Strap in as Wayne Aston and Dallin Aston unravel the mysteries of leveraging debt to your advantage! We'll share war stories, including my own brush with a mountain of debt, and show you how to turn what many see as a financial foe into an ally. Whether you're a newbie or a financial veteran, this episode promises to shift your perspective on the power of smart borrowing.
We dedicate a good chunk of our conversation to the art of structuring debt for real estate ventures, breaking down the complexities of the capital stack. Explore with us how a balanced approach between various funding sources can amplify investor returns, using a hypothetical $10 million project as our guide. If real estate investment beckons you, our insights on debt-to-equity ratios and navigating interest rates are gold mines of information you won't want to miss.
Lastly, we stress the significance of strategic financial planning through the lens of my entrepreneurial odyssey. It's not about how much you have, but how you use what you've got. We wrap up by encouraging listeners to take these insights and apply them. If you've ever questioned the role of debt in building wealth, this episode is an essential listen designed to empower your financial decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome back to the show, guys.
I'm Wayne Aston.
This is Aston Incorporated.
Joining me is my co-host,dallin Aston.
Hopefully y'all having a goodafternoon today.
We're fired up to be in studioagain.
Today we're gonna be talkingabout debt, that four letter
word that a lot of people havesome fear about.
(00:21):
Yeah, specifically we wanted totalk about good debt versus bad
debt, we wanna talk aboutstructuring your debt and we
wanna talk about debt versusequity.
So, dallin, do you wanna kickoff with a few of your thoughts
of, maybe talk to us about howyour attitude of debt and being
(00:44):
in debt almost a million dollarsat the age of 24.
Speaker 2 (00:49):
How does?
Speaker 1 (00:49):
that feel.
Speaker 2 (00:51):
Well, when you say it like that, I feel like most
people, even me included, goholy shit, yeah right.
But I'll be completely honestwith you, I don't see it that
way.
Yeah, and that has been a longtime in the making.
(01:11):
Just starting at the verybeginning, my first car, my
first car, was a 1998 HondaAccord.
I got it for 900 bucks becauseI didn't wanna go get a loan to
get a car, and so I was thinking, in my opinion or my thought
process back then was debt isbad, debt is bad, debt is bad
(01:32):
and that's programmed.
Speaker 1 (01:34):
I mean, that is, society generally thinks in
those terms, so that's a commonthing.
Speaker 2 (01:39):
Well, and in no way, shape or form am I suggesting
that you go just get a huge carloan.
That's not what I'm saying here.
Yeah, what I'm saying is Ididn't realize there was good
and bad debt.
That's kind of what I'm tryingto get at, right.
So then I got another car for areally low loan, just to build
my credit, blah, blah, blah.
All this stuff happened right,but that car loan was only like
(02:00):
3000 bucks.
I paid the rest of it down andI just wanted to build my credit
, blah blah.
Some would argue that carpayment, car loans in general,
are bad, but I think, at the endof the day, what I'm trying to
point out here is when I went toactually do the deal is where I
started to understand thereality of good debt versus bad
(02:22):
debt.
And I sat there and I willnever forget.
I was talking to all thesedifferent lenders, I was talking
to some private money peopleand I had one private lender
send me a letter of intent and Iwill never forget this.
And I opened the email and Ipull up the PDF and it was a
(02:44):
signed document saying, yeah, weintend to loan to Down Ascent,
and it was a million dollars.
It was like 1.1 million.
I was like holy cow, Likethat's.
I had never seen that muchmoney on paper before in a real
(03:05):
scenario, right, like you canthrow that number out, you can
see that number all the time,but until you're looking at it,
about to sign your name tosomething, that's when I started
going oh my gosh, that isinsane, right.
And another thing, too is keepin mind, I've never even seen a
percent of that in my bankaccount at that point, oh yeah,
(03:29):
right, I was like, well, I mean,I'm doing that Totally.
I'm talking about here is doingsomething that I've never done.
But like, this is crazy, right.
And you know, as we got furtherin the process, I looked into
different mortgages, differentequity, all these different
options and ultimately set italong.
You know what I ended up doing.
But, man, I'll tell you it wasa hard thing for me to justify.
(03:52):
Oh, man, like should I?
We talked about this in theother, in the other, I think it
was the previous episode,episode 13.
Talk about this, like, oh,should I do this?
Should I?
Like this could go wrong?
This?
Speaker 1 (04:07):
way to see if the rates get way, yeah, oh yeah, oh
yeah.
Speaker 2 (04:10):
And we've seen now they've gotten way worse, Right.
Speaker 1 (04:15):
So, so, back then, and even, and even, at mortgages
, if they were 9% today they'restill not 22%, which they were
in 1982 with.
Reagan so so there's still along ways.
They could go Right, and if youwait right now because you
don't, want to 9%.
Speaker 2 (04:32):
you might look at it Three years you might be 20%
mortgage.
Speaker 1 (04:35):
You're not going to do anything at that point,
Anything.
Speaker 2 (04:37):
Yeah, that's a great point, I guess, to answer your
question on a really long-windedsense my journey to this.
Now I'm sitting here at yeahsignificant debt If you, if you
ask someone that doesn't havethis perspective, they just if
you debt is debt and not goodand bad debt.
They'll say you are out of yourmind.
Speaker 1 (04:57):
Yeah.
Speaker 2 (04:58):
Yeah, you are 24 years old and you're in debt
$760,000.
I mean, technically you could,you can get into technicality of
exactly the debt that I'm in,but I mean, and kind of how it's
all structured, how it's allset up, but that's the.
That's what people don't see.
Speaker 1 (05:13):
Yeah, right, let's, let's, let's read, let's define,
let's redefine good debt, baddebt.
For the listeners, right now,what I'd like to have everyone
consider is there's consumerdebt and there's production debt
.
Right, two totally differentthings.
Speaker 2 (05:31):
Very different.
Speaker 1 (05:31):
Okay Now, if you haven't already, go out and get
the book Rich Dad, Poor Dad byRobert Kiyosaki.
Speaker 2 (05:37):
Most read Robert.
Speaker 1 (05:38):
Kiyosaki's.
One of those guys had inspiredme way back in 2004, 2005, one
of the most prolific real estateinvestors out there he's.
He's spent his, oh God, the last20 or 30 years creating real
estate education content forpeople to consume, and I and you
(06:00):
know he was one of thosereaders, one or, excuse me, one
of those authors that I reallydove into in the early days
Before I was, as I was making atransition out of stone and tile
business into financial marketsas an investor, and I was
really inspired because RobertKiyosaki talks about how he
(06:21):
started by buying one house,which turned into buying two or
three houses, which turned intobuying some duplexes and some
eight plexes, which ended upinto him owning apartment
buildings and hotels andcommercial real estate, and,
like in the book, he talks abouthow he scaled this up.
(06:41):
Now Rich Dad, poor Dad's a coolstory because his, his
biological father, is the poordad in the book.
Speaker 2 (06:50):
Yeah.
Speaker 1 (06:51):
And his biological father was the guy saying go get
a degree in college and you canbe an attorney or you can be a
doctor or you can be a.
You know, one of the one of thebasic when we talked about baby
boomers.
There's those basic things thatthe people that were making
money aside from entrepreneurs.
(07:12):
Were those those guys, thosedoctors and lawyers?
They got a degree.
You spend seven, eight years incollege.
You do that, right, that's what.
That's what Robert Kiyosaki'sbiological dad was trying to
really push him to do, and hehad the good fortune of being
mentored by his he refers to ashis Rich Dad, which is just a
mentor of his yeah who, whotaught him a whole nother way.
(07:34):
He's the one who taught himabout consumer debt versus
production debt and saving moneyversus investing money, and
really, really mentored Robertin the ways of being a real
estate investor.
So so, going deeper intoconsumer debt versus production
(07:56):
debt consumer debt, guys, that'syour auto loan, yeah, that is
your mortgage on your house thatyou live in.
Those are your credit cards.
Speaker 2 (08:04):
Yeah.
Speaker 1 (08:04):
So consumer, that that is the buckle card to go
buy new clothes at the buckle.
So consumer, debt is anytimeyou borrow money and you don't
get a return.
You get a product or you get.
You get like the money goes,but it doesn't re-numerate you
(08:25):
right.
So you're, if you, if you buy ahouse and you have a mortgage
on it, you're paying every monthto be in that house and you're
consuming.
You're, the house consumes whatyou pay into it right yeah Now
some might argue that you knowyour own house, that you live in
your primary domicile, mightappreciate inequity and that's
true.
We're not going to argue withthat because that that does
(08:46):
happen In Utah we're, fortunate.
The average you knowappreciation rates almost 5% a
year, so we have really goodappreciation in Utah.
But typically speaking, thoseare all in the category of
consumer debt.
Now, production debt is if Ican go, as a business, borrow a
line of credit, if I go borrow a$10 million line of credit to
(09:10):
buy investment properties withthat's production debt.
As a real estate developer, ifI can go borrow.
Well, in the case of Sage Creekwas really cool, that's a great
example.
I borrowed $28 million ofconstruction debt and all of my
friends were like just like thesame response you said about the
million You're out of your mind.
Speaker 2 (09:30):
How does it feel?
How do?
Speaker 1 (09:31):
you sleep at night?
You personally guaranteed a $28million loan.
You're in debt.
I'm like, yeah, well, the howdo you sleep?
The stress, the anxiety ofhaving so much debt?
You're buried in debt.
I'm like, yeah, well well, I'mbuilding an asset that's worth
over $100 million.
Yeah, building an asset thatproduces a debt service coverage
(09:56):
ratio of four, four times.
Speaker 2 (09:58):
Yeah, see, but going on top of that, the reason,
going back to the previousepisode, everyone says that
because their perspectivedetermines it Perspective.
Their perspective is all thatis bad debt.
Speaker 1 (10:11):
Yes.
Speaker 2 (10:12):
Right, but that's a prime example.
Speaker 1 (10:14):
That's right, yep, yep, so.
So, taking that a step further,there is a way.
There is a way that RobertKiyosaki lays out in Rich Dad,
Poor Dad, that I really like,and that is a recommendation
that, as you're young, so forthe young entrepreneurs like
yourself, dallin, and you're onthe right path if you can go
(10:36):
borrow production debt firstbefore you take on a bunch of
consumer debt right.
And focus on finding theproduction debt and finding
deals that can cash flow andthen use the cash flow that that
golden goose produces.
Use the eggs to go buy the carand go buy the house and buy the
clothes and have the lifestyle.
(10:58):
The assets pay for yourliabilities you do not go use a
credit card to go on vacationand pay for clothes and like try
and you know, live yourlifestyle on, because you have
to repay all of that Now.
I learned that the hard way,guys.
I'll just make it a disclaimer.
Before my first apocalypseevent, I didn't know any of this
.
This is before I read Rich Dad,poor Dad.
(11:20):
So I'm building a stone andtile business and I had I don't
know 80 grand in credit carddebt.
That was the only way that atthat time I knew how to go
access capital to buy inventory.
Put my employees in betweengetting paid by builders and it
(11:41):
really created some problems forme, and I know there's folks
out there that'll that'll, youknow have their credit card
strategy programs about usingthem in a positive way and I'm
not taking anything from thatthat you definitely have to have
consumer debt to build a creditprofile.
That's a big piece of itbecause when you, when you
(12:03):
dissect how the credit bureausview your profile, they want to
see a combination of revolvinglines of credit, consumer debt
yada yada, yada, yada.
right, there's that formula thatthey all use, and each of the
bureaus have their own scoringstandards, and so it does make
(12:24):
sense for you to be strategicabout the type of debt you have.
Speaker 2 (12:27):
That's how I've gotten my credit score to be as
high it is is now because I'vebeen able to be strategic about
consumer debt.
It's not you know, it's notlike I'm going and getting 20
grand, 30 grand, just because Iwant to in like a car or a, or
clothes, or vacation.
You know what I mean.
It's it's a very strategic useof consumer debt, Um, whereas in
(12:54):
my other side of it, the debtthat's you know, the production
debt, it's it's a very differentstory.
Speaker 1 (13:01):
What's your debt service coverage ratio?
Do you know off top your headon your current debt and what it
produces?
Yeah, it's about a, about afour, three or four.
Now for the listeners out there.
I'm asking this because I wasjust having a conversation with
a client just this week and he'sactually working on a big farm
project, and we were talkingabout DCSR and there was a
(13:23):
banker we were talking to and hekept throwing out the acronyms
quickly LTV, ltc, dcsr.
Dcsr is debt service coverageratio.
Guys, it just is a.
It's a metric that a lender formainly commercial debt is going
to use and apply on acommercial acquisition and it
tells me, if I have netoperating income after the
(13:45):
expenses of that asset are paidand I had that's just what's
left over the net operatingincome how many times will that
net operating income cover themortgage payment of whatever
loan I have on an asset,typically in commercial
underwriting.
If you're a 1.2 or a 1.3 debtservice coverage ratio, you're
(14:06):
gonna get to be approved.
In fact, the banker that wewere talking to for this farm
acquisition needed it to be a1.3 debt service coverage ratio
to approve the loan for 7.
Something million.
So this is why I asked you,because I want the listeners to
have a perspective.
Perspective determines behavior.
If your condos are able to paythe mortgage four times every
(14:29):
month, how risky is that debtfacility?
Speaker 2 (14:35):
Oh, very non-risky.
I mean, it's like I said thatpoorly, but it's like there's
very little risk.
Speaker 1 (14:43):
It's like you'd be stupid to not do that Right?
Right Because anyone who canproduce a four on the debt
service is making great money.
Speaker 2 (14:52):
Well, and it's so funny because you bring up the
example there of the 1.3, I feellike when I was talking to a
lot of people they'd be like ifit was a 1.8, that's great.
Yeah, you know.
It's like, well, so there'sanother bit of perspective,
right, it's like if you can geta 1.8, a two, then the debt,
(15:14):
that debt even makes sense.
Yeah, right, totally.
So you know anyway.
Speaker 1 (15:20):
And I still think you probably, you probably still
have a good deal if it's only a1.5 debt service coverage ratio.
Speaker 2 (15:28):
I'm just saying you're crushing it.
If it's a four, a higher right.
Speaker 1 (15:32):
Let's talk about structuring the debt, because
there are a million ways tostructure debt.
There's a term that I like touse as well in real estate
development, called prudentusing prudent leverage.
Okay, Prudent leverage issomething that's always in the
back of my mind when I'mstructuring the capital stack.
(15:53):
Typically in real estatedevelopment, there's layers of a
capital stack.
If I have a project and aproject costs $10 million to do,
then it's never always just abank loan.
Speaker 2 (16:07):
It's never always a cash deal.
Speaker 1 (16:12):
It's a combination of debt, equity bonds, special
assessments, grant.
I mean it could be.
There could be five or sixspecies of resources of capital
that go into a capital stack andso getting resourceful around
structuring a capital stack.
That's a special skill for areal estate developer or a real
(16:34):
estate investor.
So let's talk about we'vetalked about syndications versus
funds and we're gonna betouching on this a little bit
more here, because structuringdebt for the real estate
investors out there is thinkingabout buying an Airbnb like
you're doing.
This is relative.
So if you could go out andraise $10 million to do the $10
(16:59):
million project and you could dothat all with private equity,
does it make sense for you touse all private equity to buy
the deal?
It could, but I'd have youconsider that you've made a
commitment to the investors thatgive you the private equity to
provide a certain rate of return.
Speaker 2 (17:20):
Right.
Speaker 1 (17:22):
And if I plug all that cash equity into the entire
$10 million of that projectcapital stack, I gotta hit that
hurdle rate for my investorsfirst and foremost, whether I've
syndicated it or whether it'scoming in from a fund.
And so now what I want you guysto be considering is the fact
that if I can go get a debtfacility from the bank at a
(17:47):
lower interest rate, like a fiveto 7% interest rate none of my
equity investors are interestedin putting cash into a deal for
five or 7%.
Speaker 2 (17:59):
Everything I'm offering them is double digit
interest rates, that's the onlyway they're interested.
Speaker 1 (18:04):
My target to investors in my funds is I mean,
it's multiple, double digitsokay.
So, I'm not making anyguarantees about what the return
will be, because that can onlybe determined as we perform and
we operate and we executedeployment of capital and
development of a project.
(18:24):
But as a general rule of thumbI like to keep the equity right
around 25 to 30% of my capitalstack, and that's a strategic
choice.
What that means is I typicallyhave bonding in the very front
end of a project that handlesinfrastructure, and bonding can
(18:46):
typically handle 10, 15% of acapital stack.
In some instances, like what Ihave in Fillmore, it's covering
over 30% of the capital stack.
So special bonding is reallypowerful in real estate
development.
Bonding doesn't apply to buyinga house to fix and flip.
(19:07):
Buying a house to fix and flipor buying an Airbnb property is
much more basic.
And so you do start with thedebt facility there.
So typically you're gonna goget prudent leverage at the.
The prudent.
Prudent is that it's a lowinterest rate.
It's strategically low.
So the cost of money you wannaget as much of that in my mind
(19:32):
as you can at the low interestrate.
Now disclaimer what I'm talkingabout, guys, is for the
investor coming into a deal withno money of their own.
Speaker 2 (19:44):
Yes, now if you got a million dollars with your own
cash right and you're doing a$10 million project, that'll be
very helpful.
Speaker 1 (19:52):
A little different, but it could.
That can help dictate terms andrates, and all of that with the
bank.
All I'm saying here is that wewant to get that bank debt as
high as we can Typically that's65, 70% and then we're going to
backfill the rest with equity.
Even if I can go and I haveaccess to more equity, I don't
(20:14):
want to put 50% of the equityinto the deal.
Speaker 2 (20:17):
Right.
Speaker 1 (20:18):
The reason being is because, strategically speaking,
it's much harder to hit thehurdle rate at a if it's in the
teens or higher than the teens.
On what I've, what my target tomy investors is, the more, the
more equity in that capitalstack, the harder it is for me
to hit my hurdle rates.
Does that make any sense?
Speaker 2 (20:38):
Yeah.
Speaker 1 (20:40):
Now if we switch over to the fund model, the fund
model is very same.
I mean, I've got, you know,invictus Sovereigns, you know
managing the three funds and wetypically will not inject more
than 20 to 30% of the equity outof those funds into a project.
Speaker 2 (21:00):
Which is very interesting.
I just want to point that outbecause I personally, and so in
my studies of funds and all thisstuff that has stood out to me
very prominently, because it'slike you know, if you have a $10
million fund does not mean youshould just use the fund to just
go buy five properties.
Speaker 1 (21:22):
Right, you could be buying, you know, 25 properties
if you use prudent leverageRight Right, low interest
leverage.
Speaker 2 (21:29):
And the return is so much higher, because then you're
going off of the return for 25properties as opposed to five
properties that are just paidfor the fund.
Speaker 1 (21:38):
So let's just for kicks and giggles.
Dallin, let's let me bust outthe calculator.
Let me just run a comparativemodel on a $10 million project.
If I'm offering a 15% return tomy investors, so 10 million
goes in and.
(21:59):
I'm targeting 15% return.
That means that's $1.5 millionthat I'm going to pay my
investors for coming into thedeal all cash, right, okay.
So my internal rate of return,my cash on cash return, they're
(22:20):
both the same.
It's 15%, right, but if I havea $10 million project and I can
put in, let's see, if I have a$10 million project and I can
put 60% of that in debt, 6million of debt, 4 million of
equity goes in Instead of the 10million, instead of 10 million,
(22:42):
$4 million in the same amount,because the project's going to
produce the same, it'll producethe same, yeah, so, let's just
say that's the point.
So right now I'm not evenpulling a cash flow scenario out
of the air here.
I'm just helping the listenerunderstand that the output's the
(23:02):
same whether it's all cashequity going in or whether it's
debt and equity.
Speaker 2 (23:06):
Right.
Speaker 1 (23:06):
But what happens now is 4 million.
By limiting the equityinjection, it means that the
cash on cash rate of returncould be 29%, 35%, 50% cash on
cash rate of return, because I'musing all that bank low
interest rate debt to producethe same output that goes back
(23:30):
to me and the investors.
That's the strategy.
So again, whether it'ssyndication or whether we're a
fund, same mentality applies.
Speaker 2 (23:41):
Yeah, yeah, that's amazing.
You know, again, as I'vestudied it, that has been
probably the one of the biggestthings that has blown my mind
right.
Because it's just like howbrilliant is that when you can
structure it and just make it somuch sweeter for your investors
, They'll want to give you moremoney.
Speaker 1 (24:02):
Absolutely right.
Well and their exposure's lowertheir exposure's lower their
equity investor.
Speaker 2 (24:08):
yeah.
Speaker 1 (24:09):
Risk and exposure is on the forefront of the mind of
everyone.
Yeah yeah, and so you want tomitigate the risk as best
possible, and the banks?
Are in the business ofmitigating their own risks, but
they all have predeterminedthresholds of it's either LTC or
LTV loan to cost of the projector it's loan to value Some
lenders.
(24:30):
they'll let you get your MAIappraisal, your commercial
appraisal, done and, based onthe value, they'll lend you a
percentage of value.
I like those a lot, but whenwe're oh my heck, I was just
looking at you, I just wentcross-eyed, lost my train of
thought.
Speaker 2 (24:51):
That's okay, I can cut this part out.
Speaker 1 (24:54):
As we're.
Well, you can leave it, butwe're just pause.
So another nuance to the wholestructuring your deal.
You know, as you're structuringyour deal with debt and equity,
another big consideration isthe more equity you've got to
(25:15):
put in, the more leverage yourinvestors have against you to if
you're syndicating a deal tohave more control.
Speaker 2 (25:23):
Oh, yeah, yeah.
Speaker 1 (25:24):
Okay, and so it's an advantage as a sponsor or
developer to use more bonding,more debt.
Keep that equity equation lowso that the interest that I'm
giving them if it's asyndication is lower, because I
need to maintain control of aproject at all times.
In a fund, that's a totallydifferent deal, because we're
(25:44):
not talking about controllinginterest into a project or a
company.
So, structuring the debt pauseagain.
You're gonna have to chop thisone up.
All right, guys.
So we're jumping around here alittle bit on the structuring
(26:05):
debt and I wanna touch on theguarantees.
So all consumer debt is gonnahave a personal guarantee.
That means you're gonna sign onit and if you default on it,
you're gonna have consequences.
A lot of commercial debt willalso require a personal
guarantee.
At some point in your career youget into a situation where you
(26:27):
can get the bank to do what theycall non-recourse debt.
Non-recourse is fantastic.
That means the developersponsor doesn't have to
guarantee it.
It means your investors don'thave to guarantee it.
The bank is comfortable enoughin their underwriting and the
asset that they're not requiringpersonal guarantees.
Now, cash flow determines a lotabout what we're doing, how
(26:54):
we're structuring the debt.
So just to underscore whatwe've already said here how much
debt can I take on?
Well, when the bank looks at adeal, when they underwrite the
deal, if it's consumer debt,they're gonna look at your
credit profile.
This is the concept I wasthinking of.
I had a brain fart here twominutes ago.
(27:14):
Consumer debt is really basedon your personal credit file.
It's your credit score and yourprofile, your assets and da da,
da da In commercial debt.
When you're talking about cashflowing assets, the bank many
times will look at that debtservice coverage ratio.
They'll get an appraisal thathas an income approach on your
(27:34):
asset and you don't have to havethe strongest credit profile.
And they might ask for aguarantee.
They might not.
They might like the assetenough that they just don't
require that.
They might get lucky and havenon-recourse debt.
So that was kind of the finalpoint that I was trying to drive
home here on the structuringdebt versus equity.
And I know you were having athought here on interest rates
(27:58):
and how they're fluctuatingright now.
Speaker 2 (27:59):
Well, it's like look, it's based off of what you just
talked about.
It's like that performance ofthe asset can dictate a lot.
Right, and so, even with, as wetalk about people getting
scared because of interest rates, people getting scared because
of this, that and the otherwanting to wait for a perfect
time, now is the perfect time.
(28:19):
I would argue that now is theperfect time.
Let's take, for example, youhave an asset that is, I don't
know, $60,000 a year producingasset.
That means you can get aninterest rate right now If it's
a let's say it's a $500,000property and it produces 60K a
year, then that means you'relooking at and say there's a 7%
(28:43):
or a 6.75% interest rate.
That's about what I mean.
I've seen some going for thebutt right there, right yeah, in
my conversation with lendersand such right now.
That's a pretty good oneactually.
Speaker 1 (28:57):
That's good for today , yeah.
Speaker 2 (28:59):
So if you get a 7%, 6.75% interest rate and you have
a property that is $500,000 andit produces about $60,000 a
year, you're looking at a twodebt service.
Speaker 1 (29:12):
Yeah.
Speaker 2 (29:13):
So, going back to the conversation about lenders
being excited about 1.3, again,perspective determines behavior.
Right Like you're sitting hereand you're looking at this oh
man, I'm gonna pay $30,000, I'mgonna pay $2,488 a month.
Speaker 1 (29:28):
Yeah.
Speaker 2 (29:29):
Well, that's not the point.
Almost right, let's take a lookat okay, that's a two debt
service.
Now what are the profits there?
What is this gonna do?
How is this gonna make sense?
I would just argue, when we'retalking about structuring the
debt, if you can structure thedebt as kind of we've been
(29:51):
talking about today and leveragedifferent ways to kind of
structure this capital stack,you'll get into these deals and
a two is gonna be really good.
Speaker 1 (30:02):
Two's good and you should be focused on reserves.
I mean you should build thesereserves.
You'll have reserves.
Speaker 2 (30:07):
You're gonna be careful.
Speaker 1 (30:08):
And you know that in a short term, like within,
whatever it takes, I'm hopefulthat within 24 months we see
rates start to go back or recedeback to a normal position.
Hopefully interest rate willcool excuse me, inflation will
cool and we'll see interestrates going back to normal.
But if I'm the guy sitting herewaiting around, then I just
(30:31):
lost 24 months of revenue andthe guy who jumped in with the
higher mortgage today is makinglimited revenue but can refi in
24 months Refi has when they godown.
Take advantage of the rate andterm and get into a better
interest rate.
Speaker 2 (30:46):
I would also even argue well, what if they go up?
Then the person who's waitingfor the perfect time is going.
Oh geez, now I can't even getin.
Now it's not even a possibilityto get in, and the other guy who
got in, they're continuing thatrevenue so that in four years,
five years, when it does settleout, or however long it's gonna
(31:06):
take, then they're out of theposition, whereas the other guy
couldn't until five years later.
And then by then, who's to saythat he'll have the appetite to
do it?
Who's to say that?
You know what I mean?
It's just like there's so manyunknowns.
Speaker 1 (31:20):
We just don't know the future, so let's take a look
at the present.
The more you wait, the morefear can creep in and the more
doubt comes in and the moremystery happens and then
circumstances change and thelikelihood you're gonna pull the
trigger and do something.
Speaker 2 (31:35):
it's not a today scenario, now it's a maybe
someday or tomorrow, it's atomorrow situation tomorrow
never.
Speaker 1 (31:40):
Comes.
Speaker 2 (31:41):
It's a wish, yeah, well, and that's no excuse to be
reckless.
I wanna make sure that that'svery clear, right.
Speaker 1 (31:47):
But yeah, this is a very acutely focused
conversation around the capitalstack.
This is assuming that theunderwrite, that our due
diligence checks all of thoseother boxes and we love the
asset, that we love theopportunity, the project all
makes sense.
Yeah, we're just not.
Thank you for clarifying that.
(32:08):
That's a good one for thelisteners to keep in mind that
this is the conversation we'rehaving after we've underwritten
the whole thing and it works.
After it is the deal.
Speaker 2 (32:17):
That's right.
Yeah, right, I mean I love Iknow.
We had a conversation the otherday that really stood out to me
as like if you had a billiondollars, it would not give you
the right to spend $100recklessly.
Speaker 1 (32:30):
Yeah, that's right.
Speaker 2 (32:32):
That I mean you have to be so calculated and so
strategic.
Speaker 1 (32:38):
In many ways, what you're saying is actually, you
know, going back to the lastepisode, I see big funds and big
fund managers and bigdevelopers who are really flush
with cash, who run a little bitlooser because they can just
(32:58):
plow through it because they'reso flush with cash, whereas a
really resourceful, leandeveloper, a lean fund manager,
can't afford to lose anything isvery strategic, very
resourceful, and that comes frombootstrapping.
Business is from nothing intosomething and scaling it, and
(33:20):
there's a lot more skill andtalent that goes into
bootstrapping from nothing intosomething and then scaling it up
.
Speaker 2 (33:27):
You've got to be very tactical with how you deploy
every dollar.
Absolutely.
Speaker 1 (33:33):
So with that, guys, I think we go ahead and wrap it
up.
Thank you for tuning in.
Hopefully you're getting somevalue out of this, and please
share this with friends Ifyou're getting some value out of
it.
Guys, we want to grow the showand we really appreciate you
talking about it and tellingpeople about it and sending them
our way, and with that, we'llcatch you on the next one.
Welcome back to the show, guys.
I'm Wayne Aston.
This is Aston Incorporated.
Joining me is my co-host,dallin Aston.
Hopefully y'all having a goodafternoon today.
We're fired up to be in studioagain.
Today we're gonna be talkingabout debt, that four letter
word that a lot of people havesome fear about.
(00:21):
Yeah, specifically we wanted totalk about good debt versus bad
debt, we wanna talk aboutstructuring your debt and we
wanna talk about debt versusequity.
So, dallin, do you wanna kickoff with a few of your thoughts
of, maybe talk to us about howyour attitude of debt and being
(00:44):
in debt almost a million dollarsat the age of 24.
Speaker 2 (00:49):
How does?
Speaker 1 (00:49):
that feel.
Speaker 2 (00:51):
Well, when you say it like that, I feel like most
people, even me included, goholy shit, yeah right.
But I'll be completely honestwith you, I don't see it that
way.
Yeah, and that has been a longtime in the making.
(01:11):
Just starting at the verybeginning, my first car, my
first car, was a 1998 HondaAccord.
I got it for 900 bucks becauseI didn't wanna go get a loan to
get a car, and so I was thinking, in my opinion or my thought
process back then was debt isbad, debt is bad, debt is bad
(01:32):
and that's programmed.
Speaker 1 (01:34):
I mean, that is, society generally thinks in
those terms, so that's a commonthing.
Speaker 2 (01:39):
Well, and in no way, shape or form am I suggesting
that you go just get a huge carloan.
That's not what I'm saying here.
Yeah, what I'm saying is Ididn't realize there was good
and bad debt.
That's kind of what I'm tryingto get at, right.
So then I got another car for areally low loan, just to build
my credit, blah, blah, blah.
All this stuff happened right,but that car loan was only like
(02:00):
3000 bucks.
I paid the rest of it down andI just wanted to build my credit
, blah blah.
Some would argue that carpayment, car loans in general,
are bad, but I think, at the endof the day, what I'm trying to
point out here is when I went toactually do the deal is where I
started to understand thereality of good debt versus bad
(02:22):
debt.
And I sat there and I willnever forget.
I was talking to all thesedifferent lenders, I was talking
to some private money peopleand I had one private lender
send me a letter of intent and Iwill never forget this.
And I opened the email and Ipull up the PDF and it was a
(02:44):
signed document saying, yeah, weintend to loan to Down Ascent,
and it was a million dollars.
It was like 1.1 million.
I was like holy cow, Likethat's.
I had never seen that muchmoney on paper before in a real
(03:05):
scenario, right, like you canthrow that number out, you can
see that number all the time,but until you're looking at it,
about to sign your name tosomething, that's when I started
going oh my gosh, that isinsane, right.
And another thing, too is keepin mind, I've never even seen a
percent of that in my bankaccount at that point, oh yeah,
(03:29):
right, I was like, well, I mean,I'm doing that Totally.
I'm talking about here is doingsomething that I've never done.
But like, this is crazy, right.
And you know, as we got furtherin the process, I looked into
different mortgages, differentequity, all these different
options and ultimately set italong.
You know what I ended up doing.
But, man, I'll tell you it wasa hard thing for me to justify.
(03:52):
Oh, man, like should I?
We talked about this in theother, in the other, I think it
was the previous episode,episode 13.
Talk about this, like, oh,should I do this?
Should I?
Like this could go wrong?
This?
Speaker 1 (04:07):
way to see if the rates get way, yeah, oh yeah, oh
yeah.
Speaker 2 (04:10):
And we've seen now they've gotten way worse, Right.
Speaker 1 (04:15):
So, so, back then, and even, and even, at mortgages
, if they were 9% today they'restill not 22%, which they were
in 1982 with.
Reagan so so there's still along ways.
They could go Right, and if youwait right now because you
don't, want to 9%.
Speaker 2 (04:32):
you might look at it Three years you might be 20%
mortgage.
Speaker 1 (04:35):
You're not going to do anything at that point,
Anything.
Speaker 2 (04:37):
Yeah, that's a great point, I guess, to answer your
question on a really long-windedsense my journey to this.
Now I'm sitting here at yeahsignificant debt If you, if you
ask someone that doesn't havethis perspective, they just if
you debt is debt and not goodand bad debt.
They'll say you are out of yourmind.
Speaker 1 (04:57):
Yeah.
Speaker 2 (04:58):
Yeah, you are 24 years old and you're in debt
$760,000.
I mean, technically you could,you can get into technicality of
exactly the debt that I'm in,but I mean, and kind of how it's
all structured, how it's allset up, but that's the.
That's what people don't see.
Speaker 1 (05:13):
Yeah, right, let's, let's, let's read, let's define,
let's redefine good debt, baddebt.
For the listeners, right now,what I'd like to have everyone
consider is there's consumerdebt and there's production debt
.
Right, two totally differentthings.
Speaker 2 (05:31):
Very different.
Speaker 1 (05:31):
Okay Now, if you haven't already, go out and get
the book Rich Dad, Poor Dad byRobert Kiyosaki.
Speaker 2 (05:37):
Most read Robert.
Speaker 1 (05:38):
Kiyosaki's.
One of those guys had inspiredme way back in 2004, 2005, one
of the most prolific real estateinvestors out there he's.
He's spent his, oh God, the last20 or 30 years creating real
estate education content forpeople to consume, and I and you
(06:00):
know he was one of thosereaders, one or, excuse me, one
of those authors that I reallydove into in the early days
Before I was, as I was making atransition out of stone and tile
business into financial marketsas an investor, and I was
really inspired because RobertKiyosaki talks about how he
(06:21):
started by buying one house,which turned into buying two or
three houses, which turned intobuying some duplexes and some
eight plexes, which ended upinto him owning apartment
buildings and hotels andcommercial real estate, and,
like in the book, he talks abouthow he scaled this up.
(06:41):
Now Rich Dad, poor Dad's a coolstory because his, his
biological father, is the poordad in the book.
Speaker 2 (06:50):
Yeah.
Speaker 1 (06:51):
And his biological father was the guy saying go get
a degree in college and you canbe an attorney or you can be a
doctor or you can be a.
You know, one of the one of thebasic when we talked about baby
boomers.
There's those basic things thatthe people that were making
money aside from entrepreneurs.
(07:12):
Were those those guys, thosedoctors and lawyers?
They got a degree.
You spend seven, eight years incollege.
You do that, right, that's what.
That's what Robert Kiyosaki'sbiological dad was trying to
really push him to do, and hehad the good fortune of being
mentored by his he refers to ashis Rich Dad, which is just a
mentor of his yeah who, whotaught him a whole nother way.
(07:34):
He's the one who taught himabout consumer debt versus
production debt and saving moneyversus investing money, and
really, really mentored Robertin the ways of being a real
estate investor.
So so, going deeper intoconsumer debt versus production
(07:56):
debt consumer debt, guys, that'syour auto loan, yeah, that is
your mortgage on your house thatyou live in.
Those are your credit cards.
Speaker 2 (08:04):
Yeah.
Speaker 1 (08:04):
So consumer, that that is the buckle card to go
buy new clothes at the buckle.
So consumer, debt is anytimeyou borrow money and you don't
get a return.
You get a product or you get.
You get like the money goes,but it doesn't re-numerate you
(08:25):
right.
So you're, if you, if you buy ahouse and you have a mortgage
on it, you're paying every monthto be in that house and you're
consuming.
You're, the house consumes whatyou pay into it right yeah Now
some might argue that you knowyour own house, that you live in
your primary domicile, mightappreciate inequity and that's
true.
We're not going to argue withthat because that that does
(08:46):
happen In Utah we're, fortunate.
The average you knowappreciation rates almost 5% a
year, so we have really goodappreciation in Utah.
But typically speaking, thoseare all in the category of
consumer debt.
Now, production debt is if Ican go, as a business, borrow a
line of credit, if I go borrow a$10 million line of credit to
(09:10):
buy investment properties withthat's production debt.
As a real estate developer, ifI can go borrow.
Well, in the case of Sage Creekwas really cool, that's a great
example.
I borrowed $28 million ofconstruction debt and all of my
friends were like just like thesame response you said about the
million You're out of your mind.
Speaker 2 (09:30):
How does it feel?
How do?
Speaker 1 (09:31):
you sleep at night?
You personally guaranteed a $28million loan.
You're in debt.
I'm like, yeah, well, the howdo you sleep?
The stress, the anxiety ofhaving so much debt?
You're buried in debt.
I'm like, yeah, well well, I'mbuilding an asset that's worth
over $100 million.
Yeah, building an asset thatproduces a debt service coverage
(09:56):
ratio of four, four times.
Speaker 2 (09:58):
Yeah, see, but going on top of that, the reason,
going back to the previousepisode, everyone says that
because their perspectivedetermines it Perspective.
Their perspective is all thatis bad debt.
Speaker 1 (10:11):
Yes.
Speaker 2 (10:12):
Right, but that's a prime example.
Speaker 1 (10:14):
That's right, yep, yep, so.
So, taking that a step further,there is a way.
There is a way that RobertKiyosaki lays out in Rich Dad,
Poor Dad, that I really like,and that is a recommendation
that, as you're young, so forthe young entrepreneurs like
yourself, dallin, and you're onthe right path if you can go
(10:36):
borrow production debt firstbefore you take on a bunch of
consumer debt right.
And focus on finding theproduction debt and finding
deals that can cash flow andthen use the cash flow that that
golden goose produces.
Use the eggs to go buy the carand go buy the house and buy the
clothes and have the lifestyle.
(10:58):
The assets pay for yourliabilities you do not go use a
credit card to go on vacationand pay for clothes and like try
and you know, live yourlifestyle on, because you have
to repay all of that Now.
I learned that the hard way,guys.
I'll just make it a disclaimer.
Before my first apocalypseevent, I didn't know any of this
.
This is before I read Rich Dad,poor Dad.
(11:20):
So I'm building a stone andtile business and I had I don't
know 80 grand in credit carddebt.
That was the only way that atthat time I knew how to go
access capital to buy inventory.
Put my employees in betweengetting paid by builders and it
(11:41):
really created some problems forme, and I know there's folks
out there that'll that'll, youknow have their credit card
strategy programs about usingthem in a positive way and I'm
not taking anything from thatthat you definitely have to have
consumer debt to build a creditprofile.
That's a big piece of itbecause when you, when you
(12:03):
dissect how the credit bureausview your profile, they want to
see a combination of revolvinglines of credit, consumer debt
yada yada, yada, yada.
right, there's that formula thatthey all use, and each of the
bureaus have their own scoringstandards, and so it does make
(12:24):
sense for you to be strategicabout the type of debt you have.
Speaker 2 (12:27):
That's how I've gotten my credit score to be as
high it is is now because I'vebeen able to be strategic about
consumer debt.
It's not you know, it's notlike I'm going and getting 20
grand, 30 grand, just because Iwant to in like a car or a, or
clothes, or vacation.
You know what I mean.
It's it's a very strategic useof consumer debt, Um, whereas in
(12:54):
my other side of it, the debtthat's you know, the production
debt, it's it's a very differentstory.
Speaker 1 (13:01):
What's your debt service coverage ratio?
Do you know off top your headon your current debt and what it
produces?
Yeah, it's about a, about afour, three or four.
Now for the listeners out there.
I'm asking this because I wasjust having a conversation with
a client just this week and he'sactually working on a big farm
project, and we were talkingabout DCSR and there was a
(13:23):
banker we were talking to and hekept throwing out the acronyms
quickly LTV, ltc, dcsr.
Dcsr is debt service coverageratio.
Guys, it just is a.
It's a metric that a lender formainly commercial debt is going
to use and apply on acommercial acquisition and it
tells me, if I have netoperating income after the
(13:45):
expenses of that asset are paidand I had that's just what's
left over the net operatingincome how many times will that
net operating income cover themortgage payment of whatever
loan I have on an asset,typically in commercial
underwriting.
If you're a 1.2 or a 1.3 debtservice coverage ratio, you're
(14:06):
gonna get to be approved.
In fact, the banker that wewere talking to for this farm
acquisition needed it to be a1.3 debt service coverage ratio
to approve the loan for 7.
Something million.
So this is why I asked you,because I want the listeners to
have a perspective.
Perspective determines behavior.
If your condos are able to paythe mortgage four times every
(14:29):
month, how risky is that debtfacility?
Speaker 2 (14:35):
Oh, very non-risky.
I mean, it's like I said thatpoorly, but it's like there's
very little risk.
Speaker 1 (14:43):
It's like you'd be stupid to not do that Right?
Right Because anyone who canproduce a four on the debt
service is making great money.
Speaker 2 (14:52):
Well, and it's so funny because you bring up the
example there of the 1.3, I feellike when I was talking to a
lot of people they'd be like ifit was a 1.8, that's great.
Yeah, you know.
It's like, well, so there'sanother bit of perspective,
right, it's like if you can geta 1.8, a two, then the debt,
(15:14):
that debt even makes sense.
Yeah, right, totally.
So you know anyway.
Speaker 1 (15:20):
And I still think you probably, you probably still
have a good deal if it's only a1.5 debt service coverage ratio.
Speaker 2 (15:28):
I'm just saying you're crushing it.
If it's a four, a higher right.
Speaker 1 (15:32):
Let's talk about structuring the debt, because
there are a million ways tostructure debt.
There's a term that I like touse as well in real estate
development, called prudentusing prudent leverage.
Okay, Prudent leverage issomething that's always in the
back of my mind when I'mstructuring the capital stack.
(15:53):
Typically in real estatedevelopment, there's layers of a
capital stack.
If I have a project and aproject costs $10 million to do,
then it's never always just abank loan.
Speaker 2 (16:07):
It's never always a cash deal.
Speaker 1 (16:12):
It's a combination of debt, equity bonds, special
assessments, grant.
I mean it could be.
There could be five or sixspecies of resources of capital
that go into a capital stack andso getting resourceful around
structuring a capital stack.
That's a special skill for areal estate developer or a real
(16:34):
estate investor.
So let's talk about we'vetalked about syndications versus
funds and we're gonna betouching on this a little bit
more here, because structuringdebt for the real estate
investors out there is thinkingabout buying an Airbnb like
you're doing.
This is relative.
So if you could go out andraise $10 million to do the $10
(16:59):
million project and you could dothat all with private equity,
does it make sense for you touse all private equity to buy
the deal?
It could, but I'd have youconsider that you've made a
commitment to the investors thatgive you the private equity to
provide a certain rate of return.
Speaker 2 (17:20):
Right.
Speaker 1 (17:22):
And if I plug all that cash equity into the entire
$10 million of that projectcapital stack, I gotta hit that
hurdle rate for my investorsfirst and foremost, whether I've
syndicated it or whether it'scoming in from a fund.
And so now what I want you guysto be considering is the fact
that if I can go get a debtfacility from the bank at a
(17:47):
lower interest rate, like a fiveto 7% interest rate none of my
equity investors are interestedin putting cash into a deal for
five or 7%.
Speaker 2 (17:59):
Everything I'm offering them is double digit
interest rates, that's the onlyway they're interested.
Speaker 1 (18:04):
My target to investors in my funds is I mean,
it's multiple, double digitsokay.
So, I'm not making anyguarantees about what the return
will be, because that can onlybe determined as we perform and
we operate and we executedeployment of capital and
development of a project.
(18:24):
But as a general rule of thumbI like to keep the equity right
around 25 to 30% of my capitalstack, and that's a strategic
choice.
What that means is I typicallyhave bonding in the very front
end of a project that handlesinfrastructure, and bonding can
(18:46):
typically handle 10, 15% of acapital stack.
In some instances, like what Ihave in Fillmore, it's covering
over 30% of the capital stack.
So special bonding is reallypowerful in real estate
development.
Bonding doesn't apply to buyinga house to fix and flip.
(19:07):
Buying a house to fix and flipor buying an Airbnb property is
much more basic.
And so you do start with thedebt facility there.
So typically you're gonna goget prudent leverage at the.
The prudent.
Prudent is that it's a lowinterest rate.
It's strategically low.
So the cost of money you wannaget as much of that in my mind
(19:32):
as you can at the low interestrate.
Now disclaimer what I'm talkingabout, guys, is for the
investor coming into a deal withno money of their own.
Speaker 2 (19:44):
Yes, now if you got a million dollars with your own
cash right and you're doing a$10 million project, that'll be
very helpful.
Speaker 1 (19:52):
A little different, but it could.
That can help dictate terms andrates, and all of that with the
bank.
All I'm saying here is that wewant to get that bank debt as
high as we can Typically that's65, 70% and then we're going to
backfill the rest with equity.
Even if I can go and I haveaccess to more equity, I don't
(20:14):
want to put 50% of the equityinto the deal.
Speaker 2 (20:17):
Right.
Speaker 1 (20:18):
The reason being is because, strategically speaking,
it's much harder to hit thehurdle rate at a if it's in the
teens or higher than the teens.
On what I've, what my target tomy investors is, the more, the
more equity in that capitalstack, the harder it is for me
to hit my hurdle rates.
Does that make any sense?
Speaker 2 (20:38):
Yeah.
Speaker 1 (20:40):
Now if we switch over to the fund model, the fund
model is very same.
I mean, I've got, you know,invictus Sovereigns, you know
managing the three funds and wetypically will not inject more
than 20 to 30% of the equity outof those funds into a project.
Speaker 2 (21:00):
Which is very interesting.
I just want to point that outbecause I personally, and so in
my studies of funds and all thisstuff that has stood out to me
very prominently, because it'slike you know, if you have a $10
million fund does not mean youshould just use the fund to just
go buy five properties.
Speaker 1 (21:22):
Right, you could be buying, you know, 25 properties
if you use prudent leverageRight Right, low interest
leverage.
Speaker 2 (21:29):
And the return is so much higher, because then you're
going off of the return for 25properties as opposed to five
properties that are just paidfor the fund.
Speaker 1 (21:38):
So let's just for kicks and giggles.
Dallin, let's let me bust outthe calculator.
Let me just run a comparativemodel on a $10 million project.
If I'm offering a 15% return tomy investors, so 10 million
goes in and.
(21:59):
I'm targeting 15% return.
That means that's $1.5 millionthat I'm going to pay my
investors for coming into thedeal all cash, right, okay.
So my internal rate of return,my cash on cash return, they're
(22:20):
both the same.
It's 15%, right, but if I havea $10 million project and I can
put in, let's see, if I have a$10 million project and I can
put 60% of that in debt, 6million of debt, 4 million of
equity goes in Instead of the 10million, instead of 10 million,
(22:42):
$4 million in the same amount,because the project's going to
produce the same, it'll producethe same, yeah, so, let's just
say that's the point.
So right now I'm not evenpulling a cash flow scenario out
of the air here.
I'm just helping the listenerunderstand that the output's the
(23:02):
same whether it's all cashequity going in or whether it's
debt and equity.
Speaker 2 (23:06):
Right.
Speaker 1 (23:06):
But what happens now is 4 million.
By limiting the equityinjection, it means that the
cash on cash rate of returncould be 29%, 35%, 50% cash on
cash rate of return, because I'musing all that bank low
interest rate debt to producethe same output that goes back
(23:30):
to me and the investors.
That's the strategy.
So again, whether it'ssyndication or whether we're a
fund, same mentality applies.
Speaker 2 (23:41):
Yeah, yeah, that's amazing.
You know, again, as I'vestudied it, that has been
probably the one of the biggestthings that has blown my mind
right.
Because it's just like howbrilliant is that when you can
structure it and just make it somuch sweeter for your investors
, They'll want to give you moremoney.
Speaker 1 (24:02):
Absolutely right.
Well and their exposure's lowertheir exposure's lower their
equity investor.
Speaker 2 (24:08):
yeah.
Speaker 1 (24:09):
Risk and exposure is on the forefront of the mind of
everyone.
Yeah yeah, and so you want tomitigate the risk as best
possible, and the banks?
Are in the business ofmitigating their own risks, but
they all have predeterminedthresholds of it's either LTC or
LTV loan to cost of the projector it's loan to value Some
lenders.
(24:30):
they'll let you get your MAIappraisal, your commercial
appraisal, done and, based onthe value, they'll lend you a
percentage of value.
I like those a lot, but whenwe're oh my heck, I was just
looking at you, I just wentcross-eyed, lost my train of
thought.
Speaker 2 (24:51):
That's okay, I can cut this part out.
Speaker 1 (24:54):
As we're.
Well, you can leave it, butwe're just pause.
So another nuance to the wholestructuring your deal.
You know, as you're structuringyour deal with debt and equity,
another big consideration isthe more equity you've got to
(25:15):
put in, the more leverage yourinvestors have against you to if
you're syndicating a deal tohave more control.
Speaker 2 (25:23):
Oh, yeah, yeah.
Speaker 1 (25:24):
Okay, and so it's an advantage as a sponsor or
developer to use more bonding,more debt.
Keep that equity equation lowso that the interest that I'm
giving them if it's asyndication is lower, because I
need to maintain control of aproject at all times.
In a fund, that's a totallydifferent deal, because we're
(25:44):
not talking about controllinginterest into a project or a
company.
So, structuring the debt pauseagain.
You're gonna have to chop thisone up.
All right, guys.
So we're jumping around here alittle bit on the structuring
(26:05):
debt and I wanna touch on theguarantees.
So all consumer debt is gonnahave a personal guarantee.
That means you're gonna sign onit and if you default on it,
you're gonna have consequences.
A lot of commercial debt willalso require a personal
guarantee.
At some point in your career youget into a situation where you
(26:27):
can get the bank to do what theycall non-recourse debt.
Non-recourse is fantastic.
That means the developersponsor doesn't have to
guarantee it.
It means your investors don'thave to guarantee it.
The bank is comfortable enoughin their underwriting and the
asset that they're not requiringpersonal guarantees.
Now, cash flow determines a lotabout what we're doing, how
(26:54):
we're structuring the debt.
So just to underscore whatwe've already said here how much
debt can I take on?
Well, when the bank looks at adeal, when they underwrite the
deal, if it's consumer debt,they're gonna look at your
credit profile.
This is the concept I wasthinking of.
I had a brain fart here twominutes ago.
(27:14):
Consumer debt is really basedon your personal credit file.
It's your credit score and yourprofile, your assets and da da,
da da In commercial debt.
When you're talking about cashflowing assets, the bank many
times will look at that debtservice coverage ratio.
They'll get an appraisal thathas an income approach on your
(27:34):
asset and you don't have to havethe strongest credit profile.
And they might ask for aguarantee.
They might not.
They might like the assetenough that they just don't
require that.
They might get lucky and havenon-recourse debt.
So that was kind of the finalpoint that I was trying to drive
home here on the structuringdebt versus equity.
And I know you were having athought here on interest rates
(27:58):
and how they're fluctuatingright now.
Speaker 2 (27:59):
Well, it's like look, it's based off of what you just
talked about.
It's like that performance ofthe asset can dictate a lot.
Right, and so, even with, as wetalk about people getting
scared because of interest rates, people getting scared because
of this, that and the otherwanting to wait for a perfect
time, now is the perfect time.
(28:19):
I would argue that now is theperfect time.
Let's take, for example, youhave an asset that is, I don't
know, $60,000 a year producingasset.
That means you can get aninterest rate right now If it's
a let's say it's a $500,000property and it produces 60K a
year, then that means you'relooking at and say there's a 7%
(28:43):
or a 6.75% interest rate.
That's about what I mean.
I've seen some going for thebutt right there, right yeah, in
my conversation with lendersand such right now.
That's a pretty good oneactually.
Speaker 1 (28:57):
That's good for today , yeah.
Speaker 2 (28:59):
So if you get a 7%, 6.75% interest rate and you have
a property that is $500,000 andit produces about $60,000 a
year, you're looking at a twodebt service.
Speaker 1 (29:12):
Yeah.
Speaker 2 (29:13):
So, going back to the conversation about lenders
being excited about 1.3, again,perspective determines behavior.
Right Like you're sitting hereand you're looking at this oh
man, I'm gonna pay $30,000, I'mgonna pay $2,488 a month.
Speaker 1 (29:28):
Yeah.
Speaker 2 (29:29):
Well, that's not the point.
Almost right, let's take a lookat okay, that's a two debt
service.
Now what are the profits there?
What is this gonna do?
How is this gonna make sense?
I would just argue, when we'retalking about structuring the
debt, if you can structure thedebt as kind of we've been
(29:51):
talking about today and leveragedifferent ways to kind of
structure this capital stack,you'll get into these deals and
a two is gonna be really good.
Speaker 1 (30:02):
Two's good and you should be focused on reserves.
I mean you should build thesereserves.
You'll have reserves.
Speaker 2 (30:07):
You're gonna be careful.
Speaker 1 (30:08):
And you know that in a short term, like within,
whatever it takes, I'm hopefulthat within 24 months we see
rates start to go back or recedeback to a normal position.
Hopefully interest rate willcool excuse me, inflation will
cool and we'll see interestrates going back to normal.
But if I'm the guy sitting herewaiting around, then I just
(30:31):
lost 24 months of revenue andthe guy who jumped in with the
higher mortgage today is makinglimited revenue but can refi in
24 months Refi has when they godown.
Take advantage of the rate andterm and get into a better
interest rate.
Speaker 2 (30:46):
I would also even argue well, what if they go up?
Then the person who's waitingfor the perfect time is going.
Oh geez, now I can't even getin.
Now it's not even a possibilityto get in, and the other guy who
got in, they're continuing thatrevenue so that in four years,
five years, when it does settleout, or however long it's gonna
(31:06):
take, then they're out of theposition, whereas the other guy
couldn't until five years later.
And then by then, who's to saythat he'll have the appetite to
do it?
Who's to say that?
You know what I mean?
It's just like there's so manyunknowns.
Speaker 1 (31:20):
We just don't know the future, so let's take a look
at the present.
The more you wait, the morefear can creep in and the more
doubt comes in and the moremystery happens and then
circumstances change and thelikelihood you're gonna pull the
trigger and do something.
Speaker 2 (31:35):
it's not a today scenario, now it's a maybe
someday or tomorrow, it's atomorrow situation tomorrow
never.
Speaker 1 (31:40):
Comes.
Speaker 2 (31:41):
It's a wish, yeah, well, and that's no excuse to be
reckless.
I wanna make sure that that'svery clear, right.
Speaker 1 (31:47):
But yeah, this is a very acutely focused
conversation around the capitalstack.
This is assuming that theunderwrite, that our due
diligence checks all of thoseother boxes and we love the
asset, that we love theopportunity, the project all
makes sense.
Yeah, we're just not.
Thank you for clarifying that.
(32:08):
That's a good one for thelisteners to keep in mind that
this is the conversation we'rehaving after we've underwritten
the whole thing and it works.
After it is the deal.
Speaker 2 (32:17):
That's right.
Yeah, right, I mean I love Iknow.
We had a conversation the otherday that really stood out to me
as like if you had a billiondollars, it would not give you
the right to spend $100recklessly.
Speaker 1 (32:30):
Yeah, that's right.
Speaker 2 (32:32):
That I mean you have to be so calculated and so
strategic.
Speaker 1 (32:38):
In many ways, what you're saying is actually, you
know, going back to the lastepisode, I see big funds and big
fund managers and bigdevelopers who are really flush
with cash, who run a little bitlooser because they can just
(32:58):
plow through it because they'reso flush with cash, whereas a
really resourceful, leandeveloper, a lean fund manager,
can't afford to lose anything isvery strategic, very
resourceful, and that comes frombootstrapping.
Business is from nothing intosomething and scaling it, and
(33:20):
there's a lot more skill andtalent that goes into
bootstrapping from nothing intosomething and then scaling it up
.
Speaker 2 (33:27):
You've got to be very tactical with how you deploy
every dollar.
Absolutely.
Speaker 1 (33:33):
So with that, guys, I think we go ahead and wrap it
up.
Thank you for tuning in.
Hopefully you're getting somevalue out of this, and please
share this with friends Ifyou're getting some value out of
it.
Guys, we want to grow the showand we really appreciate you
talking about it and tellingpeople about it and sending them
our way, and with that, we'llcatch you on the next one.
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