JF1017: A Smart Yet Passive Approach to JV Deals
He is not necessarily in the deal, but his capital is! Today our guest will share how he likes to joint venture with other investors on the single-family residence level, that’s not all he does. Tune in!
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David Phelps Real Estate Background:
– Founder at David Phelps International LLC
– He began his investment in real estate by joint-venturing with his father on their first rental property in 1980
– Nationally recognized speaker on creating freedom, building real businesses and investing in real estate
– Owned general dentist practice for 27 years and Hosts “The Dentist Freedom Blueprint” podcast
– Based in Dallas, Texas
– Say hi to him at www.freedomfounders.com
– Best Ever Book: Bible
Click here for a summary of David’s Best Ever advice: http://bit.ly/2tlL57p
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
With us today, David Phelps. David, how are you doing?
David Phelps: Joe, I’m doing great. Thanks for having me on!
Joe Fairless: My pleasure, nice to have you on the show. A little bit about David – he began investing in real estate by joint venturing with his dad on their first rental property in 1980. He is a nationally recognized speaker on creating freedom, building real businesses and investing. He has owned a general dentist practice for 27 years and hosts the popular podcast “The Dentist Freedom Blueprint”. He’s the founder of David Phelps International. Based in (Big D) Dallas, Texas, my hometown. With that being said, David, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
David Phelps: Yeah, absolutely, Joe. I started out as a real estate investor back in 1980, as you just stated, with my first joint venture acquisition. I used my dad’s credit and financing and I was the manager. I was in dental school at the time right here in Dallas, at Baylor College of Dentistry, and kept that property for the next three-and-a-half years while I was in school. We sold it and split about a $50,000 capital gain. When I looked at that profit that I made managing that property, which took very little time, I realized that I made more in profit from that than I did all those hours that I spent waiting tables [unintelligible [00:03:39].22] nights and weekends. I found there’s something to this real estate…
So I went in and I got my license. I practiced dentistry, I started a practice, but I never looked back in terms of real estate investing; I was hooked. So I kind of ran both things in tandem. I built my dental practice, but I was also building a portfolio of real estate investing properties. Now, I’ve never been a flipper, a wholesaler… It was always an investment for me.
I went through the years, things in life happened, they changed; I have a daughter who was very ill, very sick. She survived leukemia, epilepsy and had to have a liver transplant when she was 12. She has changed everything for me in terms of my priorities.
Fortunately, I had the real estate, so I made the decision back in 2004 that I was going to get out of the regular practice of dentistry, the owning and doing of the dentistry, and doing something else. I didn’t know what that something else was gonna be, but I knew I had the real estate as a backdrop, so I sold the practice twice, actually… That’s a whole other story which we don’t have the time to go into today. I sold it twice – it’s not something I would recommend, but I learned a lot of lessons there.
I got out of the practice and I could spend time with my daughter, which was the reason I did it. She had a lot of health issues; she’s good today…
Joe Fairless: Thank goodness!
David Phelps: Thank you. She had the recovery from the liver transplant, and I was happy to be able to be the dad that I always wanted to be, but I never [unintelligible [00:04:59].13] because I always thought “Well, someday, when I get everything else just right…” – have you ever heard that before, Joe?
Joe Fairless: Yeah…
David Phelps: On a Sunday, when I’m gonna get all this stuff just right, then I’ll start living my life; then I’ll start doing the things that people talk about when they’re on their deathbed… They talk about all the regrets they have about not doing those things. For me, Joe, it was really a wake-up call, and I’m pleased to say that through all of the issues that I went through – and everybody listening to this great podcast today has either gone through some tough times in life, they are going through some now, or they will, and you have to realize that that’s just part of the test we go through in life… But once you get through them, you’ll learn a lot of great lessons and it will propel you to being a better person, I believe, and think about your life more in terms of impact and not “How can I make enough money to have security?”, because there’s no such thing as that.
So just to go forward a little bit faster on where I am today – I had a lot of colleagues in dentistry and medicine that once I was out of practice they would ask me, “How did you do that?” Because for most people, they end up just kind of treading water, or trading time for dollars all their life; no matter what their per-hour wage or compensation is, they never get free… And I explained that there was this real estate to my life that I didn’t really expose to that many people, and they wanted to know more. “So how did you do that? Could you help me?”
Little by little, as I just started to help and realized I could help more people if I had a little bit more of a platform, and very organically, what today’s [unintelligible [00:06:20].13] which focused initially on dentists and affiliated professional practice owners, but really today we like anybody who has a like-minded spirit that’s a small business owner and we can help them combine what they’re doing with their business or practice, but also how they can connect to real estate and build wealth outside of that primary business, and have that plan B whenever they need it.
Joe Fairless: First and foremost, thank goodness that your daughter is feeling better – that’s the most important. As far as the real estate stuff goes, I just wanna make sure I’m understanding things… So what’s the primary way that you make money in real estate?
David Phelps: Today it is taking participations with other people… But that’s not how I started. I started boots on the ground, going out and finding opportunities, primarily in single-family at first, that I could take down with existing financing or private financing or seller financing. I was not an institutional financier back in the day, I stayed away from institutions and built my portfolio boots on the ground. But today, and what I teach other busy professionals and busy business owners is it’s all about relationships. Real estate, unlike Wall-Street, is an insider’s game; it’s who you know. Now yes, you can definitely do it boots on the ground, a go-getter, and that’s where most young people start, but at some point I think there’s opportunities to connect dots, and that’s really what I do – I bring capital to deal flow, and with my own capital, I take participations. I lend money, I do equity deals, syndications, and I just really do it through other people that I have built a relationship of know, like and trust, which is critical; it’s a critical factor. I’m not being [unintelligible [00:07:54].07] find somebody to give your money to… It’s a lot more than that, but that to me is the fast-track. That’s really for me true leverage today of my time, and my time is the most important thing that I’ve got, so I’ve gotta look at my time and realize “Where do I wanna spend my time? How can I get the most out of the time that I’ve got and enjoy what I do?”
Joe Fairless: So you are passively investing, whether it is in a syndication or lending your money to fix and flippers, or doing some other type of passive investment, correct?
David Phelps: Yeah, you could say passive… I’d say it’s semi-active. I don’t get down with tenants and management and contractors and actually looking at the properties, but I stay involved with the fewer better people that I have built into my network, and I enjoy that involvement. So it’s not as passive as where you just dump your money into a fund, whether it’s real estate-based or Wall-Street-based, where you just dump it into a fund and you never hear from anybody, you’re just supposed to get checks, dividends or interest payments. That to me would be truly passive, but I like to have a little bit more control over what I’m doing. Just semantics a little bit, I just wanna kind of clarify how I feel about passive versus semi-active.
Joe Fairless: Can you give a specific example of the semi-active scenario?
David Phelps: Yeah, for sure. I’ll just keep it simple and just talk about single-family residential, which I believe is one of the best places for people to start, and actually that’s where the bulk of my portfolio is today. I do a lot of lending, and I can do short-term lending for fix and flip, but also I’ll do longer term lending where I actually take equity participation, or I’ll take option positions on equity on a longer term basis.
So I’ll put my money on a deal and lend the money for the acquisition AND the rehab if it’s someone that I’ve got a track record with. As I said, that can be a short-term deal, which is pretty simple – it’s points in an annual interest rate; I’m pretty standard on short term. But I like the longer term, because I like to keep my money invested where I don’t have it coming in and out. There’s a point where you wanna have velocity when you’re trying to grow your portfolio, but at some point you don’t need to have super-velocity on your entire portfolio…
So I put my money somewhere where it’s gonna be there for 3, 5 or 10 years. But I do have an equity hedge in those deals, and that simple – that’s one deal, one operator (if you will). I want a boots on the ground catalyst in my money in that deal. Of course, you can explodre that and do other things where you are syndicating and build off that model, but that’s pretty much a basic premise.
Joe Fairless: For the acquisition/rehab of a property where you’re lending the money and you’re charging points in the interest rate, what do you charge?
David Phelps: It’s gonna depend, Joe. It depends on the geographic area, it depends on the price point of the property, how much risk I feel is in the deal and evaluating that… It depends on my relationship with that person and how much scale, how much deal flow they can provide me. But just to give you a range, typically today the average is about 12% and two points, that’s an average.
Joe Fairless: Okay. And as far as the long-term play – 3, 5, 7, even 10 years where you said you have an equity hedge, so you have upside in the deal because you have some portion of equity in the deal, what type of returns do you look for in that?
David Phelps: Great question, and that will again depend upon the marketplace. I’ve gotta look at the market and say “Well, is this gonna be an appreciating market?” If we have – which I think we will have – some serious inflation in the next decade or two, is this a marketplace, is this a price point, a geographical market [unintelligible [00:11:09].14] great cashflow market, but not so much for appreciation? That’s one factor.
The second factor is today, when I’m making the investment, what is the equity position today? The borrower – what’s his position? What do I feel like the truly fair market value is on a quick sale, and how much am I loaning in the deal? What’s my loan-to-value? What do I feel is true equity, net after cost of sale? So those two would be determining factors on what percentage of participation I want and based on the number of years.
Sometimes I’ll go in with a flat percentage. It could be anywhere from 20% to as high as 75%. That’s gonna be dependent upon those few considerations I just gave you, plus what’s the carrying cost that the borrower wants to or feels like they can carry? Probably the top level is 8%; that’s probably top-level in a moderate priced range category. If we start getting into a little bit better properties, we’re gonna have to drop that carry for the borrower to 6%, 5%. I’ve gone down to 2%, but that’s where I’ve taken a bigger equity participation in a market where I felt like we had equity going in and I felt like there’d be an equity play on the backside.
Joe Fairless: What’s an example of that type of market?
David Phelps: Well, right now in the Dallas-Fort Worth area. In Dallas particularly, our market is hot right now. Properties that we could easily buy for under 100k, maybe in the ’80s or ’90s all-in 3, 4 years ago and cash-flowing like a big dog… Price points are up now; it’s more competitive. Now we look at properties where the gross rent has gone from 1,150 to 1,200, and now we’re up to 1,300, 1,400, 1,500, 1,600 dollars per month, and property price points there closing in on 170k. So if someone’s borrowing the greater proportion of 170k, maybe they’re borrowing 140k give or take, even at $1,600/month rent, pushing them up at 8% is gonna strain their cashflow.
I wanna make sure my borrowers have plenty of margin. Number one, their deals have to be good, and they’ve gotta be able to negotiate and close good deals. With that being said, I wanna make sure they’ve got a cushion, because a deal only works if it works for both people. If I’m greedy, or try to be greedy and take too much out of the deal, then it hurts that person, and I wanna do deals over and over and over again with a few people.
A deal like that, I’m probably looking at 6% tops on the carrying cost for the borrower, and then again, looking at whatever the equity is going in. If I think we’ve got 25% equity, then I might look at a 50/50 deal on that. I’m just talking in general right now, without penciling numbers in, but that might be a general range.
Joe Fairless: What’s the last deal you invested in?
David Phelps: Oh, gosh. Last deal… I’m doing deals every week, so…
Joe Fairless: Okay, so the one this week.
David Phelps: I do deals with a good friend of mine in Jackson, Mississippi, so it’s a low price point market; he does a lot of seller financing. He’ll do fully amortized seller finance notes to the homeowner borrowers, and they amortize out in less than 10 years. He’ll typically sell of the first 60 payments or so of that note to take care of his acquisition cost; he’ll keep a backend position, and he’ll sell those to me at 12%, so I’ve got maybe like a five-year note, 12%.
Those are easy for me to do. I’ve got my money in for 5 years, I’m very secure, and he’s got a great track record. I do deals like that all the time… Small deals like that, but my money is in play for five years or so.
Joe Fairless: What’s a challenge you have in your business right now?
David Phelps: I have probably too many ideas, honestly… I’m like a lot of entrepreneurs, I always wanna do more, or think “What if I added this or did that?” Fortunately, I have a really good team around me that helps me vet my great ideas – I say that with air quotes, “great ideas.”
It’s easy to get off track, Joe, for all of us. So I’ll think about something, I’ll read about something and I’ll go “I think we’ve gotta go do that” or “I wanna do that”, and I really count on my team to help vet my deals, and… Not that they’ll say my ideas are not good, they’ll just say “Well, maybe not now.” And I appreciate that.
Probably the biggest job for me is being true to myself and not running after every squirrel that appears out the window.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
David Phelps: Best advice ever? I would say that before anybody starts investing, that I would tell you today to start by being an apprentice. What do I mean by that? It means find somebody in your marketplace, in the space – not geographically… Just find the best person who you know well enough that has a great platform and is doing something that interests you and you believe they have a lifestyle also that reflects what you’re really looking for in the long-term. And tell that person, “Hey, I’ll come work for you for free for a period of time.” Now, most people will pay you something, you can earn your way in, but I think that’s the best advice – invest in yourself first, but you’ve gotta do that by serving others that already have a track record.
Mentorship, apprenticeship – to me that is the fastest track, inclusive of just reading a lot, being around the people, going to conferences, seminars, listening to podcasts like yours… All those are great, but I think actually being able to tag along with somebody who has already created the path and can show you so many things so quickly about life in general, business principles, finance principles, specifically about real estate – you can learn so much faster and kind of skip your own training wheels, which for most of us are wobbly at first… We fall off and scrape our knees and there’s nothing wrong with that, but if there’s a faster track where I don’t have to have patches in my knees and elbows as often and as long, then I’ll take that path every time.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
David Phelps: I’m ready.
Joe Fairless: Let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: What’s the best ever book you’ve read?
David Phelps: That’s a tough one, Joe. I’m gonna be true to my faith and say I think the best ever book is the Bible. There’s so many great lessons in the Bible that speak to everything in life… And then I’ve just got a whole library of books behind me on business: Jim Collins’ Good To Great, Simon Sinek – Leaders Eat Last… The list goes on and on, but there’s a couple for you.
Joe Fairless: Best ever deal you’ve done?
David Phelps: I’m gonna say it was the first one I did with my dad, because had I not had the chutzpah to ask him to come be an investor with me, I might not have gotten started early on like I did, and who knows where I’d be today.
Joe Fairless: Best ever way you like to give back?
David Phelps: We have a young leaders group [unintelligible [00:18:00].06] mastermind community, and we want to empower the millennial age group (18-30 years old) and give them the opportunity to live their life the way they wanna live it and not feel trapped by society norms or traditions.
Joe Fairless: What’s a mistake you’ve made on a deal?
David Phelps: Trusting but not verifying facts. Not doing enough due diligence. Not that I was lazy, just going too fast. With a little bit more work, I could have saved myself a little bit of pain.
Joe Fairless: What is the best place the Best Ever listeners can get in touch with you?
David Phelps: The best way would probably be my website, FreedomFounders.com. You can check me out on the Dentist Freedom Blueprint Podcast. You don’t have to be a dentist to listen.
Joe Fairless: Well, David, thank you for being on the show. Thanks for talking about how you invest now, your investing strategy, that is semi-active/going towards passive, but I won’t say “passive”, because you said not to… But more semi-active, versus being on the ground and being fully active… And your approach to both short-term financing that you provide, and the long-term play, where you want more of an equity upside component to the deal. Then just your path along the way that got you to this place.
Thanks so much for being on the show, David. I hope you have a best ever day, and we’ll talk to you soon.
David Phelps: Joe, thanks. My privilege!