February 19, 2019

JF1631: What Does Success Look Like? Money Isn?t Everything with Corey Peterson


Corey saw real estate success early in life, not his own, but his step dad at the time was wildly successful, and it was from real estate. After that, Corey read Rich Dad Poor Dad and started his own real estate journey. He was doing well, a lot of people saw him as having massive success. But one day, he realized he was too consumed with work, missed his son’s game, and realized this was not his idea of success. Now hear how he balances real estate success AND family success. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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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, Corey Peterson. How are you doing, Corey?

Corey Peterson: I’m doing wonderful, brother.

Joe Fairless: Good, I’m glad you’re doing wonderful, and welcome to the show. A little bit about Corey – he is the owner of Kahuna Investments, which is an apartment investing company. He’s managed and acquired over 95 million dollars in real estate. He’s the host of Multifamily Legacy Podcast. Based in Phoenix, Arizona. With that being said, Corey, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Corey Peterson: Yeah. I started off like a lot of real estate investors do – broke and with a dream. I barely graduated out of high school, I was probably not voted “Most likely to succeed”, and I was a used car salesman. I didn’t get to download from the mother ship until I was 32 years old… But something magical happened. My mom was married to this man named Bruce. I call him Bruce Wayne. Now, he wasn’t that man, but he was loaded, and he had a home in Hawaii, and mom invited me and my girlfriend (now my wife for 17 years) to go there and visit. And when we got there, we went to his house and it was right on the beach. He had cars, and fine art, and his phone wasn’t ringing. He looked like he was living the perfect life. And I asked him, I go “What do you do?” and he said “Real estate.” He owned apartments.

Now, I wish it got better, because Bruce was kind of a prick, but… [laughter] But what he gave to me was the perfect, immaculate picture of what success should look and feel like, because Bruce had time and money, and he [unintelligible [00:03:54].20] real estate and apartments. So I left the island thinking he was the big kahuna.

In 2005 I read Rich Dad, Poor Dad, and all I could do was think about Bruce, like “That’s Bruce.”

Joe Fairless: Of course.

Corey Peterson: And I started my company in 2005, I named it Kahuna Investments, because I wanted to be the big kahuna. [laughs] From there, I started off as a wholesaler. I had no money, no credit; I started wholesaling deals. I went to REIAs, I started finding people that had money, I would sit by them, ask them what kind of deals they like, and then I’d go find them [unintelligible [00:04:25].02] up a deal. I did that for about a year and a half, and then I learned how to raise private money, and I raised my first piece of private money by accident… Really, I was a used car salesman, but I actually got licensed to sell stocks and bonds and mutual funds; I was a financial advisor, Series 7/66 license.

So I took what I learned in the financial world and really when the market dropped — and I learned that people would actually give me their money. I started doing lots of fix and flips, and in 2011, at the apex of me doing lots and lots of fix and flips, and almost actually losing (I guess I’d call it) my Why… What happened was — this business can consume you. And for me, it almost consumed me, where my son is like “Dad, are you gonna be at my game on Saturday?” and it was at like three o’clock. I’m like, “Yeah, no problem, sonny. You bet, you know I’m gonna be there.” But inside I was like “I’ve gotta go look at three homes Saturday.” So I go early in the morning, and long story short, I got there at the end of the game, and my son came off the field and he was crying. He’s like, “Daddy, you promised. You promised.” And it shook me to my core.

Here I was, in the public’s eyes I was a huge success, but as a dad and as a father I was failing. I’d put money in front of my kids and pursuit of love. For some reason, in that broken state — kids are resilient; even though I hurt his feelings and it really hurt me, I dropped him off at home, and then by myself, in my car, I’m asking God to forgive me, and I drive by an apartment complex… And this is the same apartment I’d driven by millions of times, but on that day and that broken state — I used to say “I wish I could own an apartment.” That day I said, “How can I own an apartment?” and when I did that, everything changed.

My mind went right to Bruce. I go “Bruce. Life. Time and money. Apartments.” That was the vision.

I bought my first apartment in 2011. I bought it for 3.2 million, I raised 1.4 million dollars of private money, and I just actually sold that property last August for 8.8 million.

Joe Fairless: Congrats on that. That’s a good return.

Corey Peterson: And that’s what I’ve been doing ever since – just doing apartment deals. Buying for cashflow. I think with apartments it allows you to have balance. You can do work once, and get paid time and time again. And personally, what I feel like I’ve really mastered is how to raise capital. And not just how to raise capital, Joe, but really how to raise it at the right cost.

Joe Fairless: What do you mean by that?

Corey Peterson: Well, when I was a financial advisor, I dealt with a clientele that in stocks, bonds and mutual funds; that’s what you sell. And when people come in — and if you ask any financial advisor, if you ask your financial advisor, you say “Hey, what’s a solid return? What can I look for?”, most of the seasoned advisors will tell you 6% to 8%. If you can make 6% to 8%, you’re doing great. And that’s what’s preached to that demographic of people, and there’s trillions upon trillions of dollars in the stock market, we all know this.

So I used that same philosophy, and even when you break it down even further – you talk about an income product. What can produce income in the financial world (stocks, bonds and mutual funds) that’s safe? You have Treasury bonds – that doesn’t give a yield. You have CDs, we know that doesn’t give a yield. Bonds – a lot of people invest in bonds. On average, a bond is probably between 2% and 4%. I would say on the average around 3%. So most people are getting 3% on their money, and that’s where they put the biggest bulk of their savings.

When I was an advisor, when someone came in with a million dollars, a 401K, the bulk of their money we put in more fixed income products. That’s their safe money. So I took that concept and I used it into my multifamily process. And what I do is this – I offer my investors what I call a 6% pref. Now, that’s pretty standard in the industry, but here’s where I changed it up. So I give my investors first [unintelligible [00:08:33].05] of all profits based on the cashflow, and then when we sell the property, I define this payout, I give them an additional 6% annualized, meaning that my investors will only make 12% on their money, total.

What that has done is it allows me… Because I believe this – if you can raise capital at the right cost, whoever has the cheapest cost of capital can win.

Joe Fairless: Yup.

Corey Peterson: But I realized if that’s my avatar — there’s lots of “smart money”, Wall-Street money, savvy money… It’s hard for me to compete with those types of investors. But your doctors, your dentists, your attorneys, anybody that’s in the stock market – your average working person that retires from a company and has a big 401K, that IRA money, I can attract that and I can beat Wall-Street almost every time. And I think what we provide which is what is most valuable is consistency. Most people wanna get off the rollercoaster, they want consistency in their returns, and they’re willing to take less yield for consistency. So that’s what I’ve used to lower my cost of capital.

Joe Fairless: That is a low cost of capital, and props to you for being able to attract investors at that level… But it’s still a great return, too. How many deals have you done with this structure?

Corey Peterson: [unintelligible [00:10:00].23] I had it 8% and 8%. I had a 16% structure. Then I went to 7% and 7%, and now I’m at 6% and 6%. So this year we did about three deals, probably about a 4.6, 3.6, so that’s 8 — about ten million dollars this year, and that 6% and 6% process.

Joe Fairless: And that’s in equity, right? The ten million in equity?

Corey Peterson: Yeah.

Joe Fairless: Okay, so you raised ten million dollars worth of equity at a 6% preferred return, and then when you sell, an additional 6% annualized return, so in total they’re making 12% annualized return.

Corey Peterson: Yup.

Joe Fairless: And when you went from 8% and 8%, to 7% and 7%, to 6% and 6%, I know you had at least one investor say “Corey… Excuse me, what’s going on over here? Why does it keep getting lower?” Did you have that happen, and if so, what was your response, and what was their response to you?

Corey Peterson: It always happens. You also have to understand where you’re at in market conditions, right? Right now there’s more money chasing deal-makers than there is deals, good quality deals… At least that’s my opinion. But sometimes your perceptions are reality; for me, that’s my perception, and I choose to make it my reality.

So those are usually not that hard of questions, because if they’ve been with me for any term of time, what they’ve seen is the consistency that every quarter we don’t send checks, we ACH people’s money; we give our reporting every month. We have a Wall-Street-grade property packet to our investors that’s very detailed in our reporting; it’s full open book, and we communicate really well. And I say, “Guys, listen, the cost of capital has just gone down, and I wanna work your money, but I’ve gotta have it at these new terms. This is what I’m doing. If not, I wish you well.” Usually, by that point they’re just kind of like, “Dude, Corey, just give me some of the Kahuna, dude. I just want it. I’m used to it, I like it, and I just want more of it.” But that’s honestly because I’ve created relationships. These are my friends. Or at least in my mind I treat my capital like it’s gold. And by doing that, I think they’re willing to accept a little bit less. Not that I’d lose the people, Joe. Absolutely. Was I willing to lose some people? Of course. Because when I lower my cost of capital from 16% to 12% – listen, that helps everybody. It’s even easier to become more consistent with your investors, because you have a lower hurdle to meet…

I hear a lot of investors talk about great returns, Joe, but I’m not sure that they always give them. And I think by just being realistic and saying “Here’s a solid return. Yeah, I know it’s not the 20%, but that’s speculation money. I’m the place where you put your safe money, your real money.” And this concept, when you put it that way – people are looking for alternatives like that to the stock market, because they know the stock market is a freakin’ whirlwind. Look what just happened – nobody made money in 2018. Some did, but most of the market lost their money.

Joe Fairless: Right. With the type of reporting that you do, talk to us about what your system is for generating that reporting, and then how frequently you provide that to your investors.

Corey Peterson: We use Appfolio, but we use a couple different — not just Appfolio. When we provide a — we call it our dashboard, internally… It’s a combination of what’s going on with the properties, we have a property packet, “Here’s the site, here’s how many units”, we give some of our internal metrics that we track, which is what’s our occupancy… That’s gonna show up in the report anyways, but we give how we incentivize our leasing staff, how many new leases did they get, what’s the rental increase on the new leases, what’s the credit scores? What about our renewals, how many renewals did we get? How much increase did we get? Because we believe in this thing that our tenants expect rents to go up, and we never disappoint them, ever. Even if it’s $5, we will get everybody on board with “Every year you can expect a little increase in the rent.” Well, that’s how we grow the value of our property; we know this, so that’s how we program it.

But then we have an income statement, a 12-month cashflow, a balance sheet, all our bank statements. We have this one thing called the Variance Report. In fact, my Variance Report is my favorite, because it takes our budget, and then it has the last three months of what we actually did, so you compare it to our budget and we’ll say “Hey listen, our budget for labor was this, and we’re either above, median, or we’re below.”

I actually tell my investors to go there first, because not all of them can read a big P&L correctly and see what happened. So they can go to that report and get a little bit better synopsis of “Oh. Okay, now I understand.” And not only that, I take the time to read the reports and give a good synopsis of what truly went on in our deal. It takes time for me to do this, and this is one of my personal touches, this is where I actually get involved, but I think it means a lot to the investor… And by taking care of the capital, the capital takes care of you.

Joe Fairless: And you send that out monthly?

Corey Peterson: Monthly.

Joe Fairless: What are some questions that are typical after you send it out, from your investors?

Corey Peterson: Now, this is gonna sound really weird, Joe… We’ve been raising millions of dollars, and I very, very rarely ever get an e-mail. In the last six months I’ve gotten no e-mails. Nobody says anything. But if they do, it’s usually “Thanks.” I mean that wholeheartedly.

Joe Fairless: Oh, I hear you.

Corey Peterson: It’s like, “Yeah, great.” Because when you give an open book like that… Here’s the biggest question sometimes we’ll get – if we did a big capital improvement project, it’s gonna hit the P&L and it’s gonna look like “Oh man, we lost $100,000 or something. We lost a lot of money this month. What happened?” It’s usually that. And I go “Remember when we first bought the property we set aside half a million dollars in cap-ex, that’s been sitting in our checking account? We spent that money.” So we already had it in reserve, we already knew it was there. Yes, it comes off in the P&L, but if you look at our cashflow statement, you’ll see that we made money. [unintelligible [00:16:27].11] made income that month, we just spent some of the money that already had in reserve for the property, which we had already planned on doing.

It’s just about helping people understand how to read a financial statement. That there’s more than just a P&L. There’s a P&L, and your balance sheet, and a cashflow statement. Those are really the 2-3 things that you have to have. And then, of course, we even teach them how to look at our accounts payable. We want you to look, because we monitor that accounts payable. It’s important for us to not have a lot of bills outstanding.

Joe Fairless: Going back to the structure that you started with, 8% preferred return and 8% annualized return on the sale, so a total of 16% return on the money, assuming all things go according to plan and you’re able to do that – how did you come up with that structure?

Corey Peterson: I think just trying to look at other people’s PPM’s. And here’s what I did – I asked my lawyer, I’m like “Listen, here’s what I think I wanna do, and you tell me how to write it in a private placement memorandum”, and here’s how it actually reads. So we give 50% of ownership — on our deals let’s say it’s a 50/50 and ownership. So because our investors are equity partners, they get 50% of our depreciation. So in that aspect, that’s the one thing they truly split with us 50/50. But on payouts, we define that in our waterfall process, in our private placement, we say it’s a 6% pref, and then based on cashflow [unintelligible [00:18:03].08] and then upon sell, it’s a 50/50 split until our investor gets a total return of 12%, that includes the pref. So that’s kind of how we worded it.

But for me, how I came up with it, it was like “Man, there’s gotta be a better way to lower my cost of capital”, and if I’m honest, it’s all about Corey, but maybe it is. I believe that the sponsor, the guys that are doing the deals, should make a lot of money, as long as I can do it and give my investors a solid return.

Some people are beholden to their capital, I believe; I’m beholden to my capital, but I’m still the captain of the ship. And I just looked at the industry and there’s lots of people that are like “You’ve gotta do volume, you’ve gotta do all these deals.” And I’m like, the way I structured it, I don’t have to do a lot of deals. If I do two or three deals this year, I’m a nirvana, because when it’s all done, when it’s a real true split, it’s like maybe a 60/40, where I’m getting 60% of all my deals, and for most syndicators, it’s totally the opposite; it’s 70/30, and they’re not getting the 70%, they’re getting the 30%. So it’s just that I’m like “How do I create this to work for me?”

Joe Fairless: And when you describe the structure with the 6% preferred return, or whatever it is (6%, 7%, 8%, whatever year we’re doing, it doesn’t matter), let’s just go with 6%. When it’s a 6% preferred return and then it’s 50/50 until the LPs receive 12% annualized, if it’s worded that way, as an investor you say “Wait a second… So I’m not getting my 12% and then [unintelligible [00:19:45].19]? I’m getting 6% and then we’re splitting 50/50 and hopefully I get the 12%?” What do you say to that?

Corey Peterson: Normally, we sound exactly what it says. Yes, that’s what it says, and I need you to be comfortable with that. Now, in all honesty, here’s what we’ll probably do, because I always like to under-promise and over-deliver. Now, because I’ve already set the rules of 6% and then 50/50 split until you get 12%, but let’s say if we didn’t hit that and it was gonna be less, and I still gave them 12% — because I can still give up my profit as the sponsor if I wanted to, right? And normally, I do. I’ve never had to, because we always made more, but if I ever got to that spot, I could look like a hero to my capital by saying “Guys, I know it reads this, but I just want to make you [unintelligible [00:20:34].27] Can I just do that?” And boom! Now I’m going above and beyond.

I’ve always believed — you’ve just gotta be honest with people. I already know that they’re only getting 6% to 8% in the stock market, and that’s my avatar. So who does this work for and who does it not? It doesn’t work for Daddy Warbucks. That savvy, sophisticated investor, whatever that person looks like.

Now, who does it work for? I have lots of people that come in, and — I had a call yesterday from a guy that’s out in New York, he’s got a million bucks, and he’s gonna invest it with me, and I went through the same process, and he was like “Man, that sounds like a pretty good process. I like it.”

I always say you attract the right people and you repel the wrong. I believe there’s more people that hate the stock market than there are savvy people… And how I find them is through networking and through marketing. It’s not marketing, but when I say marketing, I’m going to events and meeting people, and I have a staff that’s trained, that works for me on my behalf, for my company, and they go out and meet people, just like I did when I was a financial advisor.

I learned from Edward Jones – that’s who I worked for – one of the best companies, by the way, to learn financial services… Because as a financial advisor, you know how I started in Edward Jones? They make you go door-knocking, door to door. That is the process – you go meet people, you show them your process, and things would start happening.

Now, there’s lots of different ways to raise money. This is just the way I do it, it works for me, but I don’t have to do a lot of deals to make a lot of money.

Joe Fairless: Taking a big step back, what’s your best real estate investing advice ever?

Corey Peterson: Number one, stick with multifamily. I don’t know if that’s the right way to say it, but… I’ve tried to be successful, and I’ve been somewhat successful in wholesaling and doing fix and flips, single-family business. I made a great living doing that, but I became super-wealthy, multi-millionaire, when I changed to apartments… So I believe it’s the right vehicle for cashflow.

A real good one is, listen, don’t ever ask people for money. Only ask who do they know. If you do that, you take all the pressure off of people, and now they’re critically looking at whatever you’re presenting, and then the right people will always self-select. That’s huge.

Joe Fairless: Got it. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Corey Peterson: Yup.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:23:14].04] to [00:24:19].13]

Joe Fairless: Best ever book you’ve recently read?

Corey Peterson: The Richest Man In Babylon.

Joe Fairless: Best ever deal you’ve done that we haven’t talked about already?

Corey Peterson: Eagle Village. I bought it for 12.7. In one year we’ve increased the revenue $360,000, which is almost five million dollars increase in value.

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

Corey Peterson: Not understanding who my partners were.

Joe Fairless: What do you mean by that?

Corey Peterson: You’ve got to know thy operating agreement and know thy partner. And because I didn’t read the operating agreement and how the voting procedures and stuff was working, I lost control of a deal that I was supposed to have control of. That cost me. I had to quickly buy out one investor to get my percentage correctly, and that cost me a pretty penny.

Joe Fairless: How much?

Corey Peterson: $250,000.

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

Corey Peterson: Through my podcast and through teaching and coaching, and just trying to really educate, letting people know that there’s alternative ways to make money.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?

Corey Peterson: Honestly, my podcast is the best place – the Multifamily Legacy Podcast is where I tell my story. I just say “Here it is. This is what I do and how I do it.”

Joe Fairless: Corey, I really enjoyed our conversation. I learned a different structure that I hadn’t heard of and come across yet, with the 6% and 6%, or 7% and 7%, or 8% and 8% preferred/annualized return… And your story about Bruce the prick, who had time and money, and also some of these case studies that you’ve done.

And your approach, raise capital at the right cost, as well as your second piece of best ever advice, “Don’t ask people for money, ask who they know.”

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

Corey Peterson: Thank you, sir.

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