The Science of the Deal with Matt King

Jul 21

What is your someday goal?
What is your lifestyle goal?
What are your family goals?
Someday goal - is it a number or is it creating jobs, millionaires, or lives changed
When a deal is brought to you, you’re default should be a no. Be a really fast no and a really slow yes.
In life your word is everything, however for investing you can and should change your mind
If you’re in the game, you’ll lose every so often. That is expected.
Leverage for deals

The wrong leverage will typically contract your wealth more than a good deal
A limited partnership investment still requires your attention and due diligence
Collective knowledge is power, you can do more with others than individually even when it comes to investment decisions
Life always boils down to a decision. Do you want to be wealthy or not? David Osborn
Create a DDQ for your investment process - Due Diligence Questionnaire
Deals have a momentum to it. If they’re constantly raising money for it, it is like an overcooked piece of steak, it likely won’t taste good
If theres little competition on the front end, there might be little interest on the backend
Vet the operator before the deal. Vet the operator harder than the deal

How much is the operator getting paid for the raise?
An operator’s selfishness can be aligned for you to win along side them
Ask every wholesaler - send me the original contract. I know you’re making money, but I want to know. If you’re hiding a contract, you’re making way to much money
An operators desperation for your invested dollar can show their hand
What amount of friction do you encounter when asking about due diligence?
Operators contribution of equity is typically deferral of acquisition fees + asset management fees because it is tax advantaged
David Osborn rarely invests as an LP in real estate operators because his family office operates and is an expert in this already
Create your Value Matrix. Rate the deal to your criteria

A private jet is a time machine and also a bonfire for your money.
Find the engine and supply the fuel
Play the game and see what they are willing to agree to in terms of changing the deal
There are many narratives that the herd toss around you shouldn’t fall prey to

If you are a personal guarantee for a ‘bad boy’ a nonrecourse loan can become recourse
Ask who is personally guaranteeing the loan
DSCR, Cap rate assumptions, guarantor
Banks will go after the biggest guarantee
Control of the deal = control the fate and outcome. Not working the job, its creating the option to fire you if you fail at your role
Moneyball - team built on getting on base, not home runs. This market is one to find base hits
Diversification can also backfire - a top investor has 250+ LP positions. He would be WAY better if he just invested in multifamily (what he knows) and pay WAY less taxes
The small investments that become setbacks, set you back way more than keeping things simple
Diversification - when the market moves, do assets move in separate directions? If not, you’re not diversified.
Financial Analysis

Benefits - Simple easy to calculate, allows comparison across deals, highlights value of leverage
Challenges - Only focuses on one aspect of gain, time value of money, relies on real cash flows that are always subject to change

Internal Rate of Return (IRR) = the discount rate that makes the NPV of all cash flows equal to zero

Benefits - it measures cash flows when they happen and leverages NPV, shows present value of future returns
Challenges - it’s based on assumptions that you make, if future cash flows change, IRR will change

Benefits - allows comparison across deals, you can make decisions with it, easy to calculate
Challenges -it assumes you have estimated income correctly, it assumes the market rate will be steady, higher cap rates could be riskier

Multiple On Invested Capital (MOIC) = (Total cash distributions / total equity invested)

Benefits - Pairs well with IRR, it takes total cash into account, ensures deal is net positive
Challenges - doesn’t take NPV into account, doesn’t take risk into account, doesn’t take timeframe into account

Preferred Return - a minimum return investors get before operators are paid. Not a guaranteed return
Waterfall - The division of profits
Return Hurdle - the rate of return that must be achieved to reach the next level of the waterfall

Lookback provision - if the LP doesn’t receive a predetermined rate of return, the operator has to return profits
Catch-up provision - The investor gets 100% of profits until the predetermined rate of return is hit
Promote - A disproportionate share of cash flow the operator gets for achieving return hurdles

The goal of an investment is not to defer deduct taxes, it is to make a good return. Taxes exist if you make a profit
Asset management fees can be on called or committed capital?
Mainstream syndicators/fund managers deals are catered to novice investors
Cap rate is return on money without leverage
Sidecar - opportunity to invest in something a fund you are apart of has invested in
Fund of funds - diversification, more leverage to get into investments otherwise impossible.