It’s undeniable that one of the very best ways to learn how to be successful in real estate investing is by surrounding yourself with successful others, and those with tons of experience. Frank Cava has a massive amount of knowledge to share, based on thousands of closed transactions. In this FlipNerd.com VIP Flip Show interview…Frank shares his insights on what it takes to be successful. We discuss exit strategies, raising money, and much more. Don’t miss it…
Mike Hambright: Welcome to the FlipNerd.com podcast. This is your host, Mike Hambright and on this show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your businesses to the next level. We have three new shows each week which are available in the iTunes store or my visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright welcome back for another exciting FlipNerd VIP show. Today I have with me Frank Cava who is a highly experienced real estate investor that has done over three thousand deals. He’s an active investor, mentor, and coach, has a lot to teach others. Today we’re going to focus on raising private money and Frank has a topic he calls “A thirty seven second elevator pitch to raise money.” Before we get started though, let’s take a moment to recognize our featured sponsors.
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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
Hey Frank, welcome to the show.
Frank Cava: Mike, thanks for having me I appreciate it. Good to be here.
Mike Hambright: Yeah, I’m glad you’re on. You’ve done a ton of deals, man.
Frank Cava: I guess so, I have. Yeah.
Mike Hambright: When I introduce people, you know sometimes, I say this is an experienced investor and they haven’t usually done as many deals as you’ve done, so I inserted the word “highly” experienced in front of yours. I don’t know if that’s the right thing to do but you’ve got a lot of great knowledge and it’s always good talking to people that have a lot of experiences to share. For those that don’t know you, why don’t you introduce yourself and tell us a little about you and your background.
Frank Cava: Sure, I’d be happy to. Thanks for the opportunity. I grew up in a construction family and I actually went to work for a homebuilder out of college and at the age of 29 I became a vice-president. We were doing 250-400 deals a year, and this is both land development, sales, and construction of houses so my experience is in the billions with real estate coming out of the ground and deliverables with both product and sales. In 2009, at the absolute worst time in real estate I said screw it if I can figure out how to make money in this market, I can make money in any market so I quit my cushy 9 to 5 job that paid me a fortune and I started an investment company and I started with what I knew the best which is fixing and flipping properties. I started off with one or two at a time and as we grew we were doing upwards of twenty of those at any given time. We’ve grown into different segments as well. We have a wholesale branch. We’ll close ten wholesale deals this month and we have a rental portfolio as well. I’ve been doing this so long folks, I’m sure like yourself, come up to me and say “Can you show me how to do this?” So I’ve started a small following with a coaching consultant group as well.
Mike Hambright: Yeah. So in terms of, is there a certain geography you focus on?
Frank Cava: I live in the Central Virginia regions so just outside of the D.C. suburbs we service central Virginia and Richmond is mostly where we do our business.
Mike Hambright: OK. Talk a little bit about being a developer before this. I have some good friends that are custom builders and they’ve really struggled with getting into rehabbing because, especially the custom guys, because they want to overdo everything and you have to be careful to do that. But, talk a little bit about how you kind of bridge the gap and how you think your development background maybe helped or hindered you know what you’re doing today.
Frank Cava: The development background didn’t help me at all with what I do now. What I say really helped was just learning how to study a market. So if you really look at the market from 2000 to two thousand and let’s just call it 2008 where it was blowing up everywhere, in 2000 there was kind of that ramp up period and what people started to do is they really started to overbuy houses, so you saw the McMansions and all that stuff and what I really learned is that we serve the market we don’t create the market. The market is going to tell you what it wants so thankfully in my experiences and travels I worked in several different markets, two different states, and I really saw the difference between something that was right next to Washington D.C. versus something that was two hours away. It’s completely different. Because of that you really start to learn what your buyer wants and the biggest take away for me is being able to study a market, look at what is in that market that actually does sell and the market is buying and data can help you understand that pretty quickly and once you do that you dive into the market place and you can buy what that market wants. The least expensive flip we’ve done since I’ve been on my own I think was roughly around eighty grand. The most expensive was over seven hundred grand. Those are completely different kind of houses, so you have to really understand what each market wants in order to deliver something that the market is going to accept and buy.
Mike Hambright: Yeah, you know what is interesting for me, when I first started in Dallas in this market I really, the median price point is about 130, 140 thousand, and I really didn’t want to rehab under 100,000. I would tell people I don’t rehab under 100,000 because I knew I would probably overdo it. Because when I started, and I’ve evolved on this now we do a lot more of not totally knocking a house out and just making it a great value for the next person, depends on what part of town that house is in. But I remember my first deal that I retailed and we put it out at like seventy nine nine or something like that and I wasn’t even particularly happy with it. We didn’t put granite in it; we didn’t do all the bells and whistles and I remember somebody came, early on we had some open houses and stuff like that I don’t do any of that anymore, but I remember somebody came in and you would have thought they walked into the Taj Mahal and they were like “Oh Wow! Look how nice this is,” and I’m thinking, you know it really just kind of hit home that if you find that market and you know how to serve that person you know I think a lot of real estate investors, especially newbies, they want to knock everything out and do it the way that they would like the house to be themselves if they lived in it and it just took some time to realize you know not even at the entire market level in the neighborhood level getting them to figure out what does somebody expect at this level.
Frank Cava: What you said is very important; we’re not moving into these houses so our personal taste and opinions don’t matter. What’s really important is being able to read the tea leaves and kind of see what people in this price point, in this segment, in this particular neighborhood what they want. When I first started doing this I did all that, I pulled the comps and looked at the selections and be like granite or not granite or vinyl floors or whatever it is in your market.
Mike Hambright: Right.
Frank Cava: We’ve gotten big enough now where I have a team of designers that does that for us so they literally will spec it all and then before we start a house we’ll talk through it and make sure it all fits in the budget, but it’s very much predicated by what’s in the market place not what I like.
Mike Hambright: Yeah, absolutely. Well, I know that one of the bigger challenges a lot of real estate investors have is having enough funding and capital to do their deals and in fact it’s a hindrance for a lot of real estate investors and you’ve become an expert at that so do you want to talk a little bit about why you use private capital or why those listening should consider private capital and then maybe talk a little bit about you know, how to find it.
Frank Cava: I’d be happy to. The upside of the fix and flip game is you can cash really big checks. On the small side it will be fifteen to thirty grand, but we’ve cashed checks north of seventy five thousand dollars for doing one deal, so I like those big elephant kills essentially you know you don’t have to chase a lot of little deals you can do one or two and you can really have a sizeable income. That is one of the reasons I like this segment of the business. I started, thankfully I had some seed capital of my own, and I started off just kind of bootstrapping which means self- funding all the deals. I then, I kind of did it backwards, I then went to a bank and found capital and I kind of realized with banks there’s some benefit, interest rates are lower, but there’s fees and it takes a little bit of time and as I started getting into this more and more I actually found some hard money folks that were out there. Some of them were loan sharks, man, you do not want to deal with some of these guys. They charge a ton of points and a ton of interest, but what I’ve been able to find is some people that are just looking to deploy some money that want good returns. What I find beneficial is if you find a good private money person they’re flexible, they can be really fast in how fast they get you the money, you don’t have to pay for a bunch of points and nonsense fees that a bank will charge, and you’re not going to go through a bunch of appraisals. So, I like to it have kind of a well balance. I’ve got my money and I’ve got bank money but I also like to have some private capital as well.
Mike Hambright: Yeah. Of course one of the benefits of bank money, usually, is it’s a revolving line so you can put it back in and it’s not paying interest. I know there are some folks, I don’t know specifically what you’re doing, when they raise private capital they’re responsible for the money the whole time they have it. One of the challenges I’ve talked about this before in my experience I could raise a lot more capital than I need but how do you keep those potential investors, those potential lenders happy if you can’t, cause a lot of folks if you were to go out to somebody and raise even a million dollars from somebody or more they would say great when do you want it? They kind of want it all deployed right? But, when you say oh you’ll lend me a million, or three million? OK. That’s awesome, but I only need one hundred thousand right now, can you just put the rest of it in a savings account for me and let it sit there until I need it? How do you kind of manage those expectations and manage not over raising capital?
Frank Cava: Sure. One of the things that I really teach it’s no different than any other relationship. You need to set proper expectations. If you found someone that just wants to hand you three million bucks with no track record please call me and give me their number I’d love to work with them but most people want to start a little bit slower from what I want. I’ve got a private investor that I have almost two and half million deployed with at the moment and we started off with a hundred and ninety thousand dollar relationship so what I would tell you is set expectations that are very realistic, tell them you know how long you’re going to need the money and set expectations that you can deliver to and then do what you say you’re going to do or if you tell them it’s going to take you three or four months, if you think it’s going to take you three or four months tell them it’s going to take you six. If you think you’re going to be able to sell a house for a certain price maybe come in a little bit under that so that you can kind of surprise them on the upside and show them what you really did. So what I would tell you, be conservative, set realistic expectations, and then as you start to grow just be honest say look I’m doing three right now, I need enough money to fund one of them, if this goes well I’d be real happy to put you into another couple of deals and to answer your question specifically if you can only do one deal you may have to pay more in interest, but leverage it. If you can do five deals at a time and they have a million bucks in the market place versus a hundred thousand and they want 12 percent of a hundred thousand, well 12 percent on a hundred thousand over the course of a year is twelve grand but if you can get them 8 percent on a million that’s eighty grand so if you do the math on that you might be able to get a lower interest rate since you’re paying less per deal but at the same time they’re getting a much bigger return. It’s all about leveraging and negotiating.
Mike Hambright: Yeah. Well, talk a little bit about some of the strategy you have of where to find folks and you know how you talk to them, the pitch you give, some of that information.
Frank Cava: I’d be happy to. The most important thing to know is know your business and be able to speak very educatedly about what it is you do on a regular basis and if you know that you know some of the key stats that you have in your business it really helps you. Sometimes you go in purposefully to raise money, and sometimes just by simply speaking and talking about what you do, you might pique the interest of someone who might say oh you know what? I’d be interested in doing something along those lines. And that’s some of what I’ve been able to do in my business and how I’ve been able to bring in investors is just simply talk about hey, this is what we do, these are the results and you know we have some private investors that we work with on a regular basis and we’re always looking for more and just by simply pitching it that way, if they’re interested, they’re going to ask you some follow up questions.
Mike Hambright: Right, right. In your experience where does the average person find these folks at? Is it the baseball field while you’re watching your kids? Country club?
Frank Cava: It usually starts with friends and family. The three biggest investors in my business are me, and then my brother, and my Dad. Outside of those two people it starts to kind of go to concentric circles. It usually starts with maybe an uncle or somebody like that then it usually goes to somebody outside, a friend or a friend of a friend. Right now, in our business, we have about ten people that lend us money privately and it’s all through concentric circles and basically what I’m talking to you about today is just speaking in a way when someone, you’re at dinner, you’re having a conversation, don’t botch that. Give them a good pitch. What is it you do? Practice, be ready. You never know, someone will come up to you afterward, tap you on the shoulder and say hey I’m really interested in learning about that can we go get a cup of coffee and sometimes that happens.
Mike Hambright: Yeah. So do you have any examples of what you would say? It’s funny because I struggle with this myself. I wear a few different hats so when somebody says what do you do I used to say I’m a real estate investor.
Frank Cava: Right.
Mike Hambright: But, now I’m, I mean everyone’s a real estate investor, right? But there’s more than that maybe I need to work on my pitch. Any tips?
Frank Cava: Yeah. I would say prep yourself. And I have something that I could give you as a deliverable that your group with no experience can kind of build off of what it is I have. But what I deliver is kind of this, I just say in a nutshell I have a team that finds me ugly houses, they’re priced under market value, they bring them to me and I analyze them. If the deal makes sense what we do is we add value to that house, we sell it quickly on the open market, and we improve communities’ one house at the time and at the same time make a nice chunk of money for ourselves and we reward our investors. In the past four years we’ve done more than a hundred of these deals. Of the hundred we’ve done, ninety percent have sold in less than thirty days. We’ve made money on all of our deals and we’ve repaid our investors exactly what we told them or even more. So, I’m pretty picky because I’ve done over a billion dollars in real estate through land development, sales, and construction, so I’m only looking for a real select type of person to be an investor but if you know someone who’s interested please let me know.
Mike Hambright: Yeah.
Frank Cava: That’s what I say. I mean that’s an outline, it’s not always the same but you can see it’s relatively rehearsed but at the same time it just flows.
Mike Hambright: Yeah, you have to make that stuff sound natural.
Frank Cava: Yeah.
Mike Hambright: So, cool. Well, why don’t you talk a little bit about folks that haven’t done a billion plus dollars of deals and thousands of houses and stuff like that? Talk about the newer investor that is trying to get in this business and of course everyone knows we aren’t going to sugar coat it it’s harder to raise money if you haven’t had experience but none-the-less people can still find it from friends and family if they’re a little more tolerant maybe than an outside investor. But talk a little bit about what people would do if they’re newer in the business.
Frank Cava: So here’s an asterisk a very important asterisk to the conversation; concentric circles usually start with family and friends, the last thing you want to do is put important relationships in peril because of large sums of money. So what I would tell you is if you don’t know exactly what you’re doing find someone that can coach you or walk you through the process so you don’t lose money of yourself or your friends or family. But, if you feel comfortable that you know how to do this it’s actually pretty easy. Getting money doesn’t necessarily depend on you as a human at all. The way that you set the deal up is that the money is tied to the property so if you have no money, you don’t have credit, you don’t have anything, if you find a really good deal they’re either going to give you a deed of trust or a mortgage depending on the state and if god forbid something should happen and you get struck by lightning then they can go back and get their value out because that house is securing the money and this is really easy to set up. So that’s the number one step; find a property that has value. The number two thing to do with it is to not over go, not make it more complicated. Some houses literally need lipstick and very quickly you need to kind of be able to turn those things around, some houses need major renovations. If you’re going to do a major renovation you need to build a good, strong team around you that is going to do the work and then if you’re trying to raise capital you have a contractor that’s done things that you know that you can show examples of you can bring in your money person and say, look here’s the property, here’s the contractor that’s doing the work, I’m simply going to be the conduit that makes sure all of this happens. And then the last piece is how you sell it. So you have to find a realtor that’s really, really good at knowing the market. Now I’ve done tons of these. I’ve got great contractors, I’ve got great realtors that pay under market value for everything but your first deal you’re probably not going to have that leverage but you can put that team together and you can really satisfy the concerns of the investor because you’ve got a team of experienced people around you.
Mike Hambright: Right, right. Can you talk a little bit about, I mean this is going to differ significantly depending on I know someone who borrows money from family at zero percent, so not everybody’s going to get that, right? But, what type of rates could you expect from private money you know relative to hard money and bank money and stuff like that?
Frank Cava: Perfect. I’m going to answer all of it. I’ve got bank money out right now; it’s at five and a half percent. It’s five and a half percent, interest only and it’s on a revolving line. I’ve got more than a million and a half bucks like that so I can pull it in and out real easy. I can re-fi those deals into permanent loans if I have any type of rental that I want to hold onto. But five and a half to six percent in today’s market is what commercial money is. Now, if you have a job and you can get upwards, it’s somewhere between six and ten loans you can get home loans on you might be able to get better terms, but I don’t have a job, I’m self-employed so I can’t go to Wells Fargo and get a loan. I’ve got to go to a local bank. People always ask me, and I don’t know if you get this Mike, but people always ask me what kind of bank should I go to? Like the people with national commercials that advertise on the super bowls are the best, but the small regional banks the guys that have five to fifteen branches that have a commercial division, those are the banks to go to.
Mike Hambright: Absolutely, yea.
Frank Cava: So five and a half, six percent is there. If you go to a hard money lender, hard money lenders usually going to get something between two and six points, so if you borrow a hundred grand points means you have to pay two thousand to six thousand bucks just for the opportunity to borrow the money and then they want usually between twelve and sixteen percent interest which is a ton of, you’re giving up a lot, you’re going to do the math at the end of the job and they’re going to make more money than you because of the fact that you’re paying such high rates. What I typically negotiate is somewhere between ten and twelve percent and as low as eight so somewhere between eight and twelve. And can I nickel and dime and get people down a little bit lower? Maybe, but I want to be fair. They’re taking a little bit of risk, it’s not a traditional instrument, so giving them somewhere between eight and twelve percent I think is a very fair return and I’ve found people who are very interested in lending at those levels.
Mike Hambright: Yeah, and my experience too with bank money uh which I have some that sounds very familiar sounds much like what you have there, but typically they’re not going to finance a hundred percent of the deal is that your experience as well? For folks that, truth be told a lot of folks use hard money because it’s easy, it’s fast and if they bought the house right they may be able to get in with no money out of pocket for purchase and repairs.
Frank Cava: Yeah, and I mean I’m a pro at this and we have our own money but in some instances I want to grow the business and one of the reasons I used private money is because I don’t have to have my own equity in those deals the equity is in the deal itself. So you don’t wind up with out of pocket with forty grand to by a two hundred thousand dollar house.
Mike Hambright: Right. But with a bank, my question is with a bank though with commercial loans you’re typically going to be you’re only going to do seventy five, eighty percent of the cost, right?
Frank Cava: That’s right.
Mike Hambright: The way that banks, from a regulation standpoint, they’re required to consider the cost as value even though as real estate investors that are buying at a deep discount you know that’s not true, but that’s just how they tend to evaluate it.
Frank Cava: That’s right and they have to protect themselves. They have a board of trustees and they have regulators and they have the government that’s going to inspect them where a private lender doesn’t have to think of that.
Mike Hambright: Yeah, yea. So, what do you think about for folks that maybe can borrow money at the types of rates you’re talking about and then relending that back out kind of making a market with hard money, I mean if you have access to that fund to those funds then you know that hard money is being lent out at fourteen and four or something like that with your experience have you considered getting into the hard money business?
Frank Cava: I haven’t. I’ve got enough going on right now. Also, becoming a lender isn’t really something that is overly appealing. We purchased a couple of notes but becoming a lender is not something that’s on the radar.
Mike Hambright: It’s a whole other ball game that’s for sure.
Frank Cava: What I would tell most people is everybody likes to do a hundred things at a time, what I’m a real big fan of is find something you’re good at and really master it. I talked in the beginning about the different buckets of business that we have, it’s not just me. We have a whole team of people here. I’ve got someone who completely runs wholesale. We have a company that completely runs our rentals. I can’t do all of that stuff well, so you know what I mean?
Mike Hambright: Yeah, absolutely. It’s easy to get spread thin. So, if you have a wholesale business as well are you primarily wholesaling stuff that you just don’t want to touch as a rehab, just doesn’t fit your model or maybe it’s not in the right part of town or things like that? How do you decide what you wholesale versus rehab?
Frank Cava: One of the reasons that I got into this business and set it up the way I set it up is in 2009 I worked for one of the largest homebuilders in America and they were getting just napalmed because they had just one thing that they did. They built houses and they provided mortgages; all around one segment of business and you’re going to say you’re talking out of the other side of your mouth, you just said do one thing, true but I wanted to have a couple of different tentacles into the market place so we have a wholesale business that provides income every single month with quick easy deals. We close somewhere between 6 and 12 of those every month so that’s somewhere between a hundred and a hundred and fifty grand that just comes in and that kind of takes care of overhead. Your footprint can be a lot larger with a wholesale deal because you don’t physically need to inspect those houses you can just have someone run out and just look at it. So we wholesale deals all across the state. Our fix and flip deals are in about a sixty mile envelope and that’s it. It’s about five miles wide and about sixty miles long. And we know contractors, we know everybody that’s in that market place and if something goes wrong with a fix and flip deal I can close up my computer and I can be at the one farthest away in less than an hour so that’s kind of where our marketing is. In addition, some places we don’t want to wholesale or in some instances we have enough fix and flip deals going on that we just want to take that house and sell it in the marketplace. We wholesale good deals but some of them are rentals, some of them are fix and flips but we can’t buy everything so that’s kind of what that segments for.
Mike Hambright: Well, Frank talk a little bit about some of the mentoring and coaching type things you do and if folks want to learn more about what you’re doing how they find you.
Frank Cava: Yeah, that’d be great. You hear through kind of the quick conversation we’re having here we can add value and I can personally add value to you in a lot of segments, not lending, but the other segments of the real estate market. There’s two places to find us, one of them is my name, it’s frankcavacoaching.com and you kind of queued me up nicely in the beginning I have a website called TheXperiencedInvestor.com it’s experience with just an X no E and both of those two places is where you can find us. We offer consulting, monthly consulting. We have a handful of students that we actually bring through an entire process and say if you make a sizeable investment in us, in six months we’ll show you four to six times those returns.
Mike Hambright: Awesome, Frank. Well, thanks so much for joining us today. I appreciate the information.
Frank Cava: It was my pleasure; it was great to be here.
Mike Hambright: Awesome, we’ll see you around.