GI192: Real Estate Debt Funds with Kevin Dureiko

GI192 Real Estate Debt Funds with Kevin Dureiko

Kevin Dureiko is the founder and fund manager of Birch and Dobson LLC, a private real estate investment fund located in Connecticut. His firm raises capital from accredited investors to place or purchase senior mortgages on investment real estate in addition to lending on single family home developments.

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Transcript:

Announcer:
Welcome to the Global Investor Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host Charles Carillo combines decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now, here’s your host, Charles Carillo.

Charles:
Do you have money sitting in the stock market? And you’re worried about it or worse. You have money sitting at the bank, not keeping up with inflation. My name is Charles Carillo, founder and managing partner of Harborside Partners. And since 2006, I’ve been investing my money and my family’s money into income producing properties. These are real assets, real properties with real addresses that produce real cash flow. At Harborside Partners, we provide passive investors who love real estate with a turnkey investing solution. If you want to put your money to work in real estate, but can’t find deals, don’t have the time to get funding in. The last thing that productive people want to do is manage real estate. We find the deals. We fund the deals and we manage the tenants, the termites and the properties. Partner with us at investwithharborside.com. That’s investwithharborside.com. Go to investwithharborside.com. If you love real estate, you like the idea of passive income and believe that income producing properties will appreciate over time. Go to investwithharborside.com. That’s investwithharborside.com.

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Kevin Dureiko. He is the founder and fund manager of Birch and Dobson LLC, a private real estate investment fund located in Connecticut. His firm raises capital from accredited investors to place or purchase senior mortgages on investment real estate in addition to lending on single family home developments. So thanks so much for coming on today, Kevin.

Kevin:
I appreciate you for having me. Thank you.

Charles:
So give us a little background on yourself both personally and professionally prior to getting involved with your current business.

Kevin:
I’m pretty run of the mill when it comes to that. My father was a real estate investor. You know, when I was younger, I really didn’t understand what he was doing. He was just buying houses to me. So you know, I got to cut my teeth on that without even really knowing it. You know, fast forward a number of years, graduate high school, didn’t really know what I wanted to do. Kind of fell into engineering, was an engineer for a little while. Worked for at and t underground utilities, things along those lines. Get into the market crash 2008, you know, watched all that fallout happen and decided that nine to five probably wasn’t the best deal for me. I’m not a nine to five guy. And being in New England as you once were, you understand that you underground utilities, you can only work really about seven months out of the year. So I wasn’t the guy that’s gonna sit at home during winter. So I decided to leave that as well, as much as everybody thought I was crazy. And then I started Berks and Dobson about 2007, 2008 ish. So

Charles:
Why did you choose private debt as your real, your investment vehicle with it in estate? Let’s say?

Kevin:
To me it was the perfect mix of a secure backed asset class. Mm-Hmm. With a constant cash flow. So, you know, the vi those who have the money generally make the rules. And I kind of liked that that angle that you have to it. You get the design, what your risk profile is, and you know, it, it allows you to, to help a lot of people as well. So we might not be directly investing in that bucket, you know, of real estate, but we can still have a participation in it.

Charles:
So can you explain a little bit about how your private fund works or private funds in general that are involved with debt versus, I mean, I think a lot of people understand the equity portion, but just for this conversation, how your private fund works and like how you’ve picked your asset classes to lend on, I guess we should say.

Kevin:
Sure. So we take, like you mentioned the credit investor capital. We kind of have a bucket that everybody likes. You know, like, hey, we only want to be in a property for 70% L T V mm-hmm. <Affirmative>, we only wanna be in a property. We want it to be cash flowing. So we have a bunch of matrixes that we wanna stick to. We wanna stick to a guideline, and we partner with real estate operators. So if you have a, a building 16 unit, 32 unit, a hundred unit, whatever it is you come to us, we know I wanna restabilize it, I wanna purchase it, I wanna refinance it. We put a plan together. And being that we are private, we can kind of customize those terms as long as they fit within our box. You know, our money isn’t from Wall Street, so we don’t have those handcuffs and we are able to be a little bit more flexible. And that also means a flexible with the underwriting. Generally speaking, as long as our investors can get a, their preferred return, which is anywhere between 79% and we pay that distribution monthly we can normally put a deal together now that benefits both parties, including ourselves.

Charles:
Very interesting. So when you’re saying, obviously you’re, you’re, I imagine you’re holding all these loans on your book, your books per se, you’re not selling them to another institution, is that correct?

Kevin:
Correct. So our money short-term generally we’re turning the money over every six to 18 months mm-hmm. <Affirmative>. So by nature, you know, we’re just taking the origination and we’re holding it for the entire period. We do also do one to four unit vacation homes, rentals and all that. That is something we’ll keep on the books for a short amount of time and then sell it off into the market. It just makes more sense for us.

Charles:
Interesting. Yeah. The why I say that because, and whenever I dealt with like small local banks or credit unions, they have, obviously it’s different, but it’s also they’re keeping on their books. So you’re able to build a relationship, you’re able to, I, I, you know, bend the rules of typical underwriting. Whereas if you’re going by a, you know, f a 30 year property, residential property with f h a mortgage, they’re in certain things because they keep it for a few months and then next thing you know, I mean, you’re paying someone else for your mortgage. So it’s it’s, that’s very interesting, as I found, is you can be a lot more creative with working with a firm that keeps it on their books as, as in my experience.

Kevin:
Yeah. And that’s kind of what we wanted. I’ve had the, the experience where, you know, sailing, like you said, buy a house and I think my wife and I are on our, probably our fifth or sixth servicer at this point. Mm-Hmm. <Affirmative>. So you just get tossed around and like if I, we have a problem, like who do we call? Like mm-hmm. <Affirmative>, you know, it’s, you didn’t write the loan, so you really don’t care. So on our end, it, we wanna be partners with our borrowers. We don’t want to just be a, a mortgage company. Mm-Hmm. <Affirmative>, if somebody has a problem, which everybody does at some point, like eventually one of my borrowers is gonna die, it’s gonna happen. It’s just the rule of large numbers. One of the buildings is gonna catch on fire. So it’s, you know, we have to be able to have open communication and we all ha have backup plans.

Kevin:
So like when you’re originating loans, you’re originating them for your risk profile. So like we have, let’s say we’re in it for 70% L T V, we have a 30% equity cushion for us to protect ourselves and our investors, though we are also listed on the insurance, something goes bad. Mm-Hmm. <Affirmative>, like we have a lot of fail safe. You can design with a debt fund that you can’t really get when it comes to actively investing in real estate, which I have absolutely no problem with. I’m an active real estate investor. It’s just a false amount of, you know, risk profile. It’s what do you want for returns, how do you wanna diversify? We’re just a part of that large spinning wheel.

Charles:
Yeah. So that’s, it brings me down to my next question. What are the benefits of investing into a private debt fund? I mean, I think people, like we said before, it’s, it’s mu diff much different than an equity fund. But you know, when you’re versus traditionally investing into real estate or investing into like a, you know, a syndication fund where they’re actually buying properties equity. Why would, other than diversification, why do you like the debt better? I mean, obviously you were around during the crash the great recession. So I mean, how do you see that as a great way to diversify, let’s say

Kevin:
It’s helps with cash flow, number one. You know, some people don’t wanna lock their cash up for three to five to seven years mm-hmm. <Affirmative>, you know, and syndication you know, it, it’s more about your goals really. If you want more of a consistent cash flow, whether or not it’s monthly or quarterly, if you want something that is backed by an asset, but it’s truly backed by the asset on, I mean, syndications are asset backed, but your capital is the most at risk portion of that because of either market you know, rents going up or down like that equity cushion fluctuates during the entire investment process. On the debt side, that’s a hard asset at 75%. So God forbid we have to take a property back, you know, I, we could fire sale that property, you know, or for whatever we have to do, we can get the 75% back and return the money to our investors.

Kevin:
That is the first and foremost that we’re concerned with is getting the money back. I know there’s a lot of loan to own lenders out there that, you know, at the first drop of a hat, they’re gonna try to take the property as a way of an investment. We’re not like that whatsoever. So it’s gonna take, you know, a conversation with our investment partners to decide what works best for them. Cuz we also have a ground up construction bucket as well. So if they’re more into not getting a return over the month, but they can wait 12 to 18 months and they’re willing to risk that first portion of the equity to get a bigger return, we have that program as well. It’s all depending on what the client wants, what the investor wants.

Charles:
Yeah. It’s great that you have those two different options. You mentioned a term that we haven’t really spoken about too much on the show, which is lent to own. Can you, first of all, what would make a lend to own a lender, a lend to own lender, let’s say, per se, and explain maybe first what that means.

Kevin:
Well, it’s a terrifying string of words for one, if you, if you really look at it so a lend to a loan to own lender is somebody that generally is gonna give you the most L t v, the higher rates and the shorter amount of term. So if you got everybody else that you’ve tried to get a loan from that’s in the 75, 80% range of L T V on like, say a bridge loan, but you got this one outlier that’s gonna lend you 90% and it’s gonna be at a, you know, they’re like, oh, well we’re gonna give you 90%, so the rate’s gonna be a little higher. Doesn’t that make sense? Well, yeah. It would make sense. The risk is higher. That’s a harder loan to pay back. So if you can look at it from a glass of why are they doing this and you have so much at risk

Charles:
Mm-Hmm. <Affirmative>,

Kevin:
That’s gonna be kind of a flag for a, a loan to own lender. Mm-Hmm. <Affirmative>. Not to say that there aren’t companies out there that do lend at a very hard high L T V, but generally speaking, if it looks too good to be true, they’re usually coming after your property.

Charles:
Yeah. It’s, it’s funny how you said it like a few minutes back, you, well, it’s great that you said it was that you’re saying that the lenders is really a partner. And that’s completely true, I feel, because people don’t really think that. But when you look at the capital stack and you’re seeing who’s putting up the most money, it is the debt partners, right? The lender mm-hmm. <Affirmative>. So in this scenario, a lend own, they’re just giving you a little bit too much rope and for a, let’s say newbie investor they’re gonna hang themself. And I mean, that’s kind of what happens in the scenario, I think.

Kevin:
Correct. And, you know, we do a lot of refinances for our investment properties. So we are probably on the lower end of the L T V that we’ll give out for a cash out refinance, but it’s for a reason. Like mm-hmm. <Affirmative>, you know, if somebody’s gonna give you 80% of the value of that property, and we’re in an economic climate right now where rents and inflation and everything is just out of the out of control, the chances of you not being able to pay that 80% l t v note at 7% interest or whatever it is at that time is, I mean, you’re at a high risk. So we’ve built in those safeguards, you know, we don’t want the property, my, I want all my investments from the lending fund to fit in a filing cabinet. Mm-Hmm. <affirmative>, you know, I d we don’t wanna take property back.

Kevin:
It’s expensive. And especially if you’re taking it back at a high L T v, that protective cushion that we’ve built is nearly gone once you get done foreclosing on our property. So we, during Covid, I didn’t have one delinquency, I didn’t have one property getting taken back while I watched other behemoths in the industry fold. And they’re still folding to this day and weighing off people. And they had the highest LTVs, they had the lowest rates at the time for their asset class. It’s pretty easy to spot what’s going on, even for a newbie to see, you know, yeah, I might not be the most, the highest L T v I might not be the cheapest, but there’s a reason for all of those. Yeah.

Charles:
So you, you brought up Covid, which is interesting. I mean, I think at the beginning, COVID, I think every borrower with real estate was on the phone with their lender because we had no idea what was gonna happen. And I remember doing many of those calls and not having to use any of those protections that came up, but it was just one of those things that, keeping the open lines of communication. How did, what was the reasoning for you having such a minimum 0%, let’s say issue with your loans that you had out? Was it because of the borrowers you worked with? It was, was it because that the properties that you lent on or was it a mix of both?

Kevin:
It’s a mix of both. And, you know, have to be honest, like during the covid process, the loan volume did go down cuz nobody knew what was gonna happen. And we had a hard time closing loans cuz you know, town offices were only open, you know, one or two hours a day, maybe two or three hours a week at some time. So we kind, you know, some of our biggest loans were closed during covid, but they were also, you know, less loans in volume. So underwriting and, and even the loans that happened before Covid, you know, generally because we are short-term in nature by the time they came due, even in, no matter where they were in the COVID stack or in the Covid timeline, that loan could either be refinanced out or the property was being sold before everything really hit the fan. So the short-term nature helped the properties, the, the underwriting that we were doing helped. And, you know, during Covid we didn’t shut down. So, you know, our, we just tightened everything up a little bit and made it so that our in invest, our borrowing partners, were not gonna be put in a situation where somebody gave ’em too much rope to hang themselves. Mm-Hmm. <Affirmative>.

Charles:
Yeah. So we have a number of listeners who are one to four unit investors in addition to a number of larger apartment investors. Are you able to share tips on how not only to look professional with a lender like yourself, but the best practices to actually get your loan approved?

Kevin:
Love the question. Thank you. <Laugh>. The it’s not just for lenders, it’s for your insurance people, it’s for your appraiser, it’s for everybody. Just act professionally. Your computer, no matter what, you have a Mac PC in your Word program, there is a template in there for a business proposal. Just use it. <Laugh>. it’s, it’s an outline. Give us the inf all the information. Don’t make anybody guess. You know, how many times I have to look up a zip code, like Texas is enormous. I don’t, there’s so many episodes, so many places that sound the same. I mean, don’t make us work as much. Like we work a lot on this side and just make it easy for us. Make it easy for everybody and, you know, be upfront. If, if I find something that should have been disclosed at the beginning, it automatically throws up a red flag because why aren’t you telling me? Mm-Hmm. <Affirmative>, I can get over almost every problem aside from some really like, you know, lawsuits and, you know, arrests and stuff like that. If you tell me upfront and I can design around it, we’re good. Mm-Hmm. <affirmative>, we get the closing, you know, and something pops up the loan’s debt, we’re j we don’t trust you at that point. So professionalism organization and being upfront lenders, accountants, tax people, insurance people, we all operate under the same thing. Just tell us and be professional.

Charles:
Other than those points that you mentioned, what other common mistakes I guess you would see that real estate investors that have been funded for loan make in regards to their, let’s say into, in regards to lending, in regards to getting financing on a property,

Kevin:
Not knowing their numbers. I’m guessing, so it just had one happen this week. Great property, great borrower they pulled information off of Zillow for the taxes and insurance. They, they then they sent it over. So we’re assuming you’re getting it from either your tax roll or you’re getting it from, you know, a, a source, not Hz, Zillow. And it v basically removes about 10% of the L T V we could give because it doesn’t debt service anymore. I know we’re getting it in the weeds with these technical terms, but don’t assume and just verify before you send something over. Because if I face my entire lending model off of the numbers that you give me and then halfway through everything changes all of the quotes, all of the term sheets I’ve given to you before that are useless.

Charles:
Interesting. Yeah, it’s one thing. In addition to that, what I’ve seen even from syndicates sending out proposals and just how they haven’t recalculated property taxes or insurance, especially if it’s somewhere, let’s say in the southeast right where we are, you know, we’re, we have a lot of hurricanes, we have storms. So it’s something you feel your insurance is only going up 3% a year or you feel that these property taxes are only gonna go up this much even though you’re selling, you’re buying it for twice what the person before bought it for. You know what I mean? And I see it all the time. So I imagine you see it almost regularly cuz people don’t think that those things are gonna matter much in their underwriting. You know what I mean?

Kevin:
Yeah. And it’s all elements of scale. If you have a one to four family and your insurance goes up a thousand dollars and your rent’s a thousand dollars, I mean that’s literally one month of your income for that property is out the door paying for insurance. That lowers your D C R significantly. If it’s a 50 unit building and it goes up a thousand dollars, we’re not even gonna, no. It’s all the elements of scale. So if the, the smaller property that you have with the lower amount of rent, lower amount of purchase price, those numbers are extremely important. Even a 10, 12% shift in one way or the other can really turn a deal upside down.

Charles:
When you’ve seen real estate investors lose money, what have been the most popular problems, let’s say that they’ve led to their investment failing

Kevin:
Over-Leverage and underestimating costs. That’s all. Yeah, that’s all it is.

Charles:
Now when you’re underwriting it, I imagine you’re reviewing, cuz you, when you, you for your com credit committee, they’re gonna obviously review this too. So you’re making sure that everything lines up prior to it getting submitted in. You’re reviewing all these construction costs and everything like that. Do you have someone on staff that’s reviewing ’em or that’s helping making sure that they’re in line if it’s such an issue that could lead to a disaster down the road.

Kevin:
It goes through basically two, two lines of second looks and looking glasses. I, as weird as it sounds, I’m a fund manager that knows how to weld. I can throw, I can put a roof on a house, I can plum, I can, you know, I can wire a home. I just did my roof last week on my own house. So if I get a scheduled order of rehabs on this thing and you’ve got your roof and I know I just spent $4,000 in shingles and you give me something that doesn’t even come close for, it’s on the same square footage, I, it’s already in my head. We’re short or we’re over. A lot of new people that are doing flips, they will take some courses or some classes or listen to a YouTube guru that says, pad your cost by 20% and then you can, when you pull the money back out, you can kind of pay yourself for doing the work.

Kevin:
We know that trick you know, we’re not gonna be giving you the money just because you said it cost me $7,000 to do the bathroom. We’re gonna check. So once it gets through me, if I haven’t found anything, we send it to a third party. So mostly everything goes to a third party for a review a desk appraisals, things along those lines. We just wanna make sure we’re not missing anything. And also it protects the investors that have the money that are going into the fund so we can be unbiased at that point. So that’s pretty much it. We wanna make sure that everything’s aligned, you know, per the market, all those things.

Charles:
Interesting. so Kevin, what are some of the main factors that have contributed to your success over the years?

Kevin:
Never stop learning. I’m always reading, I’m always listening to podcasts. I’m always looking at other people’s websites, what they’re doing, keeping myself abreast. I’ve read every syn syndication book there is, I’m not a syndicate for multifamily, but if my clients are doing it and they’re getting the information from these literatures, you know, I wanna know what’s going on, what’s being told out there. So I’m constantly digesting new information podcasts, you know, webinars, even the things I’m not into. I, I wanna know about ’em. Never stop learning, always reading, just trying to come up with new strategies.

Charles:
Kevin, what are some of the benefits? There’s a number of different lenders out there. What are some of the benefits of working with your firm versus another firm? Obviously you know, you’re paying these great returns out to your, to your credit investors that are investing in your fund. What are the pros for now? People that are going to your fund to get funding?

Kevin:
It’s the small, the small business feel. You know, we’re not trying to be a half billion dollar, billion dollar fund. It comes with too much of a mess. So if you want to have to be able to pick up the phone and call me that’s one of the things where you, you know, you don’t get that with a large fund. You know, if we do a hundred million this year for a small fund, that’s a big deal. That’s not a lot of loans, believe it or not. I mean, I have about 60, 63 loans and four of them make up about 70 million, so, wow. Yeah. And you know, this year, if everything closes before December, we’ll do 175 ish million dollars with the loans and every single one of those people can call me. They’re all in text threads. That’s kind of what you’re looking for. If you want the mass market, you’re gonna have to pay, you’re gonna get maybe a little bit of a lower rate, but you’re not gonna be able to have any of the control that you would have with a smaller fund. It’s not just me, it’s, it’s all everybody that’s self-managing, that’s keeping the money on the books you can call those people. If your money’s getting sold into Wall Street, once that loan closes, you’re on your own.

Charles:
Yeah. The other thing I found too is working with people doing loans that have never done your specific property type. Let’s say if you have a unique property type, I was doing a mixed use property years back refinancing it with a bank in Connecticut. And the person that they put me with knew nothing about it, had never done a property like this, and I had to get someone else because it was, you know, somebody else inside their bank to do it. And seems like someone with you, you have so much experience, you’re working with lenders all the time in these specific niches. When you look at your website, there’s a couple different niches that you work on, and it’s not, there’s not, you know, we’re not doing, you know, you’re not doing retail centers and all this other stuff that’s on there. So I think that’s great too, working with someone in that focuses on the niches of where you’re actually investing into.

Kevin:
Correct. And, you know, we pick a couple things and we, we wanna be really, really good at them. You know, we have people come at us all the time with loans and we just say no, it’s, you know, there it could, could we close it? Probably, yeah. But it’s gonna take away from our core of what we actually do. And a lot of brokers like, Hey, do you work with brokers like loan brokers and, you know, commercial mortgage workers? Like Yeah, absolutely. So they’ll send those over to their packet, I’ll Google ’em, and they do everything from investment properties to, you know, merchant loans, to equipment loans and auto lo I mean, we’re not interested, you know, it we’re, you’re muddying the waters, you’re not drilling down to, this is a very niche, very specific market and you know, if somebody’s dedicating their time elsewhere, it’s gonna be, so I couldn’t, as a lender, I wouldn’t want the investor to have to learn the process with somebody else just to get the loan done. Hmm. So we’re, we’re very strategic in who we bring on. You know, especially as a broker, we don’t have a lot of them. And honestly, I really couldn’t handle anymore if I did <laugh>.

Charles:
Well, that’s great. So how can our listeners learn more about you and your business, Kevin?

Kevin:
Well, thankfully I have a really weird last name. So if you Googled me I will pop up and I can’t hide from anybody. So just Google, Kevin Derico, D u r E I K o, my website. I will pop up my cell phone number is what I use. So if you find that too, you can call or text me.

Charles:
Awesome. Well thank you so much for coming on today, Kevin. Looking forward to connecting with you here in the near future.

Kevin:
Appreciate it, brother.

Charles:
Talk to you

Kevin:
Soon as well.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

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About Kevin Dureiko

Mr. Dureiko resides in eastern Connecticut with his wife Valerie and their young son Dallas. As a family they enjoy the outdoors and travel, and are actively engaged in their community and church.

Kevin Dureiko is the founder and fund manager of Birch and Dobson LLC, a private real estate investment fund located in Connecticut.

Birch and Dobson was founded in 2007

Mr. Dureiko’s objectives as the Fund Manager are to source property secured investments that produce returns as expected by his capital investors. The fund and Mr. Dureiko raise capital from accredited investors to place or purchase senior mortgages on investment real estate. The fund also actively raises capital and invests in single family home building.

The two core investments of the fund are single family ground up construction and lending to real estate investors with mortgages in first position on value-add syndicated multi-family properties, non-syndicated multi-family and 1-4 family properties.

In addition to fund manager, Mr. Dureiko is also retained by a $20B hedge fund as a monthly consultant to the private lending industry. This relationship is now on its fourth year.

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