How Key Principals can Help Close Multi-Family Deals with Ethan Gao

Welcome back to the Tech in Real Estate Podcast with Analytics Ariel, where we bridge the gap between real estate and technology to provide you with the latest insights and strategies for success in the industry. In this episode, we are thrilled to have Ethan Gao as our special guest, as we explore How Key Principals can Help Close Multi-Family Deals.

Ariel Herrera 0:00

Hello everyone and welcome back to the tech in real estate podcast. My name is Ariel Herrera fellow data scientists and your host today, we have Ethan gow with us, even as a real estate investor and key principle where he guarantees loans and provides interim capital. From our conversation, you will learn what a key principle is the importance of the role and factors that can help you as an investor as you're looking to scale into multifamily. Ethan has made over 300 loans invest in over 100 Single Family flips, and has been a general partner on both commercial and multifamily projects in excess of 900 units. Through his private equity fund. He has invested in more than 25 million commercial properties. Ethan graduated from Cornell University with a BA in economics at the age of 19, and then Columbia Law School at the age of 22. Following law school, he worked as an m&a lawyer on Wall Street before becoming a professional investor in 2016. Hope you enjoy our conversation and leave comments below on any questions that you may have. Today, we have a special guest Ethan gow key principle and real estate investor. Welcome to the channel, Ethan.

Unknown Speaker 1:17

Hey, thanks for having me.

Ariel Herrera 1:19

Yeah, awesome to have you here. And I'd love to just get right into it hear about your background and how you got into real estate as well as lending.

Unknown Speaker 1:28

Sure, so I got into real estate about nine years ago. So I was working as a corporate attorney, at a top law firm here in Houston, Texas, I've made a really good salary and bonus, you know, between 300 to 400k a year, it was a type of job where you had to work really, really hard, and sometimes that extremely different, and weird hours. So I was I had already saved quite a lot of money from that type of job. For, you know, at that point, I've been a lawyer for almost eight years. So what I was really interested in was finding a way to not have to work at that job. Specifically, I remembered late, late at night in the office, when I was still working till midnight, or whatever, I was started googling things like, what do I need to do to not have to work here. And this was before a chat GPT. So Google had really terrible responses. But the two of the ones that I was interested in, were buying a franchise, and then real estate investing. So I interviewed a bunch of different franchise finders. So these are people that charge you a fee to then find you the franchise for you to buy. I interviewed them. And basically they said, Hey, Ethan, there's really no franchise where you could put in money and then print free money and do nothing. They said, You're gonna have to do something. And I said, No, I don't want to do that. I basically told them, I already had a terrible job, why would I go buy another terrible job, which is what most of their franchises look like. And then I discovered things like bigger pockets and real estate investing. And I, you know, for a period of time, I listened to every single BiggerPockets Podcast that ever existed. I just listened to every single one in a row during my commute. And I still keep up religiously with it. Now I listened to almost all of them, they have four different ones. And I basically listen to all of them, just in case somebody says something smart. And what I decided was, I really wasn't super impressed by anybody that went on their podcast, everybody had a decent origin story. Some of them were highly educated, some of them were poorly educated. Some of them had a lot of money, some of them had no money. So what I decided it was I needed to get into real estate because it didn't look like there was a real barrier to entry, and it looked like a decently high margin business. So after I did all my research, I decided I was going to be a hard money lender, because I already had plenty of capital that I'd saved up for my job. And then additionally, I was already a lawyer, so I was pretty familiar with loan documents and how they all work. So that's what I ended up doing. So I've made, you know, probably 500 loans based on real estate, secured by real estate over the past nine years.

Ariel Herrera 4:05

Got it. So you're looking for time freedom. So research different particular areas to go into real estate had a low barrier to entry, and you found that you could have a real niche within hard money lending, correct. Exactly. Right. Great. So talk about that a little bit more. What were some of the challenges when you first started harmony lending? Like how would you qualify some of these individuals?

Unknown Speaker 4:26

Sure. So I would look at their tax return their credit score, their professional resume, can I spend some time with them in person to get to know their personality. And so really, I had a really good run, so I definitely took advantage of a decent market. So I started in 2014. And it was just a really good market especially in Houston even though oil prices were going down. It didn't really affect the real estate market too much. So I really had five or so core borrowers that I just lent a ton of money to. And then I had a you know another are 12 or so onesies and twosies? You know, they might do one or two with me. So I really just selected that core group really well. And they were all really good borrowers paid on time. If things went awry, they would make it right. So I just had a really good run. I've never had to foreclose on anybody. I've taken a couple to foreclosure, but they were paid off or they were they cured the default before foreclosure. And I still still have that record. I've actually never had to foreclose on anything.

Ariel Herrera 5:28

That's excellent. So clearly, how you that these individuals is pretty good. And you

Unknown Speaker 5:34

were I'm just extremely lucky.

Ariel Herrera 5:37

One of the two correct? Do you use any technology in order to screen as individuals? Like? Do you maybe look at some of their, who they follow on LinkedIn or play social media into it at all?

Unknown Speaker 5:51

A little bit. So we've got common connections that I want to see who we have a common connection with and just ask the common connection, what they think of the person? Yeah, kind of a game of telephone. And, you know, hey, if Johnny is, you know, pretty normal, and two other guys kind of know him too. And they said, He's normal. That that's, that helps a lot. Because what you don't want is you don't want an adverse or a unexpected reaction to something. So somebody says, Oh, yeah, Johnny's super weird, you know, that, that I'd have to look into that ahead of time.

Ariel Herrera 6:22

Yeah, makes sense. And then in terms of how you're tracking all these different lending deals that you have going on, do you just have it all on an Excel file? Or yeah,

Unknown Speaker 6:30

I just have it on Excel. I've had to use QuickBooks before, when I used to borrow money from banks to do my business. I use QuickBooks and I learned how to use that I have not found that to be actually time saving, it

Ariel Herrera 6:42

all. Took a lot of time to try to set it up. And then

Unknown Speaker 6:45

when I saw I paid somebody money to help me set it up and to teach me how to do it. And then once I started doing it, I was basically like, this isn't any better than an actual spreadsheet. What's, what's the point of this? So in July, so Intuit will not be given me a check, they'll probably find a way to charge me for saying that bad thing about QuickBooks.

Ariel Herrera 7:05

Right. But yeah, this is really good background of understanding how you first started into hard money lending, how you were systematizing, your process? And then how have you progressed, in terms of what lending products you provide today?

Unknown Speaker 7:20

Yeah, so now I kind of don't do much hard money lending, I mostly refer that to a couple of friends that do it full time. Rarely, why, you know, come down and kind of do it myself. So about three years ago, I started getting into multifamily and commercial real estate, instead of single family. And that was because of one particular conversation I had with a friend of mine, who just straight up asked me he said, Hey, Ethan, you've got millions of dollars in your life insurance policies. You have millions of dollars of net worth. Have you ever thought about being a loan guarantor completion, guarantor, or key principle? And I never heard of that before. So I said, Hey, what is that talk? What are you talking about? And he explained it to me. So for those of those folks who aren't familiar with it, I'll just give an example using me and Ariel. So if Ariel and I are buying a apartment building in Phoenix for $25 million, we might be able to borrow 50 million from a lender, and we'll raise 10 million from our friends, family, you know, work colleagues, associates what have you. So what the lender will typically require is they'll require that early on I became the lead sponsors, we have to have net worth that exceeds a loan amount. So if Ariel and I have 14.9 9 million, we don't qualify for a loan, we have to bring in another person to help us qualify. And then let's say area, and I have 15.1, or 15.0 1 million of net worth the bank, the lender will still say, That's awesome. Prove it to us, show us 10% of that liquid show us 1.5 million liquid and life insurance policies, which is what I mostly have, you know, brokerage account, cash CD, you know, what checking savings, what have you. In that case, if let's say, Erin, I had 15 Oh, $1 million dollars, but we only had 1.4 9 million cash available, we actually still don't qualify for both. So it's a conjunction, you need to qualify both ways, you need to both have the net worth and liquidity. So a lot of times, that's what I get brought in as I get into either shell liquidity net worth or both. And now, I'm relatively experienced, because I've done this for a while. So sometimes, if people have the liquidity and net worth, but they're new, they need somebody that's more experienced than them for the lender to qualify. So I can come in show experience, liquidity net worth, or a combination of all three to help a team get qualified for a deal. So I do that quite a lot. And then one of the side businesses I discovered from from doing that was a lot of people will tell me, Hey, we don't need you to sign on the loan. We got that settled. But you know, let's go back to that example of the deal that you and I were buying in Phoenix for 25 million. In that case, let's say we've raised seven out of the 10 million and let's say everything's ready to close lenders ready, surveys, that appraisals done, titles done, insurance is done. Everything's on we're just missing the last $3 million. And let's say, you know, that was our bro either our mom or you know, one of our friends that just really didn't show up to closing with the money in time. What do we do? You know, we might have hundreds of 1000s of dollars of earnest money at risk, we don't want to return $7 million back to our investors and tell them, hey, sorry, we couldn't get the deal done, call you next time, they might not pick up the next time you call in that situation. So what you do is you find Ethan gow, and you work out a deal with Ethan where he can lend you $3 million. And you can close your deal. And then you can pay Ethan with post closing fundraising. Or if you've got other stuff going on, you can just you know, as as you get liquidity events, you can pay Ethan using those liquidity events instead. So I've now done that type of loan about 12 times I call it a special situations or gap loan. So there's a gap in your capital structure, there's a gap in time that it helps you fill. In many ways. I'm basically like coming into your deal resurrecting it from the dead guy. But because I came in to lend you the money, we really just resurrected the deals, and gave you more time to raise money to close it.

Ariel Herrera 11:05

Very clear definition. Thank you so much, Ethan. And I can imagine that as someone who may need you for the gap, funding, that the urgency is very immediate. So what point do people usually contact you? And how do they find you in order to get that type of loan?

Unknown Speaker 11:22

Yeah, so I go on a lot of interviews, talking about it. I tell everybody I know in real estate, that that's one of the things that I do. And a lot of times I get referrals, a lot of them are third tier referrals. So it's not a direct referral from someone, it's a referral from a referral, or referral, which that that's that's great. That means, you know, the networking is obviously working. So the fastest deal that I've ever done was same day, on November 4 on a Friday, I got a call that we're missing $6,000,000.03 pm that day, I wired $6 million.

Ariel Herrera 11:55

Yeah, I think it's pretty incredible. And that you could be called and sent same day be able to wire the funds, which shows the value that you're able to provide. And if you could talk a little bit more in terms of like, Where have you seen this gap funding? I think you said last like two to three years you've been providing it? Have you seen more of an urgency as of late? For some? Yeah, that's

Unknown Speaker 12:20

a phenomenal question. So I don't quite have enough data, because I've only been doing it for about one year specifically. But then I looked back in my past, and I noticed that I've done similar things in the past, I just didn't make a business out of it. But I can tell you a lot of times, what I've seen recently with these really large hikes and interest rates that people aren't necessarily expecting is that sometimes lenders will say they'll come and they'll say, Hey, if you close by March 1, it's going to be 5.25% interest rate. For example, if you close by April 1, we're going to increase that to six. So there's a urgency to close faster, because of what the lender is doing. So saving that 75 basis points and your interest rate over five years, it's actually worth quite a lot of money. So it's worth it to do. Sometimes lenders have kind of started, you know, they're not defaulting per se, but they're not honoring their obligations as much. So they've come into deals and you know, on that specific deal idea of it is a gamble on that deal in Phoenix, where we might be borrowing 15 million. If we wait too long, sometimes lender might say, Hey, we're only comfortable lending you 13 million, now you got to come up with another 2 million of equity instead. So I've definitely seen more of those situations now with the interest rate environment that we're in. But I think the bread and butter also stays, a lot of times somebody will just lose interest, or they just won't want to do the deal anymore. And I think a lot of that happens with 1031 investors 1031 investors have to identify a number of different opportunities that they're gonna invest in, and they might select eight. And they, they can only do one at the end of the day. So there's going to be seven that they might have promised that they're going to do, and they're not going to do because they only do one. So I've seen that come up. I've seen lawyers being slow. So sometimes I've seen people say, hey, our PPM just took way too long. Our lawyer wasn't very good. Last two weeks of fundraising. That's why we're two weeks behind. And we have to close. I've seen that that should never really happen. By the way, being a corporate lawyer myself. You're if you're paying them good money, you should not it is not acceptable for them to not meet your deadline. You should call me and then I can either help you or I can refer you to somebody that went missing that one.

Ariel Herrera 14:34

So he then say if I were to come to you, I have a deal. I need funding right away, maybe 15 day period. How do you make sure that this deal isn't crap?

Unknown Speaker 14:44

Sure. Yeah. So I'll number one, check out your deal. So I don't specifically care if you're going to make your investors 15.8% or 14.9 or 16.2 that you know, I look at it at a much higher level. I just want to make sure your deal is normal and There's no reason that you can't raise money to it, right? If you come to me and your deal is, you know, class C minus, and you're gonna make 80% IRR, you know, four times equity multiple in three years, I'm gonna say, Hey, hold on boss, that is, that is an outlier what what's going on here, that doesn't sound right. You know, most, you know, the 20th to 80th percentile deals all kinds of conform, pretty similarly, they're usually around, you know, 7%, cash on cash, 15% IRR, you know, 2.01 equity multiple over a five year old or something like that. So if you're either too low, in which case, I'll say, hey, Ariel, maybe you should go back to your real job, because you're not very good at finding deals, you know, you're paying like a 4% IRR, you can go buy a CD and make five. Or if you're 80, I might say, hey, Ariel, you really ran your numbers wrong, like you forgot to carry the zero and you're only making eight. You know, there's something wrong with your math, right. So that's what I look at the deal for just to make sure it makes sense, make sure that you can raise money to pay me off post closing, because that's most likely how getting paid paid off. And then what I look for is just your overall track record. And what else you have going on kind of figuring out what are the deals you have? Because I'll generally require that you pledge me the other deals that you're on as collateral to support my love.

Ariel Herrera 16:17

Got it? And then how are you fact checking to make sure that they have ownership and those other properties that

Unknown Speaker 16:23

they put? Yeah, so we've done it a couple of different ways. So the most onerous and the most time intensive way as we go through the county records, and we check who actually owns the property, so we'll go to the property records, or we'll go to the tax records, or we'll go to both. And check that the entity that you said is the owner is the actual owner. And then we'll go to check to make sure that that entity exists. And then we'll go to make sure and check that that entity is actually owned by you or controlled by you or you're a member or you know, manager of the entity. So we do the trust, but verify. If we suspect that you are somebody that wouldn't tell us the truth and would kind of fabricate that we have no business lending you any money, you don't really care how good your deal is. But again, sometimes people just get it wrong. Like that deal I told you about in Dallas, where we had the wires 6 million the same day. You know, he was a he was actually compared to most other sponsors, he was above average and paperwork. But he didn't actually know his own organizational structure, because he had 14 different entities. So a lot of times real estate investors get confused by you know, which entity owns which entity, which owns what property. So he had flipped some around. And so then I had to go, you know, as his lawyer, you know, and he had an actual entity chart that he his lawyers had created. And it was just factually incorrect. So it was wrong. He had mixed some stuff around once I traced through the actual organization documents, they were wrong. Like wasn't material. No, it didn't really matter. I mean, it just getting some wrong at a chain. But fundamental Yeah. And he he controlled this chain of entities that owned and probably

Ariel Herrera 18:01

got it. Okay. And then the technology person and me stepping back to when you said verifying county records and such is you have like a court runner or like a VA like who's gathering that data for you to then review?

Unknown Speaker 18:16

Yeah, that's a good question. So there's a couple of services that'll do it. We tried them out, they weren't that good. So we actually just do it manually. So it's usually not that hard to Google, you know, Polk county tax records, you know, Polk County, Kentucky, you know, maybe you have to say Polk County, Kentucky or something, because there might be 20, Polk Counties.

Ariel Herrera 18:34

Yeah, that makes sense. But that's one of the unfortunate things is that as his providers tried to give this data across all counties, for example, they do poorly and some better than others. Sometimes the data is stale. It's not perfect yet,

Unknown Speaker 18:47

maybe I'm old school, but I actually prefer going straight to the source. Like I don't really see the point of paying somebody $100 for them to go Google post County, Kentucky records like I can save the 100 bucks and do it myself. It doesn't take that long.

Ariel Herrera 18:59

Yeah, that makes sense. Once you search for it's quick, and you buy

Unknown Speaker 19:02

titles a little bit different title. Sometimes the runners can actually extract the records from from the property records, which actually is a value add, because for you to for me to manually do it, it actually does take either too long, or I might make a mistake or because each website is different, I might not be able to navigate it as well. But generally just looking at the tax records really easy tax records are pretty easy to look at, because most people have to pay their taxes every year and they want to make it easy for you to actually click and pay your taxes. Yeah,

Ariel Herrera 19:32

that makes sense why that'd be a little bit more structured. In terms of like talking about geography, counties and such. Are there some markets that you won't touch or others that you're more positive on?

Unknown Speaker 19:45

I'm pretty much open to any county in any state, but that doesn't really tell the story. So I prefer primary markets first. So that's Dallas, Houston, San Antonio, Atlanta. Those are all good just because it's normal. So you're sorry. We're going to be in that 2080s percentile range. secondary markets can also be good. So maybe an example of this would be like Indianapolis, Indiana or something. And then tertiary markets get a little bit trickier, because it's, it's harder to get lending there. And there's not as many participants, not as many market participants. So your exit is a little bit harder, versus if you buy apartment building in Dallas, and then you fix it up and you post it for sale two years from now, you're gonna get 100 People who are there to look at it and interested in buying it. If you go to any Annapolis, you know, that's the capital of a major states and you might get 20 people, you start going to, you know, really small town, Indiana, I mean, you might only have five conceivable buyers, realistically, so then I just worry a little bit about the exit. So I'm always going to prefer primary over secondary or tertiary. And then generally, I'm going to prefer B and A properties oversee properties just to see properties tend to have a value add component, like an a property, a lot of times the investment thesis is you buy it, and then you just continue leasing it up, and you just charge more rent. That's not a very hard business strategy to actually implement, versus a C property where you have to evict a ton of bad tenants. And then you have to build a playground, and you have to do rubs, and you have to do this, you have to do that. I mean, that's hard. That's hard work, I can't really, you know, I can conceivably run a Class A strategy, which is just, you know, manage the property manager and make sure they're doing a good job. Whereas it'll be very difficult for me to come into a classy situation, start managing somebody that needs to evict 20% and then raise rise to much higher, I prefer easier, you know, I'm going to prefer the easier things versus the harder things

Ariel Herrera 21:49

that make sense. And then in terms of the lending products you provide, what's the ratio of what you currently provide right now?

Unknown Speaker 21:59

Yeah, so I basically at this point, I'm exclusively special situations or gap loans, I've done some earnest money deposits, too, I'm not a huge fan of doing that, unless it's done as a gap loan with collateral. So for me, I, you know, I define short term as six months and ideally four months or less. That's where we really excel. And then we really excel at the special situations where you're gonna lose, you know, like at that Dallas deal, I gave you an example, if they had $850,000 of earnest money hard. So they could have conceivably lost $850,000 of earnest money, if they did not close that day. I mean, most likely, they would have negotiated something or an extension, but, but that, but that's what legally was at risk. So we really excel at those situations where you're about to lose your shirt, or you're about to lose a great deal. Or you're about to lose your reputation. And your story makes sense. And you will be able to pay us back, you know, within four to six months, that's where we really shine.

Ariel Herrera 22:55

Got it, I can imagine the nerves that some of the ambassadors may have as they're coming to you like that's not in their situation.

Unknown Speaker 23:04

And that's, and that's why I kind of tell people, even gals a premium product or a premium situation, I'm definitely not going to be the cheapest that guy in Dallas, he should have found 60 People with 100k. He wasn't he was not going to do that in six hours, he might not even be able to find five people with odd, okay, and six out. So I'm a premium product or premium situation. So you only have to make one phone call. That's me. And then I'm a corporate lawyer, and I have a relatively flexible schedule. So I can drop everything I'm doing and work on your deal. And make sure you're close. So like the example I like to give is, let's say you got a deal closing on Monday, you call me on Friday night, and you tell me everything. And I like what you have to say. And I tell you hey, Ariel, don't worry. We're going to work on the stuff over the weekend. And we're going to wire the money Monday morning. You literally I don't want you to worry over Saturday and Sunday, about whether or not I'm going to do it or whether or not your deal is going to be saved or not. Because that's the assurance I give people is when I make you a verbal commitment or a written commitment. It's going to get done. Right. And so I'm I'm I'm going to be one of the most reliable people that you've ever met. And just in general, that's how I behave. Like I have very few unread emails, I don't, if you text me, I'm going to text you back and you call me. I'm going to call you back. If you leave me a voicemail, I'm going to call you back. Sometimes you'll have your voicemail is full, which I don't love that at all. Then that case and I can't leave you a voicemail. So I'm going to text you and say voicemail for college you bet. If you haven't heard back from me, within about 24 hours, something probably happened to me you need to call the police because I'm just trying to respond very quickly to things and that's a product of my background and my work experience. You know, I worked on Wall Street, doing large mergers and acquisitions. We were always expected to respond all the time. Even if we even if we had nothing to say, even if it was received. Right people people like knowing that what they said It was received.

Ariel Herrera 25:01

Very true. And I do like that you mentioned in some previous podcasts that you've been on, two minutes, two minutes is the time that you average out that you respond to, which is,

Unknown Speaker 25:13

yeah, if I'm, if I'm in front of my computer doing work. So if I'm not in a meeting, while I'm not asleep, or I'm not driving somewhere, if I'm in front of my computer actively checking emails, I'll probably respond back to you within two minutes. And sometimes my wife, my wife walks over in one minute, and she's like, I need you to stop checking your emails. She she worked in investment banking and private equity, and she was trained the exact same way. You know, she always respond, you know, received, acknowledged, you know, okay, because I have so many business partners that are just unable to do that. I had one call with one today, where I said, Did you see your email from two weeks ago? She said, No. I said, Okay, I'm gonna send it back to you. And she said, Okay. And then she actually checked it. And you responded back, and she said, I don't see what you said, was in there. And then I said, okay, cool. I responded back to her, and I copied and pasted what I wanted her to see in that show, she was too lazy to read the whole email chain. So I went in, and I copied and pasted what I wanted her to see. And I reply back and said, see this, this was what I wanted you to see. Yeah, you know, what? She didn't respond back received? It was it was it was a negative thing. So she wasn't going to be happy seeing it. So I'm not surprised that she didn't respond back, you know, received.

Ariel Herrera 26:26

Yeah, I agree.

Unknown Speaker 26:27

I'm somebody if you told me something bad, I'm still going to reply received. Yeah,

Ariel Herrera 26:31

yeah, exactly. principles that you're mentioning isn't being thorough being fast or respond? What are some things that you think investors that maybe you've worked on in the past, or just you've heard can improve on to be like top tier? And someone that you would want to work with?

Unknown Speaker 26:49

Yeah, so some, one of my friends recently told me about the do say, ratio. So what they mean is what you actually do versus what you actually say. So the higher that that ratio is the better. So what do I mean? So I've got a ton of people, some of them are my friends, some of them are even my business partners. They go, Ethan, we should go hang out, let's go get lunch. So my response is always when, right? And then many times they don't respond. So it was a, it was a fake offer, or it was a non serious offer. Or it was just they needed to fill, that they felt uncomfortable, and they needed to fill the space. So in that case, they get a zero. So they said something, and they weren't going to do it. So that's that's worth zero. That's bad. So I really, essentially my ratio is essentially one to one. So if I say I'm going to do something, I'm gonna do it. So yeah, I've missed stuff before, but I don't leave you hanging. So if I say, hey, Ariel, I need to make a phone call, I'll call you back in five minutes. You're going to either your call back in five minutes, or at minute five, I'm gonna say, Hey, I'm sorry, I need 10 more minutes, right? I don't do what some of my friends or my partners do, which is they wait, you know, they get busy. And then two days later, they call and they say, oh, yeah, did you need me for something? Right? Or even worse, I call them in two days and say, Hey, dude, remember when you said five minutes, it's been about 105 minutes. So what's up? And then when I tell people, Hey, let's hang out? Well, let's get together. Let's get lunch. That's not filler words. Yeah. Like, I will absolutely follow up and say when, like, when are we doing? Let's get on the calendar. Right? Like, I don't just say, oh, yeah, let's pretend like we're gonna get lunch. And then we check that box off. Now, we're friends or whatever. Like, I don't respond well to that at all. I like to have other people have a very high say to do ratio. Yeah.

Ariel Herrera 28:46

I think that's a tremendous principle to try and follow 100%. I'd like to transition a little bit over to hear your point of view, Ethan, of where are you see, you kind of talked about a little bit with interest rates rising. But what else do you foresee in real estate lending in the future or just real estate in general?

Unknown Speaker 29:05

Well, real estate is obviously very, very correlated with interest rates, which, you know, the Federal Reserve, more or less controls. So clearly, short term rates are going up, and they might not slow down for a little bit. I do have some of my bankers who are telling me that they think rates will fall next year. But until that's actually true, you know, you don't want to eat your chickens before they hatch. Right. So I think you know, fundamentally with with any market if you buy something with a margin of safety, so if you buy it with a margin of safety or if you buy a cheap enough, you should generally be fine. As long as you get a financing or a loan, that doesn't force you to sell it at the worst possible time. So if you get even a bridge loan with three years with extensions, that's not that bad. Or if you buy a If you get a loan that has a variable interest rate, but you can swap part of it in the fixed, or you can buy a rate cap that maximum that caps what your max rate is, as long as you're not forced to sell it, you know, within a year or two years, 18 months, or something where it could squeeze you out of the position, I think fundamentally, you should be fine. I don't really see real estate not performing over the long term. And like I said, a lot of real estate is truly value add, you know, the value added is actually kicking out the bad tenants, and fixing up the property. So that will always add an element of value to the deal.

Ariel Herrera 30:38

So say if someone wanted to become a hard money lender, they're a high net worth individual, they want to get started lending in that just that particular space where you were several years back, how would they start becoming a hard money lender?

Unknown Speaker 30:53

Yeah, I would first ask them, just to be really sure, are you sure you actually want to do it. So I don't think everybody has a perfect track record of no credit losses, like I do currently. I think that's relatively rare. And like I said, I think I got pretty lucky, I had five really strong repeat clients. So I also didn't have a ton of variability in my bar work base. So my five guys were just always very consistent. So that really helped my ratio, not being messed up. If I had, you know, 500 deals with one person each, I think my ratio would have definitely, there's no way I could have come out of that was zero defaults or zero credit losses. So I would actually ask them fundamentally, are you actually interested in doing this as a business, if you don't do this as a business, I don't think it's, I think you're gonna have some losses along the way, and some challenges and some really large annoyances in your life. So if you're already wealthy, and you're trying to minimize the amount of annoyance, and Bs in your life, this would not be one of those things to pick, I would actually say, buying bonds or life insurance, which, you know, I own a ton of life insurance, I think that's actually a better fit. And then I would also say, you know, just depending on which local city you're at, you may be better off just investing in a local hard money lender, or investing in a private equity fund that does that strategy. And instead of you making the full return, you just pay the manager some sort of upside, because they do do it full time. So for an example, you know, I manage a private equity firm called good bull, you know that, you know, I'm active ly doing that every day. So theoretically, if I'm not bad at what I'm doing, you could put your money with with me and good bull, and will earn you a great return, maybe not quite as great as you could earn by finding the borrower and doing all the work yourselves. But still a really good return, but minimizing the hassle and the risk that you're taking. Right? It's fundamentally you know, you use your your newbie doing it on somebody that's done it 500 times. So in general, unless I'm crazy, well, I'm really bad at what I do, I should be superior to you. And you should be willing to give up some of the return for somebody like me to manage it on your behalf. That's what I would say, Yeah, that's a great option. You know, it's, it's, it's a real business, that the people that I see at the IRA companies like quest, you know, when they have horror stories about losing money, and so usually when I hear more of it, they were never really on the ball. They weren't very experienced, and they just chose really bad credit risk. But they chose really bad properties are sometimes they chose both. They chose a horrible borrower with a terrible deal. So they took the conjunction.

Ariel Herrera 33:44

Yeah, that's not good. But it's excellent that a high net worth individual could have different options. And if they want low risk, potentially coming over to someone like you to handle besides, instead of themselves would be a good option.

Unknown Speaker 33:59

Absolutely. Most people should not be investors just straight out out of the gate. And then most people that are good at masking, they might have something better that they're good at, right. So I have this. So I'm part of a financial advisory practice. So we do a lot of personal planning for clients. And sometimes I have Doctor clients and lawyer clients, they think they're really smart. And they are, especially at what they do and they say, Oh, well, you know, I should go invest and make all this money and stuff. It almost never works out. Usually, those people are actually better off just letting a professional manage their money, and then just becoming even better or more elite at their own job. So they should become the best you know, cardiac surgeon ever. And they're going to be paid very, very well for it. Or they should become the best mergers and acquisitions lawyer ever, and they're going to get paid a lot of money for it. It's usually not a great choice for them to become like an average cardiac surgeon. And then like, try to become an above average real estate investor. especially if they're juggling like a family or other things, you know, their aging parents, it's like, Dude, I don't really think it's worth it. Like that would be kind of like me saying, I want to become a phenomenal basketball player. I'm five, six and a half, and I can't hit the broadside of a barn. It's just not a good use of time.

Ariel Herrera 35:18

Yeah, makes complete sense. And like you said, it's not as passive as someone may initially think. Yes, it never

Unknown Speaker 35:26

is. Although I just just you know, again, I don't have perfect data. But all those lawyers and doctors that told me about some great deal there were that scene and how they're going to make all this money almost every time after I follow up with them a year later, it's always some scam or they lost money or it's terrible. That's, that's happened way very frequently. And, and it definitely happens a lot in small oil and gas syndications. Whenever anybody sends me a small oil and gas indication, I immediately don't even open it, I just say pass, I've seen too many dry holes in my career.

Ariel Herrera 36:02

That's an excellent insight. And

Unknown Speaker 36:05

I don't even have to open a document. That's how good I am.

Ariel Herrera 36:09

That's because of all the knowledge and prior knowledge that you have. I've had

Unknown Speaker 36:12

way too many clients who have invested in those and they're dry holes, and they lost all their money, or some of them do it for the tax benefit. You know, because without especially intangible drilling costs, you can deduct, basically, almost all of it. So a lot of times you have clients that invest in does just for the tax benefits, but they what they end up is with is they went, they wind up with a total loss. So then it really wasn't worth it. Because you know, just because you get to deduct, it doesn't really, you know, your marginal tax rate is not 100%, it's usually 35 or 39.6, or something. So it's still a bad deal to invest in something, we cannot lose all your money. Just because it's just because it's a good tax write off doesn't mean that you should actually write it off and lose the money.

Ariel Herrera 36:56

I think that makes complete sense in terms of, you know, utilizing someone like you to minimize risk and to leverage all the experience that you have. And Ethan, I've learned so much from you throughout this discussion, and really see the value that you're able to bring. How would someone be able to reach out to you directly if they wanted to, potentially have a one of your products within lending products? To help them?

Unknown Speaker 37:25

Yeah, absolutely. So email is the best way. So my email is Ethan gao@gmail.com. So it's eth A n gao@gmail.com. I was the first guy with that name to take it. So that's great for me. So there's no two there's no space. And then I'm also on LinkedIn, I post you know, every once in a while about various things I'm doing. So if you search Ethan gow, and you can't find me put in like good bowl or a Cornell or Columbia, and you'll be able to find me. I'm the guy with five kids in Houston.

Ariel Herrera 37:55

Excellent. Well, thank you so much for your time, Ethan and hope you have a great, great rest of your day.

Unknown Speaker 38:01

Yeah, you too. Thank you so much.

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