What are the secrets to building a successful multifamily business? In this episode, Charles Dobens joins our podcast to share his wealth of knowledge as a multifamily investor and real estate lawyer with more than 20 years in the industry. He is the founder of the Multifamily Investing Academy, which provides education and resources to aspiring multifamily property owners. He discusses his experience during the market crash, practicing law and learning from the mistakes of his clients, and then later e...
What are the secrets to building a successful multifamily business?
In this episode, Charles Dobens joins our podcast to share his wealth of knowledge as a multifamily investor and real estate lawyer with more than 20 years in the industry. He is the founder of the Multifamily Investing Academy, which provides education and resources to aspiring multifamily property owners.
He discusses his experience during the market crash, practicing law and learning from the mistakes of his clients, and then later expanding into coaching other investors. Listen in and learn the do’s and don’t’s straight from the multifamily mentor.
[00:01 - 04:07] Going All-in In Multifamily
- Charles talks about investing and why he went back to his law practice
- This is what he learned from being a lawyer to investors
- His goal for the next 10 years is to do 1000 properties with his students
[09:40 - 17:59] Market Crash and Money Matters
- Why did Charles and his team got caught up in the market crash?
- The type of financing that Charles is afraid of
- A problem that investors may face during a resale when the interest rate goes up
- Being conservative in rental increases is key
- Find out why he believes that the real estate space is overbuilt
- Charles’ insight on assumptions
- How to take advantage of replacement reserves
- There’s always a third party at the negotiating table
- Losing his earnest money and experiencing phantom leases
[18:00 - 19:52] Adding Value As A Mentor
- His past mistakes help keep his clients and students away from bad deals
- Investing with his students’ using his own money
[19:53 - 24:42] Closing Segment
- What Charles is curious about and looking forward to right now
- These are the books Charles recommends
- Reach out to Charles!
Tweetable Quotes
“It's really not any type of financing. It's just not underwriting conservatively enough, not stressing your underwriting, such that your deal is going to survive if cap rates start to release and when interest rates start to go up. If your deal can't survive that, you might want to just sit back and wait.” - Charles Dobens
“If you have to do an interest-only just to make your numbers work, and then you're going to, you know, convert in three years or so none. No, no, don't do that. You're overpaying for the property. I know you can fix anything on a multifamily deal except overpaying for the property.” - Charles Dobens
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Connect with Charles! Check out the Multifamily Investing Academy website if you want to learn more about MultifamilyOS. Follow Charles on LinkedIn, too.
Resources Mentioned:
- Zelman & Associates
- Ready, Fire, Aim by Michael Masterson
- Willpower Doesn't Work by Benjamin Hardy
- 2030 by Mauro F. Guillen
- Big Shifts Ahead by John Burns, Chris Porter
Connect with me:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
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Email me → sam@brickeninvestmentgroup.com
Want to read the full show notes of the episode? Check it out below:
Charles Dobens 00:00
If you buy a property on an assumption, you're doing that seller a huge favor. That guy ought to be kissing your behind at the closing table to get... because one of the things about an assumption is the replacement reserves. So if this guy has been on the property for the last three to five years, and he's been banking the replacement reserves, you know, instead of using it to build up his collateral and protect the collateral, he's been banking it now he's got $100,000 in the replacement reserves.
Intro 00:31
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.
Sam Wilson 00:39
Charles Dobens is the multifamilyattorney.com, the founder of the Multifamily Investing Academy and the creator of MultifamilyOS program for entrepreneurs looking to build a successful multifamily real estate investing business. Charles, welcome to the show.
Charles Dobens 00:56
Hey, thanks for having me, man. First of all, is that a real background? Or is that one of those virtual ones? I love it. You see, when I'm in my studio, I've got the real thing too. And I go back and I grab those books off the back, because, you know, and I hold them up. So yeah, that's cool. I like it. I like it.
Sam Wilson 01:11
Thanks, man. You know, what it does, though, is that on days like today, where I walk in the office, and I set stuff on the shelf behind me? ... you don't have stacks of papers... you just reminded me that I got garbage on my shelf. Thanks for that.
Charles Dobens 01:26
Yeah, I have.... Part of my program for my students is, you know, they get a virtual assistant. And so we do a virtual assistant meet up every Monday morning just to touch base with all my VA's. And, you know, I look at their backgrounds, I think, wow, those guys live larger than I do. They have beautiful places behind them like no, they don't. But they don't...
Sam Wilson 01:44
Charles, there's three questions. I asked every guest who comes on the show: Where did you start? Where are you now? How did you get there? But tell me in less than 90 seconds.
01:52
Okay. Where did I start? Physically, geographically, I'm out here in the Boston area. Always wanted to own multifamily property, was running an insurance company, had about 35 employees, gonna put me in an early grave, hated it told my wife, I can't do this anymore. What do you want to do? I want to own apartments, went out there and started owning apartments, did incredibly well. Market crashed, kept some loss aome. That's when I started practicing law. I was a lawyer beforehand. But I was representing clients of mine, friends of mine, who are losing their property. And I realized, man, why did you buy this property in the first place? This property you'd never should have acquired because it's a dog. And then I thought, I realized that man, these people are being taught the wrong way to run multifamily, own and operate multifamily. And that's when I started coaching and mentoring. And I got to tell you, I own plenty of properties. I don't need to work. But this is my calling. I love helping people in this field with my law practice, with consulting, and I just got off the phone with one of my clients working on a deal. We're going to make an offer on a property today. I am just always involved in all my students' deals, making sure they do everything right every step of the way. And I want to buy 1000 properties for my students, meaning I want it or not 1000 units. I did that a long time ago. I want to do 1000 properties for my students over the next 10 years. And that is my goal. That's what gets me up in the morning and makes me run.
Sam Wilson 03:17
That is awesome. I love it. 1000 properties without, you know, what is that eight per month, eight and a half?
Charles Dobens 03:23
Yeah, and but the thing is, I started I've been doing this for 10 years, so I kind of a little head start on the 1000 goal. So, but you know, when I'm 82. When I hit 82 10 years from now, Sam, I want it to be, I'll be out 1000.
Sam Wilson 03:37
That's awesome. I love it.
Charles Dobens 03:39
If you do the math there, pal. 10 years from now I'm gonna be 82 that means I'm 72 today, right?
Sam Wilson 03:44
I'm with you. I'm not gonna make any comments.
Charles Dobens 03:47
I know, but what? You can't tell me I look good for 72? I mean, you should be saying... You know, what you're telling me now by not saying anything, is like... 72, yeah.
Sam Wilson 03:56
Yeah, ridden hard and put away wet, Charles. That's what I'm thinking, buddy.
Charles Dobens 03:59
That is such a Nashville expression foul.
Sam Wilson 04:03
Hey, man, I'm here in the south. And I'm in Tennessee. Tell me about this. In '08, you owned apartments. You kept some, you lost some. What happened?
Charles Dobens 04:11
Yikes. So that was how you got caught because you were able to make your debt payments all the way up until you couldn't refinance out of shorter-term debt.
Charles Dobens 04:11
Man, the market crashed. You know, the thing is we bought them all the right way. At that time. You know, it was the height of the market. We never, never missed a payment on anything in all the time that we own the property. But the cap rates were compressed to begin with. And then when the market turned when Fannie and Freddie filed bankruptcy and the world collapsed, the cap rates started to inch back up and it's back up. And that's when we, you know, when the terms were done on some of these properties, we couldn't refinance, you know, we'd have to go back and raise more money just to refinance it, and we just, you know, non-recourse loans, which is the only way to go. We just dropped them on the bank's desk and, you know, shook hands and partner friends and you know, fortunately that's one of the nice things about multifamily investing is you know, all these other single-family homes owners were losing their shirts. It's a business. And we just moved on to the next deal, so...
Charles Dobens 05:14
Right. And so, you know, that's what's going on. Now, you're looking at some of these cap rates and the compression of these cap rates and they can't compress anymore. Now we're starting to see inflation, interest rates go up, you know, and people's investment strategies right now, is only hoping the market continues to do what it's been doing for the last 10 years. And that's not going to you know, as Paul Moore says, trees don't grow to the sky. At some point, there's going to be an adjustment, and these people are going to get caught the same way I was.
Sam Wilson 05:46
Is there any type of financing that you're afraid of right now?
Charles Dobens 05:49
Oh, well, you know, you see these interest only's. And when there's no amortization, okay, that's fine. But you're seeing the interest rates starting to creep up. It's really not any type of financing. It's just not underwriting conservatively enough, not stressing your underwriting, such that your deal is going to survive if cap rates start to release and when interest rates start to go up. If your deal can't survive, that you might want to just sit back and wait.
Sam Wilson 06:17
What are you on an exit cap? What are you having people plug in as a general number right now?
Charles Dobens 06:24
Well, general number is about 10 basis points per year. So you know, if it's if you're going to hold it for five years, looking at least half a percent higher cap rate, that's a textbook, that's like just right out of the gate textbook. But what you have to think about is interest rates are going up. We already know that. Now, I see some of these gurus out saying no, that's okay. You know, you're locked in at this particular interest rate. It's not you that's going to have the problem. It's the person you have to sell the property to, right, that is the problem. And that problem is going to become yours. If they can't purchase that property at the valuation that you created your exit strategy at, you're going to lose. And you know, I tell you, I was, I don't know if you know Corneilous Cannon. And he has this event called the shark pool. And I'm one of the sharks where I evaluate other people's deals. These guys get on there and start talking about their portfolio and they're talking about this new deal coming up. And they see Yeah, we have a property in Lexington, Kentucky, blah blah, and I'm looking at on the screen. I'm looking at the properties. Wait a minute, what's that property right there? Oh, yeah, that's a property in Lexington. I said, Oh, and then the guy goes out and say, Well, yeah, we've really stressed it. But we don't feel as though interest rates will climb so much. That'll really devastate the property. We still think everything's gonna be fine. And I said, I just felt like the old guy. Okay, let me tell you a story. I said, back in 2008, a month before Fannie and Freddie went bankrupt. I purchased a 222-unit apartment complex in Lexington, Kentucky. And right away, Sam, you can see the both of their eyes, like bugged out, because they knew I'm talking about their property. I said, and they said to you buy Preakness, I said, I own that property right before it crashed. Nobody saw anything coming. I had to give that property back to the bank. And as I'm on the call the shark pool with them, I'm pulling up the costar report. And you can clearly see, I bought it for seven and a half million, gave it back to the bank, they sold it to somebody for 3 million a year later, that guy sold it to these guys like three years later for 7 million. So that guy between me and them walked away with 4 million bucks in the bank because he was patient, and he waited. And sometimes, you know, I look at that deal of like I lost my shirt on that deal. And this guy made 4 million bucks. It's crazy.
Sam Wilson 08:43
What were those buyers other than paying 7 million bucks for, what are the things that did not take into account besides rising interest rates?
Charles Dobens 08:52
Oh, wait, those people, the people that were on the shark pool? Well, oh, I don't know, when they bought it for the 7 million they could have bought it... If they bought it three years ago, four years ago, bravo. They're gonna make a killing on that property, good for them. But you know, if they bought it last week, they might have been paying top dollar for it and interest rates are on the climb. And you know, Lexington, Lexington is a good market, but it's, you know, a secondary, tertiary market. And so we got to sit back and wait, I hope they have a long... what you have to do. Okay, so getting back to your question about what the problem with loans today, the only thing that I would be very leery about whenever I'm looking at getting into any type of financing today is you need a longer-term than usual. Don't bring me a three or five-year deal. I'm not interested. You know, not only that, but some of the investors that I work with aren't interested either because they're looking for places to park their money right now to take advantage of what's going to happen with inflation.
Sam Wilson 09:45
Right. And I guess that would eliminate you, you know, from the ever very popular bridge debt that people are using right now.
Charles Dobens 09:52
Yeah, you know, but that's okay. Bridge debts. Okay. If it's a true value add if you're just trying to do bridge debt just to get into the deal. No, no, no, no, that's not the way to do this. I mean, if you have to do an interest-only just to make your numbers work, and then you're going to, you know, convert in three years or so none No, no, don't do that you're overpaying for the property. I know you can fix anything on a multifamily deal except overpaying for the property. So just don't do it. You're better off walking away, waiting a couple of years and picking up that type of property on when somebody else loses their shirt on it.
Sam Wilson 10:24
Yeah, which may yet happen other than putting in a 10 basis points a year what you said is just a bare minimum as an increase in the exit cap rate. What other things are you guys underwriting? What things are you doing? You feel like you're unique that your underwriting, they're kind of keeping you guys out of potential hot water?
Charles Dobens 10:40
You know, one of the things is being a lot more conservative on the rental increases, I'm going to sticking around to 3% is going to be the top number. You know, and if you listened, I did a podcast with Ivy Zelman. The woman is brilliant. She saw the 2008 crash coming. I had her on my podcast, I said it you know, this is different than 2000. And we're not going to have the same problems we had back in 2008. And I said it's you know, we have much more sound underwriting, the demand for our product is so high. And then she just kind of laid me flat which says we are already overbuilt. And I said I'd be Wait, what Whoa. I mean, I've got a waiting lists. You look at all these properties, 100% occupancy. This is a note we are already overbuilt. If you go look at all the starts that are on paper that are supposed to happen in the next three years. It exceeds demand. And we are already overbuilt. And like wow, okay. That's interesting. And yeah, so she kind of like laid me flat with some of the statistics that she had Zelman associates.com. And, yeah, it just hurt what she said made me open up my eyes. And one thing that she said, Sam, that just as a.... she says, all of these homes, there's high demand for homes where you know, you're bidding way over price. The reason why this is happening is many of these home purchases are not first home buyers, or first homeowners, meaning these are their second homes, and sometimes their third homes. And so these people are buying homes now, they own three homes, and I own three homes sitting there listening to tell me the story. And I'm thinking to myself, Wow, and when the market changes, when interest rates go up, when things started to tighten up, you're gonna see people starting to dump those second and third homes to protect themselves. And that's when it's going to come really home to roost.
Sam Wilson 12:23
Right? Yeah. When the market gets flooded with inventory. Yeah, back to the old days, supply and demand, it's gonna hurt us all. So absolutely. Tell me about a time or money mistake you've made? Or maybe it cost you both time and money.
Charles Dobens 12:38
Okay, let me see. So many of them. But you know, one thing that I found out the hard way early on in my multifamily world, was how assumptions work. If you buy a property on an assumption, you're doing that seller a huge favor, that guy ought to be kissing your behind at the closing table to get... because one of the things about an assumption is the replacement reserves. So if this guy has been on the property for last three to five years, and he's been banking the replacement reserves, you know, instead of using it to build up his collateral and protect the collateral, he's been banking it, now he's got $100,000 in the replacement reserves. Do you know what happens that money at the closing table?
Sam Wilson 13:26
Becomes his.
Charles Dobens 13:27
It's his. And you know, what you have to do?
Sam Wilson 13:29
Put in the replacement reserves.
Charles Dobens 13:31
That just... if you were doing a new money purchase, would you have to do that? No, you wouldn't have to come up with another $100,000. On day one, just because this guy didn't spend a dime on his property for the last five years. That's crazy. So I make sure now in all my letters of intent, that one of the things if it's an assumption is the seller has to spend that reserve down to zero or transferred to me at closing. That's the number one thing. And the other thing too is. The problem with assumptions is when you're negotiating an assumption, there's always a third party at the negotiating table. And sometimes that third party is silent, right up until the closing date. So on one assumption that I did I negotiated was 12% down. All I had to come up with was 12%. And that, what a great negotiator, I am looking at me go. And my returns were phenomenal. Two weeks before closing, the bank comes back and says, Hey, we noticed that you're putting only 12% down, that's not going to work for us. You need to put more skin in the game, you need to put down 20%. And I was like, Well, how can I do that? I've got a contract. I've got a purchase price. You've got a fixed mortgage amount. The difference is only 12%. Where do you expect me to put this 8%? They said, great question. You know what we are, we're a bank. And you're going to put it with us. And you are let it sit there and it's just going to sit there you can't spend on the property. We just want that there. And so I had to come up with an additional eight percent two weeks before the closing, I lose my earnest money. And that was, you know, had I known, if I had to do the assumption, if I didn't have to do the assumption, everything would have been fine. But because I had to do the assumption, I had to come up with that extra money that just sat in a bank account, I mean, it just killed the cash on cash return, because it's additional money in with no return on it. And it was a terrible deal. And the other thing, too, is, you know, so now I have a provision to protect myself in my off LOIs, that state, if the bank changes any of the economic terms, I get to walk, right, here's the thing about this, Sam, is that you go back and you read any contract with a bank, any mortgage, and any note, it clearly states the deal will be is assumable with no change in the economic terms, it says that right there. But you know who the third party is at the table? It's a bank and banks change contracts every time, anytime they want. So that's something that I found out very early on, and that cost me a lot of money. It killed the deal for me. Yeah. So that lay on top of that. Oh, here's another one. Let me give you another one. Same deal. And because this assumption went on for five months, the bank just dragged their feet. It was Wachovia. Okay, do you remember the nickname from Wachovia? No, walk all over? You walk all over you? Yeah, right. That's why they're no longer in business. So it took them forever. But here's the mistake I made early on in a contract is that I was only allowed to inspect the property in the first 30 days. After that, I'm done. I can't inspect it anymore. So for the next four months, whatever happened on that property, I couldn't go on and see it. So now my contract, say, Hey, I got to see it right up until the end, right after the closing date, I can get in there. And so we kept getting from him certified rent rolls, showing that the property was 96% occupied right up until the closing date. 30 days later, I'm calling up my property management company screaming saying, Hey, guys, you gotta go knock on doors, you've only collected 50%of the rents this month, I need more. He goes, Charlie, there's no money left to collect from I said, No, there was 96% occupancy when we took over Charlie, I've never seen a case of fraud so badly in my life. And I said, Wait a minute, you can't just throw out the term fraud, you got to give me some evidence. He said, Charlie, I found the evidence for you. And they faxed me over eight leases. And these eight leases, you could tell that the previous property management company had taken these leases and just photocopied them, because the same white out was in the same place on all eight, and three of the eight, they forgot to change the name of the property for my property. And it was the name of a property that the owner owned down the street. So that was a perfect example of phantom leases. The property never recovered. That was a disaster. So yeah, thanks for bringing that back up. Sam, I really appreciate you making me walk down that memory lane, buddy.
Sam Wilson 18:00
You know, but those are the things that I think there was a value in having a mentor having a coach having someone looking over your shoulder doing this. I don't know how many hundreds of 1000s or millions that may have cost you. But it's that one mistake that I think that's all you need when you bring somebody like yourself on board to say, Hey, buddy, don't do that.
Charles Dobens 18:20
Yeah, absolutely. As Bill Gates: success is a lousy teacher. And if I'm able to keep my clients, my students out of bad deals, and they do everything right. And, you know, part of what I do with my students is I remove the exuberance from the decision making, you know, they're all excited to read that oh, well, let's do this is gonna be right as it now this one's a bad deal. No, you don't understand. Oh, yes, I do. Oh, yes, you know, so that's the key.
Sam Wilson 18:49
Right. And so on that front, are you strictly doing, you know, the coaching and helping your students? Are you also an active investor yourself?
Charles Dobens 18:57
Oh, yeah, I'm an active investor. But the thing is that I invest my students' deals, but I use my own money. I don't cut a deal where, you know, like, if I, you know, you hire me on I keep a certain percentage of the deals that I do for your No, no, that one could get me in big trouble with the bar association because even though I'm not their attorney, I still have to, you know, live by the canon of ethics of a lawyer. And if I can't give objective, legal advice or advice, if they know that the advice I'm giving them is contingent upon whether I'm going to get paid or not, then you know, any advice I give is construed, could be construed as bad advice, because it's not objective. I have to always remain objective, arm's length. So I but I do invest in some my students deals, I see some good ones. And I definitely want to get my money in on those deals. So yeah.
Sam Wilson 19:45
For sure, I mean, that's the two things that this industry revolves around, deals and money, and, you know, when you find a good deal, it's time to get in. What's something you're curious about right now?
Charles Dobens 19:55
Oh, you know, I guess the thing that I'm most curious about is the future are, you know, I'm excited about I love that... Dan Sullivan has a saying he says old is your desire for days in the past is greater than your desire for days in the future. And I think about when the doctor came in and told my dad at 82 years old that he was you know, he had like 24 hours left. His first reaction was, darn it. I just wanted 10 more years. And I like man, that's the attitude I want to have on my deathbed. I was like, Man, I just want to keep going. I'm having too much fun. So I'm curious about the future. I'm so looking forward to it. You know, whatever God gives you. I love that saying the first casualty of 911. from the floor, Fire Department in New York. The first firefighter was the chaplain. I mean, this is how they're saying it. He was hit by debris. And they said, you know, on his eulogy, they said, he said, You want to make God laugh. Tell him what you're going to do tomorrow. Yeah.
Sam Wilson 20:52
Right. Yeah, that's pretty good. I love it. Tell me a book you're reading right now.
Charles Dobens 20:56
I'm reading so many of them. So I do audible. I have Book of the Month Club for my students. We're having it this past coming up. It's an oldie but a goodie. It's Ready, Fire, Aim by Michael Masterson. And it's, I tell you that one is... I watched so many... I teach my students that multifamily is a sales and marketing business. And I set them up with a CRM with 1000 properties in it in their marketplace, I set them up with a VA, I give them all the tools to be a success. But they have to understand that if they don't realize that their job is sales and marketing, they'll never make it in this business. And the whole thing that Michael Masterson talks about is, you know, so many new entrepreneurs are so concerned about their website, about the logo, about the business cards, and they never think about who the customers. And so that is from Ready, Fire, Aim. That's that one I just did right now willpower, and what's the one on willpower by Benjamin Hardy can't remember the full title. But that's a good one. That one teaches you that willpower has less to do about you than it does about the environment that you're in. So set yourself up in an environment that you can achieve success. Another great one that I'm doing is Mauro Guillén, this one... You hear me talking about multiple books, I'm switching at Audible all the time going back and forth, especially because you take a book like 2030 by Mauro Guillén, this is like the follow up to Big Shifts Ahead, which is another great book, but Big Shifts Ahead was written from for the period about 2015 to 2025, talking about what's going on in the marketplace, I had that that author on my podcast as well. So obviously, we're coming up to 2025, the next book behind is 2030. And the thing that he says in that book, which I so agree with, is that the definition of an entrepreneur is virtually the exact same definition as an immigrant, when you look at the two that I mean, that's why for this country to survive, with all the trillions that we're spending, the only way we're able to survive this ridiculous spending program from our government. The only way is by bringing on having a very exuberant immigration policy, bringing in the best and the brightest from around the world. That's the only way this country is going to survive. Otherwise, we're just going to implode I can keep going, man, I got so many great books. I'm always grabbing you know, little kernels out of them. But those are the three that this so far this week I've already been into.
Sam Wilson 23:18
Absolutely love it. Charles, thank you for your time today. I've had an absolute blast learning how you coach your students, you taking the time to really, you know, tell us the hard learned, hard earned mistakes, what those have taught you, and how not to repeat them. You know, you've given us obviously some great reading material there and yeah, man, I've certainly really enjoyed this conversation so...
Charles Dobens 23:41
So did I get a shirt? Did I qualify for a shirt?
Sam Wilson 23:43
You did.
Charles Dobens 23:49
I bet you you look awesome.
Sam Wilson 23:53
Charles, if our listeners want to get in touch with you, what is the best way to do that?
Charles Dobens 23:56
mutifamilyos.com, Multifamily Operating System but the website is multifamily os.com tracked me down there and we can chat more or multifamilyinvestingacademy.com. That's the parent agency of the multifamily OS program. And the best way to get a hold of me.
Sam Wilson 24:12
Awesome, Charles, thanks for your time. I appreciate it.
Charles Dobens 24:15
Thanks, Sam. Good to see you, man.
Sam Wilson 24:16
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.
