Latest / Real Investor Radio Podcast / Ep 65 | Real Estate Resilience: Home Building, Community Development, & Leadership with Pat Flynn
Transcript
- Craig Fuhr (00:00) Well, hey, welcome back to Real Investor Radio. I'm Craig Fuhr joined by Jack BeVier of the Dominion Group. And we were just speaking on the last episode with Pat Flynn of Flight Builders. We spoke at length about Pat's partnership in his previous company, Yellowbird. And if you haven't had a chance to go back and take a listen to that one, it was great stuff, especially for real estate investors who were looking to scale sort of time the market. and really think about marketing in a way that probably a lot of people don't think about tracking your KPIs and all the things that good real estate investors should do. And Pat has been and his partners were really expert in that. So Jack, why don't you go ahead and kick us off? And Pat, welcome back to the show. Pat Flynn (00:48) Yeah, thank you guys. Jack BeVier (00:50) Yeah. So I wanted to dig in on your current enterprise. So you, you and Kyle decided you had different visions for the future and how you wanted to run your businesses. know Kyle's operating a lending business right now, which I love that business, particularly from a lifestyle perspective. You know, if you've, yeah, if you, get your head around values in a market and you've got capital to deploy. Pat Flynn (01:09) So do I, actually. Jack BeVier (01:17) I mean, pound for pound. don't think there's, I don't think it gets much better than a lifestyle lending business. So someday I aspire to chill out and just do that. That would be fun. Play a little more golf, you know, see, see the family a bit more. Pat Flynn (01:24) really agree. You know, that's such a personal, it's such a personal decision though, right? To where this is what Kyle wanted. And once again, not speaking for him, but he knows the market so well, he has capital, the money's out, but it's not operationally difficult, right? He's got, he can run that whole thing with one person and... Jack BeVier (01:41) yeah. Pat Flynn (01:56) Yeah, so if you have other things to fill your time with that you would rather do, there is nothing better. Like I've been watching him up right now for two years and he's good. It is definitely not operationally intense. Jack BeVier (02:11) Yeah, that's awesome. Craig Fuhr (02:11) Hey, Pat, will you share with us what you were doing prior to being a real estate investor? Pat Flynn (02:17) Yeah, yeah, sure. So I'm from Massachusetts and the goal out of high school was my old man was a Marine, I was gonna be a Marine too. So I went to a military school in New York called Kings Point for college, US Merchant Marine Academy. The military thing there, just I was young and stupid, 19. Craig Fuhr (02:33) Mm -hmm. Yep. Pat Flynn (02:43) 20 years old and didn't necessarily subscribe to the discipline side of the military thing. So I didn't end up going Marine Corps. I ended up working offshore on like oil tankers. So I worked in the engine room of oil tankers for five, six years, and then from that I went offshore on drilling rigs. And it was great, interesting story actually. went to the school I went to, Kings Point, I played rugby there, and I'm sure you guys are familiar with Robert Kiyosaki, rich dad, poor dad. He also went to Kings Point and also played rugby. And we have like a tight, like little alumni group. So when I was a senior, he came there and spoke. And he comes for free sometimes just because it's his alma mater and he spoke to the seniors just about wealth and that sort of thing. And I've always been kind of money hungry like in into that sort of thing. And when he spoke, just started reading and just dug into it and kind of never stopped. So Working offshore on ships and drilling rigs. I'd work like six seven months a year on the rig and then be home for Maybe five six months a year with nothing to do and I graduated college in 2009 so really hard to screw up a real estate deal in 2009 so I knew absolutely nothing and bought my first piece of land and I graduated school 2009 got on a ship and when I got home Spring I bought my first piece of land through a short sale and then just kind of continued to dabble through there. Thought I was a genius because all of these deals made money, but I didn't really have the perspective of what was happening in the world at that point, right? I was in my little bubble of military school and the Great Recession. didn't know much about it, just thought I was a genius. Craig Fuhr (04:45) Timing genius, Jack, timing genius. Pat Flynn (04:48) Honestly, I graduated school in 2009, so we were talking about this last time at RAR, like my whole career, 2009 to where we're at now, 2024, like it's been pretty bullish. There hasn't been a lot of pain. So I've never really been through it, through it. So. Craig Fuhr (05:06) yeah. Pat Flynn (05:13) I'm preparing and doing every the best I can and talking to talking to people like like Fred and Jack and getting as many perspectives as I can but I think that's something very important to remember that anyone starting real estate from 2009 till now like You've only had it pretty good so That's kind of Craig Fuhr (05:35) some of us didn't fare as well as you, Pat. was sort of in the 2009 to 2012 timeframe. And Jack, I don't know if I probably told you this, but at one point we owned a bunch of, we owned about 38 rental, 38 doors in some of the seedier parts of Baltimore and all the up and coming neighborhoods, as they used to say, and dealing with a small local bank, had a $2 million of mortgages. on those properties with a small local bank and my flipping business was going gangbusters couldn't have been better. But one day the bank came to us and said, Hey, look, we're probably going to send an appraiser out just to kind of read, you know, take a look at the value of the properties and 2 million mortgages valued at $400 ,000. Yeah, so things didn't end up quite as well as I had expected on the rental side. And that's what that was the Titanic that took me down. But but getting back to You know, I think it's a unique perspective, though, for folks who Jack and jump in, who have not lived through that sort of crazy time that was 2008, a time in which most investors haven't seen nor nor might ever again. But yeah, I mean, that was a that was a wild time indeed. And but not to have lived through it and sort of through the last 10 to 12 years, I think is a much different perspective. sort of that bullet, I'm bulletproof, I'm the smartest guy in the room. I can do nothing wrong. and I just want to touch on one other thing that the Kiyosaki thing, when you think about how many careers that in real estate that guy has launched, it's, it's really quite uncanny. But to have that sort of very close connection is even more so very interesting. Pat Flynn (07:03) Exactly. It was really cool. He came when I was a senior because like I said, it's not a paid thing or anything. He just comes back to King's Point sometime. So we got to all gather around him after and have a conversation with him. It was just a really cool, impactful experience. Craig Fuhr (07:42) I know what I know. There's one other question. I'm sorry, Jack. How did you know? Because I think a lot of a lot of real estate investors deal with this this very question. How did you know it was time to make the jump from what was probably a pretty interesting career and probably one that paid you well? How did you know it was time to make the leap from, you know, your W -2 job to, you know, being an entrepreneur and jumping into real estate? What was the catalyst for you? Pat Flynn (08:11) Really, really good question. I moved down to Florida. sold everything I had in Massachusetts, moved down to Florida in 2013. So dove right into this market down here through all the RIA groups, started meeting wholesalers, started doing some direct mail myself. And so we bought a couple of rentals at the beach. So I had some really good momentum. But to be honest, in my mind, it was a really good side gig that I wanted to make full time when the timing's right, sort of thing, right? but I was having great momentum. I was making great money on the rigs and life was really good. And then I was in Australia on a rig and my girlfriend, who's now my wife, Jane, FaceTimed me and was like, well, I'm pregnant. This is 2016. So like I said, me and Jane own a good amount of real estate together. Marketing was flowing. I actually did, I took marketing calls from the rig. we were like, things were moving like pretty well. And then in 2017, Nora was born on February 27th. And I called Diamond, who I worked for, and I was just like, You don't need to pay me. Just don't call me for three weeks, for three months. Like I need to be home with Jane. don't have family down here. Well, once again, I want no money. Just don't call me. And they sent me a plane ticket to Singapore two weeks after Nora was born for a six week shipyard job. And I was like, y 'all made the decision for me. Honestly, I would have stayed out there because I liked the guys I worked with. I liked the work. It was, it was good. I was making great money. Real estate was flowing. If Diamond had not done that. it maybe have never been the right time. So I left, obviously it you know, it's, it's tough to make that transition for anybody. Like I'm losing health insurance, losing stability and income, but at the same time I had already had a really, really good momentum, like not only in buying and selling real estate, understanding wholesaling, owning rentals, but debt, but also like relationships in Jacksonville. So Craig Fuhr (10:02) Wow. Pat Flynn (10:27) It was nerve wracking, I was pretty confident I'd be fine because we already had some stuff going. Craig Fuhr (10:35) What was it about the Jacksonville market that attracted you to the, their. Pat Flynn (10:39) It wasn't anything about the Jacksonville market. Come from like a small crappy town in Massachusetts that you just don't want to be in your 20s in that town. like I said, I went to military school. I had a buddy here who lived on the beach and I left my thousand dollar rent house in Massachusetts to live on the beach in Florida for $400 a month in 2013. In my balcony that overlooked the ocean. Craig Fuhr (11:04) Say no more. Pat Flynn (11:08) And was $400 a month for my room in 2013. It was phenomenal. Like, man, now I'm married with three kids and another on the way. Craig Fuhr (11:13) The easiest time ever of life, Jack BeVier (11:23) Nice. So pivoted back to flight and that, that business today, the, so you're fee building. You're also building some properties for yourself. And then keeping them as rentals or selling them to homeowners right now. What's the mix? Craig Fuhr (11:23) awesome. Pat Flynn (11:46) That's the question, right? So, I we had, I thought we had a great conversation about this at our last time too. I think just like in the We Buy Houses space right now, where I think it's good to be nimble and run lean and be adaptable to market opportunity. I'm doing the same thing now. So I own outside of the fee billed stuff, which is great. And that's rolling really well. I own 92 or so lots right now. I'd say 65 % of those are gonna be no brainer retails. So we'll build the house and Flight treats my lots the same as they treat any other investors. So I'm just a client of Flight's. Flight will build the houses. Working through, I got four real estate agents right now. We've trademarked Flight homes to try to really. really become a home builder and go through the process of being able to market and sell infill houses, which has been a journey and I think is important right now. But 65 % of those will be, they're definitely retails. treat them almost like flips, right? In my mind. The other 35 %... are rougher urban core areas of Jacksonville. So you asked where I think the opportunity is right now, Jack, I can buy these lots for between five and $15 ,000. And these are lots, some of them are septic tank, but a lot of them in that price range have city utilities. In the urban core of Jacksonville, where we're getting a brand new stadium over the next two years, we're getting a four seasons, know, Safakas and JWB have, you know, $2 billion worth of going on downtown plus everything else that's going on down there and we have a Emerald Trail. I feel like we got what the project was called in Atlanta but they have like a belt maybe the Beltway Beltway project in Atlanta we have one of those coming in so I own these 35 % of the lots I own are in these areas and I'm not sure how the retail market will do. for this stuff right now. we can predict all we want, but you really just got to rip the bandaid off and try it. So what I'm going to do is I have six of those rougher zip codes under construction right now. We're going to try to retail them. We're going to try to pre -sell them, see if we can put homeowners in houses. If that really doesn't work, we're going to put DSCR debt on them and hold them because they rent all day, whether it's section eight or just to normal renters. Craig Fuhr (14:28) I know a guy who can do that for you. Just maybe. Pat Flynn (14:30) believe me, I know. But what I think the opportunity is, is raising a fund of patient capital and buying these. And yes, I think I can sell them right now retail and make a margin. But the real play is building them and holding them for five years and then selling every single one of these retail. Once the Emerald Trail is done, Downtown Jacksonville is done and goes that direction. That's where I think the opportunity is. I think we're going to look back in five years and be like, I can't believe that I could buy a lot in the urban core of Jacksonville for $7 ,000. And it's completely blue ocean because nobody sees it. It's very difficult to build infill in downtown Jacksonville. So we're buying lots of the unique number where we control the build and what we're doing there is unique. I just think it's a phenomenal opportunity. Jack BeVier (15:05) Mm -hmm. Pat Flynn (15:24) for the right investors. So I'm doing it at small scale. Jack BeVier (15:28) So question for you is the is the rental income enough to cover the, you know, to cover your debt service, right? On a DSCR loan. Like, are you able to build the thing, refi off the appraised value, get your hard costs back, and then the rental income less expenses is enough to, to service that, that DSCR loan, because a version of what I heard is that you're land speculating, right? Which I think is, you know, fine, right? Like if you think, Hey, this is path of progress. This is where I want to own 10 years from now. The nice thing about lots and sorry, I'm asking like three questions at once, but, the nice thing about lots is that, and what's something like I screwed up when we were in Atlanta between 2011 and 2014, we talked about, my God, there's all these, all these infill lots that you could buy for $5 ,000 that were, you know, graded pipe, you know, pipes out of the ground. Pat Flynn (16:00) Yup. Jack BeVier (16:24) utilities run to the site and we never bought any of them because I couldn't build and then I couldn't build and then put a renter in there with the rents at that time and service the debt. And we were like, we're just going to run cashflow negative. But what I should have done was just buy the lot and sit on it and cut the grass and pay the taxes because land is like a levered asset, right? Like if, if, if real estate values, if, you have $250 ,000 ARV goes to 275 and construction costs are, you know, go up by inflation. The land value goes from five to 15 or, and then it goes from 15 to 40. And so, you know, for the, for the cash that you have sitting on the sideline, you get, know, you can get really big, you can make a lot of money. Just owning land in an appreciating market. Now, conversely, if you buy land and then the market depreciates, you can lose a lot of money. very quickly buying land as well. But why build on them versus just land bank it. Pat Flynn (17:30) You're completely right and that's a good point and it's something actually Steve and I discussed. You kind of have to look at it both ways. But that's a really good point. The main reason for it is because the main purpose of this is the growth and flourishing of flight in the leadership here. I need to keep flight busy building houses. That's not a good answer just to just to build houses when it doesn't make sense. But that was at least the initial thought process behind it. But I think just buying a bunch of this stuff for five to fifty thousand dollars and the plan being to hold it and then find other opportunities for for a flight to do building where the retail numbers make a little more sense right now is certainly on the table and needs to needs to be looked at. Because to your question about Jack BeVier (18:21) Are you? Pat Flynn (18:23) the it covering the debts, the debt service, just true numbers on that. And you're going to be faster with the, with, with the numbers on lending, but we're going to be all into these houses for 160, 165 grand. they're going to appraise for two 25. That's what they're worth. And they rent for say 1350. Craig Fuhr (18:36) Yeah, me too. Pat Flynn (18:46) $1 So my thought for if you raise a fund or something like that is no you're not going to be able to take the full $160 ,000 back out and have it cash flow and be fine but Jack BeVier (18:47) subbed by Pat Flynn (19:00) You can probably take a hundred grand out depending on DSCR numbers at that point and have it flow. Okay. Or break even. And you have great appreciation on it. But what you said about land banking and not building on them is a fantastic point. And it would be a massive mistake for us to not at least look at that path forward and maybe just slow down production or find a different little honey hole where retail makes more sense. It's a great. Jack BeVier (19:28) I mean, can you land bank like, you like in Baltimore, if I tried to buy a bunch of land and then just sit on it for five years, I would get smoked by the city. just citations, you know, they don't want people coming in and speculating on land. They want you buying and like moving the real estate or get the hell out of town. like, I've, seen, I've seen it in, just different municipalities have different perspectives on letting, frankly, letting people just sit on land for a while. Pat Flynn (19:47) Hmm. Jack BeVier (19:56) But if you're not getting any pressure from it, you know, from the municipality, then that's better. Pat Flynn (19:59) No. Like you said, mow the grass. If you keep a grass mowed, you're not gonna know it has any issues. I mean, these are some depressed areas. Jack BeVier (20:04) Yeah. Craig Fuhr (20:13) Yeah, that's what I was. That was my question, Pat. Like what, you know, when I'm in my head, I see, you know, Baltimore and I don't think that Jacksonville is probably that dissimilar from Baltimore and in many respects in terms of it. Go ahead, Jack. What's yeah. So, so, you know, I'm seeing like, you know, some pretty rough houses around you. You've got, you've got this Jack BeVier (20:30) No, I got no comment to that Craig. Craig Fuhr (20:41) you know, maybe a house was torn down and now there's a lot that's available. You're building your house there. It's going to be the nicest one on the block. Is that what we're looking at here? Pat Flynn (20:48) That's exactly what you're looking at. And to be honest, what it does, what having a brand new house does to those streets is like unbelievable. you can feel, what I love about this is like kind of, you know, a little different from Yellowbird where you're buying discounted houses and you're also on some stuff to funds is you are like one step at a time really changing that urban core. the, sometimes you have some great people that move into them and take care of them and it lifts up the whole street, but obviously you still, you have a lot of crime and you have people smashing windows and stuff like that. And you may have some people that don't take care of it moving into it too. But it really does push this urban core in the right direction because a brand new house on a street just changes the whole look of it. And if the right people move in, other people in the street start taking care of their lawns and you know, we're not at the point yet where any of those neighborhoods are cool enough to be. slowly gentrifying, they're very rental heavy neighborhoods still, but we have to go that direction. mean, Jack, you've seen what Alex has going downtown, like our stadium is going to be. the best stadium in the NFL in two years once this is done, the newest best stadium in the NFL. And like the Four Seasons is going right there. The investment down there is crazy. So if you think that, and with the Emerald Trail going in, I just don't see a situation where some of those urban core neighborhoods don't become cool. I don't see it. long answer to your question. I think it has to go that way. Jack BeVier (22:25) Yeah. Craig Fuhr (22:26) Yeah. Jack BeVier (22:34) So what are your customers on the fee building side of things do? Like the guys who are putting in orders of, let's do 30 houses for me this year. Are they all spec building for retail sale or is it a build to rent play for them? Craig Fuhr (22:50) Before you answer that for maybe folks who didn't listen to the last episode, maybe you could talk about sort of the business model of flight builders. And we've obviously talked about what you're doing for your portfolio, but let's talk about the business model and what you're doing for others. Pat Flynn (22:50) Everyone Jack BeVier (22:57) yeah. Pat Flynn (23:09) Yeah, we are, most people that we build for. Jack are going to be, like if you order 30 houses in a year, like I can think of a client right now, like Cheap Coat, they're fantastic. They're flip investors who have moved new construction into part of their operation, because it's super easy. They buy a lot and they treat the lot like a flip, and we build the house for them, and they sell it retail. So really smooth. The one kind of outline, and... All of the other funds right now and guys that I really wanted to do build to rent for, nothing's happening in Jacksonville right now. There's a lot of the home builders are all over in Jacksonville and land prices haven't come down at all. But as far as build to rent stuff, I heard there was one sold recently that went to a Build to Rent buyer, but I am all over all these funds trying to get business and build a community for them. There's just not transactions happening in Jacksonville. They're happening in, as you know, North Carolina, super hotspot for it now, and they're happening in Texas where the numbers still work. But there's not Build to Rent happening in the Southeast. Yes. Jack BeVier (24:22) Just a function of interest rates still. Pat Flynn (24:27) interest rates and land prices and the fact that the builders, the nationals, are still able to pay good numbers because they're doing okay with these selling retail. So your outlier is a JWB who is a big client of ours and their They're doing a turnkey model. So it is kind of built to rent. So they're doing a lot of retail as well. We'll build 120 houses for JWB this year. As an operation, they'll do over 400 though this year. And I don't know what their ratios are. and I don't want to speak for them, but I think probably maybe 60 % of that 400 is going full retail and the other 40 % they're selling to turnkey investors and then managing the property afterwards. And interest rates are hugely important for them on those deals and they're having a lot of success right now. I mean, the bottleneck in this market is always going to be sales. It's not going to be anything besides getting these properties moved, but they're doing pretty well month over month. They're still selling stuff turnkey. So what they're doing is I'm building the house, they're putting a tenant in them, and then they're selling them to an investor in property management afterwards. Jack BeVier (25:50) What are you seeing from the difference in home buyer demand between new construction, renovated flip and existing home sale, right? Like those, cause those, those tend to, they're obviously very correlated with each other, but you know, people often talk about the new home sale premium in a slightly down market or a slightly more competitive market. The flip inventory moves a little, the renovated flip inventory generally moves a little faster than the, the home, I'm sorry, the existing home sales because it's not quite as pretty. It's not, you know, not all decked out. are you guys seeing, much bifurcation in home? I'm sorry. In home buyer behavior between those three categories. Pat Flynn (26:34) What I've seen so far is just your very basic flight to quality. You get a little bit of a premium for a new construction house right now, but still, it's very soft. It's very soft. So if I'm flipping and I'm putting it on the market, I will be the best priced, best thing. anywhere within that area because I'm not in the business of Having houses sit on the market. We're in the business of selling them and if I have to give up margin to do so I will do that and that's the same way. I'm looking at new construction I haven't had from the flips Jack I'll say I have no active flips right now But I think that's because if that's a that's a function of my pricing and the fact that I will take a less margin to just get them moved I don't have enough information on, I haven't had a wave of 15 new constructions retail to where I can give you a great answer on that. I can tell you our first new construction a couple months ago that got done, there's a bunch of actives up it. It was a beautiful house that would have sold for 385 in the peak and we sold it for 340. Craig Fuhr (27:48) Mm. Pat Flynn (27:56) because I priced it aggressively and it still took 14 days to do so. So I think we had the best house. I think because we had the best house in that area and the best price, that's why it sold, but I'm taking a haircut to do so. Jack BeVier (28:13) Are you seeing, are you worried at all about, ARVs coming down over the winter with the softness that you've already seen? you know, maybe offset a little bit by the lower interest rates, but you know, I haven't really seen much home buyer activity despite the lower interest rates over the past 45 days. And I would have expected to have seen it by now, right? If people were like, Hey, all of sudden my rate got better. There's a little bit of lag there cause you got to call your mortgage broker to get a prequel letter and then hand it to your realtor and then schedule a showing. But that's usually like, Pat Flynn (28:35) Yeah. Jack BeVier (28:42) two, three weeks and then we see a pop and I just haven't seen a pop. So I'm like, that's depressing. Pat Flynn (28:48) Yeah, I mean, ditto, same down here. And to your question, maybe a little bit of a different answer to it is I'm very committed to this business model at this point. I have to build. We have to build houses. I'm not gonna slow down. I have to keep things moving. And I feel really confident that there is a number that these new construction houses will sell at my price point. And there's a floor. I feel like I'm not building $500 ,000 houses. I'm building 250, $300 ,000 houses. I believe there's a floor there. So if you believe that, if you believe in Jacksonville and you believe we're not going to have a a re -coming of 2008, which I don't think we are, Jack BeVier (29:20) Yeah. Pat Flynn (29:34) If you believe that, then it's a function of your cash situation, in my opinion. And talking with guys like you and the guys at Genesis is awesome because you hear the statistics of, what? Real estate investors, 9 .9 times out of 10, what is gonna take you down is cash. Jack BeVier (29:54) Mm Pat Flynn (29:54) So almost 100 % of the time it is greed and cash management that takes real estate investors down. So I look at it as the 80 -20 principle. If I can put some bumpers on my balance sheet in my cash situation to heed this storm and bumpers that help me sleep at night, that little 20 % thing that I did just eliminated 80 % of my risk. So... We are putting bumpers on our balance sheet to heat this winter time period. And I'm raising a little more equity and paying a little more interest than I need to pay just to keep stuff levered up and keep plenty of liquidity in the bank, just in case. So I look at it as yes, me personally, I'll make a little less income this year because I'm paying more interest, but having... Jack BeVier (30:32) Keep cash. Pat Flynn (30:45) a cash number in the bank after every single, I know for a fact after every single thing under construction is built and on the market that I'll still have X amount of dollars in the bank, then you really eliminate a lot of your risk doing so because these houses are gonna sell, you can rent them, you can do something and if there's plenty of cash as you said to heat the storm, then you're pretty good. Jack BeVier (31:12) It's going to be, I mean, I think that it's funny how like how much more efficient the market has gotten over the course of the past 10, 15 years. Like you're now, you are now operating a platform in Jacksonville that has no middlemen, right? Like you were both the one directly sourcing lots, like paper click, direct mail, sitting at the kitchen table, you know, talking to the direct seller and you're the builder. Pat Flynn (31:37) Yes. Jack BeVier (31:40) Right? Like there's no middleman there. There's not even a middleman for, know, there's no developer middleman even. And so like, if prices come down, as long as the market doesn't literally freeze, right? If there is a new home sale in Jack's, you'll be the guy who's able to keep, know, to, make a margin there, even if it's a slim one for a period of time. And like, I just don't think we really saw that historically, right? There's usually so many more functionaries in the, you know, in the middle there and everyone was getting their piece. Craig Fuhr (31:44) Mm -hmm. Jack BeVier (32:09) But when you take out all the middlemen and like you're going direct to seller for the dirt, you know, for the, for the dirt, that's well below replacement costs. And you're the one building at, you know, a hundred bucks a foot or less or whatever, wherever you're at. like that's just, that's really hard to compete with, know, you'll be able to keep the, keep the lights going well past, you know, well past your, you know, past your customers, right? Like, even So that's a nice place to be, taking the middleman out. Pat Flynn (32:40) That's a super insightful observation and that is exactly that. But in the home builder space is just competitive, right? So I look at that as our edge. Our edge is we're at the kitchen table signing up dirt and we completely control construction. And my last piece of this is... Once again, we've been spoiled for the past 10 years. If you put a house, you can have any, you know, dipshit real estate agent, put a house in the market and it's going to sell. I think the magic over not only the winter, but these next maybe few years of this kind of leveling out of real estate prices is going to be in your sales team. It's going to take grind and effort to sell this new construction stuff. I can't expect that I'm just going to throw these on the market and they're going to sell. So we're putting a lot of effort into generating buyers leads now and walking people through houses and getting our name out there as the affordability home builder and like helping the community with all this sort of stuff. So if you can add those three and that you talk about efficiency and controlling everything right now, you control the sales side as well. So if you If you're signing lots up at the kitchen table, control construction at your margin and you have your own sales team to sell these, yeah, you're going to outlive. anyone else that's doing this in my opinion and that's our strategy and exactly what you said. You may have to ride some super thinner than you'd like margins for a while but as long as you don't get greedy with your land positions and you don't have a bunch of developments that take you down and you're just doing kind of piddly and fill a lot stuff you can heed the storm until things turn back around. Jack BeVier (34:22) I'm not personally one of the people who thinks that we're going to see nominal decreases in housing prices. Maybe there's like, maybe it's a soft winter, but I think that as long as it's like, you know, doesn't, as long as you get through the winter, it's not going to kill us. think, you know, as long as you don't run out of cash, you know, through the winter, I don't think it's going to be a big problem. But I think that, well, I'm curious from your perspective, What are the, I should have asked you this, what are the guardrails that you're putting in place? You mentioned being a little bit more conservative. What exactly are you referring to there? Just other than having just more cash on the balance sheet. Pat Flynn (35:03) So yeah, good question. It was cash on the balance sheet that I was looking at before, but we've turned to a new metric, which is cash after commitments on the balance sheet. I could have a million dollars in the bank, but if I have 20 new constructions going and... I have $800 ,000 of that that's already committed to build these houses. So once the houses are built, I actually only have 200 grand. That's a big difference. So just because you have a bunch of cash on the balance sheet, if you have a handful of flips going and a bunch of new constructions and you need to finish those, that number is pretty meaningless. So we look at cash after commitments. So I look at liquidity and cash on the balance sheet. If everything I have in progress, every new construction, every flip gets completely finished to the highest level, now how much cash do I have? Liquidity on the balance sheet? I want to keep that at a minimum of, we're looking at like 1 .5 or so right now, 1 .5 million after everything is done. So what does that mean? That means that even though I have the cash to build a couple houses, I'll use Dominion or I may use some hard money and I may lever these things up and continue to pay interest on the cash in the balance sheet just to keep that number there and stay safe to the time period. The other metric we're looking at is our debt to equity ratio on the balance sheet. That's kind of a soft thing we're looking at. looking at, we're trying to figure out if we want to stay somewhere in the four to one. or six to one range on debt to equity and that can throttle your growth in a very healthy way as well. Plus, in addition to, we just got a line of credit, our first builder's line of credit with Ameris bank, which we're really excited about and they have loan covenants to where you need to be at a three to one spec to sold ratio. So, If I have 30 new construction spec builds under construction, I have to have 10 under contract globally across my balance sheet. And I think that is another healthy bumper to keep on as well. So if I can take those three things, that three to one spec to under contract ratio, my debt to equity ratio on the balance sheet, plus cash after commitments and keeping it at a good level, I feel really safe. doing that, you know, outside of a black swan world ending situation. Jack BeVier (37:46) Yeah. Yeah. Like I mentioned, I'm not negative on where housing prices are going even over a one year period. I think they're probably going to continue to go up because of the inputs of kind of blue collar inflation into real estate replacement costs. But we've talked about that in a previous episode. I won't reiterate the whole thing, but keeping cash moving, right, is really important. you know, I've heard, you know, 10 years after the fact, guys say, you know, like 2007, 2008 just killed me. I was in the flipping business and it just killed me. And I'm always scratching. I always scratch my head because people kind of let, let that comment go because it was such a negative period in time. But I always scratch my head when I hear someone summing up their issues and like just blaming the market for it. Because if they're only running a flipping business because While real estate values went down, you know, 30 plus percent during the downturn, it took three, four years for that 30 % to happen. was, it was, we never really had home price depreciation of more than 10 % a year. now that's a big broad brush. know people, people in Phoenix are jumping up and down right now being like, no, no, no, no, the bottom fell out for us. And that's true. And so like with, with, with, with few exceptions, the market. was it was just what was so bad about that market is that was down and then down again and then down again just year after year after year. And so it was just brutal because you just never made any money. But we still flipped through that period of time and put cash in our pocket because we just let the market speak for wherever the market was at that point in time. And if you underwrote correctly and didn't look back, look way back for your comps and you were looking at, what sold 60 days ago within the past 60 days and used that to underwrite your exit, then you may not have made a $40 ,000 margin. And, you, but you only made a $15 ,000 margin because the market was down 10 % in that period of time. It sucked. You know, like you, you know, you weren't, you weren't making what you thought you should, but as long as you didn't trail the market down and just like refuse to accept the market clearing price, you did turn cash and you, and you also, got a better deal on the next one you bought. like, I like your perspective on we're a market seller wherever the market is, I'm hitting it. You know, I, I thought it was going to be 385, but we wanted it gone. we listed it at three 40. And I think that that, I think it's very wise because The defaults that we saw during that period of time were generally folks who were trailing the market down. And we as lenders, as long as the loan was current, let them. And that was a big mistake because two years later they were out of cash and now we were underwater. Cause you know, we, our LTV had accrued up to 90 plus percent LTV. And so like, that was the big mistakes. Like that's where we lost money was letting people trail the market down. And that's what destroyed people. was them trailing the market down. you know, just turning it, turning your cash and accepting where the market is at any given point in time and living to see another day was, think a big reason why we were one of the few in Baltimore who made it through the downturn. And you seem to share that same perspective. So I think, you know, I think it's smart. Pat Flynn (41:24) I love that comment. That's why I really enjoy talking to you, Jack, is I think about that the same way. Yeah, exactly what you said, making sure you're on the leading edge of the market coming down and you keep liquidity, right? You're very diligent about keeping liquidity during that time period, whether it's for a massive opportunity to take advantage of or like an shit moment. But you made the comment about it bugs you when people say, 2008 crushed me. Like I am always the person that's like, tell me why, like tell me why the dominoes fell during that time period. I'm always so interested and it's very rarely the same story. And a lot of the roots of those problems come from greed and the way they were operating during that time period, not necessarily the market, exactly what you said. Craig Fuhr (42:11) Agreed. I was just talking to a builder the other day, Jack, who just completed 10 homes in Florida. I was going to list them for $375. I'm sorry, $385. And he told me, was like, what's your net profit? What are you putting in your pocket on these? like, you know, usually around $105 per house. And I was like, well, that's significant. Where are they priced now? $385. He's talking about doing a, you know, renting them out. And I was like, did you think about taking a, maybe taking a little off table for yourself? He was like, well, we we're going to try them at three 40 calls me like two weeks later. They're not selling at three 40. And I'm like, there's got to be a market price for these houses right now. And I just think it's that greed and that sort of stubbornness that we saw a lot of post 2008 that you guys are speaking of right now. And, and, and you spoke on the last episode, Pat, about sort of the softness that you're seeing in the market right now. And, you know, you get a lot of that stubborn and stubbornness and greed and guys who just don't know their numbers well enough or just not afraid or just don't want to live to tell another day, right? Jack BeVier (43:24) Yeah, it sucks, right? Like it's really, it's hard. It's, you know, it sucks doing all that work, all that pain, and then being like, I'm going to clear 10 grand. Are you kidding me? Like that is, that this sucks, you know, like it's. Pat Flynn (43:32) Yeah. Or lose lives. Craig Fuhr (43:33) Yeah, I just worked six months of my life for 10 grand, right? Jack BeVier (43:37) Yeah, it's really hard to like make that decision. Pat Flynn (43:37) Yeah. It's way easier to bury your head in the sand and say, the world is wrong, it's worth this. It's very easy to do that. You have to, like I said, think from first principles on it and be realistic with it. But yeah, that's what caught up a lot of people is I'm right, everyone else is wrong. Craig Fuhr (43:43) Hmm. Yes. Jack BeVier (44:03) I was having a conversation with our sales team the other day. we do this like bi -weekly calls and we just talk about real estate investing the whole, you know, teams invited the hop on and it's fun. usually get like 30, 40 folks on the, on the call, all staff guys or staff people. And, the, what, what, another thing that I think is danger. I made this point on that call. Another thing that I think is dangerous, is that if you had, is that imagine if the DSCR loan didn't exist. Imagine if you had to go to a bank for a refi, right? Like the house isn't selling. You're going to lose money, right? If you, if you actually sell it at the market clearing price and, imagine that you're now, you know, it's 2000 and this is what happened. And imagine now you're, you're it's 2009 and you have to go to your local bank and say, Hey, I want to refinance this property and rent it out. It's worth 340, but you know, it's not selling at that, but I, you know, it covers at the rent that I've got right now. I mean, let's refinance this thing. And they look at your year to date financials and don't see any profit. And they deny you for that refi because you don't have global debt service coverage. And then you're screwed, right? And then you, now you can't refinance that property. I think we're going to see less pricing volatility in today's market because the capital markets are stronger because the DSCR loan exists and didn't 15 years ago. And so as long as those loans are continuing to perform and they, and they have delinquencies have not spiked up on the DSCR loans, not even as much as other non QM loans. and that's kind of a, really, a backstop, a luxury that real estate investors today didn't have 15 years ago. Now, so taking advantage of the gaps in the system, right? Which are that that product still uses retroactive you know, retro looking appraise, you know, comps, right? So the appraiser is still pulling comps from 12 months ago. If you're feeling softness from my perspective as a real estate operator, if you're feeling softness in a market and you don't like the clearing price, from my perspective, refi the thing with the DSCR loan using the comps that you used, which, you know, may not be true anymore, right? Which you you're on the front lines of knowing that they may not, they're not actually at 385 anymore. there's somewhere below three 40, but you can still get a three 85 appraisal to refi that DS with a DSCR loan and refi that property. that'll allow you to live to see another day. I'm not suggesting that we game the system here, but I think that's the, know, that's the nature of the, that's the nature of the product. And from a cashflow management perspective, it's a luxury to have that liquidity event, versus taking. the marks wherever, you know, wherever the market forces you to, you know, this winter. So I am concerned about softness this winter and that softness leading to cash low pressure. We're seeing it in our own book, which is one of the reasons we, you know, continue to be both a lender and a flipper is that it gives us kind of that frontline feedback and help see things coming in our lending portfolio that otherwise, you know, we wouldn't see until the payments stopped. Pat Flynn (47:27) Absolutely, that's incredible. mean, that's why it's great me and Kyle own this office together and it's great having him right there. It's gonna be like, hey, what are you seeing? What are you seeing? And it's like, you know, he's got some people that he's lent money to not that Kyle would ever be in a bad spot the way he lends but that are kind of following the market down and stuff. They're burying their head in the sand and they're not willing to take a price haircut because they think it's worth more. So yeah, you guys have so much insight. Also in different market, you're all over. So you get frontline insights on how those loans are performing all over the country. It's huge, great information. Craig Fuhr (48:09) Colin, the couple minutes that we have left with you and thank you again for your time. I'm sorry. You mentioned Kyle, Pat. What are you excited about, man? What are you excited about over the next 12 months with your business, with what you're seeing? You mentioned some of the urban development you're doing in Jacksonville. sounds incredible. What really has your juices flowing? Pat Flynn (48:33) So I do love and enjoy real estate, but I've found that when me and Kyle were at our peak and we were making the most money, it was honestly when I was the most unhappy because we didn't have a good clear path forward. I'm intentional with the way that I operate and the way... When when not the bottom fell out, but when the hedge fund music stopped and we didn't have a good answer for how to run our 55 team members, that was a really tough spot for me. So I've spent set up flight in a way to kind of with the fee building combination with the real estate investing side for us to be pretty nimble. When when we left and me and Kyle split, I took most of the staff and leadership team with me. So in a lot of ways, with flight I started on third base because I had a group of people that I've worked with for years that understood the way I operate they understand traction and we operate really well so what I'm most excited about is I love coming in every day because we just have our secret sauce is the way we hire and train leadership and I absolutely love it every day. I love watching these 24 year old kids from Middleburg, Florida come in and forcing them to read and talk about what they're reading and come to leadership class and grow as people. And some of the leadership stuff we have and between our book club and that and our monthly meetings and the way we operate. Yes, this is a season of life where you're working three times as hard for half the money than we just, we just talked about exactly why, but During this time period, my team gets stronger every single day and I'm getting some construction guys that I wouldn't be able to touch in 2021. Vendors who wouldn't even pick up my phone call in 2021 are coming and asking for work. So what am I most excited about? I'm not excited to not make as much money, it feels so right that we are setting up this rock solid foundation with such a kick ass team and these vendor relationships that will be with us forever that. we are going to be in an incredible spot when things kick back off or opportunity comes knocking at the door. And it's just, it's so fun to be a part of every day. And I really enjoy the people that I'm around. Craig Fuhr (51:14) That's awesome. It's the whole vision thing. Tell me, tell me one of the books that you guys are reading right now or one of the ones that you read recently that really inspired everyone. Pat Flynn (51:27) So we just figured up in the leadership side of things, we read a lot of Jaco Willink, so we just figured, finished up the dichotomy of leadership. And I feel like for real estate businesses, those different dichotomies, not only in leadership, but the way you operate your business are incredibly, incredibly important, right? The aggressive versus conservative dichotomy in real estate is really important because you can't be crazy conservative and be successful and make any money, You can't go too far the deep end the other way. So we talk about those dichotomies and they're just not only relevant in everyone's personal lives, they're relevant in all the decision making that happens here on the day to day too. Another one we just finished, we just finished the... One of my young supers wanted to read the Goggins book and he led the book club. So we read that Can't Hurt Me by David Goggins. It was fantastic. I'll tell you my two favorite of last year was Lessons for Living by Phil Stutz. Just an incredible book about... just perspective on life and growth and not being worried about the little things. Running a sales team in a real estate operation, it's very important to get that message across that the path to success in life is not linear like this. You can be going linear like this, but it is a bunch of ups and downs. And it's easy to let your mind feel super shitty about what you're doing when you're in the downs. But if you're doing all the right things during the downs, which I feel like we're in that spot now, you have to have the confidence that you are doing the right things and things will come back up when, when it gets back in your control and the market gets a little better. So, Phil Stutz lessons for living and then Ryan Howell. day's obstacle is the way comes to mind for me during this time period. The thought process that yeah, things are really difficult right now. It's getting harder to find flip deals and it's getting harder to sell them and it's getting harder to get capital. But just think about how much harder that's going to be for everyone else. Right. So I'm thinking about these obstacles we're facing and the fact that, it's forcing me to build a sales team right now to sell these houses. Where if I was building this business in 2021, I wouldn't have to worry about the sales team because I'm just putting these things on the market and they're flying. But how much stronger does that make me now having to build this sales team? Yes, it's work. and it takes a lot of time, but every single obstacle we face in the day to day is one thing that makes it that much harder for the next guy that's following behind me trying to do this. So it's changed the whole operation and the way we look at product. Infill building, we're in the business of problems. Like every single day there's problems and if you can operate well and think the right way about these problems and not let them just beat you down, it changes everyone's perspective and now the whole operation has the perspective Craig Fuhr (54:25) Yeah. Pat Flynn (54:30) that we're gonna have problems every single day and you can sit and bitch about them and cry about them or you can just continue to move forward and think about how hard it is for everyone else. a couple examples. Jack BeVier (54:40) We have this, I love that perspective. We have this in the property management side of things, which is a hard business, right? Property management's a hard, grind it out problems. Craig Fuhr (54:51) I've always said that it's the most thankless business ever. Pat Flynn (54:54) Very much so. Jack BeVier (54:54) Yeah. And we, you know, we, we, we bitch and moan about working with the housing authority and, voucher programs, but we love the tenancy duration and we love the lack of credit loss. And, know, so it's been, it's been like the cornerstone of our, of our portfolio. but the difficulties in working with those programs administratively, we're like, you know, we'll just, we'll be sitting in these meetings and hearing the war stories about it took, you know, four follow -ups and two escalations in order to get a. get an inspection date scheduled. And we're like, dude, how does anybody without a team deal with this? Like, and they're just, the answer is that you just can't, right? Like it would just burn. would, if we weren't able to afford, if we didn't have the scale to afford the team where it was someone's, you know, job to, work through these obstacles, they'd probably burn me out, right? Like I, I wouldn't keep working with them. And I'm like, we're going to get some deals. But then all Fred and I hear now is that we're going to get some deals on rental properties like the mom and pop landlords are this is going to burn them out and they're going to be sellers and we're going to get some let's keep let's keep buying rentals. Right. So the more our property management team is frustrated the more I go to the acquisitions team and be like yo get in there we're going to we're going to get some you should offer a little bit lower because they're going to sell they're having they're having the hell right now. Pat Flynn (56:17) Yeah. Jack BeVier (56:19) They're going through hell right now. Let's get some deals. Craig Fuhr (56:23) One of the things I, I Jack and I'll get a chance to Jack and I talked before I came back aboard at dominion in December and the underlying current, if, folks have listened to both of these episodes with you, Pat, is that the care you taken for the folks that work for you and Jack, you, I don't, you probably only remembered a discussion that we had. I think it was having a couple of bourbons one night and you know, I've known Jack since 2007 and it's just sort of this maturation that like, you know, Jack would be the first to admit that they, you know, go through this period of like, you know, you're new to the business and you're keeping everything close to the vest and you don't want to share secrets and you don't want to, but now I mean, the podcast is an absolute perfect example of Jack's ability to really sit down and talk about any subject, any matter of business, not keep things close to the vest, share, share information, but more importantly, the care that I think that, that I see that they take over the personnel that they have here, knowing that each one of these people supports their families, you know, with a job here at Dominion. And Pat, just, that's sort of the underlying current that I've felt and heard throughout this and through these entire two episodes. And the last 10 minutes of speaking with you has been some of the most insightful. So thank you. Pat Flynn (57:39) I appreciate that, Craig. And it really is, you know, I kind of had a... decision to make when me and Kyle split it's like I could have kind of just kept my core team and stayed on my own and made money and have be very kind of stress free but I like I said that the money piece of it has just gotten so empty for me and You look at it in the end you look at your perspective of when you're done and Retired and done with all this is it's just none of that is going to matter at all. What's going to matter is those relationships you forged and a lot of my joy comes from struggling together as a team and I think that's where a lot of just human joy comes from in general is when you go through something hard with people you enjoy being around That's the satisfaction of life right there outside of, you know, obviously the family stuff and everything. So I feel very fortunate to be able to spend every day with people I enjoy being around and solve problems and win together. And that was the purpose of this whole thing. If I wanted to just go out and make money, I wouldn't be. Craig Fuhr (58:35) That's the true fruits. Pat Flynn (58:55) building houses right now. I do think it's a good play long term, but I think Kyle had a, I think Kyle went the good route for that. Craig Fuhr (58:57) You Yeah. Jack, you want to tie us up with the bow here? Jack BeVier (59:10) No, really appreciate you taking the time, Pat. Like I mentioned at the beginning of the first episode, you're always one of my favorite people to talk to about business. I get a tremendous amount out of it. So thank you so much for joining us. I hope all the listeners got a lot as much as I did out of our conversations today. So thanks. Pat Flynn (59:27) Yeah, thank you for anything. Craig Fuhr (59:28) Pat, if anybody wants to find you online or learn more about the business, where can they find you? Pat Flynn (59:35) Yeah, so do a couple different things. I'm definitely on Instagram, Pat Flynn Homes. You can go to the Flight Homes website or your Flight Builders website, which is just flight .builders. And I write an email every Friday and I'm not selling anything. I swear it's the most unspammy thing you can have. It's just my thoughts at the end of each week. So you can subscribe to that and I really just write that for myself and share it with everyone. And I also, do my own podcast. don't interview anyone. just talk for like five to 10 minutes every week on what's going on with flight, what I'm thinking about thing, what I'm thinking about the market and problems. I, I more do that for myself too, just because I feel like it'll be a really cool thing to look back on five, 10 years to see where my head was at every single week. So Craig Fuhr (1:00:30) Your kids will love it too, by the way. Pat Flynn (1:00:30) Selfishly I do both those things for myself, people enjoy listening to them. Honestly, with the flight one, it's cool because we built it from scratch. So anyone trying to build a business from scratch, you're going to hear about major issues that you will have to deal with down the road. But those would be the best ways. Craig Fuhr (1:00:51) right? Well, man, we can't thank you enough for your time. It's been a sincere pleasure speaking with you hope to talk to you again, and wish you all the best in in everything that you're doing. Pat Flynn (1:01:04) Appreciate it, Craig. Thanks, Jack. Craig Fuhr (1:01:05) Yeah, it's Real Investor Radio. Thanks for tuning in today. Hope you got a lot out of it. If you want to comment, please go ahead and do so. We always love your comments and let us know what you think about it. Talk to you on the next one.