Interview with David Lawver
Building Recession-Proof Businesses with David Lawver
The slow-moving real estate market allows you plenty of time to make adjustments when you notice a downturn coming. It’s hard to time the market, but a crisis will surely come.
That’s why you want to surround yourself with the right people, ask the right questions, and learn to position yourself to capitalize on the next downturn.
Today’s guest, David Lawver, did just that.
David is an expert in building wealth in all aspects of life. He jumped into the mortgage business after his first year of university. After making $50,000 over the summer, he decided to bet on himself. He ditched college, dove deep into the real estate world, and never looked back.
He now operates a massively successful mortgage brokerage firm, a seven-figure flipping company, and is the owner of a wealthy Airbnb portfolio.
In this episode, David shares his advice on how to build wealth in a volatile market, how to best position yourself for the next downturn, and his tips on how to not only survive but thrive during difficult times.
Featured on This Episode: David Lawver
✅ What he does: David Lawver is a Mortgage Lending Expert, Real Estate Investor, and Entrepreneur. He’s 17 years deep into real estate lending and started getting into real estate investing 9 years ago. David is the Principle Operator of Palladium Development. He’s acquired over $75,000,000 of real estate projects since 2014, ranging from single-family dwellings, retail and residential apartments, and raised over $20,000,000 of private equity. David’s mission is to provide hassle-free, high-quality service that continues even after the transaction is complete.
💬 Words of wisdom: “I think that finding good deals is about value creation.” – David Lawver
Key Takeaways with David Lawver
- How David made $300k in two months from his first real estate deal.
- Good deals are all about creating value. Don’t just search for good deals; make them happen.
- Cash flow doesn’t guarantee the longevity of your business. Find out how David developed a steady income through real estate lending.
- What advice does David have for people just starting in real estate investing?
- Learn how David made a difficult decision that slashed short-term profits but enabled him to play the long game.
- The questions that David asks himself before any investment he makes.
- Learn the two steps for building a recession-proof business.
- His experience with Airbnb investing: The good and the bad.
- In retail, you can’t think only as a real estate investor; you must also adopt an entrepreneurial mindset. Learn why.
David Lawver – Negotiating Better Terms with Real Estate Lenders
David Lawver Tweetables“I personally don't think there's a magic pill in terms of investment. I think in every investment you have to grade time invested, risk capital, and return. And as some go up, some go down.” - David Lawver Click To Tweet “As an entrepreneur, I'm obsessed with education. I pay six figures a year for different education. I surround myself with people doing great things, and I especially learn the most from someone doing it.” - David Lawver Click To Tweet
- David Lawver on Instagram | LinkedIn
- Turnkey Ventures
- Austin Food + Wine Festival
- Michael Chu
- Brad Weimert
- Ray Dalio
- Crunch Fitness
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Read the Full Transcript with David Lawver
Justin Donald: All right. David, glad to have you on the show. Thanks for joining.
David Lawver: Yeah, of course. Thank you for having me on.
Justin Donald: Yeah. This is going to be fun because you and I have had a chance not only to talk shopping and talk about all the cool deals that we’re doing but we’ve been able to walk some deals together, which is really cool. And just some of the unique ideas and the expertise you have is so much different than many of the people in my network. And so, I’m excited to kind of dig into what it is that you do. But before we go there, I’d love to learn a little bit about why you decided to get into real estate and become an entrepreneur.
David Lawver: Yeah. Before we get into that, that deal we walked together, I’ll never forget when you stopped and talked to the guy, like, for probably 30 minutes. Like, I’ve never seen somebody build so much rapport so quickly like it was great.
Justin Donald: Oh, thanks. That’s been one of my keys to success is when you develop those types of relationships with people, I feel like a lot of the people that sell property, they sell based on who they’re selling it to. So, some people want to maximize return. Other people want to know that their baby is going to someone that they really feel good about and they’re less concerned about squeezing every last bit of profit out of it. And they’re more concerned with, “Hey, is this the right fit? Is this from a legacy standpoint? Are they going to treat the property well or are they going to be good to the neighbors? Are they going to be good to the current people that are in place?” So, yeah, I just think that’s really important and that’s been a key to my success in landing a whole bunch of deals when there’s competition. Because I think when all things are even, if someone likes you, they’re way more inclined to sell to you than if it’s just even outside of that.
David Lawver: 100% and it was on full display. I mean, the guy was telling insider stories about his life. I mean, had we wanted to get that deal, I think we had a real shot at it.
Justin Donald: I think so. Yeah, without a doubt. Yeah. It was really fun learning people’s story. And when you legitimately ask and you show interest, it’s amazing what comes out because like at first I was just asking him some questions and it was no big deal and then he could tell I was interested. And one of my questions to him is like I basically said, “Hey, I bet you have a whole bunch of stories. Like, the industry that you grew up in, I don’t know much about it but it sounds fascinating and I bet you have a ton of cool stories, don’t you?” And that was it. And he’s like, “Yeah. Let me tell you about…” Or maybe I even said, “Oh, tell me about one of them,” and then, I mean, the rest is history. Then he told me like ten different cool stories of people he met and experiences he’d had. It was awesome.
David Lawver: It was fun. That was a fun walk that day on a very cool property. But going back to how did I get into real estate, so after my first year at university, I wouldn’t say that I was like disinterested but I was kind of disinterested. I didn’t really like school that much. I liked the social aspect and hanging out with people but what we were learning just didn’t really feel that applicable to a job. And to be fair, it was still a lot of General Ed but that summer I came home and saw a job posting for a mortgage sales position. And so, I applied for that job, made $50,000 that summer, and the rest was history. So, I’ve been in the mortgage business for 17 years since and, of course, being around that much real estate and doing that much financing, you start to learn how to do deals and how to get debt and how to raise equity. And so, it levered into a career of buying quite a bit of real estate.
Justin Donald: Now, where did you go to college?
David Lawver: UC Riverside in California.
Justin Donald: And did you end up finishing up your time there or did you finish early and say, “Hey, now I’m going to just get into some real estate,” or in your case, “I’m going to get into lending first and then real estate.”
David Lawver: Yeah. There was no way after I made that $50,000 that summer, I was like just not going back to the top ramen life.
Justin Donald: You know, it’s interesting because we live in a day and age that’s much different than our parents, which is it was almost like you need to go to college to make it. At least, you know. I’m generalizing here, but from the standpoint of the masses, like that’s how you get ahead versus the reality is not really that. I don’t know that it’s ever really been that, but especially today, college is almost as obsolete as a lot of the technology that was used a decade or two ago. And so, it’s fascinating to see what can be accomplished without having a formal degree, because you can get a degree in anything if you concentrate enough energy and effort. And it might not be a certificate that says it but you might be specializing in flipping homes. You get a master’s, so to say, in flipping homes or you get a master’s, so to say, in lending and the mortgage industry. I mean, that’s a concentration you’re never going to get in any university.
David Lawver: Yeah. I couldn’t agree more. And coming from a well-educated family, my dad went to Stanford and my mom went to UC Davis, they were like and they worked their way out of a low-income situation and school was their answer. So, when they heard that my plan was to start working, it was definitely a – I don’t think they liked it right away. I think after I started experiencing some success and sustained success, I think they started to get it. But I’ll tell you this, I was insecure about it. Until probably late 20s when things really started being successful and I felt secure, like money’s okay, I was always kind of like, “Man, did I make the right decision with that?”
Justin Donald: Yeah. It’s funny. There are so many decisions we make that we spend so much time and mental space second-guessing the decision that we make. By the way, I’m guilty of this, too, and I think most people are to some degree. And instead of occupying our mind and it’s not even like how much does it occupy. It’s just the fact that there’s emotional energy around it. Imagine how much faster we could accomplish the things that we desire to accomplish if we could truly just let it go and say the past is the past and it’s not worth any more consideration because I can’t change it at this point. But it’s really hard sometimes to let go of that, this whole right and wrong thing. I was sharing this on a podcast earlier on someone else’s podcast that I was on, and I abandon this whole idea of right and wrong that like when you make a decision, there’s a right decision and a wrong decision. There are certainly morals and ethics that you can wrap around it. And by the way, people have different morals and ethics. You could actually debate back and forth on whether something’s ethical or not. And you can have one person on one side, another person on another side on various topics. And both in theory are right.
But I’m just talking more or less like two decisions that you make. Do I stay in college or do I go to college? Or do I not and do I start as an entrepreneur? And I don’t know that it’s right or wrong. I think it’s, hey, it’s path A and it’s path B and Path A is going to come with some pros and cons, and path B is going to come with some pros and cons. And those pros and cons are going to be more helpful or more beneficial to a certain type of person. But the more information you collect, the more you have to make better decisions in the future. And in my world, I’m just trying to not have those regrets, move forward, and say, “Hey, this isn’t right or wrong. It’s just a decision I made. Here’s the downside of it. Here’s the upside of it. And let me move forward more educated.”
David Lawver: Yeah. And what’s weird is for a person that didn’t enjoy education in the college framework. Now, as an entrepreneur, I’m obsessed with education. I mean, I pay six figures a year in different education. I surround myself around people doing great things, and I especially learn the most from someone doing it. If you want to get into an asset class or do this or that, if someone started doing it in a lunch or an afternoon hanging out with somebody, I can learn so much and shortcut all the easy mistakes that you fall into trying to learn yourself. And so, it’s weird. I love education. It’s just that it’s got to be education that affects something that I’m doing every day. If it’s a way to build a business or make some money or live better, I’m all about it, you know?
Justin Donald: Yeah. And it’s fun. You and I have had some good times here. We share a bunch of mutual friends. So, we did the Food and Wine Festival here in Austin together via our friend Michael Chu. We have looked at some real estate together via our friend Brad Weimert, and we’ve got a bunch of other mutual friends. And so, I’ve seen you both on the fun, hang outside non-work. I’ve seen you on the analytical side of like evaluating a deal and you’re just a fun guy to be around and the amount of detail orientation you have is incredible. I mean, when we were just running some numbers, I was really impressed with how quickly you could compute some of this stuff in your head. And I think that that’s such a great hack because if you can do that, you can say yes or no a lot faster. More importantly, you can just say no faster. You know what your criteria is, you know how you weed stuff out, and not spend a whole lot of time. I’m curious to hear your process there. Like, you have a very analytical brain so you can just make a few moves. You’re like, “Nope, wasting no more time here. Let’s move on to the next one.”
David Lawver: Yeah. Well, I think I’ve always had an aptitude for math that it’s fair. I’m also in lending, so I’d stare at these numbers all day. And I think part of it is like, at one point, 4 plus 4 equals 8 was hard. But once you know what it is, it’s just fast. So, I think early on, I took the time to underwrite deals. I did all the spreadsheets myself. I spent a lot of time with the numbers. And so, it’s just 4 plus 4 equals 8. I mean, at this point for a lot of different deal types, I can just walk in and quickly compute the numbers.
Justin Donald: I love it. I mean, you can take big numbers. I mean, we looked at a deal that I think was a $12 million deal. And the way that you were able to run the operating agreement in your head to what you thought it was worth, the square footage based on that market, even based on comps that weren’t even built yet but were projected to be built and completed at a certain time and maybe what other groups underwrote them for. That was very impressive to me. And I remember thinking, “Gosh, I got to get you on the show and just have people hear and learn how your brain works because it’s powerful and there’s so much to learn.”
David Lawver: I appreciate that. That’s quite the compliment.
Justin Donald: So, how did you transition then from, you know, and by the way, I know you’re still active in the lending industry and that’s kind of a foundation for you. But how did you transition or how long were you there before you transitioned into some of your real estate?
David Lawver: Yeah. So, I’ve been in lending 17 years. It was about eight or nine years in that I started getting into the investing side of things and our lending business, most of our business came from real estate agents, so we would meet lots of real estate agents, network with them to help their clients get loans so they could get houses. And so, naturally, one realtor called me someday and said, “Hey, I got this kind of contract or special deal. Do you have a contractor pre-approved who might want it?” And we actually brought a contractor in who I had pre-approved and he couldn’t perform. So, as he fell out with the escrow, the realtor called me. He was like, “This is a pretty good deal.” And I was like, “Yeah, it really is.” So, him and I ended up buying it together. We bought it for $1 million. We put $20,000 into just like painting it and dressing it up. We sold it for 1.3 million like two months later. And so, him and I work at the team. He was an older guy. I kind of had more of the energy in the operations, and he had more finances. So, it was a good partnership. And so, we created a partnership and that’s kind of where the investing began, although they’re not all like that first one, I think. It might have been a special one.
Justin Donald: Oh, yeah. You got to be careful because today really it’s hard to find deals that are undervalued. I mean, most stuff, there’s so much competition, it just keeps getting bid up, bid up, bid up. I mean, if you have 50 people bidding on a home, an apartment complex, how on earth can that be a good deal? Like, that kind of rules out the fact that you’re getting a good deal. The competition places a premium on getting it at whatever cost you can get it at. So, are we going 100,000 over asking? Are we going a million over asking? I mean, this is what’s happening in a lot of markets, especially the hot markets, especially here in Austin, where we live. So, what are your thoughts on making sure like that first deal is incredible. I love that you could do that, that fast. That’s generally not the case. What are your thoughts on the market and how kind of crazy it’s been? At least, we can talk public equities but, I mean, specifically real estate in general.
David Lawver: And I could probably talk the rest of the pod on this concept, but to say it concisely, I think that finding good deals is about value creation. For example, early on in the flip business, our value creation was that we knew hundreds of realtors through the loan business, and we called on literally hundreds and hundreds of realtors and looked at we’re averaging 70 off-market referrals a month and buying maybe one or two. And so, we created value by a really aggressive and over-the-top sales process. Today, most of what we’re buying is commercial assets, and our value is created in the construction. We’re buying a retail center that’s lost an anchor. We’re bringing in a new tenant. We recap it and create the new value. And so, we’re really creating value with the work and the construction and the relationship with the business that will go in. But yeah, no, I mean, this idea of like you’re going to call a realtor and they’re going to find you a good deal on the MLS is it’s just it’s not the deal today.
Justin Donald: It’s not. You want to buy them off-market. I talk about this a lot in my book with invisible deals, where you buy something that no one else knows about. There’s little to no competition. Now, you’ve had a tremendous amount of success in your retail centers. You just mentioned it a little bit. Walk us through what you’ve done there because this is a pretty cool model and this is unique. I feel like most people earn in the space. But when you understand it and when you find your niche, there’s a lot of magic that can happen. So, fill us in.
David Lawver: Yeah. No, absolutely. So, to go through the path, I mean, I think most people are searching for cash flow. The idea is you have enough cash flow to live the life that you want to live. I think another buzzword in real estate is the BRRRR method, which is you come in, you buy a place, you fix it up, you refinance your money out because you create a value and then you keep it with some cash flow. That’s all easy to say but it’s also hard to do. So, we’ve done apartments, we’ve done flips. Flips isn’t really passive, right? You’re constantly working, finding deals, turning them over, apartments. It can be passive but you’re a lot of managing the manager. The retail centers, the reason we’ve landed on that is because you sign one tenant for a ten-year deal and you get your checks every month. So, if you’re talking about real passive cash flow, it seems to be a good model. The long and short of it is, basically, we’ll find a retail center that’s lost a big anchor. You know, Amazon’s killing everybody, Toys”R”Us and all these other businesses, Kmart. And there’s not really big tenants to come in on a retail platform and fill it. So, what we decided to do was find what we thought was Amazon-proof, meaning it’s an in-person business and recession-proof business which we think Crunch Fitness is that.
So, we’ve got to deal with Crunch Fitness. I’ve got some operators that actually run the business and we own the rights to several cities for Crunch. And we’ll buy the building, we’ll put the tenant in, we’ll build it out for them, hand them the keys to a brand new store. We pre-agree on what the lease will be, so we know that it makes our deal work and they’re off to run the store and we own the building and get our rents every month. It’s a pretty good partnership.
Justin Donald: So, that’s your anchor. And then generally how many additional spaces are there that you can then lease out to different businesses?
David Lawver: Yes. So, this was a mistake I made on the first deal. I bought a single-tenant building. It was a 30,000-foot building and I just put the gym in. And then when I went to go see it, we had created the value, right? So, the new lease made the building worth – we bought the building for 3 million. We put 2 million in, the new lease made it worth 8.5 million based on the bank appraisal. So, we were thinking, “Any bank’s going to lend us $5 million on 8 million so we can refi out and go on to the next deal.” And a lot of banks did not want to take a gym-anchored retail center with gym only. So, that was definitely a lesson to be learned. It’s like you got to know your financing ahead of time. But the second building we did was half gym, half other tenants, and it was a mix of several other tenants. And the banks like that a lot more because the risk is kind of spread out. So, our kind of ideal spot is 25,000 feet vacant and then all the inline is filled and we just come in and fill the anchor.
Justin Donald: Oh, that’s nice. So, you’re buying it knowing that one big anchor tenant left, right? You have all the other tenants already there, already paying rent, already locked into some sort of longer-term lease. And then you’re plugging into the only vacant spot, which is a big vacant spot, a Crunch Fitness that you have good understanding and knowledge of to know that they’re not going to default.
David Lawver: That’s exactly correct. And that is the big thing. I mean, we looked at restaurant concepts and massage therapy and all these other things which are great businesses or can be anyway. But when you’re filling up 1,000 feet or 1,500 feet, you’re not really like creating a large value chain, whereas a gym that’s taking 20,000 to 30,000 feet, I mean, you could swing the equity position by a few million dollars with that one tenant.
Justin Donald: And I’m guessing you then have some sort of relationship with Crunch Fitness. So, you own the building, you’re the owner of the actual real estate, and then you’ve got some sort of an agreement, some sort of a partnership with Crunch Fitness, right? It’s not just a tenant-type situation. Tenant landlord, right? You have a piece of the Crunch Fitness or do you not? Do you not care about that and you really just want to collect the rent check and that’s it?
David Lawver: That’s a really good question. So, the evolution of this will be that we partner with multiple different business types. And when we get a tenant or we get a building, maybe there’s a big anchor missing but also one or two inlines. And maybe we go, “Oh, we have our restaurant concept, we can throw it. And we have our this we can throw in and, oh, Crunch goes in.” So, in theory, we’re working towards multiple business partnerships that when we find real estate, we can just quickly recap it. I think each negotiation will be different. So, the relationship with Crunch, in particular, I keep 40% of the Crunch that I build out. And if you think about it from their perspective, normally they would go to a landlord, they’d get a small TI budget and they’d have to raise $1.5 million to get the gym open. That’s pretty normal. So, they’re usually giving away 40% anyway. To get a gym open, they’ve got to raise some money and bring in some partners. So, the things that they don’t like doing, which is raising money and managing construction, I do.
So, I’m literally just like we picked the real estate, I raise all the money, handle everything, hand him the keys to an open store, and they get to just operate the business the way that they want to operate the business. And so, that one works out well but I think in other situations like, I don’t know, what if it was a Walgreens was willing to partner and they said, “We won’t give you the business but we’ll give you our valuable lease,” I’d probably do that deal. But in theory, I like the idea of having some ownership in the business as well.
Justin Donald: Yeah. I think that makes a lot of sense and I like how you structured that. You know, on the flip side, there are probably businesses that you don’t want to own like you wouldn’t want to give up the dollars maybe in a speculative restaurant if it’s not a chain and there’s not the financial strength behind them, you might be throwing money out the door to be like, “Hey, give me a percentage of your business and I’ll do the buildout.” But I think you can be really strategic in who you’re bringing in so that it’s businesses that you know well, businesses that you can help scale, where you can have influence, a positive influence to create that win-win. So, I love the partnership with Crunch and then I love the way of going after the building. So, how many times over have you done this? I’m guessing some you’ve bought and sold, and most you probably have bought and held. What does that look like today?
David Lawver: Yeah. So, my partners in the Crunch deal, they had eight existing gyms in San Diego, so those were all leased. We started this venture in 2018, 2019, so it is actually fun. So, the first one came online in October of 2019. We finished refinancing it in February of 2020, like a month before COVID, and that one was great. So, that one’s fully leased out. We have locked in a ten-year loan and cash flow is $20,000 a month. The gym is making $30,000 to $40,000 a month. We’re making money on all sides of it. The next two we bought, whereas in like January, February of 2020, literally right before COVID, so those two gyms we opened right in the middle of COVID. The one in Texas, because of the politics, they just kept open so it’s a little easier to navigate the deal. That one we still own today. It’s fully refinanced and cash flowing. And then the third one in California, we just got to profitability. We actually just finished our year-end reporting. And so, we’re working on refinancing or possibly selling that building. We may sell that building.
Justin Donald: Well, what’s great is you not only have the – you own the building, you have the layup of the partnership, but then you have this expertise already in lending. So, you know what the terms are going to look like and how to structure unique terms. And I’m guessing that you try to do as much as you can with non-recourse lending. Is that something that you go after or is that less important to you at this point?
David Lawver: No. I mean, I’m in a financial position where recourse is a big consideration. You know, I don’t have to keep buying stuff, right? So, why would I take on a bunch of personal liability, especially on something like this, where you have pretty large debt stacks? You know, it’s between 5 million to 6 million a building. So, there’s a lot of recourse if something happens to the gym. And COVID certainly remind us that things can happen to the gym. So, I think that’s a two-part answer. The first answer is, in the retail space, you are not just a real estate investor, you’re also a business investor. You do have to think about the business, how it’s run, who’s running it, do you trust what’s happening? So, that’s a big piece. And then the second piece is I think the tail wags the dog. Like, I think in terms of debt, I think you have to like figure out what debt options are available in what asset class and decide what vehicles I want to work around. And then once you know what the debt options are, back into how you’re structuring the deal. So, yeah, definitely the lending background has helped a lot with that but I think some people miss this. Like, they get into deals and don’t really think through the debt on the back side and I actually think it should be the other way around.
Justin Donald: That’s a good point. So, what are some of the terms that you’re looking for that make it attractive for you to be in the space? Because I’ve got to imagine you’re getting terms that other people aren’t getting just because you know to ask for them or just because you know that everything’s negotiable. You know, when I first got into real estate, I just thought that you negotiate the real estate deal but you couldn’t really negotiate the lending deal, right? I just thought you take what you can get. And later I learned, “Oh, no, there’s a total negotiation on the lending side.” And the better relationships you have with more groups, the more competition there is for your loan. And so, everything’s a negotiation there as well. And so, it’s funny I’ll get docs today from banks that tons of people that I know just get them and they sign them but I’ll send them to my attorney and I’ll say, “What do we need to push on?” And I’ll get a red-line document back. We send it to the bank. “Hey, Bank, we need you to adopt these red lines or adhere to these important points for us in order to get this loan done.” And so, it’s not just take what you can get. It’s very much a negotiation, and we feel we’re very much in the driver’s seat. So, I’m curious like what are the terms that are important to you? And do you do a lot of negotiating with banks?
David Lawver: That’s so funny that you talked about redlining documents. So, being in residential lending, you can negotiate but it’s usually on price. Most banks start with kind of a higher margin. If you come in with a competing quote, they’ll generally come down in rate or come down in fees. So, I certainly have been on both sides of that negotiation quite a bit. And I think probably people don’t think enough about getting a second quote and just driving down that price because it’s an option. But the docs themselves like Fannie Mae’s docs or Fannie Mae’s docs so like what you said earlier, that really is how it is in that space. So, it’s more of a price thing. The first time, so the first gym when I refinanced it out, I actually refinanced it with another commercial building that I have and we got a $10.6 million loan. And I think the two buildings were worth like 16 mil or something like that. And I remember this was my first CMBS loan I had gotten and the bank sent me the docs and said, “Oh, have your attorney send the red lines.” And I was like, “What do you mean? Like the red lines like changes? Like, I proposed the changes?” I think getting a $10 million loan and actually negotiating like what the loan docs said was like when I felt like I’d grown up in business.
Justin Donald: Yeah. And I think that’s where it gets fun, where it’s like, hey, I’m negotiating or you’re negotiating with the bankers or with the specialty lenders, right? It’s really an interesting space where, I mean, simple things like price, fees, interest rate, terms, amortization, personal guarantee, all of these are negotiable. People don’t realize that. You can negotiate your personal guarantee, which maybe in year one is 100%. You can negotiate it down to 75% in year two and 50% in year three and fall off completely in year four. You know, you can negotiate right out of the gate sometimes if you have no personal guarantee, right? So, everything is a negotiation. Are there specific terms that you look for in the retail centers when you get your lending on that?
David Lawver: Yeah. I learned a lot of lessons in COVID and not to speak negatively about the CMBS product because I think it’s super-valuable in a lot of different ways. There’s a blackout clause and a cash sweep clause in their boilerplate loan docs, which basically says that if X percentage of the businesses and the building go out, the bank has the right to just cash sweep your bank accounts. I mean, I was like, “Why would we ever have the business go black?” I don’t care if that clause is in there so I didn’t think to negotiate about it. Well, when COVID happened, the gym was technically closed down because we weren’t legally allowed to be open. And we actually opened, we created a whole outdoor gym. We kept our memberships on. We were one of the few gyms in town that stayed open, so we had a fully operating business but technically the inside of the business was closed and dark. And so, they were trying to initiate the cash sweep and I was like, “You’re not sweeping my cash.” There’s no way. And so, definitely now into the future, I’m always looking at all those little terms like what options do they have to come in and take the money or to start navigating the deal?
Another thing that may sound small, with commercial banks, they make you send financials like every quarter. And actually, in the docs they allow it for every month. So, in COVID, I kept having to prepare financials for each building per month to keep the lenders appeased. You know, I think the quarterly is enough or maybe twice a year. Like, I’m not trying to be doing a bunch of extra work to make the bank happy. So, I think paying attention to the little things is a big deal.
Justin Donald: Yeah. And that can be negotiated annual financials, right? I don’t want to provide more than anything on an annual basis if I don’t have to. So, nine times out of ten, that’s all that I like to give up. And I just give them all the info that comes at tax return time. Yeah. So, it’s interesting. You’re talking about CMBS. And so, basically, earlier you talked about agency debt, which is like Fannie, Freddie. And so, there’s probably less negotiating on terms of the contract but more negotiating on terms of the deal, the interest, the price, maybe even some of the debt-to-income ratio is that type of stuff. And then you get into another. And so, generally, with agency debt, this is non-recourse debt and then you get into CMBS, which is kind of like your Wall Street debt, where it’s packaged and sold off into pieces on the secondary market. And so, you can lock in non-recourse generally there. But the things with those two types of lending vehicles is that if you sell early, if you sell within the first ten years, or whatever the timeframe is, then there are penalties with yield maintenance or defeasance. And so, you’ve got to be careful that if you have a product that you think you might sell, on one hand, you want this non-recourse debt. On the other hand, is it worth the fees that it’s going to cost you if you sell it in year three if you’re going to be penalized up to year ten? And so, all of these things are important. And that’s why some people will say, “Hey, I’ll just take a local lender.” And I’ve been a big fan of local lenders because I feel like I can do the most negotiating there with the local lenders. I’m curious how you view the different types of lending that exist.
David Lawver: Yeah. I think you hit the nail on the head with that. I think of CMBS is like they’ll give you some pretty aggressive and interesting terms, sometimes higher loan-to-value, sometimes interest-only periods, sometimes 30-year amortization instead of say 25 or 20, which a lot of the local banks want shorter amortization. But those terms, those bonuses come with the price. We had a ten-year defeasance. I think our early payoff on our loan is like 2.3 million if we were to pay that thing off. I mean, it’s just a staggering number. And everyone goes into it bright-eyed thinking that they’re going to keep their deal ten years. But ten years is a long time and recessions change things. I mean, I think we remember in 2008, like if you had a building then would you have thought about selling it? Maybe. And so, life changes, things happen, divorce. So, ten years is a very long commitment. And so, a lot of times when you say CMBS to somebody who’s had to pay theirs off early, the bill, they’ll give you a look because people you know, know.
But in terms of, yeah, the local banks, we use local bank on the second one and it was exactly what you said. They were very negotiable with kind of contract terms and they actually like knew the location of the building and drove out there and like, “Oh, I like that one.” And so, but we only got a three-year fixed instead of a ten-year fixed. We did get a little interest-only period. So, I think there’s value for both. If there’s not like complete certainty around keeping it, I don’t think CMBS is the right answer and I think local banks will do little different things that CMBS won’t.
Justin Donald: Yeah. And here’s the thing about CMBS or the longer-term debt and you’re going to have the same experience with agency, with Fannie, with Freddie and that is this like you may think you’re going to hold it for ten years. But what if someone offers you like twice what you paid for it in a short period of time? It’s hard to not want to sell no matter how good it is. And so, I just think having the options available to sell if you want to sell or not if you don’t because you never know what the market’s going to command. You know, when I get into mobile home park investing early on, people laughed at me. They thought it was atrocious. And why would I do that? And now people are making the most ridiculous offers. I mean, we get offers that on a monthly basis at a minimum, where I’m like, “Man, that’s such a crazy offer. Maybe I should sell,” but it keeps getting crazier. Like this last offer that we got, you’re almost at this point of like impossible to say no. You just can’t say no because of how much people are willing to pay to get into the space today. So, it’s a fascinating thing. Now, I want to talk to you a little bit about your transition from residential to commercial, because when you first got into real estate or at some point in the early stages, maybe it wasn’t your first transaction, but pretty early on, you were kind of doing the Airbnb portfolio, right? That was a big play for you. And by the way, for those of you that are doing it, Airbnb can be great if you’re in the right markets, but there’s work involved. You can hire out a team to do it and pay them a percentage of the revenue or figure out some sort of profit share. But why did you, well, first of all, why did you get into Airbnb? And then secondly, why did you pivot from Airbnbs to commercial?
David Lawver: Yeah. Both great questions. So, the progression was I’ll do some flips for passive income and it became a business. I had to like hire a team and manage it and create all the business infrastructure that I have in my first company, like weekly accounting meetings, weekly investor updates, like just all these things. And so, it was making good money but it was a business. So, then I was taking the profits from that and I started buying apartment houses. You know, it’s just thin margins. Even six, seven years ago when the cap rates were higher than they are today, it was still thin margins. You go invest a million bucks and if you get a good deal, maybe you’re making 60k a year. It’s not some crazy return. It’s a long game, right? So, Airbnb, of course, is just this idea that you can double or regular rents. And so, it seemed like it could be a better cash flow model. The truth is Airbnb is much like flipping. You’re not just putting a renter in and you have income. I mean, you’re managing a manager. There’s problems, there’s things, there’s phone calls that come. And so, while I was building this Airbnb portfolio, there was a flip deal that came in that was a retail center that had a credit union and I bought that building and realized how easy it was, and that kind of helped facilitate the transition.
But I’ll say this in regards to Airbnb. So, we were buying in Nashville. At one point, we had 14 homes there and we got the permits to do the short-term rents prior to when they canceled the ability to do that. And if you had them from before, you actually grandfathered in to continue using them. I had an attorney review my portfolio to just give me ideas about asset protection and those were all bought in my personal name because I used Fannie Mae loans. And he’s like, “You got bachelor and bachelorette parties in your houses every weekend. If someone falls and breaks their neck, you don’t really want them suing you personally. We should put these in an LLC.” So, I created a NASH BNB, which I thought was really clever, and put them all into the LLC. And in changing the title, it actually constituted a sale and I killed all my permits.
Justin Donald: That’s rough.
David Lawver: Yeah. And those deals were sweet. We were buying them for 350. We’d get in about $5,000 or $6,000 a month in rent. I mean, it was really nice numbers. But to be frank, I was doing it because we were on a path and I followed through with things but it was becoming a headache in terms of management. It was like now I had the third or fourth business or whatever it was at the time. It was not like I was just investing in Nashville and getting free cash flow. And so, I think, one, the permits pushed it but, two, searching for yield with less management is kind of what led us towards retail.
Justin Donald: Okay. Yeah. That makes a lot of sense. I think that it makes also a ton of sense when you have an anchor tenant that’s a credit union. You buy a building and you’ve got a credit union there. The odds are pretty good they’re not going out of business because they’re going to be a little bit more financially strong than most banks even as a general rule, which is interesting. So, you got into commercial. And so, let’s talk about a triple net lease, right? A lot of people when you see NNN on something, your triple net lease, this is a big investment arena that a lot of people are transitioning to. And the progression that you’ll see is you’ll have people that start in single-family homes and then they’ll move to apartment complexes. Maybe they’ll get into self-storage at some point. Maybe they graduate from, you know, maybe they go right straight to self-storage or maybe they go from apartments to self-storage because it’s like, “Oh, lots of work to way less work.” And then eventually it’s like, “Hey, let’s go to triple net leases because this seems like it’s the least amount of work.” And you’ll see this a lot also in the industrial space as well as commercial retail. Walk me through some of that progression as you see it and kind of how you would describe a triple net lease operation.
David Lawver: Yeah. I’ll describe the triple nets in just a second, but I think there’s some just general thinking around this. I personally don’t think there’s a magic pill in terms of investment. I think every investment you have to grade time invested, risk capital, and return. And as some go up, some go down. A government bond is probably pretty close to zero risk, although I don’t know these days but let’s just say that that’s true. Going investing in an Airbnb in a like highly recreational area while it would be higher cash flow than a bond there’s some risk there. If recession happens and people stop traveling for a bit because it’s tight, like that building probably isn’t going to cash flow. But when it’s good, it’s good. So, I think across the board, you got to gauge time versus risk versus return and make decisions. And I don’t think there’s a right answer. But in terms of triple net, so basically this is where you put a tenant in, and the tenant’s responsible for paying all expenses of the building, including property taxes, including insurance, including maintenance, just everything related to the building.
So, from the perspective of like work, apartments are tough because when you’ve got 100 doors, let’s just say, and your expenses can very easily start creeping up on you without you notice and it will erode your returns. And so, there’s work. You’ve got to manage the manager, watch the numbers, keep an eye on things, run it well. Triple net, I mean, you sign it and they’re paying everything and you don’t have to think about it. So, it’s certainly a very good return from the perspective of least time invested. But the risk, of course, is if the business dies, a lot of retail is dying. So, you have the risk of like how do you re-tenant if something like that happens?
Justin Donald: So, what do you see as kind of the future of real estate, at least in the short term? Like, a lot of people are talking about the next recession that’s happening and you’ve got other people that are really bullish on real estate and paying prices well above asking, especially in some of your hotter markets across the United States and the world, what do you see happening? Do you see this as being still really safe to invest in real estate? Do you think that we’re going to hit some turbulence here? I mean, a lot of people thought we would have already hit turbulence and didn’t think that we’d print this much money. So, I’m curious to get your thoughts.
David Lawver: Yeah. Again, we could have talked the whole pod on just that one question and I’d actually love to hear you weigh in also but it’s really tough. I listen to these people who are well-educated in macroeconomics and I listen to macro voices. I listen to all these other podcasts. I try and hear Ray Dalio as much as I can because he seems like he’s pretty sharp. And you’re right, it’s a lot of there’s two ways to look at it but I think it’s always like that. I mean, to be frank, I think, you got to kind of think about keep the end in mind or the worst-case scenario in mind that if recession happens, what does it look like, i.e., like the business gets into like look at COVID. Our businesses got closed for a year, so how do we solve that? We made sure to keep several hundred thousands of reserves in each business so we could go some time without payments. This kind of thing. So, I think there’s two ways to create business models that account for recession. But as what do I think’s going to happen? I think the major things that I look at are and since the 2008 recession, the new homes built is way below the family creation like incredibly below. There’s these charts floating around that kind of point out that basically, it’s like half of what it should have been. So, you have the supply issue.
And then the second piece is they’ve printed 10 trillion. I mean, as a percentage of total money supply, there hasn’t been anything like it. So, I just can’t see any scenario where the real estate asset class gets walloped unless they start lending poorly again which being a lender, we’re still qualifying docs. Everyone’s putting down payments down. Like, it’s not the same as it was in ’08.
Justin Donald: Yeah. That’s good to hear. You know, I think there’s going to be some turbulence, especially in some real estate more so than others. I think if you’re in a hot market, it can likely weather turbulence. And I mean, I think it’s still better long term to be in real estate than in cash because you’re going to lose money every day you’re in cash and you’re going to at least keep up with inflation if you’re in an asset such as real estate. So, it’s interesting. You’ve got a lot of smart people on both sides. I just watched kind of like a message, a speech by Ray Dalio kind of highlighting his new book but addressing some of the market-specific stuff and paying attention to all the historical data he has and the way that he’s laying that over. And it was really a phenomenal walk-through of what history looks like and maybe what we’re embarking upon as a nation that maybe it’s not going to be as, I guess, amazing as it’s been, as fruitful as it’s been. But even if things kind of implode, I think it’s a long period of time probably before it’s really felt. So, we’ll see. You know, each market I think is going to play a different role and each asset class, I think, is going to play a different role. But it pays to have plans in place for all scenarios that could happen. You know, the stress test, what you’re investing in that in a really bad downturn, really bad economic downturn, or another COVID that your business can survive.
And I like that you had excess capital that you save for a rainy day. I think that’s really smart and I hope people do more of that. And not just on the business side. On the personal side, if you lose your primary source of income, do you have enough money saved away that you can cover 6 to 12 months of what it costs you to live? So, awesome, awesome info. I really appreciate you joining us on the show here. And, David, where can my audience learn a little bit more about you?
David Lawver: Yeah. I’d say the easiest place to find me is on Instagram. It’s @mrlawver. That’s my last name. And certainly, if anyone wanted to chat more or learn more about retail, happy to jump on a 30-minute call with anybody who’s interested.
Justin Donald: That’s awesome. Well, thanks so much for joining us. This has been just a really fun and enlightening session. And I want to end the call as I end the call every single time that we get together each week, and that’s this. What’s the one step that you’re taking today to move towards financial freedom, to move in a life that is by design, not by default, life on your terms, and one that you’re really inspired to live. Thanks. And we’ll catch you next week.