JF2127: Cross Collateral Deals With Matt Deboth
Matt served 8 years in the Marine Corps as a force recon marine and has 9 years of real estate experience with a portfolio consisting of 174 rental units and has 25 flips. He shares how he uses cross collateral financing to help him acquire more properties with little to no money down.
Matt Deboth Real Estate Background:
- Served 8 years in the Marine Corps as a force recon marine
- 9 years of real estate experience
- Portfolio consists of 174 rental units and flipped 25 rental units
- Currently rehabbing a 48-unit apartment in Des Moines, Iowa
- Located in Des Moines, Iowa
- Say hi to him at: www.TripleHoldings.com
- Best Ever Book: Titans by Rockerfeller
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Best Ever Tweet:
“One tip that will help you grow your business is to bring value to brokers without looking for something in return.” – Matt Deboth
Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we are speaking with Matt Deboth. Matt, how are you doing today?
Matt Deboth: Good, good. How are you?
Theo Hicks: I’m doing great. Thanks for asking, and thanks for joining us today. Looking forward to our conversation. Before we begin, a little bit about Matt – he served eight years in the Marine Corps as a Force Recon Marine, he has nine years of real estate experience, portfolio consists of 174 rental units, and he’s flipped 25 rental units. He’s currently rehabbing a 48 unit apartment in Des Moines, Iowa. So we’ll definitely talk about that. Also located in Des Moines, Iowa. You can say hi to him at tripleholdings.com. So Matt, before we dive into that 48-unit deal, would you mind telling us a little more about your background and what you’re focused on now?
Matt Deboth: Yeah, I spent eight years in the Marine Corps. I was on my last deployment to Afghanistan, I was ready to get out, didn’t really have a plan or knew what I was going to do, I started reading a ton of books like Rich Dad Poor Dad, investment books, I decided to give real estate a try. So while I was on my last deployment, I was scooping the MLS, I found a 20-unit apartment building, contacted the realtor, the realtor told me, “Hey, the seller is interested in owner financing,” came back, talked to the owner face to face, worked out a deal, I ended up getting out of Marine Corps in end of August, closed September 1st, and essentially, I house-hacked a 20 unit apartment building. From there, I started buying all these houses off the MLS, because it’s a good time to buy all these foreclosures. I buy them, flip them, rent them out. I was doing that for a while, and then eventually I got tired of the single-family houses and started going to apartment buildings, and that’s primarily where I’m focused at now, is value-add apartment buildings, usually 24 units or more, usually a mix of at least half two-bedrooms.
Theo Hicks: So you house-hacked the 20-unit. What were the seller financing terms? Maybe walk us through that negotiation and how did you even determine what would be a good price, since you were so new?
Matt Deboth: Well, I’ve done my research. I realized how to use Microsoft Excel, how to run all the numbers… And the seller couldn’t sell it because the market was bad, nobody in town is really buying large multifamily like that… His terms were $50,000 dollars down. I think it was 12.5% interest for three years, and the first six months were interest-only payments. And even with those crazy terms, it was still cash-flowing like crazy, and I was living there rent-free. So to me, it was a good deal. Plus I bought it at the bottom of the market, had a ton of equity into it about a year and a half later. I purchased it for $500,000; a year and a half later, I think it appraised at $950,000, and then about a year ago, it appraised for $1,150,000. So it’s been one of my better deals I purchased.
Theo Hicks: After the three years, did you refinance it into a loan to pay back the first owner?
Matt Deboth: I did. I had to pay him the payments up for the first 18 months ,and at month 19, I walked into the small hometown bank and threw it all on the table and said, “What can you guys do for me here?” They helped me out, they got me, I think, at the time, 5.25% was my interest rate.
Theo Hicks: Okay, and so after that, you said you transitioned into buying single-family foreclosures; you’d buy them, fix them up and then rent them out?
Matt Deboth: Yeah. At that time, you could throw a dart at the MLS and hit a foreclosure and get a good deal. So I was buying them like crazy. I was cross-collateralizing them with the 20 unit apartment building. Sometimes I’d have a little bit of cash to put into them. I was doing all the sweat equity myself, getting them ready to flip, getting renters in there, and then I would refi out… And I was doing the BRRRR method before I think the BRRRR method wasn’t even coined or I didn’t even know what it was at the time.
Theo Hicks: Okay. And then after that, how many deals did you do before you decided to transition back into multifamily?
Matt Deboth: I think, at the time, I was around 30 houses I had done. I sold off about half of them and I currently have about 14 single-family homes I’m holding on to.
Theo Hicks: Okay, and then what was the first multifamily deal you did after buying all the single-family homes, and maybe walk us through that deal the way you walked us through that 20 unit?
Matt Deboth: The next big deal I bought was a 17-year-apartment building in the same town. It was actually owned by my property manager, who was going through a divorce. He wanted to get rid of it, I was in the time to buy… I had a ton of equity in that first 20 unit building, so I used that as cross-collateralization for the down payment. I think I paid $425,000 for it at the time, and it just appraised about 30 days ago for $750,000. So I get a lot of equity in that. I’m gonna use that to roll over to another project here soon.
Theo Hicks: So when you say cross-collateralization, are you saying that you went to a bank and rather than give them money, you put up your 20 unit as collateral?
Matt Deboth: Yeah, in these larger deals, and even when I first started off in these houses I was doing, I had so much equity into it that instead of doing a refinance cash out, I would leave all that equity on the books in the property, which helped me out a lot, because it keeps my mortgage payment low, my debt to income is low, it keeps my DSCR (debt service coverage ratio) high. So the banks love that because they’re in a better position, and I use that equity in property A to finance a down payment for property B, and then as soon as property B is stabilized and on its own, usually within six to 12 months, I’ll refinance that so the two properties are not tied together anymore. That way you don’t have a house of cards; in case you lose one building, you’re not losing them all. So it’s usually a short time, usually between 6 to 12 months that they’re actually tied together on the same mortgage.
Theo Hicks: That’s very interesting. So it sounds like this cross-collateralization strategy is very low money down, if you can find the right deals and force that appreciation… Because it sounds like you used this 20-unit deal to buy a lot of different deals, and then you just refinance once you’ve added equity to the other deals. Is that what you did? Is that your strategy?
Matt Deboth: Yep. The only deal I’ve ever really had to put money down to these multi-families is that first 20-unit; I put $50,000 down and that was part of a savings that I had from deployment. It’s on a credit card and peer to peer lending. But everything else I bought from then on out has all been zero money out of my pocket. And I’m not buying deals that are at 3, 4, 5 cap. They’re all value-add, they have a ton of equity in them already, they’re a distressed seller, they need a little bit of rehab, the banks love them… So it’s a pretty good money down strategy. I haven’t had any problems with it yet. I don’t see that many things since I’m buying on actuals and cash flow and not proforma.
Theo Hicks: Then that’s huge. So let’s talk about the 48-unit deal. So before I go into detail, is this another deal that you’re using cross-collateralization on, or did you put money out of pocket for this?
Matt Deboth: No, I cross-collateralized the 22-unit building to buy this. So I purchased it for $2.5 million, 100% financed and the bank also financed $1.2 million for the rehab.
Theo Hicks: And it’s 100% financed because of the cross-collateralization, right?
Matt Deboth: Yeah, I had to use the cross-collateralization for the purchase price, but the building appraised– can’t remember. I think the building appraised for about $3.8 million. So I had a ton of equity into it for after repair value that the bank pretty much gave me the repair costs to put into it. So I’m using that right now to rehab the entire property. And as of right now, I think our rents are going to be about $100 more than what we’ve forecasted, so that’s just icing on the cake for the deal.
Theo Hicks: So the $2.5 million purchase price, and then the bank gave you $1.25 million in repairs?
Matt Deboth: Yes.
Theo Hicks: Okay. So correct me if I’m wrong, but 50% of the purchase price, you’re using that amount to repair the property. So does that take a while to do? That’s a long process?
Matt Deboth: Yeah, it will. It’ll probably take about 18 months. It’s one property, but it’s four 12-plexes. So we’re just doing it one building at a time. That way, we have the other three buildings paying rent, we still got cash coming in. So we’re just– as soon as one building is up and ready, rehabbed, we’ll rent that out, see what we can get for actual on rents, and then we’re going to move to the next building and go from there. Just do it chunk by chunk, instead of kicking everybody out and trying to do everything at once. Especially now with the market the way it is, nobody knows how this whole Coronavirus is hitting everything, so we’re just taking it slow and doing it step by step.
Theo Hicks: How did you find that 48-unit?
Matt Deboth: I had a broker bring it to me; a broker that had brought me a few other deals. He had been working this one for a while. The seller never wanted to sell, she was just dead set on holding, and I think one day, she just randomly called him and said, “Sell the place. I’m tired of dealing with tenants.” So he knew I was in market for something that size and that price range, and I was the first on his list.
Theo Hicks: Why were you the first on his list?
Matt Deboth: Networking. I had already done about $4 million with the deals with him in the past. I would talk to him on a regular basis, probably two, three times a week. I’d referred him multiple times; he’s got a couple of good clients from me. I think it’s just networking and staying in a circle, keeping in front of him the whole time, telling them what I want, and he knows I’m a closer; I’m not retrading on deals, I had the financing already in place for something of this size and he took it serious. Is that how you’re finding all of your deals now through these broker relationships, or do you have another method for generating leads? Mainly brokers. I’d say my next biggest one is just networking, meeting people that want to sell. I’m not doing any direct mailer or anything like that. I’m just going to real estate meetups and talking to people, trying to get out there and see what value I can add to other people, and then it turns around and gifts you with things like other deals and stuff. I don’t buy everything that I come across, but I definitely try to hook people up with other buyers that I know that are looking to buy stuff.
Theo Hicks: Are you still having a pretty easy time finding these value add deals in this market?
Matt Deboth: It’s a little tougher than it was a few years ago, but they’re out there. Obviously, they’re not gonna be blast on the MLS or LoopNet, but there are definitely a lot of brokers out there with pocket listings that they’re trading at a decent price. I think the networking part is how you get those good deals though. They’re not gonna be blasted all over the internet for everyone to see; they’re going to be in that broker’s pocket and–
Theo Hicks: For someone who wants to start the process of building that trusting relationship with a broker so that they can receive those off-market value opportunities, what’s the first thing that they should do, or what’s one thing that you do immediately to get the ball rolling on that?
Matt Deboth: I’d say, bring them value. If you can bring somebody value without looking for something in return, they’re gonna look at you higher than somebody who’s just wanting to get everything they can out of them. Network constantly, meet people, get out of your comfort zone, just start shaking hands. Oh, I don’t know now with the Coronavirus… Don’t be shaking everybody’s hand, but get out there and just meet people and go to real estate meetups.
Theo Hicks: When you say bring value to brokers without looking for something in return, do you have any examples that people could follow?
Matt Deboth: Yeah, if you know somebody that’s looking to sell or buy and they’re in a certain niche, and you know another realtor that’s in that niche, look them up, see what you can do, don’t try and get something as far as a commission or a finder’s fee or anything into it. Just try and help people out. That’s probably the best way, I think, to meet people in this industry.
Theo Hicks: Yeah. If you don’t know anyone who’s buying or selling, you can use the going to real estate meetups. That why people are there for – to find deals and things like that. Alright, Matt, what is your best real estate investing advice ever?
Matt Deboth: I would say, network. Get out there, meet people, go to real estate meetups, get on websites, forums, constantly interact with people, get uncomfortable, educate yourself as much as you can.
Theo Hicks: Alrighty. Are you ready for the Best Ever lightning round?
Matt Deboth: Let’s do it.
Theo Hicks: Alright. First, a quick word from our sponsor.
Theo Hicks: Alright. What is the best ever book you’ve recently read?
Matt Deboth: That’d have to be Titan, the story of John D. Rockefeller.
Theo Hicks: If your business were to collapse today, what would you do next?
Matt Deboth: I’d start over. I’d start hustling, start from the bottom again and try to get to the top.
Theo Hicks: We talked about a lot of your successful deals. Is there any deal that you lost a lot of money on, and if so how much, and what lessons you learned?
Matt Deboth: I haven’t lost any money on any deals, but there has been a few deals where I thought I had lowballed them quite a bit, but then they accepted my first offer so then I started second-guessing myself. And then one deal, in particular, I went to the closing table and realized I probably could have got it for about $100,000 less, but at the time, I was too scared to go any lower, because I knew if it went to market, it would be gone and it’d be out of my price range.
Theo Hicks: What is the best ever way you like to give back?
Matt Deboth: Probably attend meetups, educate people, get on the forums like BiggerPockets, help people out as much as I can, try to get people educated into real estate.
Theo Hicks: And then lastly, what is the best ever place to reach you?
Matt Deboth: I’m on Instagram @MattDeboth, Facebook, LinkedIn, BiggerPockets and tripleholdings.com.
Theo Hicks: What types of things are you doing on Instagram?
Matt Deboth: I’m just posting some deals that I’ve got, some rehabs stuff that we’re doing. I’m not as active as I probably should be on it, but I’m trying to get out there and reach people, and I meet a lot of people who have questions and I try to answer them, do some zoom calls with them and just help them out.
Theo Hicks: Well, Matt, thanks for joining us today and sharing your story, your journey and what you’re doing today. I think the biggest takeaway, at least for me, and I’m sure for most of the listeners is this – a very low money down cross-collateralization strategy. Obviously, I’d heard of it before, but I hadn’t heard about it in this way. I haven’t heard about this rinse and repeat process. So you buy one property– for you, it was this 20-unit building that you bought for $50,000 down. It was an owner financed property, and you said that you bought it for 500k and it appraised for over a million dollars a few years ago. And then after 19 months you refinanced, got out of that really, really high-interest loan into a new loan, and then you created a bunch of equity in that property, and then you used that equity as the downpayment for another property, and you kind of rinsed and repeated. So after 6 to 12 months, you refinanced. They had to be value-add deals, so you can add value and force appreciation, and then you refinance so that those properties are connected, and then you got that collateral to use for another property. So it sounds like you’ve really just had $50,000 out of pocket upfront and were able to do all of these deals.
Matt Deboth: Correct.
Theo Hicks: We talked about all different deals you’ve done – the 17-unit deal that you did, then we talked about your 48-unit deal that you did, all with cross-collateralization. We talked about how you’re finding your deals. Number one source is through brokers. Then you gave us some tips on how to get brokers to send you their off-market deals. One was to do deals in the past. You had done $4 million for the deals with this particular broker before he brought you the 48-unit deal. Speak to them; you speak to them three times a week, and then bring them value without looking for anything in return, and the best way to do that is to refer them people.
Matt Deboth: Yep.
Theo Hicks: You also mentioned that your other way to find deals is through networking. So attending real estate meetups, browsing the forums and things like that, which was also your best ever advice, which is to network and also to get uncomfortable, and you gave the example of not a deal you lost money on, but a deal that you could have made more money on, but you were too afraid to get outside your comfort zone and offer something really, really low. So I think that’s really good, solid advice, as well as the cross-collateralization strategy. So again, Matt, thank you for joining us. Best Ever listeners, thank you for listening as always. Have a best ever day and we will talk to you tomorrow.
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