Episode Transcript
[00:00:00] Speaker A: Welcome, listeners. You're listening to the Deeds in the Desert, where real estate investors tune in for the latest news.
[00:00:08] Speaker B: Hi, Pat Vassar here, the host of Deeds in the Desert. Today, I have the owner, operator of Sedera wealth with us, Addison. Tom Addison. Thanks for joining us.
[00:00:19] Speaker C: Of course, man. Thanks for inviting me.
[00:00:20] Speaker B: Yeah, it's not too, too hard to get you to come out to sunny Las Vegas. This is your old stomping grounds, right?
[00:00:26] Speaker C: Well, it's also one of the only direct flights from, from Lubbock, so makes it a lot easier for me.
[00:00:31] Speaker B: Well, that's a great segue into Texas. Why are you guys in Texas and maybe more specifically Lubbock, Texas?
[00:00:39] Speaker C: That's a really good question. So Texas in general, I think in 2018, 2019, you could have thrown a dart anywhere on a map in Texas and hit a city that was having population growth from COVID Texas is centrally located, it's business friendly, no state income tax, and it has a lot of major universities as well. So it tends to educate its own workforce.
Then at the same time we had, you know, Silicon Valley, Elon Musk led the charge there, Larry Ellison at Oracle, all these guys moving their campuses to Texas, and we started buying land there probably, I think it was about nine years ago now, might want to fact check me out. But eight or nine years ago, and we just kind of like rode this wave where everybody was relocating from these democratically run states during COVID into Texas and Florida, and we just made an effort in Texas to build affordable housing.
[00:01:39] Speaker B: Gotcha. So this wasn't a scenario where you were born and raised in Texas and you're going to start your company in Texas. You came from outside because of the opportunity that Texas afforded, is that correct?
[00:01:48] Speaker C: Yeah, we've developed property and I think it's up to 28 states now throughout the US and Texas, just all the things kind of meshed well together as far as acquisition of land, cost to develop and put lots in, and then labor costs and material. It was perfect for what we do, which is build for rent property. So you need to be able to acquire land, obviously at a reasonable price, do the vertical sticks and bricks at a reasonable price. Most of a lot of that's labor driven. And then be able to sell that property to an investor for where the rent makes sense for cash flow on the acquisition price. And it's really hard to find that in a lot of, a lot of places, but also a lot of large cities. Right. It's really hard to acquire property for $500,000 and make it make sense on a cash flow purpose. And Lubbock at the time, I mean, we were building and selling $150,000 to $250,000 houses and renting those out for, you know, 1500 to $2200 a month. And so the cash flow just made a lot of sense.
[00:02:53] Speaker B: That's amazing. Cash flow that's hard to replicate in today's environment. Obviously the markets you're in are. You're in them because you are able to replicate or get close to replicating those type of values. Other major metros infill locations of, you know, the downtown San Francisco or New York or even downtown Dallas for example, it's hard to buy land, as you said, at that price or that basis to make it afford to kind of driven off cap rates. Right. Of what type of rate of return your investors can get because you're not selling them to end buyers in the sense of build for sale or somebody coming in to live there. Yeah, you're not strictly. Yeah, it's strictly investment based. It is not someone falls in love with your design or falls in love with your layout and can. Can imagine their family being raised there. This is purely dollars and cents.
[00:03:44] Speaker C: Yeah.
[00:03:45] Speaker B: And what type of dollars and cents does it. What type of dollars do you need to make it financial sense for your investors or what type of rate of return are they typically looking at for a cash flowing piece of build to rent?
[00:03:58] Speaker C: So I mean cash on cash returns, we want to be anywhere between like 6 and 9% cash on cash.
That has been a little bit more difficult because of insurance prices primarily, but we've made some headway on that. And then also we've benefited from the cities that we invest in and we build in having a lot of inflation and rents.
So upon renewals on most of the cities that we're doing rent built to rent in, I mean we're increasing between 3 and 7% right now. And that's just a marker of Texas and how unique Texas is right now. I mean we have more people moving into the state than we can build.
[00:04:37] Speaker B: That's a great problem to have right now. You're adding that supply to the ongoing demand from those people moving in. When you say state of Texas, it's not all over the state of Texas. Right. What, what typical markets are you currently in and maybe ones that you want to get into within the borders of Texas?
[00:04:54] Speaker C: So we are all over Texas, Midland, Odessa. If you guys have seen Landman, that's like, you know, that's like the Hub of, of oil and gas throughout West Texas in the Permian Basin. We're in Lubbock, we're in Abilene, which is halfway between Lubbock and Dallas. We're in Houston. We've done some stuff in Dallas, Fort Worth, Denison, Sherman, they built like the new Texas Instruments facilities out there.
My goal over the next five years is to get into these sprawling metropolitan areas. So, you know, outside of Dallas, Fort Worth, there's a lot of like little pockets that have affordable options and people want the school zones, the nicer school zones, and they're willing to commute into the larger metropolitan areas.
We also have a large demand for people doing short term rentals. There's a tax loophole that if you buy a rental property and you get three stays for one tax year, three nights, you rent out, you qualify for the accelerated depreciation on your taxes. Really. So that has blown up for us. We started building in Houston.
It's been two years now, and I think we have close to 250 units under management there. So.
[00:06:10] Speaker B: Wow.
[00:06:10] Speaker C: Yeah.
[00:06:11] Speaker B: So under management is different than building and selling them. So you go out, acquire land, you put the sticks and bricks on it, turn it into homes, sell those homes to investors. And then do you also hold on to the. Retain on to the property management side of it as well?
[00:06:27] Speaker C: No. I mean, we have a property management company that we have oversight of. But typically what we do when we go into a market is we want to put together a list of like the four or five best property management teams and we will refer our clients to them. And when I say under management, that's kind of a loose term, like we're not managing your funds, we don't partner with you on the investment, anything like that. But we are kind of your boots on the ground, if you will, because all of our investors are all over the world, all over the United States. They're not, you know, flying from Seattle and taking time off of their W2 job to fly down and manage their property. So they call us free of charge. We handle everything for them. So, you know, if there's a maintenance issue, if there's a break in, if there's some discomfort with their, their current tenant, whatever, we can step in and help them with that.
[00:07:17] Speaker B: Great. And so you kind of operate a little like us in the sense that you're not deploying your own capital for this builder rent, for the most part. You do have third party investors that come in and acquire these. You said they're all across the world. How Many units are you putting out there? Let's say here in 20, 25, how many units do you expect to do this year and maybe how many would you expect to do over the next maybe year, two, three years now?
[00:07:42] Speaker C: So I mean, you know, the building cycle, right? So at any given time, we usually have about 2,000 units in different stages of development. Whether it's raw land that's being turned into lots, lots that are finishing development, or just vertical construction in general, we sell about 350 to 400 properties a year to investors and we hold on to 100 to 200 units a year ourself in those same developments. So. Got it. We put our money where our mouth is.
[00:08:11] Speaker B: Absolutely. And so right now where your mouth is is Texas. Do you see yourself going outside of the borders into maybe Oklahoma or some other surrounding areas where the economics might also make sense?
[00:08:23] Speaker C: Absolutely. I mean, make no mistake about it, we are opportunistic.
However, that being said, like, when we look at a market, I want to see like a 5 to 10 year Runway that we can, you know, go out there, build the infrastructure necessary to get economy of scale on building, build the teams for the third parties, the management companies, the maintenance teams, where we can, you know, pass along some savings to our investors. So it's not like I wouldn't look at a project in Oklahoma and be like, oh, I could do 50 units there this year and that would be a one and done thing. So when I go into a market, I want to see some longevity of I could do 100 units, 50 to 100 units and this city or in the surrounding area for the next five years. So that's kind of our, our minimum standard.
[00:09:06] Speaker B: Gotcha. And that's kind of how we operate as well.
[00:09:08] Speaker C: Right.
[00:09:09] Speaker B: That first deal is always the hardest because you don't have anybody you can rely on. You don't have any third parties that you can go to with, you know, surveys and studies and engineers and getting the plaid done and maybe somebody to fight with entitlements or push cities and permits and inspections. It's all starting from scratch. That learning curve is rather steep.
[00:09:28] Speaker C: Absolutely.
[00:09:29] Speaker B: And because of that, you want to be able to stay there for a while. And so is that how you kind of got involved in Texas as well? You want. You went in there for those very reasons, did a deal or two, kind of got your feet wet, took your blows on the chin, because I'm sure it wasn't nearly as profitable early on as it was later on until you kind of pay that dumb Tax, so to speak, and pay to learn those lessons that you otherwise wouldn't been able to until you first do a deal there?
[00:09:54] Speaker C: Yeah, absolutely. And I always tell our investors or any of the anyone else that we work with, like, I've made the mistakes so you don't have to like in Texas in general.
And luckily it's worked out, I think, that the economy has shaped the markets that we're in very well, even more so than we could have ever imagined. I mean, when you backtrack seven, eight years in the past and you look at like, what's the best case scenario for us as a company, we've surpassed any of our own expectations just because of what's going on in Texas.
And you add into the fact that we have built those teams, those economy of scale, we have, you know, enough leverage with the city, with inspectors, with supply companies, all of that, that we actually get our. The advantage that we're looking for.
[00:10:42] Speaker B: Gotcha. And when you say kind of the advantage you're looking for on that, it all kind of boils down to the bottom line, which is how much can you write it for on your cost basis to sell it to a client? What's that rate of return right now? You said it's 6 to 9% is kind of what you look at. I would assume that is very heavily weighed towards interest rate dependability. When the Fed's increased interest rates, that probably changes where your sweet spot is. And conversely, if and when they lower rates, I assume that changes kind of your sweet spot as well.
[00:11:15] Speaker C: Absolutely.
[00:11:16] Speaker B: When that does happen, is it primarily.
Does it. Does it take into account any risk changing, or is it purely the rate of return? Let me rephrase that. Maybe in a different way. When you get 6 or 9% rate of return right now, that is based off of your borrowing costs of whatever those are.
[00:11:34] Speaker C: Right. That's unlevered.
[00:11:35] Speaker B: That's unlevered.
[00:11:35] Speaker C: Right.
[00:11:36] Speaker B: Return. Okay, so you're six to nine unlevered when interest rates change. And if your investors are unlevered are your cap rates, I. E. Cash on cash return, you're selling them for change as well.
[00:11:46] Speaker C: Absolutely.
[00:11:47] Speaker B: So when it does change, and let's say it goes down from here, those on unleveraged cash, on cash returns, the risk profile doesn't change on it. It's the same asset in the same location, same quality of build, same quality of tenant, but your rate of return changes. So the higher rate of return, the better it is when it is higher. Like it it when it was in the. In the past, and maybe currently still is. I would assume that makes it easier for you guys to raise, raise more money, that is, get more investors on board. How do you typically raise your funds? Who are these typical investors that come in wanting that 6 to 9% rate of return?
[00:12:27] Speaker C: So we use all of our own money. We borrow money from Ignite, we borrow money from banks, we put our own cash into deals. But when we're selling to the end user, to our investors, I mean, that's all through CPAs, asset managers, referral partners that we've developed relationships with over the past 23 years.
Our typical investor is anywhere from someone wanting to just get some exposure to the real estate market. They've never owned a build for rent property, but they're making good money at their W2 job or they're running a business, they don't have time to go out and flip property.
So we get referred, they get referred to us.
But most of our investors are, you know, high net worth people that want tax advantages.
Real estate offers all of those. And so even when interest rates fluctuate, even when, you know, the cash on cash return dips a little bit, they're still invested in real estate and using our company because it's turnkey and they get the pass through tax write offs.
[00:13:29] Speaker B: Perfect. Those pass through tax write offs. Let's talk about that for a minute. Let's go obviously with the Jobs act that came out and the big beautiful bill that was passed not too long ago, some of the tax advantages of owning real estate were extended. Can you speak a little bit to what those are and how beneficial it is as an owner of real estate?
[00:13:50] Speaker C: Yeah. So I would say where we really had to put rubber to the road was when those tax advantages started lowering. Right. So you had 100% bonus depreciation, then it went to 80, 60, 40, and then it was going to expire.
So having 100% bonus depreciation is a magic pill for investors and for high net worth individuals. If you make a million dollars a year and you're in the 35% tax bracket and you're going to send them $350,000 to the IRS, you can offset a lot of that by owning real estate and accelerating the depreciation. So on a residential house, I think it's 27 and a half years. On commercial it's 35 years.
Typically you would take straight line depreciation every year over 27 and a half years on a residential property. But if you qualify as a real estate, you can actually depreciate 100% of those depreciable components into the single tax year that you buy that property. So that's game changing. So you buy a $300,000 property from us, you put 20% down. That's a $60,000 down payment. You're getting almost dollar for dollar, if not more, and a pass through write off to your, your tax return. So you're getting 65, $70,000 in pass through.
[00:15:07] Speaker B: Amazing. And obviously when they started to wean those off a few years ago, I'm sure your investors, especially the ones that are doing it solely because of the tax numbers, made it a little bit harder to go through. Do you know how long those tax breaks are extended through?
[00:15:22] Speaker C: So they're extended through the end of the Trump administration right now. So was that 2028?
I don't know if they're going to be extended after that.
And it depends on really who takes the White House, in my opinion, after 2028.
So right now it's kind of this sweet spot where you have 100% bonus depreciation between now and 2028.
[00:15:46] Speaker B: Awesome. So time's kind of limited then.
[00:15:48] Speaker C: Yeah.
[00:15:48] Speaker B: And it's not a long, long leash to get in front of it and acquire some real estate, lower your basis through the depreciation, the acceleration of the depreciation on it, and potentially get involved for tax saving for just as much as your down payment. So really, no, no cash, you know, out of hand, so to speak, on that. That's amazing.
Let's take a little step back here. And we talked about you getting involved in Texas eight or nine years ago, that you're opportunistic to look into other states to, to potentially go into. You look for drivers such as employment and, and migration to those areas and you look for ones that you're not going to do one or two deals, long Runway, where you're going to be there a few years. Is there anything on your radar right now that you're kind of sniffing around at or maybe even taking a look at, made offers on properties in different.
[00:16:40] Speaker C: Locations all the time. We've looked in Salt Lake, you know, markets in Florida, we've looked in Oklahoma, we've done some stuff in Missouri, Arkansas.
But really, I mean, I'm telling you, I mean, I'm biased obviously because of where we're developing right now, but because we've built in so many other places, Texas is by far the best place for us to have our money right now for the foreseeable future. I mean, I touched a Little bit on this with like, it exceeded our expectations. But if you would have told me that California would have pissed off all of its millionaires and billionaires and that New York and everyone that runs Wall street and the major banks was looking to relocate their banks outside of Wall Street.
We call it y' all street in Texas. Like Goldman Sachs is building a huge campus in Dallas. Google just announced a $40 billion investment in data centers throughout Texas. Like, all of this outside investment attracting itself to the state of Texas, not only in major metropolitan areas, but these surrounding cities that are logistically advantageous for these large corporations along freeway corridors, good schools, all of that stuff is just. Just taking off. So one of the places we're doing that is an Abilene. They have a 900 acre data center that they're building there right now. And they have Dyess Air Force Base, which got the contract for the new B52 bombers.
I can't lease stuff. I can't build stuff fast enough to lease it. We have a waiting list for like the next six months on units for people to rent. So just taking advantage of that, it's like, why. Why even go start over in another market, Right?
[00:18:23] Speaker B: Sounds like you're kind of in a sweet spot. And we're kind of in a sweet spot with you guys right now. We've done a few deals together, looking at doing some more. Hopefully you guys have enjoyed the relationship as much as we have and as much as our investors have as well. You know, you guys been with us for four years, maybe five years. I don't know, five. I don't have the numbers off the top of my head, but we've done quite a bit of business together, most of which is in the state of Texas. And we'll continue to do that in the.
Why do you use Ignite funding? And what are the benefits of using a group like Ignite?
[00:18:56] Speaker C: I mean, the benefits of using a group like Ignite is that you guys are set up to understand developers, to understand builders and timing.
That's such an advantage in our space of just being like, I need to. I see a piece of land, the bank has it up for auction or a seller's desperate or whatever, and being able to access quickly on a large parcel where I don't have, you know, $15 million in cash sitting around to acquire, that you guys have come in and allowed us to take advantage of a lot of those positions.
The reason we like Ignite is simply because of that. When I call you for a draw, you guys understand our business you guys are quick to respond. It doesn't go to like this big loan committee where it's drawn out for two or three weeks for us to get loan approval.
And even though the delta on interest rate is a little bit higher, what you save us in speed and being able to take advantage of a current market is more than worth it.
[00:19:55] Speaker B: Absolutely. Well, I appreciate that. And then from our side, you know what we like about it is the turn rate. Your build cycles are better than almost every other builder we have. The speed in which you guys complete it and really the execution risk which is prevalent in most loans that we do is almost nullified by you guys. Most of the deals that we get involved with you are pre sold, at least on the construction side of things.
On the development side, you're not developing for somebody else, you're not developing it and say, oh, I hope I find a buyer when this is all said and done. You are that buyer, you are that takeout finance and you are that construction builder on the back end of it. So there is no risk in the sense of, oh, I hope there will be a buyer in the end. You're going to take it all the way to the end, sell it to an end user, and during that process, find that user before you even put sticks in the ground most of the time.
[00:20:43] Speaker C: Absolutely.
[00:20:44] Speaker B: And so that the speed, ease and convenience that you guys offer us is passed on to our investors as well. So we, we appreciate that. We also really appreciate you coming in here to Las Vegas, taking time out of your day to come in and telling our investors a little about you and about your company. So I really appreciate it.
[00:21:01] Speaker C: Can I brag on something really quick before we end this?
[00:21:04] Speaker B: Let's do it.
[00:21:05] Speaker C: So when you talk about getting into a market and getting the advantages from that market, one thing that we really pride ourselves on is the time of completion for when we start, you know, vertical ready lots. Right. We're digging foot ins, going vertical. Our time of completion right now on average for a single family home is 105 days and for a duplex is 135.
So that's, that's huge for us. And you know, I couldn't be prouder of our team for making that happen.
[00:21:34] Speaker B: And to kind of put that into perspective for their investors. On the high end stuff that we work on, our average build time is about eight months.
On the middle market stuff, it's about six and a half months.
And then on the entry level product, which you guys are kind of in that same space, is usually about 150 days. You guys at 105 and 135, you know, beat that pretty, pretty easily.
[00:21:56] Speaker C: We're not, we're not building the Sistine Chapel. That's what I tell everybody. We literally take the same three or four floor plans and we rinse and repeat and build as many of them as quickly as we can.
[00:22:04] Speaker B: Yeah, once you find a good thing, you stick with it. And we found a good borrower in these guys. So we're going to stick with it and hopefully you guys stick with us and tune in to the next episode of Deeds in the Desert. Thanks.
[00:22:16] Speaker A: Thanks for joining us this week on Deeds in the Desert, where short term investments meet long term investors. We hope you enjoyed the content so much that you share it with all your friends. Who doesn't like learning about passive fixed income, right?
Still hungry for more education? Visit our website at Ignite.
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