January 6, 2018

JF1222: Pivoting From Development To Private Money Lending with Bobby Montagne

He has over three decades of residential property development, finance, and sales. After 2008 Bobby saw that banks were not able to lend on projects that previously had never been an issue. With capital drying up, he decided to pivot. He created Walnut Street Finance to provide capital to companies doing what he just pivoted from. Now his company is a full fledged private lender that understands the product (construction & development) better than most, which allows them to lend when a lot of others cannot. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Bobby Montagne Real Estate Background:

– Three decades of experience in commercial and residential property development, finance, and sales

– Successfully overseen $15 billion in career transactions

– Among an elite class of private real estate lenders and delivered high-quality returns to partners and investors

– Between 2010-’15 was principal owner of WSD Capital, a real estate development firm that renovated and resold 185 classic row houses that generated $150M in revenue

– Based in Fairfax, Virginia

– Say hi to him at: www.walnutstreetfinance.com

– Best Ever Book:Think and Grow Rich


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Bobby Montagne. How are you doing, Bobby?

Bobby Montagne: I’m well, thank you. How are you? Thanks for having me.

Joe Fairless: I am well too, and you’re welcome, my friend. I am very much looking forward to our conversation. Holy cow, I was looking over your bio before, and you’ve got some experience – three decades of experience, in fact, in commercial and residential property development, finance and sales. And in fact, between 2010 and 2015 he was the principal owner of WSD Capital, which is a real estate development firm that renovated and resold 185 classic row homes that generated – get this! – 150 million dollars in revenue.

He is based in Fairfax, Virginia. His company now – Walnut Street Finance. There’s a link to that in the show notes page… With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Bobby Montagne: Sure thing, I’d love to, and again, thanks. The short story is I got out of school in the late ’80s, I worked for other developers and finance companies for ten years. I started my own company, Walnut Street Development in the late ’90s, and then built essentially infill residential properties in and around Washington DC in what we refer to as the Beltway And by infill I mean typically very good locations, where we were tearing something down or just buying a small infill site and building a building.

We built high-end condos, we built single-family detached, and we were essentially the builder and the developer. We would buy the land, zone the land, build the buildings, sell the buildings.

In 2015, after the recession and the Dodd-Frank Law I noticed that capital was no longer available for the typical infill developer, just because banks used to be able to do essentially A to Z. After the recession, the whole front of the alphabet got taken away from them, and capital was no longer available to the typical infill developer. So if I started my company in 2012 or beyond, I probably could have never found capital to build the projects.

So I decided to pivot, and go from the builder/developer to a lender, in the space where traditional banks weren’t lending. I love this space, I understand the space, I understand real estate and the thought process, and we’ve been at it now for a year and a half. We’ve originated about 15 million dollars in 40 different deals in and around Washington.

Joe Fairless: Is that where you’re focused to lend, Washington?

Bobby Montagne: Washington DC, Northern Virginia and pieces of Maryland that, again, touch the Beltway, Southern Maryland. The plan is to do it in that market, this region, for the next year or two, and then begin to think about other markets. But we wanna perfect our model, perfect our underwriting, and just really better understand this private lending space before we move into markets that we’re not familiar with.

Joe Fairless: There are opportunities that I see all the time, but my focus right now is multifamily investing. However, I might think “Man, storage units (which I do) make a lot of sense, and so do mobile home parks.” I believe both of those things. However, I’m not gonna pivot, because I’m focused on what I’m doing.

Now, you said you saw an opportunity, because the capital wasn’t available for infill developers in 2015, and now you wanna be the solution to that, but what were the other reasons why you switched? Because it’s one thing to see an opportunity, it’s another to then switch what you’re currently doing and making money on and do something else.

Bobby Montagne: That’s such a good question. As with every pivot in a business, especially if you’re having success, pivoting is a big deal. We started buying dilapidated row houses in Washington DC in 2010, and we could buy dilapidated row houses in DC in 2010 for a great number. We would do a complete gut renovation and sell the property, and have a cash-on-cash return somewhere in the high twenties. It was a good business.

That high twenty cash-on-cash return continued through 2014. I was flabbergasted at how long it lasted. Typically, when you have those sorts of returns, others discover the space, money comes flooding into it, competition increases. Others can discover the space and get after it in an organized fashion or compete with us in an organized fashion until late ’14, early ’15.

Before late ’14, early ’15, depending on the market, we had a very simple formula – essentially, we would buy a dilapidated row house for $10  (I’m just using that as a ratio point), we’d fix for $5, and we’d sell for $20. If we were in Georgetown, that ratio would be buy dilapidated for a million dollars, renovate for 500k, sell for two million. If we were in Petworth, we’d buy it for 300k, fix it for 150k, sell for 600k. So that buy for ten, fix for five, sell for twenty formula stuck in many neighborhoods, and we did it as efficiently as we could for four years, 180-something-odd units.

In late ’14, early ’15, as others discovered the space, the buy for ten moved to buy for twelve. The fix stayed at five, and the sale stayed at twenty, so the margins got squeezed because there were more players bidding up the price of dilapidated row houses. It got very competitive, and the simple story was in a neighborhood called Petworth we had done 30-something-odd row houses; on a particular street in Petworth (3rd Street), we had done five or six deals. I knew 3rd Street really well. I knew dogs’ names.

A house becomes available on 3rd Street, I’d hear about it at one o’clock; I’d bid 350k, we’ll close as soon as they want to, and I’d get a call later that afternoon the number is 375k. I said “Okay, 375k it is. Ready to close.” I’d get a call after dinner, the number is 400k. It’s the first time Petworth dilapidated traded for something with a 4 in front of it, and that’s when it hit me – I was like, “Holy cow, the others have discovered the space. We’ve gotta think about a pivot.” And that is what led to the original thought of the pivot.

In fact, the moons always line up. I called the guy who won on 3rd Street for 400k – a great guy, a young guy, just getting into the space, quit his 9-to-five, was gonna get into this business big time, educated… But he didn’t have any capital. So I called him, I introduced myself, he said “Yes, I know who you are, I know your company, and I like your product.” I said, “Well, listen, congratulations on the buy. When do you have to close?” He said, “Thirty days.” I said, “What are you gonna do for capital?” He said, “I don’t know, but I’ve got about 25 days to figure it out.

Long story short, I lent him 300k of the 400k to buy it, and I lent him all the construction improvements and he turned into a friend of mine. I did two or three deals with him off of a yellow pad. I hadn’t even considered really getting into this lending space… And after I did a couple deals with him, I began to think, “This really makes sense, because there’s so many folks that are very good builders, and they’re also good deal bird dogs, just like this guy on 3rd Street, but what they don’t have is access to capital”, and they don’t necessarily understand money as well as they should, and I can help in both of those categories. So that was the beginning of the thought process, and it went from there.

Joe Fairless: If you were talking to someone who lives across the country from you so there’s no competition from them, and they said “Can you just tell me what are the benefits from owning a company that does these loans (hard money lending)?”, what would your replies be, from a monetary standpoint? “Well, we mitigate our risk here and then we make our money here…” What would you say?

Bobby Montagne: I would not get into hard money lending or private lending or the space I’m in if I did not understand the product as well as I do. My company really understands construction. We know what a two by four costs; we know how to underwrite, we know how long the construction takes, we know about permits and plans and marketing. We’re so comfortable in that space that I feel like I can take on more risk than most of our competitors in this space who are typically – not across the board, but typically very smart money guys, but they don’t know what a two by four costs.

So to answer your question, with that background [unintelligible [00:11:29].19] real estate, the upside in this space is the security of the investment. We’re lending 75% to 80% loan-to-value in the first lien position on a hard asset – a row house, a single-family detached, a condo in and around Washington DC, the capital of the United States, where the real estate values are pretty strong. So if things go South, we have real collateral backing our investments.

In addition to that – and again, with the caveat that we understand the space and the asset, in addition to that, lending only up to 75% of the loan-to-value, we vet fully not just the real estate, but the borrower also… Not from the standpoint that there’s a big, fat balance sheet – because they never do – but from the standpoint of “Are they capable of doing what they say they’re gonna do?” And then in the completely subjective category, do they have integrity? Are they going to do what they say they’re going to do? You get to know the borrower, and then at some point you put your hand on your heart and you “I believe he’s [unintelligible [00:12:37].22]”

So if somebody on the other side of the country is getting into this space, I would recommend really knowing the product, and I would recommend underwriting not only the hard asset, but also the borrower.

Joe Fairless: As far as how you make money on it, you initially talked about the security of it with the 75% loan-to-value, so you’ve got some leeway there, and then you also have a hard asset… What type of upside is there for you?

Bobby Montagne: Well, what we do is we have a fair amount of my own money in this, but our cost of capital we pay our investors is somewhere in the neighborhood of 8% to 9%. We pay our investors a monthly coupon, so they get a check every month. Then we lend that money to our borrowers, that’s somewhere between 10% and 12% annually, and somewhere between two and four points. The total cost is somewhere between 12% and 15%. So we receive 12% to 15% for the money that we put out, we pay 8% for that money, and we keep the delta.

Let’s say the delta is 5%. If you can build a company where you’re doing 10 million dollars in loans per year, you can count on keeping 5% of that, or 500,000 bucks. The real game is to scale the company to somewhere in the 40 million dollars of origination per year, and we’re on our way to that. We should be there in early 2019. Then when you apply the 5% delta on 40 million, it’s a two million dollar upside. You use that two million dollars to first pay your people, and you don’t need a lot of people in this space; you need a handful of really smart people, and the rest goes to retained earnings. That’s a good business.

Joe Fairless: With the investors you’ve got monthly distributions you’re doing, 8% to 9%… When you are low on projects, are you still having to pay 8%-9% to investors on projects that you’re not lending their money out to earn that higher percent so you have a delta?

Bobby Montagne: That’s a great question, Joe. Typically, in the hard money or private lending space when the money is idle, not in play in a deal, investors aren’t getting paid, so the switch is shut off. When a new deal arrives, the switch gets put back on. I don’t do that. If you invest in my company at 8% or 9%, the switch goes on and it doesn’t go off until you redeem. I’m able to do that because we have a very strong pipeline, and the reason we have a very strong pipeline is because we’ve invested very heavily in in-bound marketing, and our phone rings with viable deals.

So I don’t have the off-switch for my capital, so the next question – or the obvious question – is “Well, what happens when you have a whole bunch of idle capital and you’ve got money just going out and not coming in?” Well, we protect ourselves from that in that we can return capital. If I have idle money and I don’t see a home for it for the next three or four months, we’re gonna return capital. But honestly, where we are in the business, in the growth mode, shame on us if we don’t have a home for capital.

Joe Fairless: You said you invest heavily in inbound marketing – what are you investing in?

Bobby Montagne: We invest heavily in inbound marketing and outbound marketing. On the inbound side we work with HubSpot; we put out content blogs, two and three and four a week, primarily aimed at potential borrowers. On the outbound marketing side we have outreach meetings to talk about hunting for a deal – “What are you looking for? What neighborhoods are promising? Why would you pick that neighborhood over another neighborhood? How does the math work?” “We’ll buy for ten, fix for five, sell for twenty.”

So we’re educating… We’re content marketing, as the term is, but we’re educating. We’re constantly trying to help, not dissimilar to what you do, trying to help those worthy borrowers who are very good builders, who get up early and get after it. We’re trying to help those folks build a business. And we can do that by providing capital, and we can do that by providing help. For example, we did a loan with a guy in a great location (again, in Washington DC), in a neighborhood called Eckington. Gut renovation of a row house; permit should have taken three to four weeks. After three to four weeks, no permit. We give them a call and say “Hey, when are you starting?” He says, “I can’t get my permit.” We said, “Well, what’s going on?” He explained it to us, we provided a resource that he then engaged, hired, and it [unintelligible [00:17:42].02] and off to the races he went.

So we try to help not only with providing capital, but we also do a bit of coaching. “This is a better way to go than the other way”, if folks want to ask. If they don’t wanna ask, that’s fine, too.

Joe Fairless: Based on your experience in the industry as a developer and now on the lending side, what is your best real estate investing advice ever?

Bobby Montagne: Not my best advice, I borrowed it from Warren Buffet – it’s preserve capital. That’s the first and probably only real rule. You can’t afford to lose capital. It happens, it’s happened to me, but you really have to protect your capital. So that’s my advice. As Warren Buffet says, “Rule number one – protect capital. Rule number two – see rule number one.”

Joe Fairless: On the part where you have lost money on a deal, can you tell us a story about that deal?

Bobby Montagne: I can, actually. It wasn’t on the lending side… Like I said earlier, we’ve been in the lending business for about 15 months now. We haven’t had any deals get sideways on us. We will eventually, and we know how to deal with it when it does happen, but in 2000 to 2005, 2006 I built high-end condos in and around Washington. Very big deals. I built a building next to the Vice-President’s mansion in Washington DC off of Wisconsin and [unintelligible [00:19:10].20] a 420-unit deal in Arlington; it had a pool on the tenth floor that looked down the mall… I mean, really high-end condo stuff.

And from 2000 to 2005 you couldn’t build them fast enough. They sold off with paper before we even had the frame up of the building. In 2006 we had three buildings, mostly completely sold out. Between the three there were 15 units all in the 1 million plus range that had not sold, so we were kind of scratching our head in late ’05, early ’06, like “Why haven’t these sold?” The building is done, people moved into it, it’s a great product, but they weren’t selling.

At the same time, I was getting ready to start a building on Mass Ave. in Washington, a ten-story apartment building where we had bought the land, zoned the land, gone through historic review, and getting ready to build the building.

So I went to New York and I got a big construction loan to build this ten-story building in early 2006, and it was so easy to convince the bank in New York that this was a viable project and they should lend literally tens of millions of dollars to get it built… And I left New York on a train on Thursday night and I started thinking to myself, “That was way too easy.” There should have been way more due diligence on the bank side, way more questions, like ‘How fast do they sell? How many days on the market? What are the price points? Why did you decide to do this many one-bedrooms and this many two-bedrooms?’ None of those questions.

So I’m sitting on the train, I’m coming back to Washington from New York, and it occurred to me, “That was really easy money for this ten-story building on Mass Ave. and we have 15 units that we can’t sell in these completed buildings.” So I started thinking, “We can’t sell the last units, easy money… We’re at the top of the market. We need to get out right now.”

I went and I talked to my equity investor at the time, an older gentleman who’d seen it, been there and done that, we kind of talked through what I’ve just said, but in a little more detail, and he agreed. “It’s the top of the market, time to get out.” So we sold everything – we sold those last 15 units, five of them a at a loss, we sold that site on Mass Ave., the ten-story multifamily condo building site on Mass Ave. at a slight loss, and we got on the sidelines in 2006 and stayed there until 2009. And although I lost money and the business obviously didn’t grow, because we weren’t building anything, it was the smartest thing I’ve ever done.

Joe Fairless: Wow. I’ve heard stories where people got out, but I haven’t heard as detailed of a story like you just told us. Thank you for sharing that. Are you seeing anything like that now?

Bobby Montagne: No, I am not, and I really like the way we’re growing now. At least I can speak towards the Greater Washington Metropolitan marketplace. We’re increasing in values, but at a steady, reasonable pace. There’s no crazy spikes. Construction costs are remaining relatively steady, eaking up a little bit, but no spikes.

I remember in 2004 and 2005 we were selling a 420-unit building in Arlington, we would have a conference call every morning with my equity partners and the lead bank to talk about pricing, because we would increase prices almost every day, and we’d still sell it, which is crazytown. And when building buildings we would budget x amount for steel, and then all of a sudden steel costs 2x, and you’re like “Why?” and it’s like, “Well, that’s what it costs. The demand for steel. Supply and demand. Prices went up because everyone wants steel.”

Concrete – same story, and then you always heard, “Well, they’re building everything in China, so concrete prices are up because China is sucking up all the concrete.”

I’m not seeing anything or hearing any stories like that now. It’s just steady, the line is increasing, but not at any spike or exponential rates. I love that kind of market.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Bobby Montagne: Sure.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:23:41].26] to [00:24:39].08]

Joe Fairless: Alright, Bobby, best ever book you’ve read?

Bobby Montagne: Think and Grow Rich.

Joe Fairless: Best ever deal you’ve done?

Bobby Montagne: Clarington 1021, a condo building in Arlington.

Joe Fairless: And why is that the best ever deal?

Bobby Montagne: Not just for me, but the profit mostly for the equity partners… A profit of 15 million dollars in 18 months.

Joe Fairless: What’s a mistake you made on a transaction?

Bobby Montagne: Not doing full due diligence, and I continue to make that mistake. It’s a fight against frankly being lazy. Can’t do it.

Joe Fairless: What’s one area of the due diligence that you’ve honed in on that you need to put more focus on?

Bobby Montagne: Well, we have gotten better at that, but I would say the piece that we constantly need to ask about is document control. Are all the documents right? Do we have the originals? Is everything fine and within the right spot? Did the title report say what we wanted it to? Are we properly ensured? You know, document control.

Joe Fairless: Best ever way you like to give back?

Bobby Montagne: The best ever way I like to give back is actually being involved in the giving back and not just writing checks. For example, we get involved in helping to renovate and build houses for those that wouldn’t be able to do it for themselves, kind of a Christmas in April program. I really like that way of giving back.

Joe Fairless: And how can the Best Ever listeners get in touch with you or learn more about your company?

Bobby Montagne: Our website is WalnutStreetFinance.com. Our phone number that rings in our office on everyone’s desk and gets picked up is 703-273-3500. My cell phone – if you are interested in learning more about this space or our company, you can call me directly. That number is 202-409-4100.

Joe Fairless: Well, thank you for talking about your experience in real estate developing, and then also doing what you’re doing now – lending; why you got into lending, you saw the writing on the wall, the example of what you were looking for with the deals, I love how you simplified it. For me it was helpful, because I have a very simple mind – that “ten dollars you buy, five dollars you fix and you sell it for twenty”, and how you were seeing it bump up to twelve, five, twenty. And the writing on the wall that you saw in 2006, and what you did, and then some deals that you’ve done along the way.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Bobby Montagne: Joe, thanks so much. I really appreciate your time.

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