is the full payoff, which includes accruals.
23:25
SPEAKER_02: And that's typically what the non-performing fund is arbitraging, is essentially saying we're gonna pay close to face value of the note in terms of principal.
23:34
SPEAKER_02: Like you'd be surprised, like you're not paying 50 cents on the dollar for principal.
23:38
SPEAKER_02: What you are paying off is usually the banks have written off all the accruals, which is the unpaid interest and unpaid default interest.
23:45
unknown: Okay.
23:46
SPEAKER_02: And that basically where the money is made is yeah, we pay we paid often, often a hundred cents on the dollar of the payoff.
23:54
SPEAKER_02: Okay.
23:55
SPEAKER_02: But then there's another 40 cents of accruals that we did not pay, and that therefore that's our margin.
24:00
SPEAKER_02: And our leverage with the borrower is we're like, your full payoff right now is enormous because you've been in default for eight months and haven't been making payments.
24:09
SPEAKER_02: Yeah, you know what I mean.
24:10
SPEAKER_02: And that you're staring at a massive bill and that this thing is just cranking 25% interest for every day that you drag this out.
24:17
SPEAKER_01: I think there's like a mental something or another that you mentioned earlier.
24:22
SPEAKER_01: Like, have they mentally already defaulted on it?
24:25
SPEAKER_01: No matter who legally owns the loan or if they're what the legal position is, a lot of owners they've either decided mentally, I'm gonna keep this asset no matter what happens, and I think that's that 90% you're talking about.
24:40
SPEAKER_01: They're like bringing in the family, the friends, anybody with a penny to their name to help bail them out.
24:45
SPEAKER_02: Well, because they've been jerking the bank around and been getting away with it.
24:48
SPEAKER_01: Yeah.
24:49
SPEAKER_01: And they know they have been, and they have the ability to pay, and they're just playing games.
24:53
SPEAKER_01: And then you have the ones that are like, I want this property gone.
24:57
SPEAKER_02: No, I'm done.
24:57
SPEAKER_02: Like I changed my name.
24:58
SPEAKER_02: I moved out of state a year ago.
25:00
SPEAKER_02: Yeah.
25:00
SPEAKER_02: Like like Yeah, like that.
25:02
SPEAKER_01: Yeah.
25:03
SPEAKER_01: They they don't even answer the phone, and then when you send notice that you're foreclosing, they're like, Yes.
25:08
SPEAKER_01: Yeah, no, no, seriously, there's probably some relief where they're just like, it's off my plate.
25:11
SPEAKER_01: Yeah.
25:12
SPEAKER_01: Yeah.
25:12
SPEAKER_01: So but but it but having that it's like uh uncomfortable confrontation that the traditional bank never had that you already Well, they don't have the taste for it.
25:22
SPEAKER_02: That was the thing.
25:24
SPEAKER_02: It's that second category where I met the guy at the spun and I was like, dude, you're a psychopath.
25:29
SPEAKER_02: A brilliant psychopath, but he you could tell that guy just shows up and he's like, This goddamn borrower, I showed him who's boss.
25:35
SPEAKER_02: Like, like, I mean, just Yeah.
25:37
SPEAKER_01: Total love to fight.
25:39
SPEAKER_01: But a lot of times it's like with the borrower, they've been delaying a decision for a very long time.
25:47
SPEAKER_01: Like sometimes uh it's been years, and it's like, do you really want this property?
25:52
SPEAKER_01: Or it's kind of like it's time to part ways with it or well, no, what happens is you just file suit and then suddenly it gets real.
25:58
SPEAKER_01: Yeah.
25:59
SPEAKER_01: It's real.
26:00
SPEAKER_01: You have a you have a necessary confrontation and say, hey.
26:03
SPEAKER_02: Yeah, because that's what these guys do.
26:05
SPEAKER_02: These guys take possession of the note, and then in like the first week they're filing suit.
26:09
SPEAKER_02: Or like, don't quote me on the timeline because I realize we're discussing securities here.
26:12
SPEAKER_02: But it's like yeah, just file suit, and then suddenly now we're at the table.
26:16
SPEAKER_02: And it's like, okay.
26:18
SPEAKER_01: Well, it you don't have to put a time frame on it, but that's the top priority.
26:21
SPEAKER_01: Whether it's two weeks or sixty days, it's still gonna happen pretty quick, you know.
26:26
SPEAKER_02: Well, and that's when suddenly the borrower is gonna realize like, okay, buddy, yeah, do you want to keep this property or do you want to give it to us?
26:32
SPEAKER_02: Because we are gonna win the case because the you signed a contract where this is very clearly like there's no daylight in this contract.
26:38
SPEAKER_02: This is my property if you do not pay this up.
26:40
SPEAKER_02: It's only a matter of time before we get through this court case.
26:42
SPEAKER_01: So, you know, there's there's risk in any investment, but I see a lot of like win-win type of uh positioning here.
26:50
SPEAKER_01: It's uh I don't know.
26:51
SPEAKER_02: You see other Well, I'll tell you where the risk comes from.
26:53
SPEAKER_02: Dude, the risk is the court case because the amount of money like like I talked about, like these dudes spending 200K a month on legal.
27:00
SPEAKER_02: Yeah, that is where things get like real they can really get out of hand.
27:04
SPEAKER_02: Like, for example, if suddenly someone like if you have a hostile professional like bankruptcy filer, yeah.
27:10
SPEAKER_02: Oh, dude, you're not gonna get that property for two years and you're gonna be paying a lawyer the whole time.
27:14
SPEAKER_01: Oh yeah.
27:15
SPEAKER_01: And it's got to go through uh, what is it, the bankruptcy trustee and all that.
27:19
SPEAKER_01: Oh, yeah, yeah.
27:20
SPEAKER_01: And then you have you have a bunch of other um, you know, people with l legal claims against them.
27:27
SPEAKER_01: I mean, there's other debt holders that are there trying to go through the trustee.
27:32
SPEAKER_01: So then they have to divide it up and it's just they I don't know.
27:36
SPEAKER_01: Yeah, yeah.
27:37
SPEAKER_01: But that's where it goes off the rails, dude.
27:38
SPEAKER_01: Yeah.
27:39
SPEAKER_02: Is really like a court case going bad.
27:42
SPEAKER_01: I could see that.
27:42
SPEAKER_01: So if there was like massive, massive bankruptcy like in 2008, and I hate even pointing there because it's like the likelihood of that ever happening again is very low because the government will step in.
27:54
SPEAKER_01: The political consequences like were ongoing for decades later from that event.
28:00
SPEAKER_01: So I don't think I think our government will step in a lot sooner and and just try and print m print their way out of it.
28:07
SPEAKER_02: Dude, especially because they could have gotten out of that so easily.
28:10
SPEAKER_02: Like I just read Too Big to Fail, the the the Andrew Ross Sorkin book about Lehman.
28:16
SPEAKER_02: And that literally, like, to prevent Lehman from going under, the private banks just wanted a$48 million billion dollar backstop.
28:23
SPEAKER_02: $48 billion is nothing.
28:25
SPEAKER_02: Yeah.
28:25
SPEAKER_02: It's nothing.
28:26
SPEAKER_02: And that you you hear that in 2026, and you're like, these frickin' idiots at the Fed wouldn't give them$48 billion, and look where that got you.
28:35
SPEAKER_01: Yeah.
28:36
SPEAKER_01: Oh, I know.
28:38
SPEAKER_01: Yeah.
28:39
SPEAKER_02: It was so avoidable.
28:40
SPEAKER_02: It was avoidable.
28:41
SPEAKER_02: So avoidable.
28:42
SPEAKER_01: I I just think the pollin political consequences will be pretty they they realize how unpopular.
28:47
SPEAKER_02: Well, it would have been cheap, dude.
28:49
SPEAKER_02: Like it would have been cheap.
28:51
SPEAKER_01: Yeah, but it it's just one of those.
28:52
SPEAKER_01: I don't think it'll ever happen again.
28:54
SPEAKER_01: But, you know, with that, there are risk and any kind of investment.
28:58
SPEAKER_01: But, you know, then you have like legal delays.
29:00
SPEAKER_01: It's not just bankruptcies.
29:02
SPEAKER_01: I'm sure are there certain j jurisdictions that you stay out of?
29:05
SPEAKER_01: Do you try and stay out of California just because it's expensive to allow it?
29:08
SPEAKER_02: Okay, my partner is here's the thing.
29:10
SPEAKER_02: The partner we work with is on the East Coast and they stay there because here's the thing they have their property management company footprint that they stay in.
29:19
SPEAKER_02: Because look, what happens is you still got to take the asset 10% of the time.
29:22
SPEAKER_01: Yeah.
29:23
SPEAKER_01: So you only you only take it on if it's in a market that you feel comfortable with.
29:27
SPEAKER_02: Well, that they literally have staff on the ground.
29:29
SPEAKER_02: They have vertically integrated property management.
29:31
SPEAKER_01: Okay.
29:32
SPEAKER_02: But like, yes, but however, to like to more directly kind of answer what you were getting at, actually there are markets where there are dramatically easier or harder to foreclose.
29:42
SPEAKER_03: Yeah.
29:43
SPEAKER_02: Um, and like, for example, like Texas and Austin, what you have is non-judicial foreclosure, which means you don't have to file suit.
29:50
SPEAKER_02: Like there's no lawsuit.
29:51
unknown: Wow.
29:52
SPEAKER_02: That's a lot easier.
29:53
SPEAKER_02: You're gonna get that property a lot quicker.
29:55
SPEAKER_01: Just gonna change the law because I'm just kidding.
29:58
SPEAKER_01: I know I know the process is harder than that, but anyway.
30:01
SPEAKER_02: Yeah.
30:02
SPEAKER_02: Like that there is so I can't really speak to like I said, I'm relatively new into this trade.
30:07
SPEAKER_02: Like we did we've spent actually, it's almost a year anniversary of the negotiation before, like, and we just signed the JV last week.
30:15
SPEAKER_03: Yeah.
30:15
SPEAKER_02: I what's funny is that like it I feel so good about it because I never could have predicted rates going up another point and a half.
30:22
SPEAKER_02: You know what I mean?
30:23
SPEAKER_02: Like I wasn't willing to go long, like doing multifamily, like you're saying.
30:28
SPEAKER_02: Yeah.
30:29
SPEAKER_02: And I had a bit of conviction going short.
30:32
SPEAKER_02: And that like I think that okay, I'll take credit for myself.
30:37
SPEAKER_02: I think we made we had a very good view, and that going long was absolutely not the right time to go long yet.
30:43
SPEAKER_02: And that now suddenly I'm like, wait, I I have an opportunity like this people on Twitter are like, this is gonna be a generational run for special special situations.
30:51
SPEAKER_02: And I'm like, who's got a special situations fund?
30:54
SPEAKER_01: Yeah.
30:55
SPEAKER_01: This guy.
30:56
SPEAKER_01: Oh yeah.
30:58
SPEAKER_01: I well, I think like the mistake a lot of people made is when interest rates started going up, like in 2022 and 23, people were like, okay, and I backed out of multifamily like in 2020.
31:12
SPEAKER_01: Oh, good time.
31:14
SPEAKER_01: 21, I got away from it.
31:16
SPEAKER_01: But I just I think people thought like this'll end.
31:20
SPEAKER_01: It's not it, they're like, this is only like a two-year blip, and we'll forget about this and laugh.
31:25
SPEAKER_01: And I'm just like, this could go on for a decade.
31:28
SPEAKER_01: You know, and it and it and we're almost we're getting into that territory where, you know, I don't know how long the interest rate environment goes, you know.
31:38
SPEAKER_02: Dude, I'll give you another topic though.
31:41
SPEAKER_02: Like, besides interest rate, over half of commercial mortgage-backed securities are with a DSCR lower than one.
31:48
SPEAKER_02: Wow.
31:48
SPEAKER_02: Yeah, and so the distress had like that's the reason we were comfortable getting short and not comfortable getting long.
31:53
SPEAKER_02: Yeah.
31:54
SPEAKER_02: Is I was like, I can't get long with that kind of a statistic hanging over me where like half of these loans on the market need to be sold and cannot even pay their own debt.
32:02
SPEAKER_02: And like you want prices to go up, like, no way, dude.
32:05
SPEAKER_02: Yeah.
32:05
SPEAKER_02: And then I never could have seen that rates would then go up a point and a half.
32:10
SPEAKER_02: But even that, like, I would have been bearish regardless.
32:13
SPEAKER_02: Well, I was bearish regardless.
32:14
SPEAKER_02: Yeah.
32:14
SPEAKER_02: Like and that like, but your your point being is that it is gonna take so long to clear out the cycle, and that that has been such a learning thing of like I mean, we're literally setting up a fund to take advantage of trades that occurred five to six years ago.
32:30
SPEAKER_02: Oh, I know only finally getting judgment.
32:34
SPEAKER_02: You know, yeah.
32:36
SPEAKER_02: Like it's wild.
32:36
SPEAKER_02: And then we got another I mean, with now with rates going up a point and a half, like we probably have another five years to do deals.
32:43
SPEAKER_01: Like wow.
32:46
SPEAKER_01: Yeah.
32:47
SPEAKER_01: Yeah.
32:48
SPEAKER_01: So how do you see things?
32:49
SPEAKER_01: Um, I have to ask you, like, where's the end?
32:53
SPEAKER_01: I mean, we kind of talked about there's not a collapse.
32:56
SPEAKER_01: I kind of just think the market slowly works itself out, but I don't I don't think you see this like hopes and dreams of interest rates dropping drastically.
33:09
SPEAKER_01: I think the only way that happens if there's like a dude, you don't want that to happen, like a freaking war.
33:14
SPEAKER_01: You you don't well, it's like a war or a like a recession from like the dot-com bubble bursting and then interest rates.
33:21
SPEAKER_01: No, you don't want that.
33:22
SPEAKER_01: But most people uh assume that with lower rates you're gonna see higher prices, which isn't necessarily true, because if it happens for a bad event, even like the dot-com bubble, eventually real estate started going like this, but during that period it went down.
33:37
SPEAKER_01: Yeah.
33:37
SPEAKER_01: And that that'll cause some distress.
33:39
SPEAKER_01: I it's just not always a good thing when rates go down.
33:42
SPEAKER_01: I want to see them come down, but I don't think that's happening, dude.
33:46
SPEAKER_01: I am Oh not it won't happen fast unless there's a recession.
33:50
SPEAKER_02: I don't think it's happening I don't think it's happening in the next 15 years.
33:53
SPEAKER_02: And I'll tell you why.
33:54
SPEAKER_02: Well, it won't go it won't go down to what they were.
33:57
SPEAKER_02: No, dude, I disagree.
33:58
SPEAKER_02: I I th I think we're gonna be here.
34:00
SPEAKER_02: And I'll tell you why.
34:01
SPEAKER_02: Why is that?
34:02
SPEAKER_02: Okay, two reasons.
34:04
SPEAKER_02: Number one, and they're both equally weighted.
34:08
SPEAKER_01: Yeah.
34:08
SPEAKER_02: Number one, full faith and credit of the US government.
34:11
SPEAKER_02: I'm sorry, look at the deficit.
34:13
SPEAKER_01: Yeah.
34:14
SPEAKER_02: As long as a lot of people agree with me and feel that the situation does not have a way of turning around, that's gonna put a lot of pressure on rates.
34:23
SPEAKER_02: Number two, my bigger point is that you I think a really underrated driver in interest rates right now is actually not that.
34:31
SPEAKER_02: And it's all the money's going into AI, and that there's a finite amount of capital in the world, and that that money prefers to be in AI.
34:38
SPEAKER_02: Yeah.
34:39
SPEAKER_02: And that that drives rates up, and guess what?
34:41
SPEAKER_02: GDP growth is high.
34:43
SPEAKER_02: Why?
34:44
SPEAKER_02: Because of the data center.
34:45
SPEAKER_02: Well, guess what?
34:46
SPEAKER_01: When GDP is that's the thing, is GDP is kind of like artificially inflated because of data center and stuff.
34:52
SPEAKER_02: But that's not artificial, it's very real activities.
34:57
SPEAKER_01: Well, it can be though.
34:58
SPEAKER_01: How many of how many of those companies are profitable though?
35:01
SPEAKER_01: I believe it's a good debate to have.
35:03
SPEAKER_01: You're AI, you're a uh a technology.
35:06
SPEAKER_02: You know, I'm a complete my I am so long in my portfolio semiconductors, you have no idea.
35:11
SPEAKER_02: Yeah.
35:12
SPEAKER_02: Like, no, and that' o okay, not to too derail.
35:17
SPEAKER_02: My personal token consumption, I run two anthropic claude subscriptions, a chat GPT subscription, a cursor subscription, and a Gemini subscription.
35:25
SPEAKER_02: Yeah.
35:25
SPEAKER_02: If if I was paying API prices for that, it would be about$45,000 a month.
35:33
SPEAKER_01: Wow.
35:34
SPEAKER_02: And that's just me.
35:35
SPEAKER_02: And there's only 0.2% of the population uses coding models.
35:40
SPEAKER_02: Yeah.
35:40
SPEAKER_02: And that that 0.2% of the population is literally causing a worldwide shortage of compute and memory.
35:46
SPEAKER_02: Yeah.
35:48
SPEAKER_02: I yeah.
35:53
SPEAKER_01: Yeah.
35:54
SPEAKER_01: I'll I'll say this.
35:56
SPEAKER_01: I think with the AI thing, I think there's a lot of the companies.
36:00
SPEAKER_01: So so the younger generation, it's it reminds me of Facebook.
36:05
SPEAKER_01: Whenever they never really charged for it.
36:07
SPEAKER_01: Like they weren't doing ads, and it was just you got on there and they were just getting people addicted at that point.
36:13
SPEAKER_01: And Facebook really wasn't profitable early on.
36:16
SPEAKER_01: And I think the AI right now isn't profitable, but I think there's going to be like a version of that.
36:21
SPEAKER_01: They're just getting people addicted to the AI, and the younger generations will be addicted, but there's going to be some sort of price reset.
36:30
SPEAKER_01: Uh there they have to monetize it.
36:32
SPEAKER_01: And you're already seeing like chat GBT starting to do ads and stuff like that.
36:37
SPEAKER_01: And then there's but a lot of it's unprofitable.
36:41
SPEAKER_01: I think there'll be a slowdown.
36:43
SPEAKER_01: I don't know about a crash like the dot-com thing, but I think it'll slow down to where GDP will slow down.
36:50
SPEAKER_01: I think rates eventually come down, but I don't think it means prices go up with it.
36:55
SPEAKER_01: That's what I think.
36:56
SPEAKER_02: I I have two caveats to where there is very much a plan of why tokens are being subsidized, and that the re they have a a path out, and that path out is two trends which have been proven, which is one, the cost to produce a token is going down a lot, but the value of a token in terms of work or GDP or value of a task is going up.
37:25
SPEAKER_02: Okay.
37:27
SPEAKER_02: And so therefore, that's a that alone, if you leave it on the same trend, reaches an equilibrium where basically like consumers require less tokens to get a job done.
37:40
SPEAKER_02: Those tokens can be produced more cheaply by a lab, however, the customer gets more value out of those tokens.
37:46
SPEAKER_02: That is without a doubt a model for margins going positive and pricing power.
37:52
SPEAKER_02: Okay.
37:52
SPEAKER_02: I I didn't know we were going to go here, but I've I've like I'm such a hardcore AI bull.
37:57
SPEAKER_02: Like I could talk about this for an hour.
37:59
SPEAKER_01: Like I well, well, investors, like for somebody investing in your company and stuff like that, I think it's like, but they they're there's a lot of that that you have to talk with them through because they have like curiosity and like fear of like where in the hell are we going?
38:17
SPEAKER_01: Because it's like even people that are like small business owners, they're sitting there running their business thinking about, okay, I'm gonna invest in this debt fund, but you know, is AI gonna put my plumbing business out?
38:28
SPEAKER_01: You know what I'm saying?
38:29
SPEAKER_01: It's it's you know, they have they they just have concerns and everything's changing so fast, and you know, they're like, okay, it's like they're losing their footing.
38:39
SPEAKER_02: So well, dude, that's why both of these trades are very I have very short duration on both my funds very intentionally.
38:47
SPEAKER_02: In my hard money fund, we have six month loans.
38:50
SPEAKER_02: Yeah.
38:51
SPEAKER_02: Like that is a very structurally short-term trade.
38:54
SPEAKER_02: Yeah.
38:55
SPEAKER_02: Where I don't have to, and what do I mean by short term?
38:58
SPEAKER_02: I don't have to forecast more than six months out when my partner writes a loan.
39:02
SPEAKER_02: Yeah.
39:02
SPEAKER_02: Or I have to factor out a year because there could be a delay.
39:05
SPEAKER_02: But that the what are all of the possible things that could happen in the economy and the market within a one-year period versus a five-year period is very different.
39:14
SPEAKER_02: It is very different.
39:16
SPEAKER_02: Yeah.
39:16
SPEAKER_01: We are we are because some of the stuff you and I are talking about is like five years out, you know, or even two or three.
39:21
SPEAKER_01: I mean, but it's the same thing.
39:23
SPEAKER_02: Like look at my non-performing fund.
39:25
SPEAKER_02: It has the same average loan duration.
39:27
SPEAKER_02: On average, there's okay, no, on that fund it's like seven and a half months.
39:30
SPEAKER_02: Yeah.
39:31
SPEAKER_02: And so I I am actually very positioned intentionally as a manager around like very short-term trades right now.
39:39
SPEAKER_01: Yeah.
39:40
SPEAKER_01: Get in, get out, get your money, and then and then move on.
39:43
SPEAKER_02: You know, or that they're just trades that like all will resolve themselves in seven months, and that therefore there's not that much less that can go wrong in seven months.
39:51
SPEAKER_01: Yeah.
39:52
SPEAKER_01: Well, you you know, the the only thing I think there was downward pressure on rates at one point, but it was never going to happen fast.
40:00
SPEAKER_01: Yeah.
40:00
SPEAKER_01: It w it wasn't a fast trend.
40:02
SPEAKER_01: And the reason why is because oil and gas came down.
40:05
SPEAKER_01: Then the war broke out, and then it put upward pressure on it.
40:08
SPEAKER_01: Yeah, yeah.
40:08
SPEAKER_02: That's that's why I say I can't really take credit for the point and a half, but well, still though, it doesn't matter though.
40:14
SPEAKER_01: If it so even if it reverses and the and the war ends and gas prices come down, the trend to go to lower rates is a very slow one.
40:24
SPEAKER_01: So the stuff we're talking about is like two to three years out anyway, so it's like or or a year at least, you know, it's not going to be like this overnight rate change that people have been, you know, begging for since 2022 or thinking was possible without some major event like you said.
40:41
SPEAKER_02: So, you know, I mean what I think it comes down to though is that like which I think strengthens my AI bull case is that like like, dude, the war in Iran should have crashed the economy.
40:55
SPEAKER_02: Yeah.
40:56
SPEAKER_02: Oh, yeah.
40:56
SPEAKER_02: And why, why didn't it?
40:58
SPEAKER_02: It's because the hyperscalers are getting 30% return on invested capital for their chips.
41:04
SPEAKER_02: So they were like, I don't care.
41:06
SPEAKER_02: They were just like, hey, you you want me to pay 7%?
41:09
SPEAKER_02: Don't care.
41:10
SPEAKER_02: You want me to pay 9%?
41:11
SPEAKER_02: Don't care.
41:12
SPEAKER_02: Yeah.
41:13
SPEAKER_02: They were just like, I can handle the price shock.
41:15
SPEAKER_02: Doesn't matter.
41:15
SPEAKER_02: We're making so much money.
41:17
SPEAKER_01: Dude, I I I have this AI conversation probably like three times a week with people because I'm I sell data center properties.
41:24
SPEAKER_01: You know, like I yeah, I broker the land and stuff, you know, for like stuff in I'm working on a property in Chile, Mexico.
41:32
SPEAKER_01: You know, I have a Memphis site with some megawatts and just Oh, you got power at it already?
41:38
SPEAKER_01: And then you're just you're just kind of like, how long is this gonna last?
41:41
SPEAKER_01: You know, am I gonna go specialize in uh powered land and then it's just like it's gone in two years?
41:47
SPEAKER_01: I don't believe that, dude, at all.
41:48
SPEAKER_02: Like I told you, my token consumption is a little bit more than a little bit of a few.
41:51
SPEAKER_02: My token consumption personally is doubling every two months.
41:55
SPEAKER_01: Yeah.
41:56
SPEAKER_01: I I don't think it goes anywhere fast, but I think there's gonna be some failures in the stock market.
42:02
SPEAKER_01: Of course.
42:02
SPEAKER_01: The stock market and needing power are two different things.
42:05
SPEAKER_01: Just because, like, you know, you have a company showing profit and their stock goes through the roof and that's fake doesn't mean that there's not a need for the land and stuff like that.
42:15
SPEAKER_01: It's just I'm always curious what people's thoughts are on it.
42:18
SPEAKER_02: So No, I'm I'm bullish as sorry, I don't know how you skip without saying it.
42:23
SPEAKER_02: Yeah.
42:23
SPEAKER_03: Yeah.
42:25
SPEAKER_02: Like, dude, I'm I'm 15, 20 years bullish, man.
42:29
SPEAKER_02: Like I read I read Leopold Aschenbrenner's paper, the the Situational Awareness, the guy whose hedge fund blew up earlier this year.
42:37
SPEAKER_01: Yeah.
42:38
SPEAKER_02: And he's the he called out high rates like three years ago.
42:43
SPEAKER_02: Where he's like, there's gonna be so much demand.
42:45
SPEAKER_02: Like, if you just do simple math, like the situation, the math and the situational awareness paper, yeah, which is really about decreasing token prices, increasing token utilization, and increasing value of a token, if you just extrapolate that out, there's there's probably like 0.2% of the population is are the people using all the tokens.
43:06
SPEAKER_02: Imagine when the other 99.8% of the population figures out how to use these tokens or the tokens are forced upon you.
43:13
SPEAKER_01: And it's only and it's only going to grow.
43:14
SPEAKER_01: Yeah.
43:15
SPEAKER_01: It's kind of like, you know, I go back to the Facebook analogy.
43:18
SPEAKER_01: When you say token, just for educational purposes, what do you mean for our audience?
43:23
SPEAKER_01: Okay.
43:23
SPEAKER_02: So a token is literally a unit of compute, a unit of input or output in a model, and that's what you get charged on.
43:30
SPEAKER_01: Yeah.
43:31
SPEAKER_01: So like if you ask it a question and it answers it, or if it'll answer it.
43:36
SPEAKER_02: 200 tokens, a thousand tokens, a million tokens, it'll that's like cost per task, for example.
43:41
SPEAKER_02: Dude, I love talking about this.
43:43
SPEAKER_02: Cost per task, if you're smart in AI and you read a model card, which is they you know, it's the report every time a model comes out.
43:51
SPEAKER_02: Yeah.
43:52
SPEAKER_02: The big metric everyone talks about now is cost per task.
43:55
SPEAKER_02: Yeah.
43:56
SPEAKER_02: Because they'll benchmark the same model saying for the same.
44:04
SPEAKER_02: And the cost per task has been collapsing.
44:08
SPEAKER_02: Yeah.
44:09
SPEAKER_02: That's defensive.
44:10
SPEAKER_02: And that means that the models are smarter and they can get the work done in less time.
44:15
SPEAKER_01: Yeah.
44:16
SPEAKER_01: I get that.
44:17
SPEAKER_01: Yeah.
44:17
SPEAKER_01: It's going to become more efficient.
44:19
SPEAKER_01: So it's it's a lot of moving parts, man.
44:21
SPEAKER_01: It's like, okay.
44:22
SPEAKER_01: And you think about it, it's it's a lot coming together at once.
44:25
SPEAKER_02: So dude, I listened to podcasts where they talk about repurposing marine diesel engines into like moving them on site at data centers because they're out of gas turbines.
44:35
SPEAKER_02: And so people were like, okay, if there's no more gas turbines, is that going to stop the build out?
44:40
SPEAKER_02: And then the guy on the podcast was like, marine diesel, locomotive engines.
44:45
SPEAKER_02: Like this, like this.
44:48
SPEAKER_02: Because like the power, the power is actually only about 10% of the cost structure in a data center.
44:53
SPEAKER_02: And that therefore there's room for that to go to 20.
44:56
SPEAKER_02: And then like, like, dude, you you you gotta like get on some podcast levels where people are like going.
45:04
SPEAKER_02: I mean, because that broke my brain.
45:05
SPEAKER_02: I'll admit, like, that totally broke my brain.
45:07
SPEAKER_02: I was like, wait, they're gonna put marine diesel on site at data centers.
45:11
SPEAKER_02: And the guy's like, it's only 40% more expensive than a gas turbine.
45:15
SPEAKER_01: And I'm okay.
45:18
SPEAKER_01: Well, that you know, that's part of why like these data centers get the protesters.
45:22
SPEAKER_01: Well, it's the race with China, but you know, they um Elon, I think, brought on like old engine things, and then the environmentalist talking about it.
45:32
SPEAKER_02: No, he brought turbines on site without a permit.
45:35
SPEAKER_01: Yeah.
45:35
SPEAKER_01: I think that's a good thing.
45:38
SPEAKER_01: I think if it was used with solar, there wouldn't be as much outrage, but there's noise with those too, and it's you know, there's a I think there's a way to do it.
45:45
SPEAKER_01: You know, I just think it's there there's a need for it, and there's just overwhelming demand right now where it's like Well, and an arms race.
45:53
SPEAKER_02: And an arms race.
45:55
SPEAKER_02: I think that the federal government, like you heard Trump, he's like, we're not slowing down.
45:58
SPEAKER_02: Yeah.
45:59
SPEAKER_01: Oh yeah.
46:00
SPEAKER_01: The arms race.
46:02
SPEAKER_01: I love it.
46:02
SPEAKER_01: The AI arms race.
46:05
SPEAKER_01: Dude, no, there is.
46:06
SPEAKER_02: That's a very serious cover.
46:07
SPEAKER_02: Like, dude, we we cannot.
46:08
SPEAKER_02: I lived in China for eight years.
46:09
SPEAKER_02: I will be the first person to tell you, like, we do not want to be behind China and AI.
46:13
SPEAKER_02: Like, we do not.
46:14
SPEAKER_02: Like, that's not good for America.
46:17
SPEAKER_01: Like uh, you you you do you picture them uh sending robots over here?
46:23
SPEAKER_02: Dude, vividly.
46:25
SPEAKER_01: Vividly.
46:25
SPEAKER_02: Yes, it's a major concern of mine.
46:27
SPEAKER_02: And also, by the way, robots require um, on average, uh, I think they need 600 gigabytes of RAM, by the way.
46:36
SPEAKER_02: Wow.
46:37
SPEAKER_02: Yeah, yeah, yeah.
46:38
SPEAKER_02: You want more semi dude, I got I got semiconductor alpha for days, bro.
46:43
SPEAKER_01: Like, like I am so long.
46:45
SPEAKER_01: Like you have what what uh semiconductor?
46:48
SPEAKER_01: I well, we can't give financial advice.
46:50
SPEAKER_01: I can ask you what stocks are.
46:51
SPEAKER_02: I can tell you what's in my portfolio.
46:52
SPEAKER_02: I I like NVIDIA and I like micron.
46:54
SPEAKER_02: Yeah, I was about to say they're US based stocks.
46:57
SPEAKER_01: That's hard to go wrong with, yeah.
46:58
SPEAKER_02: Also, their net operating margins are up like 40 to 80 percent, depending on the company, yet their stock is sideways and they've gone from a PE over 30 to under 20.
47:09
SPEAKER_02: Wow.
47:09
SPEAKER_02: You said what was it, Micron or Well, Micron M U.
47:13
SPEAKER_02: So they're they make HBM, the high bandwidth memory, which everybody needs.
47:17
SPEAKER_01: I I used to be a stock trader, like uh tech stocks.
47:20
SPEAKER_01: Oh, I loved it, man.
47:21
SPEAKER_01: Like I used to do it all the time and I get got too much full time.
47:25
SPEAKER_01: I just buy and hold forever.
47:26
SPEAKER_01: Oh, me too.
47:27
SPEAKER_01: I I have a fun account.
47:28
SPEAKER_02: Yeah.
47:29
SPEAKER_01: Oh, your your play account.
47:31
SPEAKER_01: There you go.
47:31
SPEAKER_02: Yeah, yeah.
47:32
SPEAKER_02: No, my my retirement accounts are index and then my my my cash account is single stocks for fun.
47:39
SPEAKER_02: Okay.
47:40
SPEAKER_02: Yeah.
47:40
SPEAKER_02: Yeah.
47:40
SPEAKER_01: I just buy I do Roth IRA and I just buy it long term and you know, just hold it forever.
47:45
SPEAKER_01: So, you know.
47:46
SPEAKER_01: It's like I buy Nvidia and I just don't look at it.
47:49
SPEAKER_01: Because if you look at it, you'll be tempted to trade.
47:51
SPEAKER_01: But every now and again, I'll get in my trading account.
47:53
SPEAKER_02: Yeah, I tell you, like buy more, man.
47:54
SPEAKER_02: They're under a 20 on a PE.
47:56
SPEAKER_02: And both of them are now announcing dividends.
47:59
SPEAKER_02: And if you look at the dividend buyback plan for both companies, I think Micron is talking about it's some very large, I don't want to say the number because I have no confidence in it, but some very large double-digit portion of their revenue is gonna go into buybacks at this point because your PE's gone from 30 to 18, even though your net income and growth is up almost double.
48:18
SPEAKER_02: Like, yeah, buyback your stock.
48:20
SPEAKER_02: Like tech textbook.
48:22
SPEAKER_02: I mean, and that buyback pressure alone will I I think NVIDIA and Micron especially are gonna rip 27 from just buybacks basically.
48:30
SPEAKER_02: Awesome, man.
48:31
SPEAKER_01: Yeah, I don't I don't think there's anything stopping NVIDIA.
48:34
SPEAKER_01: You know, it's gonna probably keep going.
48:36
SPEAKER_01: That's not financial advice, that's just our opinions.
48:38
SPEAKER_01: No, exactly.
48:39
SPEAKER_02: Well, they have 98% margins.
48:42
SPEAKER_01: Man, um I'm I'll I really enjoy talking about this kind of stuff.
48:46
SPEAKER_01: So it's like, okay, you know, the the market crash and the AI and all the stuff everybody really does.
48:51
SPEAKER_02: It's funny because I'm so bearish real estate and so bullish semis at the same time.
48:55
SPEAKER_01: Yeah.
48:56
SPEAKER_01: Oh, I love it.
48:57
SPEAKER_01: You know, and you position your well, you you position yourself well to be bearish on real estate right now.
49:02
SPEAKER_01: So I I'm not bearish on all real estate.
49:04
SPEAKER_01: You know, there's some area?
49:06
SPEAKER_03: Same here.
49:06
SPEAKER_01: Well well, and not all markets are equal.
49:08
SPEAKER_01: Like, you know, there's certain multifamily markets that are very strong, like Indianapolis and Kansas City, but then there's a lot of them that are way overbuilt with a lot of distress.
49:18
SPEAKER_01: Yeah.
49:18
SPEAKER_01: Like industrial real estate in some parts.
49:21
SPEAKER_01: Right.
49:21
SPEAKER_01: So do I.
49:22
SPEAKER_01: And and um, you know, of course, powered land for data centers is always good.
49:27
SPEAKER_01: You know, that's where it's at.
49:28
SPEAKER_01: They need to call Carson, right?
49:30
SPEAKER_01: Dude.
49:31
SPEAKER_01: They if they have land uh with some power next to it or want to site evaluate it, they can call me.
49:36
SPEAKER_01: But let's uh let's get the focus on your uh debt fund.
49:40
SPEAKER_01: And um so, you know, overall you're you know going in, doing, you know, buying distressed uh notes on um multifamily properties, and the goal is to get paid.
49:53
SPEAKER_01: And if they don't pay, you take the property over over at a very, very low basis, a very advantageous uh place and um turn it around and sell it, right?
50:03
SPEAKER_02: Yep.
50:04
SPEAKER_02: I mean, on the performing side, it's a much more simple contract.
50:07
SPEAKER_02: It's literally just like I loan, we we, me and my partner, because I'm a fund of funds, we loan money to flippers.
50:13
SPEAKER_02: The overwhelming majority of the time they pay their interest and pay us back.
50:17
SPEAKER_02: And it's a very simple model.
50:18
SPEAKER_02: Great for cash flow.
50:20
SPEAKER_02: And and your listeners can learn about that on my website, propertylama.com.
50:24
SPEAKER_02: That's our main product, is the performing fund.
50:26
SPEAKER_02: I mean, nice double-digit cash flow.
50:28
SPEAKER_02: Very nice.
50:29
SPEAKER_02: Okay.
50:30
SPEAKER_02: And then I have a show, uh, best ever CRE.
50:33
SPEAKER_02: Uh best ever on the Monday show.
50:36
SPEAKER_02: Uh it's a show about entrepreneurship and marketing within real estate.
50:41
SPEAKER_02: Okay.
50:41
SPEAKER_02: It's not a show about real estate.
50:42
SPEAKER_02: Well, I mean, you you you get it.
50:45
SPEAKER_02: But yeah.
50:46
SPEAKER_01: Yeah.
50:46
SPEAKER_01: Okay.
50:47
SPEAKER_01: Awesome, man.
50:48
SPEAKER_01: Um I need to come on your show, dude.
50:51
SPEAKER_02: Uh, you it's done.
50:52
SPEAKER_02: It's done.
50:52
SPEAKER_02: I'll send you the booking link right after this.
50:54
SPEAKER_01: Yeah, I'll I'll talk about data center land or something or something.
50:56
SPEAKER_02: Oh, god, nobody's come on my show to talk about data centers.
50:58
SPEAKER_02: So you are you're and then we can argue about token tokens again.
51:03
SPEAKER_01: Yeah, when's there when's the next crash or something?
51:05
SPEAKER_01: I don't know.
51:06
SPEAKER_01: Yeah.
51:06
SPEAKER_01: Um, no, great having you on.
51:08
SPEAKER_01: Um debt funds are very advantageous uh where uh you're positioning yourself for a down market, and there's certain markets that don't look pretty in multifamily, so it's a good spot to be.
51:20
SPEAKER_01: So anyway, Richard, I appreciate you coming on and uh look forward to staying in touch.
51:24
SPEAKER_01: And uh Yeah, you too, Carson.
51:25
SPEAKER_01: Yeah, absolutely.
51:26
SPEAKER_01: Thank you so much.
51:26
SPEAKER_02: I will see you on the best ever CRE show very soon.
51:29
SPEAKER_02: There we go.
51:29
SPEAKER_01: I'll see you soon, man.