RG 332 – Reducing Your Investment Risk In Today’s Uncertain Market with Chad Sutton
We’re pumped to welcome another engineer on the show today—Chad Sutton! Tune in to this week’s episode to learn how Chad transitioned from a high-paying corporate job to a full-time real estate investor.
Chad Sutton is the Managing Partner at Quattro Capital, a real estate investment firm focused on residential multifamily assets. Before he became an entrepreneur, Chad was an engineer and executive leader for GE Aviation. With his experience in the corporate world, Chad took the big leap to become a full-time entrepreneur.
In this jam-packed episode, Chad and I delve into how his team went from buying to operating to selling, what it was like to work with family, and how Chad does business in today’s climate. We also get into an in-depth discussion about the challenges investors might face when buying with poor strategies today; something a lot of us need to hear with an impending recession.
Taking a risk can lead you to greater things.
When working with family members, you have to treat each other as equals.
You need a good capital stack before buying a property.
- Bridge money is expensive and no longer the most competitive thing to use.
Be Bold, Be Brave and Go Give Life a Crack!
Listen to Podcast
Reed Goossens (00:00):
Good day Good day guys. Now, before we dive into today’s show, I want you to let you know that some of you may be aware that over the past eight years, I have built a substantial multi-family real estate portfolio here in the US worth over half a billion dollars. And in that time, my passive investors have received fantastic double-digit returns. And now you too can invest directly into my deals for as little as $50,000. So if you’re an interested investor, head over to reedgoossens.com to find out more. That’s reedgoossens.com. Now, back into the show.
Chad Sutton (00:41):
You know, obviously we have seen an unprecedented move in interest rates, like we haven’t seen this since the eighties, and it it’s to combat inflation. We can get into all that, but how is it affecting us now? Well, the, the problem is you only run into problems in real estate in two situations. I can boil ’em all down to two. One is you run outta time, and the other is you run outta money, right? So is, if, if you bought a little bitty 20 unit building and you got 10 million in the bank, you’re not gonna lose that building, right? You can buy it 10 times over, right? But if you, maybe you bought it pretty thin and you don’t have a lot of cash, and all of a sudden your variable interest rate went to 7%, you might bleed out and lose that property. So that, I mean, that’s a risk. The other risk is a lot of people have tried to buy assets at, you know, sub four cap, uh, uh, cap rates, and they’ve used bridge lending for the wrong reasons, just to, they’re kind of treating it like a permanent loan and just using it to get the, the deal, and then counting on organic appreciation to get them to a refi. Well, that’s gone.
Speaker 3 (01:50):
Welcome to investing in the us, a podcast for real estate investors, business owners, and aspiring entrepreneurs looking to break into the US market. Join Reed as he interviews go-getters, risk takers, and the best in the business about their journey towards financial freedom and the sheer joy of creating something from nothing.
Reed Goossens (02:10):
Good day Good day, a ladies and gentlemen, and welcome to another cracking edition of investing in the US Podcast from Los Angeles. I’m your host, reed goossens. Good as always, Debbie with us on the show now. I’m glad that you’ve all tuned into it. Learn from my incredible guests, and each and every one of them are the cream of the crop here in the United States when it comes to real estate investing, business investing, and entrepreneurship. Each show I try and tease out their incredible stories of how they have successfully created their businesses here in the us, how they’ve created financial freedom, massive amounts of cash flow, and ultimately create extraordinary lives for themselves and their families. Life by design, as I like to say. Hopefully these guests will inspire all of my cracking listeners, which are you guys to get off the couch and go and take massive amounts of action.
Reed Goossens (02:57):
If these guys can do it, so can you. Now, as you know, I’m all about sharing the knowledge with my loyal listeners, which is you guys, and there’s absolutely no BS on this show, just straight into the nuts and bolts. Now, if you do like this show, the easiest way to give back is to give us a review on iTunes, and you can follow me on Facebook and Twitter by searching at Reed Goossens. You can find the show wherever your podcast on iTunes, SoundCloud, Stitcher, and Google Play. But you can also find these episodes up on my YouTube channel. So head over to reedgoossens.com, click on the video link, and it’ll take you to the video recordings of these podcasts where you can see my ugly mug, but the beautiful faces of my guests each and every week. All right, enough outta me. Let’s get cracking in into today’s show.
Reed Goossens (03:44):
Turn the show. I’m the pleasure of speaking with Chad Sutton. Now Chad is one of five managing partners at Quatro Capital, which is a multi-family investment firm. He leads the acquisition team, and he’s also the host of a great podcast, which I’ve been on called the Real Estate Runway Podcast. Now, Chad, like me, is also a recovering engineer, and he spent most of his professional career in corporate America in space flight with nasa, and then in aircrafts with GE before he found his passion as a real estate investor. Now, Chad is a self-proclaimed old soul, and he is a genuine family guy, passionate about building quality time with his family and a quality lifestyle, but he, he’s also really passionate about building quality communities for his residents. I’m really pumped and excited to have him on the show today to share his incredible insight and knowledge. But nothing outta me. Let’s get him out here. Good. Hey, Chad, welcome to the show. How you doing today, mate? Hey
Chad Sutton (04:31):
Mate. Good to see you. Thanks for being on the show. That’s my best. Aussie out there, hope. Well,
Reed Goossens (04:34):
That’s mate, just keep, don’t give up your day job is what they say. You know,
Chad Sutton (04:58):
You know, you mentioned this in the pre-show and I had to think back like, oh my God, how did I make my first ever dollar as a kid? But, you know, thinking back, I guess I always had a little bit of entrepreneurial spirit. You know, I, uh, my, my parents started paying me an allowance to mow the yard. And this was an Austin, Texas 95 degree heat, 110% humidity. Just awful thing to do in the summer. Nobody wanted to do it, right. And so I saw an opportunity, I was like, you know, all these other houses on the block, nobody’s mowing their yard. And they, they hate doing it. They get up early on a Saturday and do it. So I was like, well, I’ll do it for you for 10 bucks. Right? And so it is back in the, back in the day, 10 bucks went a long way.
Chad Sutton (05:34):
And I really wanted an Nintendo 64. You remember that thing? Yes, I did like Donkey Kong 64, you had the expansion pack. I, I, I wanted that system and so I, I set out to make $120 cause that’s what I needed with tax to buy the system At the time,
Reed Goossens (06:05):
Chad Sutton (06:17):
Really. Somewhere, something like that. And, and I remember, you know, I, I think I purchased the, I got the Donkey Kong game, but then I bought oh oh seven, had a game out at the time, goldeneye, I think it was. Yes, yes, yes, yes. And and I remember like when, you know, blood would come down the screen when you, anyway, it was kinda like cryptic and old, but my mother didn’t like that. And so it was subsequently taken away until I was like five years older. So anyway, that’s my childhood
Reed Goossens (06:38):
Chad Sutton (07:01):
Yeah. You know, it, it’s a, it’s a pretty short story. I think that we can, we can go through it relatively quickly, but I, I, I’ve always, I was always taught at a young age that, hey, you have nice things. If you want them, you’re gonna have to work for them and, and get on a good path to get a good job and get ’em. So I did, I was always good at playing Legos and connects and all that. And so the world told me I needed to be an engineer. I went and got an engineering degree. I got two actually. Right. Wow. And, you know, and, uh, and that led to first a job at NASA working on the space shuttle and what used to be called, uh, the, the, um, constellation Program. It is now basically the SpaceX Falcon Nine Rocket. So it was sold to them and they developed it and made it awesome.
Chad Sutton (07:40):
Right? So, um, it had a lot of fun doing, like, making things go boom. I worked in combustion. I was a mechanical engineer, designing parts that make things go boom, that, you know, when, uh, when the space shuttle ceased to be a project in our last economic downturn, you know, I, I went into the private sector and I worked for, you know, companies like General Electric designing aircraft engines and, and really enjoyed that until I looked around one day. I was probably, you know, four or five aircraft engine designs in a lot of the commercial airlines you’d be flying around on today. And I said, I looked to my left and I saw my principal engineer and I looked to my right and I saw my senior engineer and I was like, oh my God, there are three companies in the world that do this.
Chad Sutton (08:21):
I work for one of them, and those two guys are me. In the next 30 years I’m gonna be doing this. I’ll just be very, very good at it, you know? And that didn’t sit well with me. You know, I didn’t like being pigeonholed, if you will. I didn’t like the city I lived in. And there, you know, a aviation is not in the most pretty parts of the country,
Chad Sutton (09:01):
Right? Like the, the idea of the labor market is you’ll be paid commensurate with how hard it is to replace you and only enough to keep you from leaving, right? Mm-hmm.
Chad Sutton (09:45):
And my whole job was to increase, uh, uh, you know, the bottom line, like by reducing variable cost, productivity and, and, and manufacturing. So that, that was a rapid, rapid, rapid crash course in economics business, you know, profit and loss management, all the things we do as operators, right? And that eventually led to a, a global supply chain executive role. So I was, you know, pre 30 and, and an executive with Fortune 100 company in the world, or Fortune 50, I don’t know what they are now. They’ve cut, they’ve been cut up so many times. But, um, you know, great experience, great background, but meanwhile a parallel path was forming. You know, I, I’m actually a third generation investor that was unbeknownst to me until I was in my mid twenties, but my grandparents owned a lot of single family real estate. And if you’ve ever watched the show, fixerupper Chip and Joanna Gaines, uh, my grandparents used to live around the corner from Chip Kanes when they bought their first flip way back in the day.
Chad Sutton (10:39):
He’s always been as goofy in person as he is in real life. By the way,
Chad Sutton (11:26):
So we’re kind of talking about it. Well, then we go study other asset classes and discover the scalability of commercial real estate and then further, you know, with supply and demand metrics at the time, apartments and, and unit-based mobile home parks and stuff like that. Really made sense. Started buying some of that with, with our own money. Then eventually people wanted to be part of it. So we started learning how, okay, well how do you syndicate? And so we figured that out and it’s just scaled from there. And, you know, know it, it was actually, I I I had parallel path careers until about 2020 when I saw Covid coming from China, cuz I was in supply chain, right? And so I, I watched it hop from China, you know, over to India, over to Europe, over to Scandinavia, and I was actually on one of the last flights out of Barcelona before the country shut down.
Chad Sutton (12:12):
Right? Wow. So that would’ve been a fun conversation for my wife, Hey, I’m gonna be here for a few, few months,
Chad Sutton (12:54):
And, uh, but I knew I would land on my feet and I, I went to my, you know, my supervisor at the time who was a senior executive and said, look, I know, I know GEs about to tighten the belt and, and cut rope with some people. I’m worth like three jobs. Just let me leave. Give me a severance package. I walked out the door, never looked back. And then since then the business has scaled like 10 x. So it’s like once you start focusing on the right thing mm-hmm
Reed Goossens (13:32):
How close were you becoming to becoming an astronaut? Cause I know a lot of going to NASA engineering degree, mechanical. You, you like, you doing one or two, you look not, not trying to, an astronaut is a very, very glorified space mechanic.
Chad Sutton (13:48):
Well, true. True. You know, I, I’m not gonna lie, if I didn’t try or like think I could do it, but the problem is, I also, before that I wanted to become a pilot mm-hmm.
Reed Goossens (14:23):
I, I had to ask, it was the the first thing NASA mechanical engineer, you’re like, you, you’re either going left or you’re going right. You know what I mean? Yeah. So it’s, uh, that, that’s awesome. So I
Chad Sutton (14:32):
Have met a lot of astronauts. That’s a different story.
Reed Goossens (14:34):
Right, right. No. So now let’s talk about Quatro Capital and what you’ve built, because you mentioned, and I think I’ve been on stage with Kim at I m N in Dallas. You
Chad Sutton (14:42):
Were, I believe was you were That’s
Reed Goossens (14:43):
Right. I I was, I was the, i I co-host or no, I hosted a panel at the I MN recently. How has it been, you know, maybe tell us how, how many, what you got today, a u m, but also how’s it been like with a family member that, that that’s a, you’re probably one of the first people on the show to build a, a, a real estate investment company. Maybe I just didn’t ask, but a lot of the guys who come on, like find a friend or a partner, you know, through meetup groups or whatever, but, but, but you aren’t. How, how, how’s that? How’s
Chad Sutton (15:09):
That going? You know, and, and I, I have to disclose, uh, my mother, her sister is a third of the five partners in, in Cuatro capital. So there are, there are five managing partners. We have a lot of, you know, people that work with us and alliance partners as well. But the, the core five are, are three of them are family, you know, myself, my mother and her sister, my aunt. Mm-hmm.
Chad Sutton (15:52):
Like the integrity is there. And so that, that really helped a lot in the beginning when we didn’t have our systems and processes really tight and we just had to trust a lot. Now, now we’re auditable, which is different. But, um, you know, it, it’s, it’s really been good. And it’s been, you know, Kim and I didn’t know each other very well in my early life. Cuz you know, I, I, she was a corporate awesome, like doing billion dollar deals with IBM and stuff like that when they were building data centers. So she was always gone. Uh, I then moved to Tennessee out of Texas where she was living. And so I didn’t see her, but once a year, you know, we always had a good relationship, but I never knew her very well. So since we’ve started this business, I’ve gotten to know her as a person.
Chad Sutton (16:30):
Found out we actually get along really, really well. And we challenge each other a lot, which is fun. Uh, and I had to learn to work with my mother who is, who was, you know, incredibly intelligent, but you have to learn how to, um, put that mothers son relationship to the side and work as equals mm-hmm.
Reed Goossens (17:05):
And what are you primarily buying? Is it all multi-family today? You mentioned mobile home park’s earlier. I don’t know if that is one of the asset classes you’re also focused on.
Chad Sutton (17:13):
Yeah, so we, we really like unit-based real estate. So, uh, we have not really come up with any self-storage buildings to date. We’re, you know, we could, we just haven’t really found one that makes sense. We buy majority, uh, you know, scattered site multi-family or traditional, you know, garden style multi-family. Uh, so that’s the b the bulk of our portfolio. But there, you know, amongst the partners, there’s also some mobile home park type stuff. And you know, we just bought a piece of land in Texas that we’re gonna develop into tiny homes, actually that does have some mobile home park component on it. So, uh, you know, I I really, the, what we’re after is we’re just not quite square footage based people, you know, like even if you get into multi-tenant, that’s great. Uh, we just really like the short term nature of the leases. The, the fact that I’ve got a hundred little bitty income streams and not one big one or even seven on a building. Um, it just really has been what we’ve gravitated to. And, and we, we believe in the basic needs of humanity and shelter is one of them. Right? Yep. So,
Reed Goossens (18:13):
Yep. I completely agree. Tell me how you’re working through the current climate of buying in today’s world. We spoke a little bit in the green room before we press record here, but what are you, what’s your, what’s your outlook? Maybe, maybe take us back and to last year, what were you, what were you hunting for? Have you, have you bought anything recently and, and you know, how things changed for you as a, as an operational team mm-hmm.
Chad Sutton (18:38):
You know, what’s interesting about that question is you have to ask yourself two questions right there. There’s the macroeconomic environment that you exist in, you know, which, which drives your capital markets, which drives your capital stack. And that, that’s the aggregation of money you’re gonna use to buy a thing. Whether it’s your money, an investor’s money, you know, a bridge lender, a Fannie Mae, like whoever you use, you have to assemble this perfect little capital stack to buy your deal. And then you have to ask yourself, well what’s the health of the real estate market? So let me answer the, the latter first. We are, yes, we’re feeling interest rate increases, but if we put the capital side to the side for a minute, rents are still growing, you know, at record levels. Even if they flatten out, you know, we’re still gonna be in good shape for a time to come, uh, through this recession.
Chad Sutton (19:23):
So I think that the, the piece of real estate we’re buying, you know, as long as you’re buying in in areas that have the right economic indicators, you know, population growth, job growth, the basic stuff you’re going to do well, uh, as far as moving the income line, that’s what we do as value add operators. We try to keep expenses or shrink them, which is usually a little bit of the value add, but mostly it is increasing the income line that pro that prospectus is not no different than I saw a year ago. Right. And in fact, it’s worse. I mean now that you have, now that you, it’s a delicate balance here. But now that you have interest rates that I think they just peaked at 7% as of this recording yesterday for home mortgages. Mm-hmm.
Chad Sutton (20:10):
It needs to be speeding up. We need to be building more homes, we’re building less, you know, and so the supply and demand imbalance for rental housing, I think we’re in, we’re in an area where we’re gonna see rent growth and occupancy for a long time to come. Especially with inflation where, you know, we have a saying in Texas, rolls downhill, right? If, if you increase my taxes, you increase my insurance costs, you increase my cost of lumber, you increase my cost of appliances, guess who’s ultimately gonna pay that, right? As long as you’re in an area where, where incomes are rising, that is going to roll downhill to the consumer and that consumer is the resident. So the health of the market I think is very good. Now let’s talk, talk about the capital side. The capital side is, you know, obviously we have seen an unprecedented move in interest rates, like we haven’t seen this since the eighties and it it’s to combat inflation.
Chad Sutton (20:59):
We can get into all that, but how is it affecting us now? Well, the, the problem is you only run into problems in real estate in two situations. I can boil ’em all down to two. One is you run outta time and the other is you run outta money, right? So is, if, if you bought a little bitty 20 unit building and you got 10 million in the bank, you’re not gonna lose that building, right? You can buy it 10 times over, right? But if you, maybe you bought it pretty thin and you don’t have a lot of cash and all of a sudden you’re variable interest rate one to 7%, you might bleed out and lose that property. So, I mean, that’s a risk. The other risk is a lot of people have tried to buy assets at, you know, sub four cap in, uh, uh, cap rates and they’ve used bridge lending for the wrong reasons, just to, they’re kind of treating it like a permanent loan and just using it to get the, the deal.
Chad Sutton (21:46):
And then counting on organic appreciation to get them to a refi. Well, that’s gone at least for the immediate future. And those of you who may not have bought an adequate rate cap and may have a loan coming due in the next, you know, two years look out because that’s gonna be the challenge. And that’s where you’re gonna see some correction in prices. So again, I don’t see, I, I see supply of deals starting to pull back because you have people who made good le debt decisions. Like, I don’t have to sell right now. Why would I sell in a situation where nobody can get a loan to buy this thing? I might try, but you know, if they don’t get the, the, the bid ask is so far outta whack, doesn’t matter. They just won’t sell. The ones that are gonna be trading in the next 18 to 24 months are the ones who have to trade cuz they’re out of time or they’re outta money.
Chad Sutton (22:28):
And so that’s what we’re looking for right now. You know, our our, we are not buying things at, at super aggressive cap rates. We’re not running after deals right now cuz money is no longer free. Right. Money has, I mean, if when, when inflation was two, three, 4% and, and you know, your interest rates were effectively two or three, that’s, that’s, you know, that’s free money. Like I was using as much of that as I could and locking that up. But now money is, you know, depending on, on short rates it’s six, seven, 8% long rates, it’s 6%. And so, you know, with inflation being right around there, money’s about equal now. And you have to really be careful because now you gotta be prepared to hold things for 5, 6, 7, 10 years. You may not be selling things in two years cuz you got organic cap rate compression plus a little goodness on your operations. You may really be having to hold for that five year business plan. And so if you’re investing plan on that, focus on cash flow because that is gonna be what gets you through that time, the ability to cash flow over whatever this environment is that we’re in. So anyway, that, that’s how I’m thinking about things today. But there’s probably plenty of directions we can go from there.
Reed Goossens (23:31):
No, it’s, I think it’s, it’s exactly correct. We’re, we’re we, the first thing my, my opinion and I’ve, I’ve been operate, I’ve been transactional this year. Um, you know, I have bought a deal, uh, with, with, with a variable interest rate at the beginning of the year we, you probably, I bought a rate cap on it, which was good. But um, I then now have completely switched to fixed rate interest interest, right. I think there’s still deals out there to be, to be had. Yeah. And I think the price per pound that you are, I’m seeing deals trade at or starting to be boved at is very attractive. And I think if you can get the debt to work, which is the hardest part, right? Because you’ve probably got, you’re going in cap rates are still around a four, four and a half and you’ve got debt at six and a half, seven, that’s gonna be your, your your your your hard spot.
Reed Goossens (24:16):
But what I’m also seeing is that, back to your point, we have seen, we haven’t seen this unprecedented interest rate rise fourfold beginning of the year was zero. Now we’re gonna be approaching 4% by the end of the year. It’s fourfold in the seventies I think it doubled, it went from 11% to 22%. Right. So we’ve, we’ve nearly doubled what we did in the past in terms of how quickly we’ve, we’ve, we’ve, we’ve shifted. Yeah. Yeah. Even though the historically people will say we are low, but you have to also, what’s the, the growth, which is 400%. That’s what I’m more, more, more talking about. But that growth has gone quicker than what people can get your business plan to work on. And that’s what I, we mentioned in the green room before we press record is that I think people are gonna start to be coming into trouble because your business, your business plan isn’t keeping up with the rate in which mortgages, uh, or interest rate going.
Reed Goossens (25:05):
And if you haven’t got a rate cap, or you didn’t plan to hit your rate cap until next year or whenever it was, you’re gonna start be squeezed with the mortgage with your interest rate. Because higher interest rates means less cash flow. What does that mean? Less distributions to investors and you less dcr and then, you know, your banks will start come breathing down your neck, the whole, the whole kitten cab. So I think there’s a big storm brewing here, um, and we’ve all gotta be, you know, buying correctly today. But how, how have you bought in the past is gonna affect how you’re gonna exit some of these deals into the future. Yeah. So with that being said, what are you thinking in terms of what are you trying to look buy today? Are you trying to get, and and with that same question, what debt are you trying to assume when you’re underwriting that deal?
Chad Sutton (25:48):
Yeah, that’s a good question. And so, you know, where I was, even, even just December last year, we bought a pretty big deal in Evansville, Indiana. Very landlord friendly state by the way. And at that time, you know, bridge, so far was zero and bridge money was probably, uh, you know what, uh, 300 spread, something like that. So it’s like we had a 4% floating rate. We bought a rate cap at like one and a half percent. Cause we saw some tea leaves, you know, uh, of what was coming. Didn’t know it would be this, this magnitude, but we saw it coming, but we wanted to kind of fix our rate and, and we were putting three year terms with two one year extensions on there. So I, I was effectively still giving myself a five year term. You don’t wanna run out of time, right?
Chad Sutton (26:27):
Chad Sutton (27:22):
Let’s leave some room for us to do the value add. Let’s capitalize in cash and then let’s go do the value add. And then guess what? You’re gonna be open for a supplemental later at, you know, five, four, whatever percentage yet we’re at. So your net interest rate will come down when you blend that together. And so that, and, and between agencies and, and bank debt, that’s what we’re looking at. But we’re also ever being very careful about the asset type that we buy. We have, we have effectively offloaded all of our lower quality C-class product with, you know, I’m, I’m sorry to say it this way, but there are certain resident groups and, and, and the country that will be affected the hardest, you know, when, when the belt starts to tighten the, the expendable laborers, right? And further we’ve been pushing class C interest, uh, class C rental rates for what, 10 years Now.
Chad Sutton (28:10):
Some of those people are already at 40% rent to income ratio. They can’t afford a value play, right? Mm-hmm.
Chad Sutton (28:59):
So there, there are still value adds out there to have. You have to be, you have to know your numbers, you have to be on top of your construction costs right now, and you really just have to mitigate as much of the, the local debt risk as you can and keep your eyes to the horizon as real estate is a long game. There will be pain for about 18 to 24 months. There will be utter pain for a lot of people. But beyond that, you know, once we know where the bottom was, that’s the only way you know, is you look back over your shoulders and say, there it was. Now we can get back to growing. Right? And so we’re, we’re always buying, but it’s gotta be the right use the right strategy at the right part of the, of the cycle.
Reed Goossens (29:36):
For those of you who are interested in staying up to date with all the latest happenings in my business business, or to learn more about passively investing directly into my multi-family value add deals, then head over to reedgoossens.com And sign up for my monthly newsletter. By signing up, you’ll automatically be notified about my new up and coming investment opportunities. You’ll be able to stay up to date with all the latest real estate news here in the United States and much, much more. So head over to reedgoossens.com and sign up today, now back into the show.
Reed Goossens (30:10):
Yeah, I, I completely agree. And what is your thoughts on the, um, well, how are you going with your operations versus that, that, that rate increase? Because I mentioned that before, a lot of people, you know, getting in deals, getting started, getting the GCs going, it takes a period of time, it doesn’t just, you don’t just close a deal and all of a sudden you’re, you know, two months later you’ve re you’ve renovated 25% of your units
Chad Sutton (30:38):
Oh, sure. And you know, I think our standard underwriting practice was, you know, we’re, we’re pre, because you gotta think the seller, usually, if they’re operating well, they’re renewing 60 to 90 days out. So your first 60 to 90 days pretty much already signed, right? Right. Uh, not always, but pretty much already signed. We’re, we’re in a unique position right now and a deal we’re doing in Houston where, you know, the seller has let 15% go vacant for reasons unbeknownst to me. But, um, now we have 50 units we can go after right there, you know, so it is possible to blitz it out of the gate, but that takes turning plans into scope pre-close and being ready to hit the ground running with shovels and hammers, you know, on day one that’s challenging, but usually, you know, you don’t really have the opportunity to renew people until month four effectively.
Chad Sutton (31:20):
And we usually are taking that time to get the template right, you know, to, to uh, re you know, turn, uh, turn plans into scopes and turn it into action. It really takes a solid quarter coming out of the date gate to get going in general. And you can force it, but it, it’ll be clunky and then you’ll figure it out and hit your stride
Chad Sutton (32:10):
So like your, your, your net income, your net operating income is going to drop. So you have to be able to withstand that dip and then get to work and come out of that dip. And, you know, on average, I think you come out of that dip around month six, best case scenario. So best case scenario. So the problem is you have to be able to, to withstand that impact year one. And to, to your point, you know, it, it’s one thing when you’re buying with like a 5% interest rate at a four cap, but when pricing is still at a four cap and interest rates are like six to seven, that is a huge economic, uh, uh, headwind when you’re trying to come out of that gap. And so that, that’s really what’s driving the bid ask problem. Not that we don’t think we can add value to properties anymore, but it, it’s, it’s how do we get out of the gate safely? And then subsequently, if you’re using short term financing, how do you hit a refi in three years? You know, like how do you project that value? So, uh, definitely affects it.
Reed Goossens (33:04):
Question on the refi. I’ve never cardinal rule for me, and this is the way I’ve operated, I’ve never ever underwritten to a refi ever, right? This, this is, this is going back. I’ve been doing this for eight, nine years. Now that you’re coming in and you’re seeing, the only thing that really makes sense to your point is, okay, let’s go over get more equity than what we need. We’re only gonna get 50 to 60% leverage. And we’ll then we, we we’re hoping or we’re betting on a better interest rate environment in two to three years time. So are you now underwriting to a refi in your models knowing that, or or betting on the fact that the, the interest rate environment will come back and you get to replace some of your money at, say instead of you might be paying 7% today, but you’re only 50% leveraged, and then in three years time you might get it down to 5% or four four and change and you might be able to push it to 65% or 70%.
Chad Sutton (33:53):
That’s, that’s a great question. And you know, honestly, I’m gonna start by saying this is a philosophical question and mm-hmm.
Chad Sutton (34:46):
Some are gonna be 25, some are may, maybe smaller, some are gonna be like 20, 24 0.2, some are gonna be 23.8. Like there’s a tolerance on what you can actually achieve in, in manufacturing. And so let’s use another analogy and say, okay, when everything is perfect and you’re in a manufacturing shop floor and you’re sitting on, you know, a, a anchored piece of machinery, you can get those tolerances pretty tight cuz you have certainty the environment around you is certain. Now let’s think about making that same part in an earthquake out in the middle of a field, right? Your ground’s moving underneath you, the part’s moving your, your tool and your cutter’s probably hitting different ways. So you, you’re gonna, when the, when the environment around you is not controlled and not certain you have to widen your tolerance ban or you’re gonna scrap more parts, right?
Chad Sutton (35:30):
So the point is, whatever we underwrite, we look at tolerance bans. And so let, let, let’s talk about how we would underwrite a refi. You know, yes. We, we would say, okay, I’m doing a bridge loan so there is a 100% chance at some point in the ne at the end of that term, I will have to refi the deal, right? So I have to think about that, you know, and so if, if, let’s say we have a three plus one plus one and we’re gonna tar, uh, uh, we’re gonna target a refi at the end of year three, but we have our extensions as as back off, right? But so now we have to figure out, okay, if I’m taking, let’s say 30 million in a bridge loan, I’ve gotta look at, you know, how do lenders who I’m gonna refinance to, let’s think Fannie, Freddy, hud, you know, Fannie, Fred, Jenny, how are they going to look at, uh, you know, my takeout loan?
Chad Sutton (36:14):
Well, they’re gonna say, okay, hmm, what is your loan to value? And that’s gonna be based on a cap rate in the future and your noi. And then, hmm, what is your debt coverage ratio? And so you, what we have to do is predict what that is going to be based on our future NOIs. Uh, and, and you know, right now value’s not a problem. I mean, most of our stuffs looks like 40 or 50% loan to value in the future, depending on, I mean, and you run a cap rate suite, maybe you run something from four to six and you see what happens and, and can you always hit that, that value metric? Right? Now you’re limited by the debt service coverage ratio. And this is why lenders are backing off on proceeds, is they, they, they don’t want to assume an aggressive situation at refi.
Chad Sutton (36:55):
You’ve gotta look at what proceeds you have now and then look at a point in the future and look at all the rate indications and think about, okay, well if I, if I assume the rates probably aren’t gonna be three anymore, so maybe their best case four and a half and maybe their worst case six and a half, you know, like what they are today. Okay, well you start to look at that and figure out in how many cases can I hit a 1, 2, 5 debt coverage so I can actually refi the thing out, right? And so that’s what drives your decisions. So, you know, we’re of the mindset that we, you know, and by the way, none of this is wrong as long as you make the right decision. So you have, you know, you have a safe deal and you make money, doesn’t matter how you do it, you know, we, we consider what is the reality of what, how we’re structuring the deal today and then what is the reality likely to look like with some tolerance? And right now that tolerance ban is a lot wider than it used to be because the ground is shaking around us, you know?
Reed Goossens (37:46):
Reed Goossens (38:33):
If you feel good about where you are buying at and where you wanna move the needle to, then the answer is yes, you can, you can go look at a refl. So I I, I completely agree with that as well. I just, I know personally I, you’re looking at deals today and it’s just like, okay, so we’re coming into six and a half. Do we really think, is it gonna be six and a half and three and a half years time? And, and what can we push the the needle to in the noi? So it’s all,
Chad Sutton (38:52):
And that, and that’s the thing to think about right here is like, you know, now that, and I even said we are looking at fixed rate for things going forward right now. Like right now the tolerance span has gotten so wide that I don’t even wanna risk it. You know, it’s like, uh, I’d rather just say maybe I’m paying a stupid high rate for, for, you know, but if you get a bank loan for three to five years, okay, maybe I’ll pay 1% to get out of it and I can refi of something better later. But the alternative is if, if I’m not underwriting a wide enough tolerance ban or is so wide that unlike half of it, the deal works and half of it it doesn’t, it’s not a safe confidence interval to buy that deal. So you have to figure out how to get your confidence interval safe and mitigate your risk. And right now I think fixed rate is like if you’re starting a deal today, I think fixed rate is probably the way to go.
Reed Goossens (39:33):
Fixed rate. I’ll also add, you don’t wanna be where you don’t wanna be locking in your, your fixed rate with a Freddy or Fanny on a term where you have defence and that will kill you anyway. Yes.
Chad Sutton (39:45):
Reed Goossens (39:46):
To, you have to don’t be, don’t be natve like yes, fixed rate, but don’t then go and fix it for 10 years at today’s lending environment because then you’re stuck and to get out of it, it’s gonna cost you an arm leg. And I’ve been in that situation
Chad Sutton (39:59):
Yes. Before we’ve all learned that expensive lesson. Exactly. And let’s, let’s talk about that for a second, Reed. Sure. Because the, the, the behavior of yield maintenance and defence, which are similar but different, the, the yield, the behavior of them is that there’s an equation and it’s about this long
Chad Sutton (40:42):
But interest rates are now 6%. If you have something locked in at 3% and I do and I’m looking at selling it right now, your defesence is like nothing cuz they’re like, give me that money back so I can deploy it at 6%. But the inverse is also true. So the worst thing you can do is lock a high rate like 6% right now with a 12 year term and defence, cuz I, I will tell you with pretty much a hundred percent certainty by the time we get six, seven years out, rates are gonna be lower than today. I mean I, I’ll be really like, and I’ve been wrong before, but I, if history tells us anything about the future, that is certain, right? The question is the near term, not the long term. So what’ll happen there is you will lock in at 6% and then rates will be, I mean let’s say they go back to 3%, I don’t know well that lender’s like, I don’t want that money back, your just went up cause I’m making more money with you and if you terminate that loan, it’s not as good of an investment for me.
Chad Sutton (41:31):
So you gotta think, think about that as locking high with defesence is a really dangerous thing and it’ll be expensive, you know, so unless you’re married to the deal, you
Reed Goossens (41:39):
Know, you completely agree with you mate because I remember having a deal even back in 2016, if you remember rates were sort of going up at that point and we thought we were going to the moon and we locked at 4.63% on a 10 year, but the business plan was five years
Chad Sutton (42:56):
With. That’s absolutely right. And, and I’m, I’m gonna give your listeners some, some nuggets of how I do this here. Like this, this is something, it’s very numerical. You can figure this out. You know, does it make sense to buy a rate cap? Does it make sense to float my debt? Does it make sense to lock something and look at future def deviants, you know, so the first thing I gave you, go to defies with ease.com and, and you can, you, it doesn’t have to be a real loan. You can put in parameters and figure out what will that defesence be at a given time, maybe five years into your business plan. So you can predict based off what things are today, what that would look like. Uh, and you can play with the rate and figure out, you know, what like how that defence would change.
Chad Sutton (43:35):
Now rate caps, you can go to pensford.com. PENSFORD. And they have this, this great little calculator at the top right called a cap pricer. And they, they update it weekly, I think. So it’s pretty, it’s pretty accurate I found. But you download the spreadsheet and you’ll have to read about the terms a little bit. I’m not gonna be a crash course on that. But you, you put in the parameters of the rate cap and you get a pricing matrix and you can show you, there’s a little box you can play with the interest rate assumptions and see how well it pays out. It’s effectively an insurance policy. Guys, you’re just saying if rates are here, I’m only gonna pay up to here and then the policy’s gonna kick in. Right? And so with that and then knowledge of your interest rate and, and interest and loan amount, you can figure out does it make more sense for me to just hold extra cash and pay the extra interest risk if it happens.
Chad Sutton (44:21):
Or does it make sense to pay half a million dollars for a rate cap? Does it make sense to, to do a step down prepay, which is a very easy way to calculate like a 5, 4, 3 20 1% of, of loan over five years, or due diffent. So like, this is calculable. And I encourage you all to become students of the capital markets because the capital, like I don’t, you can be the best operator in the world. If you don’t know about creating a capital stack, you’re gonna, you’re gonna die seriously. Like you, you will not live in this business. So,
Reed Goossens (44:48):
Well, Chad, Matt, I wanna, I can talk to you for hours, uh, my friend. Um, but at the, every, at the end of every show, we like to Jo into the top five investing tips. You ready to get into it?
Chad Sutton (44:56):
Let’s do it
Reed Goossens (44:57):
Mate. Question number one is what’s the daily habit you practice to keep on track towards your goals?
Chad Sutton (45:02):
Daily habit that I track, you know, something amazing happens to the body when you just drink water in the morning and don’t eat until at least before nine or 10 o’clock. The brain focuses on survival and it’s very alert. And I also get a workout in, it’s not, and that may be 5:00 AM it may be 8:00 AM when I do it, but before I start my day, I make sure I get that workout in and I make sure that I’m fasting until at least mid-morning. And you’d be surprised how alert your brain is, how your metabolism increases and how, just like your brain is in a different state of mind when you have had that, that you know, that workout and feel that that level of accomplishment. It’s kinda like, what was the guy who said, one of the generals said the first battle of the day is making your bed. Mm-hmm.
Reed Goossens (45:45):
Love it. H how often or how long are you fasting for it as quickly? 12
Chad Sutton (45:49):
Hours. I, I usually, so I, no, not that long. I’ll, I’ll do a drinkable yogurt or something probiotic thing, like in the morning, maybe around nine o’clock. And I usually don’t eat until lunch. I, I don’t eat breakfast. I’ll eat and I’ll, I’ll eat probably like a 500 calorie lunch maybe. And then dinner is my, my bigger meal. So I’m, I’m more on, on that level of fasting. So not like 12 hours, but, yep.
Reed Goossens (46:08):
Yep, yep. Got it. Uh, question number two is, who’s been the most influential person in your career to date?
Chad Sutton (46:13):
Wow. That is, uh, you know, there, there is an individual out of California who, he was a big guy with CB Richard Ellis for a long time. Um, I won’t speak his name for privacy, but he, he’s also been a pre equity partner in a lot of my deals. And man, the, the knowledge that man has on the market, on deal structure, on, on, you know, operations. Like, I feel like just, just having conversations with him, I get exponentially smarter, right? So just having people like that in my life and that, that would be the main one. It, you know, he, it just, he’s, he’s an, he’s an old guy. He is a gray beard. He invests in operators and he sees something in me for whatever reason and gives me his time, which is amazing. So like that I owe a lot to that guy.
Reed Goossens (46:50):
That’s awesome. Um, question number three is, what’s the most influential tool in your business? And when I say tool, it could be a physical tool, like a phone or a journal, or it could be a piece of software that you just can’t run the business without. What is it?
Chad Sutton (47:02):
You know, it’s interesting. Um, I’m gonna give, I’m gonna go with a personal productivity tool. So I use a, a, a email client called Superhuman. And it is, it’s a new thing that, that it’s, it’s very like keyboard and, and, and shortcut based. And it’s amazing, like how I can customize like my inboxes for context. Like if I’m working on four deals, I need stuff to get in the right spot. It’s just, it’s super flexible and uh, it really helps me stay on top of things very quickly. And, and I’ll give, give you a second on a bonus one, I use, I love writing things, but I hate paper. Mm-hmm.
Reed Goossens (47:58):
Awesome, awesome stuff. Question number four is, in one sentence, what has been the biggest failure in your career? When did you learn from that failure?
Chad Sutton (48:05):
I’m, I’m trying to think of something that’s not going on, you know, in the recent past with something that’s, that’s given a lot. I would say what I said earlier, not understanding capital markets. Well, for when we started doing these larger deals, because we, in that whole defence discussion we talked about, we made that mistake where we, we lock something for too long and we added a lot of value and we had a couple million dollars in equity stuck. It’s called dead equity, right? And it’s still stuck to this day cuz I will not pay that defence. Even, even today. It, it is, it’s not a great, uh, story to sell it. So anyway, uh, I missed my window there to recapitalize and roll that money and that was an early deal so that, you know, my, my refi and roll plan fell on its face for that. So learned a lot from there that you need to know. Capital markets
Reed Goossens (48:48):
Right? We cut from the same cloth because I, I made the same mistake. So, um, so awesome stuff mate. Last question. Where can people reach you to continue the conversation or in your sphere, where do they go?
Chad Sutton (48:57):
You know, we are all over Facebook, LinkedIn, and Instagram. Look for Team Quattro, capital One, all one word, uh, no spaces. And um, if you go to thequattroway.com, that is our website, you’ll see it, our managing partners on there, you’ll see our extended team, our podcast, our deals. Like you can just do all things at that website. So love to reed love to connect with you and uh, yeah, always love talking about this stuff.
Reed Goossens (49:22):
Awesome stuff my friend. Look, I wanna thank you so much for jumping on the show today. Um, just to repeat some of the things I took away from today show. I think the number one thing is all models are wrong. Some models are good, A good guide and, and I completely agree with that. Like a model is a snapshot in time and you cannot control time. We don’t have a crystal ball. If we could control time, we’ll be doing something completely different. It is just the best guess that you can have of where things are gonna go. And then the second piece of advice I thought you, you, you spoke really well on today was tolerance bands. So in and around your model, how big are your tolerance bands and where is it gonna push point to, to make sure that you have the best exit and the most successful operations possible for your investors to preserve their downside and to protect their capital. So I think those are the two big takeaways, um, to leave anything out. And then is there anything else you wanna add before we wrap?
Chad Sutton (50:10):
No, I think you hit it very well and, and I, I guess the last piece of parting advice on all models are wrong. Submodels are useful, you know, whether you’re an operator or you’re investing in operators, you’re investing in the people driving that model, right? And, and so the model is wrong. Day one, I’ll tell you that. The question is how well can like, think about a GPS, you know, there’s gonna be detours and construction. How well can that operator navigate around the map and stay on course as much as they can because it will go, something will go wrong in the first week, I promise you. It’s just life, right? You know, but that, that’s really, that’s really the key is how well can you trap to plan not, not emulate plan.
Reed Goossens (50:44):
I love it. Well Mate, thank you so much for jumping on today’s show and enjoy the rest of your week and we’ll catch up very, very soon.
Chad Sutton (50:50):
Reed Goossens (50:51):
Well they have another cracking episode jampacked within some incredible advice from Chad. If you do wanna check out Chad, head over to thequattroway.com or just search team Quattro capital on LinkedIn or social media and or on Google. And you’ll be able to find everything they do, connect with them, get in their, involvedin their vehicle sphere cause they’re doing some incredible stuff in and around the space of multifamily and, um, mobile home park investing. And let’s have a good way of philosophy about thinking about what they’re doing and how they’re executing in today’s world. Um, I wanna thank you all again for taking some time outta your day to tune in, to continue to grow your financial iq because that’s what we’re all about here on this show. If you’d like this show, the easiest way to give back is to give it a five star review on iTunes. You can check out all the show notes from today’s show up on my email@example.com and we’re gonna do able to this all again next week’s. Remember, be bold, be brave, and go give life a crack.