Darin Davis [00:00:00]:
You're getting. You're getting the. The sweetest deal possible because you're getting to come in towards the end of the project and you're getting to place this money in there that's already. Capital's approved, common equity is raised, construction is started. A lot of times, leasing has already started. It's just. It's a gap they need to fill.
Mike Koenigs [00:00:20]:
My greatest mistakes or not getting into real estate sooner and not doing smart deals with smart people like you. I often say I'm a delusional optimist who invested in people who are delusional optimists. And that's the problem with VC deals.
Darin Davis [00:00:40]:
We do the hokey pokey all day with new investors. I guarantee you, we put our right hand in, we put our left hand in, our right foot, our left foot. And then finally, whether it's five years, ten years, 15, we go, wait, I haven't put my whole body in yet. I need to go.
Mike Koenigs [00:01:11]:
Hey, this is Mike Cannings. Welcome to another episode of Capability Amplifier. I'm here today with my friend Darren Davis, and we're talking about alternative investments in 2024. And just to give you a little backstory, I have really given up on VC investments, frankly, because I've been burned so much. I focused all my attention on alternative investments and real estate. And Darren's been my go to guy. He's also been really helpful in coaching Vivian and me on some of the things that we've been doing, even internationally. So, Darren, what's hot and what have you been up to right now?
Darin Davis [00:01:45]:
Well, first of all, good morning, Michael. Good to see you again. Good to see you. No, I got to tell you, the market is obviously interesting for most people, and there's a lot of negative news out there. But I look at that, and I guess this is being 20 plus years experience in this, but I kind of look at as opportunities, and there is a clear, clear opportunity out there that is so simple. But most investors, if they've only been investing in the last maybe ten years, aren't aware of it. And it's referred to in our industry as preferred equity. And preferred equity is a tool that developers use, really.
Darin Davis [00:02:25]:
They kind of call it rescue capital, meaning, like, I've got a project and I need a little bit more time, a little bit more money just to get this thing over the goal line. And we'll go into a little more detail. But we've been really successful at introducing this pref equity back into the market with our investors because it has so many characteristics that our investors like, and we'll kind of follow through some of those, but the pref equity is just the one that we're really focusing on today.
Mike Koenigs [00:02:54]:
Okay. So maybe for someone we did a prior podcast that went into your backstory. You've got an amazing backstory. You've been through multiple cycles, so you've seen the ups and downs, especially when it comes to real estate. And you've not only weathered the storm, but you've done it with plenty of money left over. That's taken care of you and your family, in addition, just overcoming some incredible challenges personally. But let's just get into a little bit of why this, why now. And then I'd say just dive into how pref equity works and this notion of rescue capital and why it's such a hot topic.
Darin Davis [00:03:39]:
Yeah, I sure will. And I think everybody will understand this because everybody kind of grew up this last decade where money was really cheap. So pref equity was not in demand because developers and sponsors could borrow money at three and a half, four and a half percent. And that's not really a good return for an equity investor. But the way these deals were set up for the last decade plus is that you had the senior lender, which was the bank, the construction loan would put the money up and usually around 70, 75% of the cost. And then the common equity would come in and get a preferred return anywhere from 6% to 10%, which is accruing. But then they would participate in the upside. Okay? And there were some.
Darin Davis [00:04:29]:
I mean, home runs and grand slams hit, no doubt about it. And people did really well. And if you talk to people that have been in the industry more than five years, they'll tell you, hey, those are the heydays. Don't expect that going forward. Well, what's happened now is that, and everybody knows this leverage has come down. Okay? So banks, instead of loaning 70 and 75%, are down in that 65 and 60. So who's going to fill the gap? Okay, well, now, not only is the leverage down, but interest rates are up, gaps getting bigger. All right, so you're sitting there going like, man, this is not good if I'm the developer of the sponsor.
Darin Davis [00:05:09]:
So you've got lower leverage, higher interest rates, and then you've got one more kick to the gut. Valuations have started coming down, so that drops the value down even more on your leverage. So you've got this tsunami of these three things that have hit. Well, let's talk about today. Well, three years ago, two years ago, when interest was really cheap, for the general contractors and the developers, they were getting loans, construction loans, three and a half, 4% on a floating rate. Well, that thing has floated up to about eight, eight and a half, 9% now. And so that cost of capital that they did not prepare for, they've had to utilize their interest reserves and several other things, put capital calls in to their common equity to fill that gap. Well, what we've done is we've said, hey, we understand common equity.
Darin Davis [00:06:05]:
We understand this capital stack. We have now said we will come in and we will fill that gap with that money that is needed to finish that project through the final end of construction and to stabilize. So what you have is what you call a capital stack. You have your senior debt, and then you have our piece, which is the pref equity, and then you have the common equity on top of that. And the nice thing about the pref equity is that we are senior to the common equity. So we get fully paid interest, penalties, capital, everything, before the common equity or the sponsor receive anything. So we're right after the senior debt, which is the loan, construction loan, then the pref equity, which is us, and then the common equities after us. So we have this big Safety net behind us, and typical returns for a private equity investor, just somebody that would work with us, are anywhere between 1011 12% annualized.
Darin Davis [00:07:04]:
And quarterly payments are being made immediately. So you start seeing immediate cash flow. And these are short term, too. Typically, they're usually not more than three to four years. Most of them are two to three years because that money is expensive. And these guys are wanting to either refi it, sell it, have some capital event so that they can pay us off and continue to do another.
Mike Koenigs [00:07:30]:
That's great. So that really answers some of the questions. But I'm going to do the short one for. I always look at this and say, okay, let's answer the questions for the quick starts first. If they know their Colby quick start score, and then their fact finder score, which is how much, how long, how safe. And you basically answered that, which is, it's just a few years, you start getting paid right away. It's about as safe as you can get. Unless you're the bank, right? They're going to be the first out.
Mike Koenigs [00:08:06]:
And how much, typically, does someone need to invest? Because the benefit to an investor gets involved in this because they're not doing all the deal work. You're the guy on the street sourcing these, finding them, structuring them, which is an enormous amount of work. It takes a long time to build the experience, plus to even know how to structure these things in the first place and do it right. But let's say someone wants to either dip their toe in and say this will be their first time, or if they're an experienced investor, what do they need in terms of.
Darin Davis [00:08:44]:
Yeah, well, our dna comes from educating investors and we really want people to take that first step. There's so many people that are just not sure what to do because they don't have all the data, they don't have all the knowledge. And at some point you just got to go. Now, I will tell you this, it's far more, I guess, challenging for a new investor to go into a common equity deal where the underwriting and the deal is really big and complex. All right, under this deal, under the preferred equity, if the deal is already set, okay, the construction has already started, the leasing has already started. So a lot of that kind of perceived risk on the development side, it's way behind us. All right. You're getting the sweetest deal possible because you're getting to come in towards the end of the project and you're getting to place this money in there that's already capital is approved, common equity is raised, construction is started.
Darin Davis [00:09:46]:
A lot of times leasing has already started. It's a gap they need to fill. So when people say, wow, this sounds too good to be true, I said, well, it's not too good to be true. I mean, it is true, but if you want to learn how to get into private equity through alternative investments, you want to learn how deals are structured, you want to understand how we do asset management, how we do underwriting. This is probably the safest way you can get in and see all of that and still make a fixed return short term and do quite well. In fact, craft equity deals today are making about 10% to 20% more than common equity, but they're in front of the common equity. So when I tell people, hey, is now the time to get in? I'm going, yes, this isn't 2008, 2009, where uwe hockey sticked in 2011 and twelve, but we're going to have a nice ramp up, come around. 25, 26, 27.
Mike Koenigs [00:10:47]:
Okay. And what you and I were talking about before we started recording is the fact that because these are shorter term, they're probably harder to find. And again, you got to have someone doing the due diligence, which is what you're really good at, is you really go out there and collect the data. That's the safest bet for me as an investor is I got to find a partner that I want to dance with not once, but multiple times, and sourcing these things. And you said something. Well, go ahead and comment on that. But you also said, this is a bit of a trojan horse. So explain that, because you're implying it there.
Mike Koenigs [00:11:29]:
But I really like the mindset and why that's an important thing to think about.
Darin Davis [00:11:36]:
Yeah. The way we underwrite this, and I'll talk about the Trojan horse, but the way we underwrite it, we underwrite it just like we were going to do a common equity deal like we did two or three years ago. So our underwriting is very extensive, and here's why. Because in the event that something doesn't materialize as it's contracted to do, we could end up taking that asset over. So when we underwrite the deal, we want that asset. So we're not going to go do pref equity into some deal in California or New York that we may not ever have any interest in doing. We're doing those right in our backyard, just like we've been doing for the last 15 years. So really in Texas and a little bit in Florida, those are two states that we like, but we are underwriting those just like we were common equity.
Darin Davis [00:12:25]:
But you're getting the preferred equity position. Now let's talk about the Trojan divorce and the reason why we underwrite them like that. In the unlikely event that we get this asset back, let's say it's not performing as well. The sponsor is under capitalized still, and no more capital could come into the deal unless the common equity wants to bring it. We could end up taking over that asset. And if that happens, that's why I said we want to underwrite. It's just like ours because we don't mind taking the asset over. Do I think that's going to happen? Probably not.
Darin Davis [00:13:03]:
We may get one or two deals, but I tell people this, Texas is not a distressed market today. Texas is a discounted market. So if you think you're going to come in and pick something up at $0.50 on the dollar, probably not. Could you pick it up at 75, $0.80 on the dollar? Probably. So. I think we'll see a couple of those. Now let's go to the Trojan horse. If I'm able to get in to this deal as a pref equity, and I'm in that really sweet spot with safety, I get access to all the construction numbers, all the rent numbers, all the expenses, property management.
Darin Davis [00:13:45]:
I get everything. And that's going to give me a look into the asset where we can say, hey, this is an asset we really want. Let's not take it to market and go through that six month sales process and pay all those fees and that carry cost. Why don't we come in and pay you a fair price and take that over right now? I get a front row view of everything on that asset for the next year or two, and that's what I think is more probable. We'll pick up two, three, four of those over the next couple of years, and that's the home run. Okay. For us, picking up an asset that we already know, understand invested in, know the market, and we're getting to come in and look at everything, and then we get to pick that up at a 10% discount, 15% discount, lower than replacement cost, and then we start managing it. And then we do start our own little mini hockey stick.
Darin Davis [00:14:39]:
Got it.
Mike Koenigs [00:14:40]:
So that ends up being, these are safe, smart singles and doubles. Right? And then how about think about it from the seller's point of view. Why do they like working with you?
Darin Davis [00:14:58]:
Because we do what we say we're going to do from a seller's perspective. Yeah. We have never not performed with any of our partners on providing. When we make a commitment to somebody, we figure it out and get it done. We've had some challenges, no doubt about it. We've been slow a couple of times, but it was market conditions and our partners knew that and they knew that we're good for what we're doing. But sellers know who we are. We've been in the market for 15 years here in the central Texas market.
Darin Davis [00:15:28]:
So we have a really good reputation and I got a great team. And we have a little over 300 investors. Some of them have been with us 15 years. Most of them have been with us for the last ten years. And we're small, but we're able to execute and we know that. We know the local market really well. Local market meaning Texas. We don't really go outside of Texas, except we have a couple of really good partners in Florida that we really trust and like.
Darin Davis [00:15:56]:
And we would follow those guys because we've done business with them here in Texas as well.
Mike Koenigs [00:16:01]:
Got it. So the net net is, first of all, there's two markets you know really well. There's good deals there. They let you in because you fulfill. And that also means you pick the right kind of money. Meaning talk a little bit about choosing the right investors and letting the right ones in. So they're a right fit. Like what's your selection process, or even more specific, who's a perfect fit investor for these kind of deals? And working with an organization like yours, if we were just going to be hyper selective.
Darin Davis [00:16:44]:
Yeah. And I'll tell you, really, one of the drivers, well, first of all, the market presented this opportunity, and we understand it. But one of the drivers that really made us say we need to pivot now and capitalize on this is most of our investors are right in that 45 to 65 range. A lot of them are saying, hey, I want cash flow. That's first capital preservation cash flow. Well, prep equity takes care of those two for sure. And then the third thing they said I want is, I sure would like some upside. How do I get that? And I said, well, in a pref equity, you really are not designed to get that.
Darin Davis [00:17:24]:
But however, what we just went through with that trojan divorce example, if we're in there, we will be able to pick up an asset or two, and you will be able to get, one, your safety and security. Two, you'll get your cash flow. All right. Three, you're going to pick up an asset at or below replacement cost, and then we start managing it. So that little trifecta there is very comforting to me and allows me and every other investor to sleep very well. Our market in Texas, you can't say this about all markets, but we're very fortunate. We still have huge migration coming here. We still have jobs being created that's just not slowing down anytime soon.
Darin Davis [00:18:07]:
So I think this Texas market, even though it's not what it was four years ago, it's slow, but we're not down. And Mike, here's the thing that's, I think, powerful that people need to understand and just basic supply demand, okay, we have virtually not stop. We have well over a 50%. And then some people are saying closer to 70%. Some people that track the markets. Reduction in new construction starts here in central Texas. Okay, now what does that mean? If our supply is a little high right now and our rents are, they're not eight and 9% like they were, they have a one and 2% increase, but we still have a really solid migration, but we're not starting new supply. There has been no significant new supply started in the last 18 months.
Darin Davis [00:19:02]:
That impact is not going to hurt in 24, but in the back half of 25, when all that supply is taken up and we don't have the supply that we need to maintain the demand that we're going to have, you're going to see the end of 25 26, 27. That's where you're going to see your big uptick in performance. Rents will start going up at that three, four, five, 6%, and you'll see some significant upside. We're fairly confident that rates will probably come down over the next two and a half years to a more normal level. Not the two and a half and three and a half that we saw five, six years ago, but somewhere in that four, four and a half, five range. So you start seeing all of the drivers start shifting to go in our favor about a year and a half to two and a half years from now.
Mike Koenigs [00:19:57]:
All right, so let's move on into. So we know the location, the structure, what to expect, the returns. Let's talk a little bit about the mindsets of, we'll say, the right kind. What are the fears that you run into all the time? So I'll call these, like, the investor objections and also the mindsets of the successful person who's playing in this particular category, because someone who's doing a VC deal has a very different mindset, someone who's doing a high tech investment. But when you're looking at PE, real estate specifically, what's the right approach and the wrong approach to walk into these.
Darin Davis [00:20:42]:
With, for an investor to come in and how to look at this? Well, I mean, the things that never change are just the sponsor. Okay? You've got to vet the sponsor, you've got to look at their track record, you've got to check their references. That's just anything you do, okay? And we've all done it, and then we've all made poor investments. I mean, it happened to all of us. But the thing that I will say that I think is a huge opportunity for people that are sitting kind of like, man, do I put my foot in the water. It is challenging. I said a little bit earlier, but when you've got a common equity investment, there are so many things that could happen that could impact the investment. And when you look at a preferred equity investment, what we have today, if you're looking for something that's driving income, that's in a very safe position, that's real estate backed, in a market that's growing, that's very economically friendly, business friendly, you're starting to line up everything that goes check plus, check plus, check plus.
Darin Davis [00:21:56]:
I'm going to say newbies, okay, this would be an excellent time to be in a very safe position and learn. Right now, you're not going to learn if you don't invest. I mean, you can, but really putting your money in the deal and looking at the reports and asking questions and understanding what's going on and what's the exit strategy and how does it all work. What a layup. I never had a chance to do prep equity when I started. I didn't learn what it was until probably twelve or 13 years ago. So the first ten years I was doing this, I didn't know I was just a common equity guy. But this is a really good opportunity for, I think, new investors that are wanting to get into commercial real estate passively and learn so that they can make better decisions next year, the next year and the next.
Darin Davis [00:22:50]:
This is good. Now for your more advanced investors, your more sophisticated, accredited investors, what they see is, wow, okay, yeah, that's good. My money is safe, I'm getting some cash flow, but they love the Trojan horse opportunity. They're going like, you know what, I can wait two years because I would rather get a 12% return for two years annualized, and then go in and capture that asset below replacement cost and hold it for five or seven years and generate more cash flow and appreciation. So it's such a fantastic opportunity. And I'll tell you this, it's not going to be ongoing for four or five, six years. I think our window is about three. And can I throw some numbers out at you real quick that I think are pretty important? I want to make sure I say this right.
Darin Davis [00:23:40]:
So in 2024, we have 650,000,000,000 with a b loans maturing commercial loans. All right, those guys in this year right now, if they can't meet the obligations that they have, they're going to have to find alternative financing. Graph equity is one of those alternative financing. Now, out of that 50 billion is multifamily where we'll focus. But there's some industrial we may look at, but we're not focusing there. But some of these deals may be really strong data centers, industrial type stuff. Going into 2025, it's 520,000,000,000. All right, so 650 this year, 520 next year, 380,000,000,026.
Darin Davis [00:24:28]:
Now that's why you can see the loans that are maturing are starting to decline. So that's why I think 24, 25 and 26 are going to be our years to really capitalize on not only making a profit in a very safe way, but again, you kind of asked about new people, kind of how you would vet this. This is a fantastic opportunity to get into a commercial real estate deal with private equity, alternative investments and have surety of execution than you would in most any other type of investment. As a first time or second time.
Mike Koenigs [00:25:03]:
Investor, how about tax benefits? Are there any tax benefits to this type of investing strategy, and what do they look like?
Darin Davis [00:25:14]:
Well, that's a really good question, because our investors who do common equity for the last 15 years with us, there were tax advantages, okay? But pref equity is treated like income, so you're not going to be getting any of the depreciation or anything like that. And that's the trade off.
Mike Koenigs [00:25:37]:
You're getting paid off, so you have more certainty of you getting your capital back and having multiple benefits along the way. And I guess if I were a picking man, I'd rather say, I'd rather protect my cash than I'd probably find a different vehicle for taxes.
Darin Davis [00:25:56]:
Okay, this one is just income. Here's something that I should have said this a little bit earlier. I want to give people a real example. This is a live deal we're doing right now. All right? So in the capital stack, 100% of the money, we are 5% of the total capital, and we're sitting right between the senior debt and the common equity. Now, why is this important? All right, first of all, it's obvious it's in a really safe place. But let's hypothetically say this asset was to not perform. Well.
Darin Davis [00:26:35]:
The cost of that asset with the entire capital stack is $250,000 a door, all in construction. Let's say that for some reason, we take the keys from the developer. He says, guys, we can't perform. We're not putting any more money in. Well, we end up having the ability to cure, to take over the asset, and we could take that common equity and could wipe all of that away. Now here's why I'm saying that that cost at 250 a door still underwrites and performs a really nice return. If the common equity is gone, that cost goes down to $175,000 a door. So you can see the deep discount and the safety mechanism that we have there.
Darin Davis [00:27:22]:
So when you're talking about experienced investors, they're going, guys, they're crossing their fingers. That happens.
Mike Koenigs [00:27:28]:
Yeah, almost 35%.
Darin Davis [00:27:36]:
Below replacement cost. And then the new investors, they're going like, wow, I just got a huge discount, a safety net behind me that my capital and my returns and any penalties will all be paid before one person in that common equity receives anything.
Mike Koenigs [00:27:55]:
Yeah. So again, if I had to pick tax benefit or the safety, with that added upside, it seems to be a pretty clear decision. So I'm going to go into one more mindset question here, which is, hey, action taker Mike Koenigs here. And I just wanted to interrupt for a second and let you know that if you're ready to reinvent yourself and your business, go to connecttomike.com to learn more and book a conversation with me right now. All right, back to the episode. If you look at your driving principles now, we've known each other for a while. I've been able to really deconstruct your mind. We spent a good chunk of time together, and you have gone through multiple cycles.
Mike Koenigs [00:28:40]:
Okay? This is ups and downs where you've watched the boom and bust in real estate especially, and traditional investing as well. So if you were going to look back, you could cast yourself backwards in time. Or if you were starting out now, knowing what you know, what do you think the biggest mistakes that you made that you don't make anymore when you're finding and putting together deals that also bring us to this moment in time. It's like when you look at the combination of high interest rates at this moment, deals like you see them, but also experience speaking. If you had three wisdom takeaways as an investor, what would they be? And I took a long time to ask that question because I want to give you enough time to think because we didn't prep this. It was more like, I've been thinking about everything we've talked about in the past. I'm like, what do I really want to walk away with and know today?
Darin Davis [00:29:45]:
Yeah, you could have made that a ten second question. I have the answer because it's etched in my brain. Everything's there. So I'll tell you this. When I started, it's books on tape. Okay? There was no Internet. There was no nothing. So there was a lot of.
Darin Davis [00:30:02]:
I mean, just. I had to teach myself just anything and everything. No real mentors, no mastermind, no nothing. Okay. Late ninety s. I think the thing that I've learned the most is, and I don't regret it at all, I just wish it had have happened a little different. But I got to the same point. I was probably a little too trusting in the people and the deals because I didn't quite have the knowledge at the time.
Darin Davis [00:30:32]:
All right? And so if I were to go back in time and fast forward today, what I completely do now is I vet the sponsor team. I want their track record, I want their references. I want to know what they've done, how they've done it. I want to know more about the person who's managing, managing my money. Because every deal on a pro forma looks beautiful. It's when you exit and when you perform during that time, you own that. That's what I want to know. And I get why people do it.
Darin Davis [00:31:13]:
They feel like they don't know the right questions to ask, or they don't feel like they're educated enough. I can tell you right now, you've heard it. Everybody's heard. You can't ask a dumb question. Whatever, you've got to ask questions. And that's why I say this prep equity deal, it's handing you a playbook on how these deals are put together, from the operating agreement, to the PPM, to the underwriting, to the pro forma, to how we work with the bank, all of that. I mean, it's just there. And if I had pref equity deal in front of me back in 2003, four, five, six, when I was starting off really trying to learn, I think things would have accelerated much faster for me.
Darin Davis [00:31:59]:
So that would be my thing that I would say I learned a lot. And I don't regret making mistakes or taking risk at all, because, my gosh, that's the only way we're going to learn. But I tell you, that would be the one thing I would tell people today. They shorten that learning curve. If somebody really wants to be your partner, and somebody wants to be involved with you as a sponsor and being a steward of your money, you can't ask them a stupid question or enough questions if you're not comfortable.
Mike Koenigs [00:32:34]:
Right? That makes a lot of sense. You have a bunch of notes here about risk. Let's talk about risk. Because ultimately, what would make someone who's listening to this or watching it right now is okay. I just want to understand risk, and there's a mindset risk and a practical risk, which is okay. If I hand over 50 or 250,000 or half million or million dollars over or more to Darren and his team, what are my chances of seeing something? And then what's also the risk of doing.
Darin Davis [00:33:24]:
Well, you know, I look at risk and I will tell you not. Not as much as in the last five years, but back in my late thirty s and forty s, you know what? I'm going to fire first and aim later. And that's the only way I'm going to figure this out, because everything's moving too slow for me. When I get my mind set on something, I want to figure it out as fast as I can. If I back up and see what is my personality and what are my characteristics to evaluating things that I want to do or not do. I literally jump in with both feet and then I figure it out and say, okay, that didn't work, but what did I learn from that? All right? And then that's just my personality with my money, okay, my money, all right, with investors money, I do a 180. I'm like, holy, holy, holy. I got to back up and really think through this because I can't afford to have a bad deal.
Darin Davis [00:34:25]:
I can't afford to have a bad relationship with investor. You know, like I do. You do one thing and it spreads like wildfire with this. Just. It's just one of those where that's me on and part two of that question. What was it, Mike? I was getting excited about both of them.
Mike Koenigs [00:34:48]:
Yeah, well, it's the risk of doing nothing. You have some specific notes you sent me ahead of time that I was looking at going, all right, this is legit.
Darin Davis [00:35:00]:
Yeah. And this is just 20 years of talking to people. And I love talking to first time investors, new investors. They've only been in a year or two. And I don't know if this resonates, but if you think about this, and I have some numbers here that I love to look at because it's so impactful. I'll just talk about inflation for a second. And I've got an example here. Like, if you have a million dollars sitting in a bank account, okay, and you just are super risk adverse and with inflation and not doing anything, and I get it, everybody needs a nest egg.
Darin Davis [00:35:40]:
But that million dollars, just at two and a half percent inflation over the course of ten years would be worth $769,000 in ten years from now. Okay? Now, you did nothing with it, all right? And you still have $769,000. But you decided to take a loss day one. Okay? So you've made a decision. Now, if you were to take that same million dollars and you were to invest it in something that made 8% return, and we still took out the inflation component of that, you would be, over that ten year period, you'd be looking at a million nine. I mean, a million 5.9. So a million six. All right, so $769 to $1.5 million and now 8%.
Darin Davis [00:36:32]:
And that's a straight compounding. But I did take out for inflation. But that is something that's fairly doable. I mean, the s and P over any given ten year period is eleven private equity, my world averages 1314 a year. But the delta on that being 800 and 5900 grand is significant. So if you're willing to say no, you have to be aware, and I say aware that you're deciding that I'm losing money. And we all know it. We've all experienced the last years, not two and a half percent, collectively 1215 percent.
Darin Davis [00:37:15]:
So we've taken a big hit this last couple of years. You know what I'm guilty of? I didn't have all my money invested the way I wanted to. And I went back with one of my mentors and a financial advisor, and I probably missed out on a few hundred grand because I didn't have it placed correctly over the last couple of years. Inflation just terrorized me.
Mike Koenigs [00:37:38]:
Yes. And I would say I've been pretty vocal about this. My greatest mistakes were not getting into real estate sooner and not doing smart deals with smart people like you. As I often say, I'm a delusional optimist who invested in people who are delusional optimists. And that's the problem with VC deals, because it's like, I look at it, I'm like, oh, I fell in love with an idea and a founder. Instead of saying, you know what, I took some stuff, I took it off the table. And a nice 13% or an 11% compounded adds up real fast. And ten years goes by really quickly.
Mike Koenigs [00:38:29]:
And the millions I have in dumb VC deals, like I had one in one that was away for 14 years and I got multiples on it. I probably got six x, but still, compared to the eight that didn't. And I had a big one that just died this year. And I'm like, yeah, it's the Coulda, shoulda, woulda. And I think the slow and steady beats the hell out of the out of the park chances. And your chances of being successful with VC deals is very low. Statistically speaking, this is a much better bet. So any thoughts on that before I move on to the next one? Because I got to ask you of a metaphor about the hokey pokey.
Mike Koenigs [00:39:17]:
And at first when I saw this, I'm like, yeah, I'm not going to do that. And now I get it.
Darin Davis [00:39:23]:
What's the hokey pokey? Well, it came up the other day and I was thinking about this podcast and I've got some other stuff I'm working on and it's the fear factor. And I kept thinking, and I heard this song, I was going, well, that was good timing, but put your right foot in, put your right foot out, put your right foot in. I started thinking about, I go, we do the hokey pokey. All day with new investors, and I'm sitting here going, right foot in, right foot out, left foot in, left foot out, right arm, left arm. And then at some point at the very end of the song, it says, you do the hokey poke and you put your whole body in. Okay? And I don't know if that's. And I started thinking about that. It's only when you commit, because so many people, they stick their hand in, they stick their hat in, they put their foot in, put their foot out.
Darin Davis [00:40:19]:
And you talked about, you wish I had done it earlier. I guarantee you, you and me both, I guarantee you, we put our right hand in, we put our left hand in, our right foot, our left foot. And then finally, whether it's five years, ten years, 15, we go, wait, I haven't put my whole body in yet. I need to go. And it just caught me, and I said, I got to share that with you. So we're doing the hokey, hokey. We're all in.
Mike Koenigs [00:40:48]:
We are. And I have something to say to you offline here when we're done that I don't dare broadcast, but I'll just tell you that I say this to my audience after having spent time with you and seeing and being able to deconstruct a lot of your deals, a lot of them, and see how you've thought. One of the things I would just flat out say is, if you ever get a chance to work with Darren, do it, because this guy will educate you and teach you how to think, which is the best value you'll ever get from anyone. It's like my best investments in life have always been finding good coaches who play the long game. And you're a long game with a lot of history who's survived these ups and downs without letting the ups and downs hurt your brain and your courage and your confidence. It's been shaken and you've had a lot of hard life lessons thrown at you over the past few years. So that's my endorsement of you.
Darin Davis [00:41:57]:
Thank you.
Mike Koenigs [00:41:57]:
You're welcome. And then the second side is, you've spent a lot of time preparing some really good resources. So I've got a couple more questions for you, but I want to make sure that anyone who wants to learn more and have a conversation with you, head over to Clubcapital Co. Go. And there's a page where you can get some of Darren's resources. And you can also just send an email to info at Clubcap dot Co. Or pick up the phone and just call 512-433-6325 but talk a little bit about some of the educational goodies that you and your team have put together. And then I've got another big question for you.
Darin Davis [00:42:41]:
Yeah, and I appreciate that, Mike. I've put together, boy, I've got a webinar recorded, a pref equity 101. I've got an executive summary, kind of a two pager, and I've got a couple of articles on pref equity, because a lot of our common equity investors were not familiar with it. So even guys have been with me. So we just put some content together. And I would encourage everybody to go to the site you just gave on theclubcapital Co. Go, and we will have everything on there. And there'll be several documents.
Darin Davis [00:43:24]:
There'll be a webinar, it'll be recorded. We're doing a q and a this week out on that same site. So you'll hear investors asking questions. So if people are going like, wow, I didn't think of that. And it's a 45 minutes, we'll probably have 30, 40, 50 people on it asking new questions. And we have a q and a section on there for prep equity. And then you'll also see our company as a whole. You'll see our team, our performance, our track record.
Darin Davis [00:43:56]:
You'll see all of. Specifically, we're focusing in on the pref equity, and that's the stuff we're doing today.
Mike Koenigs [00:44:05]:
Yeah. Which, again, know that, like anything, there's always going to be shifts in where money is going, how to reduce risk, how to put together these deals and interest rates and all sorts of demand. This is shifting all the time. And you're going to do the right thing because you got your own money in this. It's not like you're gambling with someone else's. You've got skin in the game with all of your deals, and you've got reputation in the game with every deal you ever do. You're approaching this as though you're staking your reputation on both sides, your investors, as well as the people you're doing the deals with.
Darin Davis [00:44:49]:
Very much so. I'm a firm believer when we go in, our entire team goes in, and investing alongside of our investors is important. So you're not going to see us promoting something that we wouldn't do ourselves.
Mike Koenigs [00:45:08]:
Right. So this always feels like a cop out question, but what are the questions I should have asked you that I didn't? And if you put yourself in the seat of an investor, so let's say you get some people who raise their hands and go. Okay, I'm at least going to start a conversation with Darren. I'm going to get his stuff and I want to talk to him. What do you think they should be asking you that they often don't? Or what are some of the first questions you'll typically get that I might not have asked you today? That'll get them in the game.
Darin Davis [00:45:53]:
I can't wait to see what you're going to ask me offline here in a little bit. But one thing I don't think investors do a good enough job doing is plan B. Plan C, exit strategies. Okay. Because when you get an offering, it's called an offering memorandum, and a sponsor sends that to you, they typically say, here's the pro forma, here's the time frame, here's the exit. Okay, well, guess what. What just happened to all these developers two years ago? Not one of them prepared for pref equity, maybe one, a small percent. But asking that sponsor, okay, what if plan a doesn't happen? What's your contingency? Where is your breakpoint? What if rents are down 20%? Can you cover the debt? But if you can't cover the debt, what are you going to do? And that guy should say, well, we have to go get more equity.
Darin Davis [00:46:52]:
Well, how are you going to get that equity? Well, we'll do a capital call with our investors, and if you don't want to do that, the sponsors can put the money in, which is the person you're talking to, or you can go get pref equity or whatever. But they have to have more than one answer because if they have one and that didn't go perfect, you might not be with the right sponsor. So I encourage to ask exit strategies because it's not going to go perfect all the time. And I think a lot of us got very spoiled between 2000 and I'm going to say 1213 to 2020, 2021, that decade right there where everything just worked. I mean, there was so much money flowing in here and money was cheap. I would not count on that for the foreseeable future. I think things are going to back up like they were in the early 2000, and appreciation is going to normalize. Costs are going to normalize, returns are going to normalize.
Darin Davis [00:47:57]:
You'll see stuff that was 2003, four, five numbers, not 2015, 1617 numbers.
Mike Koenigs [00:48:07]:
That, again would be that fall in my category of pick the right partner and make sure there are no surprises and get educated right and be prepared for changes. And picking a partner that knows how to think on their feet. It's knowing when to play the long game and playing the short game is my interpretation of what you just said. And that just takes, again, the right partner is going to come clean and say, like I say, I don't like surprises. Good news is great, bad news is fine. No news is never okay. And again, I was involved in a pretty sizable investment that just blew up recently. And a couple of them, actually.
Mike Koenigs [00:48:56]:
And the thing that all bad deals I've been involved in all have in Common is they involved a lot of. No news. No news. Yeah, you got a wrong partner when there's no news. Go ahead.
Darin Davis [00:49:13]:
I want to comment on that. Okay. Because that was going to be part two. What should they be asking? How are you going to communicate? When are you going to communicate? And I'm going to give you a couple of examples. When sponsors go dark, they bring that on themselves. Okay. And it's typically not good news. And I can't tell you, when you do a reference check, you want to ask the person you're talking to about the communications that sponsor had with them.
Darin Davis [00:49:49]:
All right? Did they only report good news? Did they report timely? Because we're all big boys, okay? We all can lose money. We lose money in the stock market every day. Every day. But the communication is out there. All right? It's more streamlined. But I completely agree with what you just said. If the sponsor is not in a proactive approach, even if it's mean, I would appreciate you calling me. Say, Darren, I lost your money and here's what happened, and here's try to do to recover it.
Darin Davis [00:50:26]:
And if we don't have option a, B and c to recover, you know, you're not really giving me an answer, you're just giving me an excuse. So. No, you're spot on with that one. And I'm glad you reinforced that because that's really important.
Mike Koenigs [00:50:42]:
Yeah, well, that's something that, again, I feel strongly that someone who's dancing with you is going to find out, is just that you're going to communicate and you treat this with, look at someone's money and people get really emotional. I've seen, again, a recent deal that fell apart that I was in and holy cow, the founder has gotten attacked by everyone. And some of the money has been in there twelve years. And I know people have less than six figures in and they're treating this person like a fraudster and they get so emotional and weird about it. And it's like, first of all, with the energy that you're putting into this, you could have made that money back already. And you entered into this knowing the risk. But the big mistake was there wasn't a communicative partner, and that makes all the difference in the world. So it's just keeping people educated and informed and knowing how emotional folks get about their money and where that scarcity gets kicked in.
Mike Koenigs [00:51:57]:
You've seen it so many times, and I know you've weathered some big storms, both personally and professionally throughout all this, which is another reason why you got to pick a warrior who's going to go to battle with you. So, with that, are there any other questions that I should have asked that I didn't, aside from, again, I want to just repeat, make sure you take advantage of some of the free tools and resources that Darren's put together for you, because that alone is worth it. Just heading over to Clubcapital Co. Or just don't be afraid to pick up the phone or send an email to info at Clubcap Co. So what else? If there's anything else that I should end on that I didn't ask you that you want to reinforce or say, darren.
Darin Davis [00:52:49]:
Well, I'll reinforce something. This is one of the best two or three year windows. If you were waiting for, like, when's the right time to buy the stock? Okay, well, you don't want to buy it when it's going up, right? You want to buy it when it's going down. Well, we're going to be down for another couple of years. All right. Down flat. All right. But we've picked one asset that will perform, one investment vehicle that will perform.
Darin Davis [00:53:16]:
And if you really think you want to be part of what that hockey stick, I don't expect it to be near as good as 2010, 1112, when it just literally went to the moon. But it's going to be strong. I think fortunes are going to be made between now and 2027, I really do, in the real estate market. And you're going to see it's going to be a little uncomfortable, maybe because you're going to still hear bad news about interest rates and inflation and all that. But I got to tell you, I'm old now, but my last 25 years of being in the private equity space, this will be my third opportunity to really capture, and I missed one and two because I missed one and two, and I'm not missing this one.
Mike Koenigs [00:54:08]:
That that's very wise. I'm just soaking that in and reflecting it and seeing where else that applies. Is there anything else we want to share with folks about just getting their foot into the game? And getting past the initial fear of doing something that if they haven't done a deal like this before, that would push them over the edge and say, yeah, this is the reason why you'd want to take this risk. Aside from all the other things we've covered, is there something else that we didn't?
Darin Davis [00:54:46]:
Yeah, Mike, not really. I think the thing that I like about the prep equity and the reason I wanted to talk about it with you, because it is a short window, like I said, two to three years. It's so safe. I mean, you're in class a real estate in a booming economy compared to the rest of the Texas is. We're fortunate. I feel very fortunate that we live here and do business here, and it's a great way to see everything about the investment in a very safe, secure, cash flowing, income generating position. And I can't say this. I mean, there's all kind of good deals out there, but there's also a lot of deals that don't have the surety and safety that this would.
Darin Davis [00:55:30]:
And that's for new people. Or I'll tell you what, I'll be quick on this one. I had a call yesterday from a woman that's 68, 69. And she got her son on the call, and he said, darren, he goes, my mom's been with you guys for eight years now, and you all done it really well. I said, yeah. He goes, but you've never done a deal like this. He's pretty knowledgeable in the real estate. He said, you've always done common equity.
Darin Davis [00:55:59]:
And we were pulling her out of the common equity going forward because of her age, and she wants income and capital preservation. He goes, I really like this. And I said, well, okay. And I can't say his name, but I said, all right, well, tell me why. He goes, I understand it. I see the safety, I see the cash flow. I see that it's short term. She's not going to be sitting out here seven, 8910 years.
Darin Davis [00:56:22]:
It's defined. And she goes, this makes a lot of sense for her. And he said, we were going to go elsewhere. We were going to t bills or something else, but we're going to double what we make on a t bill. Granted, it's not quite as liquid, but it's not five years out, it's three. But that's all I'll say on that. I've kind of beat that drum a lot, but this is really one of the better opportunities for experienced investors that understand what the upside could be in an acquisition of a deal and for new people, just a safety surety and income.
Mike Koenigs [00:57:02]:
I think. Again, getting back to the summary, perfect market timing, low risk income generating with multiple safety nets and experienced offers that are available now. That is a very beautiful, perfect storm. And that's what I look for now as an investor, especially given the fact that I'm playing a safer, smarter game and I'm not swinging for the vc fences like I used to, knowing that time's ticking and you want something that's going to create some quality returns but also build some relationships that are going to matter for the long term. So that would be my summary of what I just heard right now. So with that, I'm going to give you the last word. Darren, anything else before we wrap up?
Darin Davis [00:57:57]:
Man, I am grateful for this opportunity. Mike, thank you. You asked a lot of great questions, and I will leave everybody with this. And you said it earlier. Okay. I don't know when it hit me, but I wish it had hit me about a decade earlier to start doing private equity investing and the whole time and compounding, I'm fortunate. I have younger adult children and for the sheer fact that little bit of knowledge that I'll give them to get them started will dwarf what I've done should they pursue what I'm doing. And even as an investor, it's going to give them the knowledge to do that, and they'll be able to.
Darin Davis [00:58:36]:
And private equity is now available to people. 20 years ago, you couldn't find it. So the only thing I just start execute, go. It can be small and just go. So I can tell you.
Mike Koenigs [00:58:56]:
And the best place to go is go. How's that? There's the hook of the day. All right, well, we'll officially wrap up this episode. This is Darren Davis. I'm Mike Koenigs. This has been capability amplifier. If you enjoyed this episode, make sure you share it with someone you know, give it a rating. And also let me know if you'd like more episodes like this.
Mike Koenigs [00:59:19]:
I like getting my hands dirty, especially with people that I've worked with and working with and I refer to, and I love deals. I just love seeing deals. And if I had a regret right now, it's that I didn't start doing real estate sooner, and I didn't understand that there were alternative vehicles available that didn't require so much work. And this is one of them. So with that, this is another episode. Thanks for watching. Thanks for listening. I'll see you in the next one.
Mike Koenigs [00:59:46]:
Sooner.
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