Kiss Corporate America Goodbye through Real Estate Investing with Chad Sutton

Chad Sutton  00:02

If you have courage, and capital when no one else does, you will make a fortune. And the reason that is real estate, especially rental real estate, where people have to live is not going anywhere. And that’s why I put money into it.

 

Greg Lyons  00:16

Welcome to the passive income brothers podcast.

 

Tim Lyons  00:18

Here we take the fear out of real estate investing using real life stories of everyday successful investors. Let’s go. Welcome to another episode of the passive income bros podcast. My name is Tim Lyons and today I’m joined by none other than my brother Greg, how you doing today, buddy?

 

Greg Lyons  00:32

Tim doing fantastic. And actually, I’m doing a lot better than you are. Your technical difficulties have been a marvel to watch on YouTube. I’m sad that the people our listeners don’t get to see it. But this has been a complete disaster. But other than that, I’m doing fantastic today. Yeah, it’s

 

Tim Lyons  00:50

been two weeks, I’ve had to go through a brand new computer. A whole new setup, as I like to talk about is technological setup. And I still haven’t figured it out. So thank God Chad is somebody that I know and he’s bearing with us. And so I’d like to introduce the group to Chad Sutton from quatro capital I don’t yet

 

Chad Sutton  01:07

welcome and you know, the best part about this is is I got to witness the same thing when you’re on my podcast. So I’m start a sense of theme here. Tim, some of us are just technically challenged. So okay, brother. It’s okay. But I’m happy to be here, guys. Thanks for having me on the show. Tim

 

Greg Lyons  01:21

Tim, this could not have happened for a worse guest. I mean, the man was working on spaceships, and you cannot get zoom to work. I mean, it’s unbelievable. That you

 

Chad Sutton  01:34

any better. There’s more technology in the palm of your hand on a cell phone than there ever was in anything that flew in space. So there’s that but

 

Tim Lyons  01:42

Next I have my back chat. So isn’t so I’m excited for this week’s episode because chat is a young guy. He’s a dad, he’s a Make It Happen guy. And when you hear his story and the transference that you get from that story, it’s something special, something that I’ve experienced. I’ve heard a number of times on different podcasts. So, Chad, welcome to the passive income brothers podcast. Can you take a few minutes and just kind of take people back? Before you were a part of quadro capital? What were you up to? And then what was it that made you make that pivot into real estate?

 

Chad Sutton  02:14

You know, I always love walking Memory Lane and I haven’t done it in a while. So this might be a different flavor than y’all have heard on the podcast. But as a young boy, I was one of those guys who like I was always building with something as I was building with blocks or like a build sandcastles or candy like you remember Erector sets back in the day, I had all the erector sets and the connects and the Legos and like, even when the whole Lego robotics thing came out? Oh my gosh, I was freaking out. It was awesome. Right? So yes, I had friends, I was a played sports, all that kind of stuff. But man, I’m almost like one of those guys. I really love just spending time building things, you know? So maybe that makes me a nerd. Maybe not. But I enjoyed it. And everyone in the world told me you know, gee, Chad, you should be an engineer, you should be an engineer. And this is like from age four. Right? And so fast forward. 20 years later, I became an engineer. I went to college, everyone told me I was good at math. I was good at building things. I could see things differently. So I went to college, and I became an engineer. And I was so excited about I really enjoyed it. I went to work for NASA while I was in college. And actually when I left college, I went to work for General Electric and small little fortune 50 company you guys have probably heard of. And I spent the first decade of my life working on some of the world’s premier problems in aerospace and mechanical engineering. And it was an incredible time I got to once I spent six months one time preparing for a rocketry test that literally took 3.2 seconds. It was like such the most anti climatic event when it actually happened. But it was cool to get to do stuff like that, you know, like I worked on rocketry that would help a rockets upper stage separate from the lower stage I worked on things that like the solid rocket boosters that push the shuttle up into the air, I worked on the three little main engines on the back of that thing, that when we decided to quit playing in space, fair enough, we were having economic problems at the time maybe we don’t need to be spending billions of dollars doing the same thing we’ve been doing for 30 years. I went to the aviation industry. And that’s really where I kind of enjoyed the problem solving aspect I spent time solving lean burn combustion problems how do we make airplanes fly and not pump unburned hydrocarbons, aka pollution into the environment everywhere and then smoke out the back end. That was I got into combustion I love smoke and fire I loved just creating things right now that all started to change a little bit. When two or three new products into my life. I’ve worked on a lot of your commercial airliners at this point. So if you fly on Southwest or delta or across the pond on a 787 Dreamliner have probably touched that engine. Really cool thing to be doing and it sounded like cool and it really was but what it translated to guys and this is where we get into the real pivot and the story is I love the engineering part, I loved creating something new, right, or solving a problem or creating new technology. But two or three projects in two or three years stints in in a design project, you start to realize a trend, you get increasing responsibility, your salary doesn’t quite take off as fast as your skill does. And as you become irreplaceable, the level of diminishing returns with the law of diminishing returns starts to take effect. Further, you start to realize that this is a business, it’s not just let’s get all the resources we need and go build something every time I did it, I had to do it with less resources and less time, which means Chad worked a lot. And so it was really easy to become overwhelmed with the number of hours you’re working. And then one day doing the calculation, like how much I’m making an hour these days, like, Yes, I just got a raise, but how much am I making per hour. And so you start to realize that you’re just burning a lot of time and not really making any more money for it. And the next realization that I had was I looked to my left, and I looked to my right, and I saw my principal engineer and my senior engineer, and my chief engineer down the hall. I was like, you know, gee, I’m getting really good at this one thing, and there’s only three companies in the world, I can do this one thing for and already work for one of them, you know? And oh, by the way, everywhere else that the I mean, this one was in Cincinnati, which was an okay town. I’m sorry, I live in Cincinnati. It’s just okay. It’s not that great. And the other ones are in some other cities that I had no interest in living in. So I’m starting to question, What am I doing with my life. So I stepped out of engineering. And at that time, you guys may remember when the GE stock price went from, like $40, a share down to four, that was a pretty big dramatic thing hurt a lot of dividend investors. We’ll get into that if we desire. But I was plucked for a team of we kind of created an internal consulting group to figure out how do we fix profitability? How do we fix free cash flow? How do we fix Variable Cost productivity? Which means how do I lower the cost of producing my assets or that I’m selling, and still have a good quality asset. So my job for the next three years, y’all was literally flying around the world with the GE Amex card, which had no limit was great, had a big expense account, and I could go anywhere I wanted it where I saw opportunity in the world. And GE has a lot of sites. I was in Austria, I was in Beijing, I was in Norway, I mean, you know, just all these different places, I got to go see the world see how different cultures interact, how they approach business. And my whole job was culture change. It wasn’t how do we change the mindset of someone who thinks this is the only way this can be done? Find a better way to do it, that helps the company’s bottom line. And so to say that I got a crash course in international negotiation, international culture and culture change, and manufacturing of every different product that GE touches. It was incredible. It was absolutely incredible. Right. So that leads to a new executive role. I took an executive role at the age of I guess I was high 20s. At that point, I was pretty young. And my whole job at that point was at moved out of engineering out of this consulting role. And then over to supply chain, I was kind of the opposite of sales, I was in charge of purchasing several 100 million dollar spin, which is kind of small in the scope of GE, I was young, right, but several 100 million dollar spin of heavy electrical components. So like Transformers, and big switch gears and things that go in the bottom of a wind turbine thing and like big electrical parts. And that job, yes, I had some p&l management. So I kind of learned some business skills, and I had incentivization, and bonuses and all that. And I had international teams, which was cool. But it was despicable to me because my whole job was to take everything away from small companies. And I was good at it, guys. I was good at being big GE with the big spin. But the decisions that I would make would quite literally make or break a company’s profitability for the year. It’s just incredible how much influence that I had. And it scared the mess out of me. But then I could go win for the company and be a hero. But then I had to walk into that facility the next quarter on my quarterly site visit and look all the people in the eye whose friends jobs I eliminated. It was a really tough place to be. So let’s get to a different track here. So that’s kind of where my corporate career was starting to burn out. Right. And I was trading a lot of time for money, got to see the world learned a lot of business skills made me who I am. I don’t regret any of it. Right. But I did realize around the same time the patriarch of my family my grandfather, you know meant a lot to me. I learned a lot from him. He passes away. Okay, big impact on the family. envision this big boisterous Texas man right everybody laughing all the time. passes away. Right? Well, my aunt Kim, who is in full disclosure of the five partners and quatro three of us are family. Kim and Tammy are the second generation real estate investors in our family, their mother and father, my grandparents were the first I am the third. Tammy is my mother so they are sisters. Anyway. Kim takes over the family business and we start to see around the same time I’m I’m asking questions about Good Lord, I’m trading a lot of time for money. How do people get rich in this country? Because this ain’t it. I literally own patents that have put GE into billion dollar markets and I got $1,000 and attaboy slap on the butt and go do your job. Okay, so something’s wrong here. My value is so much more than this. And I mean, think about the consulting role. If I’m able to save ge $400 million in one project. Where’s my 10%? Cut of that? No, that’s not how it works. You know what I’m saying? So I’m starting to realize, Wow, I’m only ever going to get paid what someone has to pay me to keep you from leaving. And as I got smarter about that, that’s when I left. Okay. So Earl Nightingale says this best your rewards in life will be commensurate with the degree of difficulty of what you do, and how hard it is to replace you. That’s why people who drive a trash truck or push a broom that that can be replaced. There’s a lot of people out there who can do that. Someone who’s the CEO of a Fortune 50 company, that’s harder to replace. That’s why they make the big bucks. And everything in between. I mean, I’m not diminishing any job. I’m just saying it’s literally what’s the population that can do it, and how hard is the job? That’s how it works. And so around the same time, I’m asking these questions, how do you get wealthy in this country? How does it happen? read every book out there. In fact, I’ve got two on my desk right now, if you’re not a reader, start freaking reading, but start reading books. The common denominator was real estate. Oh, what a coincidence. My family’s in real estate, huh? I just thought that was a hobby. I didn’t know I made money. And I worked out and growing up. Yeah, I

 

Greg Lyons  11:35

mean, that’s this is this is an awesome story. And if people couldn’t figure it out already, Chad is smart. He was very gracious. As we were getting set up here. There are technical difficulties. He could have built a computer we’re doing this on and the microphone. But Chad is smart. And he really did all the right things. I mean, being an executive at GE, in his late 20s, doing fantastic work around the world. So the experiences have been unreal. But how do you get rich? How do you get wealthy? How do you get really comfortable and have a comfortable cushion for your family? And that was kind of the question he was asking. And I think a lot of people, especially people in chairs, position have a nice job, steady income, and all those things most people have this hang up is how do I leave all this and go to something unknown. Maybe for you, Chad, it wasn’t as unknown because your family was kind of in it and doing it the real estate thing. But for a lot of people, they’re first generation real estate investors. They’re first generation landlords and stuff like that. So it can become really, really hard, especially as people get older and have a family to get into real estate investing. Where are you married at the time that you got out of GE?

 

Chad Sutton  12:51

I was that was a whole nother story we can go into but

 

Greg Lyons  12:54

I was gonna say tell me tell the listeners about the conversation you had with your wife at that point, to say, hey, I have a wonderful job. But I’m going to give this all up everything I’ve worked for in my working career. Tell me about that conversation with her. And how did that go.

 

Chad Sutton  13:11

And anyone who’s trying to make a change in your life, I mean, I mentioned I spend a lot of time in culture change. It doesn’t happen like this. You don’t walk into a shop and Norway and say, Hey, I’m the American, I’m here. This is how we’re going to do things. Now you will get thrown out on your rear end, right? Same thing would have happened if I walked up to my wife and said, Hey, I’m gonna go do this. I’m under this quit everything we know. And here’s this thing about passive income. And I don’t know you understand it, but I do. It’s fine. And I’m gonna go do this. It doesn’t work that way. So I started planting seeds. And we talk a lot. So I was sharing as I was like, how do we do this? I’ll share in the questions I was asking, oh, look, I found this about this. Hey, our family’s in real estate. That’s interesting. And so I was sharing the learning along the way. And so she’d already been hearing me get become quite frankly obsessed with how to not trade time for money. Like that’s something most of us it’s the hardest link to break is like we’re just raised of you go get $1 An hour job and you get dollars for your hours and period. That’s it. But breaking away from that was the hardest pivot that I think it took me time to do. Once I did I couldn’t stop talking about it. So she’d been hearing about this for at least a year, right. And I was trying to figure out how to replicate our single family business and commercial real estate came later. But what she also saw was I put tangible effort into it, because of the role I was in my teams were in Europe and Asia. So I was able to get up at 4am. And I was able to work until about noon or one o’clock on my corporate gig because that’s when everyone went to bed over there. And I was able and boss thought I was just amazing because oh my gosh, he’s so driven. He’s getting up at 4am. To do this. He didn’t know stop and working at one o’clock. But I spent the rest of the day working on how to build a real estate business. And for me real estate made sense and not the only way to divorce your time from your money. There’s plenty ways to do it. For me, it was the common denominator and well It was a way to generate income that was not tied to me showing up at a desk. My family had some experience in it. And it’s a proven business model. It’s like there are three basic needs in humanity, folks food, water, and shelter is never going away, it’s not going to become obsolete. There’s not going to be a new cell phone that obsoletes my mode of communication if I invested in the mobile phone or something like that, right. So coming back to the story, how did I get my wife on board? Well, I did this for nearly a year, and I actually was building quatro capital, when this was happening in the early days. And so I was working a lot. And I would take few hours off at night to spend time with her and our new baby. And I go back to work until about midnight, and I get do it all over again. So she saw the tangible efforts. And then you know, we were able to acquire a project. And she kind of saw the proof of concept when that first check came in and wasn’t big. But it was a check is like okay, this works, right? Well, then the what I was telling you about my mindset of the role I held, it got worse because I knew the pandemic was here before the pandemic hit the US because I remember I said China, right. I was watching the pandemic in China, way before that. And I watched it hop across the pond and hit my suppliers and all that kind of stuff. So to say that both of my roles took 20 hours a day for a while it was not even an exaggeration. I didn’t fully divorce from corporate America till 2020. And it was because I was forced to I had to make a choice. Because think about what’s happening. I was in supply chain. That was the most upset industry in the frickin world when the world shut down. So I saw it coming way before even America knew it was happening. Not that I was smart enough to know what to do with it. But I had to spend a lot of time fixing those problems. Things weren’t shipping any more factories were closing for the first time since Noah’s Ark. I mean, come on, you know. And so that happens. And then it hits here in real estate takes 20 hours a day? Are people going to pay rent? What cleaning procedures? Do we need to put? How are we going to lease units? We don’t know. Right? I had to make a choice. And it came to the point where the choice became true and apparent. And I was also at the point of like mentally breaking with the stuff I was dealing with at the corporate job. And I walked in after a presentation that I worked all night for to appease upper level management. And at that point, they were so scared, they were not even hearing me. And I said I can’t do it anymore. And she looked at me so I quit. And so it was a little emotional here, I’m getting back to that emotional state. But that was that is like I had to build her up to it. And then it became organic, because it was like, Okay, you have an option here, you land on your feet. And I see you killing yourself with something you hate. So that’s kind of how we got there.

 

Tim Lyons  17:41

Yeah, this is like the 10th time I’ve heard this story. And I think each time I pick up a new perspective from now it’s your wife, right? Or now it’s your supply chain. COVID is coming. And what I think is so incredible is that you’ve accomplished so much in your corporate career as such a young age, right? I mean, I’m blessed and kind of grateful to know that you’re a rocket scientist. So like all the jokes grown up about hey, I’m not a rocket scientist. Well, now I know what Greg. But, so to hear all this and you’re managing teams in your late 20s. And it takes a lifetime sometimes for someone like my dad who’s 72. Now he just retired last year, people become entrenched in their jobs, and they kind of just do it and because that’s all they know, right? And I think it’s really special as an entrepreneur, now that I’ve become one to really kind of look outside and get what else is available to me what else is available to my family? And it’s not easy, right? I mean, like, like you said, you were just holding up a couple of books, right? I mean, it took a lot of time, in your 20s. And in your early 30s To figure this out to spend the time not playing video games, not watching football, not going to the bar and drinking with the boys. Right, but you’re intentional with your time. And now look what you’ve created. You’ve created this great multifamily investment company that you’re able to walk away from a lucrative job with one of the top companies in our country. So in the world, I would say. So I love hearing that story. And I hope it’s inspirational to people out there who are doing the same thing because we’ve had a number of guests on the show that are surgeons like think about that like four years College, four years medical school, five years residency, two years fellowship, and then you start making some money, right? And like then they realize like, holy cow, everything I’ve been working for, like is this It, like, this is what I’m going to be doing. And they might love it, but they might feel that there’s this insane pressure behind like you had with the supply chains and the thinking that you’re gonna put people out of business by just doing one contract or something like that. So I’m going off on a tangent, but I just love it and listen, I feel a lot of the same things through your story, right? Because I love being in New York City firefighter. I always kind of tell people I’ve had an insane amount of great days. Lots of laughter lots of Fun laughing till my belly hurts, right eating some great meals. But I’ve also had a bunch of soul sucking days where it ends up in tears. And it wears on you after a while, right? So, but I want to make a pivot, I want to make a pivot to something you said with your wife proof of concept, right. And this happens with a lot of investors, they know real estate is powerful. They know that they need to build equity in something, whether it’s owning a business, I don’t know buying a franchise or something that’s really scalable. And that’s been around for millennia real estate. But people get scared of it. They think it’s risky, they see the headlines, home prices are crashing, we’re going to be in a recession, everybody’s going to lose everything. Oh, my God. And so we’re just not going to do anything. We’re going to park our money in treasury bills and money markets, because that’s what I see on CNBC. And we’re just not going to do anything. And chat. That’s what we’re up against. Right now. I don’t know how quadrille capital is dealing with capital raising, but us, we’ve seen a significant pullback from the brand new investors, and we’ve seen the experienced investors going even deeper, right and keeping on investing. So let’s talk about that a little bit. Do started a multifamily firm. Right. So why don’t you tell us a little bit about the multifamily firm. Let’s go into some of the, like higher level. Why we do multifamily is given today’s macro economic backdrop. Yeah,

 

Chad Sutton  21:25

folks, and the first thing I have to say about that as good headlines don’t get viewers. And so what passes for the media today, that’s the closest to political comment, you’ll hear me make what passes for the media today is quite honestly motivated by grabbing your attention. And people are gravitated to negative BS. It’s what our culture is. I mean, have you ever scrolled through Instagram and saw something that was just appalling and it pissed you off, and you sit there for like 30 seconds being mad about it? Well, the algorithm picks up on that the news is the same way you sit on that channel, when we’re talking about something awful. But if it’s really good, well, you probably bounce off the channel and go watch something else. Because there’s nothing to worry about. You know, that’s the news. And so just accept that and realize that, like, I stopped watching the news a long time ago, my thesis is, if something is important enough for me to know about it, somebody’s going to tell me about it. And then I’ll go read about it and figure out what I need to know. Right? So that’s what you’re up against. Okay, then in general, if you Zig when the herd is zagging, that’s when you make a profit. If you follow the herd at all times, you’re gonna make money like the herd and the herd is not rich, the herd is honestly spend too much and make too little. So it’s a frustrating world to be in. But if you have courage and capital, we put this on a bumper sticker for you. If you have courage, and capital, when no one else does, you will make a friggin fortune. Okay? And the reason that is when times are tough, like right now, like, for example, in real estate, we do not have a real estate crisis right now the fundamentals are great. Every project I wrote is crushing it, we have a lending problem right now we have interest rates that have pushed up for and we can go into that whole mechanics if you want. But we have basically a lending problem. And so money is harder to come by, well, if you’re sitting on a bunch of cash, and you’ve got some courage, and you can look up instead of down at the right now and look up at the horizon and realize the supply and demand and real estate is a problem for the next long time. Like many, many years, we have not built enough. I forget the exact staggering rentals. But according to Dr. Peter Lindemann, and one of my favorite economists, we are 3 million homes below where we need to be for households, and we are 1 million at least below residential rental units. We have a housing supply and demand problem. Okay. And so where do we go from here? Like why do we think it’s important to invest in real estate Well, namely, any other product in the world, any other one, including other real estate products. And I’ll give you four reasons why it can be obsoleted in the next 20 years. Technology is even though it slowed down, it’s moving faster. We’re still innovating very quickly. You want to go invest in Apple and a tech company. That’s great. As long as they continue to be the best tech innovator. You want to go invest in Google same thing. But look, here’s the deal. And there’s a new story that broke the other day about Microsoft possibly having an AI solution that is actually causing the Samsung phones to remove Google is our primary search engine. What do you think that’s gonna do to their business? If that really happens, right? It’s that easy to become obsolete in any other product. Food, water and shelter. Okay. I put my money in farmland for extended shelf life things like blobs, potatoes, things of that sort of thing can sit in a shipping container food. I put my money in shelter I don’t invest in water. I haven’t figured out how yet but I do know that that’s one of the highest market drinks Coca Cola sells. Why do you think design is owned by Coca Cola? It’s the highest markup of anything that is sold on the market today, it’s crazy. And shelter. People always need a place to live businesses need a place to be house, some will go online, I get it. Why do you think office is struggling as much as it is? The fundamentals are there, we haven’t built enough of it. The supply and demand is an imbalance. We always are gonna have local cyclical problems right now. It’s a debt cycle problem. We’re just and honestly, we can talk about why we’re just going back to where we were in 2019. It’s nothing outstanding. It just happened so fast, right. But real estate, especially rental real estate, where people have to live is not going anywhere. And that’s why I put money into it.

 

Greg Lyons  25:37

Let’s kind of dive a little deeper on the kind of negative news and the lending problems. You say food, water and shelter are the three needs Tim, Jake and Gino say food, clothing, and apartments are the three basic needs buying clothes pretty close. But when you do talk about the negative news, you know, like when we talk to investors now it’s like I am just going to sit tight. I don’t know what’s going on right now. Money is tight, interest rates are high. And when you talk about that supply and demand not only have we not built enough since 2008, when a lot of Home Builders and construction companies out of business and never came back. That’s why we have that shortage right now. But the other big problem that we have right now in housing is that there are so many households that have a sub 3% mortgage, and they’re not going anywhere. I’m going to raise my hand right now. And I’m going to be in that boat say I have a sub 3% mortgage, I have no idea what my kids are going to end up which part of the country, we’re making no plans to move right now, just because number one, there’s nowhere to go and the prices are so high. If we trade in this mortgage, we’re gonna go for a six or 7% mortgage, no need to do that right now. Well, we have a perfectly good pile of bricks right here. So with this negative news, our quote unquote lending problem, how do you see it being sorted out over the next 1224 months, in your opinion,

 

Chad Sutton  27:02

if you’re trying to figure out any complex machine and break it down to the most simplest of economics, and that is supply and demand, let me apply this to this current situation. You just mentioned a very, very real fact that we’ve had some historically low interest rates. So we have people with even 2% mortgage rates on their home in the high twos. So here’s what’s happening. The supply and demand people wanting to buy a house, for example, are wanting to get out of their leave renting and go to homeownership or expand to a bigger house because their family grew. That doesn’t stop just because the market started acting weird, right? The demand is still there, their capability to buy has been affected, right? Because every time the interest rate goes up, it means they can afford less house. Well, let’s think about it. So a lot of people were saying, well, I’ll just sit on the sidelines until the rates of 3%. Again, I’ll just wait. So what is that that builds up demand. So that pent up demand where houses are no longer selling, because people are not buying at those at the current prices with the current rates. They’re thinking I’ll wait until the houses are cheaper when we have a recession like a 2008 financial crisis. They’re thinking we’ll wait until that happens. Or they’ll think and we’ll wait until rates go down. Okay, let’s fast forward rates will go down, let me just tell you that right now go look at you can go to fred.com plot up all the interest rates versus time, within a two year average of the first rate hike is always the first rate cut. Feds been on the clock since beginning of 2022. My money is by 2024 year to see some downward movement and rates. Hopefully it’s gradual. But if we continue to break the glass of the banking system, then it’ll be fast, it’ll be emergent. So that’s a whole nother story. Let’s say it happens, let’s say rates come down. All that’s going to happen is everyone who is sitting on the sidelines is now going to go out and buy a house and the price is going to shoot through the roof. And so you have kind of two choices, you can get cheaper debt next year, and make that investment in a home and pay a higher price. Or you can pay a lower price today because you will get a better deal today, less trades happening less sales, but you’re gonna pay a higher rate will lose a little I did the math at one point. If I pay an extra 1% on $100,000, it basically would equate to the difference the price you’re gonna see from this year to next year. So it’s kind of like you’re not really saving yourself anything the same thing can be applied to investing though. I mentioned before, if you have courage and capital and others don’t, you’re gonna make more money. Well, prices actually are a little bit compressed right now are a little bit decompressed. Right now they’re starting to rise. And the only reason you get in trouble in real estate ever. Like this is a law ever. The only reason you ever get in trouble in real estate, put it on a bumper sticker, you run out of time or you run out of money. Rates have changed so fast. And some people have short term debt that has to be refinanced. If they’re out of time, they’re going to be forced to probably sell because they don’t have enough loan to value left to refinance to a new loan or debt coverage at today’s rates. If they’ve been bleeding because their rates spiked up on them on a variable rate. They’re out of cash, I gotta sell you’re out of time you’re out of money. Okay? If you can invest in something today that actually is going to be priced low enough to where a buyer like me is going to buy it. Basis is forever. What you buy something at this forever. Okay, if you can be married to the price, but date the debt, the debt is temporary, I can fix the debt in two years, right. But I can’t fix the price if the price is back up just ridiculously two years from now. Does that make sense?

 

Tim Lyons  30:17

Yeah. 100% we call it data rate, right data. Right, right. Yeah. And you’re 100%. These are the types of conversations that I love to have with Greg and other people in our circle. But sometimes it’s hard to have the conversation with the casual investor, because they’re just not into it the way that we are into it. They’re not into the data, the way that we aren’t data. And he mentioned Dr. Peter Lindemann, he puts out a great quarterly newsletter. It’s battling them in letter razors, right? It cost them money to get but there’s great data in there, and we love to eat it up. So here’s the thing when we talk about fundamentals in regular investors, eyes might start glazing over and they might think they know what the fundamentals are. But why don’t we dive into that real quick? Like so far, we’ve talked about supply and demand, right? We are I’m of the opinion that we are also under supplied. But there’s been some recent stories. And if you follow Jay Parsons on LinkedIn, and Twitter, you’ll find some great commentary about this. And I think he works for real page data analytics company, and there’s supposedly Chad a ton of multifamily units coming on board and if you listen to any of the YouTubers that are involved in single family rentals are jumping all over this multifamily is over supplied tons of new units coming on board. Well, he did a great piece. Jay Parsons, I think it was last week, maybe I think I sent it to you, Greg. But when that new supply comes online, Chad, right, that’s like the class a top of the line, sexiest properties, palm trees pools, top of the line gym equipment, well guess what? That probably cost? I don’t know, three, four, maybe $5,000 a month. That’s not your bread and butter, food, clothing and apartments, right? That’s not your working class, folks. That’s not your clean, safe, affordable housing that we’re trying to provide for folks, which also brand new supply coming in on top that a class brand new stuff. But there’s also C minus and d stuff that are now becoming obsolete, right? The obsolescence where it doesn’t make any sense to put more money into it. So those are kind of fallen by the wayside. Right? So you have this top funnel coming in. And now that older class a product, maybe that 2015 2005, that’s not really Class A anymore maybe, right? It’s a B plus. But we understand that, but how do you have conversations with your investors or people that are saying, hey, Chad was talking about real estate? Isn’t there a supply demand issue? Or what are the fundamentals that you look for when you’re looking for a property? Yeah,

 

Chad Sutton  32:43

I love both those guys, Peter Lindemann, and Jay Parsons, fantastic data providers out there. And Jay will tell you, if you go read any of his stuff, it doesn’t matter. All the deliveries we have coming right now. And there’s a kind of a swell of deliveries coming mainly because a lot of people started building in COVID, and 2020, because they didn’t believe in property operations. So they shifted their money over there. Well, it takes about three years to get a project built, guess where we are 2023. So they’re all showing up, right? It’s still not near enough, it is not going to come near closing the gap of what we have in the pipeline. And oh, by the way, the following year, and the following two years, and 2021 and 2022, builds fell off dramatically, because supply chain started to ramp up and then debt ramped up. And so now we’re going to have the opposite problem three years from now, we’re going to have a gap in deliveries, okay. So you have to always be looking three years ahead when you’re talking about development. So but let’s just bring it back. Yes, we’re adding new supply all the time. And we have to be right, that new supply costs anywhere from 210,000 to 300,000, a unit to build, they’re not leasing that for 1500 bucks, the numbers don’t work unless you’re on a tax credit deal, which those are really limited, where the government sponsors it and you have to keep the rents below a certain level. That’s the only way you can make that those numbers work. So anyone who is building is going to be at the top of the market. But if it comes between leasing, I’m gonna play devil’s advocate, if it comes between leasing up and not getting rent at all, like if, for some reason, rents are declining, and all that kind of stuff. They’re gonna drop the rates, and they’re gonna get whatever they can to fill the damn thing up. But so where does that affect? You kind of have the four different classes of real estate, you know, you have your class D stuff, it’s basically high crime and functionally obsolete, you have your class C stuff that’s getting close to that level, and that’s a big bucket. Then you have your class B stuff, which is kind of what was built in the last we’ll just say 20 years, right? And getting older and probably need some renovation and then you have your a class stuff. And a class is also a big bucket. You have things that were built in the last 10 years and things that were just built. So the difference is, if you look at building construction, like this is where the engineering comes in. If you look at building construction, there’s a drastic difference in size and infrastructure and everything for something that was built in 1967 to what was built in the year two 1000 There is virtually no difference except technology on something that was built in the year 2000. And what was built yesterday? Okay, so I mean, we might have some different amenities, maybe the products have shifted slightly, building codes ain’t changed that much, right, we haven’t had a change of like no more cast iron drain pipe or something like that, right? It’s still PVC, it’s still copper packs, it’s still certain types of concrete, it’s still certain quality lumber, our building standards have just kind of gotten there. So we tend to focus in the non functionally obsolete product. And I do think over time, we’re going to see a loss of units of the old stuff that is pre, we’ll call it 1980, maybe even mid 1970s. In some areas, anything built before that, unless it’s historic and has been like go to the stud and started over, it’s probably not going to survive over time. And there are things that have good bones, and people are willing to go in and rip everything out and build new structures and new plumbing and new electrical that can work that can save units, right. But when you see, back to our example, when you see a new product come online, and if you even see maybe adding competition at the top? Well, all that does is create a supply problem up there, there may be a little excess supply, it doesn’t really affect the ones that we’re investing in the stuff. That’s the workforce housing that we’re kind of repurposing and keeping in that sub $2,000 per unit and rent. And guess what, as the years go on what is currently a product shifts down to be product, and it just kind of keeps going. So it’s always shifting through the snake. The problem is we’re losing more units than we’re building and we’re growing faster than we’re building. So that is I mean, you can just sit here and vision two points here. If we’re losing more than we’re building, and we’re growing more than we’re shrinking that supply and demand problems getting further and further apart. And I think that’s the point Jay tries to make and a lot of the statements he puts out. I love

 

Tim Lyons  36:51

that. And also just to stack on top, like during the recession, people like what Tim, you know, I don’t know if I want to invest in this deal, because there’s a recession coming. And I think great, like, that’s time. That’s time, right? I mean, but once you understand how money banking, investing works, right, like during a recession, you know that a class renter that was in that really nice building with the doorman maybe realizes that, hey, I don’t know if my job is so secure, or maybe I even lose my job. So he can bounce down to the B class, right? The B class renter can bounce down to the C class and the C down to the D, right? So there’s resiliency among the BNC class housing, where cityside capital, at least you know, strives to find good deals, because of that resiliency, right? People will pay the rent, that’ll be one of the last things they stop paying. Because if you have kids in school, if you have a job, if you you need a place to live at night, right, they’ll bring a roommate in, they’ll figure it out. But so that’s kind of the resiliency that we love about multifamily. You

 

Greg Lyons  37:55

know, like, I really think Chad does a great job, kind of laying the case out with data, black and white, kind of by the numbers. But a lot of investors do not invest with data, numbers, market studies or anything like that. They invest with emotion. So if you have an investor in front of you, and we run into this a lot, too, sometimes you lay out the case, it’s a no brainer, and someone’s like, oh, no, I just read an article, this is not going to work. But for you, you do a great job of laying out the data. But when you’re talking to that investor that’s investing on pure emotion, kind of what is your message to them right now, kind of in this quote, unquote, time of uncertainty, when it’s really time to make money, but uncertain in their minds? Yeah.

 

Chad Sutton  38:44

And that’s really tough because getting someone out of their own head and out of the emotional state is tough, we do tend to react with emotion as human beings. But talking to investors, if you can train yourself to just look for three basic things. It’s just three, right? One of them is, what is the job growth in the area? Like our jobs growing? The number of jobs? The second is wage growth? Are the wages growing? And the third is population? Are people actually moving in to take those jobs? Like, let’s just let’s take all the emotion out of it. And by the way, I could have handed you these three things in 2008 when the world was melting down, and you could have made good real estate investment decisions based on those three facts. Again, I’m gonna put in our bumper sticker, right? wage growth, job growth, population growth, why are those three things important? Who are your renters? They’re people, what do they need to get money? They need jobs. What do you hope their wages are doing growing or shrinking because that helps you charge more rent over time and still not get them over their skis on what they can afford to pay you right? And further, you really hope if they’re creating jobs in an area, people are moving to the area and taking the jobs right. If those three things are correct, you will do fine. Okay, the asset that you buy will continue to grow in value Now, that’s the simple way to look at it. And I think what I do talk with my investors about regularly when they kind of have they get into this fear mode of, are people going to pin this, this is valid. We just had an event not three years ago where some people stopped paying rent, right? How do you mitigate the risk? At least at our company? I know you do the same thing as Tim, that I’ve talked about it, you spend a lot of time mitigating risk by location, is the government business and landlord friendly? Are you going to be fighting City Hall? Is the crime rate growing or shrinking? Is law enforcement growing or shrinking all these kinds of things you think about to make sure you’ve got the core three things fine. You’ve got the area figured out. And if all those things are fine, it doesn’t matter. Like we heard all the news stories about people in California and New York who just stopped paying their rent and rent landlords went bankrupt, money was lost. That’s true. Well guess what was also true in those areas, not business friendly, people moving out of the area, and very not landlord friendly, right? If you have the laws in your favor to where you can actually operate a profitable business, this stuff doesn’t affect you. My assets in Tennessee never missed a collection. I think we had 3% Because we were able to get help them get their stimulus anyway, I’m

 

Tim Lyons  41:11

going down a rabbit hole. But the point is mitigate the risk. Okay. The only reason we have fear is because we have fear of risk, fear of failure, mitigate the risk in a logical way. And it’s really not that hard. Real estate is not rocket science. And I am actually qualified to say that, unfortunately. So I love that. Yeah, no doubt about it. And yeah, I would also like to stack on top. So Greg, and I got started our first deal close September of 2020. We’re six months into COVID. And we decided to start a commercial real estate investing firm during COVID. Like, because, yeah, we could have been scared to death and sat on our hands and said, Oh, my God, what’s happening? But we didn’t, and we follow the data. So love all that information. Chad, this has been a masterclass so far, we’re gonna have to have you back on for sure. So let’s jump into Yeah, absolutely. Let’s jump into the last three questions in the name of time. And the first one is we kind of covered it a little bit, but I can I’ll throw it over to you teed up nicely. If you’re at a dinner party, Chad, and someone says, Hey, you know, I heard you’re in real estate and looks like you’re doing pretty well. I mean, but isn’t investing in real estate just too risky? What would you say to that person?

 

Chad Sutton  42:17

Oh, I’ll probably go down the rabbit hole we just went down have not at all. It’s actually one of the simplest investments you can do. It has a hard tangible asset behind it, which means it’s always going to have even if money collapses, and we’re paying rent and Karis, y’all, I’m going to be able to sell it for some number of carrots, hopefully a lot more carrots than dollars. But I digress. And I would focus on the risk. Like, look, it’s very simple business model, tell me investing in a new tech company that’s risk. And if you know what you’re doing great, you can actually make a fortune being a venture capitalist, but you’re going to lose a lot too. You do not win them all. Any venture capitalists will tell you that. However, I can tell you real estate investors who have never lost money in real estate, why is that? Okay? It’s a staple, and you mitigate your risk. If you make foolish acquisitions and foolish investments, you will get foolish results. But if you mitigate your risk, by the simple three things we talked about, it’s not that hard. Love

 

Greg Lyons  43:08

it. Yeah, that’s true. This is probably my last time speaking on this podcast. So I just want to say chat, I’m never going to drive behind you in a car, because you’re gonna have way too many bumper stickers. I mean, you’re putting everything on a bumper sticker, I’m going to be reading the hell out of that back bumper. I’m just gonna fly right into you. So anyway, that’s just a point I wanted to make before I got into the second question, which comes from our de facto mentor, Robert Kiyosaki. And this could be a little bit controversial for people. But a lot of real estate people do get it and he said savers are losers. debtors are winners. What does that statement mean to you? It’s

 

Chad Sutton  43:47

very controversial. You’re right. And you’re going to have to work on your mindset here with me, folks, if you’re going to think about this, but especially in the recent past for debt was super cheap, right? If you were saving your money and putting it in a can in the backyard or in the bank, or whatever you’re doing. You’re not even keeping up with the rate of inflation. We’ve no one knew what the hell inflation meant a year ago, you know, two years ago, now we do. Okay, we know that the eggs at the grocery store cost like $4. Not that much. But they cost a lot more, right. 40% more than they did last year, Thanksgiving turkey cost like 70 bucks, it was ridiculous. So the amount of stuff the amount that we only have money, money is an idea. It’s not a thing. It’s just an idea. Okay? It’s an idea that we came up with this paper that’s made from trees. So it actually does grow on trees. By the way, who came up with this idea that paper will buy things in the stuff? Well, the amount of things and stuff our money will buy is diminishing over time. You’ve seen that real hand go look, if you don’t believe me, go look up the price of a Big Mac in the year 2000. And the price of it today and then just look at what it was a year ago. Right? I mean, it’s changing a lot. So what he’s meaning when he says savers are losers. If you’re just saving your money and it’s not growing at a rate equal to or greater than inflation, you’re lose Think money, if it’s not at least growing at the exact same rate as inflation, that staying at ground zero that’s keeping your head at the surface. If you want to make money, you got to figure out how to grow faster than inflation. Okay. And the other side of it is real simple when he says debtors are winners. And I’m not talking about consumer debt, double finance a friggin TV, correct. That’s not what I’m talking about. But if you go use debt, to buy an asset that helps you propel your money. Like for example, if I go buy an apartment building with no debt, I’ll just buy a $10 million asset or listen to game smaller $100,000 asset it’s going to net me 1000 bucks a month. 12% return, right, if I go do that. And I bite in cash, it took me 100,000 To get there, I’m getting 12% Return hope my math is right. I’m talking too fast. But my point is, if I then got a loan, and I only took 20,000 to buy that, and I got 80,000 on a loan, maybe only net 500 a month. But my ratios are better. I can make money faster. That’s called leverage. Leverage is using debt to buy things that make you money. So debtors are winners savers or losers. Hey,

 

Greg Lyons  46:02

Tim, let me just jump in here real quick. Yeah, this is exactly the reason I don’t do public math. Okay. It’s because because if the rocket scientist is having trouble with it, that’s exactly why don’t do it. No public math. And I

 

Chad Sutton  46:17

know better than that, you know, but so you get to talking and you’re focusing on the point and you forget decimal place anyway. But you guys get my point. Right?

 

Tim Lyons  46:25

And you were right on that. $1,000 a month. That’s 12. That’s 12,000 divided by the denominator. 100. You’re You’re right on Okay, I got it right, this time. Got it.

 

Greg Lyons  46:33

I was sweating for you. Okay, I saw where this was going. I started sweating

 

Tim Lyons  46:37

regularly a public math. Alright, number three, Jim Rohn, who I love to listen to has said something in the past that goes like this. He said, a formal education will make you a living and a self education will make you a fortune. And I think this is perfectly teed up for you. What does that mean to you?

 

Chad Sutton  46:55

Now this may even be a one liner, have a formal education will teach you how the herd is decided the herds need to be educated for the next generation. So if you want to be educated by the herd, who by the way, the herd is not rich and wealthy and free. You want to be educated by those people, go get a public education, and I’m not dogging, and I met my wife at university. It was great, had a good time, learn some stuff became an engineer. But myself education when I started picking up book after book after book and figuring out okay, I have a question, how do I answer it, because there’s so much knowledge in books that we never read and apply. And even if you do read it, you don’t apply it, it doesn’t matter, right? If you go read a bunch of books, find the common denominator, apply it, that is self education, folks, and that will literally I improve, make you millions upon millions upon millions of dollars in wealth. Okay. So I mean, any college degree that someone has gone and obtained, did not ever make them wealthy. Some people, for example, I’m going to think of the guy who invented Garmin, because he went to University of Tennessee where I went, he got an engineering degree, he invented something, he solved a new problem by self educating himself on what the problem was, and figuring out what was out there and then coming up with an idea to go figure it out. He made Garmin college degree did not teach him how to do that, and taught him how to put the wires together and make a thing, but the art and the self education is what got him there.

 

Tim Lyons  48:15

Dude, I love that. I love that you get paid in proportion to the complexity of the problem that you solve. Right. So, Chad, this is awesome. And I’m so happy that we were able to figure out my technological problems, overcome them and have this podcast. So how can people get in touch with you if they want to find out more about you your story, quatro, capital, all the good things and your podcasts by the way?

 

Chad Sutton  48:38

Well, I think what I’m going to do is I’m going to challenge our listeners. And so if you go find real estate runway podcast on YouTube, and if you’re anywhere podcasts are sold or listened. And you put in the comments if you ever hear Tim and Greg talking about Tim’s technical difficulties again after this episode, well, no, it was not an isolated incident. So go put in the comments. So I know love to hear it. But I think we’ll have to have to come back a third time and I’ll personally tell you if Tim had technical difficulties, and then we’ll see if it’s the theme itself anyway, but how to find me. The best way to find me is it Chad Sutton dot info that’s Chad Cha de su t te o n dot inf o that’s going to have everything from a link to the real estate runway podcast to a link to how to see our investments to the quatro capital website. And you can just connect on all the socials from there. So that’s the easiest way Chad Sutton dot info and I’d love to meet with you have a conversation and just love nerding out about this stuff.

 

Tim Lyons  49:30

Love it. So that’s gonna do it for us here at the passive income brothers podcast for this week and we look forward to serving you again next week. Thank you for listening to another episode of the passive income brothers podcast. We would be grateful for your support of our podcast by giving our show a five star rating and review and subscribing to our show on your favorite podcast platform. Don’t forget to take inspired action after listening to this show so that you can start building out your passive income streams. Finally, Head on over to cityside cap.com to connect with us and find out more information about how to get started passively investing in real estate