Real Estate Investing from a Private Money Lender & Developers Perspective

Last Updated on Feb 20, 2022 by Jos

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Contents

    Introduction

    Jos Aguiar 0:09
    Hey guys, I’m here today with Rick from HIS capital.

    Super excited to talk about what he does in the multifamily and real estate investing space.

    How’s it going, Rick?

    Rick 0:23
    Hey, how are you? Thanks for having me Jos.

    What got you into the real estate investing space?

    Jos Aguiar 0:25
    Doing well my friend. So let’s get right into it. Why are you in the real estate space what got you doing this?

    Rick Melero 0:34
    You know I’ve been doing this now for 20 years and some days I asked that question why?

    But no, seriously, you know, about 20 years ago, I really realised and I think that’s where I connected some dots in my life.

    I realised that my grandmother was right. And she used to tell me this as I was a little boy, tell me who you spend your time with. And I’ll tell you, you’ll become.

    And around that time. 20 years ago, I realised I was broke. I had no vision. I had no purpose. And when I started looking at my circle of influence, they were all in the same boat.

    They wanted a party, they had no vision.

    And so I went on a little journey to try to discover who I really was in what I wanted to accomplish with my life.

    And during that journey, one of the things that I wanted to do was to make an impact in the world and people around the world that have needs, but I realised that to do that I needed financial resources, and I needed access to be able to do that.

    And so it long story short in some of my research, I try to find out who are the most successful people what do they do?

    And it was in that process of researching for who the most successful people were that took me a while because a lot of them were in different industries.

    They had different skill sets, but when I started uncovering the wealthiest people and looking at their actual net worth.

    I really connected the dots because I saw that all of them just about every single one of them, boasts some level of real estate in the overall portfolio of their net worth.

    And that’s when I said Aha!

    So if all the rich people are doing this, maybe I should get into it.

    And so that’s how I started and so I interned for a guy for six months because he wouldn’t hire me.

    I just didn’t have experience but it was a great experience for me because it really challenged me to really start thinking like an investor.

    And so I started in residential, and over the years through the ups and downs of the market, we’ve grown into not only doing residential development, we’ve also done multifamily commercial.

    We’ve invested in other countries we do private lending and so we have a pretty decent strategy approach.

    That’s all about portfolios.

    And so for the last 20 years, we’ve just been adding and adding to the arsenal of what we specialise in.

    what kind of company did you start working with was it a real estate company or an investment company?

    Jos Aguiar 2:33
    Okay, now, that first point you said about just turning as an internship, what kind of company did you start working with as a real estate company or an investment company?

    Rick Melero 2:43
    It was an investment company.

    Well, no really, what ended up happening is I started doing some research when I connected those dots, and to be honest with you, I went to one of those well-known guru courses, and I was excited because they showed the vision of how you can get wealthy but unfortunately, I was so broke I couldn’t pay attention.

    So when they started offering this mentorship for all these 1000s of dollars, I’m like from where?

    So I literally just took out a newspaper and I said, Well, somebody is going to be offering a job here and as I was looking for an opportunity that was specifically in real estate, there was one particular ad that caught my attention.

    And it basically said real estate flipper doing 10 Plus deals a month looking for an acquisition specialist will make about 75,000 a year so that was the act on like, Are you kidding me? So no, apply the call.

    I showed up. I gave the guy everything I had and I think he liked me because he saw that I was really energetic. I was ambitious.

    But his response to me was basically listen, Rick, I like you, you have a lot of potential. Unfortunately, I don’t have time to invest in you to train you.

    And you’re so new. There are other options right now available.

    So as I walked out of that building, I felt defeated and then I just something in me just said Look, you’re gonna let this stop you. And so I said, You know what I’m not so I turned back around. I said, Sir, whether you like it or not, I’m going to work with you, even if that means I work for free.

    And so it just kind of did a shock and awe for him and he’s like, Sure. And so sure enough, I ended up interning for six months, bringing him a lot of business opportunities.

    And that’s kind of where I started learning about real estate investment as a whole.

    What makes a good deal?

    Jos Aguiar 4:11
    Okay, moving on from that what makes a good deal? What did you learn that time? And what did you learn?

    Rick Melero 4:17
    I really learned a lot of there’s a lot to go with that.

    Obviously, this has been something that we continue to grow and learn from every single deal that we do, whether it’s residential or commercial, but I think one of the things that I learned during that early time was that there truly is a difference between the value and price.

    And it was really just getting to understand a deal for those two components.

    And so it was always trying to find out a motivated seller that had a need that I can help with. But in return, they would offer me the value for the price that I was giving them.

    And so I think that’s been one of the biggest things is really being able to understand the difference between an investor who is speculating, hoping to have price versus truly understanding what is the true value versus the price that we have to pay for this to work and so I think that was one of the first elements that I learned very early on in my career.

    How you evaluate a real estate investment?

    Jos Aguiar 5:12
    That’s awesome. So let’s go into a bit more detail on that. What do you what are you specifically looking for in a deal? Let’s talk about how you evaluate a real estate investment.

    Rick Melero 5:23
    Yeah, absolutely. Well, I mean, the very first thing I do and it’s not common, so you may hear about this for maybe an economist, but typically you’re not going to hear this from an investor.

    The way that our company works is we have a very important philosophy that drives everything that we do.

    And the reason why I say that is because we learned from 2008 that real estate and just about every market is cyclical.

    There are cycles, and they’re driven primarily because of debt. And again, I don’t want to go into a long speech here of why credit and debt are an issue but the reality if you just take a look at common sense, if you look at productivity in business, whether that is in real estate, or in any industries, oil sales, whatever. If you really think about it, whenever I spend money, somebody else earns money.

    Whenever they earn money, they spend that money somewhere else and before you know it, there’s a cycle of growth and people are making and earning money.

    However, when you really think about that the only money that I can spend today is what I have in hand. Right? And so I can only spend what I have, I can’t overspend what I don’t have.

    And so what happens with debt is when we’re able to borrow money that we don’t have today, we’re able to spend money that doesn’t even exist that we don’t have, hoping that in the future we’ll make more money to be able to pay back what we borrowed in the first place.

    And so for that very reason, debt creates a cycle because the moment I have to pay back the debt, I have to spend less if I spend less with you, you make less money and so on and so forth.

    So it creates these cycles of growth and the cycles of decline and correction, right. So the reason why I want to lay this foundation is because as an investment company, we’ve learned that the real estate cycle doesn’t tell us when to buy, it shows us how to buy and it also shows us what are the best strategies that we need to implement to maximise on our returns.

    So I’ll give you a really quick example. So because right now we’re in a growth stage, but a few years ago, we were actually in what is called the absorption stage of the cycle.

    So there was a lot of property in inventory that was distressed and so really flipping properties were buying to hold at really high cap rates was the key to building that long term wealth, right that included buying distressed multifamily properties, for example.

    However, in the growth stage, if you really think about it is becoming much, much harder to find off market deals.

    The properties are just thin on margin. So what we’re finding is that again, the value and price equation comes to the table.

    So a lot of times what we’re able to do now is find off-market land, and then start building our own equity in our own inventory. And so now that we’re in the building cycle, his capital is focused on building a lot of properties that we’re selling retail, some of which we’re holding, and that includes even multifamily projects.

    And so again, depending on the stage of the cycle determines a strategy that we begin to implement so that we can again pivot and capitalise and that’s one of the approaches that we have.

    So hopefully that kind of gives you a better understanding of the way we think about it.

    Why did you become a private money lender?

    Jos Aguiar 8:22
    That’s super interesting.

    Let’s talk a little bit about your moving to being a lender.

    So I remember you told us that lending is part of your strategy now and how is that? Why did you do it? And how has that played into your strategy as a business?

    Rick Melero 8:38
    Absolutely.

    You know, that’s a loaded question.

    I’m gonna give you I’m going to give you a couple of pieces that I think were central because of the decision to become a private lender.

    Do you know anybody that will buy these? And I’m like, Yeah, me. Right. And so it became this great business model for us to be able to then start doing other deals. But in addition to that, then we started getting smarter and said, Look, why am I going to work for all this stuff?

    This guy brought me a great deal.

    He’s performed over the last three, four deals, why do I partner with him and let him do a volume, and now I’m more passive.

    He’s doing what he’s good at, and we’re all winning.

    And so again, that was the next element for why we chose to lend.

    It opens the door and it creates some great opportunities for us to build some synergistic partnerships.

    Partnering with Institutional lenders

    And then the last piece that I believe is essential, but this didn’t really happen as a part of the decision it was part of during the process of growth is that we realised and we learned very quickly that there is a reason why on every downtown skyscraper banks have their brand all over them.

    And that is having the ability to sell an asset that is completely passive.

    And what I mean by that is if you look at Wells Fargo and all those big banks, they fund billions of dollars of loans that are basically collateralized by real estate, and then they securitize and sell it off to a secondary market.

    And they still remain a partner in the deal collecting interest payments, right? And so it’s the best way to do it. You get all your money back, you’re still getting paid. So now it’s an infinite return and you do it again. So when we started lending money for ourselves, and building some great strategic partnerships,

    Other institutions started calling us saying whoa, what are you doing?!

    This is really interesting. And before we know it, here, we are selling 10s of millions of dollars in business on a regular basis to these institutions.

    We stay on as the partner getting collecting a percentage of the yield spread.

    Now I have the money.

    Now why is this important in this particular cycle again, everything I talked about is connected to the cycle is because, during the growth stage, there are some great strategies like what I talked about earlier.

    But what is the safest investment if you really think in really think from a bigger perspective, during a growth stage where prices are going up constantly your risk for that investment goes up?

    So this is a business that I can scale and do millions and millions and millions of dollars, because I’m selling off to those institutions, and it’s keeping me liquid.

    So it lets me scale remain liquid so that God forbid the market crashes.

    I have the liquidity, but now my institutional partners are the ones calling me saying, hey, 10% of my portfolio was a problem, Rick, please help me fix it.

    And now I’m fully connected with all of us.

    And so that was why we ultimately talked about our lending arm.

    Why are institutions investing in low cap rate investments?

    Jos Aguiar 13:41
    That’s amazing. It really is cool. Rick, I’m seeing a lot of institutions putting money into what looks like low cap rate investments. Could you tell us a little bit of about why you think that is?

    Rick Melero 13:55
    Yes, I gotta make a confession.

    Okay. It was a confession out of ignorance.

    When I first started looking at these institutions even a couple of years ago starting to buy these rental properties for what seemed to me like extremely low cap rates, right.

    And you’re starting to see them purchasing turnkey, beautiful two 300 Plus unit apartment complexes at four caps.

    I started judging them and you know what, these guys have no idea what they’re doing.

    They got too much money. They don’t understand.

    I have to take that back. And the reason why it’s a lesson we learned is that, If you really think about it this way.

    Wall Street is what we call smart money.

    It might be fickle money, and they might only use you for the season.

    They need you, but they’re smart money.

    And so any investor should be a student of what smart money is doing.

    And instead of judging it, instead of saying these guys are horrible investors, what you should be asking yourself is why are they investing in this?

    What are they seeing that I don’t see right now?

    And when I started asking that question, rather than judging them, what I started realising two years ago, is that these institutions knew that there is going to be a shift because of various reasons, and that there is going to be a problem with inflation.

    And there’s also going to be a couple of other elements with economic stability.

    So what they started looking at is what were their options.

    One of the best options they selected was real estate because real estate gives them the ability to hedge against inflation.

    They’re able over the next few years to slowly increment and increase the leases, which ultimately increases your annualised return and they get all of the depreciation so that you have it for your write-offs.

    Now, of course, most people who don’t make money don’t get how powerful that is.

    But when you’re saving money on taxes, because you have all of these assets that you can write off and do the depreciation, it ultimately impacts your overall return on your investment.

    And so what I’ve been finding is I started out collaborating with some of these top players in the industry is that they very intelligently position themselves to hedge against what’s coming next in the real estate cycle.

    And so we’re now using that as an opportunity not only to buy in our own smaller scale because we don’t have the billions they do but also we’re beginning to become an inventory supplier for those guys who will we’re building our own inventory, selling it to them, and a percentage that we sell off to them.

    We take those profits and we buy and hold for us so that we can begin to mimic, if you will, the strategies that they’re implementing as well.

    How does money printing from the fed affect real estate markets?

    Jos Aguiar 16:27
    Okay, that’s fascinating. Let’s talk about the recent printing of capital by the Fed. How does that impact the real estate market?

    Rick Melero 16:38
    Man, there are so many question marks behind that. I mean, I’ve talked to our economists a couple of times, I don’t think we’ll ever really fully understand 100% The cause and effect of being able to print money.

    I think that however, the fastest way that we can see is that printing money, right, and getting to a place where we are at a point now where we’re spending almost the same amount of money that we’re spending on our military forces on paying our interest payments.

    That’s scary, right?

    Because if you think about it, America’s credit historically, is bad.

    The only reason why we’re looked at as a very strong economy, right is simply because we have bullets and we have tanks and we have military power.

    So what happens when America gets to the place where it’s spending more money on debt service, they don’t actually strengthen the very thing that gives them their stability.

    So that’s a question mark for a whole nother conversation.

    But what I can’t tell you is because I have studied other hyperinflation and other markets, inflation generally becomes a problem when you’ve overprinted capital in an actual country.

    And so what I’ve seen that becomes kind of the cure to this is we know that no matter how we like it, no matter how you slice it, inflation has to kick in, in order to begin to disseminate that extra paper that just got printed, right.

    And so that’s why you’re seeing fuel prices going up drastically, right?

    You’re seeing food, you’re seeing all these things. And this is what’s crazy. I don’t know, Jos, you knew this because I was going through this with my economist, and just recently there was in the headlines that America just reached a 7.5% inflation rate which is the most in the last four years but they don’t tell you though, is that that’s excluding real estate.

    That’s excluding a variety of really critical things that have gone up drastically. So really, the overall inflation rate is closer to 15%.

    Jos Aguiar 18:31
    what are that they CPI is incorrect in it in regards to do it, initial calculations, they constantly messing with the formula to calculate 7.5% So if you’re looking at the original calculations, it’s significantly higher.

    Rick Melero 18:48
    It is significantly higher and but most people don’t know that.

    Because they don’t realise that our current president team has moved the goalposts for a reason, right.

    And so, again, not that I’m trying to bash people, but I want to be realistic, and investors need to understand this aspect.

    So I think the very first thing we’re going to deal with is inflation.

    With regards to that, one of the other ways that the government is going to try to respond to that over the next couple months is my bet is you’re going to try to increase interest rates because by increasing some of the interest rates you start nibbling away at.

    I’ve talked to another economist who basically told me another way is war, right?

    We don’t want to be at that point.

    But that’s yet another potential solution which I hope to God that is not our desperate attempt ultimately, but what I would say for an investor looking at it from our perspective, inflation is going to be an issue, interest rates are going to go up.

    So the question is, are we positioning ourselves to have tangible assets that will be impacted positively, and have passive cash flow? coming in?

    That can be adjusted in a short term basis to keep up with inflation? That’s really the topic of discussion.

    Jos Aguiar 19:55
    consider if we’re talking about a 15% in terms of real term inflation. How does it impact your investment strategy?

    Rick Melero 20:04
    It impacts you substantially, right. Yes, exactly. So what I what I tell people is obviously you may not have the capital that a massive institution has to hedge against it, right.

    So either you form an alliance with a group like that, where some of your cash reserves are invested with that type of firm. So that you’re getting those returns.

    That’s one option. If you’re buying actively though, what I would really encourage people to do is consider, hey, try to find off market distressed assets, if you’re going to be the active investor buying them, buy the equity in place, because that’s going to help hedge with your capital growth.

    But then make sure that you’re doing a good job at managing their property to get a decent cap rate. And over year over year, make sure that your management team is in place to ensure that every year there is going to be a slight bump up in the rents because that’s the only way you’re going to be able to keep up with the actual cap rate.

    So and that’s what I’m saying.

    So right now, for example, let’s say we’re saying 12 13% is the inflation, right? So if you own an asset that you can depreciate, that’s going to drop that down, so maybe it’ll drop it by three 4% a year.

    But then the next way you capitalise on that is then you focus specifically on increasing those rents even is by 5% a year so that over the next three to five years, your cap rate is at 20% annualised and then now you’re starting to get into the positive positioning of your business.

    How are you as a fund helping regular people invest in this kind of assets?

    Jos Aguiar 21:28
    Okay, how are you as a fund helping regular people invest in this kind of assets?

    Rick Melero 21:35
    That’s a really, really good question.

    So we usually worked on private offerings. And the reality is, it’s just a way that the system was designed, right.

    And so the government sees the population the masses as people that don’t know what they’re doing, and so in, you know, the effort to protect them.

    They exclude them from opportunities that are more exclusive to sophisticated people that have a higher net worth.

    And so up until not too long ago, those really amazing opportunities were only available for the elite, right, the most successful people.

    Now what we decided to do is once there was a new law that was put in place regarding the Securities Exchange Commission, we file for what is called a reg a plus offering, which basically took us 17 months.

    I joke about blood samples because I mean, my goodness, it was a due diligence process for sure.

    But after 17 months, they approved our company to offer an investment approach that can go public, and the investors coming in can come in literally from all walks of life.

    They don’t have to be accredited, and they can even start with as little as $5,000.

    So that’s been one of the ways that we’ve tried to kind of create a bridge between the everyday investor and an institutional type of investment strategy.

    So that these guys can jump on board with us. And we can do investments of all kinds from lending, construction and even doing what we call our club deals with even larger institutions.

    And so this is a way that we bridge the gap.

    So is this similar to what guys like Grant Cardone from Cardone capital are doing?

    Jos Aguiar 23:00
    So is this similar to what guys like Grant Cardone from Cardone capital are doing?

    Rick Melero 23:05
    It’s a similar vehicle I would say the approach is a little bit different.

    And again, not that I want to bash anyone but just to kind of give you an example.

    what is the difference between what you guys are doing and what they’re doing?

    Jos Aguiar 23:13
    Let’s come to that, what is the difference between what you guys are doing and what they’re doing?

    Rick Melero 23:18
    Right, so let me give you a picture because I think that’ll help a lot of people.

    So when you take a look at these radio offerings, you really have a couple of options. You can use this equity money, if you will, from these partners and investors from all walks of life to partner with you on a specific deal.

    Or you can build a portfolio of investments right and so to get kind of give an example, there’s several guys like Cardone out there by the way that are putting these reggae offerings.

    But when you take a look at the offering, what they’re basically doing is you’re raising $50 million from these investors from everyday investments, right from all over the world because they’re, they’re influential.

    They take that $50 million and that becomes the down payment and the carrying cost for a much even bigger loan for $115 million loan for them to buy this 340 unit apartment complex that is being purchased at almost retail.

    So if that investment goes up in value and it does perform the investors benefit because of your shareholders in that particular project.

    However, the problem is they’re now in a second position.

    So if God forbid, something happened, where those 10-year loans come due, well, then now that second position investor who’s the equity partners are at risk for potentially losing their money so there is an element of risk.

    What we try to do is to say well, that’s great and all.

    But why don’t we implement the same strategies that we’re using?

    Why don’t we take that $50 million and invest it in little buckets of income? And so this bucket is our ground-up construction.

    This bucket is our lending, and a lot of people would say Rick $50 million is not that much, but the reality is, guys, I can fund $10 million this month and sell it off in 60 days.

    So if you do the math, and I turned that $10,000,000 6 times in a year, if you really do the math, that means that that $10 million turns $16 million.

    And so there are different ways to leverage without exposing the investors as much and so that’s more what we’re trying to do is we want a portfolio of investments that are primarily in first position that are secured with equity and fixed income.

    And I believe that’s the secret sauce that separates what we do versus what other groups like the Cardone group are doing.

    How does your strategy shield investors from exposure to risk?

    Jos Aguiar 25:25
    So the way that you operate shields investors from exposure to risk,

    Rick Melero 25:30
    we do that as much as we possibly can to make sure we hedge and our investors are secured by multiple assets not just one investment that may or may not go wrong, you know.

    And I wish all of those investors well and I pray they go well and chances are because of the way inflation is going everybody will be okay.

    But I don’t want to hope I want to be able to put myself in a position where again, going back to price versus value we really have control the value as much as possible.

    Jos Aguiar 25:58
    Okay, you mentioned a couple of strategies that you could play there to ensure the investment goes well. Do you use insurance or any other strategies to protect your investments?

    Rick Melero 26:08
    So we do have a variety of investments but everything is tied to real estate.

    So aside from insuring our portfolio with hazard insurance, title insurance.

    One of our secret strategies that we’re slowly adding more and more above is what we call our club deals.

    And so, what club deals really are these, these exclusive private REITs that aren’t even traded publicly.

    And then there’s these partnerships between some of the top hedge funds that are putting together a project. Let me let me give an example.

    Okay, so currently we’re working on a project that we’ve invested in.

    It’s in Henderson, Nevada. We are building 336 units, and it’s obviously a fully Green Project.

    So it’s supposed to be a staple of the new level of building in today’s market.

    We started this now I think was June 30 or so. of 2020.

    And based on this particular investment, this became a group of different institutional partners coming together to build this incredible product.

    In fact, I think when you combine all of the actual partners, they are managing well over $1.9 billion in assets.

    So it’s a very strong group of people coming together to financing partner on this deal.

    Now, when you look at the total project cost, so if you look at the total cost, the total cost is like $80 million, in fact that there’s like 79,000,707 and change.

    The total equity is $17.4 million. That’s the equity side, the rest is creating debt, right, or bridge debt from the same institutions that are partnered up.

    And so what we’re able to do in a situation like that is when you have a personal guarantor in that partnership, that is worth a couple of billion dollars.

    There’s a much higher level of security and when you’re building a project from scratch like this, we’re projecting to get a cap rate of 10%.

    From what we’re building, you knowing the market just to be able to do a brand new construction apartment complex that is giving you a 10% cap rate.

    So we’re building the cap rate.

    We have a pretty substantial equity and the exit is there’s already a couple of other insurance companies reaching out saying, hey, once fully stabilised, we want to pay a premium.

    And so those are kind of deals that we call them, our insulation projects.

    They’re completely passive.

    They’re exclusively put with other partners and institutions that contribute and ultimately it creates an additional layer of protection for investment because we know that we have a really solid asset with really solid partners, and that hedges the additional investments that we have.

    Where can people learn more about the family deal?

    os Aguiar 28:40
    Correct. This has been great. Where can people learn more about the family deal and if they want to contact you directly? Where can they go?

    Rick Melero 28:47
    Absolutely.

    So what I would recommend that people go to hiscapitalgroup.com, that’s our main website. There’s a lot of stuff there that we talk about, but there’s going to be a specific link that talks about learn about our education.

    I think most people just need to fully understand what they’re getting into. I think one of my favourite quotes came from Warren Buffett that he says basically, that he will never invest in something he doesn’t understand.

    And so if somebody really wants to get into real estate space before you throw any money, first get educated and begin to understand what are the risks, what are the strategies, what connects with your DNA?

    I think that’s essential. So on our website, there’s a link for education that is going to take you to an actual page where we put together a step-by-step training module with a tonne of content.

    I really believe that’s the first step if you want to learn to get more involved in what we’re doing.

    And then from there, if you want to learn about the different investment options, you can reach out to us directly our contact information is on the site.

    Jos Aguiar 29:41
    Amazing. Thank you, Rick.