#185: Preferred Equity: Your Path to Real Estate Wealth
LISTEN AND SUBSCRIBE
Apple Podcasts | Google Play | Stitcher | Spotify
Chasing knowledge, not money, is the guiding principle discussed in this episode of The Richer Geek Podcast. Joining us today is Darin Davis, co-founder of Club Capital, to discuss the critical role of preferred equity in today's real estate market. With over 20 years of experience, Darin shares his journey from traditional employment to becoming a successful real estate investor. Tune in to learn how Darin utilizes preferred equity to support developers and secure safe, profitable investments, ensuring sustainable growth even during volatile market condition
In this episode, we're discussing..
Mindset Shift: Darin Davis emphasizes the importance of shifting from a paycheck mentality to focusing on financial independence and asset control.
The Power of Mentorship: Davis shares how invaluable mentorship and learning opportunities are, sometimes more valuable than immediate financial gains.
Raising Capital: Learn about the pivotal role of raising capital in real estate and how leveraging others' money can accelerate your success.
Navigating Market Shifts: Insight into how to adapt and thrive through major market changes, particularly in the real estate sector.
Strategic Partnerships: Davis highlights the importance of choosing the right development partners and staying focused on your market.
Preferred Equity Investments: Explore how preferred equity can provide investors with safer, cash-flowing, short-term opportunities in volatile markets.
Resources from Darin
Resources from Mike and Nichole
+ Read the transcript
Mike Stohler
Hey everybody, welcome back to another episode of The Richer Geek Podcast. Today. I'm proud to have Darin Davis. He's an industry leader and entrepreneur with over 20 years of real estate experience, over $1 with a 'B' and sponsored project. He's gone through several major market shifts in the last two decades. We've been in the industry that long. He's led predecessor companies pivot delivered except for returns and multifamily assets and other types. And we're going to talk about all things real estate and how he's dealing with things that we're all dealing with. Welcome, Darin, how are you doing?
Darin Davis
Mike, I'm doing great, and thank you for having me looking forward to today.
Mike Stohler
Absolutely. Before we get started, I'll have to say that today's episode is brought to you by REI Words. Your go-to SEO agency for increasing traffic to your real estate website. Check it out at reiwords.com.
Darin, give us a little bit about your history background. It's kind of like, I want people to get to know you before we start digging into what you know.
Darin Davis
Okay, pretty simple upbringing. Born and raised in Texas. We're all very proud of that. We'll say it 100 times, if you let us, but I did the traditional high school-college. Got out of college, took a job in the sales world, and I was pretty successful at selling just because, I mean, I just, I had no other choice. I was just raised by a marine and a school teacher, you're like, just do it. There's no crying, there's no quiet, just go get it, figure it out.
Mike Stohler
Old school.
Darin Davis
Old school, yeah. There was no Internet, nothing. But I saw quickly that I was a high achiever, and I saw that I was really performing well for other people. And after 15 years of Monday at 6am until Friday at 6pm literally felt like 24/7.
I just said, you know what? I've got to do something different. And I didn't know what the difference was. I truly, all of a sudden, read a book or talk to you, have a meeting, but I just said, I cannot continue doing what I'm doing. And I kid you not, I am driving from San Francisco to San Jose, and I'm listening to good, old AM radio. That's what we did back there for our education. But I'm listening to a talk show, and I'm fascinated by this guy. I've never heard anything like this. And I got to the parking lot, 10 or 15 minutes before the radio program was ending, and I just sat in the parking lot. I said, "I gotta listen. Who is this guy?" You know what? And they announced at the very end, who it was? Well, this is in '90, I'm gonna say '98. Maybe 1998 and it was Robert Kiyosaki, 'Rich Dad, Poor Dad', okay?
Mike Stohler
There you go.
Darin Davis
Yeah, I know. And I didn't really pay attention to the real estate piece of it. I paid attention to the mind shift, and I was fascinated. I mean, hook, line and sinker. So I got really in tune with understanding different ways to look at how you can control your life and assets and pass some cash flow. I didn't know any of this. My parents were a paycheck to paycheck, teacher and Marine. I mean, they got paid twice a month, and that's our life. So that started it. And then a couple years of really kind of self-education, I just jumped in with both feet and said I'd done well enough. I had a little bit of money.
And then at the time my girlfriend, who became my wife, we said, "You know what, let's go, do it." So we both love San Francisco, moved back to Texas and set up shop. And we started off with a single family section eight home. That's how we started.
Mike Stohler
Yeah, it's amazing. It's like our stories are almost intertwined, even though I didn't listen to the AM radio. I actually bought, everybody that may not know, Robert Kiyosaki, Rich Dad, Poor Dad is the book. That's what his focus is on. It's the same that a book can't change your life. And that's how a lot of real estate, if Robert could even know it's like, how many lives has he affected down just by a simple statement on that mind shift on how to change your life. I always say that I want to build a life that I don't need a vacation from. And how do you do that? It's that switch of going from the paycheck to paycheck to that single family, it just starts with that one place. Now fast forward, you've done a little bit more than just that one little house.
Darin Davis
Yes.
What happened is, I just started hitting the street hard, and I ended up meeting a gentleman. And I got to get this guy out of credit too. I met him through a friend of a friend. They said, "Hey, you want me to get into real estate? This guy, Wes over here. He does X, Y and Z." And I said, "What's a syndication?" And I asked, "What does he do?" And I was going, "Well, anyway, I'm going to meet with this guy."
He says, "You know, well, the only thing that you can really help me with is maybe raising capital." He says, "Can you do that?" And I said, "Well, sure." And he showed me how to get paid. And it wasn't a time, but I was fascinated by using other people's money, "Okay, oh, wait a second." And I heard that in the book and on the radio program. And here it is. Here it is in real life, when I did the, gosh, I think we did four single family homes. That was all my money and that.
But then when I found out, "Ooh, you can pull money." And so I worked with him, and he let me ride his coattails and learn. But I remember we did one strip center. These were like B strip centers. We'd lipstick them, paint them, re tenant, and then sell them three years, four years later.
So 1, 2, 3. That turned into 13 strip centers over the course of the next four years. So I got a great one. I didn't make a ton of money, but I did fine, but I got a great lesson in raising capital. I got a great lease and how to structure waterfall syndications. And I gotta tell you, if he had said to me, "You're going to work for free for the first two deals." I would have done it, because, hindsight, it taught me the whole foundation and structure and all it was me asking a lot of questions and pounding the street and finally getting connected with a friend of a friend.
Mike Stohler
Yeah, and that is so amazing. And a lot of people, if you can get that tidbit, it's not all about the dollar sign. It's about mentorship. It's about learning. Because you can't put a price tag $1 sign on the knowledge that this person gave you that it's so important. Especially to the younger listeners, don't chase the dollar, the dollar sign will come. Chase the knowledge, chase the mentorship, chase someone like Darin. Get involved in Club Capital, and we'll talk about that a little bit later on. It's all about the networking and just the resources. And it never changes, does it, Darin? No matter how successful we are, we're still seeking that knowledge.
Darin Davis
I still. I was on a podcast about couple weeks ago, and I learned something that I thought I should have known 10 years ago, and I told the guy, I said, "You know what? I go, for the sheer fact that I didn't know about that, I am attacking that subject matter right now because and what it is, it's about a different way of tax deferral from 1030 ones and depreciation, and it's a different concept. I've never heard of it. And so here I am, 61 years old, and I'm still picking up great nuggets of information that I can utilize and I can share. Solet's talk about this coaching tree. Everybody heard about the coaching trees. Okay, I'm going to use Tom Landry as an example,Jimmy Johnson or whoever, somebody else, but think about the impact that coaching legacy just spreads that foundation of bills and guys like you and I that share that with one guy, then it goes to four guys, and it goes to 12, and then, I mean, that is powerful, powerful that networking and mentorship. And to your point, I mean, especially for the younger people, the money's not the most important thing that that relationship and that knowledge, just like you said. I just wanted to reinforce that.
Mike Stohler
Yeah, the money will come if you do it right, if you just listen, it will listen. That's not I never want to hear a young kid say, "Mike, teach me this." Why? "I'm going to get rich."
Yeah, I'm not interested. Go away.
Darin Davis
Yeah. Another one
Yeah.
Another one is if they come in and ask you the first thing they ask you is, "How much do you pay?" and I go, "Nothing, leave."
Mike Stohler
"How much are you worth, Mike?"
And I'm like, "You want to learn?"
Darin Davis
Yeah, exactly.
Mike Stohler
Because you don't want to know what my hourly rate is to teach you.
They have no idea what the hourly rate is. But a great story. Let's talk a little bit about what you do now. You have Club Capital and are doing some LP work. Talk a little bit about where you're at now and what you're doing.
Darin Davis
Yeah, so when I finished that, the syndications on the retail centers, and I'm going to give everybody kind of what I did and what not to do, real quick. I thought I was super smart, okay? Now let's go back to 2008, alright, 2007.
I start saying, "Hey, I can do this on my own. I'm ready to flip the cord and go do it." Now, I was okay, but I made a few mistakes.
But 2008-2009, we did our first multifamily development. Now, I say first because I had never done one, but I had purchased a piece of land and I wanted to do it. Well, 2008 and 2009, I purchased the land without having all my entitlements, and then the market crashed, okay? I've got a term sheet, takeout letter for a construction loan by a very well known lender, and they said "We're going out of business, so sorry, so sad. See you later." And I go, "Whoa. Okay, I just put, I mean, hundreds of $1,000 into this." So my point on that is, for you guys thinking about development, you have to have all your entitlements before you go spend a ton of money, period. And we'll, we're going to get off that subject. But we did multifamily development. Did another, did another. Now we're not so much the developers, but we're primarily the LP equity.
Now, sometimes we co-develop, and sometimes we're a Co-GP, and that's important. It all depends on the deal. We started working with a network of our friends because they said, "Hey, what are you doing? We want access to this." Now, Austin's growing. Dallas is growing. Texas is growing. So we were undersupplied in multifamily housing because of the '07, '08,'09, '10 crash that we had. So there was just this main rocket ship of construction and that needed to go on.
So we had this good ride, and I probably hindsight, I wish I had taken more advantage of it, and we'll talk about this a bit later, but we just started raising capital, raising capital, raising capital. And one thing that I'm really glad we did, we stayed very focused in our market, so we know it well, and we didn't chase the return or the deal. We chased the relationship. We wanted development partners and sponsors to be vetted in the community, not just the one and done or its flavor of the day. These are guys that have four or five projects, they have a business, and so we really selected some key partners, and we selected a couple that weren't key, and we got away from them quickly.
But my point here is that we started doing LP equity multifamily with a handful of really good developers, and we had a nice 10 year run, and we've been doing quite a bit, all the way up until the last 18 months, when numbers just didn't pencil. And, yeah, but now pivoted, and we'll talk a little bit about what we're doing there. Yeah, so, but that was it. We did, you know really well, Texas is great for business. We had a net positive migration. We have jobs. I mean, we're just fortunate. We have a good business climate here. But what's happened, and I think everybody knows this to some degree, is that where we are in the market today, interest rates have risen, leverage has gone down, used to get 75% bank loans.
Now it's 55-60% valuations have come down because rents have come down, supplies gone up, so you've got this perfect tsunami. And it's not like when interest rates come down, if they do in the next couple years, that's going to fix everything. You've got to have about three or four of those metrics work for you.
Mike Stohler
Yeah.
Darin Davis
So I tell people today, I think we're in this kind of bottom of the trough now for another 12 months, maybe 18 months. But here's the good news. All right, the good news is, all of these developers that took out loans 2, 3, 4, years ago, on these floating rates, those loans have gone from three and a half to 8% all right, guess what's happened? They burned in their interest reserve. Well, here's the other thing that's happened. Let's say rents were $2 a foot. Well, now they're $1.70 a foot. Well, guess what? Your income is not as high, but your expenses are still the same. So these guys are going like, "You know what? I've got a good project." We're finishing up construction, we're finishing up leasing and stabilization, but to do all my reserves, I need some rescue capital or some capital that's got some high octane oxygen in it. And so that's called press equity, or preferred equity. And so what we're doing is with those select developers that I mentioned, that we pick, we pick the guys we know we're coming in and putting these plugs of capital and filling that gap to get them over the goal line. Now what does that do for the investor? Well, for the investor, they come in and it puts them in front of all the common equity that's currently in the project, and they get a fixed rate of return, usually paid out quarterly, and usually about two years. So you've got a shorter term investment, you got a cash flowing investment, and you have a priority over the common equity. And so you're in a really good position to be sitting there going, all right, I've got a Class A asset in Texas or Florida or Arizona, a nice Sunbelt growth state. And I've got this, 30% of this money, or20% of the money behind me is my safety net. It's all that common equity is the safety net. And then behind that is the sponsor's promotion,so you're really sitting in a good position to get paid.
That could be one and done. If somebody's just looking for short term double digit returns, that's really safe and secure. But here's the little catch that we're kind of working on. We're only funding deals that we would acquire, so we're underwriting them as if we were acquiring them. That's a very in depth underwriting process. And the reason why is because, if you think about this, we're getting a corp side seat, or a front row seat to the asset, and we're getting paid, and we're getting paid to look at it all right? So we get to watch the asset management, we get to watch the property management, and we get to see the performance of the asset, and we're sitting there going, you know what? This is an asset we underwrote to own. It's in our backyard. We're watching the asset getting paid to watch it. We're going to either in some of our agreements,not to go into a bunch of details, but like a first round of refusal that we can and acquire the asset so that the sponsor doesn't have to take it to market for six months and pay all the broker fees.
Mike Stohler
Yeah.
Darin Davis
We're the Trojan force with the olive branch. That's kind of the Part B, but that's how we look at it, as extra value add, and not just a one and done. It could be a one and done, but it could also be an acquisition.
Mike Stohler
Yeah and that's a fascinating first time I've heard of this. There's all these other things. And this is what's truly amazing about doing this podcast, is every time I go on to a podcast and I host a podcast, I'm learning something new within my own niche, within the real estate investing connection. It's just amazing.
Now we've hit upon a little bit about limited partnership investors returns. For those that may not know, how important is it to diversify, and instead of just holding everything and and not getting dividends, not getting passive income, they're just kind of sitting there holding things until they're 65 or something like that. And I know you have a very personal story on why it's so important, but talk a little bit about the passive income just going, it's mailbox money, basically, right?
Darin Davis
Yeah. You know, the older I've gotten, the more fixated, and I mean, fixated on my personal investments, and the investments that we offer to our investors. Because you start seeing clearly, you don't have the you're chasing these returns and these big unicorns, you're going, You know what? I need singles and doubles. And you start adding them up, and you get that compound effect and and 10 short, I mean, 10 short years, you're going to be in a really cool position to see them. I've heard this so many times, and I remind people, when people say "Cash is king." I go, "No, no, no. Cash flow is king, period. Okay, just period. Nobody can argue with me better on that. So I just, I'll leave it at that.
But you know, I'll share with you a little bit about my personal story. So, we came out of that Kiyosaki thing and spent two or three years really figuring it out, then went into the syndication piece. And at that time, my wife and I are going, you know what, we get it okay, it's going to provide us freedom. Not today. We're not going to get rich in a year or two. It's going to take a decade, but if we do it right, we're going to be just fine. Well, we were bombing them, following the bottle, okay? And we decided to really build our own business. And then, things were going great. And this is where life just happens. You know, this happens, she was diagnosed with cancer, given two to six months to live, and we as a family, just said, "You know what? We're going to be, we're going to beat that time. Okay, we're going to beat it all right?" Well, I thought maybe it would get us to six months. Well, what ended up happening is that I had to virtually leave the day to day operations of the business, but I had a great team, and we had passive cash flow coming in. So I knew the money was coming in. And what we ended up doing is that kind of second Life that we were preparing after the kids go to college and all that. We just took that and went straight after her on the medical side, okay, and we did not even have to think twice about it. We focus on her. She lived over four years with stage 4 cancer. Day one, we've kind of figured out what was going on. And I tell you, I sat back and watched family after family after family get wiped out because we're in the hospital virtually every week, and because they couldn't go to work, they didn't have the resources. They were paycheck to paycheck, and everything from losing their house to going bankrupt to all this, it just absolutely devastated me to see these families just one after. Neither two financial things just got lost, or, here's the other thing, Mike, that I just you're going to get me to go on a rampage here. But when the insurance says, "I'll pay for this treatment, but not this one." Well, the doctor goes, "Well, I want this one."
Sorry, we're paying for this one, I didn't have to face that. My wife and I didn't have to face that. We said we don't care if the insurance will pay for it. Great. Doctor, you want the one that they won't pay for? Yeah. Good. We got it covered, and that was 100% because we had spent 10 years building that foundation that we were able to do that and not go micro.
Mike Stohler
You know, Darren, I mean, that's just a heart wrench, but also a reminder and a testament about what we beat and try to beat into the heads of everybody that listens to this podcast, is you just gave the true life story of why we keep beating in passive income and cash flow and ladies and gentlemen, for those of you listening and the wheels are turning, it's just do it. Get a mentor, get a business partner. If you don't know how to do it, find someone that you know, and partner with them and learn from and learn from,get with Darin and learn from that.
Darin Davis
Anybody on this podcast wants to call me, you're going to talk, this is true to my core, my heart. I mean, Mike, everybody listens to this podcast, or I speak at some small conferences and stuff every now and then, but 10% of us have a life event. Okay, I'm part of that 10% on this you know that. But by the time you're 60, which I just turned 61, okay? 50% of the people in your audience are going to have that life that it's going to happen. I mean, the odds are, the older you get, and the time that you spend today, as small as it may be, compounded over 10, 15, 20 years, life changing, absolutely life changing.
Mike Stohler
Yep, absolutely. So let's shift gears, alright? Everyone wants to get into passive income. Everyone is like, "Okay, Darin, Mike, you've talked to me about it. I need some passive income. I need to know how to invest with Darin." So Club Capital. Talk a little bit about going to Club Capital. You click on what and how, what is the process of getting started or learning information.
Darin Davis
Yeah, thank you. I mean, we've got a couple things on there. We have our current investments, which are on our investment page. And we have the basic, "Hey, fill out, make sure you're an accredited investor, and it's like three clicks, name, email on that." We also have a newsletter there. We're going to show a landing page at the end of this that talks a little bit about club capital. It's going to be a link connecting you and I together that'll talk about pref/preferred equity. You know what that is? It's like pref/preferred equity 101, it's 10 things you need to know about pref/preferred equity. So if you're investing in that for the first time, we're pretty easy to find. We're very easy to deal with.
We have a lot of content on their educational content, which I keep wanting to refresh it all the time, which is okay, but I keep listening to it. I'm like, that hasn't changed that much. It's been the same for the last 20 years. You know, granted, we learn something new, like a nugget. But I mean, the foundational stuff hasn't changed that much. It's really quite a bit up there. I would love taking calls. But here's the other thing I tell people, I think this is super important. You're passionate about what you do on the syndication and you're in the kind of you're in the in the hospitality or extended the hotel space I'm in, primarily multifamily, all right, but the I tell every young investor, and I say, young, I'm talking to the 40s, because a lot of guys, once they become an accredited investor.
Mike Stohler
Yeah,
Darin Davis
They're not, usually not 25 except, well, I take that back, high tech guys, they're 25...
Mike Stohler
Some of our listeners are young and have some money.
Darin Davis
Yeah. I tell them. I go, look. They go, "Well, what do I need to look for"? I'm gonna say, "You take your money. Let's just say you got 250 grand, alright?" And they want to start looking. I said, "Go, put 100 here, 100 with this guy, and 50 with this guy." And you watch the way they communicate with you. Do they do what they say they're going to do? Are they available? Do you really get answers, or do you just get fluff? I say you do not want to put all your money with me or Mike or anybody. You've got to go test the waters. You've got time to find one or two good sponsors, hit your wagon to that horse and build that relationship. Because I have relationships now that are I've got a handful of guys who did that first department complex we did in 2008 and 2009, still with me today. And here's the trust factor. When we send them something, they don't even read it. They just call me and say, "I'm in." And I've been, "Well, Scott, you ain't even read it yet. Or, you know, Paul, have you even read it yet." "I don't need to read it anymore. I've been with you for 15 years. I know what you do, yeah?" So that becomes super empowering on both sides of the table.
Mike Stohler
Absolutely. Before we leave a couple things. Is there anything that I've missed out in these closing minutes that you'd like to let our listeners know? And then we'll go into the different ways of how they can contact you,
Darin Davis
Yeah.
Mike Stohler
What kind of tidbit?
Darin Davis
I got 100 of them, but here's what I'll tell people I used to say a long time ago, education without execution is just entertainment, right? And what I like about that is I get so many people that have this just complete analysis paralysis, just won't take that step. And I'm going to tell you right now, you're not going to make the right decision every time. Okay, I've made several wrong decisions, but I've learned and learned and learned, and taking that first step is just you've got to do it, and it gets easier and easier and easier, because you gain more knowledge every time, you know? And keep it simple. I see so many crazy waterfalls and structures and deals and partnerships. It doesn't have to be that. If it's that complicated and you don't clearly understand it or walk away, you know? And I become an older guy, I kid around about this sometimes and a few other things.
But you and I know The Beatles. I think The Beatles have been the test of time for 50 years or more, And if I were to tell you this, it's hard to believe sometimes 21 of their number one hits had three chords, 1-2-3, 1-2-3, 1-2-3, because it was simple. It was successful. Everybody could understand it. Everybody could relate. Everybody knew what was going on, whether you were a fan, whether you were a producer, whether you were a musician, everybody was in sync. It was simple. But when you have 21 number hits and you have three chords, yeah, you're focusing on what really counts and not grabbing straws everywhere to see if I can make this deal great. And it doesn't work.
Mike Stohler
Yeah, very good. Darin, where can everybody get a hold of you?
Darin Davis
Okay, I love this. It's clubcapital.co then forward slash and there you are, right?
Mike Stohler
Yeah.
Darin Davis
Hang on, I want to erase that. We're just going to do that clubcapital.co for now.
Mike Stohler
There you go. That's how you find everybody, Darin Davis. Thank you so much for coming on The Richer Geek Podcast. Everybody learn, get a hold of Darin and find out something new about pref equity, everybody. Thank you so much. And this concludes another episode of The Richer Geek podcast. Take care, everyone.
The information, statements, comments, views, and opinions (collectively, “Information”) provided in this podcast are not intended to be and should not be construed as financial, economic, legal, accounting, tax or other advice. For our full disclosure, click here.
ABOUT DARIN DAVIS
Darin Davis is an accomplished real estate industry leader with over 20 years of experience, having overseen projects exceeding $1 billion. He has successfully navigated major market shifts, particularly excelling in multifamily assets. As co-founder of Club Capital, Darin is instrumental in equity investments, partnership relations, business development, capital raising, and investor relations. In 2023, he launched The Never Quit Initiative, a non-profit supporting families affected by cancer, reflecting his dedication to making a positive impact beyond business.