Brett Tanner and Katelyn Mitchell break down how Brandon Turner raised $25 million to buy a 388-unit apartment building, then lost $15 million of investor money. Brett puts the blame on the loan. They walk through the cap rate math, the 4-year adjustable loan on a 5-year hold, and the five structural reasons real estate syndications die.
Brett TannerHost, founder of Be Wealthy
Katelyn MitchellCo-host, runs operations for BrettBrett says investors have been doing cash-out refinances since the 1970s, and Brandon Turner's BRRRR, buy, rehab, rent, refinance, repeat, is the same move with new branding. His concern is pulling 100% of your capital out almost immediately instead of waiting years for real equity to build.
Jump to 4:05Turner raised $25 million, split into $10 million of class A shares and $15 million of class B shares, to buy a 388-unit Class A apartment complex in Houston at the end of 2021. County records show a purchase price around $66 million, though Turner has cited $72 million.
Jump to 29:02Brett illustrates it with a building earning $200,000 a year: at a 6% cap rate it is worth $3.3 million, but at an 8% cap rate the same income only supports a $2.5 million price, a 30% drop with no change to the property itself. That is the mechanism that sank this deal once rates reset.
Jump to 23:50Over the roughly 5-year hold, Turner's team did raise rents 33%, more than Brett initially gave them credit for. But taxes, insurance and other costs doubled in the same stretch, which Brett argues actually left them about 65% behind on fixed costs.
Jump to 35:15The deal used a 4-year adjustable commercial loan against a 5-year buy-and-hold plan, forcing a refinance before the hold was even over. Rates reset about 500 basis points higher, which Brett says is what actually killed the deal.
Jump to 35:15Of the $25 million raised, $10 million came in as class A shares, mostly from the sponsor's inner circle and larger investors, and those were paid back in full. The $15 million in class B shares, held by people who put in less money, were the ones wiped out.
Jump to 36:18Turner refinanced his personal home and put $200,000 of the equity into the deal to help cover the shortfall. Brett says that gesture looked good on social media but did almost nothing against a loss that size.
Jump to 41:29Brandon didn't lose because of the market. They lost because of the loan.Brett Tanner · at 48:50
Tap any chapter and the video starts right there.
“If the dreams are big enough, the facts don't matter.”
Brett Tanner at 8:15See how a cap rate change swings a building's value the same way Brett breaks down the math that sank this $25 million deal.
Brandon Turner raised $25 million to buy a 388-unit Class A apartment building in Houston at the end of 2021. He used a 4-year adjustable loan on a 5-year hold, and when rates reset about 500 basis points higher, the deal became insolvent and the $15 million in class B investor money was wiped out.
Brett says BRRRR, buy, rehab, rent, refinance, repeat, is a rebranded version of the cash-out refinance real estate investors have used since the 1970s. His concern is pulling 100% of your capital out almost immediately instead of waiting years for real equity to build.
A commercial property's value equals its net income divided by the cap rate, so when interest rates rise and cap rates rise with them, the same income supports a lower price. In Brett's example, a building earning $200,000 a year drops from a $3.3 million value at a 6% cap rate to $2.5 million at 8%, a 30% loss with no change to the property.
Brett says to ask how much of the general partner's own money is in the deal, their track record completing deals full cycle, exactly how they plan to grow the property's value, the debt structure, what the operating agreement allows, and when you get your money back if the deal goes sideways.
Of the $25 million raised, $10 million came in as class A shares, mostly from the sponsor's inner circle and larger investors, and those were paid back in full. The $15 million in class B shares, held by people who put in less money, were the ones wiped out.
0:00Imagine you are a real estate investor in the 70s and you bought a property and it went up in value and then you refinanced it. Since the history of time that was called a cash out refinance.
Okay.
I think you're missing it. This guy renamed it Burr. He just lost he just torched $15 million of investor money but Katelyn I have an issue where people use a platform to raise money from others. And then light it on fire. Brandon didn't he didn't lose because of the market they lost because of the loan. Welcome back to the Be Wealthy podcast. I'm Brett Tanner this I'm joined by my co-host Katelyn Mitchell. The Be Wealthy podcast where we help real estate agents, real estate investors, and entrepreneurs make more money and then we show them what to do with it. Today Katelyn I am very excited. The internet is a buzz. Uh it is out there everywhere any platform you name it. The guy called this is going to blow your mind. The guy that created the Burr. And for those of you that are familiar I'm not talking about getting cold I'm talking about something super cool. I'm talking about something so sophisticated this concept that he created of the Burr.
1:02I mean What? You take something and you just name it something different but it's still the same thing. Imagine this. Imagine you are a real estate investor in the 70s and you bought a property and it went up in value. And then you refinanced it.
Okay.
I'm imagining.
Since the history of time that was called a cash out refinance.
Okay.
I think you're missing it. This guy renamed it Burr.
Ooh the classic rebrand.
What? He Now what does it stand for? You buy I'm already cool on step one I think I've got it. You rehab okay. You rent it out you refinance it and then you repeat. Wait hold on. Boom Katelyn are we going to need to go get Kleenex for your mind just exploded I think what I did.
all over me.
You were you you weren't Did you Did you miss it though? Before in the 70s it was a cash out refi.
But 2017?
You go 2017 you get on some bigger pockets and you take the same thing and rename it financial wizard. So this guy Brandon Turner I think he's a nice guy. That's what others tell me. And he just lost he just torched $15 million of investor money
2:05today, and nothing's really happened in the economy yet. I mean, if we're being honest, I mean, it's it's a weirder time, sure, but you torched $15 million, and he did like an apology tour on social media. You know, it's very popular these days, right? Instead of just, you know, owning your losses, you kind of go out to the marketplace to get a bunch of people telling you like, "Oh, you're so like honest and vulnerable in sharing how you lost all of your money." Like
yeah, it's like the celebrities rehab, right? Don't worry, we're going to go to rehab.
You know, what I'd like to see is the video of the grandmother's money who lost everything because of this guy who used a platform to raise money and took exuberant like just a crazy amount of risk. And that's my issue. Like, I'm sure it was all well-intentioned and great, but Katelyn, I have an issue where people use a platform to raise money from others, and then light it on fire when I bet you Brandon lost less than $15 million in this deal {slash} probably zero. And so, I think we'd walk Let's walk our audience through cuz this is out there.
Sure.
3:07
Syndications are are out there, and and not all syndications are bad. That's not what That's not what I'm saying. I do think there's a lot of syndications done by folks who've never done the thing they're talking about, raising money from friends and family to do something they don't even know what they're talking about because they went to one seminar and paid, you know, $995 to watch a a multifamily class online, and now you're going to be perfectly suited to go buy a $97 million apartment building. Right? It's just there's a few education pieces maybe between those two points.
Sure.
So, Katelyn, and you you get the bird, right? We've you you you understand the bird you Are you
Well, I think I think we should take a step back because this happens all the time. So, I have the opportunity to take a lot of the welcome calls of welcoming people into our mastermind group. And you do a lot of training and education around investing in real estate. And on I would say 80% of my calls, they ask me, "Does Brett teach the BRRR method?"
Well, I It's called a cash-out refinance.
This is what they ask me. So, we we're
4:09branding in a way like tissue is redone by Kleenex, right?
Yeah.
I'm telling you the BRRR method was the cash-out refi, right? So, it's discussed at a really high level and they say, "My model is BRRR. Is Brett doing BRRR? How do we BRRR harder? I want to freeze." Whatever it might be, right?
here's the thing you're not thinking about. What Brandon done is so genius. So, first of all, he created BRRR.
From a branding perspective, can we just say Brandon branded?
But hold on. You haven't even seen the next thing. Recently, I think this deal he sets up the roast.
Well, let me finish on Let me explain the BRRR method.
Okay. All right. I'm so excited because
I know you're just so excited to make the transition.
so excited. No, Katelyn, I get so excited because
the audience with you.
How many people create two acronyms that will live forever? One great one and then one that you're going to be branded, you know, kind of with a scarlet letter for a little bit.
So, the reason that you don't teach the BRRR method I I just I would like to drill this down because I think a lot of people are going to be listening who may be involved in the BRRR method and maybe
5:11utilizing it at a high level and not realize some of the dangers associated with it, right? The only The difference in the 1970s cash-out refi and the BRRR method that exists today is the difference in equity still in the transaction. So, your hot button on the BRRR method, that has been for a long time, is that you find our clients or our prospective clients could harm themselves by over-leveraging the real estate, pulling out the cash-out refi, putting it into something else and not having the proper cash flow, expense loads. It's a mathematic equation. And for you, the BRRR method got so aggressive and so lean, you said I'm not against that. What I am against is over-leveraging your real estate in a way that compromises the equity position across your entire platform. I just want to make sure people understand why you're polarizing about the BRRR method.
Well, and I I think you're That's a really good point, I I The reason I'm against it because if you owned a property for 10 years or something, okay? You bought it. And then 10 years from now, rents have gone up and you've
6:13improved it and you've added more net operating income. And then you go do a cash-out refi
Yep.
and you still have crazy cash flow, makes total sense.
Uh-huh.
The problem I have with the BRRR method is you're not waiting the 10 years. Nothing changed in economics. It's literally how quick can I buy it, rehab it, rent it, and just rip all my money out of the deal. And what makes deals cash flow is typically your investment going in, the equity piece that you alluded to. And so that The problem I have is very few properties today. I bet if you and I ran a thousand today, would it make sense for us within a six-month period or nine-month period to buy a buy a property, get 100% of our capital out of it with today's interest rates, and it's going to cash flow dramatically? So that whole idea, the reason why it's popular, it's the same reason that subject two's popular. Because anything where you highly leverage capital, and you can take an unsophisticated audience, and with limited capital, and show them how they could become millionaires and billionaires, will always be the sexiest thing ever.
You're going to be able to sell a lot of nonsense.
You will sell courses like you can't dream. However, it doesn't really work. And the people It doesn't create durable wealth
7:14and it causes a lot of pain. And
Well, I'll tell you, that's why most people don't think that you have the sexiest model that you teach, right? Short term.
rich slow?
Yeah, people don't find that wildly sexy, Brent. I've been along this ride for a long time. People aren't running through the streets for that model.
Warren Buffett and I love it.
But I will tell you, the model for our mastermind members who've been with us for a long time and all your private clients, it totally works. The problem is you have people out there selling things like the BRRR method to move faster, go faster, over leverage, no cash needed. And that is super scary for people. So, you always warn people against that. I want to make sure I went back in
That's really important. And it doesn't sound as cool, Katelyn. It doesn't sound as cool.
Yeah, when you say, "Where are you going to be in 30 years? You can be anywhere you want to." People have hard time with that when someone else is telling them, "You can go ahead and do all of these things and over leverage yourself and have everything you want and get super rich within 12 months." That's easier to sell.
It's it's way easier to sell. And it doesn't work and it never happens, but it doesn't stop people from, you know,
8:15going on the internet and it's the faces.
Or looking at the nightmares.
You know what they say, Katelyn? And there's a great quote out there, Cole. I don't know if you've heard it. And I think it applies to my buddy Brandon Turner here. If the dreams are big enough, the facts don't matter.
Yeah.
was the old Amway slogan. The dreams are big enough.
Was that really theirs? I mean, that was not their slogan. That's the slogan you gave them.
Cole, actually, would you Cole, would you fact-check that that if the dreams are big enough, the facts don't matter? I'm pretty sure that's Amway.
Brett tries to recoin things for people. I was listening to
Well, you think I made the First of all, I made that up as the greatest thing ever. And I would love it I would love it to be my own Okay. You know, you don't think it's me? So, you you literally don't know who it is.
You have no idea. I don't have a clue.
You have no idea who it is, but you sure know it's not me.
Sure as heck no.
It's just a motivational phrase. I use it when I use it in a context Here's how I use it, Cole. Someone says something completely insane, like I'm going to do a BRRR, and I'm going to make a million dollars, and I go, "Whoa. The dreams are big enough, facts don't matter. Why lock yourself down? Why don't I sell real estate on Mars right now?" So, what's cool
9:16
dreams,
So, speaking of dreams, the Justin attorney, he went from the BRRR, which is the buy, rehab, rent, refinance, repeat, to what I'm calling the roast.
Wow. Cole versus warm.
Obviously, it's a new thing. It's the same energy. It's just a little spicier.
Okay.
Okay? You're going to love it. You You raise a fat fund off a webinar. Okay? You use your platform to go get a webinar. Then you overpay for real estate at the top of the market. You really got to get in here
right at the peak.
Like, you know what? It's just crest, you go bam, that's me.
this is what the top of the mountain feels like for the market.
This is the 16th value add in this apartment building. I'm going to value add value. Then you go, what do you do? A, we're on A, so we we've raised a fat fund, we've overpaid the top of the market. Now we're going to acquisition fee, asset fees, all the fees. Got to fee this thing out.
is going to collect all this, right?
he
I mean, 2% here, 1% here, 4% off the top, 4% gross rev.
Hey Brandon, I'll fee, fee, fee, fee. Brandon, I'll put it out there, I'd love to have you on the show. I think it'd be a blast. Let's just see at the money you put in and then let's look at the fees that you raised and how much money you actually
10:17profited from a deal that cost people 15 million. And if you're willing to share all that, brother, let's do it. But the reality is you made a lot of fees and you torched people's money. The S, here it comes in, you sink underwater when rates climb. By the way, rates didn't go from 4 to 17 like 1987. They went from 4 to 6 and instantly they were shattered. And then you just tell the LPs, which are your investors, ah, market got us on this one. So that's the roast. Raise a fat fund, overpay, acquisition fee'em, sink underwater, and then tell the LPs kaboom. I'm on my apology tour, catch them next cat time, guys. Let's go get it. And so, what Katelyn I want to do here
is let's like have a walk-through when you're thinking about making an investment like this. Katelyn, we want to help our audience to not do it because I think a lot of people go, hey, I don't have access to this 97 million dollar asset or 72 million dollar asset. So I I need to I want to get in with other people on it. And so I'm not saying there's not great operators out there cuz there are.
There's fantastic operators out there.
know how many of those operators were influence influencers turned operators.
11:20I think that number is shockingly less. However, and and the interesting a lot of syndications are ran by influencers, so that's the part that might be confusing. But there are great operators out there. And so, the big number, let's talk about how the commercial real estate market. It is the biggest It is the biggest economy out there when you think about it. The commercial real estate market globally.
It is the largest asset class in the world.
And and I you we all think that we get that, but it you really got to let that sink in. Like it is It is so large. You just think I mean commercial real estate it's it's over 1.26 trillion dollars. I'm sorry, 1.26 trillion is coming due.
So so
That's what's coming up like next year.
Let's go to the asset class first. So you have commercial real estate as a whole. It's the largest asset class in the world. It's bigger than global stocks or bonds. And it's hardly discussed, right? You turn on choose your business business news of choice, right? It could be CNN, it could be Fox Business, anything you want to, right? All we're talking about typically are
12:22stocks and bonds, right?
That's right.
However, there's an entire asset class overarching that that's significantly larger, which is commercial real estate.
And why do you think there's not more coverage on it? Since it's the largest asset class, bigger stocks and bonds. Well, I have my own take. Why do you think? Why is it?
I have to put some thought Are you always You hate when I say this. When I don't know the answer I go, I'd like to give you a thoughtful answer. Can I think about it?
hard in a podcast to give a thoughtful answer when you want to answer it tomorrow because a podcast is now. So if you don't know, you can always just say I don't know.
I don't know. Why does it not get more coverage?
Because it's not accessible to the average investor.
Okay.
So I'm in some like high net worth groups of people, right? Different you know, been in different couple different masterminds and and I don't even I don't even masterminds, some are just groups you join. And they do some of them do great data on all their members. And they ran the the assets. What percent of investors with high net worth balances What percentage of their portfolio is in commercial real estate? And you would think these are the wealthiest people
Sure.
lots. It's like 48% of their It's It was just shocking. It
13:24was a much lower number than I anticipated. And I think that's all due Katelyn too. It's it's a little harder meaning you've it's not a everyone's bought and sold a home. We live in homes. We're like, oh, this is a rental property. This is a duplex. It's just two homes. Like it's more like I think we just get it better. And then you're like, I don't know that I'm going to go from this home of 300,000 to buying the $3 million Starbucks. Even though you might have the same amount of rental property you might have three $300,000 or 10 $300,000 homes. The same economics. You just don't naturally go that way. And I in my own life that was a mistake I made. I was a single family rental guy cuz I sold single family homes in Phoenix, Arizona. And that's what my portfolio looked like the homes I sold. And it was I would say that I would tell our listeners it was a mistake I made. Commercial real estate is where the money's made. You do fantastic in residential. It's great. But at some point I think it makes sense to take those and roll those up into what we're talking about. And it's just a totally different asset.
Well, I think what happens now that you're 100% right. It is the access component which is why it's so sexy when
14:27someone who's an influencer goes out and reaches down to the common person who may not normally have access and given the opportunity to do so.
You can say that you own. And then and
And you can say you own and you own, you know, 3% of something or 2% of something.
3% These these mostly investors are putting in 50 to $100,000 Katelyn. They hardly own the toilet in one of the units.
But you can say you own a 200 unit apartment complex.
And and how many units was this bad boy? Let me just look here. This was a 388 class A
A in
And obviously you say it's class A so you know it's good. Class A Houston, Texas.
Oh, it really is a beautiful property.
Already cash flowing. 97% occupancy. We're not going to We're not going to go there yet. But the point is I just want So a deal like that you get to say though at the at at happy hour honey, we own 388 units. I mean we're kind of a big deal. And that sounds real cool.
Really cool.
Really cool. Now
Really cool and sophisticated.
And it's a when you invest in things like this when they go belly up and you
15:28lose all your money, Katelyn, great tax write-off. You get to write-off the whole thing. Isn't that cool?
All right. So, you have the largest asset class, right? So, that's commercial real estate. And then, Brett, there's two pillars under commercial real estate that you need to consider. I'm going to call them levers, and don't make fun of this dance.
I hope we get this on video. And And those are are First of all, to our tens of millions of audio listeners, you need to switch over to video cuz Katelyn just started running a choo-choo train. I don't know what this is. I don't know where I don't know how pillars
They're levers. My arms are levers.
These are pillars moving to levers.
that These are pillars that move to levers, and then that's how you get rich.
Okay. Okay.
only that's what we're teaching here.
Well, you you don't want to roast, you want to burp, but keep going.
All right. So, you have commercial real estate. And the thing about commercial real estate that most people don't know is how it's valued. So, you have comps You just taught this at our last mastermind. You have comps versus cap rates. So, when you think about how commercial real estate is valued, can you explain that to our listeners so that they understand that piece of the component first because that's part of the variable that caused
16:31this issue.
So, So, you think about a house, right? So, we've got Katelyn with us. Assume Assume you have a rental across the street and I've got a rental. They're both 1,500 sq ft. And I'm a much better landlord, and so I've rented mine for $1,800 a month. And you've rented yours for $1,400. At the end of the year, we have different net operating incomes. I'm making five grand more than you. When I go to sell my It's an exact model match. When I go to sell my house, will I sell it for any more than yours?
No. Why?
Because I'm We have the same house. It's just they're comps. So, it's like that's the house. So, we use
It's price per square foot. It's a comp of what people are willing to buy in the neighborhood.
same similar. They're going to sell at the same rate. Now, if you do move those same things and just make the numbers a little bigger and make call them two Starbucks. And you own a Starbucks and I own a Starbucks. and my Starbucks makes $200,000 a year net operating income, and yours makes $150,000. Though even though they're the same square footage, they look the same, and they're identical twins, one of them is worth a lot more because it's sold on the income it creates.
Correct.
17:32
Right. So, if we use that example, Katelyn, I'm going to get out my calculator. Something I would highly recommend, and just being a friend of the calculator. I think being using it often. So, at $150,000 at a 6% cap rate, Katelyn, your building is worth $2.5 million. At $200,000 net operating income, my building is worth $3.3 million. So, we had an $833,000 swing because of the difference in economics. And so, that's what makes it different. The better operator who runs it right and who can execute a strategy and has rent increases baked in, whether that's against inflation, whether that's 2% per year, whether that's 10% increases every five, but, you know, as you increase net operating income, you radically can change the value of the property. I mean, it in the enterprise value. Radically.
So, so my dad explained it this way, which my dad passed away a few years ago. He was significantly older, he was 86 when he passed. He probably taught me
18:33this when he was 82 or 83. And when he explained it to me, I was like, "Dad, this seems archaic in a very weird way to explain it, but it actually really worked." He's like, "Katelyn, you have this how do I said, how do cap rates work? How do I know when I raise rents or interest rates happen, and you're looking at commercial, how do you determine the value of it, right?" And he said, "I'm going to explain it to you the way that it was explained to me years ago." And he went to Wharton. And I'm wondering, was this a Wharton principle? Right? But, he explained it to me this way. He said, "Katelyn, think of it like you have a very rich uncle, and your uncle's name is Uncle Irv, right? This is like grandpa style teaching, but it was right. He said the income of the property there's only three variables. Income of the property, the rate of return you're looking to achieve that you're achieving, and that creates the value. By rate of return, he meant the cap rate.
Yeah.
And so when you have that triangle, that's how the entire value occurs. So
19:37now let's go into So now we know all of the values are going to change different than your single-family residential. Now let's go into how is a cap rate determined, Brett?
Okay. So cap rate I mean cap rate is the easy it just our it's a yardstick that we're going to throw out there. And it's a way to just look at what is the income it spins off.
Okay.
And you're going to compare that it's just assume that you paid all cash.
Perfect.
It's how it performs. Right? So in the example I gave you, you know, this it the building a $3.3 million building that has a net operating income of $200,000 is a 6% cap rate. And that operating income divided by the cap rate gives you the value. And so cap rates are important because we want to measure those against the long-term debt rate.
Correct.
Because if we in in banking, right? And this is done and you know, we go back and watch our other episode we did with George Anton, good friend of mine, great dude. Everyone should go read his book The Banker's Code. I mean that that book there was a fair there's only a handful of books that changed my life and that was one of them. And the whole I concept of that book is that we're all running a
20:39bank. And banks make their money on spreads.
Yep.
You've got the person next to you at the teller line depositing money that's getting in their savings account that's maybe getting 1% on their money. And then eight eight lanes down in the other teller line, there's someone borrowing the money at 8%. It's the bank is making a spread between the 1% they're paying in their savings and the 8% on this guy's auto loan.
Sure.
And so it's the same way it works in real estate. So Katelyn, if I can have a if I've got a 6% cap rate property and hypothetically I have I had 4% debt and I borrowed $50 million and I'm and I put say 5 or 10 million down. So on my money I put down I'm earning the full cap rate. So with a 6% cap rate I'm earning 6% on my $10 million down payment. It's cool. But then I'm making 2% the difference between the long-term debt rate and the cap rate on every dollar I borrowed. So in that context the more dollars I borrow the more lucrative the leverage and the spread of the arbitrage is.
21:42But this is where things go bad. And this is what happened here, right? Is your The problem is Katelyn, I don't know if you can see it in the lighting we're in here in this pirate ship. The The lighting's not good in the pirate ship. Oh, did knocked a little cover off of the electro and made the pirate ship had a storm last night. That's the second spew goal. I've got Katelyn to literally spew her drink twice.
for the podcast is how many times you can get me to spew.
How many times I can get Katelyn It's the That's when I know the jokes are really landing.
What Brett's trying to to nail down for us is two components. When you go to buy commercial real estate, they often talk about what is the cap rate you're purchasing it at, right? And that's always based on cash purchase. So assuming no debt at all. The reason that they do that is because it allows if I'm putting a certain group together to purchase the property and Brett's putting a different groups together, he may just be using his capital, putting 20% down and he has an a loan at 5 and a quarter or 6% for 80%
22:47or for 80% value of the property. I may be going out and syndicating and raising money. I'm committing to a 10% rate of return for the debt that I'm collecting, which is my 20% down, plus I'm going out and getting financing for the other 80% so I'm pretty aggressively leveraged. So when I go to buy the property I may my offer price may be very different than Brett's because of the interest rate or excuse me because of what our debt stack and capital stack looks like. So here's kind of the one thing I want you to focus on. When interest rates go up like they have over the past few years cap rates are also going to go up. Fair? Okay. Again, I just
that again until we get so
When interest rates go up
So if rates went from 4% to 6% which means long-term long-term debt is way more expensive.
Correct. So when the interest rate for your long-term debt goes up your cap rates are going to go up. And when your cap rate goes up
investors want
23:50
a higher rate of return. Yep.
right.
And then when cap rates go up the value of the property goes down because we now need to buy it at a lower purchase price so we can give those higher rates of return to our investors.
Let's use our Starbucks example just to to echo this back.
Sure.
So our same now the $200,000 let's say I got to go to an 8% cap rate. Okay, so the building at a 6% cap rate we know was worth 3.3 million.
Mhm.
So now let's go to 8%. What do you think? Just guess.
2.4.
Uh you almost nailed it. 2.5 million. So now we lost you know, as a percentage what is that? 800,000 you know, is it we're we've lost 30% of our
equity
of our equity disappeared overnight.
If we had to sell right now.
If we had to sell right now. So
So here's but here's the key point. The same building same income now you have the smaller price tag. So this this is the principle of the issue. So I just want to say it one more time. When the interest rates go up so in 2021 versus today interest rates went up.
24:53That means the cap rate upon which the property is selling also goes up. And the consequence of that is that the values go down. So, same building, same rent, smaller price tag. Now, why does that matter? So, in commercial real estate, commercial loans are not like your house, and you know this, Brett. It's typically you purchase a home, it's a 30-year fixed mortgage. Everyone knows what that looks like. Maybe you can refinance in a few years to lower it, but we're locking and loading for 30 years. You typically are not getting a variable rate. In commercial real estate, a third of the third of that asset class, which is the largest asset class in the world, is all done on variable rate. And the key is you want to purchase in a way where you'll still have the right cash flow that if something happens like this, where the interest rates go up, which causes the cap rate to go up, and your value to go down, you want to make sure on the front end,
25:56and a lot of the great GPs out there have done this, that your property has the right cash flow to sustain that, should your debt reset. So, you need a buffer in there. If the debt resets, we need the ability to survive another debt cycle of 5 to 10 additional years. So, your cash flow and your expense load are the two most important things you should be looking at. And I don't believe most of the syndicators like what we're talking about today went into a model in not conservative way to be able to sustain the debt cycle that we're looking at. And all of that debt that I just talked about, 1.26 trillion dollars of US commercial real estate debt, is coming due in 2027 alone.
Well, and the problem is so to Katelyn's point, right? So, commercial I just want to echo your point, which is the loans are radically different than residential. And Katelyn, you could do a 5-year fixed, you might do a 7-year fixed, or a 10-year. Usually 10 years is about as long as you're going to be able to fix
26:58it. And while yes, a third are variable. There's also the two-thirds.
That aren't.
That aren't. And I would tell you that there's a lot of mistakes made in the steel that aren't presented on the internet, which we're going to get through. But I think that the debt's really important to realize that you it's not fixed for 30 years. Uh you do have to have a plan and you need to but knowing that these aren't like they don't randomly call the loan.
No.
Like you know when the maturity is. And so knowing that rates could rise and I could have to refinance any time that is not ideal. You could plan for this though knowing like I okay, 7 years from now, you could plan for a lot of these things.
A thousand percent.
And you could have a contingency plan like what if cap rates are higher at that point in time and I couldn't sell my building, I'm going to need to build my fund in such a way that would give me the latitude to do that instead of just turning people's money through the roast strategy.
All right, let's get into it.
So the rate So the We talked about the rate. The other thing is like you can't just sell your way out of it. Right? Because the value went down so
28:00much if you didn't have a plan, you you might have to hold it or you're going to I mean it's going to be bad. Cap rate's everything, right? So the issue is he got caught in the bus cycle, right? Rates went up. Thus value Thus cap rates went up. Thus value goes down. And now you went from the time frame in which you did it is very interesting. So let's let's look at time frames, Katelyn. I want to talk you through this. So he bought this property at the end of 2021. I want you to close your eyes for a moment. Get back in your time machine, Katelyn.
Okay. I may or may not have a mask on in 2021.
Okay, you may Yeah, may or may not. Do you remember what happened with rates around this period of time?
Yes, absolutely.
Rates were at some of the lowest in history.
Which means what to the cap rate? So then the cap rate also changed. So, the values were astronomically high in real estate commercial real estate.
You're you know you're you're you're getting 4% debt. I mean, so he bought this thing for $72 million. The internet doesn't show match up perfectly, by the way, with this story.
29:02So, there there could be some, you know, this could be off a little. The county records show it was $66 thousand million dollars. But
Turner goes out, he uses his influence, he raises capital, right? Just like a lot of people were doing at the time.
He raised 25 million in a class A and class B.
Okay. So, he goes out, he raises the 25 million, and I'm not saying specifically this is what he did, but at the time, a lot of people, a lot of GPs, which is the general partner, were able to raise capital with a story, right? They were able to paint this story that you can continue to increase your rents, continue to add value to the property above and beyond where it currently sits in such a way you can do it. Astronomical returns in a 5-year period. We can run it really skinny, highly leveraged, because of that short window of time, right?
But this is where but I I want I really want you to just follow my logic for a minute cuz I I'm curious where did he go? So, that he bought a property that was 96% occupied.
30:06
And it's class A already, which means it's I mean,
So, for our listeners, can you can you walk people through when you buy a 96% class A occupied that's 388 units? Katelyn, you run some bigger bigger properties in Texas. For $72 million, the upward value creation possible in this is almost zero.
Well, this is usually where hedge funds park their money. So, hedge funds park their money here because in class A you're typically not going to have a lot of asset improvements, additional pieces you need to put in. It's It's typically the top of the market. So, class A is going to be something built relatively new. It's going to have all the amenities already. It's going to have the gym. It's going to have the pool. It's going to have a really cool, you know, my favorite thing to talk about lately these Amazon lockers which are a nightmare. It's going to have Oh, soft seating's usually my go-to.
thought it was going to be soft seating. But, Katelyn, but
has all of this in an absolutely beautiful way and it's usually optimized.
So, how much upside on the average class A building you've seen in your life based on your experience at 96%
31:08occupancy when you're buying or selling at 2 million and you're quoting an investor a rate of return somewhere in the 10 or 12%? I'm unclear on how you could ever create that before you started.
You can only increase cash flow in three ways, right? Number one, you can increase rents.
Okay, which is going to be your kind of class A at 96% occupied. Your your and rents are going to increase over time.
Okay, increase income. So, it could be rents or it could be additional value pieces you provide to the customer to collect income from. Number two, you can increase your So, that's your growth They call that gross potential rent. So, you can increase your gross potential income. That's number one. Number two, you can increase your occupancy rate. He's at 96%. I got to tell you, I feel like I run pretty tight 7-day turns to get to 96 true occupied, not your trend line, but true occupancy is a lot. You're running a really There is
But, how much
Technically right I was going to say I was going to say my husband's name. Technically right, you can only increase a 4% there, right?
32:10
But, do you
And then the third way is to compress expenses. That's it. There's only three ways.
So, Katelyn, if I buy this 96% occupied at a 4% cap rate, 4% cap rate.
I don't see where the blue sky was that he was selling.
Why How did you raise the 25 million dollars under this thesis?
I don't know. I really would love to see the pitch deck. I don't get it.
And they sold it at a six cap which is That makes sense to me. They sold it at a six cap. But, so I Again, And all went under the in in everyone can verify this on the internet. So Katelyn, if you go back and they looked at what rate what could they have done? So hold on. If you bought something 96% occupied, I would have got and the rates were at the lowest point in history. Now let's just assume you know nothing. I just want everyone our listeners just to dream with me for a moment. And you had a choice. And you could have locked in debt at a four-year, a seven-year, or a 10-year fixed at the lowest rates in the history of Earth.
I feel like we're going to
And you would go shortest term possible, boss. That's what I'm going to lock in. You but any logical person would have not done this.
33:11
But that may have been part of So I'm going to just take the opposite for a second. That could have been his pitch. His pitch could have been your exit's quick. Like the Burr.
I know, but why wouldn't you but you gave yourself no options.
I understand that, but he's not you. He's not looking for your favorite thing, which is optionality.
I'm My where I'm going here though is this is the same thing that happened with our government.
Mhm.
They did the exact same thing. And you could go look at this. You could go look at how much of our how much of our national debt could we have refinanced at the lowest point in history. And I And I did that for our data for our last mastermind and it would have saved the country about five to seven trillion dollars. Which is a crazy amount of money. Now that was over a 10-year horizon. Had we just refinanced all of the debt instead of rolling it variably and then if rates skyrocketed, now it's just it's a nightmare what happened here. So why and I guarantee the difference in interest rate was irrelevant.
Mhm.
So in other words, what happened here by doing it the way he did, you're like, "Oh, well my rates went you know, my all my class B investors just got torched." Yeah, but they didn't have to. And so that was all a choice and I'm just bringing this up to like but you're
34:13investing with people that made a decision that I could walk a 10-year-old through and they would get it right every time.
But if your whole brand, everything you've built, it's you know, 2016, 2017, Burr got really hot, no pun intended. Bam! Burr got really popular then and he he created a reputation around this quick cash out refi. Quick dreams, quick grow quick things are going to happen for you. So, now he's gone in, he's bought this beautiful stable class A property. Maybe slightly below market rents, but he's at 96% occupancy. He's got to go in and sell. We're going to do bam bam bam some three things really quickly, and in three or five years we're going to sell it, and I'm going to give you all your money back. He can't subscribe to the Bret Tanner method cuz that's not his model. His model's pull out the cash, make money quick, let's go let's run and gun and light our pants on fire, which is what he did.
And so, he did I mean in fairness over the five-year period, I don't exactly
35:15what he sold them. It's pretty I would say it was a five-year period total. They they did increase rents by 33%. So, in fairness they did.
Oh, they did. Okay, I missed that.
Yeah, so they they would they
That actually's great. Okay, I missed that.
But hold but you you still what had they had the right loan, they would've been fine.
Okay, so I was wrong. I I shouldn't have spoken to that that emotional stance.
Well, they did increase rents Katelyn, but here's the problem but you you actually nailed it. Their expenses though doubled. Taxes, insurance, all the other costs we were very familiar how it worked in COVID. So, while he's bragging on the Facebook post, I took rents up you know 33% sir. Yeah, but all your other costs doubled. So, that was actually a negative. You went backwards 65% is what I would argue. On your on your fixed costs. And so, you know one sentence what's killed it, they had a four-year adjustable commercial loan on a five-year buy and hold thesis, and may it was a forced refinance guaranteed they had to do it, and then they got a a 500 basis point increase and kaboom you're done. You know he his his comments were bad timing, market headwinds. Uh the deal worked, and then now I'm apologizing.
36:18And so, one thing I wanted to point out though when you look at these Katelyn, you'll notice there was two things. There was class A shares
Okay.
that were about 10 million of the 25 raised. And then the class B was 15 million. So, I'm going to I'm going to kind of leave you there. So, the the the 10 million that was class A, they all got paid out. Who do you think was the class A investor? What do you think determined who was class A and class B? If you were guessing,
the general partner and maybe his inner circle were class A since they had act I'm guessing they probably had active participation in the property, meaning maybe he's a general partner, he's running things.
It's two things. Friends and people with more money. So, like you might be a class A investor cuz you put in 500,000 instead of you put in 50,000. So, the people in this deal, if we were to look at the people who lost all the money, were the people who needed it most. And that's why that's the negative of syndications that I don't like. I don't like seeing where, oh, super cool. Who lost?
37:21The unsophisticated person who trusted you.
Yeah.
Because the not everyone lost. All the class A people got all their money back. No, it's not their fault. It's the It's the GP's structure that punished people who didn't know.
So, the GP, so Brandon, he executed the business plan. And I was wrong on that. He executed the business plan. It's the capital stack that caused the issue and the only people who were impacted by it were the class B shareholders. That's what we're talking about here today.
That's right.
Okay.
That's right. So, I mean, as you look at that deal, I think that we've done So, let's talk down why syndications die. Katelyn, let's go through for our audience. There's five structural reasons syndications die. Short-term floating-rate debt on a long-term thesis, right? If we're making a long-term investment, we need the debt to match. You know my view, you know, I'm trying to short the US dollar and so I want the longest mortgage possible. If they would give me a 50-year with decent rates, I would do it. Because the dollar is worth less in 50 years than it is today, Katelyn. You
38:23know, we use this again as a unit of measurement and I give this guy credit all the time, Josh Mettle. I think he just did the best job explaining this. And it it's just that we use a dollar like a unit of measurement, Katelyn, it isn't. You know, you look at a bottle of water that's 16.9 oz and in 30 years it's 16.9 oz. And this pirate ship that we're sitting inside of is 25 ft across. And the beautiful thing above us is probably 15 ft across. And in 30 years those will all be the same. And then we go like, well, a dollar is a dollar, Katelyn. We have a dollar, I have a dollar, you have a dollar. And then in 30 years we'll have a dollar. And he's like, well, let's see it while it looks the same on the paper, its value is radically less.
Okay.
Now, how much less in 50 years? I don't know. Is it worth 18 cents? Is it worth 26 cents? That That That's I don't control those things. But it's worth less in the future. That's the way it works. So, you're paying in 50 years I'm paying it back with dollars that are worth less. So, I benefit from the longer-term financings. So, it doesn't make any sense to take short-term. The only reason you would take a short-term loan would be that there they didn't have
39:26high occupancy and the bank didn't want to they wanted to do it variable for a short period of time, stabilization. You're going to go out there and rent up the whole thing, then you're going to refi it in the first 12 to 24 months once you fully stabilize. I could get that. But you bought a 96% occupied building. You could have got the greatest financing in the world. You chose not to. Right? Like that one decision caused the whole thing to go kaboom. And it was an obvious one again that everyone would have got right. Underwrite Underwriting permanent rent growth and cap rate compression. So, you know, the the thought here, Katelyn, they it interest rates are going to in rents, I'm sorry. Rents are just going to go up forever and ever and ever and we're going to come in here and we're going to just jump every rent 20%. Probably not cuz you're going to have a Rents over time, sure, they can climb. And then, you know, we cannot control cap rates at the time of sale, right? We just got to be aware that if you're selling a large commercial asset, Katelyn, you and you say, "Hey, I want to kind of sell it 5 years from now." It may not be exactly five cuz you may have to wait a window or a period of time. Here's the
40:28other thing, over-leverage, right? If you said, "What killed the deal?"
So, that's what I was about to ask you. What happened?
Okay, it's it's a it's it's two things, right? Not locking in your debt and then you were over-leveraged it. Right? I Well, first of all, you bought something that actually was really stupid. You bought a 4% cap. I mean, I wouldn't buy a 4% cap rate of anything. Why? Cuz I'm not the Teachers' Pension Fund of Iowa. I'm not a hedge fund. Like, that's what they buy for capital preservation.
Correct. That's where they park cash.
point are you raising money from investors in a capital preservation play.
They It's So, these properties are usually sold, they call it, to an institutional investor.
Or it's a pension
Yeah, exactly right. Or or the people who own them are wealthy families that are looking to preserve wealth over time.
It'll rents will rise for inflation and I got a great asset that's good. But, you're not buying it saying, "I'm going to juice these returns and really make it sexy." It's not This is not how it works. And so, then you've got the next part of it, right? We've got over-leverage and then we've got reserves are thin.
Mhm.
And I bet if you saw the reserves in this thing, when I say thin, I mean like razor thin.
41:29
Okay.
Right? So, cuz well, then they had to go back in and more money and he he talks about how he went back and refinanced his house to throw in money in the deal, which looks really cute on social media, but throwing $200,000 of your home equity at a $25 million loss doesn't really do a lot. Other than it just sounds cool. And then, the sponsor with brand equity but no operating track record at an asset class at that size and scale, right? He even said I think it was the biggest deal he's ever done and then he partners with another group, disruptor, whoever they were. So, they're charging a bunch of other fees. So, he's not even managing the thing. I mean, if you looked at the fee stack, I would say when I look at most of the cases, Katelyn, and if you think about it, right? The smartest money managers on this planet, like, if you took a 20-year horizon, the smartest money managers on the planet, They're going to average 10 or 12%
Mhm. right? Like people that are managing through cycles, through it all. And then you've got someone who's a podcaster who hasn't done this at all and talked about it as a theory and they're somehow going to generate 25% returns. It's just kind of that doesn't actually
42:32make sense. And then you they got to generate a 25% return because of the fee structure is going to get you know, fee to the GP and an asset fee and acquisition fee and a management fee and a fee to think about looking at the fees and the investor can get 10 to 12 but the only way you're going to do that is with crazy leverage.
Sure.
You're just going to leverage the leverage of the leverage and when it goes well, your investors go. I don't think this deal actually had the rates not gone up. I think they'd be able to hold it. They would have been able to extend it where they couldn't go but the deal never made sense. The investors were never going to hit the rates of return quoted, I don't believe.
Time ultimately would have saved the deal though. Like if they had had more time to survive this debt cycle. So the debt cycle the
I'm talking about the with the investor got the rate of return that they were believe they were going to get.
Oh.
I don't believe that would have ever occurred. They would not have lost the property and the people that lost the $15 million potentially might have lost less. But when you buy a four cap, for you to make money though Katelyn, let's get clear. It's got to go down to a three cap. Which means that you believe that rates per your comment earlier are going to go below the lowest rate he'd ever seen at that period of time.
43:35So he must have thought long-term debt rates are going to fly down to 2%.
Or that his income would have gone up to such a point that even if it stated a four cap, that if it traded at a four cap, it would have it's it's that variable, I think. I think he was looking at it and and I had misspoke earlier. I I think and and I could be wrong Brett. I know you've done way more research on this than I have. I think he really thought that the rents would have gone up, occupancy, his net income would have gone up but what we didn't calculate was insurance, property taxes, CapEx repairs, all on top so our cash flow's thinner, if that makes sense, all on top of the increase in in debt coverage. And he can't afford the increase in debt coverage, which forces the sale, right? So, he's insolvent at that point. Forces the sale, but now the sale's going to be at a value less than it was purchased because of these changes that we talked about today.
Totally, you're you're 100% right, but it's just I still don't when I see someone going in there and running on a
44:38four cap looking for upside, my calculator just doesn't do those. Like, I just don't get it. Like, I mean, again, we could try to make up economics, but it just doesn't work. And so, what I want our listeners to learn is a couple things today. Number one, I hope you looked at it like dig into it now, right? So, let's let's look at the questions you and I let's let's just brainstorm this, Katelyn. If I was looking at a syndication, which I'm not, and I never would, cuz I invest all our money in our own projects. We we actually have no outside capital. And I'm very proud of that. We're sitting here at Apple Mountain inside of a pirate ship, and we own the pirate ship with all of our own money. And so, I'm not bound to sell in a day, a week, a year, 10 years, ever, um because we do our own thing. And we believe in long-term fixed debt. We don't We believe we'll we'll hold indefinitely as our our current strategy.
However, you've maintained the whole time your word of 2026, which is optionality.
I want all the options. I'm never going to stop someone from overpaying something for something I have, right? So, everything's for sale. But, I've structured a way where
You have all of the options, yes.
And so, where I think we're at today, so Katelyn, the questions I want our people to know. Number one, I would want The first question when someone brings me a syndicated pitch deck, I ask a simple question. How much of your Wham, aka Wham is walking around
45:42money, how much of your capital's going into this deal? I want to know the GP.
Mhm.
Ooh, you're raising 25 million, you got a million bucks in here? Can I see it? Cuz if they don't have their money in it, I'm a little confused. Well, all my cash is tied up. Really? So, you don't have any money. Well, I don't know that I want to give you money if you don't have any. Like, so you're just getting it all from other Like, that is fundamentally I want to know how much
a steward of your money, right? Like, if if you look at partnering with someone, you want to be You always laugh when I use this term. You want to be equally yoked in the outcome.
You do love this one. You love an equal an equal yoke.
yoked because for some reason it makes people feel olden times, biblical, slightly Amish even if you're
But, you're yoke Let's go alignment. We'll be one is alignment.
Correct. You want alignment in the outcome. If if if the I believe the way that you've described it is if the GP does not have a hefty involvement in the deal or skin in the game, their alignment is to do the things in the operating agreement that give them income first and foremost. So, they're
46:45going to be looking at how do I They're naturally Charlie Munger has an incredible an incredible a speech on this. They're naturally going to subconsciously or consciously pull on the oars upon which they're incentivized, right?
Cuz incentive is the most powerful force on the planet.
Correct. So, so consciously or subconsciously, they may be a saint. However, subconsciously, they're going to pull on the oars harder in the way in upon which they're incentivized. The only way to ensure that they don't do that at the detriment of the business, meaning that all of the choices they're making as the GP are indeed the best possible thing for the investment group as a whole. How do we benefit the investment group as a whole? The only way to make sure that that happens is to make sure that they're equally aligned.
You've got to have So, the way you do that, alignment, right? Would be I want the GP to win when I win and lose when I lose.
Mhm.
And I want them to lose their own capital alongside mine. So, if I go to somebody and go, "Hey, I'm putting in a million bucks in this deal." I'm like, "Okay." Now I'll go to Now I mean Now I'll hear
47:46the pitch.
Sure.
But, I don't even hear the pitch until How much money of How many doll hairs of yours are we getting? So, I want to know that. Second thing I want to know is their track record. How many times have you done this full cycle? Not in progress. Which would take you That's how you get the white hair. But you need time to have done it a few times, right? I don't want the guy or girl that's on their This This one of the next one will be two that they've done. I don't want that, right? Like I just think that's crazy. So, I want a track record. Then I want to look at the actual investment model. So, in this deal, if you brought this to me and was like, "We're going to buy a four cap
Yeah, so it's 96% occupancy. I go, "Yeah, I'm out. I don't get it. I'm just not smart enough to figure that out. So, how are you going to turn this into an an eight cap? I don't How are you going to raise value so much? Like how are you going to double the net operating income on something that's 96% occupied?" And rents can't be that far below market. That would In a class A property
They weren't because they'd show they weren't because they were only able to raise them 33% over the over the five years, Katelyn, which was less than the market increase anyway. So, we actually under raised rents if we want to be really technical here in that period of time. And so, those questions, right?
48:50Then I would want to know their financing. What's the debt stack? Then I want to know controls. What does that operating agreement say? And then the last one, right, I want to look at, "When do I get my money back? And what do capital calls look like if this thing goes sideways?" And I just really want to dig into that. And so, when you're investing money with others, it could be really great. The challenge is I think most of the pitches people get are from people they know or people they look up to that may or may not be the best operator. The Some of the best GPs I know aren't on social media.
Right.
They're not on any of this stuff. They're not, you know, they're not doing it. They're just out there quietly making tens of millions of dollars. They're not running around, you know, on TikTok.
Influencing.
They're not influencing and talking about They're not sitting around talking about the things that they think those that do do.
They're not worried about views.
That's my favorite. There are those that do in life and there are those that talk about what they think those that actually do do. And so, Brandon didn't He didn't lose because of the market. They lost because of the loan. They made a simple decision and they over leveraged. And so, our goal here at on the BWB podcast, we want to bring you information that's relevant. And if we help one single person today,
49:52Katelyn, I mean one human not lose $100,000 or $200,000, that makes this a great use of your and my time.
I totally agree.
And so, I would say, go out there, share this episode with someone. If you're investing money with others, you need to go back and listen to this episode. Listen to the entire thing, and then do your own research on what happened. Go dig into this deal and say, would you have bought a four cap? Would you have made the decision and not fix it? Just go back and run it. I mean, it's cool that he's going on in the apology tour, but it also would be more instructional instead of doing that for social media and all the little Have you read the comments? It's just disgusting. Uh instead of doing that, actually go teach it. And teach the problem. And don't blame it on the market. Walk them through the nine mis- Now, that would be very valuable.
Walk them through the roast.
You walk them through the roast, man. Go create the roast. So, Brandon, I'm challenging you today, man. You did the burr. It's time for you to go on the roast. Show those fees. Show it all. Put it out there, and then let Earth decide. That's Katelyn Mitchell. I'm Brett Tanner. This is the Be Wealthy podcast. We will see you back here next week.
One day in the room with Brett on your real numbers. You leave with a 5-year plan.
