The Rich Own NOTHING, Here's the Secret to Wealth #realestatedevelopment #realestateinvesting #realestate

The rich own nothing and I'm going to tell you why you should too. The steps to this process are easy. Anyone can do it, but you have to get started. The first step is forming an entity that will be your management or development entity. What is an entity? An entity is just something that controls a corporation, an LLC, a person is an entity as well. However, you don't want to do this in your name because there's a lot of liability and risk. So you form a single purpose entity or SPE. In this case, that'll be an LLC and we'll call that the management entity. That entity is out there doing business. So if you have an idea to buy a business or to buy a property, then what you're going to do is take dollars from this entity, flow it over and make investments in a commercial real estate development project that could be putting down the deposit, hiring the architects, hiring the engineers, hiring the lawyers. You're then spending that money to pursue an idea. Those are your high risk dollars. That's what your sponsor or your developer or your entrepreneur or your opportunist will do. Different than your investor or your debt source that we'll talk about in a bit. Right now, we're still at the high risk phase. So you have this management LLC and then you have your idea. Then as that idea starts to evolve, you have a project under contract, you've started to line up your tenants, you've started to outline what the building can look like, you've met with the city, you've done those different things. Then what you're going to do is form a new LLC that is a single purpose LLC to own the property, but you don't own the property yet. At this point, all you're doing is putting it under contract. Now for me, I still put it under contract in my development entity, but I know that before closing, I'm going to transfer it to the single purpose entity. Now at this time that you have your high risk dollars out, you then have to come over and determine a development budget. A development budget is simply an estimate of your total costs. That is your land, your hard cost, your soft costs. Land, we all know what that is. That's either a piece of dirt or an existing building. Your hard cost is any money to physically improve the project. Think about an AIA contract with a general contractor or even on a big scale, or if you're just renovating a house, it would be hiring the painter, hiring the HVAC company. It's the same difference whether it's a hundred billion dollar high rise with a sophisticated general contractor or whether you're renovating a house. Your soft cost. Your soft cost are any expenses that are not hard. For example, design, attorneys, interest, consultant, even travel can be lumped into that. Once you know your total cost, in this example, we'll call it $10 million of which your land could be 1 million. Your hard cost could be 7 million, and then your soft cost would be the difference of what is left or 2 million. So now you've figured out what your project costs. Then from there, you want to ask yourself, okay, if there's going to be this much money out, how am I going to create my pro forma? Your pro forma is simply your future revenue or your rents minus your expenses equals your net operating income. Net operating income is what they call above the line, meaning it doesn't take into account debt or equity or how you capitalize it. That's why when you see properties marketed as income properties, it'll be at a cap rate because the cap rate just shows what the in-place NOI is. Because whether you buy that $10 million property for all cash or whether you come in and use a 70% loan and only 3 million of cash, it doesn't matter. Every investor, every developer has their own strategy on that, so they focus on the NOI. However, at this point, we're still the developer. We're not selling the fully baked Walgreens to the market for coupon clippers. We're still coming up with an idea to develop an idea, and we haven't even closed on the land yet. So now you've got to come over here and say, okay, if your net operating income, for example, is $1 million, then what you're going to have is, let's say it was a 5 cap, for example, which would be a great cap, and what you'd see on that, that would be a $20 million value. Now, the difference between 10 and 20 million is pretty good. Of course, in this example, I'm giving it a little extremes to illustrate the point, but what all you still have now is an idea. You have your management company spending tons of money, sometimes hundreds of thousands of dollars to pursue this idea. You're meeting with a tenant. You're doing design. You're meeting with a city. There's lawyers everywhere, and they're billing you monthly, but you see the goal. So what do you do? You then come back and say, all right, how do I get $10 million? At this point, maybe our entity has $250,000 of high-risk pursuit costs. Why is that so high-risk? Because you don't have the deal baked yet, but you're starting to get there, right? So now you have a tenant that's telling you they want to pay your rent on a particular site. So you're going to come back over here and say, all right, what will the bank allow me to do? The bank will give me 70% on a development budget. So that's $7 million to $10 million, all right? Now you're getting somewhere, but you have a problem. You only have $250,000, and you need $3 million or 30% of your equity. So what does that mean? It means you have to go out and raise $2.75 million, okay? But you now have a pro forma showing your profit. So what are you doing? You're then showing these investors what that potential profit is, what the time frame, what the duration, and you're determining what their pro forma IRR, or internal rate of return. Mr. Investor, if you give me $2.75 million, it takes me 12 months to get it approved, 12 months to get it built, and then 12 more months to exit it. But then we're going to split up the difference between these two numbers, and that's a good return, and that's how you bake it in. So at that point, what you now have is you've said, okay, we have a project at Pencils. So we're now going to move to close. So your bank loan is going to do business with this LLC. Your equity is going to do business with this LLC, but the property is still in contract with your management LLC. So before closing, you're going to assign the rights to that contract to this new single-purpose LLC, and what's going to happen is you'll either leave that $250,000 in the deal, or your investors can pay it back to you, so you can use it on the project. It just depends how big you are of a company, and what your resources are, and how many. But that part doesn't matter. What matters now is this new single-purpose LLC has land, it has a lease, it has debt and equity, it has a business plan. So then at that point, you move to close. Once you're closed, you're under construction. So with that money, you can now go back and do this as many more times as you want. But what is important to realize is that you don't own any of this. The LLC is each owning all the assets, and then you have a management LLC that's putting the high-risk dollars. So you're now going to ask to split some of this profit, but you're entitled to it because you had the idea, and you put up the high-risk dollars. So once you've done this, and you've established it, this is the orange chart and the outline to starting to build your development company. So now you've started to form your empire. So what we're going to do is we're going to clean this up. You now have your development or management LLC over your different LLCs that are under construction. However, after that 12-month approval, 12-month construction period, you then will have an income-producing property versus a high-risk development property. Over here, you used high-risk dollars of your own, then you brought in more high-risk investors. However, once the cake is fully baked with all these different ingredients, you then want to either sell the cake or refinance the cake to someone that is long-term stable money versus high-risk money. At that point, you take this LLC, and you're going to move it over, and you're going to refinance it with a new bank or sometimes the same bank, but you'll go from a construction loan to a stabilized loan. And at that time, you can either refinance additional dollars to pay some of this money back, or you can agree to sell it, or this original money can come over and stay in the deal and now have an income stream off of that. The goal is to move all of your high-risk deals at different stages of the process into income properties off of the high-risk. And then by doing that, you can use that reoccurring income of after you've paid your investors and what is left to start more high-risk projects to continue to build the process. The individuals that want to own and invest these dollars are drastically different than the high-risk dollar. So all you're doing is following market efficiencies of based on where my projects at and the lifestyle, what is the right type of capital in order to capitalize it? And your job as the manager of the LLC is then to continue to grow this. Well, what does that mean at that point? Once you've started to do this, then you should start to build up your team up front and create a payroll LLC to help empower, train, teach new people that want to learn the business in order to take your ideas and your expertise and spread it over a larger scale. Then all of a sudden, what you have is you've gone from being an investor and entrepreneur to creating a machine or an organization that takes care of the people, all the people take care of it. That allows you to do more and allows you to scale your time because ultimately what you should be doing at this point in the journey is teaching people how to do it, letting them execute on it, come back to you with the results of that so you can continue to grow the organization. So at this point, you control, call it 10 LLCs that each have separate assets and projects, yet you own nothing because the cashflow from the LLC goes to pay the bank, pay the investor, and then what's left flows back to the management company to be reinvested. In 20 something years of doing this, I've never paid myself a paycheck from the development company. I've let everything grow and accumulate with this strategy and I've owned nothing in my name except for my primary residence. So what do you now have is you have a platform, but the key to getting here is understanding how do you raise capital? Remember, you go back to, you have an idea, then you have to have a team, you have to have a resume, you have to have people that believe in what you can do. Then you have to build your development budget. How much does it cost upfront? And then how much would your pro forma will it bring in over a five or 10 year period? And all you're doing is comparing these two things to make sure the upfront investment makes sense based on future cash flows. All types of investing and money raising is, is what's the net present value of future cash flows coming in today and should I cut this check today in order to get that income in the future? But the brilliance of raising money is you have a wide variety of investors. You have a high net worth individual on one end that wants to make a small investment. You have a high net worth individual that wants to make the whole investment. So in this 2.75 example, you could have one group that wants to put $50,000 in that might not be worth your time because it would take a lot of $50,000 checks to get 2.75 or you might have one investor that wants to cut the whole check. The magic of how you do that's up to your own style and preference and what your relationships are, how sophisticated, how good your project is, but those are just individual investors. Then you go on the other end of the range. There's institutional investors that are just designed to cut this check. Now they're going to have different regulations, expectations versus, you know, a bunch of doctors cutting in a smaller check. And so once you build your package, management team, idea, development budget, pro forma, and you have these different items, you want to send this to all of your investors that are a right fit for it. It's very important. Only do business with people that pass your go, no-go checklist. What's a go, no-go checklist? Well, in this situation, having money is important to be an investor, but the point that I'm trying to make now is you should have a relationship with the person. You should have trust, rapport, respect. Normally, when you call someone to raise money the first time, it's not so much about that. You're showing them a project. You don't actually expect them to invest the first time. It's about them seeing you do it with many other projects over the years. And every time you call them and just say, Hey, I'd like to run this opportunity by you. It's not a high close situation. It's building a relationship so they can see you doing this. And then you call back in a year or two later on another project. Oh, how did that one go from two years ago? Oh, thank you for asking. Actually, we just refinanced it and that investor got their money back. Great. So you're continually doing that process of building equity relationships on one side and then debt relationships on the other side. The debt relationships are your banks, private capital, and all different forms of groups that give you fixed interest money that is in first position. The difference between debt and equity is the level of risk it takes. Banks and private lenders still are always in front of equity because they have lower returns. We're very fortunate to have banks that will take four to eight percent returns in order to give you a 70% of the money so you can go make this a reality. And that way your entrepreneurial equity investors, you know, have a chance of making a real return. So at this point in the journey, you've now converted all these high risk projects to income project. Then you have portfolio level decisions to make. Do my investor partners want to own these long term or do we want to exit these and reinvest in new high risk project? And that comes down to everyone's strategy. Where are you at life? What level of risk? What's your level of energy? What are you passionate about? Some people want to have some income from their business and be able to travel the world and be happy. Others want to go build a high rise and take over the country. It doesn't really matter. But we have to decide as your portfolio decisions are lined up with the types of assets you have, the type of market you have, what's your partner's preference and what's your overall strategy. So, for example, at this point, you sold everything off to a REIT in one transaction. You then have great cash, but that cash wouldn't be doing anything for you. So you'd either restart the process. But if you restart the process the next time, maybe you're going to do it a little less risky. You know, when they teach you about financial advising, they say as you get later in the journey, you're supposed to take less risk. So maybe the second time you build the portfolio, you're not going quite as aggressive on the different things that you're doing, which means that your upfront investors won't get as high returns. But it's OK because at this point, they're realizing there's less risk. So today we covered the strategy and the structures of how to build an organization to create wealth while owning nothing. In future videos, we'll break it more down and get in-depth on individual projects that show you how to capitalize those. We'll talk about some of the case studies. We'll talk about ordinary income versus capital gains and appreciation income. We'll talk about how all these strategies tie together to create sustainable wealth over a long-term vision. If you like what we're doing, hit subscribe below and check out more of our videos on development, buying businesses, making investments, and the mindset required to be successful in this great country.