Latest / The Commercial Builders’ Network (TCBN) / How Real Estate Financing Really Works (From $1B+ Deal Maker) PART 1
Transcript
- speaker-0: Well, if you understand finance, you can understand how the world works. If you play with pennies, you make pennies. If you play with dollars, you make dollars. They may be doing five to 10 deals a year. We might see 50 to 60, 50 to 100 deals a month. Every one of those loan submissions is a story. speaker-1: This is the Commercial Builders Network, where trust is restored, power is reclaimed, and legacy is built. Let's get to work. Hello, beautiful people, and welcome to another episode of the Commercial Builders Network. My name is Tanisha Reed. I'm your host. And today we have the GOAT of financing, all right? Any type of deal that you need, this man can get it done. This is Kenneth Egway. How are you, sir? speaker-0: I'm doing wonderful. speaker-1: Look, I've been following your tri-rack for a long time. You know, I was a small fry. I'm still kind of small fry. And you was doing your thing. It's been a long time. I've known you and your team for at least 10, maybe? At least 10 years. At least 10 years. So I love it. I love what you're doing for the industry, for our people. And the people that you've trained up are always good people. I thank you. speaker-0: Thank you. appreciate the con words. It definitely has been, we've been in this space for 11 years and it's definitely felt, ⁓ I felt every single year of it. definitely felt that also. speaker-1: Awesome, awesome. So tell the people. Now know I told them you to go. Go ahead, tell people who you are and what are you known for. speaker-0: Sure. So ⁓ as you stated, my name is Kenneth Egway. I'm the managing director for Baker College and Company. ⁓ I'm a finance guy. ⁓ I run a firm that finances real estate investment projects all over the country ⁓ for residential as well as commercial real estate investors, developers, as well as business owners. ⁓ One of the things that delineates us from other groups is we also not just run the firm, we also teach. So really big on education and making certain that people really understand what they're getting themselves involved in, not just on the real estate side, but also on the business side. And so we want people to really understand how these products can work for you. And we share with you the pros as well as the cons when we get into these deals. speaker-1: Awesome. Awesome. So before we jump further into the capital and financing, tell me about Little Kenneth and where you're from and what shapes your mentality to get into real estate and finance. speaker-0: Awesome. So I was born in Nigeria. I came here when I was five. That's why you don't really hear an accent. Obviously Nigerian parents and went to, I was supposed to become a doctor as so many Nigerians ⁓ become. Whether you're a doctor, an attorney or engineer, anything else is nothing short of a failure. And so as a good Nigerian boy, I decided went to high school to become a doctor, realized that medicine probably wasn't for me after kind of looking at a couple of interning with a neurosurgeon my junior year of high school and going to a live surgery. And I don't know if anyone's ever been to a live surgery. It's not what you see on TV. So here I am. I'm playing, I'm running track. I'm playing football. So I'm a bigger kid, pretty athletic. But even with my size, I was almost fainted in that hospital room because I was just like, just didn't want to do that. My goal was to become the world's greatest neurosurgeon. But after kind of interning with him, realizing that, hey, medicine is just not for me. So at that point I decided to become an engineer. And that kind of put me on the path to engineering. From there, went to Morehouse College. There's an also Georgia Tech. There's a program that they have where you can get two degrees for the price of one. It's called the dual degree program. So I got a NAFTA grit, more house. I got engineering a grit or Georgia tech. I realized that, you know, spent my first year out of undergrad working for IBM, but came to the realization very quickly that ⁓ engineering can be as, as much as I love putting together, solving problems, working on systems. It just wasn't something I thought about doing for a while. So read about, you know, books like Rich Dad, Poor Dad and Robert Kiyosaki and read about all these things about real estate. And guys, this is early 2000s. So there was no YouTube, there were no platforms that we're currently having this discussion on. A lot of information that you had to get was either through reading books, or going to seminars. And so I did a lot of those to the point where I would literally I was at a seminar every single Saturday. just trying to absorb as much as this information as possible. And those seminars actually led me to doing a couple of residential flips. That's when I kind of, I got bit by the real estate bug. And because of that, that just kind of led me on this journey. I started to try to do some wholesale deals, realize I wasn't really fond of wholesaling, but candle realization, I like doing these little flip things. But then I wanted to do bigger deals and. That kind of allowed me to kind of get into the commercial real estate space, which right now we'll chat more about as well. speaker-1: So you said engineering, mathematics, and finance, that's a powerful academic combination, right? How does that help you, I guess, with your views on how you structure your deals and things like that? speaker-0: Um, well, you know, math teaches you how to think logically about situations and how to structure problems, how to math people rely. The basis of mathematics is it is numbers, but it's really logic and thinking through problems and solving problems. Engineering teaches systems and how to apply those systems so you can get the best results and how to use components and how those components interact with each other. And then finance teaches you how to kind of. put together the solving of problems, put together the systems and how teachers also how capital flows, right? And how did those decisions really impact risk and return? So that's kind of like, this is why I like to call them the triumvirate. And I think it was a good trajectory as to how my careers has gone. Just understanding the solving of problems, understanding how humans think through problems, understanding risk and return. And so those things just kind of was natural for me. And also just in understanding how human beings are affected by the decisions that ⁓ these things can create or how they can either benefit you or work toward your debt. speaker-1: What was that moment earlier in your career where you realized that understanding financing, how you structure the deal and understanding the mechanisms behind it that made you realize that that's where the real power lies in real estate. speaker-0: Very good question. So when I was in grad school, one of my professors shared with me that, now this was actually undergrad, I apologize, this was undergrad. I took a course, business course, and I was a math, I was an engineering guy ⁓ in undergrad and had no thought, I always knew I wouldn't have run my business or run a business or own a business in some form or fashion, but he said something that just kind of never, just left an indelible impression on me. And that was, If you understand finance, you can understand how the world works. If you understand finance, you understand how history works. If you understand finance, you'll never be without a job. So you'll always have a good job if you understand how finance works. And so when he said that, that just kind of changed the way I thought about a lot of things. ⁓ And so because of him saying that while I was doing my little real estate deals back in early 2000s, some fix and flips and things that sort, I was really kind of interested in how the financing works. And then one of the things, and there was a seminar that I did go to in the early 2000s. there's the, he, the gentleman that was giving the seminar, ⁓ he was ⁓ Jim Rome's, no, Carlton Cheech's competition. The guy, he's still alive. God, I forget his name, his name escapes me at the moment. But when he stated, Hey, look, if you play with pennies, make pennies. If you play with dollars, you make dollars. And so what he was trying to get people to understand is to consider working on bigger deals, specifically on the financing side. And so those two statements from those two gentlemen really changed the course of my life and realize and also realize by playing by understanding financing, I get to play and we get to play on so many more deals. The average real estate investor made me know if they're a residential real estate investor. Let's see, even if they're doing a high value real estate investor. They may be doing five to 10 deals a year. That's a high value residential real estate investor. Now I called, there are some very sophisticated guys and gals who are probably doing 50 to a hundred deals a year, but those are more like small enterprises. But most folks who do that now compare that to what we do. We might see 50 to 60, 50 to a hundred deals a month. And so we're going to be able to see, and I look at every single loan submission, especially that char our team. every one of those loan submissions is a story, right? They all have commonalities to them, but they're all different stores because they represent different ⁓ metrics. They represent different personal metrics that investor, different business metrics. They represent obviously different localities. We finance deals all over the country. So we get to see all these stories that come in. And we realize the common denominator that is going to allow them to finish this story is obtaining the financing for it. And so we play that part in it. So realizing that financing kind of allowed you to interact with so many investors, really just, I just found that to be amazing. ⁓ This was an awesome thing. speaker-1: Absolutely. So you've been in the game over 20 years and along this time you have helped to originate more than one billion and that is what the bee people. One billion dollars in debt and equity. Please tell me what is the hardest or the toughest lesson that you've learned along the way? speaker-0: ⁓ everything revolves around clear communication and just being upfront with folks. and if you're not clearly communicating to your capital partners, which we have a good amount of, and you're not clearly communicating to your borrowers, which we have good relations with, ⁓ that goes a long way. The hardest lessons are the times where we were not communicating well with them or we just made the assumption that they knew certain things. And so by making certain assumptions, this is where folks tend to have things get challenging. ⁓ We had to learn that. And I know that sounds super simple, but when you're dealing with certain investors, especially folks that are just getting into the business, whether it's on the residential side or the commercial side. And even on the commercial side, there are some commercial investors that are not really understand, they don't really understand how certain types of financing works, but really communicating with that. ⁓ And understanding that sometimes the lowest rate is not the best, best structure. The structure is what really makes this work and really educating folks as to how that works. So we've been taught a lot of lessons. as I've probably made every single mistake you could make as a, ⁓ yeah, an operator and owner of a company of the size. But we understand that those are just lessons. not necessarily failures. And you just have to be able to learn from them in some form or fashion, and just keep moving, move on and share them with share your lessons to folks that they don't make the same ones as well. speaker-1: Absolutely. So with this 20 years, you've been through quite a few different market shifts. Can you tell me, has there ever been a time where you were like, ah, I can't keep going with this? And if not, what made you keep going? speaker-0: Um, so when I got out of, um, undergrad, I obviously worked, in the, worked for IBM for some time and fixed a couple of houses. But then I went back to grad school and, um, prior to that, I was actually, I was able to get a job in investment banking. And so, and, and that's some banking, um, especially in the real estate side. Uh, we kind of lived through the, uh, the 2007, 2008, uh, real estate crisis. That was tough. That was tough. That was very, very difficult. And I don't think people understand how challenging that was. I lost a lot. A lot of my colleagues lost a lot. Unfortunately, there are some people, and this has not been recorded in the news, there are some people that actually took their own lives. And so it kind of just allowed everyone to kind of understand, hey, this could go wrong really badly. And so that was the time that I really thought, hey, look, man, this real estate thing may not be for me. So much to say, I actually left real estate and tried to start, well started a oil trading company because I was like, you know what, this real estate thing is great, but this market is tough. ⁓ You're seeing the same players. I just was making every single excuse as to not move forward with it. So I did quit. I did take a break. But I went into another venture, a venture that I should never have stepped my toes in, put my toes in because that venture almost bankrupted me, full disclosure. I mean, I'm literally trying to set up a company where we were going to we were trying to sell jet fuel to certain airlines, realize that that was a very, very, very, that industry is a very tough industry, the energy markets, especially when you're trading, buying and selling oil to certain to certain industries. So not certain industries, but certain companies, especially when those companies have been established. for 20, 30, 40, 50, 60 years. So that was when I just led, and I didn't just think about it, I actually did it. But what brought me back to real estate was realizing, hey, number one, the oil trading business wasn't for me. You're losing a lot, you're losing a lot. You've lost a lot monetarily, you've lost a lot of sleep, your health isn't that great. There's so many things you're losing, why not go back to what you know? I love finance, I love real estate. Why not go back to something that kind of encompasses or that has both of those components together, which is real estate finance. speaker-1: Awesome. It's interesting you say that. I love your transparency because I am one of those people, and I'm sure there many others out there, when it gets to that point between eating and not eating, you figure out how to pivot. ⁓ And sometimes the pivot is not, it looks like it's going to be a better option, but sometimes it could be to your detriment. And I've experienced that personally. What is your advice to people who are in that moment where it's like, I don't know what to do, I don't know where to go, should I keep going, should I pivot? Based on your experience, especially having a passion and knowing what you're good at and what your first love is, what would your advice be to those people? speaker-0: big on community. I'm really big on community. I'm really big on establishing relations with the people who have either gone through it before and they don't necessarily have to be in your industry. You know, this is when I was at my lowest. I would just, I mean, I'm like, I think of myself as a logical person, but when I was at my lowest, obviously, I thank God I have a strong family and I can call, I've got a twin brother who we talk about, we were in business for a number of projects together. I've got some amazing brothers and sisters and I've got a great family, got a great support network. ⁓ Now for someone who may not have that, you have to go out elsewhere for some of that information. But the very first thing you do if you're considering a career change, if you're considering doing something else, if you're considering pivoting, start having conversations with people who you know, like and respect. And they were going to be honest with you about what they believe you should do. Take their opinions, take them out to lunch. If you can't afford it, just get on a phone call with them. and discuss this and be transparent with them. Because, and you know, find people who've gone through this before, because every single person in business, if you have not gone through a challenge or a crisis, or some type of ⁓ storm, ⁓ you haven't been business strong enough, or you haven't dared yourself enough to be to be to do bigger stuff, right? ⁓ But just have that community in place and start now. But you know, have this conversation with people. ⁓ the people that you know, like and respect people who have done these things, who have gone through these waters, sometimes choppy and have those conversations because they're the ones who are going to kind of give you the advice. And some of the advice may not necessarily be for you. Some of the advice should be like, ⁓ my God, that's amazing. Some of the advice in the air, some of the advice may be exactly what you need to hear, but just start there and then just try to figure out. I'm a big believer of just obviously taking the advice from folks. And then thinking through what I need to think through and then trying to figure out again ⁓ an analysis of, what's the worst that could happen? What's the best that could happen? Can I live with this? And how will this affect my mental health? Because that's necessarily that needs to be taken to account on some levels as well, because you have to be mentally ready and mentally prepared every single day when you go out and you have these conversations with folks. No matter what industry you're in, but just be mindful of those things as well. But really start to get, if you're not in a community already, just start to get into one. And it doesn't matter. it doesn't, the community doesn't necessarily have to be the industry that you're in. ⁓ I'm in multiple communities. I like having conversations with people who are in different industries. I love conversing with folks who are in, you know, the arts and folks that are in the life sciences and folks that are in outside of real estate and finance, but just get different perspectives from those folks as well. speaker-1: That's really good. So when I know that your company does private financing, private lending, can you explain what the difference is behind your products and private lending compared to traditional banking financing? speaker-0: So we've actually re we've reframed. ⁓ Well, we've we've kind of changed the way and how we finance deals. So on we only work with real estate investors. So if you're someone who's looking to buy property to live in, we are not the firm for you. You're not. So we have two teams. First team works with real estate investors, ⁓ residential real estate investors ⁓ in the sense of where they're structuring renovation loans, single family renovation loans. single family new construction loans, single family rental loans. That's our residential real estate investment team. That's more so private lending, right? On the private side, ⁓ we will work with certain groups such as ⁓ private equity funds, debt funds, in some cases, insurance companies will also work with ⁓ family offices to provide bridge loans and also permanent loans. for the residential real estate investment group. On the commercial side, because this is another side that we have, and when someone says commercial real estate, to me, I'd love for people to be more specific as to what they do in commercial real estate, because commercial real estate, there's a mosaic of asset types, right? You've got office, retail, multifamily, industrial, hospitality, land, special use. There's a number of those items. So we finance those asset types, ⁓ and we finance them through either bridge financing, or perm financing, and that could either be private money. also will finance products. We offer loan types such as CNBS loans, commercial mortgage backed securities. We do debt funds. We'll finance it with SBA loans. So we have a number of different loan products that we work with. But on the private side, this is where to answer your question, on the private side, this is a little more flexible. Private side, private money, a term that's been used over the last couple of years now is private credit. That's just a fancy way of saying, offering financing for bars that may not necessarily fit within the conventional or the traditional lending box, meaning that their projects may be a little more complex and the bank is willing to take on. ⁓ They may not have certain things in place such as taxes that the banks are going to want to see, personal as well as business. Typically on the private side, taxes are not really that big of an issue. On the private side, income verification, employment verification, those are things that banks are going to definitely want to see in some form or fashion. On the private side, those are items that are just not necessarily needed. So on the private side, it's a little more flexible, but with that flexibility does come, admittedly, a little bit of a higher interest rate, admittedly, a little bit of higher origination fees, admittedly, a shorter loan terms. because they're riskier loans and because they're not requiring ⁓ tax returns and income verification and employment verification, that these loans are now a little riskier. And for the risk, for the increased risk, now we are going to, ⁓ the pricing is going to be different. ⁓ However, it still allows an investor or developer or business owner to achieve the goal of either buying real estate, refinancing the real estate they already own. or developing the real estate that they're either looking to buy or acquire, own or acquire. Very long-winded answer, but wanted to be specific. speaker-1: Get me together. appreciate it. I appreciate the explanation. ⁓ I want to kind of walk through a couple of like scenario, real life scenario base to see because I know you have a lot of products that you offer. Just to see what type of ways that I you would fund a deal. say that you have maybe a person that's an investor who has a small commercial building, whether it's an office space or a warehouse of sorts, right? And it needs to be rehabbed, needs some upgrades before they either rent it out or sell it. What's the first kind of thing that you would look at? Thanks for tuning in. Part two drops next week.