Show notes
Monte Anderson of Neighborhood Evolution and Options Real Estate in Duncanville, Texas joins me to talk about extremely practical matters: making money in real estate. That is, as a small developer, how is it actually done? What are the pros and cons of different approaches, such as buying and holding vs selling?We start this by discussing a YouTube video from The Real Estate God. Yes, that’s the real channel. Titled, “The best way to 3x your money in 2024,” the video is a good jumping off point for how to structure deals in an ideal world. And, it goes over the differences between general partners and limited partners.Monte talks about why nothing ever works as quick as he thinks it should, and the realities of development fees. We discuss the challenges, but also the joys, of working in development. Find more content on The Messy City on Kevin’s Substack page.Music notes: all songs by low standards, ca. 2010. Videos here. If you’d like a CD for low standards, message me and you can have one for only $5.Intro: “Why Be Friends”Outro: “Fairweather Friend”Episode Transcript:Kevin K (00:01.733)Welcome back to the Messy City podcast. I'm Kevin Klinkenberg. Got our returning champion, Monte Anderson in the house here today. Monte, it's always great to see you and talk to you. Where are you in Dallas? Are you roaming around the country somewhere?Monte Anderson (00:16.022)Yeah, I am in Dallas today. Glad to be here with you, but I am in Dallas. I'll be in Lafayette, Louisiana tomorrow morning and Elkhart, Indiana next week. So lot of traveling coming up, but I'm home for this afternoon. It is. It is. We've been going down there for, this is our second year. And so yeah, there's a lot of good food down there. Yeah.Kevin K (00:26.257)Cool, Lafayette's a really cool town.Kevin K (00:39.449)Yeah, was going to say amazing food, fun people, it be a great time.Monte Anderson (00:43.647)Yeah, they are fun people. lot of entrepreneurial spirit down there, know, they've had to do a lot with a lot of things against them, know, hurricanes and, you all the things that you've got in that part of the country.Kevin K (00:53.627)Yeah. Yeah.That's right. That's right. Well, guess depending on where you are, you've got something. like we don't have hurricanes, but we've got tornadoes and floods.Monte Anderson (01:06.668)Yeah, yep, that's right. There's something always out there, the unknowns.Kevin K (01:10.245)Yeah, I know. I think I texted you a couple of weeks ago, we were up in Dubuque, Iowa, where I know you're also doing some work and they were dealing with the Mississippi is flooding this year. It's been very, very high. And so they've had some flooding in different portions. So in fact, we were going to take like one of their riverboat cruises and we couldn't do it because the river is too high.Monte Anderson (01:28.705)my.Yeah. my, that's because that town is right in between the river and the bluffs. The downtown is right there in the valley, if you will, between the two hills. Yeah.Kevin K (01:37.67)Yeah.Kevin K (01:42.063)Yeah. It's really cool. had not spent a lot of, I've driven through, I'd driven through before, but I hadn't really spent any time there. And it's really a neat, neat little town with like incredible bones and, just a really pretty setting there on the river.Monte Anderson (01:52.802)Yeah.Yeah, the great thing is it doesn't have any major interstates that go through it.Kevin K (01:59.569)But they had a lot of urban renewal. I'll say that. For a small town, boy, did they have a lot of urban renewal that was done to them. anyway, Monty, I wanted to talk to you today. We were exchanging some emails. I sometimes subscribe to these just kind of random YouTube channels or blogs or whatever that touch on real estate or design or planning or whatever.Monte Anderson (02:03.544)Yes.Monte Anderson (02:07.554)Yeah. Yeah.Kevin K (02:27.953)this is one, that I shared with you that is a YouTube channel, from somebody who calls themselves the real estate God, which, of course kind of made us laugh, but it was a really interesting short video. has some pretty interesting content, especially for, newbies, in this video that, I wanted to talk about today, the email, called it the best way to three X your money in 2024.but really it was like a seven minute video that was about a basic investment strategy for real estate that I think is real, that is similar to what you teach. And I wanted to kind of walk through this and talk about it because I think it is, it's interesting. we've talked about financing before we've talked about different aspects of development. It's interesting to take it kind of step by step.and help people understand how, you know, where you put money in, how you get money out, how you make money doing some of these smaller projects.Monte Anderson (03:30.506)Yeah, that's a really big deal for people getting started, you know, in this business. I mean, how do you get money out? Right? You put it in, but where does it go? And how does it come out fast? And it doesn't come out fast unless you buy and sell. That's basically the bottom line. If you don't buy and sell, it doesn't come out fast. You know, because if you buy a, you know, if you buy a property and you get a loan and you restore that property,Kevin K (03:37.969)Yeah.Monte Anderson (03:59.286)and you run it and you get it leased up over time. It's not going to cashflow really great in the beginning. It's going to take, it's going to take a while where I find myself these days and making money as far as making, pulling money out is, and this is what the big, developers do, buying something, fixing it up, getting it all rented up or, or, or buying something and getting it ready to sell, you know, and then selling it. And that's where.A small developers have to do more like buying and selling. And in my case, you know, I charged myself, you know, brokerage fees and management fees and things like that. So my operating company, you know, gets commissions and gets development fees. And that's how we live. And big, big companies do the same thing. You know, the big developer will buy, you know, build a 200 unit apartment complex, lease it up and sell it to the Ohio state teacher pension fund.You know, and that's where the money's made. That's where the big quicker money is made. But it's, it is really difficult as a small scale developer to buy a property, fix it up, build it and get, and I mean, you're building wealth. Okay. Because usually the property is going up in value, but you don't get a lot of cash flow out of it really quick. It's just, that's just, I think in my opinion, and you know, of course, I don't know everything. It's kind of unrealistic thinking. It looks good on paper.but it's unrealistic thinking.Kevin K (05:29.967)Yeah, it seems like so generally when we talk about making any money in real estate is either you're making money off of the cash flow of the project itself, whether it's a residential project or a commercial project, you know, it's producing more income than your expenses. So you're making a little money year after year on that, or you make money when you sell it to somebody else, assuming you've added value along the way and you're selling it for substantially more than what.you put into it.Monte Anderson (06:01.614)That's correct. And then depending on how much equity you put in in the front and how much leverage or how much debt, how much loan you put on the property, you know, will depend on what your cashflow is going to be. So if you've like in the, I've always been one for putting as, you know, having as little debt as possible because you can go through the times like we just went through in the last year or two when interest rate, like on one of my properties went from four and a half to seven and a half percent.like it renewed and just went up. mean, they could have went up to 8 .5%, but my bank lacked me, so they did 7 .5%. But if you have much debt, if you have a lot of debt, first of all, you're not going to probably cashflow for a while. And then secondly, when the markets change, when the markets change or when interest rates go up or when vacancy goes up, then you're going to be in trouble.And that's when you see foreclosures and that's when you see, like right now we're seeing a lot of properties on the market right now, either not so much in foreclosures, but people just needing cash. So they're selling their properties. So.Kevin K (07:13.233)Yeah. So like, you know, let's just say if you, random project that you're a small developer and you scrape together $50 ,000 and you, you put that into a deal and then you have debt on the back of it for the balance of the project. You're, you're either getting that 50 ,000 back to you when you sell it. Hopefully plus a profit or you're getting it like drip, drip, drip over time, over a number of years.Monte Anderson (07:43.211)Exactly.Kevin K (07:43.429)which like you said, at that small of a scale, that might be maybe make a few thousand bucks a year, but you can't make a living off that.Monte Anderson (07:52.47)Right. Well, you can't make a living off the drip, drip, drip part. You can't really make a living off that, but you can if you have a hundred units then. Okay. Then you have it. And you can, if you're in the real, if you have a real estate operating company, like I do, where we do our own leasing and management and development and construction. So we pay ourselves to do those, do those things. If, if the money is available, you know, if there is enough, you know, to do that, butAnd many times these days, I put myself in better positions. You know, I should have learned after 30, you know, 35 years, I should learn, but I put myself in better positions where I can get those fees mostly. So even if the property is dripping, I'm still getting the fees for operating the property. Now I've got a big one that I'm sitting in right now in Duncanville, Texas. It's called Wheatland Plaza, which is an old strip center, know, with some townhomes I'm going to put on the parking lot.And right now I've got all my fees into it. got, you know, I've got, I sold another property to, you know, make the cash calls to keep this thing going because I didn't want to get more debt right now while interest was high. So I made a conscious decision not to add more debt on. In fact, I may not have even been able to get more debt on because I'm in a leasing upstage and I bought aKevin K (09:06.673)MmMonte Anderson (09:17.87)strip center that was 60 % least and it went down to 28%. Now I'm back up to 80, but I'm still not up to really breaking even, know, nearly up to breaking even. And when I put the 20, the 19 townhomes on the parking lot, you know, I'm to have a mixed use building. And then now I've got something that's operating, but it takes, it takes time. So that'll probably take me, what I just described is probably take me four or five years to get that done. So you got to last that four or five years.Kevin K (09:47.589)Yeah, yeah. Yeah.Monte Anderson (09:47.736)you know, negative cashflow and you've got a cash negative cashflow has got to come from from somewhere. So it's, it's funny to hear like in the, the podcast or the, the YouTube we were talking about, it's funny to hear some of the people talking about this stuff because they, this would be the way I would put it on paper to show you a deal. I would show you that in reality, it's just not that easy. And you're constantly having to,You're constantly having to look for new ways of financing or finding another property to buy and sell to make cash flow or buy and sell something you've already got or raising capital from what we call community impact investors who don't expect huge high returns but are also, they expect a little return but they're as interested in the community impact as they are the return. They're interested in both.Kevin K (10:45.541)Yeah. Well, so let's look at a couple of the basics that he talked about just to clarify. He described the way he looks at it as like being a real estate private equity company. I think, I mean, that's clever, but I think it's just basically kind of the way a lot of real estate deals happen. And that is you have general partners and you have limited partners. And I wonder if you could talk a little bit about like in your experience, how those, what's the difference between the two?What roles do they play?Monte Anderson (11:16.29)Yeah, like I'm the general partner or the managing partner in, in, you know, nearly all the deals I do. And I have partners, limited partners or, or members. These days we call them members of the LLC. Same thing, same, but they're passive, passive investors. And so in any real estate deal, you really need two things. And this is what I talk about in all small scale developers need two things. Really. We need really a good, decent loan from a bank.And I always say a bank, bank servers are still our best partners. They're going to be the probably lowest interest rate. They're also be the toughest to underwrite you, know, looking at your paperwork and, you know, looking at you closely and asking you questions. And then you need, you need affordable equity. You're either providing that equity or the down payment or your investor partners are providing that down payment.Kevin K (12:09.617)Right. Just like if you're buying a house and you have to put 5 % down, 10 % down, 20 % down, whatever it is. For a real estate deal, it's the same way. And a bank is probably going to require 25 % down pretty typically or more. Yeah. Yeah.Monte Anderson (12:14.079)same thing.Monte Anderson (12:23.726)or 35 % today, or you may want to put 35 or 40 % today at seven and a half or eight, eight and a half percent interest. I can remember years ago that used to be not be that bad of a rate, but we got used to this low rates. we kind of, you know, below 5%, I kind of call that free money. It's kind of free, you know, really. So it really makes deals easier to do. when they go up, butKevin K (12:45.265)YouMonte Anderson (12:51.822)Yeah, it's the same thing. You you buy a piece of property, you need a loan, you need equity, whether it's 5 % on an FHA loan to buy a house or whether you got a commercial loan at a bank and you need 25, 35%. We used to say 20 % down on commercial loans, but now these days I would say it's minimum 25 to 35 % down that banks are requiring. Not such a bad thing either, to tell you the truth, but it's kind of going back like a hundred years ago when we didn't have financing.Kevin K (13:21.211)MmMonte Anderson (13:21.678)Cause if you think about most of you're in my friends, not wealthy, you know, we didn't grow up with extreme amounts of wealth. 35 % might as well be, you know, might as well be a hundred percent, know, we got nothing, you know, you got nothing, you know, it's still a, still a lot of money. But once you get your, your, your investors, your limited partners, your, your members of your LLC, your passive investors, the passive investors don't, don't operate.Kevin K (13:33.859)Yeah.Monte Anderson (13:49.806)on a day -to -day basis. They're just like they have stock in your deal. And they need to be accredited investors, which means they have to have a certain amount of knowledge or net worth or wealth. Th…
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