Questions to Ask BEFORE Investing Featuring Christopher Huffman | 430

What sort of questions should you ask a real estate investor BEFORE investing money with them?

Today, Chris Miles interviews investor and deal operator, Christopher Huffman, about the questions he would ask before putting any money into a deal.

Christopher Huffman is a serial entrepreneur who has bought and sold several successful real estate companies, generated millions of dollars worth of returns for investors nationwide, and has built teams around integrity, hard work, and a “win-win” mentality.

Tune in now!

Chris Miles (00:00):
Hello! My fellow Ripplers! This is Chris Miles. Your Cash Flow Expert and Anti-Financial Advisor. Welcome you out for a wonderful show. A show that’s for you and about you. Because it’s about those of you that work so freaking hard for your money, and you’re ready for your money to start working hard for you. Now! You want that freedom. That Cash Flow. That prosperity. Today! So you work because you want to not because you have to. So you can do what you love being with those you love whenever the heck you feel like it. But guys have so much more than just being financially free and driving fancy cars. It’s not about that. It’s about living a life of meaning, of purpose and creating a Ripple effect in the lives of others too. So as you’re blessed, you can bless more lives. And guys, I’m excited to be a part of this.

Chris Miles (00:47):
Thank you for allowing my ripple effect to go through you. And again, thank you for bingeing, sharing and doing everything you guys do here. Quick reminder, check out our website, www.MoneyRipples.com. There’s great blogs on there, including videos of these same episodes on there and everything else, as well as the free eBook Beyond Rice and Beans you can download for free today. So check it out. So today guys, I’ve got a special guest here Christopher Huffman, right? I almost mixed you up with one of my clients, Christopher because, I have a client named almost like yours, but in fact, he’s probably listening right now and he’s laughing, but anyways so I have Christopher Huffman here today with AIM Capital. He’s the Founder and Owner of that company. Now, the reason I brought him on, I mean, not only does he have great deals, right?

Chris Miles (01:30):
But the big thing is, is that he’s a serial entrepreneur he’s bought and sold several successful real estate companies. He’s generated millions of dollars for investors worldwide or nationwide at least built teams around with integrity, hard work and a win-win mentality. But on top of that, his company Aim Capital has unique strategic partnership with another marketing company called The Verge Marketing, which is being able to produce incredible off-market leads, branding organization, and top of the industry marketing funnels to attract the best deals, all this stuff, his course for you guys, he works night and day doing hundreds of deals. And in specifically he’s even got his own apartment deals and things like that. And that’s how I got to be introduced to him as well as through other investors, people like you that said, Hey! You need to talk to this guy, check him out.

Chris Miles (02:13):
So today, specifically the topic we want to talk about is “How do you know if a deal is right for you?” Right? Like how do you know? Like, especially if you’ve got somebody who’s a sponsor or a deal operator out there, how do you know if it’s a good investment or not? Should you be jumping into these deals or not? Especially with everything going on in the world right now, the charlatans, the posers, those are the people they’re actually going to go out of business, but the real deals, those are the ones you need to find. So how do you know you’re funding an investment? Especially if somebody else is running the deal, doing the real estate deal, how do you know what’s right for you? That’s my breakfast for on here for here today. So Christopher, welcome to our show!

Christopher Huffman (02:51):
Thank you very much, Chris! I’m excited to be able to be here. You know, you have definitely been creating a Ripple in a lot of different ways and I’m just greatful to be a part of it.

Chris Miles (03:00):
I appreciate that man. Really do, man. So what, so tell us, like, you know, what even got you down the real estate path? What led you down this path in the first place?

Christopher Huffman (03:09):
So I had other family members in a variety of different fields, but surprisingly, I can’t think of a single family member who was in real estate when I was growing up. And you know, my dad was always, was a business owner and he always taught me discipline and hard work growing up, but I never exactly had an individual to follow into the real estate world. I was going to college here in Utah where I’m based out of it, Utah State there’s any other Aggies out there. But I actually took one of my real estate professors out to a breakfast. You know, I was super, he was extremely interested sorry. He was very interesting to be able to listen to. And he actually had gone out there into the real world and been successful. And now he was coming back to give back and I took him to breakfast and he told me what a cap rate was, how to measure return on investment and show me one of the more recent deals he had done. And ever since that day I have been hooked. So I’ve been through a couple of different companies. We started in the Airbnb space before Vrbo and stuff got bigger. I was a consultant a little bit. We did, I actually owned a development company, a brokerage and our main company is Aim Capital, which focuses on multifamily syndication now.

Chris Miles (04:33):
Yeah, absolutely. And you’re starting to find some deals yourself out there lately. Aren’t you?

Christopher Huffman (04:38):
A hundred percent. We’ve got a lot of you know, there are a lot of individuals, it’s interesting to see people’s mindset when things become a little less stable, you know and or when maybe when the media gets a little bit louder or there’s, you know, a lot of like ups and downs and people don’t know what’s going to happen next month.

Chris Miles (04:59):
Yeah.

Christopher Huffman (05:00):
COVID is surprisingly brought a lot of different opportunities out and a lot of different things that we’ve actually been able to utilize in a positive way, you know, kind of taking a negative experience for a lot of people and hopefully being able to come back out of it bigger, better, stronger than before. So

Chris Miles (05:19):
That’s one thing I’ve told a lot of my clients, even some of the people on the show, right? Is that in the springtime I was saying, Hey, watch out. Like once you get to summer fall, you’re going to start seeing some more deals pop out. Primarily. I said, there’s probably gonna be some more deals popping out from people that just aren’t great operators. They’re not really good at managing their properties. And that’s going to be the ones that the people are, the real deal are building up cash and starting to raise capital right now to be able to buy into these great commercial properties, you know? And right now maybe not buying a Strip mall is the best thing currently. That’s the calm, I’m expecting that one to come down the road, The Pike’s here pretty soon,

Christopher Huffman (05:55):
A hundred percent.

Chris Miles (05:57):
Well, tell us, like what in your experience, like what are some good questions to ask someone if they’re looking at an investment? If they’re trying to figure out, okay, is this person the real deal or not? Is this not even just the person? Because I know it’s the investor first you got to look at, then it’s the investment second, right?

Christopher Huffman (06:13):
Yep.

Chris Miles (06:13):
What are some of the questions you ask? Or you look into to say, all right, this is good versus this one I would definitely pass on.

Christopher Huffman (06:21):
Yep. So, I mean, first and foremost, syndications, I can say very straightforward as a syndicator who raises capital for projects. We structure deals in a variety of different ways, syndications aren’t right. For every situation, you know, a lot of the individuals you’ve either had on your show or a lot of individuals that you’ve worked with. It really won’t be the best solution for everybody, but there are a lot of situations where it is one of the best options out there I’ve ever found. I compare a syndication to a horse race. You got a horse and you got the jockey. You know, the the jockey is going to be your team and the horse is going to be your market. So there are four general areas that we look at whenever we’re either, I’m looking to invest some of my own money into a deal, or whenever I’m talking with investors.

Christopher Huffman (07:14):
So we have the sponsorship team, the market, the property, and the structure. And nine times out of 10, you are betting on the jockey or the team far above and beyond, but the property, the market and the investment is still a good thing. If you don’t have a good team, or if you have an incredible jockey, he’s going to put you on the right horse.

Chris Miles (07:42):
Right.

Christopher Huffman (07:43):
Even if you don’t see it the same way that he does. Whereas if you don’t have an experienced team or know who you’re, you know, betting on the horses, they might get lucky, but at the same point, I’d rather be consistent over a long period of time than lucky once or twice.

Chris Miles (08:00):
Nice. That’s it. I wholeheartedly agree. So, what are ways, especially with finding the right jockey, right? What are some good questions or where are some good things to look at to understand whether that person is really the real deal?

Christopher Huffman (08:14):
Yep. First and foremost, the number one question you should ask every sponsor or individual you’re going to invest with is what are you putting on the line? How much skin in the game do you have and taking it one step further, You know, like sometimes

Christopher Huffman (08:34):
Sponsorship teams will be made up of multiple people and even multiple companies knowing who the biggest stakeholders are, who’s putting up the money and who’s really putting their own personal name on the line for that deal is far more important to me than the overall amount. If that makes sense.

Chris Miles (08:57):
Well, what you’re really asking is this person actually taking any of their own risks? Do they believe in it enough that they’ll put their own money at risk to do this? Versus those that say here, I’m just raising money, but I don’t have any money in this deal. I’m just trying to make money off these people. Right?

Christopher Huffman (09:11):
If you’ve got a team of, let’s say five individuals, I would dig in and ask of the five individuals, what are your responsibilities? Who’s in charge of asset management and executing the business plan?, Who has the construction experience to, you know, who created the business model in the proforma? Who is the one responsible for making sure we stay on budget? Who’s going to be responsible for selling? Knowing what role each of the team members has is important. And knowing what percentage of skin people have in is, is also vital of those five people. You could have only one person, you know, the sponsorship team could be putting up 15, 20% equity and you can go, wow! That’s great. But it could be coming from one and the other four, haven’t put a single penny in. So their interests aren’t aligned and they might be the key. You got to find out who the decision maker is and who the lead sponsor is.

Chris Miles (10:12):
Yeah.

Christopher Huffman (10:12):
In a deal.

Chris Miles (10:12):
It might just be putting in sweat equity, which is not horrible. But if everybody’s is doing sweat equity and there’s only one person funding the whole thing, and we’ve got an issue.

Christopher Huffman (10:20):
If somebody hasn’t put any skin and in their own, it’s not a deal breaker for me, because in my very first deal, I didn’t have a penny to my name. You know, our very first development. I with my partner, we had to raise three and a half million dollars. I don’t recommend doing that for your very first one, but I had like $3,500 to my name and we had to figure it out. And if they strictly went off of how much money, like they wouldn’t have been able to make a really, really good return when we went full cycle on that deal. So,

Chris Miles (10:55):
Yeah, that’s great! What are some other good question that people should be asking?

Christopher Huffman (11:00):
Absolutely. so for the sponsorship team specifically, has the sponsorship team done a deal together? If there are multiple companies involved that are partnering and it’s not just coming from a single person, have they done a deal together? And if they haven’t, what are their responsibilities and dig into the individual experience to make sure that they’re in the right seat?

Chris Miles (11:23):
Right? It’s kind of like a championship team, right? If you look at the NBA or something like that, you know, if you just throw a bunch of players together, they’re not going to jail came, right?

Christopher Huffman (11:33):
A hundred percent.

Chris Miles (11:34):
You got to have that history that past and knowing how to work and knowing what roles work.

Christopher Huffman (11:39):
One other question for the sponsorship team is do you have three to five people that you’d be willing to connect me with? Who’ve done business with you, who’ve invested into one of your projects that I could talk about their experience.

Chris Miles (11:52):
Yeah.

Christopher Huffman (11:53):
See if they’re willing to be open and transparent with you and their contacts, because sometimes sponsors can be very cautious of sharing contact information with others, but if they’re willing to be transparent with you, that is a golden star in my book.

Chris Miles (12:10):
Yeah. I get it. Because obviously there’s gotta be some privacy there, but I know when people ask me the same question, I would say, well, I have to ask for permission from these people first.

Christopher Huffman (12:19):
Absolutely.

Chris Miles (12:20):
You know, I’ll see if I can connect with some of these people. You know,

Christopher Huffman (12:24):
As an example, I’m in one of our more recent properties, I had a new passive investor come onto one of our deals. He’d never invested with me before, but we had known each other a little bit. And he asked me that very question. And so I shot out an email to all of our passive investors currently in that deal or in some of our other projects and say, Hey! Who would feel comfortable? Having a quick conversation. And there were three or four of them that did, and I connected them and he was incredibly happy about it. So

Chris Miles (12:53):
It is a good sign. You know, it’s a really good sign. People are actually willing to speak about it too. Really good.

Christopher Huffman (12:58):
Absolutely. So it’s kind of digging in a little bit further, you know, I’m going to come back to the sponsorship team when it comes to how they actually structured the deal. But the second one is the market. We always want to be able to bet on a good market, that if we got stuck into a deal for 10 years, we’re going to have overall growth and be able to sell for more a market like Detroit. That’s constantly, you know, if we had, if we were forced to stay in longer than our business plan, every month, we’re going to be losing money because home values have decreased for, you know, two decades. Whereas if you bet on a market, even smaller markets, like even St. George, Utah, or some of the markets were up in an Idaho or Tucson or Phoenix, Arizona, those markets have really good, strong population growth. There’s a variety of different indicators that we look at. It’s markets are a hundred percent data driven. And have you gotten to connect or interview with Neil Bala before?

Chris Miles (14:04):
No. I know who he is, but I’ve never had them on the show or anything.

Christopher Huffman (14:08):
So he’s a wonderful example of somebody who uses data to find good markets. He’s extremely analytical and actually has a lot of criteria is that he used that we’ve adapted into our own underwriting for when we’re looking at new markets.

Chris Miles (14:24):
Yeah .I remember that was a question I had for you on one of your deals. It’s like, Hey, this market, it’s a small market. Like tell me about this a little bit more. Right? Yeah.

Christopher Huffman (14:33):
Yup. So I can go through like, you know, a couple of these, what past experience does the sponsor have in that market? What you’re really digging for is do they have a good network? Do they have a contractor base? Do they have a relationship with the property manager? Because if they don’t have those, they could hire a property manager and have to fire and that’s going to cost the investor’s money. Or the contractors could have to do jobs twice because they don’t know the standard of work. That’s going to slow down your renovation schedule or increase your budget. So, all very important. Even more so than the actual data of that market is a sponsor’s past performance in that market rather than just the number of deals they’ve done.

Chris Miles (15:17):
I agree. You definitely have to have that team there and I’ve seen some people try to go into brand new markets. I think you’re on crack. Like I have no clue why you’re doing this, you know, and you have to be careful. What about the other two areas as well?

Christopher Huffman (15:32):
Yep.

Chris Miles (15:32):
Yeah. We have the sponsor and the market, and those are big. What about the other two areas?

Christopher Huffman (15:36):
So next is the property. The main thing with the property you want to dig into is the assumptions and the stress testing that the sponsors put into their underwriting. I am, I love Excel. I can make a property look any way I want by changing about three different things and it’ll make it look like the best return in the world or the scariest most return in the world. So you need to be able to be careful that you’re not being sold to. So here’s a few different things to look for. When you’re looking to underwrite a property, number one is how did the sponsor find the project? Is this a special deal where they actually got a good project? Which you talked about the marketing company divulge marketing that helps us. And we specialize in working with sellers directly and some of the psychographic stuff to be able to identify sellers that are willing to they have different trigger points, making sure we’re getting a good deal, rather than just a mass marketed Daisy Chain property and more the one who’s willing to pay the most.

Chris Miles (16:44):
Right, exactly.

Christopher Huffman (16:46):
A couple of other things. So, you know, what assumptions are they using for their growth rates and expenses? Especially in a covered environment, you know, no growth or 1% seems realistic. The biggest two questions to ask is what is the exit cap rate of a market? Because that is what your IRR is going to change drastically with by even 50 basis points, your return will change drastically. So they’re off, like how did they arrive at that? And how do you know it’s conservative? And secondly, is there a refinance? Because a lot of investors today, and this is one of the business models we even use, but they’re able to supercharge returns by returning capital to the investors faster through a refinance, So if you’re using a stress test that we use, it’s called a permanent debt coverage test.

Christopher Huffman (17:41):
And all it essentially means is we’re going to adjust the vacancy rates and we’re going to adjust the rents up and down. And we’re going to make sure that we’re going to see what happens to our DSCR, which is your Debt Service Coverage Ratio. It’s a huge indicator. Your lender is going to look at when you’re refinancing. And that is going to determine what Loan To Value or LTV your lender is going to give you on the refinance. If one of the biggest parts of your investment is, Hey! You’re going to get all your cash back in two years, I would be really questioning, okay, what loan product are they going to use and how much room do they have for being able to do that? Because if they only get me half of my cash or a 30% of my cash, the returns don’t look so good now. So,

Chris Miles (18:30):
Yeah. And that’s the thing I don’t want to kind of spend a second on this too, because no banks, really, everybody listening right now, you want to be like the bank. You want to look at a deal like a bank, right. Whereas, which is, you mentioned stress testing. I know I had several clients say, what do you mean by stress testing? Right? What we mean is you change the numbers. Say if like, you know, like you said, vacancy rate, like if there’s not as many people renting this facility or renting the apartment complex, right? There’s less renters. Beause people are defaulting or whatever it might be. Will the numbers still hold? Will they, will you still make money? Or are you going to be in the hole so badly that you’re going to lose the whole deal? Right? And that’s what he’s talking about.

Chris Miles (19:09):
He’s talking about, we adjust numbers, you just vacancy rates. You just like, Hey, what if we can’t refinance all this money out? And it’s still work. If there’s still debt servicing, you have to do on this property for still making these payments or that thing that, you know, those kind of things. And that is essential to look at this, what’s some of the downside protection? You know, like if the numbers still work, even if you had say, Hey, half the people moved out, we’re still, we’re still at least breaking, even good sign. You know, that’s amazing! Actually. You don’t usually see a deal like that, but if he can see something like that, that’s awesome.

Christopher Huffman (19:39):
A really important question to ask is under what circumstances can we actually lose money? I’ve never seen a Pro forma that loses money.

Chris Miles (19:48):
Exactly.

Christopher Huffman (19:49):
So ask the sponsors. What, how can we lose money here? Like, tell me, what are we thinking about? The last thing I’ll say about the property is what are the biggest challenges we as a team have to overcome with this property and how can I help? Whether it’s a large cap X, whether it’s a new market, whether it’s you’re repositioning a tenant base, you’re going from a class C property to a class B there’s some big expense there that people don’t realize. So I know we’re short on time. So the last section is the structure asking, you know, like, is it a 506 C or a 506 B? Which is different, like asking what kind of syndication do you have to be? What’s called an accredited investor. Which is a fancy way of saying you either meet certain income or net worth requirements you qualify to invest.

Christopher Huffman (20:40):
What are your, give me an outline of your fees that you charge what happens in a capital call? Which means if we run out of capital, the sponsors have technically the ability to ask for more money. And if you can’t give your portion of, you know, you invested 50,000, they do a capital call for $10,000 from you. You can’t give it or your shares diluted. Did the general partners come in? What happens under that scenario? And what happens if something happens to the sponsorship team? If you go bankrupt, if you, one of the sponsors dies, Because that would be terrible. But under that scenario, how do I get my money back? And how do I make sure my investment is protected?

Chris Miles (21:26):
Exactly. That’s so important. Again my mantra is expect the best, but prepare for the worst, right?

Christopher Huffman (21:33):
A hundred percent.

Chris Miles (21:34):
Make sure that’s going to be there. And like you said, most of this weight, if you’re looking at the weight between these four different points, I mean, definitely it goes towards who are the sponsors, like, who is really doing this deal. And definitely, is there a track record there. Like, have they done this? You know, through thick and thin, have they honored their word? Because, I mean, there’s like you said, you can look up Pro forma and it always looks awesome. Right? It always is great. The real question is, is what’s behind the numbers.? You know, that’s, that’s, what’s really important.

Christopher Huffman (22:02):
Like when you’re, when you’re looking at the past performance of a deal sponsor, I said this in the beginning, in the beginning, and I want to say it again, focus on performance, not the quantity or size of deals. Focus on quality. If you have a sponsor, that’s done 50 deals and 48 of them didn’t go so well, you know, like I’d rather have an individual who’s worked hard. Who’s a hustler. Even if they’re newer and, you know, they’ve done two or three deals better than inexperienced sponsor. Who’s done 10 to 15 deals, but they got into trouble with the SCC. He’s lost multiple deals before, like dig into performance.

Chris Miles (22:44):
Yeah, that’s right. Well, this is great stuff, Christopher. I really appreciate it. This is awesome. Now I know you’ll, you’ll have a PDF that people can actually download, like with more of these questions. Right? They can actually go through and say, Hey, these are the questions I want to ask somebody when I’m looking at it. Right?

Christopher Huffman (23:00):
Yep. So if you guys want, I’m going to make this available to anybody go to www.aimcapitalco.com/20questions And you can go there. It’s a free download. You can download it onto your computer. I’ve got it right here. If you can see it to front and back, and you can use it as reference you know, take it to your sponsor interviews and just look down on the corner and you use it to help you guys out. And I hope it provides value.

Chris Miles (23:28):
And that’s /20questions with a 20. Is that correct?

Christopher Huffman (23:31):
Yep. With a 20.

Chris Miles (23:32):
Right. Perfect. Well, I appreciate your time today, man. This is great, valuable stuff. Everybody definitely check that out at www.aimcapitalco.com/20questions I will have that link in the show notes as well in case you guys don’t want to. If you’re driving right now, please do not write this down. Anyways, guys, I appreciate you being on. Have a wonderful and prosperous week and we’ll see you later!