#27 Less deals and more profits in Commercial Real Estate with Cory Peterson
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Today, we have Corey Peterson. Corey is the owner of the Kahuna Investments, who aims to provide his investors with long-term capital appreciation and stable cash flow by buying multi-family apartments. He has managed over $95 million in real estate across the country. Corey is also the bestselling author of “Why The Rich Get Richer– The Secrets to Cash Flowing Apartments” and hosts the “Multi-Family Legacy” Podcast. Join my conversation with Corey to learn more about how to take fewer deals with more profit!
All right. Welcome to today’s show. We have Mr. Corey Peterson, the big kahuna. You’ve heard of Corey. If you’re in multifamily prior to Corey, Corey runs a syndication company that puts together multifamily real estate deals and he does them all over the country. I’m looking forward to connecting with you, Corey. I’ve known Corey for a few years now, and it’s been a little while since we talked so good to see you, man.
Yeah. Good to see you too, brother. I’m super excited to be on.
Yeah, man. So catch me up, dude. I know you’ve been doing some big things last time I talked to you, you were scaling up, but you’ve done a lot of, a lot more since I’ve talked to you. So catch me up a little bit. Apartments. Tell us about apartments.
Yeah, man. So just got addicted to the cash-flow life, right? Getting out of those checks each and every month, it’s been a pretty cool thing. It’s not been without its challenges. I mean, 2020 was a, was a rager with COVID and you know, people not paying rents and I own a half of my portfolio is student housing. So that’s been really challenging – about half of itself. You have, it’s not, but overall man, it’s, it’s been a great division. I think we did maybe $25 million. We didn’t do anything last year. Except for, we were just ready to start a new development from the ground up of $14 million. But the previous year we did almost like $35 million in acquisitions, which is decent, which is really just three, three projects. And that’s the great thing I love about this business. You don’t have to go at it at super crazy speeds like we did in single-family game. One or two deals a year wins the race, man.
Yeah. So tell us about that single family to multifamily. So we talked about that a little bit before we jumped on here, that’s where a lot of people like to go. They like to get their hands in, in single family, residential, smaller, smaller deals, easier deals, and then they want to go to multifamily or some kind of commercial. So tell us about the leap and the difference between single family to commercial.
Yeah. You know, that’s, and that is my journey. I started off as a wholesaler to fix and flipper to multifamily. And the reason why was, I think the reason why most people want to get into multi-family is for passive income. Like we all read that book, rich dad, poor dad, and Robert never talked about flipping or wholesaling. He was all about cash-flow. And that’s what we all fell in love with. Unfortunately, we turned on the TV and we saw flip this house. And so we got into that and listen, I’m not going to beat those industries that, but that’s where I came from. I make great living and great money wholesaling and flipping, but the difference was I wanted more time and money and I didn’t want it – for me, it just felt like an easier progression is when you do this, right.
It’s a bigger, more sophisticated game. But more importantly, as Robert would tell you, the biggest reason is uncle Sam, right? Your biggest partner in life is uncle Sam. And he always wants his. And when you actually own property for a long time more than a year, and we’re not fixing and flipping, you can actually get depreciation. And that really is in my mind, the biggest changer of why. And then, you know, it just comes down with systems and procedures, right? So in my mind, the biggest change Tony was really money. Being able to raise private money is the one thing that I did differently than all my guys that were in single family fix and flip and wholesale line that I think led me over the edge is I started flipping like, ’09, ’10 and there wasn’t really much like bank money or hard money or that type of funding out there at that really pivotal point in time.
And the only way you could get money was through individuals. It felt like private money. And so I just got, I say, it’s luck, but I put a lot of work and effort into it in learning how to raise private capital. And once I had a big pool of money and the market started to change, that’s when I transitioned into apartments, I was like, man, I’m working my butt off doing fix and flip and wholesale. I was the, you know, Jack of all trades, but not all the different hats. And I was just really actually, I was becoming a bad dad where I was putting so much of my work life in front of my family and everybody else that I was really becoming a train wreck. I was kind of a miserable person. You know, looking at me you’d think I’d successful, but inside I was dying.
And so I just knew that I needed something different and I actually had a mentor that first gave me the idea of apartments. He came to my life almost 20 years ago. His name was Bruce. I call him Bruce Wayne and he wasn’t Batman, but Bruce was loaded and it’s actually how I came up with the name of my company, Kahuna Investments. So I went to Hawaii like 20 years ago. My mom was married to Bruce and I didn’t know that Bruce had a home on Hawaii right on the beach. And I was like, I was blown away. This thing was right on the beach. It’s in Kauai, the garden Island and he’s got nice cars, he’s got fine art. Like he, you could tell and he’s got time, his phone wasn’t ringing. And I was like, this guy is different.
And so I asked him the words, like, what do you do? And that’s what he said. It was magic. He said apartments. And he was in real estate. And I just go back to that. I realized that Bruce was living, what I call now is that cash-flow life. And when I was looking at my single family fix and flip and I was just hustling, grinding so hard I just knew I was failing as a dad. I just knew I needed to change. And so that really helped me, I guess, kind of kicked me out of my comfort zone and pushed me into the apartment syndication world, which I already had a skill set that was really valuable, which was raising private money.
Yeah. So let’s talk about the difference between single family and multifamily. So there are some that are obvious, one unit, one to four units to tens or hundreds of units potentially. Raising private capital is very similar. You get individuals to invest into deals. The structure of it is a little bit differently, different. I think a lot of people don’t get into multifamily or commercial in general because they’re scared of the bigger numbers. You know, there’s been this, you may have seen the debate recently with Alex Pardot and they had single family versus multifamily. And honestly like both of them are great. Both of them have their strong points. So looking at commercial, a couple of deals a year, that’s huge compared to doing 30 5,000 deals a year, like a lot of single family guys do. So tell us about, I guess the time it takes to put those deals together two deals, you know, 15, 10, $15 million deals. What does that entail?
So the first step is just a lot of underwriting. So it takes, you know, a hundred and 150 tries or looks at good solid potential deals to find you know, which is the goal is to try to find the needle in the haystack. And you know, there’s always going to be markets that are harder. Sometimes they’re better, sometimes they’re worse, but we’re still finding them today. And so finding a needle in the haystack, you have to strike gold once or twice a year. You know, three times would be like Nirvana for me. But if I can just find that one deal and really I’m happy if I just get one. So now in that you’re going to miss out a lot, right? So you’re going to find potential deals and you’re going to go in a bidding process. And a lot of times we lose, like we’re never the highest, you know, sometimes we are, but even then sometimes we’re not.
So we don’t win a lot, but when we do win and let’s just say, that was just, you know, one deal in a full year, a $15 million deal. If you fast forward that deal to it, when it’s ripe, it can make you a multimillionaire. And so that’s what I’ve kind of learned. And I guess the trade off is – the velocity is not there, but really the daily work – so like Isaac behind me, if you watch it on YouTube, or if you posted online – Isaac jobs acquisitions, all he does is look at deals and put them in a in machine and data. That’s kind of like the same stuff that we did in the single family game. So there’s a lot of similarities. It’s just that you don’t have to strike gold every time. And I think the biggest hiccup change for most people, Tony is we’re trained in the single family deals at some price, a deal works, right. And with the multi-family game, sometimes the deal does not work at any price. So that’s the difference. I know when I’ve trained a lot of people into the multi-family side that came from the single family side, one of the thing I keep them from trying to make the same mistakes. We can make this work. We can make this work. And sometimes it’s like, no, you can’t make this work. This is fundamentally flawed for cash-flow.
Is it because of the areas or because of there’s just too much work that needs to be done? Like why would numbers not work if you were to get the property at a certain price?
Yeah. Because most of the times it’s it’s in the wrong area. It’s got really the wrong, bad things wrong. You know, usually we like to fix bad management and you know, deferred maintenance, you know, broken stuff. That’s pretty similar. But if you, you really can’t, it’s hard to fix a bad area or bad economics or Hey, listen, this, this market, there’s people moving out of the market, not moving into it. It’s not going to sustain long-term. Where with with fix and flip.,it’s just like I could buy it and sell it. And you’re only in there for a short amount of time, but if you’re buying and holding for apartments, you’ve got to really look at the macro and micro economics. And sometimes that means that, man, I probably shouldn’t be buying in this area. So it’s a really little bit of a hurdle, cause usually we’re trained to say no matter what, there’s a price that this still works.
And sometimes that’s called for me, opportunity costs. I can spend all my time jacking with this one or let me go and just go find another one’s way better. And then my stress level goes away. Because the, the stress level for the multifamily side is the commitment to pay your capital. Right? And so if you can make that as easy as possible. So like sometimes I’ve showed people, they’re still, they’re looking at this really crappy 1970’s kind of in the war zone kind of property. And they’re like, Corey, it’s 50% vacant. We fix it, we kill it. But I’m like, Oh my God, what, you know, how much money that take to do it? It’s a $3 million rehab. And I’m like, well, but I can go buy this 1986 property. That’s a little bit more, but it’s 90% occupied. I can raise my money and start paying like next quarter, give me the easy button. Right. And make just as much money. Maybe not make that big pop, but still like, you know, I usually try to buy for cash-flow. So that’s, it’s really weird how it works. That is some of the differences and similarities to it in the game.
And it’s return on time too. Right? I mean the stress and the time to do a deal, that’s really tough that could make more money may not be worth it when you can find a deal that takes a fraction of the time, even though you’re not making quite as much money. Right.
And the other part, Tony is the money. Right. the money is usually the biggest like you said earlier, some of the biggest, like that gets the hiccup is man, can I raise a million dollars of money? And the million dollars seems like a lot, but then once you start doing it, it’s like really, that’s 10 people with a hundred thousand dollars. And you know, it’s like anything else we have, we create systems for wholesaling for fix and flip. It’s just a different set of systems to raise capital. And it’s just, it’s the money game. And luckily, I came from a background where I was a financial advisor, so I got taught the money game and how to talk to money, what exception, where it hangs out. And so once you unlock that, it’s not so bad. And and if you just give people what they want, because most people, they, they hate that roller coaster. They don’t want to be on it and the stock market. And so what we really talk about, what we do is we’re an alternative to the stock market and we are able to take in capital and we make people’s money grow.
Yup. So from a standpoint of raising a hundred thousand dollars for a single family deal compared to a million dollars for a commercial deal, I guess really the difference is probably a few things. It’s the paperwork, right? Because you’re bringing in multiple investors. So you have to have a different set of paperwork. It’s them having the property in for a longer period of time. And I think the only other thing I can think of off the top of my head, and you can tell me if there’s more, is that there’s a little bit more of a variable and single family, private money. Typically you pay a fixed, fixed interest rate with commercial and multifamily. It’s typically a preferred return plus cash flow. If there isn’t any, anything that I’m missing,
No, that’s really close. So we, we, I’ve actually tried to mimic what I do in the single family space a little bit. And I probably raised money differently than most syndicates out there in that I’ve defined my payout in my PPM. So the first, the paperwork is different. We hire an attorney that creates a syndication called the private placement memorandum. And that’s how we can pull money together. And there’s do’s, and don’ts with that system and what you can do is advertise and things like that. But when we get our pool of investors to come in, what we typically try to do is pay a pref. That means they get first dip out of all profits. And usually that’s paid through cash-flow. And then we’ll define the back end, meaning like when we sell or disposition the property that we’ll pay them an additional percentage on the sell.
So we know a lot of syndicators just say, it’s a, you own 80%. So you get 80% of the income and 80% of the back end and stuff like that. We’ve just learned to control it a little bit more and say, here’s what we’re going to give you. And the reason I do that, Tony honestly, is I got in this business for Cory and as long as I can raise capital at the right price and give my investors what they want, which is a solid return. I get to win as well. So I get to win a little bit.
So you’re saying you give your investors a fixed return.
Yeah, well pref, so we give up, but we don’t give them a note and deed of trust. Right. So I give them a, it’s called the 6% pref and then 6% annualized on the back-end. So my investors will make a total return of 12%.
Okay. So do you pay, do you pay quarterly? Do you pay cash flow as well?
Well, that is part of the pref. The part of the pref is the cash-flow.
So with multifamily or commercial, if you do smaller deals, there’s less transactions. And I think also people think, well, you know, I don’t want to wait for the cash flow or I don’t want to wait for whatever it is. Right. So there’s different profit centers you can build into into syndicating deals. There’s obviously cash-flow there’s developer fees, syndication fees, construction fees, kind of run us through that on, on what you would recommend people charging or not charging when they put deals together.
Yep. We, we take between the two and 4% acquisition fee. So that’s right upfront that’s money that we raised that money to pay ourselves for putting the whole deal together. So on a $10 million deal at a 4%, that’s 400,000 bucks. So listen, I can make $400,000 on my first deal. That’s enough to cover all my expenses in my team and the cost. Right. then we’ll typically now two to four, two’s probably the industry standard. We take four. Why? Because I, one day I put it on a piece of paper and I said, I’m going to make all the deals I buy qualify at 4%. And so if your deal qualifies, your investors don’t even care. Trust me. Like, they’ll let you make more money if you just show them that you’ll deal and how it works. I’ve learned that. So then we also will take a 2% asset management fee.
And in the beginning, Tony, I didn’t do this. I wish I would have, because you’re going to have ongoing costs. You know, I got staff and team and people and you know, people come in, in and out of your deals, they get married, they change, you’ve got to have a a process for managing your investors. And especially, it’s not so bad when you have one deal, or two deals, but when you get to six, seven, eight, nine,uit becomes a big, you know, chicken’s nest. And you just want to make sure that it’s perfect and that’s what your investors want is they want perfect accounting, perfect financials and things like that.
So is that 2% of the asset value or the money that’s raised?
2% of the purchase price. So if I buy a $10 million deal you know, at 4%, that’s 400 K.
You said something about 2%. So 4% total.
And then asset management fee is the 2% of collected income monthly. So that’s a monthly income. Your typical, your management company is going to cost you 4% and then you’re going to take 2%. So you run a 6% management fee line in that piece. And again, so it’s all about underwriting. That’s the one thing that’s the same as in the wholesale and fix and flip businesses. Like you got a pencil, you know, your pencil. Once you create your standard template for your pencil, you make those deals qualify, and then you then verify to make sure that you’re not buying in the wrong spot and the right whatever, and all those things that would disqualify a property. So when you get one that works, all these things are already built into your template. And you’re like, okay, we got a deal.
Yeah. Okay. So, you know, I talked to someone over there today. They’re a single family guy and, you know, everyone looks at the numbers and you’re like, why can’t we do that? Right? Or, or they get scared of it. You know, it’s usually one of the two. So he’s like, well, I helped a guy buy a building for 7 million. He put 2 million into it and then appraised that it was either 13 or 15, nine. Right. So 4% equity spread, obviously there’s costs in there. So it’s probably reduced a little bit. So for me, those numbers work, it’s like, yeah, it sounds like I would do those deals all day long. How hard is it to find those deals? Like, obviously you’re only finding one to three deals a year. Like, you know,
I’ve been doing it for, I don’t know, this is my seventh year doing it. I’ve. I mean, the only reason we need to find it your last year is we didn’t want to, It was COVID, there’s too many uncertain. So I was like, hey, let’s just bow out and see what happens. Right. We were actually under contract and we walked away from the deal. So we could have closed one solid, like $10 million deal. But we actually just said no, and we just, I just did it as coming. Like, I don’t know what’s going to go on. I want to see what’s going to happen. I’m not gonna make any decisions. And like, I, I don’t have to make any decisions. That’s the great part. Once you start cash-flow and like, that’ll change -that by the way, Tony – that is the thing that changes your life
In my opinion. When you’ve got an everlasting gobstopper that doesn’t ever go away, that cash-flow that shows up every month, dude, it changes everything. Like you get a big F you factor, no factor. No, I don’t want to do it. And that to me is that’s the best thing about, about the cash-flow life is that when you know that it’s coming in, you, you can just say no easier and faster. And that’s what we did last year. But the truth is Tony. You know, we can do whatever we put our minds to. So if you, if you gotta look at a lot of deals to find a couple of one or two, that’s what we do. And it’s not that hard, but it just takes belief and it takes some training and some systems, you put that all together, it’s the recipe for success.
So it’s hard to find contractors in your own local market for single family deals. So let’s say you put together a million dollar construction budget for an apartment complex. And tell me, I don’t know, do you do value add on all of yours or do some of them, you just buy for cash-flow?
Some of them, some of them will call micro repositioning. It’s like, well, okay, let’s paint. And you know, counter-tops or you know, we usually have a we’ll go in there and knowing what we’re going to pretty much do on these properties before we buy them. But listen, we still have to deal with that. But you’re getting you’re play. You can also deal with it. A, we have staff. So a lot of times when we first buy a property, the first thing we do is fire. Most of the tests, staff sucks. So we’ll have to find qualified maintenance guys that HVAC certified. And we really try to, we try to hire like a painter and some of the guys can actually do some, a lot of our work for us. In-house, and then we sub out what we have to, and there’s lots of commercial contractors that, that are out there. It’s a different set of contractors then your guys are doing single family fix and flip. I think, I think it is. I think it’s a different set of contractors.
So obviously you have to have a good team together. You got to have a legal team, you gotta have a good management team. You have to all those things together. Someone doing their first deal. I mean, is that, is that pretty tough to, to put together for your first deal?
Yeah, it is. I mean, I’m not gonna lie. It was a lot of work, but compared to what, you know, like it was the same amount of work I had to do doing my own first fix and flip except, you know, my first deal I bought for $3.2 million, Tony, I held it for five years. I sold it for 8.8 million. Wow. Right. I made $4.7 million net profit of which two and a half million dollars was mine to keep. And so that was, I mean, I can only deal with two and a half million dollars. I took that money, but a $12.7 million property that pays me like $350,000 in cash-flow every year and has now for awhile. So if that’s the soul, you know, that’s one deal, one good apartment deal. So I mean, I just, I believe that if you play the game and do what’s required, whether you’re single family wholesaling or any of that real estate is the way, but once you understand that cash-flow part of it, one of the biggest things I try to tell all my friends are in single families, buy more to keep, buy more for yourself, because the other part of that is depreciation.
We’ve not really talked about it, but like that was my opening statement early. One of the biggest changes in my life. I’ve not paid taxes in years, my friend and I mean, I’m just like Trump, that’s the reason Trump didn’t show his taxes. He doesn’t pay taxes and neither does Cory Peterson. Because depreciation, this cost SEG study that they allow you to do. Like we bought a $10 million property. We got like a $3 million depreciation schedule in year one. And because I’m a real estate professional, I can use that to offset all my other income. So my info business and things that we do and teach there, we offset that income as well. And that’s become a, a game changer for us.
Yeah. I was fortunate to have in 2020 to have a good income and got all of it wiped out with accelerated depreciation from commercial property. I, I own a big co-working space that I put a million and a half into, and I was able to take most of those renovations in the first year that we put it in use. So a lot of huge tax benefits there. And I think is it 2022 is the last year you can do that or is that going to potentially change with Biden coming in?
I don’t know that we’re watching it, you know, so hopefully I think it’s slated for 2022. So we’re just, I mean, we’ll see what happens. Listen even with before it was that it was 50% bonus. So instead of getting 3 million, I get 1.5. I’ll still take that. But right now we’re playing out a pretty cool field. And so we want to get as much as we can.
Yep. Totally. Well, cool, man. So we got a little bit of time here. So what are some lessons that you’ve learned in the last seven years of scaling up this a multi-family business that if you could go back first year, knowing what you know now, what would you tell yourself?
Know thy partner. The biggest in the multi-family space. A lot of times it is partners coming together, different people coming together to do a deal. I would say know thy partner and know the operating agreement and my first deal, I didn’t understand both of those. And it caused me a lot of pain and headache because I had bad partners. And then I had a bad operating agreement that really made it very hard to get them out and ended up buying them both out. And it was very painful experience. Great deal solve that. But I see that mistake a lot when people, and what I try to say to people now is do deals and don’t do partnerships. A lot of times, Tony, we can get together on a deal and say, here’s your responsibility. Here’s my responsibility. Let’s understand this deal, but it doesn’t mean that I have to go into every deal with Tony as my partner. Right. I want to be autonomous to say, listen, I got another deal. Let’s, who’s the right people to put into the thing to make it work, because I may have done this first deal. And I realized that, you know, XYZ partner was really not, he became dead weight. And I don’t want to experience that again. And so I’ve just learned to do deals and not partnerships.
Yeah. That makes sense. Yeah. Well, awesome, man. Well, Hey, good catching up again. It’s been awhile. We are going to put a link down in the podcast in the show notes for you to connect with Corey. He’s got an info business where he teaches people how to invest, and if you want to invest with him as well in his projects, I’m sure you could reach out to him and he’d love to connect with you. So appreciate it, bud. Any last words for the audience before we jump off?
I mean, I just believe this with all my heart is no matter what, in this, in this business of multifamily investing or just investing period it all starts with your belief. And I just truly believe from my heart if, if you believe it and tell it to yourself daily you can achieve it. You can achieve anything you want in this business, and it is a wonderful, wonderful business.
Absolutely man. Good stuff. Thanks again. Cory, look forward to connecting again soon. Bye man. See ya, bud.