GI281: Reinventing Downtown Buildings with Matt Drouin

GI281: Reinventing Downtown Buildings with Matt Drouin

Over the last 18 years, Matt has been involved in real estate management, brokerage, and development while growing his portfolio to 176 residential and commercial property units. Matt specializes in repurposing troubled properties to their highest and best use.

Watch The Episode Here:

Listen To The Podcast Here:

Transcript:

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Matt Drouin. Over the last 18 years, Matt has been involved in real estate management, brokerage, and development while growing his portfolio to 176 residential and commercial property units. Matt specializes in repurposing troubled properties to their highest and best use. Thanks so much for being on the show today, Matt.

Matt:
Hey, thanks for having me on. I appreciate it.

Charles:
So I was recently on Matt’s podcast and we’ll get a plug out for that later on here in the show. But it was I thought, you know, it’s a great person to have on for our show. And so Matt, tell us about your personal and professional background prior to getting the bug and getting involved with real estate investing.

Matt:
Yeah. To understand where I am and my real estate journey has to begin before the real estate journey, right, <laugh>. So so it was it was definitely came from a place of lacking and not really sure what to find that was gonna be the missing piece. My, both my parents were, you know, blue collar. My mother was a dialysis nurse. My father was a general laborer at Genesee Brewery, you know, doing like, you know, low skill type of stuff like cleaning, fermentation tanks and that sort of thing. And you know, fast forward, you know, it was just growing up in a higher income affluent neighborhood when we were like, kind of like living on the other tracks. I was exposed to, you know, the difference in terms of wealth and wealth inequality and that type of thing.

Matt:
And making me feel not so great as a kid, you know? And I was a spoiled brat, right? So like my, I got a hand me down Chevy Blazer from my aunt and uncle, and I had, you know, kids that were driving in on their 16th birthday and like a brand new Lexus, right? And I was like, here, I was like, I got a free car <laugh> for, for crying out loud. So but it was just from that standpoint of like, and then, you know, money always created a problem that ended up splitting my parents apart. My father wanted more, was sick of looking, living paycheck to paycheck. My mother wanted my father home. My dad got his real estate license, was selling houses on like nights and weekends, and that really led that to them being driven apart and then set on course, like, pretty much like the, all the traumatic experiences that I had through childhood.

Matt:
And, you know, fast forward to, in my twenties, I lost both my parents in my twenties due to health reasons. And going through all the estate issues, I realized that they’re both living paycheck to paycheck this entire time, right? Like, you as a kid are always like, your parents are up here on this pedestal, right? Like, they are the model citizens. Like, regardless of whether it’s true or not, right? And that whole experience was like the universe telling me like, you have to get out of the matrix. That’s what I referenced, the, the matrix. And so I found that real estate really was my way for doing that. I was a, you know, c plus B minus student in high school and college. And I, you know, I was not, I wasn’t gonna be the guy that was gonna develop the next new killer app.

Matt:
Like, I just wasn’t that smart. And somebody told me that the real estate business is the idiot’s business, and I liked the sound of that. So so I had graduated college. It was in 2006. Couldn’t find a job. I was working part-time. It was the best job I could find. Part-Time as a bank teller at Chase Bank in the village of Pittsburgh, which is a suburb of Rochester. And I was just like, this absolutely sucks. And I was complaining enough to my dad that he was like, Hey, if you get your real estate license, you can, you know, I’ll show you the ropes. I’m not gonna give you any business. I have to earn as much as I possibly can. But that’s really what set course for that. ’cause I would’ve rather eaten a poop sandwich rather than go back in a chase bank.

Matt:
So I took any opportunity that I could, had a part-time job, working at a liquor store to make ends meet. And then finally, you know, I saved up about 16,000 bucks in commission checks. And my dad, you know, gave me the next blow, which was, Hey kid, you can’t live here anymore. You got until the end of the year to move out. So I liked the idea of not paying rent. Like a lot of like adult children probably don’t like the idea of paying rent. So I thought of my opportunity to, you know, to buy something, build my credibility as a real estate agent at the time. ’cause I looked young because I was 22. And so I bought a four family property, and that’s when I got bit by that bug. You know, I had eight 8, 18, 50 1000, 850 bucks in rent check sitting in my mailbox, like as if magic happened after I closed that property.

Matt:
And I was like, all right, this has gotta be, this has gotta be the way. ’cause I knew how hard I had to work grinding, selling, like, you know, grinder city properties for like 40,000 bucks. So that was my way. And then I just knew that all right, this is my way to be able to replace my income. So I just started scaling from there. So for the next 11 years 11 years, 25 properties, seven, six doors was what required for me to replace my income. And then I started graduating into commercial deals and scaling from there. So

Charles:
You, you kind of man mentioned it as you were getting involved in being an agent. But was there anything I guess you didn’t see it from your family’s standpoint, but did, was there anything else that really pushed you into the realm of you becoming a real estate investor, not just a salesperson, which is, you know, what an agent is. I mean, so was there, did you see successful people you were working with that were making more money? What, what was the thing that said, this is not, this is, this is the side of the table I want to be on?

Matt:
Well, I saw my dad investing in real estate and lost his butt. All right. So I learned a lot that way. And that’s what I associated like being a landlord was, was you buy a property your tenants stop paying, you rent, you have to evict, they destroy the place. And that was just like, rinse and repeat of like, just a money pit. So I had that as an example of, you know, my dad did it. He wasn’t particularly good at it, but I didn’t really have anybody besides like, you know, the Robert Kiyosaki’s of the world to lean on from this, like, the ideation around passive ish income and building your wealth that way. So that’s really what kind of like, put me down the rabbit hole with with like starting and then scaling from there.

Charles:
Was your dad done after that first encounter?

Matt:
No. So he had he accumulated about 20 20 properties, about 40 doors over like a, you know, five to 10 year period. And then you know, the neighborhoods started to change after he had bought in those neighborhoods. And so so what ended up happening is he ended up having to, he held in these properties, kept them well maintained for like 20 years and sold them for exactly the same amount that he paid for them originally. Right? So definitely not a great hedge against inflation, right? So so that was, you know, kind of said. So he didn’t like lose at all, but it was just like, it was not the ideal model for, in which to build a real estate portfolio for sure.

Charles:
I imagine cashflow during that time, though. Oh,

Matt:
Cra cashflow like crazy in the beginning. Yeah. And then the tenant demographics changed, and the neighborhoods that he bought in you know, I mean, he was, there was a point in time where, you know, they were going on cruises, you know, he was buying like, you know, like like, you know my, my dad was like, you know, product of the seventies, right? Was like, you know, you know, wearing like, you know, fancy jewelry and that sort of thing. And then all of that stopped.

Charles:
Well, yeah, it’s one thing I found is if you’re, I don’t know what the market was like, but I found that, you know, you get that, you get markets that are very appreciation heavy. You get some that are a mix, and you get some that are really cashflow heavy. And where I started investing in central Connecticut the town I was in was, I mean, the population never really changed. It probably loses like, you know, I think I figured out one time when I sold my property, it’s like a hundred people a year or something. So it was very minor change, but very cashflow heavy, very appreciation, light, you know what I mean? Mm-Hmm. <affirmative>. And then you come down to where I am now in Florida and parts of Florida and it’s appreciation a little bit more on that end, but you’re still getting that mix of cashflow, but it’s nowhere near as high as the numbers, you know, different markets. So it’s, it’s pretty much, it’s really market dependent where I think in slower markets, you’re gonna have more of a cashflow play, I feel. So it’s not all bad. I mean, it’s just kind of one of those things that and also as that neighborhood changes, I mean, it’s like you have to adjust your investment strategy to kind of coincide with what’s happening there, you know?

Matt:
Oh, a hundred percent. I mean, I, I think, I truly believe that you should buy the most expensive real estate you can possibly buy in whatever market you have. Not, you know, knowledge with or with a sponsor that has, you know, deep, rich understanding of that marketplace. Because, you know, you’re not gonna get rich with the cash flow game. You’re gonna get rich on the, on the actual appreciation game by paying down debt on a desirable asset that, you know, maintains or appreciates in value, even if it’s meager appreciation of let’s say 3% per year. But it’s predictable. That’s really the model that I ended up diving into, buying in the most desirable markets in our markets, in our ne, you know, neighborhood, Rochester, New York.

Charles:
Yeah. That’s really, people don’t really wanna talk about it, but that’s kind of the one thing is when we’re reaching out to if we’re reaching out to people that own properties and trying to, you know, buy ’em from them, you know, maybe they’ve owned for 10 or 15 years, there’s one like theme. You have a lot of these mom and pop investors, is that there’s no more no mortgage, whether they started with it, maybe they had 20 years on it and they paid off early, or whatever it is. And that’s really the key to building wealth in it. It’s very difficult, like you said, to, you know, make $150 a unit on an ongoing basis every month for the rest of your life, there’s gonna be, you know, expenses to come up with it. The real game is really kind of paying down that debt.

Charles:
And as you pay it down, your, you become, your property becomes in a, it just becomes all safer, right? Mm-Hmm. <Affirmative> it becomes safer. Like now, if you have a balloon payment, it becomes a lot easier to refinance <laugh>. You know what I mean? It’s a lot easier to refinance a property when it’s a 50% loan to value than a 75% loan to value. Mm-Hmm. You know what I mean? Mm-Hmm. No matter what the market is, especially if it’s a bank that you’ve had years of a relationship with. So that’s just one thing. So, yeah, I, I totally agree with what you’re saying there.

New Speaker:
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. And 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 invest with harborside.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 invest with harborside.com. That’s invest with harborside.com.

New Speaker:
So let’s talk about, Matt, what you’re doing now. So you had an give us an overview. ’cause Oak Grove, your company, I mean, you guys are doing all different types of things within real estate. Can you give us an overview of really what services your company provides, and kind of an overview of what your current real estate investment strategy is?

Matt:
Our focus since we started Oak Grove was acquiring a historic adaptive reuse properties at a significant discount for the replacement cost. So we’ve our core focus has been in Rochester, New York. We haven’t gone outside of Rochester. And our competitive advantage to focusing on, you know, very, very intently on our own market is that we know every player we owe know every street, every block. And the niche that we got involved with is this. We just, I noticed that when I bought properties that I appreciated that had historic value to them, and you know, unique architectural features and history, even like with, you know, millennials and younger people, our like craving authenticity and you know, there’s nothing more auth authentic than like, you know, than going to these pe these pieces of property that are like a piece of art, for instance.

Matt:
And so I really dovetailed that passion with with acquiring properties that that, you know, people didn’t want anymore. So over the past few years, we’ve been acquiring properties that are, and I know this is gonna sound crazy, but acquiring, we’ve loved office properties post covid. There’s steep, steep discounts in o office buildings. And the way that we do the test of value on there is if this thing was, you know, if this thing was like, you know, vacant, for instance, could we rent it as like cold storage for like two bucks a foot and still make our monthly expenses? And if the answer is yes, then that’s something we’ll buy because we have, and assuming that it’s gotta be in a, a decent location, the reason why we loved office is because, you know, the investment community has really like thrown the baby out with a bath water and redlined that asset class out.

Matt:
So we’re definitely contrarian investors in that sense. And this is something where we can cut really, really aggressive lease deals and be, you know, and basically beat out everybody else that’s locked in at a higher basis on those on those properties so that we can quickly lease properties up. And then our plan B, if we can’t lease them up at a that produces cash flows that will pay for long-term capital improvements, then we can always pivot. And we’re doing this with a couple of our assets right now that we’re gonna be redeveloping into residential. And so we have a low enough basis on these deals where we can actually have somebody in the bone to be able to do that from an equity standpoint. And also the market is supportive of of market residential. Yeah,

Charles:
A lot of great information there. Before we get into the transitions into residential, ’cause I think that’s something that people hear and they think that’s a good idea. Can we talk about, as I understand, most of your properties are that have office, are mixed use properties. Is that correct? Yeah.

Matt:
The, the property I’m in right now, the Wilder building downtown, which is our next project we’re gonna be doing redevelopment on, is it’s office on top and retail on the first floor.

Charles:
Okay. So just so that’s what people know as mixed uses. My first commercial property was mixed use. And one thing I found when looking at these properties and underwriting them, and I by no means at that time or now a professional underwriter was, it was very difficult. I mean, it’s very difficult, especially when I’m buying these with a lot of vacancies in them. And you some, you know, usually you would have a commercial vacancy in them. So for me, coming from more of a residential background at that point of a few years and getting into this what I did to limit my downside was saying that 90% of like the rentable square footage in this property had to be residential. And then that way, I don’t know what I’m doing with this commercial. I mean, I might rent it for a thousand, I rent it for two 50.

Charles:
I, I really didn’t know. So that was my way of kind of hedging my downside without really knowing what I was doing. And just tell us about like, how you would do it now when you are valuing a mixed use property, and why this is difficult is because, you know, the apartments might be easier because you might say, a thousand square feet, two, one, this is what it goes for. Across the street, there’s gonna be a lot of those comps everywhere that people can easily find. But when I’m getting into specialty, you know, older properties have units that are a little specialty more, which is like, you know, you, you don’t have a building of just all the same units, you know what I mean? You have one, this is a little smaller, this is an attic apartment, this is like, you know, was a closet that’s now an apartment legally somehow.

Charles:
And then when you have in the commercial sense, you have different, you know, it’s where the location is. So, I mean, of where it is on the building, you know, where the parking situation is, I mean, how it’s already built out. The other thing too is that you have a lot of people down in town hall that are telling you in the building department what can go there, what can’t so that limits your tenant. So that’s a lot. This is a huge question, but I’m just saying like, how do you value, what I’m saying is how do you value this mixed use property? Because I imagine you’re going into and to, to build its value, you’re gonna have some level of vacancy in there. And yeah. How, how would one value that correctly and how do you do it?

Matt:
It’s actually super easy. So we buy based upon in-Place leases and in-Place income. So if we buy a property that’s at 50% occupancy, we give no credit whatsoever to the 50% that’s vacant. So that’s how we are able to buy a bar margin of safety. So we have 50% of the building that can sit vacant for years on end, and we can still actually cash flow and and, you know, make our debt service and pay our investment partners, then that’s a deal that we’ll do. What’s very common in multifamily, for instance, is that you’re giving credit for a certain amount of vacancy, like even on a distressed deal, right? So with this, and the reason why we like it is that every lease deal that we sign is pretty much a hundred percent profit. So it quickly drives up net operating income on those opportunities that we do buy.

Matt:
So that’s how we do, like, you know, your sort of distressed, you know, poor occupancy commercial assets, and at least that’s how we do it with a hundred percent vacant buildings. The test of value that we do on that is like, okay, what is, what is cold storage rent for out here, like bargain basement, like, you know, the cheapest of the cheap type of rent. And that’s how we base our offer prices on. So like next door to this building, we bought a building probably about three to four years ago. It was a hundred percent vacant, and it was a 22,000 square foot six story building. We bought it for 175,000 bucks. How we determined that offer price was based upon that cal, that calculus, all right? They were asking like $350,000 for it. And I was walking through it with my partner David, and I was like, is this thing worth three 50?

Matt:
And he is like, nah, I’d have to think about it. I was like, is it worth 300? And it’s like, ah, I still have to think about it. And I was like, two 50, same answer, 200. I was like, what about 150,000? He’s like, that’s a no-brainer, right? So you have to acquire these assets at like a no-brainer, like, like bargain basement type of price. So then you can actually go through the business plan and do that. And we were able to lease up that building within within, I think it was like nine to 10 months, we were able to push the value of that building from 175,000 to 600,000 bucks. That was one of our smaller deals, but it was a, a strategic value to the property. We had over contract the Wilder buildings, which sat right next door to it because we needed to have a second means of egress if we were gonna do a redevelopment to have a second sta second stair tower and also have a cooling tower placed on top of the the, the shoulder, the shoulder building. So we didn’t have to get as big of a crane to, to bring a a chiller in.

Charles:
Wow. That’s, yeah, that was my mean, my question is that when buying older properties, especially ones that are vacant like that, I mean, there is a ton of regulation that goes into it. I mean, just dealing with the fire marshal, I mean what goes through it? So with you buying it that lower price, it allows you whether there’s a fire alarm that has to go in or whether there’s a sprinkler system, whatever it is like you said which is which is all the thing when we we’re buying old, you know, older properties, a hundred years old properties, the the two means of, you know, ingress egress kind of thing. And it was just a yeah, it’s, it’s something difficult and making sure that stuff is grandfathered in because not every unit has it. And yeah, it becomes, it becomes difficult to buy properties and you really have to buy ’em with so much, I mean, so much of a level, like you said safety margin, you know what I mean, that if, you know, the fire marshal comes in here in a year from now and says, you need to put a staircase down here, or you need to do this, or you need to do that you have money available ’cause you bought it at such a discount.

Charles:
And it’s important to let you know whoever you’re buying it from know, but they probably already know. I mean, it’s out there already. They have an idea of what this pushback’s gonna be from. I imagine their brokers told them.

Matt:
Yeah. And the thing with at least as it pertains to code in Rochester, for instance, is that if you are keeping the same use on a property then that will be grandfathered in. It’s when you start changing uses from like, let’s say office to residential, then that is what’s gonna trigger if we change an office to like, let’s say a, an event like an event space or a, a place for assem, like a assembly class, right? So that is like where you, and this is the really, really great advantage to, you know, focusing on like a few key markets. So, you know, okay, I know the building department, I know the zoning department, I know what makes them tick. I know the actual zone like zoning codes and building codes for this area so that you can manage your your risks and expectations through the process.

Charles:
Yeah, that makes perfect sense. And as a segue going into how you guys are transitioning from some units, maybe to commercial to residential, my first office I had in Connecticut, literally, this was a old factory, and this factory was so big, they had 22 acres of factory floor. I mean, that’s how large this, this yeah, this thing was. And when I look at that and I go, you know, it sounds great from the outside when I’m driving by, I can make this into apartment building, but then I walk it and I’m like, like, there’s gonna be apartments here with like no windows. Like how, how do you go about like, designing that and like the feasibility? ’cause A lot of, when I speak to contractors that a big thing was that years back was that motels into apartments, right? And every time I talk to, especially electrical contractors, they’d say it’s the electrical, electrical is so expensive to redo these properties. And I always ask people that when they’re doing it. And so what would be for you, I mean, what are some big hurdles that you guys are overcoming in the design implementation of that business plan?

Matt:
So the great thing about buying buildings that, like were built in the late 18 hundreds is that they depended a lot on natural light. So a lot of these buildings now, so this is a plus and a minus, like a double edged sword, right? So a lot of these buildings were built with a lot of windows. So this building I’m in right now, it’s in a, it’s in a U shape. It’s got windows on all, basically on all sides, right? Because they depended upon a lot on natural light, right? ’cause They had natural gas to actually provide light in buildings, not electric. And so that’s one thing, the one additional thing that makes it difficult is when you’re redeveloping the building and you’re utilizing historic tax credits like we do for these projects, then usually your historic preservation consultant is going to require you to keep any windows and rehab them that that are, you know, in the building. They’re still like functional, for instance, or even semi-functional. So that, you know, the window project, you know, if we could replace them all with like, you know, black vinyl replacement windows, which you wouldn’t know the difference standing at the curb, like that would be a savings of probably several millions of dollars, especially in a project this size

Charles:
When you are when you’re working with commercial tenants and commercial properties. Another issue I’ve had from my past, which you can see why I’m not like a huge commercial real estate investor, but for a commercial unit type investor. But the thing though was that finding and underwriting good tenants. Now obviously if I was renting out a space for a large national chain or tenant, that’s a whole different thing. I can ask for anything and they’ll provide it to me and it’ll be great. But we’re talking about going to older properties not class a office space. I mean, how do you effectively underwrite tenants in these spaces where people are just starting their businesses, maybe they don’t have the finances, they don’t wanna sign along, lease you know, go kind of go through a little bit about that. It’s pretty straightforward, we know with apartments, but how would you do it with commercial?

Matt:
Yeah, with commercial, I mean, we’re definitely taking a look at their personal assets and do they have a significant amount of liquidity to weather the storm? A lot of people that are starting up a business or expanding a business look at their projections with rose colored glasses, right? And I know as well as my partner knows, like it’s going to, like, it’s gonna be a tough run for the first couple years, so you’re gonna be, you know, sinking money into this thing over that time period. So that’s number one thing that we look at. We’ve taken chances on people before that maybe were light on liquidity but, you know, we’ve required a, a, you know, personal, a personal guarantor, like a co-signer that does have those assets. So we at least know now when it comes to enforcing a personal guarantee, are we gonna go through the entire process of doing that and getting a judge and getting a judgment that we might get paid on?

Matt:
You know, probably not, but we know that they have a support system behind them, right? Somebody else that actually believes in their, like, in their idea. And then credit score. Absolutely. I mean, we run credit score like the exact same way we do for for residential. And so, you know, looking at something that’s, and we, and it goes on a property by property basis based upon the type of like, you know, tenant mix we have with a pro with like, with a specific deal that we’re working on. But, you know, generally speaking, we’re gonna require a credit re credit score range that’s higher than would be for residential. We’re, we’re looking for people that, you know, have a good idea, have a good idea that’s actually gonna have harmony with the existing tenants in the building and with the tenants we wanna curate for that building as well.

Matt:
A lot of people are just like, this thing has been vacant for six months. Like, I’ll take anybody at this point in time. And then you end up putting in somebody that’s got like, let’s say a, you know a recording studio and it’s next to, you know an accounting firm for instance, right? That’s not gonna be a great mix between those two uses. So just, it’s a little bit more complicated on and not so black and white when you’re doing residential, but commercial is also a lot less regulated than than residential. So if you like, and this is gonna sound really horrible, but if you’re like you, you’re gonna do essentially like gut checks with potential tenants you’re gonna sign leases with. And I use instinct a lot when I am evaluating potential commercial tenants. Absolutely.

Charles:
No, I mean, I think people are using instinct anyway when they’re speaking to the first time with that potential residential tenant. You know what I mean? If they’re rude on the phone or they’re not answering the question or they’re you know whatever it is, it’s, you can kind of gauge somewhat to some level, I mean, just by speaking to someone for a few minutes. So it’s I think a lot of it is that, but kinda moving forward here too, you mentioned this earlier on about your goal of being financially free building up over so many years to go into 70 plus units, and you’re able to reach that goal when you’re 33. You know, one thing I find when people are going from, like, you start with $16,000 to building a $15 million portfolio, and real estate’s a very capital intensive business. So I mean, how did you grow those assets? Was it really a lot of financing that you worked, a lot of terms that you worked? I mean, what was coming some of the basis for you being able to do it other than you being a very hard driven worker?

Matt:
So a, the first chapter, right, in my small multifamily residential career was a lot of seller finance deals. A lot of deals where I was purchasing properties with hard money where I was able to increase their force depreciation over a short period of time and then place bank financing on that and not have my own capital as a bottleneck to that. And I was having hard money lenders that, you know, they’d write checks for like, let’s say say 300, maybe three 50 tops, right? When I started getting into, you know, million dollar plus deals, I went back to those same hard money lenders and like, I don’t, like, I don’t have cash that big. And certainly if I did, I wouldn’t be, you know, overexposed with you. So that was the first time, like when I first bought my first like you know, million dollar plus commercial deal was an office building, and it was, it was a million dollar deal, and I had to come up with $300,000 in cash I didn’t have.

Matt:
So I went back to those hard money lenders. I was like, Hey, I need 300,000 bucks you lends to me before, can you lend it to me again? And this is my business plan and, you know, I paid you back and, you know, with, with interest and on time and ahead of schedule and all that stuff. And they’re like, is it in first position? I was like, no, the bank’s gonna be in first position, right? And like, and there was like a hard pass like on every single of these lenders that I worked with, even though I had the relationship, it’s just sort of so much outside of their brain chemistry that’s just like, that’s like an antithesis to what they, you know, to what they know, right? So then I started having to go to non-real estate sophisticated people for private money, right?

Matt:
And if you, you know, if you pitch an opportunity where somebody can earn an 8% fixated return, partially guaranteed by you you know, paid back with their principal in less than five years, you present that to somebody and they’re like, where do I sign up? Right? You present that to an experience like real estate investors, like, well, you know, I can get 15% do like doing on my own or just lending it out to somebody else. So it was a difficult transition to going from, from hard money lenders to to what I call private money lenders

Charles:
When you’re doing those deals because this is something that people might be interested in doing, and I’m interested in learning how you did it, but you were, so you’re going to the bank, you’re getting your 70%, let’s say, loan to value. Then you’re going to private lenders, you’re gonna get your 30%, they’re gonna be, are they actually getting, you’re getting multiple people to put this 300 in. How are you structuring that? They’re gonna have an actual mortgage on it, second position, and everybody’s wrapped into one. So it’s like an LLC that owns that mortgage and it’s all your investors. How does that work?

Matt:
Promissory notes to our, to our LLC? Yeah, it’s a straightforward as that and it’s col collateralized by our membership interest in the actual property itself. So it’s not a more, it’s not a mortgage or anything like that. I’m

Charles:
Sorry. ’cause The thing is that you’d have an issue with your bank, so you just explained that, correct, yeah.

Matt:
Yeah. So, and then your, your bank may have an issue with that either, like in some cases, right? So it’s like, okay, well, is, are you still able to make these people’s payments and also make a debt service coverage ratio of 1.2 to 1.25? So there’s a, there’s that, and most banks, if you have a great relationship with ’em, a great track record and a great reputation around the community, because bankers do talk to each other generally speaking, they’re more flexible and working with you on creative creative financing and that sort of thing.

Charles:
Yeah, it’s all the relationships. I found that so much in getting into small commercial deals. Anything like that, when you’re dealing with it’s local banks, it makes all the difference and they provide deal terms to you and specifics that are really just unmatched between banks and local credit unions. So great information there, there. The other thing I found when looking into doing financing, like you were just saying, is that the banks also don’t wanna butt heads if you have to foreclose with another lender, right? And it’s interesting because this model is done all the time in residential personal primary homes, right? You know, one bank somewhere has you know, the the first mortgage on it, and then some local bank, you know what I mean, he’s picking up like 10% or something like that, or giving you in like an HELOC or something.

Charles:
But when you’re getting into commercial it’s a whole different story with that. So I think that’s one thing that investors aren’t really, maybe new investors aren’t really sure about how they can structure it, but promissory notes. I know another investor here locally where I am here in Florida he does the same thing when he flips houses. So he’ll get a, he does like luxury flips, and he will get a, he’s buying a $3 million property. He’ll get two and a half million dollars from a you know, from a hard money lender. And then he’ll get the rest, like all in just increments from in promissory notes for people that he knows really well. So it works well and it doesn’t scare off, you know what I mean? It doesn’t scare off that hard money lender saying that, hold on, there’s gonna be someone else here. It’s like, it’s just you in line. You know what I mean? And then they’re just got your membership shares. So they get like, you know, fir first right. To that.

Matt:
Yeah. I mean, and, and that’s the great thing about deals you can do, like, you know, marrying hard money or seller financing with private private money via promissory notes, is that you don’t have a bank you need to like open your kimono up to, all right, so like we’ve, we bought deals through conventional bank financing and then we bought deals direct to seller with seller fin with seller financing. And also through brokers too. There’s a, there’s definitely, you know, a lot of people, you know, put shade on brokers for like, well, you know, they’re not, you know, they’re gonna shoot down seller financing before they even like, present it to their their client. But I always do two offers when I make an offer on a deal, or even three offers, right? I make a, you know, cash offer with bank financing and I’ll make another, you know, another offer or two with some type of creative or seller financing deal. And also in articulating in that, that, you know, there’s also, you know capital gains deferral benefits from doing an installment sale via seller financing too. So,

Charles:
Yeah, no, a lot of great information there. I found that when you’re dealing with sellers, it’s easier to bring up seller financing when you are going straight face to face with ’em. And then I’ve also found you know, there’s, they’re finding out what the seller really wants, whether it’s that top price, whether if you’re, if they’re taking terms, if it’s gonna be the interest rate or the down payment, and if you find out what they really want and what they’re really focused on getting, and then you kind of build the rest. And usually it’s not the down payment. It’s usually like getting that price and whatever they have to do. That’s how I found it over the years.

Matt:
Oh yeah. It’s, it’s a, i I think that there’s, there’s psychological like anchors in all of these sort of these sort of moving parts with the transaction. And I mean, I was victim of it myself. Like I, I had a deal that was off market. It was 17 units that I sold earlier this year. $1.8 million was my price, and I wasn’t gonna go a penny below that, right? So I got an offer from somebody for 1.7 million and I was like, I’m not, I won’t take it, but I’ll, I’ll get creative to get to 1.8, right? So they said, okay, well you can hold, can you hold a second mortgage for a hundred thousand bucks with no interest and no payments for five years? I said, done. Sure. So we made a deal.

Charles:
Yeah. And now it’s backed by, you know, backed by the property that, you know, so there’s, it’s even safer than if you were just a hard money lender with a property and that you didn’t even know about. So I find that much easier because it’s, it’s something they know, they know that property better than anyone in the transaction, and if they’ve owned it for so many years, they know all the ins and outs of it, and it’s most likely gonna be a safer investment than any other lender coming in to put that money down. So they’re most likely to go a little higher on that of what I’ve, what I’ve found. And it makes sense. If I was in the found selling property that I own, I would probably do the same thing.

Matt:
Absolutely.

Charles:
So as we’re kind of like closing up here a little bit, there’s one thing I know last time we spoke and it was kind of off air when you were interviewing me for your podcast. And one of the things you mentioned is that in all these different commercial deals you had won and you turned down a rent increase of $5,000 and kind of stuck with me and I, we didn’t get into it too much, but can you kind of give us that story of you had a tenant, they, you said you weren’t gonna renew ’em, they said they were gonna give you an extra 5,000 a month. You turn it down still

Matt:
<Laugh>. Okay. this is another benefit to not, you know, not having equity partners. So, which, which I, I’m sure that there’s a lot, not a lot of other people out there. So they can, they can speak to that, but I prefer to have straight up just to capital, capital stacks where it’s myself or myself and my partner David, that are calling the shots and what we feel is best for the community and best for the deal and best for the subject neighborhood that it’s in. So there was a mixed use, a 28 unit mixed use deal that I’d acquired probably about five years ago. There was a company that I can’t, I can’t name names, but to, you know, to protect the the innocent here. They were in the business of renting out furniture, right to low income people.

Matt:
And it was a, you know, very predatory business model that wasn’t in alignment with my values. This property was two blocks away from my house, so it was just an element that I just didn’t want in part as part of our neighborhood. So they had a five year renewal option that was undefined. So that was like my little, like, when I was doing my lease file audit during due diligence, I was like, alright, that’s my way, that’s my way to get ’em out. So they had they said, okay, well we’re paying 2000 bucks a month now. We’ll pay, you know, we’ll offer 4,000 a month. And I was like how about 12,000 a month? ’cause There’s Starbucks right down the street that pays 28 bucks a foot, and you’re proposing to pay 11 bucks a foot.

Matt:
And so then they counter, you know, then they counter back and then, you know, eventually we got ’em up to $7,000 a month, which is $5,000 more. And and then, you know, I countered ’em back again and then they walked. And so, and then, you know, we reprogrammed the retail for that mixed use, mixed use building. It’s just so much more of an asset to that neighborhood than what was there before. So yeah, I mean it’s like, and believe me, it was tempting when there were, when there were up to $7,000 a month, I was like, I don’t know, maybe I could like, you know, do that and then I could, you know, I could you know, gi give some money to the neighborhood association for, you know, neighborhood improvement projects and that sort of thing. But I ended up just like sticking to my gum guns. I promised myself that I was not gonna have them there. And I didn’t wanna break that promise to myself nor the other people that I told that I told that that I was gonna do that to.

Charles:
Yeah, that’s great. I mean, more power to you. There’s a lot of real estate investors that would not have made that trade off. That’s why I wanted to bring it up here, <laugh>. Because everybody tells you about how they want to help the community and you know, I understand, we know we’ve fixing up stuff, it makes it better. I got it. But that is something where you’re actually changing right away the trajectory of a neighborhood, because they’d probably be in there if they got renewed, you might sell it and they’ll still be in there, still paying the rent increases. And I imagine a corporate tenant or corporate landlord comes in and buys it from you they’re probably not gonna have as much of care for that neighborhood as you do. Yeah,

Matt:
No, absolutely. And that’s, and that’s why like, you know, we, we do equity participations with the larger deals that we do, but I think that we have like these like two different types of deals that we do, right? We do smaller deals where we keep all the equity, so then we can actually call the shots that are in alignment with our values. Like, listen, if this was a, a deal we had equity partners on, and now there’s like a, now there’s a fiduciary responsibility there. Like, you know, we would’ve probably been forced to do that deal, right? But we, but we didn’t because we didn’t have that structure

Charles:
For sure. That’s a, that’s a, a great model. As we’re kind of finishing up here, I mean, what are some common mistakes you see real estate investors make overall your years, almost 20 years in the business?

Matt:
Oh, God. Just not I dunno, there’s so many ways I can answer this question, <laugh>. So I think that, you know active investors you know, focusing on the relationships first before they start going out there and looking at looking at properties, you know, I, the mantra that I hear all too often is, you know, find the deal and the money will come. You know, I think that it’s important to start quote unquote raising capital before you need it via via relationships. ’cause Relationships only move at the speed of trust. And so I think that’s the biggest mistake that I, I see, I see out there. And they might, that might work in smaller residential, but it does not work in, in, in commercial when you’re, you know, raising in invest investment capital from from private money for sure. Yeah,

Charles:
No, that’s a great one. That’s the first thing when I’m coaching people, that’s the first kinda conversation we have. Are you, is there any chance you’re ever gonna raise money in the future for doing this? Or is this like your own money? And usually they say they are, and I’m like, all right, now you have to like, start putting together the database. Like this is a whole thing. You know what I mean, of potential investors. So Matt, how can our listeners learn more about you, your business and and your podcast?

Matt:
Yeah, we host the podcast on our YouTube channel, and then I put on a lot of like, long, long form educational content on the YouTube, on the YouTube channel. You know, I’m all over social media. It’s, it’s my, you know, it’s my job with our company unfortunately is to be on the marketing and sales side of side of things. So but YouTube is probably the best way for me to give you as much value as I possibly can. And you know, feel free for anybody that’s listening to reach out to me. I’m an open, I’m an open book. There’s no secrets here. And I’ll stand by it. It’s still the idiot’s business, even though though there’s a different order of magnitude.

Charles:
<Laugh>. Well, thank you so much for coming on today, Matt. I’ll put all those links into the show notes for your business and your podcast, et cetera. So looking forward to connecting with you here again and sometime in the future.

Matt:
Absolutely, Charles, thank you.

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.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

Links and Contact Information Mentioned In The Episode:

About Matt Drouin

Matt grew up in Rochester, NY, as the son of a dialysis nurse and general laborer at Genesee Brewery.  After losing his parents to health issues in his 20s, Matt descended into an existential crisis.  How could two hard-working Americans who do everything the “right” way struggle financially their whole life and then die young with little to no savings?  Matt looked around and found that his parents weren’t the only people who were victims of this, and if he didn’t do something to change his trajectory drastically, he would wind up the same way.  He wanted to be present for his family.  He never wanted money to be why he and his family couldn’t act on their dreams or aspirations.  He needed to find a way to “exit the Matrix.”  His lifelong goal was to become “retired” by his 40th birthday.  Building wealth in real estate was the way.  After obsessively pursuing this lofty goal, thinking about it every day for over 10 years, he achieved financial freedom by his 33rd birthday.  You might think that this moment was euphoric; however, the moment Matt realized that he achieved his lifelong goal, he descended into depression.  After spending weeks introspecting and reading, he was able to reinvent himself and develop a new vision beyond the confines of his life on Earth so that he would never have to go through the painful process of reinventing himself.

Today, Matt is a partner at OakGrove Development, a real estate investment and development firm focusing on value-add commercial and residential properties in Rochester, NY. Over the last 18 years, Matt has been in real estate management, brokerage, and development and has grown his portfolio to 176 residential and commercial property units.  His company mission is to develop real estate projects that add value to their investors and put long-term community interests front and center.  Matt believes that you can do well as a real estate developer and that community-centric development ultimately boosts long-term profits for investors.

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Scroll to top